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Will Maryland's Rate Shift Send Tremors Around the Country?

 |  By kminich-pourshadi@healthleadersmedia.com  
   May 21, 2012

When it comes to healthcare, what happens in Maryland (unlike in Las Vegas) doesn't always stay there. The state is home to the Centers for Medicare & Medicaid Services, which is based in Baltimore, and its geographic location has made Maryland a testing ground for many of the agency's payment programs. So it was noteworthy when the Maryland Health Services Cost Review Commission (HSCRC), which sets payment rates for hospitals in the state, adopted reimbursement payments at a near-freeze level on May 2.

"I've always looked what happens in Maryland with CMS as an incubator for what could happen next in the rest of the country," says Michelle Mahan, senior vice president and CFO at Frederick Regional Health System in Frederick, MD.

Maryland's rate statement reflects the shifting dynamics of the healthcare business. According to the HSCRC final rate recommendation document, "Healthcare reform has altered the concept of efficiency in healthcare. There has been an increasing recognition that true efficiency is not at the level of the hospital discharge but at the level of providing population health. When the existing waiver was developed, the concern was the length of stay within a hospital discharge and the utilization of resources within that stay. Medicare and rate-setting states adopted prospective method payment methods for a hospital stay."

Although the rate change, which takes effect July 1, is technically an increase, the uptick was so paltry it is considered more of a freeze, explains Mahan. The HSCRC accomplished this by raising rates for patients receiving outpatient services by 2.59%, while lowering rates for inpatients by 1.25%.

"It's basically flat. But I could certainly imagine that Medicare could say they will have a [national] rate drop. That's what they already said on the physician side, and they might say it's the best way to constrain expense growth," says Mahan. "In this case, it is another waiver strategy—they're trying to keep our waiver cushion."

The Maryland healthcare system holds overall costs down by spreading the expense of patient care throughout the entire system of providers. All insurers, including private companies, state Medicaid, and federal Medicare, pay hospitals the same reimbursement rates. Therefore, regardless of the hospital's payer mix, a rate change affects all hospitals equally. For the last few years, Maryland hospitals have had overall rate increases that have been lower than their cost increases. Additionally, hospitals have started to see a decrease in patient volumes, causing leaders to take an even harder look at cost reductions.

The Maryland healthcare model's linchpin is its Medicare waiver, exempting the state from national Medicare payment methodologies and permitting the HSCRC to set rates for all payers—governmental, commercial, and self-pay. However, the Medicare waiver comes with the requirement that the state's charge per case cannot grow faster than the rate at which national Medicare payments grow. In recent years, Maryland's charges have been catching up with the nation's, causing the HSCRC to try to find ways to keep the Maryland rates and costs in check.

Maryland hospitals are piloting a payment bundling program in which a subset of Medicare providers receives a single payment for an episode of acute care in a hospital followed by post-acute care in a skilled nursing or rehabilitation facility, the patient's home, or other appropriate setting. "Right now we're doing per charge, per episode [care] and charging a flat rate for readmissions. And we already have some quality indicators in effect," Mahan says.

The state's need to keep the payment lower has consequences on hospital budgets, as it would for financial leaders at any organization.

"Costs must come down to accommodate the rate changes, and we'll have to look at our labor [budget]," says Mahan. "We've made a point of not laying off staff and we plan to continue that." She says Frederick Regional will likely restrict new hires and leave vacant positions open. Other healthcare organizations in Maryland may not be able to take a similar approach, however.

Adventist Healthcare in Rockville is a prime example. The five-hospital integrated delivery network, which serves the Washington, D.C., metropolitan area (as well as northwestern New Jersey), is eliminating nearly 100 jobs. The layoff was announced to employees a week before the Maryland rate changes were made official, but the organization cited the potential changes to hospital rates as among the reasons for the staff cuts .

At Frederick Regional, "We are asking our managers to figure how to stay with their current staffing levels and still create more efficiency, and we'll see how that works," says Mahan. "The thing is, we are balancing our reimbursements against programs that depend on providing good customer service. And if an employee feels they are overworked and stressed out, how happy are they going to be with the patients?"

Financial leaders, take note: What's happening in Maryland may come your way soon. As Medicare reimbursement rates decline and you look for various cost reduction solutions to offset revenue losses, don't forget that the human element could have a whiplash affect on your revenue. Trimming the labor line for immediate savingscan create an overworked staffthat translates into poor patient satisfaction scores, ultimately causing more financial loss through the value-based purchasing program.

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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