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Maryland Becomes First State to Cap Hospital Spending

Maryland replaces a one-of-the-kind agreement with the federal government for another unique arrangement: the ability to limit spending in all hospitals to the rate of economic growth.

Johns Hopkins Hospital in Baltimore, Md.
Johns Hopkins Hospital in Baltimore, Md.
Being the only state still with the power to set rates at all of its hospitals, Maryland is no stranger to health experimentation. But the state took another big step forward on Friday with the announcement that the federal government will allow the state to tie increases in hospital spending to economic growth—a bold challenge for a sector of the economy that has typically far outpaced the broader economy. 

After a decade in which hospital spending in Maryland grew twice as fast as the state’s economy, Maryland will hold all of its hospitals to a growth rate of 3.58 percent, the state’s per-capita rate of economic growth. The state is also required to capture $330 million in Medicare savings over a five-year test period, reduce hospital readmissions, prevent hospital infections and file annual reports on population-health benchmarks. The new agreement with the Centers for Medicare and Medicaid Services upends the practice of paying doctors for each individual transaction, instead transitioning to “global payments,” which offer bulk sums for an entire population and encourage providers to reduce unneeded procedures and improve care to hold onto as much of the money as possible. 

The agreement replaces a waiver in effect since 1977 that allowed a state board, the Maryland Health Services Cost Review Commission, to set rates for all payers, from commercial insurers to Medicare and Medicaid. In exchange for the ability to set Medicare rates lower than the national program, Maryland has had to keep the rate of increase in costs per hospital admission below the national average.

Under that system costs per admission decreased from 23.6 percent above the national average in 1974 to 5.1 percent below the national average in 2005, but more recently the number has crept closer to the national average, leading to lower annual adjustments in hospital rates and other measures to avoid losing the waiver, according to a 2010 health spending report published by the state. During that period many states adopted a similar model but all abandoned them, leaving Maryland alone as the only state with rate-setting authority. 

This new waiver came about in part out of the necessity to do something big to save the old one, said Bradley Herring, an associate professor of public health at Johns Hopkins University. To a degree, Maryland was a victim of its own success, Herring said: hospitals were reducing overall admissions and spending overall but the cases that were left were more costly on an average basis. “Maryland needed to do something because they were in danger of losing the waiver,” he said.

The state now joins Vermont and Massachusetts among the most innovative in the country in terms of health care, said John McDonough, a professor of public health at Harvard University and a former state legislator. But Vermont has yet to actually finance its single-payer system and Massachusetts, which passed a law in 2012 tying spending to the rate of economic growth and encouraging global payment, has no real enforcement or accountability in its latest reforms. “Maryland, in my view, now leapfrogs over the other two and assumes a leading role in creating meaningful accountability for their health sector,” McDonough said.

But Maryland’s proposal has risks. If the state doesn’t meet the terms of its agreement, it will revert to the national Medicare payment system it left decades ago. 

“There’s a big risk that suddenly if this doesn’t work out, then this whole experiment of rate setting in Maryland goes away and you have to conform to what every other state’s doing, and that would be a real dramatic change to the hospitals in Maryland,” Herring said.

Chris covers health care for GOVERNING. An Ohio native with an interest in education, he set out for New Orleans with Teach For America after finishing a degree at Ohio University’s E.W. Scripps School of Journalism. He later covered government and politics at the Savannah Morning News and its South Carolina paper. He most recently covered North Carolina’s 2013 legislative session for the Associated Press.
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