The program is a legacy of the 1970s when a number of states had rate commissions that set hospital payments. Maryland's all-payer price-setting model—never repealed as it was elsewhere in the country—succeeded admirably in reducing costs in Maryland. The state went from being among the highest-cost states to being somewhere in the middle of the pack.
But from the vantage point of the CMS, it is a bad deal. The government gave Maryland a waiver from its usual rates so private insurers could pay the same rate as Medicare and Medicaid. In other words, no cost-shifting is allowed. As a result, Maryland's per capita Medicare hospital costs are among the highest in the country.
The all-payer model also did nothing to reduce the perverse incentive under fee-for-service medicine that rewards volume over quality. A preventable readmission leads to another billed patient under all-payer pricing just as it does elsewhere in the country and, sadly, Maryland has among the higher readmission rates in the country.
After more than a year of negotiations, Maryland agreed to limit per capita hospital cost growth for inpatient and outpatient care at 3.58% a year, which was the average growth rate of the state's gross domestic product over the past decade. This target is one percentage point lower than the maximum growth rate target contained in the Patient Protection and Affordable Care Act, which set up an Independent Payment Advisory Board to come up with cuts whenever Medicare spending exceeds per capita growth of GDP plus 1%.
Maryland also agreed to limit per capita hospital cost growth to the national GDP minus 0.5% for 2015 through 2018, which it estimates will save Medicare $330 million over the next five years. The state also agreed to a special readmissions reduction program and a 30% reduction over five years in 65 potentially preventable hospital-associated conditions. Maryland even agreed—after the CMS insisted—to give up its all-payer system if the experiment fails to achieve its cost-control targets.
Critical-access hospitals in some semirural towns already have experience with capped payments. The state's rate commission calculated their payments based on what it takes to keep hospitals open in those areas. Freed from traditional fee-for-service medicine, many of these hospitals have become quite adept in developing programs to keep people out of the hospital—cooperating with public health agencies or long-term care providers, for instance.
Maryland is betting that hospitals from impoverished Baltimore to the wealthy suburbs surrounding Washington will be able to achieve something similar. By focusing on care coordination and overall population health, some will be able to live within their capped budgets. Others may fall by the wayside or be absorbed by more creative systems.
It's easy to see politics in the program. Maryland Gov. Martin O'Malley is being widely touted as the “not Hillary” candidate in the 2016 Democratic primaries. A successful cost-control program would be a real feather in his cap.
For healthcare providers, a successful capped payments program in Maryland poses both threat and promise. If successful, it could become the national model for payment reform—just as Massachusetts became the model for insurance reform.
That would raise the stakes enormously for any provider that isn't taking seriously the movement toward accountable care and population health management.
Follow Merrill Goozner on Twitter: @MHgoozner