Can one state lead the nation to healthcare reform?

March 7, 2016 / By Steve Delaronde

The ultimate goal of the Triple Aim is to address the problem that healthy communities create for hospitals and other healthcare providers. Under the fee-for-service model, providers make money treating sick patients. The incentive is clear – the sicker the patient, the greater the frequency and intensity of the intervention, and thus, the greater the revenue.

Even if a community can address the wide variation that exists in the price of different healthcare services and procedures, the incentive is still aligned for the healthcare provider to deliver more services. This is particularly true if rates for individual services or hospital stays are reduced through an all-payer or single-payer system. Maryland is an excellent case study and an evolving example of healthcare payment reform that is worthy of attention from the other 49 states.

The good news

In the 1970s, Maryland adopted an all-payer hospital rate setting system and established a state commission that directly set rates for specific procedures for its 46 hospitals. In 1976, one year prior to implementing this policy, the average cost of a hospital admission in Maryland was 26 percent above the national average. By 2007, it had dropped to 2 percent below the national average. Additionally, Maryland’s hospital charges, the amount that is listed as their “sticker price” for a procedure, have remained consistently low. They have done this by maintaining the lowest markup of charges compared to costs in the United States.

The bad news

HCFA (now CMS) agreed to reimburse Maryland hospitals at higher rates than hospitals in other states. This waiver was granted so the state could meet hospital demands for payouts that were higher than existing Medicare rates. This meant that for 90 of the most common 100 procedures in 2011, Maryland ranked in the top 5 among all states for Medicare reimbursement.  For example, a hospital received an average of $6,011 nationally to treat a case of bronchitis from Medicare while Maryland hospitals received $8,375. Without this concession from the federal government, it is unlikely that Maryland could have sustained this policy and would have abandoned the program.

In fact, this is exactly what has happened to the multitude of states, such as Massachusetts, New Jersey and New York, that enacted hospital rate setting policies and prospective payment systems in the 1970s. The rise of HMOs in the 1990s led states to deregulate rather than require HMOs to be included in hospital rate setting. The logic was that HMOs would be able to constrain health spending more effectively than state regulation. It didn’t work.

Maryland remained the lone hold-out throughout this period of deregulation amidst HMO expansion. However, the expectation that HMOs would manage hospital admission volume led the state to make a concession to the hospital industry and stop making cost adjustments tied to increases in hospital volume. While the state was able to continue to control costs per admission, from 2001 to 2007 the volume of admissions increased by 2.7% compared to a national average of 1%. Additionally, readmission rates continued to climb and soon became some of the highest in the country.

The good news (again)

Maryland is in the midst of a 5-year Center for Medicare and Medicaid Innovation (CMMI) initiative that began in 2014 to address the issue of rising hospital admissions. The state replaced its policy to limit per admission payments and changed its focus to limiting overall per capita expenditures for hospital services. Additionally, the state is trying to reduce its potentially preventable condition rate by achieving a 30 percent reduction in its aggregate rate of 65 3M Potentially Preventable Complications (PCCs).

The preliminary results are encouraging. According to a November 2015 NEJM article, $116 million was saved in the first year of the program, which puts the state well on its way to save $330 for Medicare over five years. The 1.47% per capita growth of hospital costs from 2013 to 2014 was 2.11% lower than the agreed-upon rate of 3.58%. Maryland also saw a 26.3% reduction in potentially preventable conditions between 2013 and 2014.

It remains to be seen whether these trends will continue throughout the 5-year term. The state plans more rigorous evaluation methods using a propensity score method with matched comparison hospitals and market areas. In the meantime, Maryland seems to be taking a major step towards a model that should be considered by the remainder of the country.

Steve Delaronde is director of consulting for populations and payment solutions at 3M Health Information Systems.