Maryland's one-of-a-kind method of setting hospital rates - a system that has provided nearly $1 billion in additional federal money per year to local hospitals and consumers - is threatened by pressures to reduce costs under the U.S. health care overhaul measure.
The system, which dates to the 1970s, has been hailed for spreading the expense of patient care, slowing the growth of patient premiums and keeping Maryland hospitals afloat. But it has not controlled costs as well in recent years. And with the new health care overhaul law prompting changes in federal payments, Maryland will have to work hard to preserve its advantage.
"We are going to go through a messy decade," said Chet Burrell, chief executive of CareFirst BlueCross BlueShield, the state's largest health insurer. "The path forward isn't clear, and it's very complex."
Alone in the nation, Maryland has been getting a special deal. As long as its Medicare spending per hospital admission does not rise faster than the national average, the state is allowed to dictate the rates at which Medicare and Medicaid reimburse hospitals.
That bargain is worth an estimated $900 million to $1 billion in additional federal funding per year. The extra federal money is the lubricant in a system that covers charity care, so hospitals don't turn away the uninsured, go bankrupt treating them or pass the costs on to everyone else.
Advocates say it makes for a fairer system. Within a hospital, patients are billed roughly the same amount for the same service.
"Maryland, for many, many years, has had one element of this very, very complicated issue solved," said Robert Neall, chief executive of Priority Partners, which manages Medicaid coverage for about 170,000 low-income patients in the state.
But to help cover the expense of insuring millions more Americans under the Obama administration's health care overhaul, the U.S. government plans to reduce growth in Medicare payment rates for hospitals, which have agreed to $155 billion in federal cuts over 10 years. That will lower the national average that Maryland must beat.
Carmela Coyle, presidentof the Maryland Hospital Association, said federal health care changes are bound to strain Maryland's rate-setting method. "We really are looking at continuous pressure on hospital rates. It will take the hospitals from a financially fragile state to worse."
The recession has forced tough decisions about hospital rates. The state contributes to Medicaid spending and has been balancing its budget by pulling back. That has sparked tensions between rate-setters and hospitals, which are among the state's largest employers and say they are already feeling the pinch. Now the pressure is really on to keep costs down or lose the multimillion-dollar federal sweetener.
"It's vitally important," said Robert Murray, executive director of the Maryland Health Services Cost Review Commission, the rate-setting body.
Without the additional federal money, current and former rate-setters say, Maryland's system probably would unravel. Hospitals could substantially increase charges to private insurers and the uninsured, something many institutions outside Maryland have done for years.
"The health systems are poised for this, because the health systems are very large and very influential," said Jack Cook, who worked for Maryland's rate-setting commission in the 1970s and now is a health care finance consultant. "In a contracting faceoff with most insurers, I think they would have their way."
Maryland's Medicare and Medicaid deal, known as "the waiver" because it waives the usual way the federal insurance programs for the elderly and the poor set their reimbursement rates, dates to 1977. Sen. Barbara A. Mikulski, a Maryland Democrat, sponsored the measure that was written into federal law in 1980. A handful of other states once had waivers, but all lost them or voluntarily gave them up when they abandoned rate-setting.
The test Maryland has to meet is cumulative rather than annual - its average Medicare increases since 1981. Murray figures the state has at least five years before it would be in danger of losing the money, because of the cushion it built up earlier. But Maryland's performance in any year affects its running average, so it can't afford any thumb-twiddling.
"Everybody needs to keep their nose to the grindstone on this," said Joseph Antos, a commissioner with the cost-review body. "The waiver cushion is not that [large]."
Skyrocketing health costs are a major problem nationwide, eating away at Americans' wages and contributing to the federal deficit. Everyone agrees that health spending must be reined in. The problem is how.
As experts grapple with new ways to deliver care, some are taking a look at Maryland's example. Massachusetts is debating whether to review health care rates and reject any deemed excessive, a move in the rate-setting direction.
"This is a way to address the cost problem," said Paul Ginsburg, president with the Center for Studying Health System Change, a policy research group. "I'm predicting that the federal government will start looking at this very seriously in a couple of years. ... It appears as though Maryland has had success, and it's had that success without ruining its hospital industry."
How well Maryland contains costs depends on the measurement, though.
Murray says it works: Hospitals in Maryland spent 26 percent more per case than the nation as a whole in 1976, but a bit below the average in 2007, he said. If the U.S. experience mirrored Maryland's, it would have saved more than $1.8 trillion since 1976, he said.
