The physician behind Maryland's move to capped hospital payments

In early January, after extensive negotiations with HHS, Maryland became the first state in the nation to agree to caps on hospital payments by Medicare and Medicaid. Dr. Joshua M. Sharfstein, who serves as secretary of Maryland's Department of Health and Mental Hygiene, led the state's negotiating team. The pediatrician and graduate of Harvard Medical School brought a wide range of policymaking experiences to his current position. He previously served as commissioner of health in Baltimore, principal deputy commissioner of the Food and Drug Administration and top minority staffer on the House Government Reform Committee. Modern Healthcare editor Merrill Goozner caught up with Sharfstein as he was preparing to testify before his state Legislature on the troubled implementation of Maryland's health insurance exchange. What follows is an edited transcript.

MH: Many states that ran their own exchanges had smooth rollouts. What went wrong in Maryland?

Sharfstein: Maryland has faced a lot of challenges, including software that was defective, the hardware configuration and other problems. We've made a lot of progress since Oct. 1. The website is working a lot better for consumers. We're focused right now in getting as many people enrolled by March 31 as possible.

MH: What's your goal, and where are you at?

Sharfstein: We had an informal goal of 260,000 enrollees across Medicaid and the privately insured. We think we've passed the midway point. We were able to enroll 92,000 people in Medicaid by automatically converting them from a limited benefit waiver program. We marketed that program all year knowing we could convert them to full benefits Jan. 1.

MH: Are you seeing significant competition on the exchange?

Sharfstein: We have four carriers, including a new carrier, which is a co-op. Our prices are very competitive.

MH: Maryland is the only state in the country with an all-payer system—every payer gets the same price. Why wasn't that enough to hold down cost growth?

Sharfstein: All-payer does not get rid of fee-for-service medicine. There are two major challenges with fee-for-service. It's not aligned with better outcomes in terms of the actual healthcare delivered. And from a public health perspective, the challenge you have in a fee-for-service hospital system is that it's really hard to figure out how to save money if the hospital is volume driven.

There's a program in Baltimore where they send a handyman to a senior's house, which can significantly prevent falls, which are very expensive. The hospital says, why doesn't your department pay for that? We don't have money for that. If the hospital system is oriented toward volume, even if we figured out how to pay for it, the healthcare system wouldn't stop growing. It's hard for the system to achieve better value if the hospital isn't oriented toward achieving better value.

MH: Did the all-payer system make readmissions worse?

Sharfstein: Maryland had some of the highest readmission rates in the country. It was exempted from the readmission penalties because we had other incentives. But because the previous waiver was based on price, as you're reducing certain preventable readmissions, the ones you're left with may be more expensive. … Now payment is premised around total spending per capita. We don't care about the price. It's only about total spending.

MH: How specifically does putting limits on hospital spending change that?

Sharfstein: It aligns financing much more strongly with better outcomes. If the hospitals shift from fee-for-service, we're no longer talking about a penalty for a readmission. It's the entire readmission payment that comes out of their budget. Now if there is a hospital-acquired infection or condition, it's coming out of their budget if they have to pay for that. It's a true alignment of the general financial payment with the goal.

It's not exactly capitated payment. It's an alternative growth cap tied to per capita growth.

Our rural hospitals are on a global budget. I visited one in Western Maryland. I called it the anti-gravity zone for healthcare. The hospital is quiet, just 60% full. You go to the ER, and they have people whose entire job is to focus on asking people what their plans are when they go home. The CEO calls it a culture shift. It's not that “we never want to see you again.” It is part of their jobs to make sure they don't see them again. They've seen a significant decline in preventable readmissions.

There are other hospitals in Maryland where they get paid a readmission bundle. This is the amount that went to readmissions last year. We say, “We'll give that to you again, but you have to stay within that.” But they get the full bundle no matter how many readmissions there are. So there is financial alignment for reducing readmissions.

MH: You agreed to scrap the all-payer system if this capped payments program doesn't work. Did the CMS insist on that or do you think it has become unworkable?

Sharfstein: They insisted on it. My sense is that both the state and the federal government think this is a better way at this point to organize the system. So that's what we're shifting to. There was this fear that if we could go back to a system that was based on price, then maybe we wouldn't see through the kind of structural transformation that was needed.

MH: What will happen if capped payments don't work out and you lose the all-payer system?

Sharfstein: We think the system delivered a tremendous amount for the state. The cost-shifting problem doesn't exist. The overpricing of the uninsured doesn't exist. The distribution of medical education costs is better.

We think it will work out. The reason … is that the system is very hard to transform unless you do it across all institutions. You have to have the whole hospital be about a different way of delivering care.

If one payer does it one way and another payer does it another, it's much harder for a healthcare system to change. You can't transform your institution based on 20% of your patients. We're trying to solve the problem caused by trying to do it in little steps. This is taking a leap across all payers. All-payer provided the CMS with the opportunity.

MH: Hospitals in Maryland have accepted this experiment. What's in it for them?

Sharfstein: Under the old waiver, we couldn't keep the individual prices of each institution down. We expect there will be some increase in prices. But as one hospital CEO said to me, in the old world, we drove 5% more volume to get a 1% increase in margin. The alternative is getting that 1% margin through a higher price because we also control volume by doing the right primary-care partnerships and other steps. Overall hospital use may decline even as they preserve margins.

We're giving hospitals a different way to make money: by improving the health of their community and by preventing readmissions.

MH: Gov. Martin O'Malley has national political aspirations. What role did he play in developing this plan?

Sharfstein: The governor is very interested in prevention and wellness and a healthcare system that produces good outcomes. He is data driven. This was a complicated negotiation that required a lot of support from the governor as we worked with hospitals and insurers. He felt this was a way that Maryland could provide national leadership—by taking a risk, by taking a path that hasn't been taken before.

Follow on Twitter: @MH