For more than 30 years, the federal government has allowed Maryland to operate by different rules from other states when it comes to the way Medicare pays for hospital services. So long as the state managed to keep the growth in the average cost for each hospital admission of a Medicare patient below the average for the nation, the feds would agree to pay the same, higher rate that private insurers do for hospital services.
In general, it has worked out well. When Maryland first received its Medicare waiver in the late 1970s, the average cost per admission was 25 percent higher than the national average. Now it's below average. Hospitals benefit to the tune of $1.6 billion a year in higher reimbursements from Medicare. For average Marylanders, it means we all pay the same rates for hospital stays and procedures no matter who insures us, and we don't have to support public hospitals with our tax dollars.
But measuring based on the cost of an average hospital admission makes less sense today than it did 30 years ago. Much more medicine is performed on an outpatient basis now, and there is a growing realization in the medical community that keeping patients out of the hospital is not only more cost effective but also frequently produces better outcomes. The myopic focus of the current waiver produces some perverse incentives: If the goal is to keep the average cost per admission down, it makes sense to admit patients who aren't that sick and to avoid admitting patients who are.
In fact, doing the medically and fiscally responsible thing — that is, treating patients in the least intensive and expensive way that is appropriate for their conditions — only made Maryland look worse as far as the Medicare waiver was concerned, to the point that the state is at risk of soon failing to meet its terms. That would mean a massive upheaval for the largest sector of Maryland's economy and likely the disruption of health care services for residents across the state.
Maryland's response is to use a provision of the Affordable Care Act — better known as Obamacare — designed to encourage innovation in health care payment and delivery models to propose a high-stakes experiment. The gamble is that by focusing not on the narrow metric of average hospital admission costs but instead on the overall costs hospitals incur for inpatient and outpatient services, Maryland can radically slow the growth in health care spending while producing better outcomes.
The proposal includes a variety of new models for compensating hospitals with the overarching goal of shifting from a system in which they get paid more for admitting more patients, doing more procedures and running more tests to one in which they are rewarded for keeping people healthier and treating them in the community as much as possible. Hospitals would have incentives, for example, for reducing the number of people who are released only to be re-admitted a short time later.
The Department of Health and Mental Hygiene submitted an initial version of its proposal to the federal Centers for Medicare & Medicaid Services earlier this year, but the state's hospitals balked. After extensive consultation, the state submitted a new, clearer proposal with simpler goals late last month, and this time, the hospitals are on board. But even if the federal government approves the waiver request, the hard work will have yet to begin.
Among other goals, the application calls on the state to limit growth in hospital spending to the rate of growth in Maryland's economy — about 3.4 percent a year — and to produce $330 million in savings for Medicare over five years. If the state doesn't, it loses the waiver. Making good on those goals requires the state's Health Services Cost Review Commission and the hospitals to fill in lots of blanks, and to do it quickly. The hospitals are going to have to do a much better job of tracking patients and coordinating with primary care providers in the community, and they will have to figure out how to align their new incentives with private practice physicians, who will still operate in a fee-for-service model. It will require new investments and a change in culture.
Still, Maryland needs to do what it takes to make this succeed. A system that has provided stability and equity in our health care system for decades is at stake, but so too is the ability of states to use the flexibility provided by Obamacare to improve health care quality while reducing costs.