Healthcare Business News
Dr. Joshua Sharfstein, Maryland’s secretary of health and mental hygiene

Maryland experiment aims to keep healthcare spending in line with economic growth

By Melanie Evans and Harris Meyer
Posted: January 10, 2014 - 4:00 pm ET

Maryland's healthcare system is going to start looking more like Germany's and Switzerland's.

The state has won federal approval for a five-year experiment to set a global budget for hospital spending per capita that stays in line with state economic growth.

Maryland already regulates hospital prices—with all payers negotiating uniform rates with hospitals—under an existing federal agreement. Under the new agreement, the state will enforce a statewide cap for inpatient and outpatient hospital revenue at 3.58% annual growth, or the average of the state's economic growth over a decade. The state has set a goal of saving Medicare $330 million over five years, measured by comparing the state's Medicare per capital spending growth to national Medicare per capita growth. Maryland will work with the CMS Innovation Center to evaluate the effort.

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If the experiment fails to achieve the targeted Medicare savings, Maryland will convert to Medicare's national payment model. But the state would propose a five-year extension if it succeeds. The new program arises from the fact that the state has struggled to keep healthcare price growth below Medicare prices, a requirement of the previous all-payer arrangement with Medicare. There also have been concerns that providers were jacking up volume to make up for the price controls.

“We are spending a lot for healthcare,” said Dr. Joshua Sharfstein, Maryland's secretary of health and mental hygiene. “We are spending more than most other places in the world and we should be able to get more for that investment.”

Maryland is not the only state with plans to keep healthcare spending in check with economic growth. Massachusetts has established a target tied to the economy in 2012, though it did not cap spending.

The Maryland agreement will seek to improve healthcare quality and lower costs using targets to reduce unnecessary hospitalizations or preventable conditions and by shifting hospital payments into global budgets within five years. Each of the state's 46 hospitals would be given a budget. “Hospitals will be paid more on the basis of value than volume,” Sharfstein said.

Maryland's aggregate rate of hospital readmissions within 30 days cannot exceed the national average under the deal. Incidence of 65 conditions identified as potentially preventable must drop by 30% over five years. The state will increase performance incentives tied to the 65 conditions starting in 2015 from 2% reductions or bonuses, based on outcomes, to 3%.

Sharfstein and CMS officials, writing in the New England Journal of Medicine, described the deal as unique to Maryland but not without significance in other states, which could use it as a model.

“The process of developing Maryland's all-payer model was transparent, productive and sometimes intense,” they wrote. The effort sought to include comment from the state's healthcare industry and citizens and required a year of negotiations between the state and CMS. “The two parties were able to reach agreement because they concentrated on areas of mutual benefit and shared goals.”

Maryland's unique regulation of hospitals will also allow for a widespread and rapid test of reform models, the said.

The state has a strong incentive to make the new capped model work because it doesn't want to be required to use Medicare's traditional payment models. Researchers estimate the state saved $45 billion over four decades using the all-payer rate setting system, with hospital spending growth significantly lower than in the rest of the country.

Follow Melanie Evans on Twitter: @MHmevans

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