State health regulators approved a larger increase in hospital rates for the coming fiscal year than initially proposed but not quite as much as the hospitals wanted.
The two-step increase approved Wednesday by the Health Services Cost Review Commission amounts to a 2.72 percent average increase to hospital rates for fiscal 2017, which starts July 1.
The decision is a compromise between the higher rates hospitals sought and more modest increases proposed by the commission's staff members, who were concerned about breaking the rules of the federal agreement that allows the state to set hospital rates in the first place.
The commission approved a 2.16 percent rate increase for the first half of the fiscal year, July through December, and a 3.28 percent rate increase for the remainder of the fiscal year.
"We appreciate the commission's recognition that an increase greater than that initially proposed was necessary to maintain the momentum hospitals have achieved so far in focusing on community health," said Carmela Coyle, CEO of the Maryland Hospital Association. "We believe the approach ultimately adopted by the commission is a balanced one."
In its initial proposal, commission staff proposed a 2.16 percent increase for the full fiscal year. Hospitals wanted a 3.27 percent increase.
The hospitals' rates are tightly managed under a long-term agreement between the state and federal regulators that has afforded the hospitals higher reimbursements for those on public health insurance in exchange for keeping overall health care spending in check. But in 2014, the state also began managing the hospital budgets as part of a five-year experiment to further control costs by pushing hospitals to focus more on preventive care and less expensive methods of delivering services.
Investment in such a change was central to the hospitals' argument for higher rates.
The commission staff, however, said past rate increases have reflected the needed investments.
"Approximately $200 million has been placed in rates over the past 3 years," said Steve Ports, a spokesman for the commission, before the vote. "In other words, the public — purchasers of care such as patients, insurers/payers, business, etc. — has already been paying for many of these investments and they should expect a return in better care and reduced potentially avoidable utilization. The results have been varied."
Potentially avoidable hospital visits, those that might have been prevented with better care coordination or preventive care, are a major focus of the reform the state is seeking with its five-year plan. The idea is to provide better care that also costs less.
The five-year agreement beginning in 2014 specifically gives Maryland hospitals higher federal reimbursements for public health programs such as Medicare and Medicaid in exchange for keeping the state's annual health care spending growth below 3.58 percent, which reflects the state's average economic growth, plus $330 million in Medicare savings.
As another condition of the deal, Maryland must keep Medicare spending per beneficiary — both in and out of hospitals — below the national rate. The state's rate-setting plan will be put under review if it misses this benchmark two years in a row. Maryland missed the mark in 2015 and regulators worried that a higher rate increase for fiscal 2017 could push Medicare spending above the national rate in 2016, too.
The compromise allows the state to keep rates low for the remainder of 2016.
"We're going to be monitoring this very closely," Ports said.
The rate decision comes as the commission prepares to apply for the second phase of its rate-setting plan, which must be submitted by the end of the year. The approach, which federal authorities have said they would like to replicate in other states if successful, would encompass more aspects of health care in its next phase.