Gov. Martin O'Malley said the state needs to focus on a balanced approach that encourages prevention and wellness, not just treating illnesses.
"Such a shift will reduce costs for families and small businesses and will simultaneously keep many Americans from dying of preventable causes," O'Malley said.
The changes were needed to maintain a one-of-a-kind Medicare waiver that the Maryland Hospital Association says has saved the state roughly $45 billion in its 36-year history. To maintain the waiver in the past, Maryland was required to keep its price for hospital admissions low, or below a certain benchmark, but in recent years the state came close to not meeting the benchmark.
The initiative marks a major shift in how the state will maintain the waiver that allows Medicare payments to be based on rates set by a Maryland commission, instead of national federal payment principals.
Maryland operates the nation's only all-payer hospital rate regulation system under which all third parties pay the same for hospital services. Over the years, Maryland has kept the rate of hospital cost increases lower than other states, and the federal government has made larger Medicare payments to the state to offset the costs of uncompensated care. The annual financial impact of losing the Medicare waiver to the state's hospitals would be roughly $1 billion in lost Medicare reimbursements, according to a 2011 analysis by the Maryland Department of Legislative Services.
The new plan was submitted to the federal Centers for Medicare and Medicaid Services in September. It was reviewed by several federal agencies before approval.
Carmela Coyle, president and CEO of the Maryland Hospital Association, said the goals of the new system will be very challenging for hospitals, because the ideas have never been tried or tested before on this scale.
"Maryland's hospitals will have to find ways to provide care at a lower cost than today, and in broadly different ways," Coyle said.
Maryland's all-payer model will be tested through a center created by the federal Affordable Care Act to test payment and service delivery models. The model will require Maryland to generate $330 million in Medicare savings over a five-year performance period, measured by comparing the state's Medicare per capita total hospital growth to the national Medicare per capita total hospital cost growth. The plan also calls for Maryland to shift nearly all of its hospital revenue over the five-year performance period into global payment models.
"It refreshes, reforms and revitalizes Maryland's all-payer health system," said Sen. Barbara Mikulski, a Democrat who worked to keep the waiver in federal law more than three decades ago. "Modernizing this waiver means we will be able to improve care quality, delivery of services and costs for seniors and families who need it most, saving money and saving lives."
Under the agreement, if Maryland fails to meet performance goals during a five-year period, state hospitals will transition to the national Medicare payment systems over two years.