In a world of constantly rising health-care costs, Maryland has long stood alone. Through a novel system that gave regulators unusual leverage to set prices, the state delivered care at a price that grew slower than elsewhere in the country — even at some of the nation’s most renowned hospitals.
But after saving an estimated $45 billion for consumers over four decades, the system is in danger of running aground. Hospital expenses have risen so relentlessly in recent years that the original price controls now appear unsustainable.
In its place, Maryland officials are pressing for an expansion of the state’s authority over its hospitals. The new system would not only set prices for the procedures they perform but also cap the growth in their overall spending.
The proposal has ignited a debate in Annapolis and beyond over how far the government should go in reining in sky-
rocketing health-care bills. Advocates for the plan say it is the most effective way to curb costs and that it could serve as a model for the rest of the country.
“Maryland wants to really hold health-care costs accountable,” said John McDonough, a health policy professor at Harvard University. “So far, no state has ever done that.”
But critics say the near-collapse of the state’s old system proves the perils of heavy-handed regulations.
“Hospital rate-setting clearly didn’t succeed at meaningfully slowing costs down,” said Joe Antos, who served eight years on the Maryland board that set rates.
The debate is being closely watched as health officials around the country are struggling to implement the Obama administration’s new health-care law. Many states are seeking ways to keep costs down as millions of uninsured Americans are added to the rolls of the insured.
“Should Maryland demonstrate meaningful initial cost savings, we believe other state and national efforts . . . will gain momentum,” George Huang, a senior analyst at Wells Fargo Securities, wrote in an April analysis of the Maryland proposal.
Maryland’s existing system was once hailed for eliminating an unwieldy element of the health-care system: the haggling between medical providers and insurance companies.
In other states, each time a hospital provides a service, it has to negotiate how much money it receives from an insurer. The time-consuming and often contentious process results in widely varying prices for the same procedures.
Hospitals pushed for the highest possible payouts partly because they say they do not receive enough from Medicare, the federal program that reimburses medical providers for their care of the elderly.
Maryland put an end to the wrangling. It established a state commission that directly set rates for procedures at all of its 46 hospitals. Over time, hospitals and insurers embraced the system because they knew exactly what to expect.
Medicare had to reimburse Maryland’s hospitals at a higher rate than it did in other states. But federal officials went along with it because, at the time, they wanted to experiment with other models of health care.
In the late 1970s, the U.S. government agreed to a provision that gave Maryland the unique authority to set its own prices — even for Medicare. Analysts estimate that recently the state’s hospitals have been receiving an extra $1 billion in Medicare reimbursements each year.
A handful of other states, including New York and New Jersey, tried to implement a similar system in the late 1970s and early 1980s. But unlike Maryland, they did not get the higher reimbursements written into federal law and gave up on the program.
“Maryland made a very strategic, savvy move,” said McDonough, the Harvard professor. “Had they not locked in those higher payments [from Medicare], there wouldn’t be value in the program.”
The system led Maryland hospitals to charge patients and their insurance companies much-
lower prices than those in other states. New Medicare data released this month on hospitals’ sticker prices for the 100 most-common procedures showed that, in each case, Maryland’s hospitals submitted the lowest charges in 2011.
In 1976, a year before rate-
setting was put in place, the average cost of a Maryland hospital admission was 26 percent above the national average, according to a widely cited study by the former head of the rate-setting commission. By 2007, it was 2 percent below the national average.
But when it came to payments from Medicare, Maryland’s reimbursements were well above the national average. For 11 of the 100 common procedures, Maryland hospitals were paid more than hospitals in other states. And for 79 procedures, the state ranked among the top five.
While hospitals nationwide received, on average, $6,011 to treat a case of bronchitis from Medicare, Maryland hospitals were reimbursed $8,375.
Over the past several years, Maryland’s system began to unravel. Hospitals saw their expenses soar, and the cost controls proved too inflexible to handle the rise.
Part of the problem with the old system is that it gave hospitals an incentive to admit as many people as possible. The more patients who walked through the door, the more the hospitals would get paid.
So Maryland officials came up with a new approach. On top of setting rates for individual procedures, they are proposing a cap on the growth of the total amount the hospital system spends per person in the state. The plan also allows hospitals to charge higher prices if they adopt preventive-care methods that improve patient health and reduce repeat visits, said Maryland’s health secretary, Joshua Sharfstein.
“We think this new approach allows us to better tackle overall costs and create a strong incentive for better health,” he said.
Under the proposal, total hospital spending would be tied to long-term economic growth in the state. That way, when the economy is in recession, costs would grow more slowly, while in boom times, they would be allowed to rise quicker, officials said.
Maryland Republicans have for years objected to the state’s central role in rate-setting for procedures. In 2011, Senate Minority Leader E.J. Pipkin, an Eastern Shore Republican, urged the federal government to rescind the state’s authority.
He said he was stunned by the scope of the state’s new proposal and added that the legislature should have been consulted.
“My question is, what does this do for patient care?” Pipkin said. “The state is trying to impose a solution on a problem, but it is a dramatic change to the system of health-care reimbursement in Maryland, and it’s not being property vetted.”
Hospitals say the plan, if approved, could be onerous, hurting the financial health of the $15 billion hospital industry that employs nearly 100,000 people in Maryland.
John M. Colmers, who chairs Maryland’s Health Services Cost Review Commission and was a key architect of the proposal, acknowledged that the proposal might be “a challenge” for hospitals. Colmers is also a top vice president at Johns Hopkins Medicine in Baltimore.
Insurers, meanwhile, have approached the new plan with cautious optimism.
“It’s probably very sensible to consider doing something like this,” said Chet Burrell, chief executive of BlueCross BlueShield CareFirst, the state’s largest health plan.
Maryland officials say that they are in intense discussions with federal officials and that the plan could still be refined. They have also reached out to hospital and insurance executives to solicit additional input. State officials hope to get approval from federal officials over the next several months so they can put the new system in place by January.
“At its core, this proposal would put a lid on total hospital spending for all the people in the state, and that’s what makes it such a big deal,” said Carmela Coyle, head of the Maryland Hospital Association. “It’s never been done before. It’s never been tried before.”
Aaron Davis contributed to this report.