We needed to move away from a fee-for-service-driven health care system, where the incentive was to do more to be paid more, and instead move to a system where the incentives are aligned to what we all feel needs to be done.
– Carmela Coyle, CEO, Maryland Hospital Association

Since 1977, Maryland’s unique all-payer system has succeeded in keeping health care costs relatively low. Now the state is embarking on a new demonstration project that could influence health care delivery across the country.

The all-payer system

In most states, facility fees for episodic care are negotiated between hospitals and their various payers. But in Maryland, these fees are fixed by the state’s Health Services Cost Review Commission (HSCRC). Hospitals statewide receive uniform reimbursements for their services, subject to price adjustments for factors like labor costs and acuity mix. Maryland’s top-down pricing even applies to Medicare (which provides the state with a special waiver for this purpose).

While Maryland’s system has historically kept hospital costs below the national average, it hasn’t necessarily curtailed the growth of those costs. Despite uniform pricing, hospitals can still raise revenues by increasing patient volumes. In 2013, health care costs in Maryland grew 7 percent — roughly twice the rate of the state economy and at a comparable rate to health care spending across the country.

Moreover, because Medicare actually pays more to Maryland’s hospitals, it’s considered an “expensive” state for that program. In recent years, Medicare has balked at rising care costs by threatening to revoke Maryland’s waiver.

So state regulators came up with a novel solution that builds neatly on this unique pricing structure.

Putting hospitals on a budget

Maryland’s new five-year demonstration program aims to take its cost-control experiment a step further, using measures much broader in scope than those set by the Affordable Care Act.

The program (which has been piloted with 10 rural hospitals since 2010) places each Maryland hospital on a fixed budget guaranteed by HSCRC. These budgets will increase by 3.58 percent over the next five years, a number that reflects the state’s annual rate of economic growth (averaged over all years since 2002).

Hospitals that go over budget will have to lower prices in the next year to repay their debt to HSCRC. These financial penalties make Maryland’s program much stricter than similar cost-control measures passed in other states (most notably Massachusetts).

What’s more, the program also includes groundbreaking provisions that move HSCRC reimbursements toward global payments. This will greatly incentivize hospitals to coordinate care in order to increase efficiencies and prevent readmissions.

Trends to watch

There are a couple of reasons that this new budget wrinkle makes the Maryland experiment especially worth watching.

Number one, it could be the future of health care — especially if it goes well. It’s received the blessing of the Department of Health and Human Services, which hopes it will slow growth of Maryland’s Medicare payments. And because of its proximity to the capital, Maryland has historically served as a trial balloon for federal programs.

Number two, Maryland could well serve as a living laboratory for cost control and value-based purchasing that could help hospitals across the country meet the challenges of health care reform.

Here are just a few of the ways I believe the program will drive innovation in health care:

Shifting care to non-hospital settings. The new system creates a strong incentive to keep all but the most acute patients out of hospitals. Suddenly, because reimbursements are not driven by volume, hospitals will have financial motivation to shift care to urgent care and surgical centers to control cost and prevent patient revisits. We can also expect to see resources shifted to EDs to provide infrastructure that will direct ED presenting patients with chronic conditions to unregulated settings and home care to avoid expensive admissions.

Leaner hospitals. Now that hospitals have fixed budgets, we will likely see them rethinking their investment in staffing, supplies and utilities. As more patient care is shifted to the outpatient setting, there will be shifts toward consolidated resources and decreased overhead. Inpatient bed capacity can be expected to decrease across Maryland as hospitals look to reduce costs.

Greater coordination of care. At present, nearly one in five inpatients is readmitted within a month of discharge, making readmissions a major driver of hospital costs. In Maryland, hospitals now have incentives to ensure smooth transitions of care and monitor their patients across the care continuum. In the rural “pilot” hospitals, this led to investments in home visit and social work programs — all of which paid dividends in revenue and patient satisfaction.

Focus on population health. In the course of setting hospital fees, HSCRC gathers a wealth of data on patients that can be used to manage group health more effectively. In the “pilot” hospitals, this data supported the establishment of primary care clinics and outpatient centers focused on chronic disease and behavioral health, again with positive results.

Reduction of hospital-acquired conditions and readmissions. Under the new arrangement, hospitals will not be reimbursed for the care of hospital-acquired conditions such as bloodstream infections and bedsores. Also, care of patients who are readmitted within 30 days of a hospital admission will not be reimbursed, and hospitals will be financially penalized if readmissions rates are not curtailed from baseline. Extensive strategies and processes will be instituted by hospitals to control these hospital-acquired conditions and readmissions to help maximize their revenue.

So can Maryland’s budgeting experiment succeed? It will no doubt face challenges. The population is aging rapidly with an increasing demand for care. Consumers may resist the approach as a form of “rationing.” And the state’s ambitious goals will challenge hospitals to be more nimble and innovative than ever before.

Pascal Crosley is vice president, practice development, CEP America and medical director, St. Agnes Hospital in Baltimore, MD.