Maryland moving toward global budgets for hospitals

Maryland All-Payer Model to Deliver Better Care and Lower Costs

Centers for Medicare and Medicaid Services, January 10, 2014

On January 10, 2014, the Centers for Medicare & Medicaid Services (CMS) and the state of Maryland jointly announced a new initiative to modernize Maryland’s unique all-payer rate-setting system for hospital services that will improve patient health and reduce costs.

Maryland operates the nation’s only all-payer hospital rate regulation system.  This system is made possible, in part, by a 36 year old Medicare waiver (codified in Section 1814(b) of the Social Security Act) that exempts Maryland from the Inpatient Prospective Payment System (IPPS) and Outpatient Prospective Payment System (OPPS) and allows Maryland to set rates for these services.  Under the waiver, all third party purchasers pay the same rate.  The State of Maryland and CMS believe that the new model test announced today will provide an opportunity for Maryland to reform its delivery system to align with the goals of delivering better health, better care, and lower cost.  

Terms of the Model

Maryland’s all-payer rate setting system for hospital services presents an opportunity for Maryland and CMS to test a unique model that has the potential to inform CMS and other states.  This opportunity is available through the authority of the Innovation Center, which was created by the Affordable Care Act to test payment and service delivery models.

Under the terms of the Maryland All-Payer Model:

• Maryland will agree to permanently shift away from its current statutory waiver, which is based on Medicare payment per inpatient admission, in exchange for the new Innovation Center model based on Medicare per capita total hospital cost growth.  

• This model will require Maryland to generate $330 million in Medicare savings over a five year performance period, measured by comparing Maryland’s Medicare per capita total hospital cost growth to the national Medicare per capita total hospital cost growth.

• This model will require Maryland to limit its annual all-payer per capita total hospital cost growth to 3.58%, the 10-year compound annual growth rate in per capita gross state product.

• Maryland will shift virtually all of its hospital revenue over the five year performance period into global payment models, incentivizing hospitals to work in partnership with other providers to prevent unnecessary hospitalizations and readmissions.  

• Maryland will achieve a number of quality targets designed to promote better care, better health and lower costs.  Under the model, the quality of care for Maryland residents, including Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) beneficiaries will improve as measured by hospital quality and population health measures.  

• If Maryland fails during the five-year performance period of the model, Maryland hospitals will transition over two years to the national Medicare payment systems.  

• Before the start of the fourth year of the model, Maryland will develop a proposal for a new model based on a Medicare total per capita cost of care test to begin no later than after the end of the five year performance period.

This model will test whether an all-payer system for hospital payment that is accountable for the total hospital cost of care on a per capita basis is an effective model for advancing better care, better health and reduced costs.  CMS expects that this model will be used to engage all Maryland hospitals, as well as other care providers, in payment reform and innovation.  

CMS and Maryland expect that the All-Payer Model will be successful in improving the quality of care and reducing program expenditures for Maryland residents, including Medicare, Medicaid, and CHIP beneficiaries.  Moreover, the Maryland system may serve as a model for other states interested in developing all-payer payment systems.


Guiding Principles for Implementation of Population­-Based and Patient Centered Payment Systems: A Report from the Advisory Council to the Maryland Health Services Cost Review Commission, January 31, 2014

The State of Maryland is leading a potentially transformative effort to lower health care spending in the State while at the same time improving access to care and quality of care. Stated in terms of the “Three Part Aim,” the goal is a health care system that enhances patient care, improves health outcomes, and lowers total costs.

To achieve this goal, the State of Maryland worked closely with the Centers for Medicare and Medicaid Services (CMS) throughout 2013 to craft an innovation plan that would make Maryland a national leader achieving the Three Part Aim and permit the federal government to continue to participate in the four‐decade long all‐payer system that has proven to be both successful and enduring. The federal government is anticipated to approve Maryland’s new Model Design application and implementation begins in January 2014.

Building on the Commission’s existing authority to regulate and set hospital rates across all payers including Medicare, the State is preparing to tie system‐wide hospital inpatient and outpatient payment to economic growth. Effectively, the State is instituting a plan to shift from payment based on inpatient hospital cost per admission to total hospital cost per capita. The ultimate goal is to tie total health care spending per capita to the per capita growth of the state’s economy. New health care delivery and payment models will be aligned with numerous existing initiatives to help meet the goals.

Advisory Council Recommendations

2.  Hospital Global Payment Models are the best strategy for the first phase of implementation.

The HSCRC anticipates that most hospitals will be operating under global payment models by early 2014. These models hold the most promise for meeting the revenue targets in the early years because they move away from incentives in fee‐for‐service payment that foster a greater volume of services and offer strong budget discipline. In addition, global payments provide clear and simple revenue targets with flexibility for hospitals to manage within these macro goals. In the long‐run, these models will need to evolve to ensure that the revenue in the system follows the patients.

(DISCLAIMER: This is a draft document for discussion purposes which has been prepared by consultants to the Advisory Council. The contents of this draft have not been reviewed or approved by Advisory Council members.)

Draft Report:

Maryland Health Services Cost Review Commission

All Payer Hospital System Modernization: Advisory Council:

Overview of Proposed New All-Payer Model:


By Don McCanne, M.D.

The model for a single payer national health program, as proposed by Physicians for a National Health Program, includes placing hospitals on global budgets. Just as police and fire departments are funded by single, publicly-financed global budgets rather than being paid for each fire or crime intervention as they arise, hospitals would likewise be placed on single, publicly-financed global budgets that are adjusted based on some reasonable index of inflation. Not only does that cost less, partly by dramatically reducing administrative waste, it also improves quality by providing the hospital administration with the flexibility to improve the allocation patient care dollars, plus it slows health care inflation to a sustainable level.

Maryland is the only state that currently has an all-payer hospital rate regulation system. Under this system, all payers, including Medicare, Medicaid, CHIP, private insurers, and individuals pay the same rates for the same hospital services. This has reduced administrative complexity, made payment for hospital services more equitable, and has slowed the increases in hospital spending from one of the most expensive states down to average.

Since their all-payer system pays for services provided, incentives remain to increase volume of services. Under the new system just approved by CMS, payment will still be all-payer but will not be based on volume of services, but rather will be based on “the Medicare per capita total hospital cost growth.” In essence, that establishes “global budget” as a form of hospital financing in the United States, though it is limited to Maryland under the authority of the Innovation Center, which was created by the Affordable Care Act to test payment and service delivery models.

We certainly have many questions about the details that have not yet been revealed. It does fall short of hospital global budgets as envisioned by PNHP. For instance, this model still seems to pool funds from multiple public and private sources, whereas the PNHP model would use only public funds from a single pool funded by equitable taxes. That is a crucial difference since multiple sources leads to administrative complexity and inequities in funding.

In general though, it seems that we can celebrate this step towards a more equitable and just financing system. It won’t get us in the back door of single payer, but it will provide us with another talking point on policy - the fact that global budgets are an improvement but that we can make them even better when we mesh them in with a bona fide, comprehensive single payer system - an improved Medicare that covers everyone.