Maryland has submitted a plan to the federal government to modernize the state's all-payer rate setting system for hospital services, Gov. Martin O'Malley announced Friday.

The state, which has sent the plan to the federal Centers for Medicare and Medicaid Service, is proposing a shift away from fee-for-service reimbursement toward a healthcare delivery that emphasizes prevention, quality care and value.

The plan aims to provide hospital incentives for better outcomes at lower cost. The plan also seeks controls on costs by including an annual limit on the total increase in revenue based on the 10-year average growth in the state's economy and at least $330 million in savings over five years to Medicare, the O'Malley administration said.

The state's Health Services Cost Review Commission will be working with payers, providers, and many others to develop approaches to create savings, the administration said.

Maryland is the only state that has a waiver with the federal government that allows Medicare payments to be based on rates set by a state commission, instead of national federal payment principals. However, Maryland must meet tests showing that cumulative growth in state payments doesn't exceed the rate of growth in Medicare payments nationally. The state has come close to failing to meet the standard in recent years.

The annual financial impact of losing the Medicare waiver to the state's hospitals is about $1 billion in lost Medicare reimbursements, according to a 2011 analysis by the Maryland Department of Legislative Services.