Study praises effort to cut state medical costs

System to limit hospital admissions, expenses draws national attention

Saturdays at Mercy Medical Center used to be perversely lucrative. The dialysis clinic across the street was closed on weekends.

That meant the downtown Baltimore hospital would see patients with failing kidneys who should have gone to the dialysis center. So Mercy admitted them, collecting as much as $30,000 for a treatment that typically costs hundreds of dollars.

“That’s how the system worked,” said Mercy CEO Thomas Mullen. Instead of finding less expensive alternatives, he said, “our financial people were saying, ‘We need to admit them.’”

Maryland’s ambitious hospital-payment overhaul, put in place in 2014, has changed such seemingly crass calculations, which remain business as usual for most of American health care. A modification of long-standing state regulation that would be hard to replicate elsewhere, the system is nevertheless attracting national attention, analysts say.

As soon as Mercy started being penalized rather than rewarded for such avoidable admissions, it persuaded the dialysis facility to open on weekends, saving close to $1 million annually in state health care spending.

In the four years since Maryland implemented a statewide system of pushing hospitals to reduce admissions, such savings are adding up to hundreds of millions of dollars for the taxpayers, employers and others who ultimately pay the bills, a new report shows.

A report, released Friday by Maryland’s Health Services Cost Review Commission and the Maryland Department of Health, found that the system, already produced $586 million in hospital-related savings for Medicare in its first three years.

Maryland essentially pays hospitals to keep people out of the hospital. Analysts often describe the change as the most far-reaching attempt in the nation to control the medical costs driving up insurance premiums and government spending.

Like a giant health maintenance organization, the state caps hospitals’ revenue each year, letting them keep the difference if they reduce inpatient and outpatient treatment while maintaining care quality. Such “global budgets,” which have attracted rare, bipartisan support during a time of rancor over health care, are supposed to make hospitals work harder to keep patients healthy outside their walls.

Maryland’s system, which evolved from a decades-old effort to oversee hospitals as if they were public utilities, regulates all hospital payments by every private and government insurer. That makes it radically different from piecemeal attempts to lasso health spending, such as creating accountable care organizations, which seek savings among smaller groups of patients.

From the program’s launch in 2014 through 2016, per capita hospital spending by all insurers grew by less than 2 percent a year in Maryland. That’s below the economic growth rate, according to the commission’s report, which is based on data from the Centers for Medicare and Medicaid Services.

Keeping hospital spending below economic growth — defined four years ago as 3.58 percent annually — is a key goal for the program and something that rarely happened.

The state plan achieved “substantial reductions in hospitalization and especially improvements in quality of care,” said a spokesman for Medicare, the health insurance program for seniors and the disabled.

In the three years measured so far, he added, “the state has already exceeded the required performance for the full five years of the model.”

As high costs for hospital care have been growing more slowly nationwide, Maryland hospital costs over that period rose even less.

“It looks like it has very strong results,” said John McDonough, a Harvard health policy professor who helped craft the federal Affordable Care Act.

What Maryland is doing, he said, “is pretty bold and it’s pretty thoughtfully done and has generated a huge amount of interest around the country.”

The comprehensive results through 2016 are the most recent available from Maryland, although savings continued last year, Maryland officials said. The report found Medicare saved a total of $461 million as some costs outside hospitals increased over