Panel OKs rate reform; Md. hospital costs can track inflation after mid-2000; Health care


State regulators approved a plan yesterday to reform the way Maryland sets hospital rates after a work group hammered out a compromise that would phase in increases and avoid the uncertainty and rancor of annual debates over how much hospital rates should change.

The plan will give hospitals an inpatient rate increase of 2 percent for the fiscal year beginning in July -- less than the expected inflation rate of 2.7 percent, which hospitals had been seeking. After the first year, rates could track inflation as long as Maryland keeps its costs below national benchmarks.

The rate-setting system influences the insurance premiums that Marylanders pay. It also is critical for the hospitals, determining whether they have the cash to expand -- or at least maintain the same level of service -- or must contract to meet cost controls.

The system reform is designed to end annual haggling among hospitals, insurers and the rate-setting panel, which has struggled to keep Maryland rates down. Both hospitals and insurers wanted a system that will provide more stability and predictability so they can plan more than a year at a time.

The five-month reform effort was also driven by concerns that hospital costs in Maryland had been increasing faster than in other states, where HMOs have taken advantage of an unregulated market to squeeze rates.

Yesterday's consensus included elements pushed by insurers, who are seeking to hold down hospital costs, and elements proposed by the hospitals, who said too stringent rate-setting could harm patient care.

"It wouldn't be a deal if each side didn't feel some pain," said Kevin Sexton, president and chief executive officer of Holy Cross Hospital in Silver Spring. "We're accepting less in the first year to get on the right path."

David Wolf, executive vice president of CareFirst BlueCross BlueShield, the state's largest insurer, also approved of the compromise. "We believe there is a good working relationship with the commission and the hospitals that would allow us to achieve our goals. We want to give the new system a chance to work," he said.

One insurer representative on the work group, Barry Rosen, an attorney representing Mid Atlantic Medical Services Inc., challenged the consensus. He said the plan would work fine if, as believed, Maryland cost increases have been at or below the national average for the past year. Until complete data is available for 1999, he said, the deal risks moving Maryland ahead of the nation, which could cause the Medicare program to refuse to pay Maryland rates.

As approved yesterday, the new system would allow the rate-setting Health Services Cost Review Commission to step in if the cost of an average hospital stay in Maryland increased faster than national rates.

As long as Maryland rates remain below the national benchmarks, hospitals' rates would automatically be adjusted by inflation, as measured by a "market basket" of Maryland hospital costs. Individual hospitals would have their rates scaled up or down from the overall inflation figure, based on measures of their efficiency.

The reform also shifts from a focus on setting rates for individual services -- such as an X-ray or a day in the hospital -- to setting targets for the cost of an average case at each hospital.

The work group left unfinished a number of technical details, such as how to set case targets and how to measure hospital performance to scale inflation adjustments up or down.

The commission's staff and hospital and insurance representatives hope to develop the precise formulas during the next few months.

The group left for later study several complex issues affecting hospital costs in the state, including excess hospital capacity, a nursing shortage and continuing disputes between hospitals and insurers over claims denials.

Yesterday's consensus was reached during hard bargaining at a public work session. While various points were being debated, representatives of interest groups passed notes or huddled in small groups in the hallway to refine their positions.

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