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On Healthcare Payment Policy, Maryland and Massachusetts Are Aligning

Posted by John McDonough  March 31, 2013 08:13 PM

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If Maryland health officials have their way, their state's health care financing system is going to resemble key elements of the Massachusetts health care financing system as adopted by our Legislature and Governor Patrick last August. Click here to read Maryland's 136-page proposal to the federal Centers for Medicare & Medicaid Services (CMS). If adopted, Maryland will be the second state, after Massachusetts, to establish a framework to keep health care costs rising no faster than the growth of the state economy.

What's that saying? One is an accident, two is a trend, and three is a movement. But I'm getting ahead of myself.  Let's review some history:

Way back in 1971, Maryland was the first state to pass a law imposing overall limits on the growth of hospital spending, a system called "all-payer hospital rate setting." Surprisingly, the law was written in the offices of the Maryland Hospital Association which assumed a similar structure would soon be imposed nationally, and they wanted to get a jump by designing their own version. They were helped when the federal government provided them a "waiver" so that services to Medicare enrollees would be paid under their new state, and not federal, rules.

By the early 1980s, more than 30 states had established their own rate setting systems, mostly voluntary for hospitals, and some tightly mandatory. Massachusetts, New Jersey and New York established the toughest systems next to Maryland's, and obtained Medicare waivers from a sympathetic President Jimmy Carter. In the late 1970s, Carter unsuccessfully pushed Congress to establish national rate setting rules, and granting generous state waivers was an alternative path to encourage states to move in the rate setting direction.

Beginning in 1981, President Ronald Reagan shifted direction, discouraging state rate setting and the federal waivers that accompanied them. Just before Reagan, two of Maryland's savviest lawmakers ever, then Congresswomen Barbara Mikulski and then State Assembly Speaker Ben Cardin (now both Maryland U.S. Senators) succeeded in locking the terms of Maryland's waiver into federal law, protecting it from future political threats. Ironically, the pro-market Reagan Administrative was responsible for creating the most tightly regulated payment structure in U.S. history when it implemented the Medicare Hospital Prospective Payment System (PPS) in 1983 with the accompanying "diagnosis related groups" (DRGs) as the key payment device.

Because the PPS system was intentionally generous to hospitals in its early years, hospital associations in the rate setting states determined that they would do better financially under PPS and began lobbying to drop their federal waivers, join PPS, and move from "all-payer" to "three payer" systems involving Medicaid, Blue Cross plans, and commercial insurers. With the loss of the waiver and its added benefits, hospitals lost any reason to support continued rate setting and, one by one, deregulated -- Massachusetts in 1991, New Jersey in 1992, and New York in 1996.

Maryland with its lucrative waiver payments locked into federal law, stayed with the core of its system. Over four decades, it has been able to meet the specific requirements needed to sustain its federal waiver, keeping its inpatient hospital cost per case well below the national average. Of course, there are other ways to measure state hospital financial performance, and on some key ones such as overall admissions and overall costs, Maryland did not fare as well, as this 2011 post from the Incidental Economist explains.

A feature of the 40-year Maryland experience is cyclical. When overall U.S. Medicare spending it high, Maryland's performance looks good by comparison, and when overall spending is lower, Maryland tends to have a harder time meeting the Medicare waiver requirements. This is true now, as Medicare spending is rising at the lowest rates seen since the mid-late 1990s. The Obama Administration has been pressing Maryland for changes.

This time, Maryland officials appear ready for significant change. Joshua Sharfstein, Maryland's Health Secretary, and John Colmers, the state's Hospital Cost Review Commission Chair, released their new federal proposal late last week.

On the face it, the new plan makes sense. Key parts of Maryland's system are like a 1971 Chevy, maybe made sense then, though no more. For example, in the 1970s, inpatient care represented the lion's share of hospital service, and no effort was made to regulate outpatient care, the new spending behemoth.

Those who take the time to read the Maryland submission will notice strong parallels with both the Affordable Care Act's delivery system reforms as well as the Massachusetts health payment reform law passed last August. All three seek to move medical care away from fee-for-service financing and toward value-based accountable care to reward outcomes rather than volume.

Also, Maryland wants to structure a new system by tying spending growth to the growth in the overall Maryland economy. This is the main policy foundation of Massachusetts' new payment system.

All of a sudden, pending federal and state approval, Massachusetts has company on its cost control path.

Does "two" represent a trend? We may soon find out.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »

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