Global budgets are an alternative payment model (specifically, a form of capitation) in which providers—typically hospitals—are paid a prospectively-set, fixed amount for the total number of services they provide during a given period of time. Providers are responsible for expenditures in excess of the set amount in addition to quality outcomes, creating an incentive to reduce unnecessary utilization and invest in prevention. Thus, global budgets are a key tool that payers can use to lower healthcare spending, particularly in markets that lack competition.
Global budgets are relatively uncommon at the state-level, but a few states have incorporated the strategy into their plans to reduce spending and improve population health. Maryland has implemented global budgets for hospitals as part of its all-payer rate setting program, with notable success. Various studies1 have documented improvements in the rate of per capita hospital spending growth, reductions in potentially preventable complications and hospital admissions and lower out-of-pocket costs for Medicare beneficiaries with no negative affect on patient experience and hospital financial performance. However, increases in Emergency Department use were also observed.
Other states are now testing the utility of the model in a non-rate setting environment. Pennsylvania’s efforts have focused exclusively on rural hospitals,2 while Vermont is using global budgets as part of its All-Payer ACO Model.3
Global budgets create spending targets for providers that represent a “reasonable” level of costs for services provided to a specific patient population over a given period of time. Similarly, some states have established statewide spending targets (also known as benchmarks) to constrain total hospital or healthcare spending growth over time.
Health Spending Target Examples
|What is Capped?||Mandatory Target?||Voluntary Target?|
|Total healthcare spending||Vermont||Massachusetts, Delaware|
|Total hospital spending||Maryland, Pennsylvania (rural hospitals only)|
Massachusetts was the first state to create an annual cost growth benchmark4 by which to monitor total per capita healthcare spending. If the annual growth of total healthcare expenditures across all payers (public and private) exceeds the benchmark—set at 3.6 percent from 2013-2017 and 3.1 percent from 2017-2018—the state’s Health Policy Commission can require healthcare entities to implement Performance Improvement Plans and submit to strict monitoring. “Total healthcare expenditures” include:
Massachusetts met its cost growth benchmark in 2013 with total growth of 2.3 percent. However, the state exceeded the benchmark in both 2014 and 2015 with 4.1 percent and 4.2 percent cost growth, respectively. The Commission’s 2018 Cost Trends Report found that total healthcare expenditures grew 3 percent in 2016 and 1.6 percent in 2017—a rate significantly lower than the benchmark.5 Additionally, Massachusetts’s spending growth was well below the national rate (approximately 4 percent in 2017).
While data from Massachusetts shows us that even voluntary targets are helpful, mandatory targets may be even more impactful. Quality benchmarks, such as those being developed in Delaware,6 are also important to ensure that efforts to reduce growth in healthcare costs does not negatively impact health outcomes.
As healthcare spending continues to increase faster than wages and the rest of the economy, establishing overall spending targets are an important tool for addressing high healthcare spending.
1. Sharfstein, Joshua M., et al., "Global Budgets in Maryland: Assessing Results to Date," JAMA, Volume 319, Issue 24 (June 26, 2018).
2. Centers for Medicare and Medicaid Services, "Pennsylvania Rural Health Model," (July 9, 2019).
3. Bailit, M., et al., "Balancing Health Care's Checkbook: New Strategies For Providers And States," Health Affairs Blog (July 20, 2018).
4. Massachusetts Health Policy Commission, "Health Care Cost Growth Benchmark," (March 29, 2017).
5. Center for Health Information and Analysis, "Performance of Massachusetts Health Care System: Annual Report September 2018," (September 2018).
6. Delaware Office of the Governor, "Governor Carney Signs Executive Order Establishing Health Care Spending and Quality Benchmarks," (November 20, 2018).