Maryland hospitals said they will need to cut jobs and patient services after a state panel voted Wednesday to keep hospital rates flat, despite a 2 percent cut in Medicare payments required by federal sequestration.

"There are significant job cuts literally on the near-term horizon," Robert A. Chrencik, CEO of the University of Maryland Medical System told commissioners during a hearing before the vote. "I think folks need to be aware of that."

The 5-1 vote by the Health Services Cost Review Commission, which sets the state's hospital rates, effectively forces the hospitals to absorb the cut in Medicare reimbursement at a time when hospital margins are razor-thin. Hospital representatives who filled a hearing room to lobby for a rate increase criticized the decision, saying it will further hurt the already financially strapped industry.

Hospitals sought a rate increase for the remainder of the 2013 fiscal year, which ends June 30, to help offset the Medicare cuts. Now, the state's hospitals will collectively lose about $7 million to $8 million a month in April, May and June, the commission estimated.

The Maryland Hospital Association released a report Friday that said 1,450 Maryland jobs would be lost for every 1 percent drop in total hospital revenue. The job losses would come from hospitals and from firms related to the hospital industry. Hospitals in Maryland employ nearly 100,000 people, according to the report.

Chrencik, who said after the vote that he was "disappointed" in the decision, predicted a failure to increase rates also could affect hospitals' access to capital and hurt their ability to fund community services.

He also said access to care could be harmed. Many hospitals have already cut services because hospital rate increases have not kept pace with inflation, hospital executives said. For example, the University of Maryland system cut the obstetrics program at its Chester River Health System in eastern Maryland.

"People are now traveling a longer distance to get routine obstetrics care," Chrencik said. "The economics of that just weren't feasible."

The Medicare cuts are part of the $85 billion in across-the-board federal spending reductions known as sequestration. The U.S. Department of Health and Human Services plans to cut $15.5 billion under the plan, with much of it coming from Medicare.

Medicare patients will not face reductions in benefits under sequestration. Instead, the federal government specifies that cuts should be made to payments to hospitals and doctors and to monthly payments made to private plans that administer parts of Medicare.

Commissioners said they will account for the impact of sequestration as they decide hospital rates for fiscal year 2014, starting July 1. They added a provision to their decision Wednesday requiring the commission staff to develop a proposal on new rates in the next 30 days. That provided little comfort to the hospital industry, which worried that commissioners might lose sight of the Medicare cuts as they debate new rates.

"It's possible the sequestration gets lost in the breadth of the larger discussion," said Carmela Coyle, president and CEO of the state hospital association, which represents 46 acute-care hospitals in the state.

Commissioners said they sympathized with the hospitals' concerns, but felt other issues outweighed them.

Specifically, they worried how raising rates would affect the state's Medicare waiver, an agreement with the federal government unique to Maryland that allows the state to set hospital rates. Insurers, including CareFirst BlueCross BlueShield and UnitedHealthcare, also favored keeping rates flat because of the waiver.

The state must pass a test to maintain the waiver. Maryland keeps the waiver if its average cost per hospital admission rises no faster than in other states. The state, which is in the process of negotiating a new waiver test with the federal government, worried that a rate increase might disrupt those talks.

"I think we should keep our eye on the bigger ball, which is retention of the waiver," said Dr. Bernadette C. Loftus, a commission member who is also associate executive director of the Permanente Medical Group.

Thomas R. Mullen, president and CEO of Mercy Medical Center in Baltimore, was the only commissioner to vote against keeping rates flat. He said the option of increasing rates 0.16 percent for three months was small enough that the commission should consider implementing it, given the financial condition of hospitals.

"Putting in something for three months … would not be a deal breaker," he said.

Maintaining hospital rates was one of three options considered by the commission staff. The option supported by hospitals would have treated revenue lost from sequestration as a one-time "unusual expense," and rates would have risen to compensate. Hospital rates would have increased 0.16 percent for the last three months of the fiscal year.

Another plan would have split the impact between insurers and hospitals. Half of the sequestered revenue would have been treated as a one-time expense and hospitals would have gotten a 0.08 percent increase in rates until the end of the fiscal year.

The hospital association issued a report last week detailing financial troubles facing the state's hospitals.

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, the report said. Twenty-five of Maryland's 60 hospitals — 42 percent — had negative operating margins, according to the report. In other words, they were losing money caring for patients.

The rate-setting commission increased rates by 0.3 percent last year, when inflation was expected to increase by 2.11 percent, the report said.

In its recommendation, the commission staff said hospitals are more profitable as a group this year than they were last year despite the reduced operating margin. The hospital association countered that profits grew because of stock market gains, which can be volatile.

"I'm more concerned than ever about what I see happening to the financial condition of hospitals in this state," said Ronald R. Peterson, president of the Johns Hopkins Hospital and Health System and executive vice president of Johns Hopkins Medicine.

An earlier version gave an incorrect vote count. The commission voted 5 to 1. The chair only votes in the event of a tie. The Sun regrets the error.

andrea.walker@baltsun.com

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