Hospitals in Maine dodged a bullet when provisions that would have regulated hospital prices were stripped out of a state healthcare reform bill. But the narrow and still-uncertain escape illustrates that health insurers in Maine and elsewhere have successfully painted targets on the backs of hospitals across the country, as lawmakers look for ways to shoot down rising healthcare costs.Facing calls for rate regulation, hospitals in Maine and across the country may be forced to accept tighter controls on their operations as state budget crises force lawmakers to more carefully scrutinize every public dollar they spend.
It is on this regulatory shooting range that new rules to clamp down on hospital budgeting and other activities are beginning to take shape, according to Modern Healthcare's news reporting and interviews with hospital and government officials in several states.
While the Maine Hospital Association said it was "fortunate" that the most objectionable provisions were removed from the health reform bill, "this is a harbinger of what will go on nationally and what will continue to go on in the state of Maine," said Steven Michaud, president of the MHA.
"This is only the beginning of yet another trend of very heavy government activity in healthcare to rein in expenses," Michaud said.
Regulations recently enacted or now in the works range from rate-setting proposals like the one in Maine to more government oversight of hospital construction, billing of the uninsured and preparation for bioterrorism and even earthquakes.
In recent years pharmaceutical expenses have been blamed for a good portion of the industry's cost inflation, but "hospitals appear to have returned as one of the leaders in the escalating cost of healthcare," said Thomas Piper, director of Missouri's certificate of need program and a past president of the American Health Planning Association.
That certainly appeared to be the case in Maine, where Democratic Gov. John Baldacci proposed a health reform plan that would have regulated hospital revenues and expenses to contain cost growth.
"To cover the cost of care for the uninsured who can't pay, hospitals and physicians raise their rates, and all of us who pay healthcare premiums pay more," Baldacci said in a speech last month announcing his health reform plan. According to the MHA, hospital spending per Maine resident in 2001 was $1,448, 8.5% more than the national average of $1,335. The so-called "rate setting" system, now used only in Maryland, met with major opposition from Maine hospitals (May 26, p. 6).
Under rate-setting, state regulators establish and closely monitor the prices hospitals can charge to put all hospitals on the same financial footing and create uniform incentives for securing reimbursement from multiple payers. Only a handful of states has adopted the practice. New York first enacted hospital rate controls in 1965 but ended the practice in 1996 when officials determined it no longer met the goals of lower-cost, higher-quality care (See related story). New Jersey and Massachusetts abolished their rate-setting systems in 1992.
In Maine, a preliminary deal struck earlier this month between Baldacci's office and state healthcare organizations removed the most controversial rate-setting provisions from the bill after an aggressive lobbying campaign by the MHA. Those provisions included a state-imposed budget for all hospitals, a 3.5% cap on annual expense growth and a one-year moratorium on certificate-of-need approvals.
On May 29, hospitals, insurers and the governor agreed to a tentative deal that would abolish those provisions. Under that arrangement, which is still subject to change, hospitals would be asked to voluntarily hold their consolidated operating margins to 3.5% for one year, which the MHA conceded "to get the other things out of there," Michaud said.
The MHA also agreed to let stand a yet-to-be-determined cap on CON expenditures in return for eliminating the rate-setting provisions. "Would we have preferred to get the CON cap out? Yes. But in the spirit of trying to do healthcare reform, and trying to get all parties in agreement, we gave in on it," Michaud said.
At deadline last week, Maine hospital, insurance and government officials were still crafting legislative language, using their early agreement as a foundation. Lawmakers and others were hopeful a bill could reach Baldacci's desk before June 10, when legislators adjourn.
Baldacci's plan sought to create Dirigo Health Insurance, a program that would assess an annual 4.1% surcharge on all private health-insurance premiums to subsidize indigent care in the state. Insurers were successful in negotiating an arrangement under which they can pass that cost on to employers and beneficiaries in the form of rate increases. That has the state's business community up in arms and could put an additional strain on formalizing the tentative agreement on a bill.
Hospital rate-setting represents the most extreme of new regulatory proposals, several observers said last week. At the same time, however, the fact that the proposal surfaced in the first place may be an indicator that hospital regulation is being revisited.
