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CMS, Maryland Announce Plan That Would Limit Medicare Hospital Spending

By John Reichard and Rebecca Adams

January 10, 2014 -- A potentially historic experiment in the state of Maryland that could blaze a hard-to-follow trail toward long-term control of Medicare spending has won the approval of the Obama administration.

Democrats have strongly resisted block grants or caps in the Medicaid program—making one feature of the new plan, an administration-approved cap on spending in the more politically popular Medicare program, eye-popping to say the least. But left-leaning thinkers, including those affiliated with the Center for American Progress, have advocated global budgets as a long-term solution for the nation's extremely high levels of health spending and Maryland's new plan fits in with that line of thinking.

The plan "modernizes" Maryland's unique all-payer system in which insurers, including Medicare, all pay hospitals the same rates for inpatient admissions. It's a rate-setting approach that other states do not follow largely because it's viewed as government overreach into the private economy.

But with demographic trends driving health outlays ever higher in coming decades, what's unpalatable to many now could prove more enticing later on.

The plan announced last week by the Obama administration with Maryland state officials would limit per capita hospital spending growth in Maryland across the board, not just for Medicare. But it requires savings of at least $330 million over that period for Medicare, with various "guardrails" coming into play as the mechanism to enforce that level of savings.

A Centers for Medicare and Medicaid Services (CMS) news release said Maryland "will limit all-payer annual per capita hospital [spending] growth, including inpatient and outpatient care, to 3.58 percent, below historical trends."

"It's effective as of Jan.1 and changes the underlying orientation of the hospital system away from a price kind of focus to a total cost kind of focus," Joshua Sharfstein, secretary of Maryland's Department of Health and Mental Hygiene, said in an recent interview. Sharfstein said it's fair to describe the approach as a form of cap on Medicare spending for hospitals in the state.

Asked whether such a step will spark controversy, Sharfstein suggested that won't be the case in Maryland. "We have broad support in Maryland for this. It's the flexibility to change the incentives for all payers that really makes it exciting. This isn't just a price kind of focus."
He noted the fact that Maryland already has an all-payer system lays the foundation for the new approach. "It's really the fact that we have this system that allows us to implement an approach like this to cost."

Sharfstein said in the CMS news release that "by shifting away from traditional fee-service payment, Maryland's new model encourages collaboration between hospitals and physicians to improve patient care." It promotes innovative approaches to preventing illness leading to hospitalizations and "accelerates efforts to avoid unnecessary admissions and readmissions," he said. Hospitals, for example, could establish programs with nursing facilities to improve care and thereby reduce readmissions back to the hospitals.

Maryland already has pilot tested the program. In it, a hospital gets a global budget, or a flat dollar payment covering all admissions over a period of time, regardless of how many admissions occur. That means if it finds ways to keep patients healthy and out of the hospital it can, in effect, get more money per patient. Under the current system, the payment rate per patient stays the same regardless of the number of admissions.

In a highly simplified example, assume a hospital now gets $2 per patient. Under the new system, assume it gets a global budget of $100. If it has 50 admissions, it gets the equivalent of the same $2 per patient. But if it can reduce admissions so it treats only 25 patients, then it gets $4 per patient, or double what it gets now.

That creates clear incentives to deny care. But the new approach calls for improving the quality of care by applying certain performance measures to the delivery of services, such as standards to reduce rates of infection.

"Maryland has had this system for decades and the fact that it hasn't driven Johns Hopkins and other prominent institutions out of business, that's important," said Paul Ginsburg, a senior fellow at Mathematica Policy Research. "I believe this CMS contract will include monitoring of quality. It's not like a debut for the Maryland system. It's movement to a more advanced stage. And it's consistent with what Medicare is trying to do with ACOs and bundled payments and what is happening throughout the country."

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