Declining margins. Dependence on fee-for-service revenue as pressure rises to expand participation in alternative payment models. Frustration among medical professionals over loss of initiative and authority. Uncertainty over the future of national health policy.
The year was 2013, and Maryland's unique rate-setting system for hospitals was at a crossroads. To succeed, the leaders of Maryland hospitals chose a path not previously taken: all-payer global hospital budgeting. No longer would there be an imperative to keep inpatient volumes high. Pivoting away from fee-for-service reimbursement, each hospital agreed to receive a prospectively set, all-payer global budget each year. By July 2014, these new arrangements involved more than 98% of the state's hospital revenue.
Three years later, Maryland hospitals are still standing—in fact, margins are up. Preventable admissions and readmissions are down. So too are costs, with hospital expenditures in the Medicare program for Maryland residents running more than $400 million under national trends. Collaborations with community organizations across the state are expanding.
Should hospitals outside Maryland go global too? Small, rural hospitals have been the first outside Maryland to express interest. Many of these hospitals, on the brink of insolvency, are struggling to maintain needed fee-for-service volume. Some have tried to survive by offering new services to their communities, such as hip and knee replacement. However, without adequate volume, the quality of care can be questionable, and financial returns are far from guaranteed.
An all-payer global budget, by contrast, stabilizes revenue and offers the chance to align a hospital's incentives with the health of its community. "Before global budgeting, I met with my chief financial officer each week to figure out how to keep the beds filled," one CEO of a Maryland hospital said at a meeting. "After global budgeting, I meet with my CFO each week to figure out how to keep the beds empty." His hospital is expanding access to healthy food, school-based health services and primary care.
In January, Pennsylvania announced an all-payer global budgeting pilot that aims to involve 30 rural hospitals over the next three years. The idea is for a new rural health redesign center to set the budgets in coordination with the CMS, assign payments to public and private payers, and provide technical assistance and startup funding to hospitals.
Large, safety-net hospitals could not look more different than their rural counterparts. Their emergency departments are teeming with patients, and their service areas may overlap with those of private health systems. And yet—like their peers in small-town America—these hospitals have a strong social mission that includes a commitment to address the underlying causes of health disparities and major sources of preventable illness.
Their common frustration is finding the funding to invest in critical community services, such as mental health crisis response, addiction treatment, enhanced primary care and supportive housing. Many safety-net hospitals still receive the vast majority of their revenue from fee-for-service reimbursement, and most Medicaid indirect payments also track along with inpatient utilization. This means that success in preventing illness might reduce hospital revenue and even precipitate a financial crisis.
Far better for success is a system that rewards efforts to prevent illness—an incentive structure inherent to global budgeting. That's why vulnerable urban hospitals might also consider this financial model as a tool to assist in transforming services to emphasize community health and prevention.
As a recent Commonwealth Fund paper describes, establishing all-payer hospital global budgets requires a series of steps: a vision for transformation, an operational plan that includes identifying an agency to set and apportion the budgets with payers, and strong support from state and federal policymakers.
This innovative approach to payment isn't right for every hospital. Some may be able to succeed through fully integrated population health approaches such as accountable care organizations and partnerships with insurers. But for those with dwindling margins, conflicting pressures and anxiety about the future, the time for serious consideration of global budgeting is now.