Maryland’s Approach to Hospital Pricing

By September 18, 2009November 2nd, 2009Commentary

Maryland has set hospital payment rates for over thirty years.  A Wall Street Journal article examines the state’s experience.  (WSJ Article)  A state commission gathers extensive data from every hospital in the state and uses that data to set hospital-specific rates for various services.  The rates take into account each hospital’s input costs, amount of unpaid care and patient illness severity.  Everyone, from the uninsured to private health plans to Medicare, pays the same price to the hospitals.  This eliminates the cost-shifting from government payers to private plans which appears to occur across the rest of nation.  Hospitals have stayed in good financial shape, although not all are happy with the program, partly because the commisison sets rates at a level designed to encourage the hospitals to keep their input costs under control. 

Although Maryland’s hospital costs are now a little less than the national average, its overall health spending appears to be higher than average, so it may be that some services have been shifted from a hospital setting to avoid the fixed rates.   At some points the hospitals also appeared to be increasing volume to increase revenue but the commission appears to have made changes that discouraged that practice.  Translating the Maryland system to the national level would have some interesting consequences.  Medicare and Medicaid would likely be paying more for hospital care and private insurers would be paying less.  That might help expand private coverage or at least slow its decline, but would exacerbate the funding problems of the public payers.  It would also need a large bureaucracy to gather the information and set the rates, and as with most policy changes, there would likely be some unintended consequences which might undo some of the potential cost savings.  But given the state of hospital consolidation in most markets, the Maryland experience is worth a close look.

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