While health care reformers argue about what it would take to “break the curve” of health care inflation, the state of Maryland has done it, at least when it comes to hospital spending.
In 1977, Maryland decided that, rather than leaving prices to the vagaries of a marketplace where insurers and hospitals negotiate behind closed doors, it would delegate the task of setting reimbursement rates for acute-care hospitals to an independent agency, the Maryland Health Services Cost Review Commission.
When setting rates, the Commission takes into account differences in labor markets and how much a hospital pays in wages; the amount of charity care the hospital does; and whether it treats a large number of severely ill patients. For example, the Commission sets the price of an overnight stay at St. Joseph Medical Center in suburban Towson at $984, while letting Johns Hopkins, in Baltimore Maryland, charge $1,555. For a basic chest X-ray, St. Joseph’s asks $81 and Hopkins’ is allowd to charge $155. The differences reflect Hopkins’s higher costs as a teaching hospital and the fact that it cares for generally sicker patients.
Such adjustments are never perfect, but in this case, it appears that the Commission is treating hospitals equitably..Since the program started, the Wall Street Journal reports that Maryland hospitals have enjoyed a steady profit margin, unlike hospitals in other states that often make more money during boom years and less during a recession. Statewide hospital profit margins average 2.5% to 3%.—just enough of a surplus to give hospitals maneuvering room when setting budgets. Before the commission was established, Maryland hospitals were losing money covering the uninsured.
What is most remarkable is how state regulation of prices has contained costs. When the program began in 1977, the state’s hospital costs were 25% higher than the national average. Today, Maryland’s hospital costs are 2% lower than the national average. Meanwhile, over the same span, Maryland boasts the nation’s second-slowest increase in hospital costs .
One reason the Maryland solution works is that Medicare and Medicaid have agreed to accept the prices that the Commission sets—as long as Maryland’s hospital costs grow slower than Medicare payments nationwide.
The deal makes sense for the government because for Medicare, the elephant in the middle of the room is health care inflation. If Medicare spending continues to grow faster than the economy, Medicare is in trouble. ( Yesterday, the Centers for Medicare and Medicaid announced that in 2009 U.S. health spending reached $2.5 trillion, and that health care’s share of the economy grew 1.1 percentage points to 17.3 percent—the largest one-year increase since the federal government began keeping track in 1960 )
Below, a chart from the American Hospital Association illustrating Maryland’s remarkable success.
Maryland’s approach gives its hospitals relief from low Medicare and Medicaid reimbursements. As a result, Maryland’s hospitals cannot argue that they must shift costs to private insurers. State regulations require that they charge all insurers the same rate for a particular service– no more and no less. Thus, the Maryland plan does away with secretive negotiations between providers and private insurers which often turn on just how much market clout the hospital has.
As I noted in part 1 of this post, in other states, a “brand-name” provider may be able to demand twice as much as another hospital or physicians’ group for comparable services simply because insurance companies know that their customers want to see that name in the insurers’ network. If an insurer resists paying a premium for a marquee name, the provider will refuse to take its plan and customers will switch to another insurance company. It’s worth noting that in Maryland, at Johns Hopkins Hospital, the profit margin from operations has been running somewhere between 2% and 4%, not far from the state-wide average of 2.5 % to 3%.
By contrast, Massachusetts serves as a prime example of how providers with clout use market leverage to hike prices. As I explained in part 1, Massachusetts Attorney General Martha Coakely recently released a report which reveals that:
- Prices paid by health insurance companies to hospitals and physician groups in the Commonwealth vary significantly within the same geographic area and amongst providers offering similar levels of service.
- Price variations are not correlated to (1) quality of care, (2) the sickness or complexity of the population being served, (3) the extent to which a provider is responsible for caring for a large portion of patients on Medicare or Medicaid, or (4) whether a provider is an academic teaching or research facility. Moreover, (5) price variations are not adequately explained by differences in hospital costs of delivering similar services at similar facilities.
- Price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers
When Coakley lifted the veil on how much insurers pay various providers (information that is normally considered proprietary), she found that insurers pay elite providers up to 200% more than they pay other physicians and hospitals.That surcharge is then passed on to patients in the form of higher insurance premiums.
What Drives Health Care Inflation: Steeper Prices and More Aggressive Care
When the U.S. is compared to other nations, researchers find that we spend far more on health care for two reasons: we pay higher prices for the same services and, as Commonwealth president Karen David notes, “we perform more complex, specialized procedures.” Hospital stays are often shorter in the U.S. than in many other countries, but “more happens to you while you’re there,” observes Dartmouth’s Dr. Elliot Fisher .
Massachusetts confrims the trend: health care in Boston is more expensive than in any other town on the globe both because well-known providers can command higher prices, and because these hospitals tend to offer more aggressive and intensive care.
Consider Mass General: , when it comes to the “intensity of care” measured by the amount of time spent in the hospital, the number of patients seen by 10 or more specialists, and the intensity of physician services, Dartmouth research shows that Mass Gernerl ranks in the 82nd percentile..
Mass General is not alone. Other well-known Boston hospitals also tend to recommend more specialized, high-tech care for their patients. On the “intensity” index, Brigham & Woman’s and Tufts New England Medical Center both score in the 70th percentile, while Beth Israel Deaconess ranks above the 60th percentile .
By contrast, academic medical centers located in regions where medical practice tends to be more conservative rank lower on the intensity scale: Both North Carolina’s Duke, and the Mayo Clinic,in Minnesota wind up in the 30th percentile, while San Francisco’s UCSF ranks in the 40th percentile and the Cleveland Clinic scores just above the 50th percentile. (As I have reported in the past, outcomes are just as good—or better—at these medical centers. This suggests that patients receiving the most aggressive care may be over-treated.)
Meanwhile, Coakely’s report confirms the second reason why care in the Boston-area is pricey: elite providers can command higher prices for identical services.
Here, it’s worth noting that, hospitals often claim that they are paid more because they treat more poor patients. But the new Massachusetts study confirms what many reseachers already know about spending on low-income patients: According to the Massachusetts’ report, hospitals that treat large numbers of poor patients . . . are paid 10 percent to 25 percent less than average by commercial insurers.
To rein in spiraling health care costs, reformers realize that they must face up to the two factors driving health care inflatiion: over–priced care and over-use of cutting edge medical technologies which can expose patients to risk without benefit.
Addressing the second problem, policy-makers are pretty certain that they can reduce over-treatment if we re-align financial incentives for prioviders so that instead of paying them for “doing more,” we begin rewarding them for better outcomes at a lower price
But what do we do about the fact that, as providers consolidate, some have the clout to demand exorbitant reimbursements from insurers?
In part 3 of this post, I’ll comment on a recent report by Rand Health to the Massachusetts Division of Health Care and Policy which suggests Massachusetts might consider adopting the Maryland solution.. I’ll also note that in the past, 30 other states have tried to regulate hospital rates; Maryland’s program is the only one that has survived. Why?
I’ll l also explain how, while putting a lid on health care inflation, the Maryland Commission has achieved four other important goals: :
- Making fees for services affordable and equitable across hospitals;
- Increasing the transparency of hospital financials;
- Making hospitals financially stable. and
- Ensuring access to hospital care for all Marylanders, including the uninsured,
Finally, I’ll suggest that we don’t have to wait for Washington to pass heath care legislation. This is one reform that could and should be done at the state level.
Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much, an examination of the economic forces driving the health care system. A
fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.