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Hospitals could face rate freeze in Maryland

By N.C. Aizenman,

Maryland officials face a decision Wednesday on a controversial plan that would effectively freeze payment rates to hospitals in the state over the next year.

Hospital representatives say they could be forced to lay off workers if the proposal is approved by the Health Services Cost Review Commission — an independent agency made up of seven commissioners appointed by the governor.

For the past two years, the commissioners have increased hospital rates by less than the inflation rate hospitals faced, said Carmela Coyle, president and chief executive of the Maryland Hospital Association.

“We are very concerned that this will really jeopardize hospitals’ financial condition at a time when we need to strengthen it,” Coyle said. “This will have serious consequences.”

She noted that Rockville-based Adventist HealthCare has announced that it will let go up to 100 workers, citing expected rate cuts by the commission as a major reason.

However, Patrick Redmon, executive director of the commission staff that recommended the freeze, said holding the line on payments is the only way to preserve Maryland’s special system of setting hospital rates.

In other states, hospitals tend to charge vastly different rates depending on the customer — negotiating a separate fee schedule with each insurer and padding where they can to make up for the far lower rates that states pay for Medicaid patients and that the federal government offers for those with Medicare insurance.

By contrast, in Maryland, everyone — private insurers, individuals paying out of their own pocket, Medicaid and Medicare — pays hospitals the same fixed rate set by the commission.

Supporters say the result is a far more equitable, rational system. But because it essentially empowers Maryland to set its own, higher rates for Medicare, the federal government requires the state to meet a special waiver test. The test requires that Maryland’s charge per case not grow faster than the rate at which national Medicare payments grow.

In recent years, a confluence of factors has undermined the utility of that measure.

For instance, the commission introduced financial incentives that have encouraged hospitals to avoid admitting patients who stay only about a day or so if it is just as safe to monitor them on a — less expensive — outpatient basis. This has saved Medicare, and all payers in the state, money.

But because such “short stay” patients tend to require far less costly care than those who are hospitalized for longer periods, reducing their number has the effect of boosting Medicare’s average per-patient expenditures in Maryland by about 3 percent over the current fiscal year.

“So under the waiver test, we look worse than we used to,” Redmon said. So much worse, in fact, that the commission staff has found the state is coming perilously close to failing the test.

The commission is in talks with federal officials to come up with a new, fairer test. But it is unclear how long that process will take.

For the moment, the commission staff argues that the only option is to reduce hospital inpatient rates by 1 percent.

Although the rate for outpatient services provided by hospitals does not affect the waiver test, the commission staff recommended increasing that by only 1.75 percent — less than the 2.59 percent inflation rate faced by hospitals. They reason that as part of emergency measures adopted by the commission last month, outpatient rates were already increased substantially.

The combined effect of the two rate changes would be to freeze overall hospital rates.

The Maryland Hospital Association’s Coyle said her members reluctantly agree that the cut to inpatient rates is necessary. But she said it is crucial to increase the payments for outpatients by at least the inflation rate because hospital operating margins are dangerously tight.

Redmon countered that although the impact on hospitals would be “trying,” they had the capacity to weather the storm.

That view was echoed by Joshua Sharfstein, secretary of the state Department of Health and Mental Hygiene, who, as head of Maryland’s Medicaid program, advocates cutting outpatient rates by 1 percent.

“I think both the cost-review commission and the hospitals are doing the right thing by looking down the field and structuring payments in innovative new ways,” he said. “That’s really the future. . . .Not arguing back and forth over 1 percent rate changes on the outpatient side.”

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