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Laslo Boyd: Waivering on hospital costs

There’s a debate raging right now about the rates that hospitals in Maryland can charge. That debate is a short-term version of a much larger and more complicated process that will impact the entire health care system in the state and that may have national implications as well.

While the basic issues can be described in reasonably straightforward terms, the problem is that there are so many issues and significant uncertainties associated with just about every one of them. People’s opinions about the best course of action depend on their own assessment of the risks involved and of how they would be impacted by those risks.

The focal point of the debate centers on the waiver that Maryland has negotiated with the federal government on the rate at which Medicare costs in the state are reimbursed. Unlike every other state, Maryland gets reimbursed for Medicare patients at a rate established by the Health Service Cost Review Commission rather than the lower rate that Medicare normally pays.

In exchange for the waiver, Maryland has had to keep the growth in hospital costs below the national average. The system has been a rousing success. Maryland hospital costs in 1976 were 25 percent above the national average and dropped by 2011 to about 4 percent below the national average. The system, according to one study, has resulted in billions of dollars in cost savings to Maryland consumers.

More recently, however, the gap between Maryland and the rest of the nation has dropped. One consequence is that some observers believe that Maryland’s Medicare waiver is in jeopardy unless changes are made in the way in which it is calculated.

With Health Secretary Joshua Sharfstein taking the lead, Maryland is in the early stages of negotiations with the Center for Medicare and Medicaid Services to adopt a new approach. The early draft focuses on moving away from a standard based on inpatient costs to a “global spending cap” that requires hospitals to manage total health care costs.

This is the point at which the whole issue gets very complicated. On the one hand, hospitals are wary about the new approach largely because it represents such a drastic change from the current methodology and it’s hard to know how it would work in practice. On the other hand, the current system has led to continuous battles about relatively small rate increases and to hospital bottom lines that are increasingly being squeezed.

Hospitals are arguing that they are under incredible financial pressures and that they have used up all the short-term remedies. The operating margin for all 62 hospitals in Maryland, according to a recent report by the Maryland Hospital Association, is 0.8 percent. That same report points out that the rate increases allowed over the past four years have all been below the rate of inflation and, as a result, 25 hospitals are currently losing money.

The most recent piece to be added to this puzzle is the federal budget sequestration that has starting rippling through the economy. The impact on Medicare payments is a 2 percent reduction in the overall amount paid to hospitals for treating Medicare patients.

On May 1, the HSCRC voted to not allow hospitals in Maryland to increase their rates to cover the impact of the sequestration reduction. The resultant loss of revenues has hospitals preparing layoffs and cuts to programs as the only means they see to respond. Some have even talked about the possibility of smaller hospitals in more remote areas having to close.

HSCRC has both a mandate to control hospital costs as well as one to ensure that hospitals remain financially viable. Their perspective on their role seems to be very much driven by their determination to maintain Maryland’s Medicare waiver. Hospitals have an incredibly high stake in maintaining the waiver as well. A Legislative Services study estimated that the loss of the waiver would cost the state’s hospitals approximately $1 billion a year.

One immediate question is how much of a rate increase would put the waiver at risk. Hospitals argued that offsetting the sequester would not go over the line, but the HSCRC disagreed. The question will be taken up again shortly when the commission makes rate decisions for the 2014 fiscal year.

The complexities and uncertainties are far from over. What will happen over time with the sequester? Having watched Congress in “action” over the last five years, it’s hard to believe a compromise solution will be achieved.

Meanwhile, the full provisions of the Affordable Care Act kick in at the beginning of next year. We know that a lot more Americans will have health care coverage at that time and we know some of the other specific provisions, such as those regarding existing conditions, but we really don’t yet know what the full impact on the health care system as a whole will be.

Maryland has been a hospital cost success story even as other health care costs as well as insurance premiums have continued to rise. In the current policy debate, there seems to be some truth on both sides. Hospitals are facing serious —some say unprecedented — financial pressures and see no alternative to making cutbacks. The dilemma is that the current Medicare waiver system is unsustainable and all but guarantees that hospitals will continue to scramble as they have the past few years.

Will a new Medicare waiver methodology fix everything? Even if a new approach can be agreed to, hospitals face a difficult transition period getting from this system to the next one. And as with everything else in health care, uncertainly seems to be the order of the day.

Laslo Boyd writes a monthly column for The Daily Record. He has held senior positions in higher education in Maryland and Massachusetts as well in the governor’s office here. He is the managing partner of Mellenbrook Policy Advisors and can be contacted at