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Maryland experiments with capping hospital spending

Measure aims for costs to rise no faster than economy

Wall Street Journal
Jan. 10, 2014 6:34AM

By JENNIFER CORBETT DOOREN And AMY SCHATZ

BALTIMORE—Maryland said Friday it would cap spending on hospital care in the state and ensure that costs rise no faster than economic growth, an unusual experiment in government-imposed controls that is likely to draw attention from other states.

The plan, backed by the state’s 46 hospitals and major insurance companies, also involves paying hospitals a fixed annual sum based on broad measures such as the population of the region they serve rather than paying fees for each service.

A state commission will work out the details of how hospitals will get paid before the plan is set to take effect in 2015.

Maryland is already unusual in that it is the only state in the nation to set prices for hospital services rather than having them negotiated with individual insurers or set by Medicare. The state’s “all-payer” system has been in place since 1976. But like the traditional hospital financing model still widely used nationwide, payments have been based on the number of services provided patients, otherwise known as fee-for-service.

John Colmers, the chairman of Maryland’s Health Services Cost Review Commission and a vice president at Johns Hopkins Medicine in Baltimore, said the commission setting the new hospital payments would rely on hospitals’ historical spending as the base, while taking into account changes in population, inflation and other factors.

The annual growth rate will be capped at 3.58% during the five-year program and will apply to both inpatient and outpatient hospital services.

The agreement also won the blessing of the federal Centers for Medicare and Medicaid Services, which granted Maryland a waiver from Medicare rates that apply to hospitals in other states.

As part of the agreement with CMS, Maryland has to generate $330 million in savings for the Medicare system over five years or convert to the system currently used by every other state. The state will also have to reduce hospital readmission rates, which state officials said will be a challenge particularly in some parts of Baltimore, and it must achieve other quality measures such as reductions in hospital-acquired infections.

“We are testing the premise that we can lower the total cost of care and boost the quality of care,” said Jonathan Blum, the deputy administrator for CMS. If successful, Mr. Blum said he hoped Maryland’s model could be used by other states.

One precedent comes from Massachusetts, which sets targets for overall health spending as part of a 2012 law and has the ability to penalize providers who exceed it. But Maryland’s new plan is more stringent because the state is setting firm payment limits and has tight control over hospital revenue.

The proposal could eventually mean residents with more expensive, complicated cases are sent to hospitals in nearby states because Maryland hospitals will be incentivized to fill beds with less sick people who cost less to treat, said Edmund Haislmaier, a senior research fellow at the Heritage Foundation, a conservative think tank.

“It will be increasingly difficult to get care for the more complex risky procedures. That care will migrate elsewhere,” he said.

However, Vincent DeMarco, the president of the consumer group Maryland Health Care for All Coalition, said his organization—which supports the new hospital payment system-—will closely monitor the effort to make sure “this is not going to become, ‘We save money by throwing people out.’ ”

Write to Jennifer Corbett Dooren at jennifer.corbett-dooren@wsj.com and Amy Schatz atAmy.Schatz@wsj.com