The way Maryland hospitals do business would be overhauled under a plan released Friday by state health officials.

The Maryland Department of Health and Mental Hygiene's plan would tie hospital spending to the state economy and virtually eliminate a reimbursement model based on hospital admissions that has been in place for nearly four decades.

The Maryland Hospital Association embraced the plan but said it would come with growing pains because it changes the way hospitals operate.

Controlling rising health care costs has been a major subject of debate, especially in Maryland, where health care is one of the biggest industries and top employers. The state's hospitals are often at odds with health officials who say the medical institutions need to operate more efficiently.

The proposal is part of an application that must be approved by the federal Centers for Medicare & Medicaid Services to update the state's Medicare waiver, an agreement with the federal government unique to Maryland that allows the state to set generally uniform hospital rates through a special commission. In other states, hospitals typically set their own rates, while Medicare dictates rates for its patients.

The waiver has nothing to do with the national health reform law, known as Obamacare, which also aims to cut health care costs.

In every other state, Medicare reimbursement is the lowest rate a hospital receives — and hospitals make up for it by charging other patients more. In Maryland, thanks to the waiver, hospitals are reimbursed at the same rate for all patients. As a result, the federal government gives Maryland a larger Medicare payment than it gives other states, and the state could lose billions of dollars without it.

When state officials first proposed a plan in February, hospitals and insurance companies complained it lacked details. The revised waiver proposal released Friday adds more, including the explanation that the plan would be tested for five years before it is fully adopted.

The new proposal also specifies how much hospitals' costs would be allowed to grow in the next five years, capping that growth at 3.58 percent in the first three years. That's how much the state's economy grew year-over-year in the past decade.

Maryland Health and Mental Hygiene Secretary Dr. Joshua Sharfstein said the proposal will drive down health costs while improving care for patients. It focuses on keeping people well so they don't end up in the hospital and emergency rooms, where treatment is costlier.

"Hospitals can embark on programs that keep people healthy and not worry about losing money because there are fewer admissions," Sharfstein said.

The newest proposal was put in place with input from hospitals and insurers, which sat on a committee formed by the state after the first draft was criticized.

"The goals will be very challenging for hospitals as the ideas included have never been tried nor tested before on this scale," said Carmela Coyle, president and CEO of the Maryland Hospital Association, in a statement. "Hospitals will have to find ways to provide care at a lower cost than today."

Coyle said hospitals were up to the challenge and could play a role in changing the way care is delivered.

CareFirst BlueCross BlueShield, the region's largest insurer, said it was still reviewing the details, but agreed with the broader framework and goals.

"We are encouraged by the promise that the application holds for improved cost control and improved quality of care in Maryland hospitals," said CareFirst CEO Chester "Chet" Burrell.

The state's 36-year-old waiver creates a system in which insurers, including Medicare, pay the same rate to all hospitals for procedures. It also funds uncompensated care — treatment for people who can't or don't pay — so there is no need for public hospitals.

But recently it's been a struggle for the state to meet the waiver test that requires it to show Medicare costs grow more slowly in Maryland than elsewhere in the country. The state argues the waiver test is based on an old health care model that focuses on inpatient hospital stays, while health care is moving toward a model of keeping patients out of the hospital by providing preventive and outpatient care.

The new plan would help the state meet the test, state health officials said. But they acknowledge the plan is experimental and want to put a time limit on it to see if it works.

If the plan does not seem to be working and the state can not pass a waiver test, Maryland will shift to the same Medicare model as the rest of the country, according to the proposal.