An annual struggle between Maryland's hospitals and the state's Health Services Cost Review Commission is tradition dating back to the 1970s. Under a unique arrangement with the federal government that has allowed the state to collect larger reimbursements from Medicare than it otherwise would, Maryland for four decades maintained a system in which state regulators determined annually what each service a hospital provided would cost. It kept the rate of growth for inpatient hospital care lower than the national average for many years, but the changing landscape of health care made it obsolete.
Two years ago, the state updated the partnership in a radical way. No longer would hospitals operate under a fee-for-service model, but instead they would be paid a fixed amount to cover the costs of caring for the patients in their catchment areas. Suddenly, the incentive went from putting patients in beds and performing procedures to keeping them healthy and at home.
As a result, though, this week's meeting of the HSCRC is particularly fraught. No longer does the regulatory body decide what hospitals can charge, it decides, in effect, what their budgets will be. It's both much harder for state regulators to manage and more consequential for the hospitals. If the numbers aren't adding up, a hospital can't any longer try to better market its more lucrative services; it's stuck.
The Maryland Hospital Association and others are pushing back from a recommendation by the HSCRC that would hold global revenue growth to 2.02 percent, or just 1.49 percent when factoring in the growth in the patient population. They argue that such a low rate of growth would inhibit their ability to make the kinds of investments that are necessary to ensure the ultimate success of the new arrangement. The issue is particularly acute for academic medical centers like Johns Hopkins, for which the move to global budgeting has been more difficult. We hope the state regulators will take their suggestions seriously and allow for more breathing room in next year's budgets.
As part of the new Medicare waiver, Maryland hospitals agreed to a series of cost-containment and quality-care goals. Among them, the state agreed to limit the growth in hospital spending to the rate of growth in Maryland's economy, historically about 3.4 percent a year; to produce $330 million in savings for Medicare over five years; and to reduce hospital readmission rates. On the whole, it is working exceptionally well. Just half-way through the experiment, Medicare savings already total $325 million, suggesting that attaining the $330 million by the end of year five is all but a foregone conclusion. Hospital spending growth per capita is cumulatively five percentage points below the target so far, and the hospital readmission rate for Medicare patients is more than half a percentage point below the national average. Regulators had been concerned about another metric — the growth in the total cost of care, not just the growth in hospital costs — but the most recent data for this year suggest the state will still make its goals for that statistic as well.
Granted, predicting in advance how this new payment model will pan out is exceedingly difficult. It involves assumptions about inflation, patient population growth and other factors that are simply impossible to determine with certainty in advance. That's why the HSCRC has, for the last two years, baked a half-percentage-point of wiggle room into its annual calculations to compensate for unforeseen events. That funding — the equivalent of about $80 million a year — has not yet been used.
But the broader point is that federal regulators have been nothing but enthusiastic about Maryland's experiment. In as much as it is difficult to predict the state's health care economy one year in advance, it was much more difficult for state and federal officials to see five years into the future, and the Feds appear appropriately flexible. Rather than expressing concern in the few instances so far when Maryland has failed to meet one annual metric or another, it has held up the state as a national model.
The reason the new Medicare waiver is working is because hospitals have started to invest in programs and activities that keep people healthy — for example, better coordinated care at skilled nursing facilities or better follow-up for people who have been discharged from the hospital to make sure they are properly taking medications or completing rehab. The risk is that by worrying too much about holding the line on one measure in one year, the HSCRC will prevent the hospitals from continuing the investments that make the waiver work in the long term. For that reason, state regulators need to consider the hospitals' request for a higher rate adjustment this year not as the usual jockeying but as a crucial factor that will determine whether Maryland's attempt to chart the way to a better, more affordable health care future will succeed.