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During the 1970s, in an effort to limit rising health care expenditures, several states adopted various forms of all-payer rate-setting models, where all payers pay the same price for services at a given facility. Over time, most state models failed and only Maryland’s all-payer hospital rate-setting system remains. Recently, there is renewed interest in these models as states seek to improve patient health and reduce skyrocketing health care costs. The Centers for Medicare and Medicaid Services (CMS) is working with two states to implement all-payer models: Maryland is refining its current all-payer system, and Vermont is implementing a new model. The experience of these states present good case studies for states seeking unique solutions to reduce health care expenditures and improve patient care.
Since 1977, Maryland has established the same hospital reimbursement rates for all payers, including Medicare. Important to its model are transparency and payer trust in the system and success hinges on all payers adhering to the set rates. If any payers, including CMS, elect to withdraw from the agreement, Maryland’s all-payer model could potentially collapse or cause disruption within the state health care environment.
Maryland’s system has experienced both successes and failures. Originally, service-specific unit rates were used as the basis for hospital reimbursement. Under this model, Maryland successfully lowered the cost growth rate per admission to 2 percent below the national average by 2007, resulting in an estimated cumulative savings of $40 billion (see figure 1).
Cost shifting among payers was eliminated and uncompensated care costs and medical education were spread more equitably. It also provided hospitals with financial predictability and a level of stability. However, despite its successes, there were also flaws in the system. Hospitals were unintentionally incentivized to increase the volume of services performed. From 2001 to 2007 hospital inpatient admissions increased by 2.7 percent , nearly triple the national average of 1 percent (here). Maryland’s per-admission cost growth also began to exceed the national average, threatening CMS’s willingness to participate.
In response, Maryland worked with CMS to implement a new model in 2014 that improved upon the existing system. It transformed its hospital payment system from fee-for-service to global payments under which total revenue is set at the beginning of the year. The new model also emphasizes improvements in quality of care and population health. Thus far, the transformation has enabled Maryland to meet or exceed a majority of the goals set by CMS (see Table 1).
However, this model applies only to hospitals. In order to address to the total cost of care, it must be expanded to encompass other care settings, such as outpatient centers and physician practices.
Vermont recently began implementing an all-payer model in January 2017, a voluntary all-payer accountable care organization (ACO). Because it seeks to include all providers and a majority of residents by 2022 it is far more ambitious and more difficult to implement than Maryland’s.
Although the state remains divided on the model and implementation has proven difficult, the model has many potential benefits including: maintaining patient freedom of choice, rewarding quality over quantity, seeking to contain health care costs, incentivizing care delivery and population health outcome improvements, encouraging better care coordination among providers, is provider-led, and may provide better care for Vermont residents.
However, there are concerns regarding cost containment. Because Vermont reportedly provides some of the lowest-cost, highest-quality service in the country, achieving cost savings will be difficult. Coupled with potentially increasing administrative costs, there are doubts about advertised cost savings. In addition, because the statewide ACO is a private entity, transparency and accountability is a concern. “It is difficult enough to get transparency and accountability from government; it will become much more difficult when a private organization is in charge.”
Both Maryland’s and Vermont’s all-payer models present lessons for other states contemplating health care reform. However, just as the Maryland and Vermont models are different, states will likely require a customized model that fits the needs of their states. Any reform will be difficult and require complex negotiations among all parties, but CMS is willing to work with states to make it successful. Any model must be transparent, capable of evolving as Maryland was able to do when transitioning to value-based care, and be able to earn the trust and cooperation from all parties. As Maryland, Vermont, and other states continue to develop and implement unique solutions to reduce health care expenditures and improve patient care, Leavitt Partners will continue to track, examine, and evaluate each state’s health care transformation.