Sat. Nov 26th, 2022

Health care costs too much in the United States, so the federal government is constantly searching for methods to rationalize physician and hospital services, thereby extracting unnecessary and expensive care. The Centers for Medicare and Medicaid Services (CMS) leads the way, today often using the authority created by the Affordable Care Act to undertake pilot programs overseen by its Center for Medicare and Medicaid Innovation (the Innovation Center). Indeed, the activities of the Innovation Center in many ways define the innovation space around cost control.

One Innovation Center pilot is operating in Maryland today, known as the Maryland Total Cost of Care Model (TCCM). The TCCM entails all-payer (both commercial and government) rate regulation, with hospitals operating under a prospective budget. It is the successor to the CMS-sponsored Maryland All-Payer Model, which operated from 2014 to 2018. That program in turn derived from Maryland regulation of hospital rates that began in the 1970s.

Hospital payment rate regulation is the most ancient of government cost control regulations. It began in the 1960s, following research by Milton Roemer and others that detailed the variation and presumed excesses of hospital spending. In the late 1970s, as many as 15 states attempted to control the reimbursement rates that hospitals could charge. The commitment to the market that came with the Reagan-era politics swept most of the state regulation of hospitals away, including rate regulation. By the start of this century, only Maryland, and to some extent West Virginia, persisted. The nuances of rate regulation, and the value therein, have been largely absent from the health policy conversation.

Recently, however, Maryland’s programs have witnessed a revival of academic interest. A two-part article in this publication by Ezekiel Emanuel and colleagues set forth the current structure of the TCCM and its predecessors and outlined their benefits. The authors found that global budgets and uniform prices paid by commercial and government insurers lowered costs, improved quality, and created incentives for innovative approaches to better care, especially with regard to managing unnecessary hospital admissions. They wondered aloud whether other states might emulate the Maryland program.

Another qualitative study that involved interviews of various stakeholders in Maryland came to much the same conclusion: Global budget implementation can inform future reforms in payment models. Meanwhile, the program has been extolled by the head of the Innovation Center, who has noted it was one of the six programs initiated by the Innovation Center that saved money, compared to 44 that did not.

These reviews appear on whole to be accurate, and the Maryland TCCM is something that must be considered as we seek ways to rationalize the health care system. However, close scrutiny of the data, and conversations with opinion leaders in Maryland, reveal some nuances that should be included in the policy assessment. Perhaps most importantly, the Maryland approach has grown up slowly and, in some ways, organically. Indeed, its evolution is so distinct from the rest of the country’s experience that it is hard to see how other states could rapidly move to something similar, although individual aspects of the program could be emulated. These points deserve more airing if Maryland is really to provide a model for reform.

The Evidence On Performance Of The Maryland All-Payer And Total Cost Of Care Models

By law, the Innovation Center must evaluate its pilot programs formally and often pays consultants to do so. As a result, we can benefit from some in-depth reviews of the Maryland program. As well, recent academic analyses have brought additional evidence to bear.

The first empirical question is this: Has Maryland’s all-payer hospital rate regulation reduced Medicare expenditures? Emanuel and colleagues address this, relying appropriately enough on Henry J. Kaiser Family Foundation per capita Medicare spending data to conclude that Maryland’s spending indeed decreased compared to other states. To be specific, Kaiser Family Foundation data indicate that from 2013 to 2019, Medicare spending per beneficiary went from $11,989 (second highest jurisdiction) to $11,377 (seventh highest). Data from the CMS contractor hired to evaluate the program indicated that there were $1 billion in savings from 2014 to 2018 during the Maryland All-Payer Model.

Such statistics suggest that Maryland can be a model for reducing the rate of increase of Medicare expenditures, a critical policy goal going forward. But CMS appears cautious about this conclusion. In an evaluation published in 2021, CMS notes dryly that there is significant room to improve. Their adjusted Medicare spending data indicated that in Maryland, the federal government spent $13,037 per beneficiary, more than any other state in the country. The average state spent $10,891. With regard to hospital spending, Maryland came in at $7,111 per beneficiary, with the average state being $5,816. The savings achieved in Maryland have apparently reduced the rate of growth, but it is still a very costly state for Medicare.

