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Massachusetts’ Problem and Maryland’s Solution

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.

Image001

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.

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California in Home Health Care Agencyaugiebev M.D.Margalit Gur-Ariemaggiemahar Recent comment authors
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California in Home Health Care Agency
Guest

They are really grand kids… Give them more love and affection… Thanks for sharing this…

MD as HELL
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MD as HELL

Peter,
Your conditions are arbitrary. It is when would THEY like their illness treated or diagnosed, not you and not me.
And obviously there is a cost to providing care, but so many patients have no cost to them, they come regularly and gorge. They also do this at the doctor’s office.
Patients cannot have a Mercedes just because they ask for one.

Peter
Guest
Peter

“People love free care. Ask anyone who works in an ER. People can’t get enough of it.”
So MD, would you rather provide them “free” care in the ER or free care at the much less expensive family physician? Would you rather treat their illness at an early stage or at an acute late stage? Would you rather have them contribute something to healthcare through income taxes or get nothing from them in the ER?

augie
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augie

Don’t Maryland and HSRSC get the benefit of a Medicare waiver in which Medicare is required (by law) to abide by their rules and payment levels? I know that used to be the case. And I believe the similar systems (in New York, New Jersey and yes Massachusetts ), which were not written into law, were revoked by the Federal government years ago, because they were costing more than regular Medicare. So, any state could do what Maryland did, yes, if the Feds agree to pay more for Medicare than they are otherwise. And veterans of those systems will tell… Read more »

MD as HELL
Guest
MD as HELL

Maggie,
People love free care. Ask anyone who works in an ER. People can’t get enough of it.

Barry Carol
Guest
Barry Carol

“In New York if you want to apply for insurance you have to prove that you have been “continuoously insured” (with a break of no more than 63 consective days) up until the time that you apply for new insurance.” Maggie – I stand corrected on this. NJ uses the same continuously insured rule with no more than a 63 day break in coverage as well. The discussion of community rating vs. medical underwriting does apply mainly to those who purchase insurance in the individual market. People who work for large self-funded employers are effectively community rated though for companies… Read more »

Legacy Flyer
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Legacy Flyer

Maggie,
You say: “You seem to forget that when Maryland began regulating, hospital costs were 44% above average. Now they are 2% below average.”
And as you say: “Source, evidence??”
Again, what is your source? Neither the Dartmouth data nor the Kaiser data go back to 1977.
Also, neither shows costs 2% below average. Both show costs above average.
What hat are you pulling these numbers out of?

Peter
Guest
Peter

“Not to be tiresome about it, but it’s about time we found out what sacrifices providers are willing to make for the greater good.” No one will go willingly, and the reason you haven’t heard much from medical providers is because the “Reform” Bill left them alone. When Canada was instituting it’s Medicare the docs were the loudest opponents and largely still are. As well all the continuing fights to keep Medicare from eroding to a for profit system is with docs. But every other country that either uses single-pay or government controlled healthcare establishes what it will pay for… Read more »

maggiemahar
Guest

Margait– Just saw your comment after I replied ot Barry below. Here’s a short version of what I said to Barry– Yes, young people who have large-group employer-based insurance will not be affected. Young people who have no insurance will find themselves paying significantly more–or paying a fine. In between, young people who now buy their own insurance will save because in the Exchanges, they’ll get group rates, but they’ll also find themselves in a pool with more sick people. Will the savings resulting from group rates balance the extra costs of sick people in the pool? This no one… Read more »

Margalit Gur-Arie
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Margalit Gur-Arie

Barry, I may be missing something, but I’m not so sure that the young and healthy would necessarily have to pay that much more, if at all. For the young and healthy that obtain their coverage through employment, nothing should really change. The problem seems to be in the individual markets. If we had one Federal public plan for all folks that cannot get employer insurance, wouldn’t that large pool be at least as effective at spreading costs as the various employer pools? Of course, if we compare to paying nothing and having no insurance, the currently uninsured young and… Read more »

Barry Carol
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Barry Carol

Margalit – I don’t have any numbers for a 63 year old in Ohio though perhaps Nate does. I should have mentioned in my earlier post that NY is also a guaranteed issue state which, when combined with community rating, tends to result in people waiting until they get sick or know they will need expensive care in the near future to apply for insurance. While the New York City metropolitan area is an expensive market, healthcare costs are much lower upstate. Community rating is a great deal for people like me who are not only older but, in my… Read more »

Practice Admin
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Practice Admin

You are smart enough to know that it would be virtually impossible to “source” my point to your satisfaction. Physician Fee Schedules of the commercial insurance industry are harder to get than the nuclear codes in the Oval Office. Worse, they remove the old fee schedules to prevent any comparative analysis. So unfortunately, I must depend on my QB software coupled with our EMR software to prove to me that we make less per patient today. So, let me use a current change in Medicare to prove my points that reimbursement to physicians including specialists is decreasing and has decreased… Read more »

bev M.D.
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bev M.D.
Margalit Gur-Arie
Guest
Margalit Gur-Arie

Barry, regarding the Ohio-New York premium comparisons for a 20 year old, are there any available numbers for insuring, say, a 63 year old in those two states? I assume the New York number will not change.
And aren’t there additional factors that would make the NY rates higher, other than the existence of community rating?
BTW, I came across this report from AHIP http://www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf
It seems that their numbers are a bit lower than the ones you got from WellPoint.

Tom Leith
Guest
Tom Leith

Maggie writes: > the governor of Maryland is supposed to > put the public good first The public seem to think it is very good to get everything for free, and the governor thinks it is good for the public for him to get re-elected — he is not disinterested and neither is the public. Who was it that said we get the government we deserve? Of course, that goes all the way back to the Israelites — they wanted a king and they got one. But I digress. When the public’s ideology about the common good improves, we’ll find… Read more »