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Hospital rate rules under fire

THE BALTIMORE SUN

When ailing Marylanders enter a hospital, a unique regulatory system stands behind them, holding down hospital rates and guaranteeing care for those who can't afford to pay.

It's been this way for more than 20 years, since the state legislature created a hospital rate-setting system, still the only one of its kind in the nation.

But today the system faces unprecedented challenges and growing demands for change from insurers and employers.

The Maryland Chamber of Commerce, under president Champe C. McCulloch, is urging Gov. Parris N. Glendening to form a commission to consider overhauling the system. There is a "crisis in the regulation of health care," the organization says.

Jeff D. Emerson, chief executive of HealthPlus, a Greenbelt-based health maintenance organization, recommends that the system be discarded. "I think it squelches competition" among hospitals, keeping rates higher than they should be, he says.

Even state legislators -- who are proud of the regulatory system's accomplishments -- are raising questions. Rather than approve hospital regulators' proposals to impose new costs on community surgery centers, the General Assembly recently decided to study the issue this summer.

That study could become a springboard for a far-reaching examination of the regulatory system's continuing effectiveness. "I think it's not only time, but long overdue," Mr. Emerson says.

The regulation debate results from changes that are transforming the health-care system.

Cost-conscious insurers are demanding cheaper alternatives to inpatient services, encouraging the development of community outpatient surgery centers and expanded use of nursing homes to treat patients who otherwise would remain hospitalized. Hospitals are responding by breaking down competitive barriers and forming alliances with other hospitals, doctors and other providers of health services.

"In an industry undergoing change as rapidly as the health-care industry," the chamber says in a letter to Governor Glendening, "attempts to regulate become increasingly more difficult."

The critics' concerns extend to the entire state health-care regulatory system.

In 1971 the legislature authorized creation of what eventually became the Health Services Cost Review Commission, which regulates hospital rates. Then in 1982 the Health Resources Planning Commission was established to determine how many health facilities -- from hospitals to nursing homes and surgery centers -- Maryland needs. In 1993, another agency, the Health Care Access and Cost Commission, was set up to make the health-care market work more efficiently.

In addition to the three agencies, the state Department of Health and the Maryland Insurance Administration oversee health services and health insurers.

"The overlap and confusion are obvious," the Maryland Chamber of Commerce says of the regulatory system, "as are the costs and delays involved in such a complex regulatory superstructure."

Spurred on by the chamber and their own questions, legislators have directed regulators to prepare a report on how the agencies coordinate their efforts.

But neither the chamber nor the legislature has reached the point that Mr. Emerson has. The hospital rate-setting system, which is the foundation of state regulation of the health business, continues to enjoy support in Annapolis and in the politically influential hospital industry.

"It unquestionably is the most effective system in America," says Larry Lawrence, executive vice president of the Maryland Hospital Association, noting the record of cost control and providing charity care.

"We haven't seen any indications whatsoever that there is any undermining of support for the system," he says.

The question raised by most people isn't whether the system should be abandoned, but how it should be changed. "Some degree of regulation of this critical part of Maryland's economy is undoubtedly appropriate," the chamber acknowledges. "Defining the right form of involvement by government is the challenge."

Business advocates favor greater reliance on competition as a means of forcing hospitals and other health services to become more efficient. Regulators agree such competition is good, but say it must be guided to prevent the kinds of serious problems that gave rise to the regulatory system in 1971.

Hospital costs then far surpassed the national average, a problem that insurers, employers and consumers shared in the form of higher charges for patient care. Marylanders who didn't have insurance were becoming a costly burden.

The legislature passed a law creating a regulatory system founded on these goals: to contain costs, provide access to hospital care for all Marylanders and increase the fairness of the payment system, which featured different rates for different patients.

"When you go back and look at the performance of the system over the last 20 years there's a lot of evidence that we have fulfilled those goals," says Robert B. Murray, executive director of the Health Services Cost Review Commission.

Hospital cost increases dropped below the national average. Charity care was funded by building its cost into the rates paid by insured patients. Fairness was achieved by requiring each hospital to charge all insurers the same rates.

One of the key benefits of the system is that Medicaid and Medicare, federal health programs for the poor and elderly, pay virtually the same hospital charges as other insurers. This way the government helps pay for charity care, which currently amounts to more than $400 million a year.

In other states, Medicare and Medicaid generally pay less than other insurers. The federal government agreed to participate in Maryland's regulatory system because it was able to hold annual hospital cost increases below the national average, thereby restraining cost increases for the two federal programs.

Few questioned Maryland's regulatory system until the lTC health-care system itself began to change in the 1980s. HMOs, which manage care, began steering patients to hospitals with the lowest rates. That's a particular problem for urban teaching hospitals like Johns Hopkins and the University of Maryland, whose rates are higher than average because they provide a lot of charity care and also bear the costs of training young doctors.

Then HMOs began sending patients to community outpatient surgery centers, which can charge less than hospitals because they don't have as much overhead and don't have to provide charity care, though some do so anyway. This poses a threat to many hospitals.

Regulators asked the legislature this winter to allow them to charge surgery centers some of the costs of charity care and medical education, but the legislators decided to first study the issue.

Even so, Mr. Murray says the regulatory system is evolving to help hospitals adjust to this and other business challenges -- without losing the ability to control costs, set fair rates and provide charity care.

So-called "alternative rate setting" will permit hospitals to meet competition from surgery centers by lowering prices for hospital-based outpatient surgery. But the alternative rate-setting methodology isn't simply a bookkeeping trick. To take advantage of it, hospitals must find ways of providing outpatient surgery more efficiently, Mr. Murray says.

Greater Baltimore Medical Center in Towson is the first Baltimore-area hospital to benefit from the new outpatient pricing system.

But Mr. Murray says others in the region, including Anne Arundel Medical Center, are asking for permission, which is granted if the hospital appears financially able to provide outpatient services at the proposed rates.

To assist Hopkins, the commission is allowing the hospital to do special "package" pricing of costly, complex services such as transplants. This program allows Hopkins to charge a fixed fee, instead of a rate that would otherwise vary among patients, to satisfy insurers' demands for predictable pricing.

In its boldest experiment, the commission has authorized North Arundel Hospital to assume risk by agreeing to provide services to an HMO's subscribers under a fixed budget.

If the hospital can take care of subscribers' problems for less than the budgeted amount, it keeps the difference as profit. If the hospital can't, it takes a loss -- within limits monitored by the commission.

Mr. Murray says the North Arundel example demonstrates the regulatory system's ability to meet the needs of HMOs. "This system has the flexibility to change and that's a function of the way the law was written."

Mr. Emerson draws the opposite conclusion: that the traditional rate-setting system is breaking down under marketplace pressure.

"There are cracks in the dike and the water is beginning to spill out," Mr. Emerson says. "North Arundel is a perfect example of that."

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