Can Maryland Hospital Price-Setting Serve as a National Model?

April 11, 2018 8:40 am

Several years into the pilot of a global hospital budget, one criticism is that hospitals have not done enough to find savings.

April 10—Hospitals may have reasons to support a shift to a global budget model like the one used in Maryland, some healthcare policy leaders say.

In Maryland, each hospital is provided a global budget at the beginning of the year that is essentially independent of the amount of services they provide.

“So they can actually make money by preventing illness,” said Joshua Sharfstein, MD, the former secretary of the Maryland Department of Health, where he was involved in establishing hospital global budgets.

The early returns in the global budget five-year pilot have generally been positive. For instance, during the first three years of the pilot, also known as an all-payer model, total per-beneficiary Medicare expenditures and hospital service spending declined relative to a matched comparison group, according to a recent third-party analysis.

At the Lown Institute’s annual conference in Washington, D.C., Sharfstein was cautious when asked whether the results show that Maryland could be a cost-saving model for a nation in which hospital spending comprises one-third of healthcare expenditures. He noted hospitals in the state had not gotten to the point of repurposing the savings and that much of the savings came from “taking things that didn’t need to be in the hospital out of the hospital” and providing better care.

Sharfstein also noted that Pennsylvania has struggled to get off the ground its own global budget program for rural hospitals.

However, the beneficial financial results and potential for more stability—the finances of even rural Maryland hospitals have improved under the all-payer model—should make the approach more appealing to hospitals than proposals to implement Medicare-for-all.

Others don’t see a shift to global budgets as imminent.

“Politically, it would be hard to get it in the short term,” said Mark Miller, PhD, vice president for the Laura and John Arnold Foundation and former executive director of the Medicare Payment Advisory Commission.

A more likely way that regulators could push providers to reduce their costs and prices would be to establish limits on what they could charge any payer for out-of-network care—similar to limits on providers that are paid by Medicare Advantage (MA) plans. That could push many providers back into negotiations where prices could come down, Miller said.

Another way to move toward global hospital budgets would be to implement MA-for-all, said Phillip Longman, policy director at the Open Markets Institute.

“Anything that is anywhere near sufficient to solve the problem is arguably politically impossible, but it better not stay that way,” Longman said. “This proposal is not as radical as it might sound at first hearing.”

Hospitals—in many cases safety-net hospitals—that can cover their lower care costs at Medicare rates should welcome MA-for-all, he said, because it will level the playing field with competitor hospitals that have much larger mixes of commercial payers, which pay much higher rates for the same care.

“It seems their interest, whether they realize it or not, would be in getting everybody else to take the same prices that they have to live with,” Longman said.

Sharfstein said MA-for-all would be another reason to switch to global budgeting “because some people would say, ‘I don’t want to be on a volume treadmill at those rates anymore, give me a different deal.’”

More Maryland Results

The first three years of the Maryland model featured a decline in total Medicare per-beneficiary per-month (PBPM) expenditures, producing an aggregate $679 million in savings to Medicare—which amounted to a 2.7 percent relative cut in total spending, relative to the comparison group.

The recent report also found savings on professional services and post-acute care.

“Although these services are not subject to global budgets, lower spending for professional services in regulated settings is consistent with decreases in inpatient admissions and use of some hospital outpatient department services,” the report by RTI International stated.

Total hospital spending declines were driven by declines in outpatient services. Reductions in Medicare expenditures for emergency department (ED) visits and observation stays amounted to savings of $155 million, or 24.5 percent. Slower spending growth in other Medicare outpatient department services saved an aggregate of $354 million, or 12.7 percent.

However, the first two years produced no statistically significant differences in total expenditures or total hospital expenditures for the commercially insured, according to the recent analysis. The authors of the report blamed that shortcoming on increased payments for hospital and non-hospital outpatient services, which offset savings on ED visits and observation stays.

“They felt like Maryland private insurers were paying higher prices to compensate for the declines in volume for the first two years,” Sharfstein said in an interview.   

Shortcomings Identified

The strongest criticism of the five-year global budget pilot, with which Sharfstein agrees, is that hospitals should do much more to find ways to save money.

“There are increases in the number of people who had a visit right after they left the hospital, there’s a lot of focus on people with high needs, but it’s just at the beginning of putting a whole system in place for them at the same level,” said Sharfstein, who is now an associate dean at the Johns Hopkins Bloomberg School of Public Health.

Hospitals have found some economic stability under the model. For instance, RTI’s analysis of operating margins from audited hospitals found “a generally positive trend for Maryland hospitals since the implementation of the all-payer model.”

However, the overall trend masked considerable variation among hospitals.

The report also found that hospitals with relatively large operating margins appeared to be banking those funds against future uncertainty, rather than investing them in strategies to improve their operations.

Focus groups of physicians and other clinical providers said that global budgets “limit investments in new medical technology and, as a result, stifle clinical innovation.” And some hospital leaders agreed that the global budget model was “limiting their ability to bring care to their communities, leading them to send patients to regional and tertiary care centers.”

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare


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