Md.’s Medi­care ex­per­i­ment needs to end

Baltimore Sun - - COMMENTARY - By Benedic Ip­polito Benedic Ip­polito is an econ­o­mist at the Amer­i­can En­ter­prise In­sti­tute. His email is benedic.ip­polito@aei.org.

Mary­land has long been praised for its dis­tinc­tive “all-payer rate set­ting” hospi­tal sys­tem in which all in­sur­ers pay the same ad­min­is­tra­tive­ly­de­ter­mined price for given pro­ce­dures at hos­pi­tals. Ad­vo­cates pro­mote the Mary­land rate-set­ting sys­tem as a sim­ple al­ter­na­tive to our frag­mented health care sys­tem. But they con­ve­niently over­look a hard fact — Mary­land’s sys­tem is ex­pen­sive, and the rest of the coun­try is help­ing foot the bill.

Once a prom­i­nent fea­ture of the U.S. health care landscape, with 10 states op­er­at­ing sim­i­lar sys­tems in the 1970s and 1980s, all-payer rate set­ting sys­tems have fallen out of fa­vor. Mary­land’s sys­tem, which has been in place since 1977, rep­re­sents the last all-payer regime in the U.S.

Ab­sent an all-payer sys­tem, hos­pi­tals col­lect markedly dif­fer­ent pay­ments from each in­surer. Com­mer­cial in­sur­ers typ­i­cally pay much more than Medi­care and Med­i­caid (roughly 75 per­cent more on av­er­age, ac­cord­ing to a re­cent study). Even within the group of com­mer­cial in­sur­ers, some can use their greater bar­gain­ing power to ne­go­ti­ate bet­ter rates than oth­ers.

In light of this com­plex­ity, an all-payer sys­tem seems to bring some ap­peal­ing trans­parency and sim­plic­ity to rate set­ting. Rather than ne­go­ti­ate sep­a­rate rates, each in­surer pays the same price, which in the case of Mary­land is de­ter­mined by an in­de­pen­dent rate-set­ting com­mis­sion.

But how high should the uni­form pay­ments be? Al­low­ing com­mer­cial in­sur­ers to pay the low Medi­care or Med­i­caid rates would be un­ac­cept­able to hos­pi­tals, which have long ar­gued these prices are not high enough to cover costs. At the same time, re­quir­ing Medi­care and Med­i­caid to pay the much higher com­mer­cial prices would be too costly for those pro­grams. In the end, Mary­land set­tled some­where in the mid­dle.

For that to work, though, Medi­care must be will­ing to pay more in Mary­land than it does any­where else in the coun­try.

States do not have the author­ity to sim­ply dic­tate that Medi­care in­crease its pay­ments. In­stead, the Cen­ters for Medi­care and Med­i­caid Ser­vices (CMS) sets Medi­care hospi­tal pay­ment rates at a na­tional level. But CMS has granted Mary­land a “Medi­care waiver,” agree­ing to pay the rates set by its com­mis­sion. This agree­ment is of no small con­se­quence.

The waiver’s bot­tom line is that Medi­care spends more in Mary­land than it oth­er­wise would. The ex­tra cost to U.S. taxpay­ers is re­port­edly $1.5 bil­lion per year, over $1,600 per Mary­land Medi­care ben­e­fi­ciary. It is hard to ex­plain why the rest of the coun­try should so gen­er­ously sub­si­dize health care in the na­tion’s wealth­i­est state.

It may be un­der­stand­able that Mary­land’s sys­tem was ini­tially sub­si­dized. In the 1970s the fed­eral gov­ern­ment made an ex­plicit ef­fort to sub­si­dize states to ex­per­i­ment with al­ter­na­tive health care pay­ment de­signs, hop­ing they could find ways to con­trol costs.

But that ar­gu­ment can’t jus­tify a per­ma­nent sub­sidy. Although taxpay­ers have been sup­port­ing Mary­land’s sys­tem for nearly 40 years, Mary­land has not been suc­cess­ful in con­trol­ling hospi­tal costs.

It’s true that Mary­land hospi­tal costs per ad­mis­sion have grown more slowly than in the rest of the coun­try. But that glosses over the more im­por­tant point: due to in­creases in the num­ber of ad­mis­sions, over­all hospi­tal spend­ing has ac­tu­ally grown faster than av­er­age in Mary­land. In other words, more fed­er­ally funded Medi­care dol­lars have flowed into the state over time.

To their credit, un­der a re­cently up­dated agree­ment with CMS, in or­der to keep its waiver, Mary­land will have to limit its to­tal hospi­tal cost growth for all pay­ers to 3.6 per­cent per year. That may sound rea­son­able, but it’s not clear this solves the prob­lem.

First, the 3.6 per­cent limit is largely ar­bi­trary. That fig­ure rep­re­sents the 10-year an­nual growth rate of the state’s econ­omy rather than a mea­sure of health care cost growth. Ad­di­tion­ally, na­tion­wide per-capita spend­ing in Medi­care has slowed to a crawl in re­cent years — av­er­ag­ing as low as 1 per­cent per year. Even if over­all spend­ing growth picks up — as many pre­dict it will — agree­ing to pay Mary­land’s rates while costs grow at 3.6 per­cent a year main­tains a very gen­er­ous level of sub­si­diza­tion to the state.

Ul­ti­mately the new agree­ment cen­ters on the wrong goal: rather than work­ing to elim­i­nate Medi­care’s sub­sidy, it largely pre­serves it. After 40 years of Mary­land’s fail­ure to con­trol its costs, re­con­sid­er­a­tion of the sub­stan­tial fed­eral sub­sidy to its “ex­per­i­ment” is long past due.

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