Skip to main content

Maryland Modernizes Its All-Payer Payment System

 |  By Berkeley Research Group  
   March 01, 2017

CMS partnership changes hospital financial incentives, resulting in more than $400 million in savings over three years.

"As we transition to value-based care, including ACOs and other models, the techniques being piloted in Maryland have more and more appeal." — Patrick Redmon, PhD, director at Berkeley Research Group

In 2014, Maryland and CMS’ Center for Medicare & Medicaid Innovation took a significant step toward value-based care by beginning to partner in a demonstration model that updated the state’s unique all-payer hospital payment system and its 36-year Medicare Waiver.

The result was the Maryland All-Payer Model, a five-year initiative designed to cut Medicare costs and boost care quality. The demonstration model requires hospitals to rein in spending and reduce hospital-acquired conditions (HAC) and unnecessary hospitalizations through tighter collaboration and rigorous quality programs. To date, hospitals have saved hundreds of thousands of dollars and are meeting other key goals. The All-Payer Model also has implications for hospitals in other states.

Creating a new model of care

Maryland was a strong target for the All-Payer Model because of its existing payment system. Under the state’s original Medicare Waiver and all-payer system, hospitals were paid the same rate from commercial and government payers, with the stipulation that Medicare costs could not grow faster than the national average. This posed a problem when the Affordable Care Act (ACA) was passed, says Patrick Redmon, PhD, director at Berkeley Research Group. As hospitals reduced readmissions and short stays, they were left with sicker patients and higher charges per case, he explains.

"The All-Payer Model seeks to change this by conforming to the ACA and the IHI’s Triple Aim," says Redmon. "Instead of focusing on DRGs and charge per case, the demonstration model is trying to improve care coordination and contain hospital costs as well as the total cost of care." Under the demonstration, hospitals are paid through a global or a fixed budget. "Providers are strongly incentivized to move away from volume-based care and keep patients healthy and out of the hospital," Redmon says.

All-payer key provisions

The demonstration, which applies to hospital care for Maryland residents only, has five provisions. The first is a requirement that 80% of the state’s hospital revenue fall under a population-based reimbursement method by year five of the model. Second, hospital spending cannot grow faster than the state’s economy. The demonstration caps hospital gross patient revenue at 3.58% per capita annually, which matches Maryland’s 10-year per capita growth of its gross state product, says Redmon. "Prior to this, Maryland’s hospital per capita revenue was growing at double the rate of the state’s economy."

Provisions three and four call for Maryland hospitals to reduce Medicare readmissions to the national average and reduce HACs by 30% over the course of the demonstration model. Regarding the latter, hospitals must meet the requirements of the Maryland Hospital Acquired Conditions program, which includes 65 potentially preventable complications. The final provision requires hospitals to save $330 million over the entire demonstration.

Hospitals move the needle

Maryland hospitals are rising to the challenge and changing care delivery, says Redmon. "They’ve had to reconfigure their thinking and work more closely with physicians and post-acute care providers to take care of patients with a fixed budget." The state is helping through grant money for infrastructure that improves care coordination, especially for patients who are frequently readmitted. Hospitals are using the funds to implement case management programs, station nurse practitioners in nursing homes, and establish more mental health resources.

Mid-demonstration results are positive. The state regulatory agency has limited hospital revenue growth to less than 3.58% in the first three years, says Redmon. The state also estimates it has saved Medicare more than $400 million. Maryland hospitals have met their goal for reducing HACs and are on track to lower Medicare readmissions to the national average. Moreover, approximately 95% of state hospital revenue is now under a global budget, which meets the definition of a population-based model.

Still, challenges have emerged with the transition to a global budget, says Redmon. Global budgets were developed based on historic volumes, but some hospitals have experienced a rise in volumes due to shifting populations, changing physician affiliations, and normal changes in use rates that occur over time. "Hospitals that are acquiring volume are getting hurt financially," says Redmon.

"To compensate for this, state regulators have developed a methodology that allows dollars to follow patients when they shift across facilities," Redmon says. But he adds that only 25 cents on the dollar is changing from one hospital to another. The state must also figure out how to pay for hospital innovations, such as new technology systems, under a fixed budget. "Both are longer-term policy discussions," says Redmon.

CMS considers next moves

"As we transition to value-based care, including ACOs and other models, the techniques being piloted in Maryland have more and more appeal," says Redmon. CMS has indicated an interest in using global budgets outside of Maryland, he adds. In the meantime, Maryland hospitals are preparing for phase two of the demonstration, which seeks to control total state Medicare spending over a five-year period. "In addition to containing hospital costs, it will also target physician and post-acute care spending, which together comprise about three quarters of the total spend for Maryland Medicare patients," says Redmon.

Get the latest on healthcare leadership in your inbox.