Hit­ting the re­set but­ton

More states con­sider re­turn to rate-set­ting

Modern Healthcare - - PAYERS AND PURCHASERS -

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.

Tem­po­rary so­lu­tion?

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-

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