Wednesday, 18 November 2015 03:50

Maryland Hospital Demonstration Results Offer Promising Signs for Future Benefits

Written by D. Patrick Redmon, Ph.D.

The Centers for Medicare & Medicaid Services (CMS) has announced first-year results from Maryland’s statewide hospital demonstration model, and the results are promising. The demonstration began with Maryland Medicare patients ranking among the most expensive in the nation, with the state’s readmission rates ranking among the nation’s highest. Both of these issues are addressed under the five-year demonstration, which applies to inpatient and outpatient services for Maryland residents no matter where they receive care.

The model is built around the state’s unique all-payor system for setting hospital rates. Under this system, the state sets rates for each acute-care hospital, and commercial and governmental payors pay the same rates for units of service from any given hospital. While a few states developed hospital regulatory systems in the 1970s, Maryland’s is the only remaining all-payor hospital regulatory system in the nation.

The demonstration model shifts Maryland hospitals from a fee-for-service regulatory system to population-based payments. Each hospital is given a global budget that is updated annually for population growth and aging, inflation, and shifts in market share.

The system is designed to control costs, enhance quality of care, and improve population health. The major goals of the demonstration model were set out in a contract between CMS and the state at the beginning of the initiative. The major requirements of the model are to:

  • Place at least 80 percent of the state’s hospital revenue under population-based payments by the end of the demonstration model;
  • Limit hospital gross revenue growth to the long-run growth rate of the state’s economy, calculated to be 3.58 percent per capita annually for the 10 years prior to the demonstration model;
  • Generate savings for Medicare of at least $330 million for the five-year demonstration period;
  • Reduce the rate of hospital-acquired conditions (HACs) under the Maryland Hospital Acquired Condition (MHAC) program by 30 percent by the end of the model period; and
  • Reduce Medicare readmissions in the state to the national Medicare average.

Under the demonstration model, CMS also is monitoring the total cost of care in the state to be sure that costs are not being shifted from hospitals to other parts of the delivery system, potentially costing Medicare more than it pays in the state currently. At the end of the five-year model, the contract between CMS and the state calls for a second demonstration model that will expand to cover the total cost of care in the state.

Maryland implemented the new model in January 2014 by establishing global budgets for each hospital. This approach had been tested in 10 rural hospitals in the state prior to the launch of the new demonstration model, but in the first year of the model, 92 percent of hospital revenue was placed under global budgets. Urban hospitals and academic medical centers were brought under global budgets, as well as rural facilities.

In the first year of this model, hospitals’ gross patient revenue grew by 1.47 percent per capita, well below the annual 3.58 percent limit. Furthermore, the state generated $116 million in Medicare savings during the first year of the model, although no savings were required in the first year in order to allow a ramp-up period for the demonstration. HACs declined by 26 percent across all payors, and readmissions declined on both an all-payor basis and for Medicare beneficiaries, though not at the pace targeted by the state.

While the model is off to a strong start, issues to be addressed remain. The most prominent is the need to strengthen care coordination beyond the hospital walls. Because the model applies to hospitals alone, financial incentives between hospitals, physicians, and post-acute care are not aligned. Fee-for-service payments are still predominant, encouraging volume in the delivery of care. This misalignment poses a potential limit to the long-term effectiveness of the model and is a continuing source of discussion between the state and CMMI.

Other issues have emerged during the implementation of the global budget methodology as well. While the regulatory agency has established a methodology for adjusting for shifts in market share between hospitals, the policy yields small adjustments for hospitals acquiring volume from competing hospitals in its market, with growing hospitals complaining of a lack of resources to treat the new patients. The agency is walking a tightrope between providing resources for the expenses associated with incremental volume without providing incentives for acquiring new volume, as under the traditional fee-for-service model.

Furthermore, other questions are emerging that must be addressed:

  • How will the system deal with excess capacity that is emerging in some hospitals under the system?
  • Because hospitals with declining volumes must receive higher prices to achieve their budget goals, what prices are reasonable under the global budget, especially when individual consumers may face these prices with high deductibles and copayments under new insurance products?
  • Can prices and quality be made more transparent to consumers in order to facilitate consumer choices based on cost and quality of care?

While there has not always been agreement between stakeholders, Maryland’s regulatory system has a history of innovation and general cooperation since the 1970s. That same approach has characterized the development and early implementation of this demonstration model. The challenge for the state and CMMI will be to maintain that consensus toward reform as emerging issues are addressed – and particularly as the demonstration model brings in more stakeholders when the focus turns toward total cost of care in the second phase of the model.

About the Author

Dr. Redmon comes to BRG with over 20 years of experience in healthcare economics and in working with healthcare clients as well as in government and academics. His work has focused on payment and rate-setting methodologies, payment reform, and clinical analytics for providers. He has worked with health systems, academic medical centers, community hospitals, and trade associations in assessing and developing payment methodologies in a variety of settings.

Most recently, Dr. Redmon served as the executive director for Maryland’s Health Services Cost Review Commission, where he led the organization in the development and implementation of a variety of payment methodologies for episodes of care and population-based reimbursement. He worked with state leaders and system stakeholders to modernize the state’s Medicare waiver program and develop the state’s proposed demonstration model submitted to the Center for Medicare and Medicaid Innovation. As deputy director for research and methodology at the Commission, he was responsible for the implementation of APR-DRGs in the all-payor rate-setting system, along with methodologies for recognizing indirect medical education, disproportionate share, and uncompensated care in hospital payments.

He has also served as an associate professor in Xavier University’s Health Services Administration Graduate Program and as a senior economist at the Government Accountability Office in Washington, D.C. He holds a Ph.D. in economics from Michigan State University.

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