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Maryland's All-Payer Answer

Once dismissed as a relic, Maryland's all-payer rate setting system is getting a second look.

Forty-five billion dollars. That's how much Maryland residents have saved in hospital costs as a result of its unique all-payer hospital rate setting system, says Robert Murray, executive director of Maryland's Health Services Costs Review Commission (HSRC). Murray, a Stanford-trained economist with an MBA, has overseen the nation's only all-payer system since 1993. I recently spoke with him about how Maryland's system works and why he thinks government intervention is sometimes necessary to correct market failure. An edited transcript follows:

What is HSRC?

We're an independent agency of the government -- run by a board or commission of seven individuals. They're all appointed directly by the governor to four-year terms. While there are no specific slots for different [occupations or industries], we do like to have an economic perspective, a hospital perspective, someone from labor or business, someone from the insurance side and a physician.

The culture here has been built such that [appointees] don't represent individual constituencies but rather serve the public interest broadly defined. We are politically independent. We don't report to the Department of Health, and we're legally independent in that all of our decisions are appealable only directly to the courts. There's no additional administrative appeal available.

What is your role?

We are the principal rate setting authority, and basically, we have very, very broad authority to collect any kind of health-related data that we need. From those two functions come five or six policy goals. The first and foremost [goal], I would argue, is cost containment. The second is access to care. One of the reasons hospitals strongly supported rate regulation when it was created here [was because] we were looking for a way to pay for uncompensated care. So, we built into rates additional amounts to cover reasonable levels of uncompensated care. Arguably, we have better access to hospital care, as a result of that. The third [goal] was to have an equitable, fair payment system. We prohibit the so-called cost shifting that takes place elsewhere. Hospitals can't try to mark up their charges to the private sector like they do in other states. We also are required to provide sufficient funds for hospitals to remain solvent, the caveat being that we are only required to maintain solvency for "efficient and effective" hospitals. The last two [goals] are transparency and accountability. More recently, we focused on quality improvement and linking quality measures to payment rewards and incentives in the payment system.

Would it be accurate to say that Maryland's system was created because of the perception that health care is an area where there's market failure or where competition alone wasn't working?

Yes, I think there are a number of reasons why we'd be suspicious as to whether the health-care market operates effectively. It's not like buying VCRs at Circuit City or another business. We are relying very heavily on the people who are selling or providing the goods and services -- the doctors and hospitals. They have a tremendous amount of clout [in determining what to buy]. We're also all insulated from cost by insurance, so it's a multitude of things about the marketplace that doesn't make it operate like your normal competitive market. Our goal is to intervene where we can correct for market failure. This issue of prices going up in the private sector, I believe, is an indication that increasingly there is not fair negotiation between payers and hospitals.

What evidence do you have that Maryland's approach works?

In our experience, when you place hospitals under some degree of financial pressure they do what you would expect: they focus on managing their costs. So we control the reimbursement per case, and they respond in a very, very demonstrative way controlling the use of service per case. Had we grown at the U. S. rate, and actually, prior to 1976, we were growing faster than the U. S., we would have had $45 billion of additional hospital expenditures.


Graphic: HSCRC, Source: American Hospital Association statistics, 1976-2009.

We've talked about costs and cost-shifting, but what else are you working on now that you think is interesting or promising?

Well, two things in particular. One is that we are focused on quality and linking quality metrics directly into the payment system. You've got this highly leveraged system that provides the ability to put big rewards, or even penalties, into the payment system if hospitals are not performing well. We've done that on efficiency. Now, we have quality metrics, evidence based process measures similar to what was proposed in the [Affordable Care Act]. We've been providing rewards and penalties in the payment systems for hospitals since 2008. We have 19 different process measures, and we are adding to them over time. But more importantly, we've moved to outcome measures in a pretty aggressive way, starting in 2009, on things like hospital-acquired conditions. We've linked performance directly to payment on a series of 49 different complication categories. We believe that between 2009 and 2010 we eliminated about 12 percent of hospital-acquired complications and took out about $62 million dollars in unnecessary costs.

We're also applying that same concept in a broader way by building out payment into larger bundles. This year, we negotiated ten global hospital budget arrangements with ten rural, somewhat isolated facilities in the state. We've said, "Okay, you can have whatever your base revenue is. That's all you get, regardless of volume." So, we capped their revenue. Anything they are able to cut in the way of unnecessary admissions, unnecessary re-admissions or shifting care to less expensive outpatient services, they get to keep. That's extraordinarily exciting.

Do states need to have an all-payer rate setting system to do what Maryland has done?

I think there are other ways of accomplishing much of what we are able to do, particularly in these highly concentrated markets [where certain providers have very high market share]. Legislation could be established that sets a maximum payment obligation for private payers. That would change the negotiating dynamic instantaneously, and shift the balance of power back to more of an equilibrium. Right now the large hospitals and health systems have all the leverage and people insured with private insurance or self-funded plans are taking it in the throat.

To see a PowerPoint deck of a presentation Murray recently presented at the Urban Institute, visit

Must Reads

As budget season begins, state health officials find themselves in a bizarre and possibly untenable situation. To close budget deficits, they must curb Medicaid costs, and to comply with the Affordable Care Act (ACA), they must dramatically expand coverage in 2014. The result has been a furious debate over the future of Medicaid and strident demands for greater flexibility. The following Must Reads capture these debates:

Alabama Gov. Robert Bentley, a Republican, is one of two governors with an M.D. after his name (the other is Oregon's John Kitzhaber). In an interview with, he explains what's wrong with the ACA. Like other Republican governors, Bentley says he wants the feds to block grant Medicaid and give states the freedom to determine eligibility and set benefit levels. The Center on Budget and Policy Priorities responds that the result would be a bad one for most states - and a disastrously bad one for some.

But while there's no agreement on block granting Medicaid, there is agreement on the need for greater flexibility. Last month, the U.S. Department of Health and Human Services signed off on Arizona's request to drop 250,000 childless adults from its Medicaid program. HHS Secretary Kathleen Sebelius then sent governors a letter explaining where ACA offers states flexibility. Early this month, Maine received a waiver from the medical loss ratio requirements. At roughly the same time, President Obama unexpectedly endorsed a bipartisan proposal by Republican Sen. Scott Brown of Massachusetts and Democratic Sen. Ron Wyden of Oregon that would allow states to propose their own approaches to health reform in 2014 rather than 2017, as specified by the ACA. Republican Sen. Sam Brownback isn't impressed.

These debates are important, but what about strategies for addressing real cost drivers, such as multiple chronic conditions and the dual eligible? Health Affairs offers states a roadmap toward how ACA can promote more community-oriented long-term care.

What states are most likely to face physician shortages as the ACA expands access? Kaiser Health News offers this map.

And finally, health policy wonks continue to wait for the Affordable Care Organization regulations. How to fill the time? Consider taking a look at MACPAC's first report. It provides an excellent overview of the Medicaid and CHIP programs (and also a review of what we don't know about the programs that serve over 70 million Americans).

Elizabeth Daigneau is GOVERNING's managing editor.
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