Maryland for All?

An all payer hospital payment system just minutes from the US Capitol

A couple of months ago, I had to rush a close family member to an Emergency Room (ER) after a couple of days of high fever. We had been advised by an urgent care doctor to immediately go to the ER. Even though I have worked in healthcare for over a decade, I had never been to an ER. The fact that ER visits can be wildly expensive had been drilled into my head through family and media anecdotes. He was visiting from India, and he had travel insurance. We were worried about his health but also about what this would mean financially if his travel insurance did not reimburse the expenses for the ER visit.

We were staying near DC when we realized we needed to go to the ER. The trip to the ER could have gone two ways (literally). We could have gone to an ER in Maryland or in Virginia. We ended up going to Adventist Healthcare in Maryland. After staying in the ER for about 12 hours, we returned home. We knew the bills wouldn’t arrive for at least a month or two, so we started estimating what it would cost us if his travel insurance did not cover the charges. I found out that the average price for an ER visit in Maryland is the lowest in the country at $623. In Virginia, it costs $1,941. And in California, where I live, it costs $2,960. Maryland’s healthcare costs are so much lower than the rest of the country because of the state’s All-Payer Hospital Payment System and Global Hospital Budgeting.

All-Payer Hospital Payment System

After the creation of Medicare and Medicaid in 1965, hospital costs rose dramatically in the early 70s. In parallel, hospitals serving large panels of non-paying patients were on the brink of insolvency and closure. To reign in costs while ensuring access to care, the Maryland legislature passed a law creating a new agency - Health Services Cost Review Commission (HSCRC). The agency had the authority to set hospital rates for all payers that would apply to all Marylanders rather than letting hospitals individually negotiate with different insurers. At the time, CMS used a cost-based model, which ran counter to the idea of healthcare efficiency. The more it cost Hospitals to provide care, the more they got paid. HSCRC also obtained a waiver from CMS, which meant that even Medicare and Medicaid would pay Hospitals based on HSCRC-approved rates in Maryland. 

Maryland’s legislature had three broad goals.

1. Constrain growth in hospital costs

2. Financial viability for hospitals to provide accessible, high-quality, efficient care

3. Equity and fairness in hospital financing 

Eight fundamental principles in service of the three goals.

1. A Maryland Solution - Healthcare is local. Regulation must also be local to respond quickly to changing local needs.

2. Social mission - Hospitals have an obligation to serve all patients regardless of their ability to pay, and all payers have a shared responsibility to finance uncompensated care and medical education. 

3. Fairness and Equity - An independent commission (HSCRC) must exist to ensure fairness amongst payers, patients, and hospitals.

4. Solvency must be earned - Hospitals must fulfill their mission efficiently and effectively. Society must help maintain the solvency of efficient and effective hospitals to ensure access to care for all.

5. Regulation - Without adequate oversight, market failure in healthcare is inevitable. The market will not finance the social mission while ensuring cost containment, access to care, solvency for providers, and equity for all. 

6. Public accountability - Transparency in prices, quality, trustee relationships, and regulator actions through public access to data is essential to maintain trust.

7. Trust and cooperation - HSCRC was made up of providers and non-providers. The Maryland Hospital Association, which was made up of trustees rather than administrators (as in the rest of the country), supported the HSCRC. Deliberations had to be in open forums to build trust. Flexibility to set rates allowed regulators to respond to market dynamics while balancing the goals of solvency, efficiency, equity, and access.

8. Prospective payment - In contrast to payment methods back in the 70s, the law specified that rates were to be set prospectively. As I mentioned before, even Medicare and Medicaid paid on a cost basis rather than on a prospective basis as it does today. This design was to make sure that patients and payers know what they would pay, and hospitals would understand what they would get paid in advance.

Whack-a-mole.

Even as thoughtful as Maryland’s rate-setting plan sounds, healthcare is a game of whack-a-mole. Disincentives create new misaligned incentives. Although the payer rate-setting system effectively kept costs down for an individual hospital visit, it had a major flaw - it didn’t control the number of visits. Hospitals had no incentive to prevent chronic patients from getting readmitted, and readmissions meant more money.

Global Hospital Budgeting.

