Maryland hospitals largely escaped the financial crisis that struck providers nationwide in the wake of the COVID-19 pandemic, when elective procedures were canceled and routine care was postponed. That’s thanks, in part, to a unique system for regulating hospital revenue.

The same system saved taxpayers $781 million in Medicare costs over three years and improved quality of care, according to a recent report.

So what is this system, and what’s behind its effectiveness?

In 2014, Maryland started an out-of-the-box practice of setting annual hospital budgets in advance, which fundamentally altered how hospitals in the state are paid.

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Rather than being paid per service, with greater volumes generating more money, advance “global budgets are based on the number of patients treated and services provided in the past, and adjusted for performance on quality measures, basic inflation and population changes. If hospitals find volumes are lower or higher than predicted as the year progresses, they respond by lowering or raising rates accordingly in order to meet revenue targets.

That approach is made possible by Maryland’s longstanding practice of standardizing rates across insurance types. Hospitals are paid the same rates by public insurance programs Medicare and Medicaid as they are by private insurance plans and cash payers.

Maryland is the only state in the nation to use a uniform “rate-setting” system. The state has a waiver exempting it from federal rules governing Medicare and Medicaid reimbursement. Maryland can maintain the exemption, which it’s had since 1977, as long as Medicare spending in the state does not rise faster than it does nationally.

The change to pre-set annual budgets was prompted when the state risked violating the terms of its waiver starting in the early 2000s as hospitals sought to make more money by treating more patients.

Under global budgets, hospitals get to keep more revenue by providing less care, which, when paired with quality measures tied to financial rewards, incentivizes them to keep patients healthier and out of the hospital.

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But the switch to global budgets didn’t fully rein in Medicare spending. Costs shifted to the outpatient setting as hospitals endeavored to lower their own expenditures by moving care outside their walls.

“There was sort of a squeezing-the-balloon concern,” said Greg Peterson, principal researcher at public policy research and data analytics firm Mathematica.

That motivated the Health Services Cost Review Commission, the agency administering Maryland’s rate-setting program, to revise the global budget model in 2019. The commission decided to put hospitals — and by extension, the state, in terms of maintaining its waiver — on the hook for the total cost of Medicare patients’ care versus hospital costs only.

“Maryland is the only state now where hospitals are accountable for the health of their communities,” said Nicole Stallings, executive vice president and chief external affairs officer at the Maryland Hospital Association, “so this really accelerated the investment that was happening outside of hospital walls.”

Cost savings, quality improvement

Hospitals are now beholden to expanded quality measures that discourage unnecessary or redundant care, maximize efficiency and incentivize prevention. In turn, this should lower Medicare spending across the care continuum and enable the state to keep its waiver. The new model is appropriately named Total Cost of Care, and it’s being tested by the Center for Medicare and Medicaid Innovation through 2026.

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A recent Mathematica analysis led by Peterson shows it’s working, generating $781 million in savings to Medicare as well as significant improvements to quality of care over its first three years.

Maryland hospitals saw a 16% reduction in preventable admissions between 2019 and 2021. Unplanned readmissions decreased by 10%, while the rate at which patients accessed timely follow-up care after a hospitalization or emergency room visit increased by 3%.

Like costs, quality measures had previously been hospital-focused, but they were broadened under Total Cost of Care to capture different aspects of population health that aligned with federal and state goals.

Maryland has identified preventing diabetes, reducing opioid deaths and strengthening behavioral health crisis services as targeted areas for improvement in population health. The commission offers grants for hospitals to form regional partnerships to develop programs in one of these areas.

The commission also compensates some primary care providers based on patient complexity, rewarding them for treating people with chronic illnesses. Under a regular fee-for-service system, primary care providers may prefer to see patients who are less time-consuming and medically complex, since there’s no incentive to do otherwise.

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Robust quality measures provide a needed check on the global budget system by helping to ensure that lowering costs does not compromise access, Peterson said.

“You just want to make sure you’re not limiting access to acute care that really is needed,” while working to avoid unnecessary care, Peterson said.

The report, commissioned by the federal Centers for Medicare and Medicaid Services, suggests that hospitals’ efforts to improve efficiency have not come at the expense of patient satisfaction. Patients’ ratings of their personal doctor and the hospitals where they received care did not change measurably between 2019 and 2021.

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Pandemic protection

Maryland’s rate-setting system and global budgets had the added benefit of acting as a pandemic “shock absorber,” said Brett McCone, senior vice president of health care payment at the Maryland Hospital Association, by allowing hospitals to maintain steady revenue and weather a storm that proved catastrophic for their counterparts in other states.

Hospitals’ increased financial security meant they could be more engaged during the pandemic, doing massive vaccine campaigns and running homeless shelters and the Baltimore Convention Center field hospital, said Josh Sharfstein, vice dean for public health practice and community engagement at Johns Hopkins Bloomberg School of Public Health and former Maryland health secretary.

“Not having to be in complete financial free fall was really important,” he said.

Still, hospitals “certainly weren’t completely insulated,” from pandemic-related financial impacts, McCone said.

These effects may be more pronounced as the pandemic slides into the rearview mirror, he said, due to rising inflation, exhausted federal funds, fallout from years of contract labor costs, and the ongoing labor shortage, which also drives up wages.

McCone said the cost of inflation has not been fully factored into the current model, resulting in 3% underfunding over the last two years. He said an “essential agreement” of a fixed-revenue system is the funding of cost inflation.

A collaborative state

So, given early signs of success, why is Maryland the only state using this approach? The answer can be traced back 50 years.

Maryland was one of several states to obtain a waiver to institute state control over hospital rates in the late 1960s and 70s, amid a national push to rein in costs. But other states’ programs fell apart in short order.

The longevity of Maryland’s rate-setting program can be partly attributed to hospital support, which was much stronger from the start than it was in other states, Sharfstein said.

Some Baltimore hospitals shouldered a disproportionate share of debt from unpaid medical bills and were on the verge of bankruptcy in 1970. The state’s system was designed to incorporate the cost of uncompensated care when setting hospital rates.

Hospitals across the state were aware of the financial struggles of larger, urban institutions and were motivated to make the program work.

“Maryland has been a very collaborative state,” Sharfstein said. “People have really worked together and the whole political and health care ecosystem has supported innovations in payment for a very long time.”

Maryland hospitals remain invested in the model today. “We view the total cost of care model really as the continued evolution of Maryland continuing to lead the nation in the way in which our unique hospital financing system takes care of patients in a really holistic way,” said Stallings of the Maryland Hospital Association.