Please ensure Javascript is enabled for purposes of website accessibility

State seeks to change hospital rate system

The state Department of Health and Mental Hygiene submitted a landmark proposal to the federal government on Friday that, if approved, would completely change the way hospitals in Maryland get paid.

The proposal represents a fundamental shift away from Maryland’s long-standing fee-for-service reimbursement system, which is based on the amount of services provided to a patient admitted to the hospital, toward a “population-based payment model” that would reward hospitals for providing quality, cost-effective care to all patients.

Over the course of five years, the plan would minimize revenue from fee-for-service billing and maximize revenue based on the quality of care, measured by such things as achieving fewer patient readmissions and preventing certain diseases. It suggests specific “quality targets” to measure those achievements.

The proposal also enacts cost controls on health care spending based on growth in the state economy. It would cap the annual growth in total hospital spending at 3.58 percent — which is how much the state’s economy grew each year during the past decade.

The plan is subject to the approval of the federal Centers for Medicare and Medicaid Services (CMS).

Dr. Joshua M. Sharfstein, Maryland’s secretary of health, said he is hopeful the agency will make a decision this fall. Meanwhile, over the next few months, an Advisory Council made up of hospital officials, insurance company executives and other health care experts will come up with more specific implementation strategies and report to state officials, Sharfstein said.

“What this proposal fundamentally does is align the hospital system with many other entities within the health care system,” Sharfstein said. “And it helps everyone work together to improve patient care and patient health. Hospitals will now have the ability to collaborate with nursing homes, primary care [physicians], community health organizations and other entities. The more they work to keep people healthy, the more they will benefit financially.”

Modernizing the waiver test

The proposal reworks Maryland’s unique “Medicare waiver” system — a special agreement between the state and CMS that allows a state panel to set the rates hospitals charge all patients, including those with Medicare. In all other states, CMS decides how much Medicare will pay — and it’s usually not enough to fully cover the bill. That drives up costs for private insurers and self-insured consumers, who have to make up the difference.

Because of the waiver, which requires all payers to pay the same rate, Maryland hospitals receive up to $1 billion more from Medicare than other states.

To keep the waiver, Maryland must prove that health care costs rise more slowly in the state’s hospitals than nationally. What the proposal seeks to do is change the way CMS measures the growth of costs.

State officials say the current waiver test, which was developed in the 1970s, uses an outdated metric: the cost per inpatient admission. Hospitals now increasingly focus on outpatient care, and they’ve decreased the number of inpatient admissions, reserving the hospital beds for people who truly need intense care. That drives up the cost of each inpatient admission.

Officials say the waiver test should reflect modern care delivery methods. Their proposal would create a new test that evaluates overall hospital expenditures, rather than inpatient costs only.

The final proposal is the culmination of months of work by state officials, hospital executives, insurance company representatives and other stakeholders. DHMH released a blueprint of the plan in March, but the Maryland Hospital Association wouldn’t support that version because it lacked important details. Those kinks were ironed out over the past several months, and the MHA got on board with the updated version, which was unveiled in late September.

State officials then sought public input on the plan during a comment period that lasted until Oct. 7. Sharfstein said the department was able to submit the plan on Friday without making further changes because the comments were overwhelmingly positive.

The proposal establishes a five-year trial period for the state to test the new model. Over that period, the proposal says Maryland hospitals will increase the portion of their revenue that they generate through a “population-based payment model” rather than the existing fee-for-service payment model. They wouldn’t be paid for each service provided; rather, payment would be based on a variety of “quality targets” that could measure how well hospitals are treating all their patients.

Officials outlined specific targets for moving to that model. At the end of the second year, the goal is for 50 percent of revenue to be generated through population-based payments. At the end of year five, the goal is to generate 80 percent of revenue that way; ultimately, Sharfstein said, the state wants to abandon the “fee-for-service” system and generate 100 percent of revenue through population-based payments.

Before the five years are up, state officials and health care providers would have to come up with another set of metrics and objectives for extending the model permanently. If they don’t, Maryland would then revert to the reimbursement rules that apply to the rest of the country.

“There are a lot of different directions this could potentially go in,” Sharfstein said. “There will be a lot of work to be done over the next five years.”