Currently, Maryland is the only state in the nation where an independent state commission sets hospital rates for all payers, meaning that private insurers and Medicare pay the same. This unique arrangement dates back to the 1970s, when the state received a waiver from Medicare to pay Maryland’s hospitals different rates than the rest of the nation.
The U.S. Department of Health and Human Services recently approved Maryland’s bold new initiative to build on this oversight. In addition to setting hospital rates, Maryland can now give each of the state’s 46 hospitals a budget and limit health spending growth to 3.58 percent for the next five years. The growth limit reflects Maryland’s average annual per capital growth rate over the past decade. To work within their new budgets, hospitals aim to sharply reduce the number of infections acquired in the hospital as well as readmissions. Since hospitals have a firm budget and quality targets to meet, they are expected to shift from a fee-for-service to a pay-for-performance model and becoming more accountable to patients.
During the five-year demonstration program, Maryland is required to generate $330 million in Medicare savings. If Maryland fails to meet performance goals, state hospitals will transition to the national Medicare payment systems over two years. Maryland’s experiment will serve as a model for the rest of the nation on whether government regulation can drastically reduce health spending. If successful, it is likely that other states will emulate Maryland’s initiative.