For 35 years, Maryland has enjoyed a unique exemption from the federal government that allowed it to regulate hospital rates so that patients are charged the same no matter where they seek care.
But the system that state health officials say has created an egalitarian way of charging for health care now faces an unprecedented challenge.
The state has come dangerously close to failing a test it must meet every three months to keep the exemption, under which the federal government gives Maryland larger Medicare payments than other states. To pass, the state must show federal officials that its Medicare costs have grown more slowly than in the rest of the country.
For years, clearing that bar wasn't a problem, but that changed as health care costs in the state soared in recent years. The margin keeps narrowing and is all but nonexistent this year.
The state wants to renegotiate what it calls an outdated waiver test predicated on an old health care model that examines costs based on inpatient hospital stays. Health care today focuses on preventive care and keeping people out of hospitals, which makes overnight stays more costly because they are used only in the worst cases.
To compensate, the Health Services Cost Review Commission, which sets the state's hospital rates, has dictated flat rates for hospital care in the past few years, prompting complaints from hospitals faced with rising costs. The commission has made it a priority to negotiate a new waiver test with the Centers for Medicaid and Medicare Services, which monitors the waiver.
Often at odds, insurance and hospital executives have banded together to help the state come up with a way to overhaul the system to better fit today's health care system.
"We are looking to evolve the system to address changing circumstances in health care," said John Colmers, chairman of the cost review commission. "I think there generally remains support for this among the political leadership, the hospitals and the insurers."
Created in 1971, the commission was a cornerstone of then-Gov. Marvin Mandel's consumer protection package. Set up to operate much like the Public Service Commission, which regulates utilities, it was given the power to set hospital rates in 1974.
The unique rate-setting system became a national model for containing costs and was copied in West Virginia, New York, Massachusetts and Washington state. The federal government issued the waiver in Maryland because the system worked so well at keeping down costs.
Today, Maryland is the only state that still has the waiver. Other states eliminated their systems for various reasons, Colmers said. Some had to get rates approved legislatively each year, which could be cumbersome and acrimonious.
Health officials don't want the same fate for the waiver in Maryland.
The rate-setting system was based on a hospital stay because in the past that is where most care was administered. Now, people often are treated at urgent-care centers or seek outpatient care at their doctor's office. Procedures that once required overnight stays can be done in a couple of hours.
But efforts to reduce hospital admissions to cut costs have made the average cost for inpatient care much higher, those in the industry argue.
Health officials say that losing the waiver could cause problems for hospitals and cost consumers more because prices would rise. Hospitals could receive less reimbursement for the many Medicare patients they serve, forcing them to raise rates for everyone else.
"Our payment system for hospitals provides equity of payment and access to care in ways that significantly benefit the citizens of Maryland," said Robert Chrencik, president and CEO of the University of Maryland Medical Center. "However, the continuation of our payment system in the long term will be difficult if the [cost review commission] cannot provide adequate rate increases and a sustainable long-term solution, which will require that we redefine the waiver test."
Hospitals have had to absorb the cost of inflation the past three years because pressure to meet the waiver prevented significant rate increases. This month, the cost review commission approved a 0.3 percent rate increase for fiscal year 2013, which included a 1 percent cut to inpatient rates — aimed at meeting the waiver test — and a 2.59 percent boost for outpatient services.
"Given the direction of health care, there is no situation in which the waiver test is viable," said Carmela Coyle, executive director of the Maryland Hospital Association, which represents 46 member hospitals. "Maryland will fail the current waiver test and we will revert back to the national Medicare program, and that will have significant adverse consequences for Maryland hospitals."
Thomas R. Mullen, CEO of Mercy Medical Center in Baltimore and a member of the cost review commission, said his hospital is looking for ways to cut $10 million from its budget. Failure to modernize the waiver would make the situation worse, he said.
Without the waiver, hospitals would have higher costs for uncompensated care. Under Maryland's rate-setting system, those costs are spread across all hospitals. Mullen says hospitals would have to raise prices considerably to cover uncompensated care if the waiver were removed.
"To have free care, you have to pay for it," Mullen said. "It's not like money comes out of the sky."
The rate-setting commission has begun preliminary discussions with the Centers for Medicaid and Medicare Services, but it is far from hammering out what a final waiver test would look like.
The commission, hospitals and insurers envision a test that would take into account the total cost of caring for a patient that looks beyond a hospital stay.
"We need to move it from an inpatient test and look at hospital costs more broadly," Coyle said.
The timing for such a change is not ideal. The state is seeking a new waiver test even as the Medicare system faces cuts amid federal budget constraints. But the state has political clout on its side, including the support of Sen. Barbara A. Mikulski, the Maryland Democrat who submitted the original legislation that created the federal waiver.
The Obama administration would likely be supportive of Maryland's system, which under health care reform promotes many of the same initiatives the state has established to encourage preventive care.
Still, commission members and hospital executives aren't betting on a new waiver.
A challenge to federal health care reform in the Supreme Court has created uncertainty in the whole system. If Republican Mitt Romney were to win the November election, that would change the political environment and perhaps add another obstacle.