Once a month, people gather in a nondescript, state-issue conference room in Baltimore to discuss topics such as "the non-hospital-specific portion of the labor market adjuster" and "the 3 percent corridor for undercharges in ancillary services."
Behind the jargon is a complex system that determines how much Marylanders pay for hospital care. Using sets of dense formulas, the Health Services Cost Review Commission sets how much each hospital can charge for each service.
That system could be about to undergo its most serious changes since it was created 25 years ago. Some are likely in the next few months; more dramatic reforms are possible in perhaps a year. The changes could determine whether health costs go up or down, which hospitals prosper and which have to close, and how and whether people without insurance get care.
Some want the rate-setting system junked altogether. In the current competitive environment, "I don't think any government agency can inject as much efficiency into the marketplace as the marketplace could on its own," said Richard Zoretic, chief executive officer of United HealthCare of the Mid-Atlantic.
More are calling for reform. There is no consensus on how, but there is a growing sentiment for change among hospitals, insurers, policy-makers and the rate-setters themselves.
"I think everybody understands the way things have been will no longer be," said Thomas P. Barbera, president of the state's HMO trade group and executive vice president of Mid Atlantic Medical Services Inc., a Rockville managed-care company.
Don S. Hillier, who chairs the rate-setting commission and is trying to figure out how to make it work better, said, "It keeps me awake nights -- and I didn't think I was that kind of guy."
For a long time, the system generated pride, not sleepless nights.
Maryland created its rate-setting system in the 1970s, when costs were rising at a fairly rapid clip everywhere. The market exercised little control, since third-party insurers typically paid more or less whatever hospitals charged. And the cost of an average hospital stay in Maryland was about 25 percent above the national average.
"If ever there was a market that called out for price regulation, this was it," said Carl Schramm, a health economist who served on the cost review commission from 1976 to 1985. Schramm is now president of Greenspring Advisors, a merchant banking firm concentrating on health-related start-up businesses.
From 1976 to 1992, rate regulation drove Maryland's costs from 25 percent above the national average to 13 percent below. At the same time, hospitals, with predictable revenue streams, remained solvent.
And, the commission-set rates -- the rates all insurers and government agencies must pay -- contained an allowance for training residents and for paying for care for the uninsured, so those costs were shared broadly. Hospitals had no incentive to turn away uninsured patients, so Maryland did not have "patient-dumping" controversies or a separate system of charity hospitals.
But over the past few years, the trend has reversed. For six years in a row, Maryland's average cost grew faster than the nation's. Not only is Maryland's price advantage gone, but the cost review commission estimates a Maryland hospital stay currently costs about 3 percent more than the national average.
It isn't that the rate-setting system has changed; it's the world around it that's different.
"In the '70s and '80s, Maryland did an outstanding job on controlling costs, but that was compared to a nation that was totally uncontrolled," said Philip B. Down, chief executive officer of Doctors Community Hospital in Lanham and a member of the cost review commission.
But the advent of managed care upset the apple cart. In the other 49 states, HMOs have been demanding -- and getting -- discounts from hospitals. Costs nationally have been essentially flat, increasing just 0.4 percent on average over the last four years. Over that period, the cost of a hospital stay in Maryland has increased, on average, 3.4 percent a year.
Watching the numbers with increasing discomfort, the regulators have tweaked their formulas with new caps and ceilings and a "systems correction factor." Each time, HMOs have called for more aggressive rate controls, while hospitals have complained they're being squeezed too hard. So far, there has been little impact on cost trends.
Slow responses
Robert Murray, the commission's executive director, says commission actions necessarily produce slow responses. A few hospitals a month get their rates adjusted, so it takes a year after a change before all hospitals have had their rates set by the revised formula.
The commission is now gearing up to tighten its formulas again by spring, and to take targeted action against high-cost hospitals. (Murray last week recommended shutting inpatient care at New Children's Hospital in Baltimore, although the commission deferred action for a month.)
"What we need to do is some fine-tuning to continue to contain costs," said House Speaker Casper T. Taylor Jr. "It's important that we maintain a competitive edge in our Maryland economy. To do that, we can't let medical costs get too high."
The speaker is inclined to leave the details of regulation to the regulators.
He is, however, convening a series of meetings to consider how the regulators are organized. He expects the next session of the legislature to produce a bill combining three state commissions into one, or, as an interim step, two.
Besides the cost review commission, there is the Health Resources Planning Commission, which can give or withhold approval for expensive capital plans and new services, and the Health Care Access and Cost Commission, which regulates the small-group insurance market and produces HMO report cards.
While pushing reform of the regulatory system, Taylor says he will be "very protective of keeping cost regulation" as a way of assuring care for the uninsured.
While it waits to see if it gets merged with another board, the cost review commission is continuing its efforts to modify its formulas in the next few months.
At a recent planning retreat, the commission decided it not only wanted to stop losing ground to the national average, but to beat the national figure by 2 percentage points a year for the next three years.
The Maryland Hospital Association has questioned that target, calling for a "deliberative and analytical" effort to set goals. The HMO association has called for more aggressive rate-cutting. Both the goal itself and the means for reaching it are likely to be debated through the fall and winter.
Basic retooling
Meanwhile, there is increasing talk of more fundamental reform.
Calvin Pierson, president of the hospital association, long a strong supporter of rate regulation, said, "Most of our membership believes there needs to be some very basic retooling of the system. It was designed in the '70s for conditions that existed in the '70s, but at the turn of the century, conditions are very different."
Besides the growth of managed care, the most vexing change for the hospitals has been the growth of freestanding centers for ambulatory surgery and other outpatient services. Those unregulated centers are under-pricing and taking market share away from the hospitals, since they not required to help pay for care for the uninsured and are free to negotiate discounts with HMOs.
Pierson said the hospitals need to talk more to reach a consensus, but generally favor a simpler regulatory system that will allow hospitals more flexibility to negotiate contracts with HMOs and that deals with currently unregulated competitors.
At least one hospital executive, Winfield M. Kelly Jr., president and CEO of Dimensions Healthcare System, which operates two hospitals in Prince George's County, has begun circulating a position paper to legislators calling for a phaseout of the system over the next five years.
On the HMO side, Barbera said, "There's an absolute consensus that for hospitals costs to continue to be above the national average is unacceptable, but different HMOs have different levels of patience" with system reform.
John A. Picciotto, executive vice president and general counsel of CareFirst Inc., the parent of the Maryland and D.C. Blue Cross plans, says he hopes to see a consensus on a reformed system develop over the next six to 12 months.
Kelly said he'd like to see the next legislative session, in addition to combining commissions, set up a study of the system's future, including how a deregulated system could pay for training medical residents and for care for the indigent. Ultimately, he said, the reform process may last for several years.
James J. Xinis, president and CEO of Calvert Memorial Hospital in Prince Frederick, who chairs a hospital association task force on rate regulation, believes it will take some time for a consensus to form. He said there has been so much focus on how to adjust the formulas in the short term, dealing with problems like calculating the labor market adjuster, that "we haven't spent a lot of time on structural reform."
Pub Date: 11/08/98