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Research Brief | No. 1 | August 2017 (update from March 2015)

Hospital Rate Setting: Promising, but Challenging to Replicate

More than 40 years ago, state-based rate setting was introduced as a method to curb hospital expenditures while improving payment equity and reducing price variation. While more than half of U.S. states at one point had programs to review or regulate hospital rates, Maryland has the only remaining statewide all-payer hospital rate setting program.

The system used by Maryland has been found to lower rates of annual hospital spending, while providing a platform for quality improvement and a potential reduction in administrative burden. Maryland’s program also has reduced cost-shifting between public and private payers, enhanced access to care for uninsured patients (because uncompensated care is built into hospital rates so hospitals have a way of financing it) and added to the financial stability of hospitals. More recently, Maryland has broadened the impact of its program by proactively treating chronic conditions and forming regional partnerships to organize care management within geographic areas. 

In most states, hospitals negotiate payment rates with each payer. Payers can include private health insurance plans, self-insured employer plans, and uninsured individuals, and may also include public payers like Medicaid and Medicare.1,2 

Hospital rate setting is a system in which an authority, usually a state agency, establishes uniform rates for hospital services for multiple payers. When every payer in the state participates—as is the case in Maryland—it is referred to as all-payer hospital rate setting.  

A rate-setting system does not mean that all hospitals in the state receive the exact same payment. In Maryland, rates are set so that all payers pay approximately the same price for a given service at a given hospital (see Figure 1). Payers pay on the basis of charges regulated by the rate-setting authority—but some payers, like Medicare, may pay slightly lower rates. 

All-payer systems, such as Maryland’s, require a federal waiver in order for the state’s rate setting agency to replace Medicare’s payment rules with its own. The waiver requires the state not exceed the per admission amount that Medicare would have paid under its regular payment rules for hospitals. 

This paper updates Hub Research Brief No. 1 (March 2015) with results from Maryland’s most recent Medicare waiver, and the state’s progress towards the Triple Aim: improving the individual experience of care, improving population health and reducing per capita costs.


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What Value Problems Does Rate Setting Address?

Hospital care represents 32 percent of national healthcare spending.3 Annual increases in per admission spending has been identified as a major driver of medical spending, and even a modest decrease can mean annual savings of billions of dollars.4 A system that relies on the negotiating strength of each individual payer can leave smaller payers and the uninsured paying much higher prices for hospital services.5 

A hospital rate setting system can contain costs by establishing payment levels and controlling the rate of growth of those payment levels over time. In theory, rate setting systems also should lower costs by reducing or eliminating the administrative burden of negotiating multiple payer contracts and could streamline claims processing. Perhaps most importantly, a rate setting system can provide a platform for payment reforms to promote improvements in the quality and equity of care. To the extent that quality incentives are built into the uniform payment rates, they apply to the full population of patients, rather than just an individual insurer’s population, increasing the incentive to deliver care more efficiently. Because spending flows and performance metrics are publicly debated, and the rate setting agency is usually required to report on overall hospital performance, these systems should be able to provide better price and quality transparency to consumers.

What Does the Evidence Say?

Research has found that rate setting can be successful in controlling the rate of increase in hospital costs.6 However, success depends on the way in which rate setting is implemented, as well as regulators’ ability to enforce the rates and impose penalties for noncompliance. The evidence for this comes from Maryland’s experience as the only state to maintain and update its all-payer hospital rate setting system over time.7,8

Maryland Model (1971-2013): Formulation and Evolution of the All-Payer Rate Setting System

Maryland established its hospital rate setting system in the 1970s. The Maryland Hospital Association initially proposed rate regulation as a means of financing the growing levels of hospital uncompensated care. In response, the state established the Health Services Cost Review Commission (HSCRC), a state agency with broad powers of hospital rate setting and public disclosure. With a 1977 Medicare waiver, the system allowed Maryland to set Medicare rates, creating a true “all-payer system,” with all public and private payers paying on the basis.

