Hospitals: All-payer or global budgets?

Maryland's Hospital Cost Review Commission at 40

By John A. Kastor, MD; Eli Y. Adashi, MD, MS
JAMA, September 14, 2011

In 1971, the state of Maryland established the Health Services Cost Review Commission (HSCRC) to regulate the rates that hospitals in the state could receive from Medicare, Medicaid, and private insurers. Although other states once regulated hospital rates, only in Maryland does the practice continue. In this Commentary, we describe the Maryland system, discuss why regulation in other states failed, and suggest that other states should consider regulating hospital rates.

In 1976, when the system began full operation, the adjusted costs per admission in Maryland hospitals were approximately 26% higher than the national average. Between 1977 and 2009, Maryland hospitals experienced the lowest cumulative increase in cost per adjusted admission of any state in the nation. For fiscal year 2009, the average cost per admission at Maryland hospitals increased by only 2% compared with an estimated 4.5% increase for the rest of the nation.​ Because the HSCRC regulates the amount hospitals can increase (“mark up”) their charges, Maryland also has the lowest absolute charges of any state.

Why has regulation succeeded in Maryland? First and foremost, there is the HSCRC's enlightened design with its legislated independence, broad enforcement powers, and discretion to chart its own course. Accordingly, changes the HSCRC sees as advantageous can be instituted without additional legislative action. Most stakeholders—hospitals, payers, and patients—favor the system. Hospitals appreciate the transparency and equity of the rate-setting process, the enhanced compensation by public payers, and the elimination of protracted rate negotiations with each payer. Payers value the clarity and parity of the HSCRC-approved hospital rates, the absence of hospital-driven cost-shifting, and the containment of continually increasing costs. Patients welcome the unfettered access to care.

Although as many as 30 states once regulated hospital costs, by 1991, only Maryland continues to use an all-payer rate-setting system. While the reasons varied state by state, fundamental to the decrease in the rate-setting system was federal policy, beginning in the 1980s, that replaced the regulatory model with deregulatory market-driven schemes. Managed care, capitation, and diagnosis related groups, not rate regulation, became the mantra to control increases in health spending.

The Maryland experience demonstrates that an enlightened independent public utility can be empowered to successfully stem inflationary growth in hospital spending. Is this the time for other states to consider or reconsider using rate regulation to control hospital costs?


A National Health Program for the United States: A Physicians' Proposal

By The Writing Committee (PNHP's proposal)
The New England Journal of Medicine, January 12, 1989

Payment for Hospital Services

Each hospital would receive an annual lump-sum payment to cover all operating expenses - a "global" budget. The amount of this payment would be negotiated with the state national health program payment board and would be based on past expenditures, previous financial and clinical performance, projected changes in levels of services, wages and other costs, and proposed new and innovative programs. Hospitals would not bill for services covered by the national health program. No part of the operating budget could be used for hospital expansion, profit, marketing, or major capital purchases or leases. These expenditures would also come from the national health program fund, but monies for them would be appropriated separately.

Global prospective budgeting would simplify hospital administration and virtually eliminate billing, thus freeing up substantial resources for increased clinical care. Before the nationwide implementation of the national health program, hospitals in the states with demonstration programs could bill out-of-state patients on a simple per diem basis. Prohibiting the use of operating funds for capital purchases or profit would eliminate the main financial incentive for both excessive intervention (under fee-for-service payment) and skimping on care (under DRG-type prospective-payment systems), since neither inflating revenues nor limiting care could result in gain for the institution. The separate appropriation of funds explicitly designated for capital expenditures would facilitate rational health planning. In Canada, this method of hospital payment has been successful in containing costs, minimizing bureaucracy, improving the distribution of health resources, and maintaining the quality of care. It shifts the focus of hospital administration away from the bottom line and toward the provision of optimal clinical services.