Nor did early reviews of the Maryland All-Payer Model find much change in health care use. Eric Roberts and colleagues could not discern decreases in hospital use or increases in primary care use. This appears to be the only peer-reviewed study of the program to date. Its results are somewhat at odds with the report by CMS’s contractor, RTI International, perhaps due to the choice of control groups.

RTI International completed a comprehensive study of the All-Payer Model in November 2019. They used a difference in difference methodology with matching to similar populations and did indeed find $975 million in total savings for Medicare over the five-year time period, $796 million of which resulted from hospital savings. The rate of increase in spending in Maryland was 2.8 percent less than the control group. Much of the savings was related to a decrease overall in inpatient admissions, including the subset that was classified as potentially avoidable. However, the commercial population saw neither statistically significant savings overall nor a reduction in the number of admissions. Spending on professional fees increased significantly for the commercial population but apparently not for Medicare.

The consultants at RTI International found that hospitals adapted to the hospital global budget by attempting to avoid hospitalization through use of care coordination and social work interventions. The hospitals reported being flummoxed at times by the variation in payment rates and negotiations about the size of the budget, as payment rates changed based on the number of admissions. Overall, however, the state government and the hospitals seemed very pleased with the results and progress. This is echoed in discussions with Maryland insurers, who firmly believe that hospitalizations have been decreased by the global budget incentives. Moreover, hospital and insurance company leaders believe the All-Payer Program delivered greater equity in care. With payment virtually the same from all payers, there is no discrimination against patients with “poorer” payers.

To some extent, it is easy to see why both hospital and insurer stakeholders should endorse the hospital payment reform. The Maryland program has two key characteristics: the global budget and the all-payer system. The global budget creates incentives for cost control and prevention. The all-payer system equalizes rates between payers. Since Medicare pays nearly the same as other payers (Medicaid and Medicare do pay 7.7 percent less than commercial), the Medicare rates are much higher in Maryland than they would have been in the other 49 states, which are paid according to the Inpatient Prospective Payment System (IPPS). Those IPPS rates are typically much lower than commercial rates.

The payment differential underscores another important point. RTI International noted that Medicare payments were 33–44 percent higher in Maryland than in the control group states, which seems conservative in light of other estimates. If one accepts the CMS estimates of $7,111 per beneficiary in hospital costs for the more than one million beneficiaries in Maryland in 2018, then 40 percent lower hospital payment rates would have yielded more than $2.5 billion in annual Medicare savings.

This insight raises the two key issues about the Maryland program. First, commercial insurers are not suffering from the same cross-subsidy pressures as are payers in other states, where hospitals negotiate aggressively with commercial plans to make up for their deficits on Medicare rates. That dynamic of cross-subsidy is one of the key elements of the health care system in the 49 other states. Second, the key way that Medicare saves money is brutish: It names a price, much lower than the commercial rates. Had Medicare simply applied their typical payment rates in Maryland for five years, it would appear that the resulting savings for Medicare would have been 10 times what accrued from the All-Payer Model.

All that said, the global budgets will continue to drive down hospitalizations, and so costs. The question is this: Can the Maryland model accelerate savings fast enough that CMS begins to get more in savings than it is spending in additional fees for the all-payer program?

Moving To Total Cost Of Care

As noted above, the Maryland TCCM has recently been re-approved by the Innovation Center, modified now to emphasize total costs of care. Policy experts in Maryland would contend that the program has been total-cost-of-care oriented since 2014, but the new program has some additional innovations. The global budget and all-payer rate system is still at the core, but there is a now a care-redesign program that allows hospitals to make incentive payments to non-hospital providers who can implement quality-of-care redesigns. There is also an initiative to pay primary care practices an incentive to adopt advanced primary care services, particularly care management. In some ways, the latter echoes the Primary Care Medical Home program that largest insurer in Maryland, CareFirst Blue Cross Blue Shield, promoted over part of the past decade.

