It wasn't easy for Maryland to enact its unique healthcare system.
This article was published on Tuesday, October 26, 2021 in Kaiser Health News.
For the past 18 months, while I was undergoing intensive physical therapy and many neurological tests after a complicated head injury, my friends would point to a silver lining: "Now you'll be able to write about your own bills." After all, I'd spent the past decade as a journalist covering the often-bankrupting cost of U.S. medical care.
But my bills were, in fact, mostly totally reasonable.
That's largely because I live in Washington, D.C., and received the majority of my care in next-door Maryland, the one state in the nation that controls what hospitals can charge for services and has a cap on spending growth.
Players in the healthcare world — from hospitals to pharmaceutical manufacturers to doctors' groups — act as if the sky would fall if healthcare prices were regulated or spending capped. Instead, healthcare prices are determined by a dysfunctional market in which providers charge whatever they want and insurers or middlemen like pharmacy benefit managers negotiate them down to slightly less stratospheric levels.
But for decades, an independent state commission of healthcare experts in Maryland, appointed by the governor, has effectively told hospitals what each of them may charge, with a bit of leeway, requiring every insurer to reimburse a hospital at the same rate for a medical intervention in a system called "all-payer rate setting." In 2014, Maryland also instituted a global cap and budget for each hospital in the state. Rather than being paid per test and procedure, hospitals would get a set amount of money for the entire year for patient care. The per capita hospital cost could rise only a small amount annually, forcing price increases to be circumspect.
If the care in the Baltimore-based Johns Hopkins Medicine system ensured my recovery, Maryland's financial guardrails for hospitals effectively protected my wallet.
During my months of treatment, I got a second opinion at a similarly prestigious hospital in New York, giving me the opportunity to see how medical centers without such financial constraints bill for similar kinds of services.
Visits at Johns Hopkins with a top neurologist were billed at $350 to $400, which was reasonable, and arguably a bargain. In New York, the same type of appointment was $1,775. My first spinal tap, at Johns Hopkins, was done in an exam room by a neurology fellow and billed as an office visit. The second hospital had spinal taps done in a procedure suite under ultrasound guidance by neuroradiologists. It was billed as "surgery," for a price of $6,244.38. The physician charge was $3,782.
I got terrific care at both hospitals, and the doctors who provided my care did not set these prices. All the charges were reduced after insurance negotiations, and I generally owed very little. But since the price charged is often the starting point, hospitals that charge a lot get a lot, adding to America's sky-high healthcare costs and our rising insurance premiums to cover them.
It wasn't easy for Maryland to enact its unique healthcare system. The state-imposed rate setting in the mid-1970s because hospital charges per patient were rising fast, and the system was in financial trouble. Hospitals supported the deal — which required a federal waiver to experiment with the new system — because even though the hospitals could no longer bill high rates for patients with commercial insurance, the state guaranteed they would get a reasonable, consistent rate for all their services, regardless of insurer.
The rate was more generous than Medicare's usual payment, which (in theory at least) is calculated to allow hospitals to deliver high-quality care. The hospitals also got funds for teaching doctors in training and taking care of the uninsured — services that could previously go uncompensated.
In subsequent decades, however, hospitals did end runs around price controls by simply ordering more hospital visits and tests. Spending was growing. Maryland risked losing the federal waiver that had long underpinned its system. Also, under the waiver's terms, Maryland's hospitals were at risk for paying a hefty penalty to the federal government for the excessive growth in cost per patient.
That's why in 2014 the state worked with the federal Centers for Medicare & Medicaid Services to institute the global cap and budget system in place today. Dr. Joshua Sharfstein, who was the state's health and mental hygiene secretary, met skeptical hospital administrators to "sell the concept," as he described it, assuring them the hospitals would still get reasonable revenue while gaining new opportunities to improve the health of their communities with money to invest in preventive services.
Studies show the program, which was further revised in 2019, generally worked at keeping costs down and generated savings of $365 million for Medicare in 2019 and over $1 billion in the prior four years. What's more, working with a fixed budget has provided incentives for hospitals to keep patients out, resulting in programs like better outpatient efforts to manage chronic illnesses and putting doctors in senior housing to keep residents out of hospitals through on-site care.
Instituting this type of plan may be politically unacceptable statewide in other places today, given the much greater power now of hospital trade groups and large consolidated hospital networks. "Where hospitals are making money hand over fist, it's a hard sell to switch," Sharfstein said. "But where hospitals are facing economic pressure, there is much more openness to financial stability and the opportunity to promote community health."
Sharfstein thinks the Maryland approach can be especially attractive for financially strapped rural and urban hospitals that treat mostly people on Medicaid and the uninsured.
Though Maryland is an oddity in the United States (the few other states that tried price controls in the 1970s abandoned the experiment long ago), many countries successfully use price guidelines and budget limits to control medical spending. Notable among them is Germany, whose health system is otherwise similar to the United States', with multiple insurers. A landmark 1994 study comparing efforts here and abroad did find that the German system, for example, can be stingier at providing care that is expensive or elective.
But, referring in part to that issue, the study's author concluded that costs are so high in the United States that the country "could probably lower our expenditures and see none of the problems that we found in our study for a number of years."
Data also shows that operating margins, a measure of profit, are generally slimmer in Maryland than those of big health systems in the rest of the country. Johns Hopkins' margin was 1.2% in fiscal year 2019, compared with 6.9% at the Mayo Clinic in Minnesota and 5.8% at the University of Pennsylvania Health System; Stanford Healthcare's was 7.1%.
But those margins can also reflect how much of its income a hospital chooses to spend on things like amenities and executive pay. Living with financial constraints may be at least partly why Johns Hopkins Hospital's main entrance is pleasant but functional, lacking the elegant art-filled marble lobbies I often encounter at its peer hospitals.
My experience demonstrates that excellent care can be delivered to patients by a system that works within financial limits. And that's something America needs.
Kaiser Health News is a national health policy news service that is part of the nonpartisan Henry J. Kaiser Family Foundation.
The state-imposed rate setting in the mid-1970s because hospital charges per patient were rising fast, and the system was in financial trouble.
Hospitals supported the deal — which required a federal waiver to experiment with the new system.
Hospitals could no longer bill high rates for patients with commercial insurance, the state guaranteed they would get a reasonable, consistent rate for all their services, regardless of insurer.