Maryland, to its credit, recognized the problem of over-utilization and passed another law in 2014 capping the growth of health spending. Somewhat unthinkable in the rest of the country, but they capped how much revenue each hospital could take in each year. Every hospital in the state is under one fixed budget. Fixing hospital budgets and rates that hospitals could charge for procedures meant that hospitals could not make more money on patients after they hit their revenue cap. The small rural hospitals that might not have enough patients to spend their whole budget still get to keep the difference rather than filling beds.

The global budget was not meant to reduce healthcare spending but to control the growth rate - capping it at 4%. The legislature hoped this would encourage hospitals to consider patients’ long-term health, eventually bending the cost curve.

In 2019, Maryland created a total cost of care model. To complement rate setting and global budgets, it added incentives to reduce hospital visits for six common health issues — substance use disorder, diabetes, hypertension, obesity, smoking, and asthma — to lower health care spending overall.

The jury is still out. But if it works, the hope is that hospitals will invest in community health and advanced primary care to keep people healthy and reduce health care spending. The goal is to prevent hospitals from shifting the spending to facilities outside their own budgets, like primary care or skilled nursing facilities. 

The thinking is that if you limit how much revenue hospitals can bring in, then you push hospitals to look at treating sickness within the community rather than the hospital walls. Hospitals can then start thinking about social determinants of health. Helping a heart disease patient eat healthy food, shop at a grocery store, transport at no cost to get care, access to a community garden, and help with meal prep aren’t typically seen as healthcare interventions. Still, those are exactly the kinds of things that keep patients from getting readmitted. When hospitals stop looking at readmissions as a profit center, they can think creatively to fulfill the community’s broader needs. Early signs are that this model is helping drive down readmissions.

But it’s not all hunky-dory.

While Maryland is the most innovative state, even after 40 years of experimentation, there are still challenges to lowering the cost of healthcare spending. Here are the problems that continue to pester Marylanders -

1. Cost savings haven’t been passed on to consumers. The biggest failure of the rate-setting model is that even though private insurers are paying among the lowest rates for healthcare services in the country, insurance premiums have not dropped. Employers are still pushing more costs onto workers, and private insurance premiums have grown in line with the rest of the country.

2. Drug costs are not regulated under the global budget. Pharma companies are not capped for the drug prices, on the whole, contributing to the lack of cost savings for consumers. A new law (first of its kind in the country) set to take effect in 2022 creates the Prescription Drug Affordability Board. The board will have the power to impose limits on the maximum amount paid or reimbursed for a prescription drug product.

3. Mixed results on utilization and spending. A 2018 study did not find consistent evidence that the model reduced hospital use or increased primary care visits for Medicare beneficiaries after two years. There is no consensus on whether this model has actually lowered healthcare spending.

4. Some providers still charge a fee per service they perform. Doctors, Ambulatory Surgical Centers, and Clinics, unlike hospitals in Maryland, don’t fall under the global budgets. They are paid per service. As a result, routine surgeries were outsourced to care sites that do not fall under the budget. Radiologists for example, still encourage unnecessary testing and imaging to practice “defensive medicine”. Doctors even avoid taking poor patients for lack of reimbursement.

5. The model doesn’t extend health coverage for the uninsured. Rate setting and Global budgets don’t make people sign up for health insurance.

Takeaway

New York, Connecticut, Massachusetts, New Jersey, Washington, Wisconsin, and West Virginia all experimented with payer rate-setting models but abandoned them after the spread of HMO plans. Maryland has stuck to its payer rate-setting model and continued experimenting for the last 40 years. Maryland’s model illustrates how incentive structures in American Healthcare are fundamentally broken. It is really difficult to provide high-quality, accessible, affordable care that preserves the rights of individual choice - a non-negotiable for most Americans. Adam Smith’s invisible hand shall have to continue thumb-wrestling the visible hand of regulation.

Are you from Maryland? Do you know Maryland’s unique system really well? Reach out or comment below to share how this system works in your experience! Always open for feedback.

Find me on LinkedIn @tejasinamdar, Twitter @tejasinamdar_ and tejasinamdar.com

References:

Maryland’s All Payer Hospital Payment System - Harold A Cohen, Ph. D, First Chairman HSCRC

The answer to America’s health care cost problem might be in Maryland - Vox