The state's hospitals would absorb all of the 2 percent Medicare cuts required by federal sequestration under a proposal released Thursday by the state panel that sets hospital rates.
The recommendation by the staff of the Health Services Cost Review Commission would mean that state hospitals would not get rate increases for the last three months of fiscal year 2013, a decision that prompted intense criticism from medical institutions that say they already operate on slim margins.
Hospitals sought a rate increase to help offset the cost of the federal budget cuts and said they will have to cut services and jobs without one.
"Our view is now is not the time to impose yet another cut on Maryland hospitals," said Carmela Coyle, president and CEO of the Maryland Hospital Association. "We are too financially fragile."
Insurers, however, supported the plan recommended by the commission staff.
The commission is scheduled to vote on the proposal Wednesday. Collectively, hospitals would lose about $7 million to $8 million a month under the proposal for April, May and June, the commission said.
The Medicare cuts are part of $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 cuts should be made to payments to hospitals and doctors and to monthly payments made to private plans that administer parts of Medicare.
The cost review commission staff, which developed the recommendation not to increase rates, declined to comment, saying its views were clear in the recommendations posted on its website.
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 quarter of the fiscal year, which runs through June.
Another plan would have split the sequestration 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 state's largest insurer had no comment on the staff's final recommendation Thursday, but had supported not increasing rates for hospitals.
Increasing hospital rates would have "diluted" the intent of sequestration, which was to reduce federal expenditures nationally by 2 percent, wrote a CareFirst BlueCross BlueShield executive in a March letter to the rate-setting commission.
CareFirst and the rate-setting commission staff said they also 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.
The state must pass a test to maintain the waiver. Maryland keeps the waiver if the average cost per admission rises no faster than in other states. The state is in the process of negotiating a new waiver test with the federal government.
Rate increases would "erode the state's position on the current waiver test and disadvantage Maryland under any new waiver test," CareFirst said in its letter.
The hospital association, which represents 46 acute-care hospitals in the state, has tried to sway the commission to make up for the cuts with higher rates. The group issued a report Thursday detailing financial troubles it says the state's hospitals are facing.
As a group, the hospitals' operating margin was 0.8 percent for the first eight months of fiscal year 2013, the second-lowest performance in 14 years, the report said. Twenty-five of Maryland's 60 hospitals — 42 percent —have 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 rate-setting commission will begin discussing fiscal 2014 rates in coming weeks and said it will look at the impact of sequestration then.
Hospitals will have to make cuts immediately once a decision is made. Coyle said the cuts will likely have to come from services and jobs.
"There is no ability for hospitals to say 'OK, we're just not going to purchase this new piece of equipment next year,'" Coyle said.
The commission staff's recommendation isn't final and will be further debated at Wednesday's meeting. Coyle hopes some commissioners will have a change of heart. She said the federal law enabling the waiver requires the rate-setting commission to ensure hospitals are financially sound.
"I feel strongly there is still a chance, and I hope the commissioners will take a good hard look at the financial condition of hospitals and really think about rejecting the staff's recommendations," she said.