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One Price Fits All: Maryland's Strategy for Containing Hospital Costs

Frontier Group intern Emily Schneider is a third-year student at Dartmouth College, where she studies biology and public policy.

Health care costs are high and rising, currently accounting for over 17 percent of GDP. Despite the prominence of health care in political debates, the United States has failed to make much headway in containing costs.

That is a problem, especially given the aging of the Baby Boomer generation, which, together with longer life expectancy and increased demand for medical care, is expected to increase health care spending to nearly 20 percent of GDP in 2025. 

To add insult to injury, for all the money that Americans spend on medical care – around $10,000 per person per year – we are not healthier than people in other countries, and have measurably lower-quality care.

Can America contain rising health care costs? While little progress has been made at the federal level, some states have taken actions to contain costs and improve the quality of care – actions that could serve as a model for other states and for the federal government. 

Maryland, for example, has implemented an all-payer system for its hospitals. This system empowers an independent group, the Health Services Cost Review Commission (HSCRC), to set prices for hospital procedures across the state. These rates are updated each year, and take into account differences in hospital costs and patient populations. Hospitals can petition the commission if they feel that rates are unfair.

The result of the system is that each patient receiving the same surgery at a given hospital will be charged the same amount, regardless of their insurance. This is in contrast to the rest of the country, where hospital charges vary based on insurance coverage, and only the uninsured are charged the full “sticker price” (which is usually much higher than the rates negotiated between hospitals and insurers). 

Maryland’s system is currently celebrating its 40th anniversary. In 1977, Maryland became the first and only state to receive a waiver from the Centers for Medicare and Medicaid Services (CMS) allowing the state to set rates for all patients, regardless of their insurance, so long as the state was able to keep cost growth below the national level.

For the first 30 years of the program, the rate of medical cost growth in Maryland was significantly lower than the national rate, saving an estimated $40 billion. Access to health care for the uninsured also increased

However, in the 1990s and 2000s, both costs and consumption of health care services began to increase, driven by loosened regulations and issues with the rate setting formula.

In 2014, CMS and the state of Maryland renegotiated their contract, allowing the all-payer system to continue, as long as other goals were met, such as improving outcomes and population health, and saving CMS $330 million over five years. 

Maryland’s system has evolved in other ways as well. The state added spending caps to nearly all of its hospitals, limiting the amount a single hospital could spend in a year in order to provide incentives for hospitals to curb unnecessary care and hospitalizations. It also shifted its payment system to one based on episodes of sickness, rather than fees for individual services, thereby removing any incentive for doctors to provide unneeded and low-value care. These address one of the major flaws of the U.S. health system: Hospitals and doctors make money from providing more care, not necessarily for making us healthier. Now, hospitals in Maryland are incentivized to keep patients out of the hospital through effective home care, rather than earning more money for additional services if a patient is readmitted.

Maryland’s efforts have been successful, with preliminary results showing significant progress towards the five-year goals with both large Medicare savings and improvements in quality measures, such as the frequency of avoidable complications. As of February, the state has saved CMS $429 million, far exceeding their goal with two years to go. 

Maryland’s all-payer system works because the market for health care is different than that of other goods and services. Controlling the price of heart surgeries wouldn’t be expected to cause an increase in demand, as might occur with other price controls. The fact that Maryland’s established rates are relatively generous – set higher than Medicare reimbursements in the rest of the country – ensures that hospitals will be able to cover their costs and have sufficient incentives to continue to provide the service, avoiding shortages. And the use of quality measures protects against decreases in the quality of services provided.

Not only has this system effectively controlled costs, but it has also brought order to a system of health care pricing that is chaotic in much of the rest of the country, one in which two patients receiving the same care can be charged wildly differing amounts depending on the insurer they (or, in many cases, their employer) choose. In Maryland, all patients are charged the same prices, preventing the tragedy of uninsured patients being charged many times more than somebody who is insured, and leveling the playing field for insurance companies. 

Rising health care costs are a problem across the United States. States such as Maryland provide ideas that other states, and the federal government, can apply to ensure that our health care system provides high-quality care at a price our pocketbooks and the public purse can afford.

Photo: capl@washjeff.edu under Creative Commons 3.0 license.