That could drive up health care costs for everyone in the state not using Medicare.

Rather than basing rates on cost per admission, the new plan is based on population. It ties hospital reimbursement to the projected services of a specific population. In the state's 2012 fiscal year, about 10 hospitals in the state, mostly in rural areas, already followed a population-based model. Under that model, hospitals get a set amount of annual revenue to treat patients in their population. This gives hospitals an incentive to reduce unnecessary admissions, testing and other things that may drive up costs.

Joseph Antos, a fellow with the conservative American Enterprise Institute who served on the state's Health Services Cost Review Commission for eight years, said the goals outlined in the proposal may be hard for some hospitals to meet. For instance, hospitals that serve a disproportionate number of low-income patients may have trouble with readmissions, he said.

"One of the keys to improve readmissions is to have good follow-up care after the person is released from the hospital," Antos said. "If you don't have good health at home, you are likely to be readmitted. There is not a lot you can do about that from the hospital perspective.

The plan must be approved by the Centers for Medicare and Medicaid Services, and it's not clear how long that might take. CMMS did not have anyone available Friday to comment. The state also is taking public comments on the proposal through Oct. 7.

The Health Services Cost Review Commission, the state panel that sets hospital rates, will be responsible for setting up the details on how hospitals will meet their cost goals and how the population-based models will work.

Coyle said it will be important for hospitals to play a part in that process.

"Right now, the proposal doesn't specify the how," Coyle said. "What new programs will they put in place that will allow us to reduce spending without jeopardizing patient care? The policies and programs will all be left to the state rate-setting commission."

MedStar Health, which operates 10 hospitals in the Baltimore-Washington region, said it supports the state's proposal because one of its key strategies already has been to move toward a population-based health care model

"We will continue to participate actively as the proposal is finalized and implemented," the health system said in a statement.

The University of Maryland Medical System, the state's largest with 12 hospitals, declined to comment on the proposal.

Johns Hopkins Medicine, which includes six U.S. hospitals, supports the state's proposal to modernize the waiver, although it will be difficult, said Executive Vice President Ronald R. Peterson.

"This represents a significant change in the way our all-payer system will operate, and will provide incentives to improve coordination of patient care and overall population health," he said.