Global budgeting brings financial stability, care redesign to hospitals

Like many hospitals, Pennsylvania’s Chan Soon-Shiong Medical Center at Windber saw its service volume collapse earlier this year after a pause in elective procedures.

CEO Tom Kurtz said the decline would have wreaked havoc on its operating revenue in previous years, but it didn’t, because this year Windber joined Pennsylvania’s Rural Health Model, a global budgeting experiment. “We protected 70% of our revenue … when our operating revenue would have been 20% to 25%,” Kurtz said. “We looked like financial geniuses to our board.”

Pennsylvania’s rural hospitals get paid a lump sum at the beginning of each year to cover all inpatient and hospital-based outpatient services for all payers under the model. According to CMS’ Center for Medicare and Medicaid Innovation, policymakers hope the demonstration bolsters rural hospitals’ financial viability to ensure continued access to care for the state’s rural residents and improve health outcomes.

So far, it’s achieved those two goals. Andy Carter, CEO of the Hospital and Healthsystem Association of Pennsylvania, said each of the state’s 13 participating hospitals had stayed afloat during the pandemic. He’s disappointed that more hospitals aren’t taking part in the experiment. “It’s proof of the complexity of turning the delivery and financing system … 180 degrees,” Carter said.

But global budgets haven’t been a cure-all for runaway healthcare spending. The payment model has not greatly reduced healthcare costs or cost growth, as many experts and policymakers had hoped. Still, they have achieved some lower spending growth as well as something that’s hard for hospitals to come by throughout the coronavirus pandemic: stability.

Most of the evidence comes from Maryland, which in 2014 implemented all-payer global budgets for inpatient, hospital outpatient and emergency department care for most of its hospitals. The results have been mixed.

A 2018 study in JAMA Internal Medicine concluded that Maryland’s global budget wasn’t affecting hospital or primary-care use. Researchers found no consistent differences in annual hospital stays, 30-day return hospital stays, emergency department visits, hospital outpatient department utilization, or primary-care visits after two years.

But a federally funded report by RTI International found slower growth in average monthly expenditures per beneficiary for hospital services. That translated to $554 million in aggregate Medicare hospital savings, 4% of baseline period expenditures, during the first three years of global budgets (2014–16), according to Health Affairs. “In addition, the report found $679 million in total aggregate Medicare savings (3% of baseline spending), indicating that Maryland achieved hospital savings for Medicare beneficiaries without shifting costs to other parts of the healthcare system outside of the global budgets,” according to the Health Affairs blog. Other studies have found similar results.

But cost savings could take a while to materialize, as hospitals develop new business strategies and put them into practice. RTI’s report didn’t find reductions in hospital admissions until the second year of Maryland’s demonstration. It saw large decreases in the third year.

Rising drug costs could also limit global budgeting’s effect on healthcare spending because those costs play a significant role in hospital spending.

Experts say the Innovation Center will continue experimenting with ways to reimburse providers in the coming years. But it’s unclear how far President-elect Joe Biden’s administration will push payment reform and global budgeting in the wake of the coronavirus outbreak. Industry insiders disagree about how the pandemic will affect the pace of change, but there’s bipartisan consensus that payment reform is crucial to fixing the healthcare system.

“The biggest single impediment to improvement in the U.S. healthcare delivery system is the payment model,” said Dr. John Chessare, CEO of Maryland-based GBMC HealthCare.

Global budgets face other headwinds. Policymakers often tie global hospital budgets to other healthcare goals, like increasing access to primary care. According to Medicare Payment Advisory Commission member Dr. Amol Navathe, the marriage of global budgets and primary care can create tension between hospitals and other providers, which could help explain why they haven’t led to the cost savings experts predicted. “Hospitals are not usually in the business of primary care,” he said.

In addition, hospital executives might be resistant to aggressively cutting costs since it could lower their budgets and reduce their staff over time, which might shrink their clout in the healthcare industry, Navathe said.

But experts said global budgets are still worthwhile, even if they don’t lower healthcare spending, because they can improve providers’ financial stability and protect access to care. They also enable providers to invest in redesigning care. “The real reforms, as usual, occur at the provider level,” said Joe Antos, vice chair of the Maryland Health Services Cost Review Commission and a researcher at the American Enterprise Institute.

