Hospitals concerned about state rate-setting proposal

A state plan to tie medical spending to the growth of the economy is making hospital executives uneasy.

Executives support the spirit of the plan proposed by the state Department of Health and Mental Hygiene, which seeks to reduce health spending by shifting patient care away from their facilities and toward more outpatient and preventive care.


But they worry that its spending goals are too aggressive, and that they can't be attained in the time period the state has laid out.

And they say it lacks necessary details on key elements, including how hospitals can be expected to limit spending increases to state economic growth. Hospital inpatient and outpatient costs grew 7.6 percent in fiscal year 2011; the state economy grew by only 2.64 percent in calendar year 2011.

"If we are going to look at having targeted spending levels we need to make sure those levels are reasonable," said Carmela Coyle, executive director of the Maryland Hospital Association, which represents 46 hospitals in the state. "If we are going to look at some dramatic policy change, we need to be careful to understand if it is workable without creating significant disruption in the hospital field."

The head of Maryland's largest insurer, not typically on the same side as the hospitals, also said the state plan could cause trouble if details on how it is to be achieved aren't worked out.

"You have the makings of a potential disaster," said Chet Burrell, president and CEO of CareFirst BlueCross BlueShield.

Health Secretary Joshua M. Sharfstein said there will be discussions with hospitals and insurance companies about the plan, but he argued that spending needs to be curbed to prevent health care from becoming unaffordable — a challenge confronting the nation as a whole.

"Managing the status quo is no longer an option," he said. "The question is: Are we going to adapt and develop an approach that improves and controls costs, or are we going to let the changes in the health care system happen to us?"

The state presented the proposal recently to the Centers for Medicare and Medicaid Services as part of an application to update its Medicare waiver, an agreement with the federal government unique to Maryland that allows the state to set hospital rates.


Hospitals, insurers and health officials say Maryland has benefited in many ways from the 36-year-old system. The state has kept Medicare spending growth on hospital admissions below the national rate.

The agreement creates a system in which insurers pay the same cost to all hospitals for procedures, and funds uncompensated care so there is no need for public hospitals.

It also has given the state more flexibility to create incentives to improve in problem areas such as readmissions.

But the state has had a difficult time meeting a waiver test that requires it to show Medicare costs have grown more slowly than that of the rest of the country.

The state says the test is based on an old health care model that focuses on inpatient hospital stays. Health care is moving toward a model of keeping patients out of the hospital by providing sufficient preventive and outpatient care.

Under the state proposal, a new test would take into account both inpatient and outpatient care, and do so per Maryland resident rather than per case. The new test would take away the incentive for hospitals to increase patient volumes. Instead, it would beef up incentives to decrease readmissions and encourage hospitals to work with community groups and more closely with physicians to care for patients before they are hospitalized.


"The expectation is that implementing these system changes will produce incentives that reward providers for achieving efficiency and higher quality through integration of services," the state wrote in its report.

The plan still awaits action from the Centers for Medicare and Medicaid Services. State officials hope to begin implementing it next year.

"We've received the proposal from Maryland and we look forward to reviewing it and working with the state," the agency said in a statement.

Joseph Antos, a fellow with the conservative American Enterprise Institute who served on the state's Health Services Cost Review Commission for eight years, called the state proposal "more than aggressive," and described the spending caps for hospitals "a remarkably tight limitation."

But hospitals also want the state to keep the Medicare waiver, so it will have to come to some consensus, he said. Losing the waiver would mean a loss of around $1 billion in annual hospital revenue.

"The health care industry is getting more money out of Medicare than they would have without the waiver," said Antos. "If there is a time to show solidarity, it is critical now."

State officials worked with hospitals and insurers on the application over several months. Sharfstein said they will continue to talk about the plan and could make changes.

Dr. John Chessare, president and CEO of Greater Baltimore Medical Center in Towson, said the proposal unnerves some hospitals because it calls for a totally different way of doing business.

"They have to morph themselves into an entity that manages the care of a person and doesn't wait for them to get sick," Chessare said. "Nobody has seen their role in this expanded light. That is why everybody is scared, because they need to become a new entity."

Chessare said GBMC has begun moving toward more preventive care, but the change in approach is taking time. The hospital created a network of 100 primary care personnel under its umbrella, but most of the revenue still comes from hospital care rather than physician care, Chessare said.

"We are scared about the payment system not changing fast enough," he said.

He said hospitals support the goals of the state to cut costs and improve care, but more discussion is needed.

"We are aligned around the goal," Chessare said. "The question is how fast can we get there and what are the rules."

Coyle, of the Maryland Hospital Association, said the plan contains new approaches that haven't been tried in other places.

"There is certainly room within Maryland's health care system overall to continue to reduce costs; hospitals are doing that every day," she said. "I think what we are talking about here are very new approaches that haven't been tried in other places.

"This is truly on the edge of policy experimentation," she said.

Coyle and others said more details would help hospitals figure out the ramifications of the plan.

"These are unchartered waters," said John Topper, CFO of Mercy Medical Center in Baltimore. "There is a scary part and exciting part. We have all these ideas on how to manage total population health, but the question is how it will be put in place and what incentives we will get for doing it."

Topper said he hoped the state would consider rate increases to offset hospitals seeing fewer patients. It would be difficult to make up the difference entirely through cuts, he said.

"If they are going to reduce volume growth, they will have to provide some balance in the rate increase," Topper said.


The state's Health Services Cost Review Commission, which sets hospital rates, would be responsible for hammering out a lot of the details under the state's plan. Sharfstein said state officials wanted to leave some flexibility in the process.

"There is a strategic decision not to hard-wire the application with a lot of commitments," Sharfstein said.

But Burrell, of CareFirst BlueCross BlueShield, said it is possible to be too vague.

"We're not taking the view that you have to do this in a straightjacket and tell us every little thing," Burrell said. "You can't be so vague in terms of being flexible that we don't know what we're going to do."


Inpatient and Outpatient Hospital Spending Growth for U.S. and Maryland


2005: 7.95 percent5.98 percent

2006: 8.37 percent6.42 percent

2007: 8.76 percent6.86 percent

2008: 9.14 percent7.10 percent

2009: 9.39 percent7.20 percent

2010: 9.65 percent7.23 percent

2011: 9.88 percent7.55 percent

Source: Health Services Cost Review Commission