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Maryland’s Hospital Payment System

By September 26, 2011Commentary

As many recent reports have demonstrated, hospital unit prices are a primary source of health spending growth.  Several decades ago Maryland had some of the highest hospital prices and price growth rates in the country.  The state adopted an all-payer rate regulation system which appears to have helped control hospital service spending.  Recent reports demonstrate the ongoing value of the system.   (Maryland Report) Maryland’s system not only has all payers, including Medicaid and Medicare, paying the same price for the same service, but it also folds the cost of uncompensated care for a particular hospital evenly into all the rates paid to that hospital, avoiding any cost shifting.

The Maryland system was established in 1971, and is managed by an independent commission which is funded from the hospitals.   In 1976, when the rate system was fully implemented, Maryland’s hospital charges were 26% above the national average.   Today those rates are just below the national average.   In 2010, the average price paid for a hospital admission was $10,983, about 2% higher than the previous year and below the national average of 3% growth.  The cost to a hospital of an admission also only rose at 2%, and from 1977 to 2009 Maryland hospitals had the lowest cumulative growth in hospital costs to provide services.  Hospital markups in Maryland are well-below the national average, primarily because there is no cost-shifting and margins are controlled.

Uncompensated care was about 7% of gross revenue in 2010, a decrease from the prior year.  Hospital profits were 3.8% of revenue, up from a very small loss the year before.  Interestingly, on regulated activities, i.e., those subject to the rate control system, profits were 6.2% of regulated revenue, while the hospitals had losses on unregulated activities, primarily outpatient services, which was largely due apparently to excessive physician compensation.  There was a 1.4% decrease in admissions, which led to a slight decline in regulated revenue.   The Maryland system has to be viewed as a success and much as we dislike regulation, it may be a model to be applied nationally to get hospital pricing under control.  It appears to have forced hospitals to manage themselves better and control costs.

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