Hospital Payment Policy in Canada: Options for the future

By Jason Sutherland
Canadian Health Services Research Foundation, March 15, 2011

Canada’s publicly funded healthcare system is facing increasing cost control pressures. Hospitals alone represent a substantial burden on provincial health budgets, accounting for 28% of total costs. Presently, in the Canadian system, the primary source of funding for hospitals is through a global budget. Under this model, a fixed (global) amount of funding is distributed to each hospital to pay for all hospital-based services for a fixed period of time (commonly one year). Global budgets:

* Are based on historical spending, inflation, negotiations and politics in many provinces, rather than on the type and volume of services provided.
* Constrain hospital spending growth and create budgetary predictability; however, its consequences may be decreased services and increases in waiting times.
* Do not provide incentives to improve access, quality or efficiency of hospital care.

Funding hospitals on the basis of the type and volume of services they provide has become the international norm. Known as activity-based funding (ABF), these systems have been systematically supplementing global budgets in public and private insurance-based health systems around the world. ABF:

* Provides powerful financial incentives to stimulate productivity and efficiency: efficient hospitals retain the difference between the payment amount and the hospital’s actual cost of production.
* Is associated with higher volumes of hospital care, shorter lengths of stay, and yet has not been linked to poorer quality of care.
* Is linked to higher overall spending, due to higher volumes of patients being treated, and evidence of lower cost per admission is mixed.

Combining properties of ABF and global budgets may optimize the strengths of both global budgets and ABF. Many countries that have ABF to fund their hospital systems utilize a blend of global budgets to control spending, while instituting an ABF mechanism to create incentives for hospitals to provide timely and equitable access, appropriate volume of care, and efficient care.


By Don McCanne, MD

Much attention is being directed to Maryland's all-payer system of rate setting for hospitals since it has been effective in shifting Maryland from a state with amongst the highest hospital costs to a state with the lowest absolute charges. Should we ignore these findings and merely proceed with the relatively ineffectual tweaks of the Affordable Care Act? Or should we adopt an all-payer system for all hospitals? Or should we change to a system of global budgeting for hospitals?

Unfortunately, the Affordable Care Act provides only illusions of cost control for hospitals. As an example, the early experiences with accountable care organizations have failed to demonstrate any significant cost savings. If we really do want to improve value in our hospital spending, we are going to have to look beyond the Affordable Care Act.

What makes Maryland's approach unique is that hospital rates are set by a commission that has the power to regulate the rates paid by all private and public payers, including Medicare and Medicaid. They have been able to get the pricing right, to the satisfaction of hospitals, payers and patients.

So why hasn't their all-payer approach been adopted by more states or by the federal government? It is because those that support deregulated, market-driven schemes are in control of the political process. We are being guided by the philosophy that government is always bad, even when it's good!

In  contrast to all-payer, a single payer approach establishes global budgets for hospitals, much like global budgets for police and fire departments, schools, public libraries, and other institutions serving the public interest. Negotiated global budgets are the most effective model of ensuring adequate hospital services and resources while preventing waste on superfluous services such as the large bureaucratic monoliths within their institutions. Global budgets provide the best value in hospital care purchasing.

If we can succeed in reestablishing a public service role for government, then wouldn't it be reasonable to simply enact an all-payer system for hospitals? The problem is that it only makes one change in our fragmented, dysfunctional system of financing care, and not a complete change at that. Under all-payer, only the rates are controlled, but each service still must be accounted for and paid for independently, and the hospitals would still have multiple public and private payers with which they would have to interact.

Canada has had tremendous success with its program of global budgeting for hospitals. As the article from the Canadian Health Services Research Foundation indicates, even the best of processes can benefit from refinement, though decisions will have to be made as to whether "activity-based funding" is a beneficial refinement.

We can applaud the efforts of Maryland which has proven for us that the health care system works better when the government is involved. Now we can go Maryland one better by establishing global budgeting for hospitals as part of a single payer national health program. Then we would have it all.