Becker's Hospital Review

72 Financial Management L eaders at Mercy Medical Center in Baltimore don't need to worry about payer mix. "Rates are uniform, no matter what your payer source is," says Thomas Mullen, president and CEO of Mercy Health Services. "A Blue Cross patient will pay the same as Medicare." That's because Maryland currently runs the country's only all-payer hospi- tal rate setting system, under which facilities in the state are paid the same amount by all government and private health insurers. Since the state legisla- ture established the all-payer model in 1971, the cost of a hospital admission has plummeted, the financial stability of the state's hospitals has improved, and Maryland has seen the lowest markup of charges compared to costs in the U.S., according to a 2009 Health Affairs article by Robert Murray, execu- tive director of the Maryland Health Services Cost Review Commission, the state agency tasked with setting hospital rates. In January, Maryland and CMS announced a new initiative meant to mod- ernize the system by promoting value instead of volume. If the all-payer model proves successful under its new terms, it could potentially provide a blueprint for efforts to contain costs and improve quality of care in other states. "I think the hospitals will tell you that they're actually very nervous about what's going to happen, and I don't blame them," says Maryland Health Sec- retary Joshua Sharfstein, MD. "But the general sense is we have a chance to be masters of our own destiny." The why and how of Maryland's all-payer system State lawmakers revamped the Maryland rate setting system decades ago in response to skyrocketing hospital costs and growing levels of uncompensated care, according to Mr. Murray's article. The Maryland Hospital Association originally suggested rate regulation to bolster providers that were struggling financially as a result of treating the uninsured, and hospital trustees crafted the bill that established the Health Services Cost Review Commission, which consists of seven governor-appointed members serving staggered four-year terms. Six years after its creation, the commission obtained a waiver from CMS to align Medicare reimbursement with the rates set for other payers. "This Medicare waiver is the linchpin for the system and a galvanizing force for all stakeholders," Mr. Murray writes. Originally, the rate-setting commission used service-specific unit rates as the ba- sis for hospital reimbursement. The state sought to contain hospital revenues through case-mix-adjusted per-case limitations, with annual updates to account for inflation. Under this system, average hospital cost per case in the state went from 26 percent greater than the national average in 1976 to 2 percent lower in 2007, according to Mr. Murray. Furthermore, while American Hospital Associa- tion data places the average hospital markup of charges over costs exceeded 180 percent in 2007, Maryland's average markup was just 21.5 percent. Additionally, according to a New England Journal of Medicine perspective piece Dr. Sharfstein co-authored earlier this year, the system has "eliminated cost shifting among payers, more equitably spread the costs of uncompen- sated care and medical education," in addition to successfully holding down per-admission spending. In terms of how it affects hospitals, Mr. Mullen of Mercy Health says the system was well-received because of the financial pre- dictability and stability it offers: "We knew what our revenues would be going forward, as long as we received the volume levels." However, despite its many positive points, the original all-payer model had some considerable flaws. Mr. Murray's article notes that hospital admissions ballooned at a rate of 2.7 percent in Maryland from 2001 to 2007, compared with the national growth rate of 1 percent. Dr. Sharfstein says the old system created "some perverse incentives" that became apparent over the years and drove the state's decision to redesign its payment model: "It was creating some incentives for high volume. It was recognized that was not optimally aligned with the triple aim of lowering overall costs, enhancing the patient experience and improving outcomes." Additionally, Maryland wasn't able to keep costs per admission contained as effectively as desired. The combination of those two factors meant the state was in danger of losing its CMS waiver unless it changed the rate-setting methodology, according to Dr. Sharfstein. Therefore, Maryland and CMS agreed on a new initiative to update the 36-year-old Medicare waiver. Under the new system, the all-payer system is based on containing per capita total hospital cost growth rather than pay- ment per admission. The state has agreed to limit its annual all-payer per capita total hospital cost growth to the 10-year average growth rate of the state's economy, 3.58 percent, according to CMS. Additionally, Maryland will transition essentially all of its hospital revenue into global payment models during the five-year initiative. The state is also aiming to improve quality of care by reducing its aggregate Medicare 30-day unadjusted all-cause, all-site readmission rate to the na- tional rate, achieving an annual aggregate 6.89 percent reduction in 65 pre- ventable hospital-acquired conditions, and submitting an annual report on its performance relative to numerous population health measures. Overall, the initiative requires Maryland to produce $330 million in Medicare savings over the course of five years. Has Maryland Found a Solution to the U.S. Healthcare Cost Crisis? By Helen Adamopoulos

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