With regard to TCCM specifically, there is an adjustment mechanism under which Medicare beneficiaries are attributed to hospitals. If the total costs for Part A and Part B for those beneficiaries exceeds certain benchmarks, there is a 1 percent penalty applied to the global budget. Finally, the state is further involved by providing catalyst grants to help promote care management. The state is responsible for producing $2 billion in savings through 2026, using a 2013 baseline. The state also has committed to improving a series of overall health metrics, such as diabetes care, average body mass index scores, and drug overdose deaths.

The TCCM has been evaluated by yet another CMS contractor, Mathematica, reporting in July of 2021. It is of course early, and any evaluation across 2020–22 will have to account for the disruption that COVID-19 has wrought in health care financing statistics. Nonetheless, Mathematica finds progress. At least one-third of hospitals are participating in the new Hospital Care Improvement Program, and 3 percent of Medicare beneficiaries have been enrolled in the Episode Care Improvement Program, indicating renewed hospital efforts. Forty-seven percent of Medicare beneficiaries are seen by primary care doctors engaged in the Maryland Primary Care Program, and participating practices have been awarded on average $168,000 in incentive rewards. The state estimates it saved nearly $400 million the first year of the program, exceeding its goal. Maryland has made $165 million in catalyst grants available as well.

What is a bit harder to find is savings in the total costs of care, which should cut in two directions. First, are the commercial payers getting any savings? They are certainly benefiting from not having to cross-subsidize Medicare, but are there any other systematic savings? The Mathematica report does not seem to address this. On the other hand, a study by the Maryland Hospital Association showed that commercial insurer inpatient and outpatient costs increased only 22.1 percent from 2010 to 2019, compared to 52.7 percent in a comparison group of states. Commercial insurer total health costs in Maryland increased 44.6 percent over the same period, compared to 50.7 percent in other states. These data re-emphasize that the hospital behavior has changed in Maryland.

Second, and perhaps more important, there is the “unregulated business,” as it is referred to by Maryland regulators, insurers, and providers. One would naturally have expected during the All-Payer Model that care would have moved to ambulatory settings owned by entities affiliated with the hospitals. While increased use of non-hospital resources would drive up the total cost of care, that effect is diffused through the system, rather than attributed to one organization—a classic commons effect. However, this issue is not addressed by either RTI International or Mathematica.

But hospital leaders are clear that they have substantially invested in ambulatory surgery. Indeed, Maryland is the country’s leader in ambulatory surgery rates. In 2018, Maryland’s rate of outpatient surgical procedures was 66 per 1,000 people, compared to 21 per 1,000 in California and 19 per 1,000 in Texas. Every party I talked to in Maryland acknowledges this fact, and all attribute it to efforts to increase overall margins by doing more “unregulated” business.

This is not surprising: Restricted by the cap on the overall budget for hospital services, it is predictable that institutions will seek other paths to profit. There is a possibility that doing more in ambulatory centers lowers overall cost. But there is also the possibility that a higher portion of this care is unnecessary than in other states. The record is not clear, except for the extraordinary activity in ambulatory surgery centers in Maryland. The TCCM’s 1 percent penalty for exceeding Medicare Part A and B benchmarks should at least partially address this, but that data are not yet available.

Nor is there much focus in the available evaluations of the TCCM on professional fees. As one observer mentioned to this author, the surgeon’s fees still depend on doing the surgery, so there is non-alignment in that regard with the hospital costs-savings model. RTI International does mention some accounting for evaluation and management codes, but this would not be a substantial part of overall physician payments. Physician payments thus can be considered another largely unregulated part of the system.

As noted, the TCCM does support new primary care initiatives. But there does not seem to be much direct oversight of the physicians who are most costly—those doing procedures and surgeries. This leaves open perhaps the most interesting question about the Maryland experiments: To what extent are the doctors, especially the expensive proceduralists, able to evade the incentives for savings? Current commentary about the program sheds little light on this.