Moving to a global budget probably saved Windber because it changed how the hospital thought about and provided care, Kurtz said. He believes it could save other rural and small community hospitals, saying that most rural hospitals will be out of business within a decade unless they move away from fee-for-service payment. “It forced us into doing strategic planning,” Kurtz said.

Now that its payments aren’t based on service volume, Windber can focus on serving the community’s needs rather than boosting its revenue. Experts said global budgeting frees up providers to improve chronic illness, social determinants of health, behavioral health, care coordination, health equity and other issues critical to public health outcomes. Hospitals are more likely to talk with payers about their care transformation plans when they’re part of a multipayer, global budget arrangement, said HAP’s Carter. “That strikes me as a more fruitful conversation (than) lengthy contract disputes about payment rates,” Carter said.

Chessare said it’s “liberating” for healthcare executives to get the money upfront because they don’t “have to chase MRI scans.”

They can also give hospitals and payers more certainty about the price of a given service since it’s baked into the budget, Navathe said. But they don’t give hospitals total control over labor expenses and other related costs. That can make it challenging for hospitals to sustain the right mix of services for a community because they can’t subsidize those services for Medicare and Medicaid beneficiaries by charging private payers more money. Policymakers are increasingly asking hospitals “to step outside their four walls, and that may not be where the hospitals are actually at their best,” Navathe said.

Global budgets can noticeably affect provider competition, too, Navathe said. An all-payer global budget system like the one in Maryland could “neutralize” the effects of mergers between medical groups since they can’t use increased market power to negotiate higher reimbursements from commercial insurers, he said.

But global budgeting might also encourage hospitals to buy medical groups, and it’s unclear how that could play out. Vertical integration might improve care coordination, but it could also reduce provider competition and drive up out-of-pocket costs for consumers. It may also trim employment opportunities for clinicians if there are fewer places for them to work.

Provider alignment and buy-in, short timelines to show cost savings and cultural transformation have proved vexing challenges for healthcare executives trying to put global budgets into practice.

Under Maryland’s Total Cost of Care Model, health systems are responsible for the total cost of care for Medicare beneficiaries, including care delivered by providers that don’t get paid under the global budget. University of Maryland Medical System CEO Dr. Mohan Suntha said his health system continually works with outside providers to ensure that their care delivery goals align with UMMS’ goals, no matter how they get reimbursed. He recommended hospital executives make sure that all providers share the same value-based care goals and agree to objective measures to assess progress, even if they aren’t part of the same system, to make sure they work together instead of acting like “confederations of states.”

GBMC’s Chessare said it could be challenging for executives to convince proceduralists that the C-suite is “still going to love them” when the hospitals’ revenue is no longer tied to service volume. It was hard to persuade them that “we don’t want people churning procedures just to bring in revenue,” Chessare said.

Hospitals and health systems must develop a culture rooted in value-based care to ensure long-term success. “If you just try to make a payments system change without a vision of where you’re going to go, you don’t get very far,” Chessare said.

He said Maryland’s high-cost hospitals have struggled since the state moved to global budgeting in 2014 because they’re getting lower rate adjustments than they did historically and “haven’t gotten out of the fee-for-service mindset.”

That can have profound consequences for hospitals and their communities. After a neighboring hospital cut back its pediatric services, GBMC stood up a child abuse prevention team to offset losses to Baltimore County’s child abuse protection program. “You don’t get reimbursed for child abuse. You can’t cover your costs. But (we need to be) there for a crying mother with her abused child.”

Chessare said for-profit hospitals could have an even tougher time making global budgets work because the goal is to reduce unnecessary utilization. “The stockholders are not going to like that,” he said.

Advocates of global budgets say the COVID-19 pandemic has highlighted the benefits of the model and proved that the healthcare delivery system could fundamentally change under the right conditions, pointing to the healthcare industry’s rapid adoption of telehealth.

But making long-lasting, fundamental change is a team effort. “You’ve got to get early buy-in from your physicians and board of directors,” Kurtz said. “Every person in this hospital was involved in the transition.”