Maryland Will Limit Hospital Charges Statewide

Maryland just became the biggest petri dish in America’s experiment to contain health-care costs. The state will limit how much money hospitals take in: Over the next five years, it will try to keep hospital charges from growing faster than the average growth rate of Maryland’s economy, saving Medicare $330 million.

The state will also transform how hospitals get paid, from billing for each service provided—an incentive for doctors to order more tests and treatments—to getting paid for keeping people well. That’s an idea that Medicare, the federal insurance program for the elderly, is testing across the country with groups of doctors and hospitals. The Affordable Care Act nudges health-care providers to move away from the fee-for-service system in an attempt to tamp down the national medical bill, but it’s still how most health care is bought and sold in the U.S.

“The goals of this new system will be very challenging for hospitals,” said Carmela Coyle, president of the Maryland Hospital Association, in a news release (pdf). ”The ideas included have never been tried nor tested before on this scale.” She calls the change “the right thing to do.”

Maryland is in a unique position to experiment. In other states, hospitals negotiate prices with private insurers and agree to lower rates set by Medicare—often below their costs. Maryland is the only state where a state commission sets hospital prices for all payers—that is, private insurers and Medicare pay the same thing. It’s similar to how state utility commissions set the rates for electric companies. The arrangement, which dates to the 1970s, requires a waiver from Medicare to pay Maryland hospitals different rates than the rest of the country.

That agreement is being updated under the new deal. The state will get to continue setting rates, but overall per-capita hospital spending can’t grow more than 3.58 percent per year, the average growth rate of the state’s economy over the past decade. Hospitals agree to meet certain quality targets—reducing how many Medicare patients are readmitted, for example. They’ll also shift from fee-for-service payments into a pay-for-performance system, the details of which still need to be worked out.

“We’re really looking at being measured on how healthy the communities are and not just how much we bring in,” says Jim Reiter, spokesman for the Maryland Hospital Association.

The Obama administration is betting on the model to bring down costs. In a news release, Medicare chief Marilyn Tavenner called it a “step to ensure that Maryland’s unique health-care delivery system can also be aligned with the goals of lowering cost and improving health.”

If Maryland can’t make it work—if hospitals fail to contain costs and don’t deliver the savings to Medicare—the state will have to go back to the same Medicare rates that hospitals get in the rest of the country. But if the change does succeed in reining in hospital costs and improving the health of Marylanders, it likely won’t be the last state to try.