CMS data on the All-Payer Model did reveal that in Maryland from 2014 to 2019 Medicare hospital spending growth was 8.17 percent, compared to 19.94 percent nationally. Meanwhile, non-hospital Medicare spending increased 28.45 percent in Maryland, compared to 21.30 percent nationally. Clearly, if you squeeze the balloon in one place, it expands in another. Further evaluations of the “unregulated” business are really needed to get a clear view of what is happening in Maryland.

Maryland Has Become Quite An Outlier

As noted above, the critical health policy issue in the other 49 states is the yawning gap between payment by Medicare (and Medicaid) and payment by commercial insurers. Hospitals have continued to consolidate, gaining market share that gives them leverage in negotiations with payers. The problem is that leverage does not count against the government—the strategy only works with commercial payers. But against them it does work, and commercial rates have shot up much faster than Medicare or Medicaid rates. With hospital services now paid by commercial insurers at twice the Medicare rate on average, one has to wonder how much more runway this phenomenon has.

That reality of tough negotiation dominates everywhere but Maryland, where the payment rates are essentially equalized by the sturdiest part of the state’s regulations, hospital rate, and budget setting. The Maryland program has evolved over the past 20 years, at the same time that the hospital consolidation/rate improvement phenomenon has played out in other states. To now move those states rapidly to a Maryland-style system would seem to be a very tall order—if only because of the increase in Medicare payment rates that would be necessary.

Pennsylvania is attempting to create global budgets without the all-payer format used in Maryland, with some success for rural hospitals. A more practical question is whether the conditions that would permit global budgets without the Maryland boost in Medicare payment can take hold in other states.

The Maryland TCCM has one other interesting side effect. It retards the development of Medicare Advantage. The Medicare Advantage market penetration in Maryland is 12 percent, compared with more than 40 percent nationwide. The reason is simple. Medicare Advantage programs rely on the low Medicare payment rates to develop affordable policies. If a hospital in a state refuses to contract with a Medicare Advantage insurer, the rates default to Medicare. In Maryland, the Medicare rates are high, so the Medicare Advantage policies cannot be priced as aggressively. This point re-emphasizes the larger one: The cost-control strength of the Medicare program has been its overall low rates. Maryland’s programs are an outlier in that regard.

All this said, the rate regulation scheme, including the TCCM, is widely accepted and even lauded by insurers and hospital leaders in Maryland. They agree that it is not a perfect set of solutions, but it has, they believe, led to fewer hospital admissions. Perhaps more importantly, it seems to have created an environment where all parties take accountability for the system of care and finding ways to improve it. That in itself is quite an important accomplishment. Moreover, the multifaceted aspect of the overall reform offers a list of particular reforms—such as global budgets linked to primary care reform—which in themselves could be a model for others. CMS should continue to study the individual elements as well as the entire package.

It seems likely that Maryland’s reforms will continue to evolve. The program likely needs to be comprehensive, or “unregulated” business could swallow savings produced from a focus on hospitals. Fortunately, the collaborative nature of the TCCM lends itself to continuous efforts to improve and hence new insights for CMS. There is another reason the reform model will likely proceed: While the demonstration project is dependent, going forward, on specific savings goals, it is hard to see how CMS could pull the plug. Ending the demonstration would mean Medicare rates drop back to CMS prospective payment system levels, which would be catastrophic for the Maryland hospitals. They would not be able to raise rates fast enough with commercial insurers to create cross-subsidies—in other states, that process has taken years. Ending the Maryland experiment would also undermine the salutary incentives that are reducing unnecessary admissions and ameliorating preventable conditions.

In summary, Maryland’s evolution bears close watching. It has and will continue to provide valuable insights for health policy reform. Nonetheless, given the radical difference between Maryland hospital reimbursement and other states, especially the Medicare additional funds, the full package of Maryland reforms may not provide a reasonable template for other states.

Author’s Note

The author is on the board of a diagnostic testing company, Lumira Dx. He has equity in major health insurers and retailers. At present, he has no consulting arrangements or other financial relations with relevant companies.



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