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Federal government approves new Medicare waiver for Maryland

The federal government is expected to announce its approval Friday of a plan that would allow Maryland to continue setting hospital reimbursement rates for Medicare patients and could become a national model for reducing health care costs.

The decision, eagerly anticipated by state officials and hospital executives, allows Maryland to remain the only state in the nation with a waiver from federally set Medicare rates, generally considered the lowest rates paid in every other state.


The blessing from the Centers for Medicare & Medicaid Services comes as a victory for state officials who pushed to keep the waiver, but modernize it to make it more sustainable by focusing more on preventive care and keeping patients out of the hospital.

While they supported the plan, it will radically alter the way Maryland hospitals — some of the largest employers in their communities — do business. Rather than tying reimbursement to admissions, the new system gives hospitals a pool of money to treat a specific population that will grow in tandem with the state's economy.


"This is among the most important changes in the health care delivery system in the state of Maryland in a generation," said John Colmers, a Johns Hopkins executive who played a large role in the waiver process.

Maryland Health Secretary Dr. Joshua Sharfstein said the plan should result in significant cost savings.

"The challenge in health care is that the system is out of balance," Sharfstein said. "There is enormous focus on caring for people after they get sick and very little attention to keeping people healthy. The incentives that underlie payment are a major reason we have that lack of balance."

CMS said it would closely monitor Maryland's new reimbursement system, which could become a model for other states to adopt if it proves successful. CMS agreed to give the state five years to generate $330 million in Medicare savings or lose the waiver and convert to the system that other states use.

"Today's announcement is an encouraging step to ensure that Maryland's unique health care delivery system can also be aligned with the goals of lowering cost and improving health outcomes for our citizens," said CMS Administrator Marilyn Tavenner in a statement.

Similar efforts to transition care away from hospitals are underway across the country, but Maryland's is the broadest effort that includes a large number of insurers and hospitals.

"This is across the entire breadth of the state," Colmers said. "By doing this on an all-payer basis the type of fundamental change in delivery of care CMS is more interested in pursuing can be done more rapidly and with more sustainability."

The state's waiver, granted 36 years ago, created a system in which insurers, including Medicare, pay the same rate for procedures at a hospital no matter the patient. In other states, Medicare provides the lowest reimbursement hospitals receive and hospitals make up for it by charging other patients more.


In Maryland, the independent Health Services Cost Review Commission sets hospital rates and is able to keep the rate of hospital cost increases lower than in other states. In exchange, the federal government grants Maryland larger Medicare payments to offset the costs of uncompensated care for people won can't or don't pay.

In addition, Maryland's average cost per admission fell from being 25 percent higher than the national average before the waiver to below average now. The waiver system also funds uncompensated care so there is no need for public hospitals.

But the state has struggled increasingly to meet the waiver test that requires it to show Medicare costs grow more slowly in Maryland than elsewhere. The test remained based on an old health care model that focused on inpatient hospital stays, even as health care moved toward a model of keeping patients out of the hospital by providing preventive and outpatient care.

"‎A new day and a new way for Maryland's waiver means we will continue to be at the forefront of cost-effective and modernized care serving as a model for the nation," said Sen. Barbara A. Mikulski, who helped push for the original waiver, in a statement.

The new Medicare agreement would link growth in hospital costs to the state economy, limiting the annual growth rate to 3.58 percent in the first five years. That's the state's average annual growth in the past decade.

Rather than basing rates on admissions, which incentivizes hospitals to admit as many patients as possible, the new plan is based on population. It ties hospital reimbursement to the projected services needed by a specific population.


Ten hospitals in the state, mostly in rural areas, already follow a population-based model. Under that model, the hospitals receive 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.

"We need to shift away from our near-exclusive focus on treating illness, and move to a balanced approach that encourages prevention and wellness," said Gov. Martin O'Malley in a statement welcoming the decision. "Such a shift will reduce costs for families and small businesses and will simultaneously keep many Americans from dying of preventable causes."

The waiver plan was supported by both hospitals and insurers, though hospitals are bracing for growing pains. The change likely means cutting costs and better coordinating the care of patients once they leave the hospital so they aren't readmitted.

"For hospitals, this will be challenging, no doubt about it," said Carmela Coyle, CEO of the Maryland Hospital Association, who described it as moving care outside the four walls of the hospital. "They have never been tried or tested at this scale."

Thomas Mullen, CEO of Mercy Medical Center in Baltimore, said his system wants to coordinate care more with health clinics that can treat patients with illnesses that don't require hospitalization. In the past year, the medical system has implemented programs to prevent readmissions, such as calling patients to make sure they have taken medication after release from the hospital.

"In the past, it was such a piecemeal system that it wasn't the hospital's responsibility," Mullen said. "With the new system, it is everybody's responsibility."


CareFirst BlueCross BlueShield said it was working at ways to implement changes.

"We have already begun discussions with key stakeholders regarding the implementation process and stand ready to do our part to help ensure that it is successful," said CEO Chet Burrell in a statement.

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CMS said in a draft news release that it expected the new model to drive down health costs and improve care in the state.

The agreement calls for the state to reduce the occurrence of 65 preventable conditions by 30 percent over the five years and reduce the number of patients who are readmitted to hospitals within 30 days of discharge.

Sharfstein said CMS would review effectiveness of the plan annually and there will be room for changes.

"There is a process by which CMS would tell us that we're not doing well and we'd have a chance to correct," Sharfstein said.


An earlier version misstated how hospitals are reimbursed under Maryland's Medicare waiver. Insurers pay the same rate set by a commission for procedures at a hospital. But the rates can vary from hospital to hospital. The Sun regrets the error.