Since adopting the all-payer rate system, Maryland has effectively moderated per admission spending growth and improved the financial stability of the state’s hospitals.9 Moreover, Maryland has kept per service cost growth much lower than in other states. Under this system, average hospital cost per admission in Maryland went from 26 percent greater than the national average in 1976 to 2 percent lower in 2007.10 Further, the system helped create a more equitable spread of the costs of uncompensated care and helped eliminate cost shifting among payers.11

However, while the system effectively reduced per-admission costs, Maryland faced challenges with the original model. Hospital admissions in Maryland increased at a rate of 2.7 percent from 2001 to 2007 compared to the national average of 1 percent,12 indicating that the system created perverse incentives for high volume.

To address this issue, in 2008 the HSCRC piloted a global budget system for hospitals as an incentive to reduce unnecessary admissions and readmissions. The 10 community provider hospitals that participated in the three-year Total Patient Revenue System (TPR) pilot program received a fixed global budget covering all outpatient and inpatient services (see Figure 2). The global budgets were based on the participating hospitals’ revenue from the previous year. The revenue was then adjusted by an estimate of underlying cost inflation, demographic changes in the hospitals’ service areas and relative performance on specific quality measures.13 Operating on a fixed budget, these hospitals were incentivized to reduce services that did not provide good value.

Overall, the TPR hospitals successfully reduced the number of admissions and readmission as well as emergency department visits.  For example, between 2010 and 2014, Western Maryland Health System (Cumberland, Md.) reduced inpatient admissions by 32 percent and reduced readmissions by 42 percent.14 TPR hospitals also improve overall profitability.


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Maryland Model (2014-2019): Making Progress Towards Achieving the Triple Aim

In 2014, Maryland and the Centers for Medicare & Medicaid Services (CMS) launched a new initiative to modernize Maryland’s all-payer rate setting system. Under the new five-year waiver, the all-payer system is based on containing total, annual per capita hospital cost growth rather than payment per admission or per episode. The waiver requires that Maryland transition at least 80 percent of hospital revenue to “population-based payment methods” like the TPR hospitals.

Specifically, under the waiver, hospitals in Maryland must meet the following requirements:

  • Limit the growth in annual per capita hospital spending growth to less than 3.58 percent; 
  • reduce Medicare hospital spending by $330 million over the five-year period;
  • limit per beneficiary Medicare spending growth so it does not exceed the national average; 
  • reduce the 30-day, unadjusted all-cause, all-site readmission rate for Medicare patients to the national average; and
  • Reduce potentially preventable complications (PPCs) by 30 percent during the waiver period.15

Now entering the fourth year of the waiver, analyses show that the program is performing well against the benchmarks outlined above. A recent evaluation shows that three-year results have already met or exceeded most of these requirements (see Table 1).16 Each year total per capita hospital spending growth has been well below the maximum allowed rate of 3.58 percent. Also during this time, hospitals have reduced PPCs by 48 percent, sailing past the 5-year target. 

While progress continues to be made with respect to readmissions, Maryland’s rate still exceeds the national rate. Between 2013 and 2016, Maryland has reduced the gap in Medicare readmissions compared to the national average by more than 70 percent. 

Perhaps the most remarkable metric is Medicare hospital savings to date. With a five-year goal of $330 million, Maryland has already seen savings of $429 through August 2016, with 2 years remaining in the waiver.

Other data show hospitals are expanding their efforts to help patients transition home or to post-acute settings after discharge. They are using case managers in emergency departments to connect patients to primary care and other resources, and proactively treating chronic conditions such as diabetes, heart disease, and pulmonary disease.17

Encouraged by the success of the model thus far, in late 2016 Maryland submitted a progression plan to CMS. While Maryland’s regulatory authority is limited to hospitals and Medicaid services, the progression plan calls for extending the model beyond hospitals and engaging physicians and other clinicians in voluntary efforts to redesign care. In addition to outlining a plan to further improve measures of quality and cost, it places a renewed emphasis population health improvement, particularly for complex, high-need patients.


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Research Needed on Administrative Cost Savings

Although theory strongly predicts administrative cost savings under this system, research is lacking to measure the impact of the all-payer hospital rate setting model on administrative costs. In a 2011 article, researchers created a model of potential savings in Vermont if the state adopted an all-payer system for hospitals. The model predicted a 7.3 percent decrease in administrative costs.18 Further  research is needed to contrast the hospital and insurer administrative spending in Maryland with that of other states.

