Maryland Regulators Holding Hospital Costs in Check

President Obama’s health care reform bill is filled with experiments on how to hold down health care costs.  There will be bundled payments for episodes of care and extra payments for raising quality standards. It calls for the reorganization of hospitals and physician practices into “accountable care organizations,”  which will share in savings if their costs fall below previous levels.

What’s not in the legislation is old-fashioned hospital rate regulation, which only one state in the nation uses. The latest results from Maryland suggest rate regulation works.

The state’s Health Services Cost Review Commission (HSCRC) announced earlier this week that average costs per stay at Maryland’s 51 hospitals rose just 2 percent in 2010, significantly less than the 3 percent national average. Since 1977, when rate regulation went into effect, hospitals costs in Maryland have experienced the lowest cumulative growth rate of any state in the nation, going from 26 percent above the national average to almost exactly average, according to data contained in HSCRC’s latest annual report .

Maryland, which had the sixth highest hospitalization costs among 50 states and the District of Columbia in the mid-1970s, today ranks squarely in the middle of the pack. Its $10,983 in average costs per equivalent admission in 2010 was slightly less than the $10,996 national average.

“The Maryland experience demonstrates that an enlightened independent public utility can be empowered to successfully stem inflationary growth in hospital spending,” said John Kastor, a professor of medicine at the University of Maryland in Baltimore. He co-authored a commentary in the Journal of the American Medical Association touting the state’s experience this week. “Other states ought to think about it.”

“I could see this happening in a number of states in the next few years,” said Paul Ginsburg, the executive director of the Center for Studying Health System Change, a Washington, D.C.-based think tank. He testified before Congress last week on how increased hospital and insurer concentration is raising health care costs.

“Concentration and other factors are raising hospital rates well above trend,” he said. “The overall cost trend has been modest mostly because utilization trends have slowed due to the recession.”

Created during the Progressive Era, the traditional model for controlling monopolies or businesses in industries with unchecked pricing power is state-based rate regulation. The HSCRC regulates hospital rates in a fashion similar to the way states historically regulated telephone or electricity rates. Its staff carefully reviews each institution’s costs, and then sets a standard rate for services, which is charged to all payers, whether privately insured, uninsured or government-insured.

In most states, the privately insured and people paying out-of-pocket are charged higher prices to make up for the below-cost prices paid
by Medicare or Medicaid.

When setting up its “all payer” rate regulations in the mid-1970s, Maryland needed a waiver from Medicare and Medicaid rates, which was granted. It was one of 30 states that moved to rate regulation in that era, which, like now, was plagued by rising health care costs.

However, most states jettisoned their regulatory agencies over the years in favor of market-based schemes like managed care and capitation. Those reforms’ ability to control costs proved fleeting, while Maryland’s successes have endured.

The all-payer scheme provides its greatest benefits to private employers and individuals who purchase insurance through the private market or self-insure, Ginsburg said. In most states, the privately insured and people paying out-of-pocket are charged higher prices to make up for the below-cost prices paid by Medicare or Medicaid and to reimburse hospitals for providing care to the uninsured. Such cost-shifting is ended under an all-payer scheme.

Those extra payments by the federal government are passed through to private employers and individuals in the form of lower premiums.

“By eliminating the cost-shifting that occurs in the rest of the nation to pay for the uninsured or when Medicare and Medicaid don’t pay their full share, we think we have the most equitable hospital payment system in the nation,” said Stephen Ports, the acting executive director of HSCRC. “It’s well-supported by hospitals and payers, and business and labor representatives on the commission are big supporters.”

Ports estimated the federal government’s Medicare costs in Maryland are $400 million to $600 million higher than they would be if Maryland hospitals were simply paid under the national “prospective payment system,” which compensates hospitals with a set fee for a specific “diagnostic related group.” Those extra payments by the federal government get passed through to private employers and individuals in the form of lower premiums.

State regulated “all payer” rates also puts an end to discrimination within the privately-insured market. Smaller insurance companies that sell individual and small group policies do not have the economic clout to negotiate the same low rates as health maintenance organizations or large self-insured employers, which hospitals as customers to remain financially viable in their geographic markets. So in most states, small employers and individuals gets charged the highest hospital rates and therefore pay the highest insurance premiums.

The other major beneficiaries of an all-payer scheme are the uninsured, whom hospitals charge the highest rates since most of them don’t pay anyway. They account for the largest share of uncompensated or “charity” care provided by the nation’s hospitals, which, in fact, isn’t charity at all but is simply passed along to other ratepayers. “Cost-shifting, in which better-insured patients cross-subsidize those with less or no insurance, is not permitted in Maryland,” Kastor said.

Instead, the HSCRC calculates the uncompensated care provided at every hospital in the state – about 7 percent of gross revenue or $926 million in 2010 – and spreads those costs equally among all ratepayers at all hospitals with the money flowing into a fund doled out to the hospitals delivering the uncompensated care. “Patients without the means to pay for their treatment are assured access to care because they can receive treatment in any Maryland hospital, including private community hospitals and the state’s two academic medical centers,” Kastor wrote in his JAMA commentary. “Furthermore, because the amount in rates among all hospitals for uncompensated care is the same fraction, hospitals located in areas with poorer patients are not disadvantaged.”

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect, The Washington Post and Financial Times.

This post first appeared at The Fiscal Times and GoozNews.

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2 replies »

  1. Mr. Goozner makes the same mistake Maggie Mahar made in a very similar article published about a year ago.

    Yes, Maryland’s HSCRC has cut the cost of hospital care in Maryland, but it has NOT cut the cost of Medical Care. Maryland remains a high cost state (see data for Medicare beneficiaries) Many of the higher ticket items have just been pushed out of hospitals into the outpatient setting.

    I am familiar with the strategies that hospitals use to get “outpatient” surgi-centers and imaging centers into “unregulated” space immediately adjacent to the hospital. The costs don’t show as “hospital” costs but need to be paid all the same.

    It’s like a bean bag chair – you push it in in one place and it pops out in another.

  2. I’m still not clear how Maryland has fared in terms of overall health costs, or employer health costs, over time. It is easy to imagine scenarios where providers shift care to non-regulated places of service, and the state ends up with overall higher costs and/or higher rates of overall increase. The last data I found — from 2004 — showed that Maryland was still the 17th most expensive state, with lower rates of growth than the national average for 1991 – 1998, but higher rates 1998 – 2004. Not entirely a clear success.