Maryland Puts Hospitals on a Budget, for Efficiency's Sake

In an experiment, Maryland tries to control medical costs

Mercy Medical Center’s emergency department treats 70,000 patients a year. About 20,000 of them arrive at the Baltimore hospital with minor complaints, such as cuts needing stitches, that could be taken care of elsewhere at a much lower cost. Thomas Mullen, Mercy’s chief executive, says the hospital considered opening an urgent-care unit for lesser injuries, but the economics of running a hospital made it hard to justify the investment. “If I did it, we would lose revenue,” he says, “so why would we do it?”

Mullen may now have a good reason to try. In a novel agreement with the federal government, Maryland will attempt to control rising medical costs over the next five years by limiting the total amount hospitals can charge to treat patients each year. The state will also change how hospitals are paid by private health plans and government insurance like Medicare. The current system bills for each service provided—an incentive for doctors to order tests and treatments. Under the new plan, hospitals on fixed budgets will have to decide whether those treatments are worth the cost. If it works, it will save Medicare an estimated $330 million over the course of the trial.

Mullen is talking with community health centers, including one across the street from Mercy, about partnering to provide urgent care. With a lump-sum budget, every patient he can keep out of the emergency room means Mercy saves money, rather than loses revenue. “We don’t get penalized for trying to do proactive things to improve quality for the patient,” he says.

Maryland is in a unique position to experiment. In other states, hospitals negotiate prices with private insurers and accept the rates set by Medicare, which are often below their costs. Maryland is the only one where a state commission sets hospital prices for all payers—that is, private insurers, Medicare, and Medicaid pay the same thing. It’s similar to how state utility commissions set the rates for electric companies. The arrangement, which dates to cost control efforts in the 1970s, requires a waiver from Medicare to pay Maryland hospitals different rates than the rest of the country.

That agreement is being updated under the new deal. The state will still get to set rates, but overall per-capita hospital spending can’t grow more than 3.58 percent per year, the average growth rate of the state’s economy over the past decade. Health spending in the U.S. has historically grown faster than the economy as a whole, rising from about 5 percent of gross domestic product in 1960 to 17.2 percent today.

Maryland’s existing price controls already capped how much hospitals could charge for each treatment, but hospitals could boost revenue by filling more beds. “It now will be a target with a closed end,” says Kevin Sexton, CEO of Holy Cross Health in Silver Spring, outside Washington. He and Mullen have both represented hospitals on the state’s rate-setting commission and are advising on the transition to the new system.

In recent years, Holy Cross has stopped inducing labor or conducting C-sections for pregnancies before 39 weeks, in line with national guidelines. The change meant fewer newborns needing the neonatal intensive care unit, Sexton says. “Right now, that just costs you money,” he says. Under the new system, Holy Cross will reap the savings.

Doctors anticipate they’ll have to reassure patients that they’re not withholding needed care. “A lot of people are afraid we’re going to cut access,” Mullen says. The details on how hospitals will switch to the new payment model still need to be worked out, but Mullen says the system will have safeguards so that hospitals will be penalized if they simply reduce quality of care to save money. Hospitals will also have greater incentives to prevent unnecessary visits, so relatively inexpensive services such as sending social workers to check that discharged patients are taking their medications may become more attractive. Hospitals will pay closer attention to “what happens before people come and what happens after they leave,” Sexton says.

Plenty could go wrong with the experiment. Sexton is concerned that the growth targets don’t account for the state’s aging population. Mullen worries that new technologies or expensive drugs might hit the market and break their budgets. Already 40 percent of the state’s hospitals lose money, according to the Maryland Hospital Association, and delivering less-expensive care may lead to layoffs. Sexton says the potential upsides are worth the risks but expects bumps along the way. “It would be a mistake to say, ‘Now we know what we’re supposed to do, and we know how to do it,’ ” he says. “I think that’s baloney.”


    The bottom line: Under an agreement with the federal government, Maryland will cap how fast hospital spending grows.

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