The Keys to Maryland’s Success

For about 25 years Maryland has been the only state with an all-payer hospital rate setting system. Several researchers suggest the following as to why Maryland’s system has endured:

The enabling legislation was drafted by the Maryland Hospital Association, an organization that was run by hospital trustees and the hospital industry has continued to support it.19

The HSCRC statute merely articulated the key goals of the system but otherwise gave the Commission broad legislative authority and flexibility to develop methods to enable the system to perform and meet the goals.20

The political and budgetary independence of the HSCRC. The HSCRC is an independent agency led by volunteer commissioners appointed by the governor and funded through assessments on hospitals.21

Challenges for Other States

Like all comprehensive reforms, establishing an effective state all-payer rate setting program presents a number of challenges.

Participation from Medicaid and Medicare: The Medicaid and Medicare programs may have concerns about increases in provider reimbursement under rate setting programs. For example, increased Medicaid reimbursement rates may improve patient access but could negatively impact state budgets. But states have the option of preserving existing discounts in the system. An all-payer system that preserved some differences across payers could still limit spending growth. 

Other discounting consideration: States may want to preserve discounted rates that other private payers receive, such as health maintenance organizations (HMOs). According to one study, HMO’s inability to receive hospital discounts led to dissatisfaction with rate setting in the 1980’s.22 As described above, it may be possible to preserve some relative discounts inside an updated rate setting system.

Concerns about increases in admissions and readmissions if global budget approach is not used: Prior experience in Maryland with a system that focuses on cost per case instead of a more global approach suggests that a state should be wary of possible increases in admissions and readmissions. The TPR hospital pilot described above was successful, in part, because it was implemented with a global budget payment system.23

Patient Impact: To stay within predefined spending limits, a hospital could feel pressure to reduce services, transfer costly patients or not admit patients with complex medical needs. Maryland attempts to prevent this through strict monitoring and possible penalties or downward adjustments to hospital budgets from the HSCRC.

Consumer Considerations

The all-payer hospital rate setting system has the potential to lower costs for patients and improve quality. The comprehensive nature of the reform means that any benefits will accrue broadly across the state’s population—but any downsides could be similarly widespread. Possible downsides include hospital avoidance of costly or complex patients in order to meet spending targets. 

Benefits are more likely to outweigh downsides if:

  • The rate setting process uses a public, multi-stakeholder process to establish rates and monitor hospital performance. Consumers and their advocates should have a formal, supported role in the process.
  • A robust data collection and analysis system is implemented and fully funded (out of the savings the state will realize) in order to measure the impacts on patients. Providers must receive timely, actionable reports on their performance. This data system should incorporate not only claims data but also other information such as patient complaints made to hospitals, insurers or regulators, and patient experience survey data.

Conclusion

Without underestimating the size of the endeavor, Maryland’s approach deserves serious consideration by other states. For reasons described above, hospital rate setting systems can improve patient outcomes produce predictable revenue for hospitals, while still providing overall system savings. Yet, even though Maryland’s recent hospital-based waiver is built upon the state’s existing all-payer rate setting system, it still took six years to develop,24 suggesting that other states would need to dedicate years to establishment these programs. It is critical that states contemplating a rate setting system similar to Maryland’s include input from stakeholders, including a strong voice from consumers, providers and other organizations involved in payment and costs for care. Additionally, it is critical that the rate setting body have access to a robust data collection and analysis system to support implementation and the monitoring of progress. These strategies help to ensure the rate setting program is reducing costs and improving the patient’s hospital care experience.

If Maryland's model under the current waiver succeeds, it may provide a roadmap for how to eliminate the negative incentives of fee-for-service systems by substituting a population-based system of payment and care delivery, which is consistent with the goals of the Triple Aim and many of CMS’s new payment initiatives.

Notes

1. Bringing in public payers requires a waiver from the federal Medicare program and also that the state Medicaid system agreed to be a part of the payment system.  In Vermont, for example, Medicaid decided not to participate in a proposed multi-payer system that was designed for them. Medicaid has to agree or be mandated to be a part of the system by the legislature.

