Maryland hospital policy evens up Medicare, private payments

August 1, 2011

As the struggle to halt healthcare costs continues, Maryland has uniquely managed to contain hospital reimbursement.

AS THE STRUGGLE to halt healthcare costs continues, Maryland has uniquely managed to contain hospital reimbursement. Lessons from the state's decades of experience with managing rates, including its shortcomings, could yield workable ideas for other states.

Driving the Maryland program is the Maryland Health Services Cost Review Commission (HSCRC), which among other things sets hospital rates for all payers-Medicare, Medicaid and private insurers. The HSCRC has been operating since 1971 and setting hospital rates since 1977. Its goals include promoting cost containment, access, equity, financial stability and hospital accountability. When Medicare introduced its diagnostic-related group (DRG) reimbursement system, the state received a waiver from the federal government that allowed the HSCRC to continue setting rates for Medicare reimbursement.

By most accounts, the HSCRC has been a success. Unlike most states where private insurers pay more than Medicare and Medicaid, all payers in Maryland pay the same, and any increases in rates are tied to premiums paid to private insurers in the state. A closer look indicates some particular areas of strength for the system, as well as some areas for improvement.

"In some other states, private health insurance rates tend to be 20% to 30% higher than rates for Medicare, and rates for Medicaid can be 20% to 30% less than Medicare rates," says Bradley Herring, an associate professor in the department of health policy and management at Johns Hopkins Bloomberg School of Public Health in Baltimore. "Hospitals argue that Medicare barely covers their costs and that they lose money on Medicaid, so they make up the difference on privately insured patients."

Although equitable reimbursement rates are one of the Maryland system's key strengths, it can also make replicating this system difficult in other states. Specifically, most states would have to significantly increase their current Medicaid reimbursements.

"Moving toward all-payer rate setting would likely increase a state's costs considerably," says Herring. "Right now, states are generally underpaying hospitals."

• Limits on hospital markups. Overall, the reimbursement system reduces allowable markup by hospitals.

"The actual charges to everyone, including self-pay patients, are lower than any other state in the country," says Mark Higdon, a partner with KPMG and healthcare leader for the MidAtlantic region in Baltimore. "The average markup on costs nationwide is well over 200% and probably closer to 250%. The markup in Maryland is between 115% to 120%."

For hospitals, this limit on markups requires a different financial mindset. Hospitals in most states must make do with current Medicare and Medicaid rates, then shift costs to private insurers.

"These hospitals don't have to focus on cost because they can make it up on the revenue side with the commercial payers," says Robb Cohen, chief government affairs officer with XL Health in Baltimore.

In a state without all-payer rate setting, hospitals spend a lot of time negotiating with private health insurance plans and dealing with different payment methods, says Herring.

• Coverage for uncompensated care. The financial burden of uncompensated care is a key issue for public hospitals so Maryland includes a structural commitment to financing uncompensated care. The HSCRC builds an extra component into its hospital rates, which is distributed to hospitals based on the amount of uncompensated care they provide.

"The first and foremost benefit is access of care," says Higdon. "The hospital rates factor in uncompensated care levels and all hospitals receive reimbursement for this care. As a result, there is no incentive for any hospital to redirect uninsured patients from one hospital to another."

• Strict increases. Managing healthcare costs requires a tight rein on reimbursement rates, which comes with pros and cons. For one thing, there is very little differentiation of payments from year to year.

"The commission has been restrictive when it comes to annual payment increases," says Higdon. "For the last three years, increases in charges and payments have averaged 1.5%."

Hospitals must increase the bottom line by cutting costs because they cannot increase revenue. Providers are operating in a restrictive financial environment and margins are lower than the national average, says Higdon.

"Although cost per case is in good shape, admissions are higher than the national average," he says.

Joanne Sammer is a freelance writer based in Brielle, N.J.