A state panel voted unanimously Wednesday to increase the rates hospitals can charge by 1.65 percent, but the medical institutions say the amount is inadequate and will collectively drive hospitals into the red.
The Maryland Hospital Association said the decision will cause operating margins to plummet to negative 0.24 percent. The association had pushed for a rate hike of 2.43 percent, which would have also pushed down margins, but still left hospitals operating in positive territory.
Members of the Maryland Health Services Cost Review Commission said they preferred the lower rate hike proposed by their staff. That plan sought to balance the financial constraints facing hospitals with the state's attempt to negotiate with the federal government over a new Medicare waiver, an agreement unique to Maryland that allows the state to set hospital rates.
The state has been concerned that rate increases might disrupt those talks.
"I am really worried about the waiver," commission member Dr. Stephen F. Jencks, an independent consultant and senior fellow at the Institute for Healthcare Improvement, said in explaining why he supported the staff recommendation.
"I am mindful of what the hospital executives are saying," Jencks said. "But I feel pretty strongly that in this environment where cost competition has essentially been removed, that the pressure of limited resources is the only way that you get real interest in improving productivity. We have to hear your concerns with both respect and empathy, but the fact we hear your concerns does not mean the system is out of kilter."
Commissioner Jack Keane, a health care consultant, also said he was "not persuaded by the financial condition of the hospitals." He also said hospitals could adjust to the changes.
Hospitals say the commission's balancing act is wobbly and puts hospital finances on the back burner.
"We believe the commission is too singularly focused on the fear of losing the waiver," said Carmela Coyle, CEO of the hospital association. "But what good is the waiver if in the process we bankrupt Maryland hospitals?"
Robert A. Chrencik, CEO of the University of Maryland Medical System, said five years of low rate increases have prompted hospitals to tighten their belts and the commission's vote makes things more difficult. He worried about the impact on the bond ratings if hospitals become more financially strapped.
"It is a decision that continues to underfund cost inflation and makes it more difficult financially for hospitals to operate," Chrencik said after the meeting.
Chrencik said hospitals won't sacrifice care as they try to balance budgets, but may consider cutting services that aren't profitable. The obstetrics unit at Maryland General, which is owned by the University of Maryland, will close June 30 because of a decline in deliveries that doesn't make it financially feasible to maintain the unit.
Meritus Health in Hagerstown is considering eliminating paid time off to deal with financial constraints. Vanderbilt University Medical Center in Nashville, Tenn., announced a similar strategy in April to deal with federal budget cuts. Under its plan, the staff won't accrue vacation time for three months or receive pay increases, according to the Tennessean newspaper.
"It is easier than laying people off," Raymond Grahe, senior vice president and chief financial officer at Meritus Health System, told the commission. "It is easier than reducing, but it cuts benefits. … It is a serious consideration that goes before my board next month.
"One would say this rate increase does nothing but maintain the status quo or less," Grahe said.
Anne Arundel Medical Center said job vacancies are being carefully scrutinized and that the hospital is reviewing positions to make sure they can be supported.
"Proposed payment reductions leave hospitals with few options for reducing spending," the hospital said in a statement. "This weakening of hospital finances concerns us. We are not cutting services, and actually hope to expand our community outreach later this year. But we are not sure how long we will be able to sustain this growth without adequate reimbursement."
The rate increase would take effect July 1 and run through the end of the year. The rate-setting panel typically decides rates for a full fiscal year's time, but did it in a smaller increment because of the waiver negotiations.
The state must pass a test to maintain the waiver, but has a hard time meeting its standards. Maryland keeps the waiver if its average cost per hospital admission rises no faster than in other states.
The rate increase comes as Maryland hospitals have complained that the state hasn't done enough to help the facilities increase revenue to help make up a 2 percent cut in Medicare payments required by federal sequestration, which began in April.
Hospitals say they are facing some of the worst financial conditions in years.
As a group, the hospitals' operating margin was 0.8 percent for the first eight months of the 2013 fiscal year, their second-lowest return in 14 years, a recent report by the hospital association found. Twenty-five of Maryland's 60 hospitals had negative operating margins, according to the report.
The hospitals had also sought a rate increase for the remainder of fiscal year 2013: April, May and June. But the commission voted at a May meeting to keep rates unchanged, leaving the hospitals to absorb the federal cuts. The facilities are collectively expected to lose $7 million to $8 million a month during that period.