Hitting the reset button
More states consider return to rate-setting
Opponents call hospital rate-setting a backward approach to cost control, a practice that fell out of favor in the 1980s. Those critics dub the practice socialist, a desperate move by healthcare providers to limit costs while sacrificing profits.
While the Massachusetts Hospital Association and the Federation of American Hospitals say improving cost-control is a necessary endeavor, they worry about limiting profitability. The federation’s mission statement makes that apparent: “We are staunch advocates of a market-based healthcare system, which benefits consumers by continually improving the quality, safety and value of care through competition and innovation.”
The American Hospital Association lacks an official position on the issue, deferring inquiries to individual state agencies, contending that what works for one state might not work in another.
Meanwhile, California and Massachusetts are exploring their own rate-setting programs, a practice popular in the early 1970s when as many as 30 states had their own versions of the practice. Now only two states remain: Maryland and West Virginia.
Carmela Coyle, president and CEO of the Maryland Hospital Association, says she understands why rate-setting could be attractive: “There’s the frustration that everybody is facing and that is a shortage of funding in the states, especially for Medicaid.”
West Virginia’s program covers only private payers. In contrast, Maryland’s program applies to all payers. The distinction with Maryland’s program is a waiver with the CMS allowing the state’s Health Services Cost Review Commission to set the state’s Medicare and Medicaid rates.
Coyle says the state is proud of its system and happy to be a model for the rest of the country: “We have been able to control costs and to hold costs at or below the national average.”
Maryland legislators created the program in 1971, and its seven-member commission has set hospital rates since 1977. The panel convenes monthly and sets rates annually, with the governor-appointed commissioners serving four-year terms, consisting of a mix of administrators, policy experts and healthcare professionals. Its goals are to constrain hospital costs, ensure hospitals have proper resources for high-quality services and to increase the fairness of hospital financing.
Coyle says financials prove the program’s success. Over 32 years, from 1977 to 2009, the state’s cumulative growth in costs per admission ranked lower than any other state, and since 1981, Maryland’s rate of increase for average admissions payments is 315% versus the national rate of 358%. That’s a stark difference from 1976, when costs per admission were $1,458, or 26% above the national average of $1,165. Had that rate continued through 2010, Maryland officials say hospital spending would be at $3.2 billion in 2010 alone.
For fiscal 2010, the equivalent inpatient admission was $10,410 and the average amount for a hospital stay in Maryland grew by 2%, compared to the national average of 3%. Rate-setting also saved Maryland patients $113 million compared to what they would have paid if the state’s hospital rates grew at the national level in fiscal 2010 alone.
Hospitals can appeal the commissioners’ rulings by asking for a special rate order. Since fiscal 2006, five such appeals were submitted and four were granted.
Massachusetts officials are pondering revisiting rate-setting, despite protests from hospitals. “The hospital industry here in Massachusetts is very concerned about government trying to intervene in the rate-setting process that is the relationship between payers and providers,” says Lynn Nicholas, Massachusetts Hospital Association president and CEO.
An independent commission set hospital rates in Massachusetts from 1975 through 1991, and during those 17 years, hospital costs remained 2% below the national rate. The program ended in 1991, when hospital costs in Massachusetts matched the nation’s average rate, according to the state’s Special Commission on Provider Price Reform. Nicholas sits on the 10-member group, which recently formed to re-examine rate-setting and other cost-control measures. They presented a report in November to Massachusetts legislators.
The Massachusetts rate-setting plan would be reviewed after two years if enacted, but lawmakers remain in the preliminary stages of discussion. No target date has been set to implement any of the proposals. Rate-setting was among six recommendations in the report, which included increasing transparency on price variation and to offer a variety of plans to increase consumer enrollment.
Massachusetts lawmakers see rate-setting as a temporary solution, but that’s not good enough for Nicholas. She cast the only vote on the commission opposing the report, specifically because of the rate-setting recommendation. She made no secret she was on the panel to represent the best interests of hospitals: “As a strategy to reduce costs, (rate-setting) takes the focus away from the real issue, which is cutting medical spend in all respects.”
She also wondered about the other factors leading to increased spending. She reiterated Coyle’s concerns about the federal government falling behind on Medicare and Medicaid payments to doctors and hospitals, and says rate-setting should represent a “minor piece of the puzzle.” The report also mentioned New York and New Jersey as states with significant experience with rate-setting. Their programs were among those that vanished in the early 1980s.
Chester “Chet” Burrell is familiar with the Maryland and New York rate-setting pro-