Stateline Story

One State's Hospital Cost Solution: Regulated Prices

  • March 29, 2011
  • By Christine Vestal

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The new federal health law has created a flurry of hospital mergers as the industry prepares for major changes in financing and delivery of care. Some worry that the resulting behemoths will have too much price-setting power.

In one state, however, monopoly pricing won't be a problem. The state sets the prices.

For more than 30 years, Maryland has regulated the rates hospitals can charge, while all 49 other states have relied on market mechanisms to keep prices in check. For the most part, it has worked. The urban hospitals that serve large numbers of uninsured Maryland patients are financially strong, instead of nearly bankrupt like most inner-city hospitals.  And everyone — private insurers, the uninsured, and those on Medicaid and Medicare-is charged the same amount.
Maryland has the lowest price in the country for average hospital cases — a little more than $13,000, compared to a national average of $32,500.  The cost of health insurance in Maryland is second lowest in the nation as a percentage of median income.

Robert Murray, who as head of Maryland's health services cost review commission  is the state's chief regulator, admits that Maryland's "macro" regulation is not perfect. But he says it has put the state in an ideal position to provide incentives for the kind of highly coordinated and efficient care the federal health law is now calling for.

Already, ten of the state's 46 hospitals have volunteered for a program in which the state sets a flat, three-year budget based on current spending levels, and hospitals have the opportunity to use cost-cutting procedures to improve their bottom lines and reap higher profits. One such procedure involves providing caseworkers for patients who are discharged from the hospital to help them plan their care after leaving so they are less likely to be readmitted for preventable reasons. 

Hospitals are supportive

A regulatory approach works in Maryland partly because all stakeholders — hospitals, doctors and patients — have bought into it. Carmela Coyle, president of the Maryland Hospital Association, says the state's hospitals strongly support the system and work closely with Murray's 29-person regulatory staff on a daily basis. It's "equitable and predictable," she says, and it ensures that everyone has access to high quality hospitals. Facilities in poor areas of Baltimore, for example, do not suffer disproportionate financial burdens.

"But the system is in need of modernization," Coyle says. The biggest problem is that Maryland's federal charter allows it to regulate only those services provided within a hospital building or campus.  As more and more doctors set up outside operations such as ambulatory surgery centers, medical imaging and diagnostic testing in smaller facilities, regulated hospitals stand to lose business to these less-expensive providers.
                                                                                         
Len Nichols, a health policy expert at George Mason University in Virginia, agrees. Effective cost regulation eventually would have to expand to cover these services, he says. Otherwise, it stands to become gradually less relevant to the real world. Even today, hospital services account for only one-third of all health care costs.

Still, says Murray, "Maryland has bent the cost curve over the last 30 years" without micromanaging. By setting separate spending maximums for each hospital, his small staff has been able to spread the cost of uncompensated care across the state's $14 billion hospital industry. This has ensured that every hospital maintained profitability, although at relatively low margins. In addition, the state's Medicaid program has not suffered the same kind of spiraling cost increases other states have experienced. 

Deregulatory trend

Maryland hasn't always been a lone regulator. In the mid 1970s, Massachusetts, New York and New Jersey also set hospital prices and fees. In the decade that followed, hospital expenditures in those places declined. Earlier in the 20th century, a majority of states imposed some form of price regulation on hospitals. Since then, however, state and federal health officials have opted for letting the market regulate prices, banking on increased competition among managed care and health maintenance organizations to keep costs down.

The American Hospital Association has argued that consolidation in the industry since the 1990s created economies of scale that have generated greater investment in technology and improved safety and quality. But critics say it has also resulted in runaway price escalation.

Whether other states will emulate Maryland's system is an open question.  Any attempt to invoke cost regulation relies heavily on the people involved and the voluntary cooperation of the state's hospitals. That is not always easy to achieve. In the end, however, Murray insists that the regulatory approach relies on a simple concept: "It's no surprise that when people try to stick to a budget, they tend to limit their needs. Hospitals are no different."