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Hospital rate-control is working Legislators have chance to head off inequities built into managed care


For nearly 20 years, Maryland's Health Services Cost Review Commission has aimed to have all payers pay the same prices for hospital services.

For the consumer and the hospital industry alike, this rate-setting system ensures a measure of fairness in an increasingly competitive health care marketplace.

It means that a given hospital charges the same price for a particular procedure regardless of who pays the bill.

Simply, the cost of an appendectomy should not vary based on whether the patient is covered by Medicare, Blue Cross or an HMO.

While some, especially advocates of managed care, argue that regulation of hospital rates is outmoded, it is hard to argue with the results in Maryland.

The cost of a hospital stay has gone from 23.6 percent above to 8.1 percent below the national average, and Maryland hospitals have outperformed the country as a whole in containing cost increases for 18 of the past 19 years.

The rate-setting system prevents larger insurers, whether government or private, from bullying and distorting the market.

For instance, in every other state Medicare pays hospital rates that are discounted to below actual cost, and the remaining charges are shifted onto private insurers.

By having all payers pay the same prices, the rate-setting commission has encouraged Maryland hospitals to serve patients without regard to insurance coverage, thereby avoiding the two-track system of care seen in most states, where financially strapped governments must operate hospitals to provide care to the poor and uninsured.

But how are the costs of uncompensated care -- technically defined as charity care and bad debt created by patients who renege on payments -- accounted for in the Maryland system? Who pays the bill when the patient doesn't?

To appreciate the importance of the question, it is useful to look at the scope of the problem.

More than 700,000 Maryland residents -- many of whom work for employers who do not offer benefits -- lack health insurance of any kind.

As a result, the HSCRC reports that hospitals in the state provided almost $400 million in uncompensated care in 1994.

The short answer to the question of who pays the bill is that all payers do, in the form of increases to the rates charged by each hospital.

The costs of uncompensated care are built into rates on a hospital-specific basis, reflecting each Maryland hospital's reported costs for charity care and bad debt. But those costs vary widely.

That is because the poor and uninsured tend to go to hospitals near where they live, whether in the inner city or rural Maryland.

And certain facilities, such as the University of Maryland Medical System and the Johns Hopkins Medical Institutions, provide specialized and extraordinarily costly care to people from all over the state, regardless of insurance coverage or ability to pay.

Other hospitals, meanwhile, serve more affluent communities with fewer uninsured people and, on the whole, treat less severe illnesses and injuries.

As a result, the increase to hospital rates caused by the amount of uncompensated care provided ranges from just over 1 percent to more than 27 percent.

So while it is true that all payers are charged the same price at any given hospital, there is significant variation in rates among hospitals in the state.

Because upward rate adjustments occur at the level of individual hospitals, we should return to the question: Who pays for uncompensated care?

Now the answer is this: The insurers who pay for services at a particular hospital also support the uncompensated care provided by that hospital.

Thus, a patient whose treatment at University Hospital is approved by his health plan contributes to the costs of those who cannot pay their bills at University.

Although the financing of uncompensated care through

establishing consistent prices for all payers has proved effective to date, the era of managed care has seen a profound shift in control of the health care dollar.

Where once patients could go to almost any hospital on the recommendation of their doctor, today most must have their care pre-approved and are told what facilities they can use.

Not surprisingly, managed care companies look to pay the lowest possible cost and, with price as a primary criterion for the selection of "in-plan" facilities, hospitals with high uncompensated care adjustments built into their rates are at a disadvantage.

While they cannot discount prices in Maryland's regulated market place, managed care companies can use less expensive hospitals, those with smaller amounts of charity care and bad debt.

Regardless of the needs of the uninsured, a city hospital with a 16 percent uncompensated care rate adjustment looks less attractive on the bottom line than one in Baltimore County or Howard County with only a 5 percent increase in base rates.

Recognizing the potential distortion of the market caused by wider and wider variations in hospital rates, in 1992 the General Assembly authorized a study of alternatives to the hospital-by-hospital financing of uncompensated care.

An HSCRC task force recommended dividing the state into three regions and pooling uncompensated care costs among the hospitals serving those areas.

Instead of a hospital's rates being determined by the affluence ,, or poverty of its surrounding neighborhood, uncompensated care costs would be shared more broadly, and not only by payers but by hospitals as well.

For the sake of maintaining equity in the rate-setting system, the hospital industry endorsed the task force report.

But when the HSCRC proposed in 1995 to move forward with regional pooling of uncompensated care costs, a small group of hospitals -- all with low uncompensated care percentages -- strongly objected to changing the current hospital-by-hospital system of rate adjustments.

These hospitals offered economic arguments -- saying the anticipated steering by payers to lower-cost hospitals had not occurred, and that teaching hospitals and other facilities with high levels of charity care and bad debt had maintained their market share.

They talked about health policy -- asserting that pooling would encourage further over-utilization of hospitals, especially emergency rooms, by the uninsured.

They took a classic city vs. county political approach -- arguing that pooling of uncompensated care costs would penalize patients and hospitals in the suburbs with a "hidden tax" to subsidize urban patients and hospitals.

These hospitals did not articulate an obvious self-interest: that, issues of fairness aside, giving up the advantage of lower prices, especially in a market where managed care continues to squeeze down costs and limit the use of hospitals, would be an awfully unappealing business practice.

In light of the controversy, regional pooling of uncompensated care costs was deferred pending further study by the Maryland General Assembly.

The legislators and business leaders who conceived Maryland's hospital rate-setting system in the early 1970s recognized that an unregulated health care market could not be relied upon to support the social missions of hospitals, including charity care.

From its inception, the HSCRC was intended not only to set fair prices but to assure access to needed care for all Marylanders.

During the current session, the legislature will again face the question of who should pay for care when the patient can't.

Certainly, the current method of hospital-by-hospital rate adjustments encourages payers -- both traditional insurers and HMOs -- to favor one hospital over another based simply on geography.

But whether they approve regional pooling or look to devise some other method of financing uncompensated care costs, legislators should not focus on the fight among hospitals over market share.

The issue of uncompensated care is not about hospital profits, it is about everyone -- payers, hospitals, citizens -- equitably sharing a social responsibility.

Since any of us could be without health insurance at some time, all of us should hope that the legislature remains committed to the principles of fairness and access to care that have long been hallmarks of the Maryland system.

Douglas Peddicord, Ph.D, is a policy analyst at the University of Maryland School of Medicine.

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