But Maryland's Medicare bills for average hospital stays have increased faster than the nation's in 10 of the past 15 years. And it ranks sixth-highest in the nation for money spent on chronically ill Medicare patients in their last two years of life, according to the Dartmouth Atlas of Health Care. Maryland's cost-review commission hopes to attack the problem with incentives for avoiding preventable readmissions.
Nelson J. Sabatini, Maryland's health secretary under Govs. William Donald Schaefer and Robert L. Ehrlich Jr., says that a federal investigator such as the Government Accountability Office ought to audit the system.
"We've had a huge expansion in the number of people covered under Medicaid, so this is a different environment than we had in 1980, and who says it's perfect or it works?" he said. "Let somebody really take a good, hard look at it and find out."
Maryland's health secretary is confident the answer is yes.
"There's no doubt in my mind that this is a state that has held costs down, not by breaking the bank, but by beating the national average by 1 to 2 percent a year," said John M. Colmers, a former executive director of the cost-review commission.
Even amid the wrangling over Maryland's effectiveness on cost-control, hospitals say the pressures are more and more intense. Hospitals expect to have about a 1 percent operating margin at the end of June, which many have said is too tight.
"At some point in any business, you can't cut costs any further," said Bob Reilly, chief financial officer at the Anne Arundel Health System.
Though the federal health care overhaul aims to ratchet back the growth in payments per case, it does not tackle the bigger question: How do you rein in total spending? Expanding insurance to 32 million more people means more patients using more health care. Even without the overhaul, usage has ballooned as people need or demand more services.
In Maryland, the hospital association, the rate-setting director and the health secretary told the state's congressional delegation that they want to devise a plan to "modernize" the waiver program by November. Rather than measuring just the cost of the average inpatient stay, the waiver should take into account a much broader slice of rapidly rising health costs, they say.
Inpatient hospital bills account for less than a quarter of all health care costs here. The test does not include outpatient services or physicians, for instance.
Whether doctors should be included is a key question, said Burrell of CareFirst. In an ideal world, the primary-care physician would be the "quarterback" of a patient's care, coordinating with other providers and hospitals, he said.
Gone could be the days when patients are readmitted to the hospital for an ailment that would have been better handled by a primary-care doctor, Burrell said.
Getting a handle on hospital spending will also require more cooperation. The lack of it is one of the reasons that other states decided to scrap their rate-setting commissions in the 1980s and '90s. Negotiating became too political, observers say.
That has become more of an issue in Maryland lately. Former state rate-setters say the system hasn't been nearly as successful at cost control since the early '90s, a change they attribute to pushback from hospitals.
The hospital industry brings "huge political pressures" to bear on the cost-review commission, said Jack Keane, a health care consultant who was a senior staff member there from 1981 to 1985.
"The industry leaders now think it's a game and that the public has an endless capacity to have additional rate increases," said Cook, the chief rate analyst until 1979.
Coyle, president of the hospital association, said her members are concerned about being more efficient but need a cushion. "There has to be a reasonable bottom line in order for us to invest and improve," she said. "It's a balancing act."
Hospitals were in favor of trying rate- setting here in the 1970s to ensure solvency. The idea was to cover the cost of charity care by building it into the rates that everyone paid, with the cost-review commission adjusting each hospital's charges to account for its particular situation.
Advocates say that dampened the hospitals' incentive to turn impoverished patients away - something that happens elsewhere. The system also prevents the uninsured from being charged two or three times as much as the negotiated, lower rates for the insured, a common practice.
Hospitals on the whole are probably better off under Maryland's system, said Martin L. "Chip" Doordan, chief executive of the Anne Arundel Health System.
Some hospitals - particularly those that do not see a lot of low-income, uninsured patients - would do better without it, industry observers say; others, such as Bon Secours, which provides care for some of Baltimore's poorest residents, would likely fail. Reform won't get everyone insured.
That's why rate-setters and many in the industry think the system is worth keeping, even if hanging on to the waiver money will prove difficult. They say Maryland should have an easier time innovating in the wake of the health care overhaul than other states, because it has a mechanism for getting insurers and hospitals on the same page.
"Trying to improve quality, trying to improve efficiencies, can be done writ large in Maryland," said Kevin Sexton, chief executive of Holy Cross Hospital in Silver Spring and vice chairman of the commission.
And he says that a system all the players in Maryland know, if not always love, will have value at a time of big change.
"That kind of predictability may turn out to be very useful," he said.