Health Care in Maryland Hospital
In the fight over a health-care overhaul, Maryland’s experience with setting hospital rates suggests the federal government could realize savings on health spending, but at a price of more regulation for health providers.
President Barack Obama and some congressional Democrats are pushing for an independent agency to set Medicare payment rates as a key to controlling costs. In Maryland, an independent agency has been setting rates since 1977 for all patients, including Medicare beneficiaries, at the state’s acute-care hospitals.
In establishing the Maryland Health Services Cost Review Commission, the state Legislature wanted a way to set reasonable prices while also generating enough money to cover patients who couldn’t pay their bills. The system has helped bring Maryland’s hospital costs below the national average.
But the state’s hospitals have been required to turn over to the state data covering everything from a patient’s diagnosis, demographic information and treatments to how much the patient was billed, which are made public.
Ronald Peterson, president of Johns Hopkins Health System, says the commission helps Johns Hopkins cover the cost of treating the uninsured while giving the hospital a predictable budget and financial stability.
As a result, he says, Maryland hospitals have a steady profit margin, unlike hospitals in other states that often make more money during boom years and less during a recession. For Johns Hopkins Hospital, the profit margin from operations is consistently between 2% and 4%, Mr. Peterson says. Statewide, the commission says the profit margin averages about 5%; before the commission was established Maryland hospitals were losing money covering the uninsured.
But covering Maryland’s uninsured does add some costs. In the 1970s, as Maryland and other states experimented with cost-saving schemes, Medicare agreed to pay the state-established rates, which included a subsidy to cover charity care. The subsidy, now at 8%, translates to about $500 million this year.
With Medicare and Medicaid paying these higher rates, hospitals agree not to “cost shift” — meaning they won’t raise rates on private insurers to make up for low reimbursement from Medicare and Medicaid. Cost shifting is a major factor in rising health-care costs.
The state commission has about 30 people on staff to come up with the rates for the state’s 47 acute-care hospitals. It also sets rates for privately insured patients at the state’s specialty hospitals. The rates take into account each hospital’s wages, charity care and severity of patient illnesses.
The commission, for example, requires St. Joseph Medical Center in suburban Towson, part of Denver-based nonprofit Catholic Health Initiatives, to charge $984 for an overnight stay, and Johns Hopkins, $1,555. For a basic chest X-ray, St. Joseph’s rate is $81 and Hopkins, $155. The differences reflect Hopkins’s higher costs as a teaching hospital and its care for generally sicker patients.
Private insurers aren’t allowed to bargain for discounts, though patients may not notice the difference. But that isn’t the case for the uninsured. In other states, hospitals typically charge the uninsured steep prices that no insurer actually pays, forcing the hospitals to write off the costs. In Maryland, where hospitals know they will get reimbursed for charity care, hospitals charge the same rate whether a patient has insurance or not.
The system has largely reined in hospital costs. In 1976, Maryland hospital costs were 25% more per case than the national average; by 2007, the latest year for which data are available, Maryland’s costs were 2% less than the national average. Maryland also saw the nation’s second-slowest increase in hospital costs during the same period, said Robert Murray, the commission’s executive director.
On average, Maryland hospitals charged patients 20% above the cost to treat them in 2007, compared with a national average of 182%, according to the American Hospital Association.
Not all Maryland hospitals are happy with the arrangement, especially this year, when rates didn’t rise much. “It’s an annual process that continues to have challenges,” said Carmela Coyle, president and chief executive of the Maryland Hospital Association. “Much of the discussion around the annual update goes on in private between various parties and is presented at one or two public meetings.”
Ms. Coyle sees a number of challenges for hospitals. The rate decisions are made by seven commissioners appointed by the governor to four-year terms, and hospitals can appeal only to the commission or take the dispute to court. Also, because the commission’s jurisdiction is limited to hospital services, it doesn’t factor in all physician costs to hospitals and lacks the flexibility to allow innovations such as higher rates to hospitals and doctors for coordinating patient care.
In the fight over Medicare rates, the American Hospital Association opposes an independent agency to set payment rates for the federal insurance program for the elderly and disabled. Ms. Coyle says the Maryland association agrees with the AHA’s stance. A federal agency, she says, would limit Congress’s role in setting payment rates and policy, and “could ignore significant differences in health care needs across the states.”
Supporters of a rate-setting commission say an independent agency without congressional interference will go through with cuts to providers that Congress has stopped numerous times. Critics argue that the commission would still be lobbied and could still decide not to cut spending much.
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