by Sarah Kliff
The Obama administration is set to announce Friday an ambitious health-care experiment that will make Maryland a test case for whether aggressive government regulation of medical prices can dramatically cut health spending.
Under the experiment, Maryland will cap hospital spending and set prices — and, if all goes as planned, cut $330 million in federal spending. The new plan, which has been under negotiation for more than a year, could leave Maryland looking more like Germany and Switzerland, which aggressively regulate prices, than its neighboring states. And it could serve as a model - or cautionary tale - for other states looking to follow in its footsteps.
“You can put Maryland in the company of Massachusetts and perhaps Vermont as the three states furthest out in trying to invent a new future for cost accountability in health care spending,” added Harvard University’s John McDonough. “Success creates a model that other states will want to look at emulating. And failure means it’s an option more likely to be crossed off the list.”
For Maryland, the new rules build on past success. Since the mid-1970s, it has been the only state to set the prices that hospitals charge patients. Typically, hospitals negotiate with each health insurer individually, leading to disparate rates. In Maryland, all customers — whether a private insurance plan, public program or uninsured patient — pay the same price. Researchers estimate the system has saved $45 billion for consumers over four decades and prices have grown more slowly in the state.
Under the old system, prices in Maryland couldn’t grow faster than the prices set by the Medicare program. But as the cost of health care rose rapidly in recent years, the state struggled to hit that target.
State officials also worried about the old system creating perverse incentives: The best way for a hospital to make money was to provide the highest volume of services, regardless of whether that care made patients healthier. That meant payers would simply sign checks for as many treatments as the hospitals recommended. The new system intends to end that revenue strategy by capping total spending.
“It’s essentially moving away from a system that is focused on volume to one that is focused on value,” says John M. Colmers, executive director of Maryland’s Health Services Cost Review Commission, which will oversee the effort.”
The Centers for Medicare and Medicaid Services approved Friday Maryland’s proposal to continue setting hospital prices while adding in a cap on all hospital spending. The state will limit hospital spending growth to 3.58 percent for the next five years, largely by giving each of the state’s 46 hospitals a firm budget to work within. That level of growth would be tied to the projected, overall growth of the state economy.
“We need to shift away from our near exclusive focus on treating illness, and move to a balanced approach that encourages prevention and wellness,” Gov. O’Malley said. “Such a shift will reduce costs for families and small businesses and will simultaneously keep many Americans from dying of preventable causes.”
State officials hope that the firm budget — combined with the state’s pre-existing power to dictate hospital prices — will put downward pressure on health spending, forcing hospitals to spend their limited dollars on the most cost-effective health care.
The state also has promised to hit certain quality metrics, such as reducing hospital readmissions and hospital-acquired infections, to ensure that hospitals don’t hit their cost targets by skimping on patients’ care.
“Obviously financial incentives create a lot of risks,” Colmers says. “But the current system could be said to be creating lots of incentives for unnecessary care. There are incentives built into any system that one has to guard against.”
If the state cannot hit these cost and quality metrics, the federal government will transition it to Medicare’s more traditional payment models — which would represent a significant setback for a state that has spent decades developing an innovative approach to health care spending, Colmers said.
State officials have spent years working on this new plan, which they see as a continuation of the rate-setting system they pioneered decades ago. Some hope that at the end of this pilot program, which will last five years, the state will be ready to explore ways to extend a similar approach to other parts of the health care system, like doctors’ offices and nursing homes.
“It’s an important step for Maryland, which has had a fairly cutting-edge rate setting program, to continue to be at the cutting edge and move ahead of the rest of the country,” says Paul Ginsburg, a senior fellow at Mathematica Policy Research, who has studied the Maryland system. “They’re making the leap into the world that so many of us are anticipating for the future, the world of global payments.”
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