"I can think of a lot of areas that hospitals will be told for the public good what to do," said Uwe Reinhardt, a health policy and economics professor at Princeton University, citing tighter CON requirements and more thorough accounting for the public dollars hospitals receive as examples.
"I certainly don't see deregulation," Reinhardt said.
Several states are proving Reinhardt's point.
In New Hampshire, state legislators are considering doing away with a board that approves the construction of health facilities. Under a bill passed last week by the state House, the state Health Services and Planning Review Board would be abolished and the state Health and Human Services department would take full control of the CON process.
Hospitals still would be regulated, and in addition other operators seeking to build outpatient facilities near hospitals with less than 70 beds would have to apply for a CON if the hospital requests it. The New Hampshire Senate, which had rejected another version of the bill, is expected to vote on the new version this week.
In California, lawmakers plan to take up a bill next year that would call for public hearings if a hospital wants to shut down or downgrade medical services. Under the bill, any two hospitals located within 25 miles of each other and owned by the same system would have to hold public hearings, at the hospitals' expense, if they want to consolidate.
Lawmakers proposed the bill as a result of Nashville-based HCA wanting to close the San Jose (Calif.) Medical Center because it does not meet state earthquake requirements, which when fully implemented in 2030 are estimated to cost California hospitals some $24 billion.
"We have issues with the bill ... because not every hospital can afford to retrofit or rebuild" to meet the earthquake standards, said Jan Emerson, a spokeswoman for the California Healthcare Association.
Another California bill introduced this year would allow the state to set rates hospitals can charge the uninsured and underinsured. Under that bill, hospitals could charge such patients the highest of Medicare, Medicaid or workers' compensation rates.
"I have a hunch that as the number of uninsured grows, hospitals will be asked to account very explicitly for every penny they get for indigent care," Reinhardt said.
While few states are making proposals as radical as Maine's, some are taking a fresh look at how hospital rates are set. In Vermont, state regulators for years have approved hospital budgets but haven't imposed limits on spending or revenue. Under legislation signed last week by Republican Gov. James Douglas, the state's Department of Banking, Insurance, Securities and Health Care Administration, or BISHCA, will have the only say in whether a hospital's budget is approved or rejected.
Currently the BISHCA approves budgets but the Public Oversight Commission has an advisory role that will be eliminated, according to state Rep. Anne Donahue, the Republican author of the bill that became law last week. The legislation does, however, give the Public Oversight Commission a greater role as a regulator of hospital expansion projects; now hospitals also will have to meet with the commission a year before proceeding with an expansion.
Driven in part by a construction scandal at Fletcher Allen Health Care in Burlington, Vt., the legislation redraws the CON process, calling for community input and creation of a statewide planning system for hospital expansions and equipment purchases. "It's transferring (information) from a grass-roots level upward, rather than from the top down," Donahue said.
Fletcher Allen, Vermont's biggest hospital with 510 beds, got into trouble when it allegedly withheld information from state regulators about the cost of its $356 million expansion project. The hospital's former chief executive officer, chief operating officer and senior vice president of planning and business development all left as a result of the scandal.
States' movement toward a more stringent regulatory framework for hospitals follows reports issued last year by the Blue Cross and Blue Shield Association arguing that hospitals are largely responsible for cost growth in the industry.
The American Hospital Association and other provider groups quickly mobilized to defend themselves against that charge, issuing their own reports and arguing earlier this year that the health insurance underwriting cycle contributes more to healthcare costs than hospital care (April 14, p. 18). The AHA disagrees with the notion that the Blues' reports prompted a new wave of state regulation. Others said the controversial reports were definitely part of the mix.
The Blues reports contributed to an uptick in hospital regulation, according to Missouri's Piper, but other factors are at play too. Regulators look to hospitals for cost reduction efforts because hospitals keep good records of their spending, represent the largest single healthcare entity in most communities and have political structures to engage in reform discussions, he said.
A spokesman for the Blue Cross and Blue Shield Association said, "We are not aware of anyone using our research for specific legislative purposes," adding that the research is publicly available and may be used in ways unknown to the association.