Breaking The Healthcare Cost Curve…Maryland
Breaking The Healthcare Cost Curve
Re-posted from 2/20/2010
Quite a bit of the commentary has been written on the question of how-to-rein-in rising healthcare costs and to slow costs to less than the rate of inflation. Massachusetts has been able to provide healthcare to its citizens but still struggles with keeping healthcare insurance costs low and affordable. Healthcare costs continue to rise at 8% annually and will double by 2020 unless Massachusetts can find a methodology to control the rising cost of healthcare.
One answer might be LAC Healthcare Solutions, a regulatory commission of seven governor-appointed-commissioners serving 4 year terms and having the responsibility of setting appropriate rates for hospital inpatient, outpatient, and emergency department care to manage its rising healthcare costs by limiting payment to the minimum amount necessary to cover hospital operating expenses, and requiring all payers (both private insurers and Medicare) to adhere to the rates set. This regulatory commission is nothing new for Maryland and has been in place for years. At one time, 30 other states regulated hospital rates only to have them fall by the wayside in the late seventies and earlier eighties with the deregulatory movement.
When Maryland’s Commission determines what can be charged by each hospital, it takes into consideration a hospital’s wages, charity cases, and the severity of illnesses. If not satisfied with the commission’s decision, hospitals can appeal to the commission or go to court for a variance in prices. So what has been the success of Maryland in its attempts to tamp down healthcare costs? Separately, the net savings for Maryland was determined to be an ~$40 billion since 1976 (Health Affairs, “Setting Hospital Rates to Control Costs and Boost Quality,” 2009) and additionally:
“Had a similar system for all states been in place, a savings of $1.8 trillion dollars would have been achieved for the nation’s healthcare system.”
Emory University’s Elena Conis adds:
“The savings and financial stability engendered by the system also receive credit for granting the state (Maryland) the lowest health insurance premiums (as a fraction of income) in the country (‘Impact of a State-Level All-Payer System’).”
In her article “How Maryland Broke the Curve; A Solution for Massachusetts”Maggie Mahar (Health Beat) continues doing the yeoman’s work with additional research on whether hospitals had shifted medical procedure or device functions offsite to avoid regulation. Maggie’s research didn’t find evidence of a shifting of either offsite when compared to other states.
- In 2004, Maryland was spending slightly more than the US average of $5283 at $5590 and was lower than 16 other states, Massachusetts included.
- The growth of its healthcare costs as compared to inflation was at the national average of 6.7% and less than 32 other states.
- In measuring against the state’s GDP, Maryland was at the national average or 13.3% for medical bills.
Maryland has managed to maintain the same markup over costs since the Commission’s beginnings as compared to the rest of the US (see chart “Keeping Costs Down”).
So what’s in it for Maryland hospitals? Hospitals are reimbursed at a higher rate for treating those who are uninsured and result in being charity cases; Medicaid and Medicare accept the Commission’s pricing and pays Maryland hospitals at the same rate as private insurance. The standardization of pricing goes a long way towards eliminating operations in the red; offers greater financial stability for hospitals as variation caused by the economy is minimized; prevents leveraging by insurance or hospitals and creates comfortable operating margins; lowers hospital administration costs with standardized pricing by eliminating insurance payout variation; and creates transparency for hospitals and patients on pricing.
What Maggie on Health Beat suggests for those waiting for a federal solution for rising healthcare costs may look to states to play a more active role in the control of cost. While the Federal Government may play a more efficient role in mandating healthcare insurance for people, states may actually hold the key to controlling healthcare costs. States are more knowledgeable regarding local conditions impacting hospital costs and pricing.
But what of Massachusetts? Realizing it could not maintain the same healthcare insurance prices against rising healthcare costs, The Massachusetts Division of Healthcare and Policy contracted Rand Corporation to strategize and help it develop a plan to contain healthcare costs. Besides the bundling of hospital and doctor fees, Rand recommended a similar approach to what Maryland has in place in addition to 10 other strategies and options, Controlling Healthcare Costs in Massachusetts,”
Estimated Massachusetts Cumulative Savings from Selected Policy Options, 2010–2020
As shown in Rand’s chart, the recommended actions and the resulting savings.
It appears to be a direction well worth taking and relieving the Federal Government of much of the responsibility of healthcare cost containment. Hat tip to Maggie Mahar at Health Beat, “How Maryland Broke the Curve; A Solution for Massachusetts”
As I understand it the Japanese have a similar scheme. Once a year prices are set nationwide in Japan. Of course if the feds did it it would be the evil price fixing.
On a side note are physicians net net leaving or entering Maryland?
Lyle, till we do have federal price fixing; the states will competing similar to corporate rules which let companies operate at the detriment of the nation. The answer to some questions like health care or debt creation of money does not work. Anything that affects the national health or wealth should not be left up to market forces.
I guess my only concerns are:
1. If you are at the national average, you are riding the crest of the wave, you are not ahead of it.
2. How are the other 17 states below the national average cost/gdp state beating our Maryland?
I’m not against Marylands approach and success, I’m just asking for a better picture and thus possible solution.
Lyle we (Maryland) have lots of doctors (27% MORE THAN NATIONAL AVERAGE). Mostly a function of two major teaching hospitals, and the NIH in Bethesda. I wonder how much supply contributes to the success of setting prices.
From that “keep costs down” graph, the commission is clearly targeting the markup of charges over costs and is clearly succeeding (remember, pricing of input costs and even on-hospital healthcare spending is outside its jurisdiction). Controlling price inflation with markups caps, what does this remind me of… oh yes:
“Enter the Lerner-Vickrey-Colander solution.
Say we wanted to control the prices of the health sector — maybe keep ’em on track with the overall movement of the price level.
Simple: you cap the markup over non-sector inputs for all sector firms, by creating a sector-wide markup warrant market.
This essentially limits depreciation charges, wages, salaries, as well as profits — i.e. the same value that is taxed by a value added tax…
Prolly firms would get issued a flow of warrant “credits”. If a firm wants to increase mark up above warranted levels, the firm has buy the warrants with cash on the warrant market… By the way, you could use a Pigou tax here too — cap and trade mechanism sets the inflation rate, leaving the markup cost to the vagaries of the market, whereas the Pigou tax sets the mark up cost, leaving the ultimate inflation rate uncertain…”
Sorry, I meant NON-hospital healthcare spending is outside commission jurisdiction.