2. Murray, Robert, “The Case for a Coordinated System of Provider Payments in the United States,” Journal of Health Politics, Policy and Law Advance Publication, Vol. 37, No. 4 (August 2014).

3. CMS, National Health Expenditure Projections 2013-2023, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2013.pdf

4. See Urban Institute’s Containing the Growth of Spending in the U.S. Health System, for more information. http://www.urban.org/publications/412419.html

5. Bai, Ge, and Gerard F. Anderson, “Extreme Markup: The Fifty U.S. Hospitals with the Highest Charge-To-Cost Ratios,” Health Affairs, Vol. 34, No. 6 (June 2015).  

6. National Conference of State Legislatures, Health Cost Containment and Efficiencies NCSL Briefs for State Legislators: Equalizing Health Provider Rates All-Payer Rate Setting, Washington, D.C. (June 2010).

7.Murray, Robert, and Robert A. Berenson, Hospital Rate Setting Revisited: Dumb Price Fixing or a Smart Solution to Provider Pricing Power and Delivery Reform? Urban Institute, Washington, D.C. (November 2015). 

8. A non-statewide program is the Pennsylvania Rural Health Model, which began in January 2017. Under the program, participating rural hospitals are paid based on all-payer global budgets. More information at https://innovation.cms.gov/initiatives/pa-rural-health-model/

9. Murray, Robert, “Setting Hospital Rates to Control Costs and Boost Quality: The Maryland Experience,” Health Affairs, Vol. 28, No. 5 (September/October 2009).

10.  Ibid.

11.Cost shifting occurs when providers seek higher reimbursement rates from private payers to compensate for low reimbursement from public payers. The cost shift is then built back into the premiums paid by people who are covered by commercial insurers.

12. Rajkumar, Rahul, et al., “Maryland’s All-Payer Approach to Delivery-System Reform,” New England Journal of Medicine (2014). http://www.nejm.org/doi/full/10.1056/NEJMp1314868

13. Maryland Department of Health and Mental Hygiene, Supporting Financing Mechanisms, Maryland Total Patient Review. http://dhmh.maryland.gov/innovations/SitePages/maryland-total-patient-revenue.aspx

14.Slide deck from National Health Policy Forum, “Capitalizing on Change: Improving Value and Community Health” (May 30, 2014). http://www.nhpf.org/uploads/Handouts/Repac-slides_05-30-14.pdf

15. Centers for Medicare & Medicaid Services, Maryland All-Payer Model, https://innovation.cms.gov/initiatives/Maryland-All-Payer-Model/ (accessed on July 28, 2017).

16. Sabatini, Nelson, et al., “Maryland’s All-Payer Model—Achievements, Challenges, And Next Steps,” Health Affairs Blog (Jan. 31, 2017).

17.Ibid.

18. Adamopoulos, Helen, “Has Maryland Found a Solution to the U.S. Healthcare Cost Crisis?” Beckers Hospital CFO (Aug. 29, 2014) http://www.beckershospitalreview.com/finance/has-maryland-found-a-solution-to-the-u-s-healthcare-cost-crisis.html

19.Author conversation with Robert Murray, former Executive Director of HSCRC (2014).

20.Ibid.

21. Hsiao, William, “What Other States Can Learn from Vermont’s Bold Experiment: Embracing A Single-Payer Health Care Financing System,” Health Affairs, Vol.24, No. 7 (July 2011). http://www.ncbi.nlm.nih.gov/pubmed/21734195

22. Atkinson, Graham, State Hospital Rate-Setting Revisited, The Commonwealth Fund (Oct. 27, 2009). http://www.commonwealthfund.org/publications/issue-briefs/2009/oct/state-hospital-rate-setting-revisited 

23.One way around this is to apply a rate setting adjustment (used previously in MD and also in all other state rate systems) called a “volume adjustment system” that created incentives for hospitals in their payments not to unnecessarily increase admissions or other volumes.

24. http://www.healthcaredive.com/news/will-marylands-pioneering-healthcare-system-become-the-nations-new-roadma/413438/


 


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