Imagine Kmart raising its prices to help out higher-priced competitors.
As improbable as it seems, suburban hospitals are preparing to do something like this.
The Maryland Hospital Association has given its blessing to a new regulatory system that will shift some of the $400 million annual cost of paying for charity care from urban to suburban hospitals.
This system will help safeguard the state's long-standing commitment to provide hospital care to those who can't afford it -- primarily Maryland's 700,000 uninsured citizens.
But some hospitals are going to pay a price.
When the system kicks in next spring, rates of Baltimore hospitals like the University of Maryland Medical Center and Johns Hopkins will begin to drop, while rates of county hospitals like St. Joseph Medical Center in Towson will go up.
The net result: a narrowing of the price gap between competitors.
For example, state regulators say the new system will reduce the rates of Johns Hopkins Hospital by 2 percent, saving money for patients, employers and insurers.
The total average cost of an appendectomy at Hopkins would drop $96, according to the regulators' calculations, from $5,193 to $5,097.
Suburban hospitals, meanwhile, may experience rate increases of the same amount or more, unless they can make offsetting cost reductionsin other areas. Yet most hospitals aren't complaining.
"We just think it's the right thing to do," said John Ellis, chief financial officer at St. Joseph. Charity care "should be everybody's problem, not just the inner city's."
It's not clear that all other suburban hospitals share his attitude. But hospitals are working with regulators in the state Health Services Cost Review Commission as they put the finishing touches on the new system, which actually dates to 1992.
State regulators had developed a new system then but were unable to use it because of legal questions that were finally resolved in April by the U.S. Supreme Court. Ruling in a New York case, the justices buttressed the states' authority to regulate hospital rates.
Maryland's charity care system had worked well for a number of years prior to 1992. Regulators permitted hospitals to build the cost of such care into the rates they charge paying patients and their insurance companies. In effect, insured patients subsidize the uninsured at each hospital.
But the cost of charity care soared in the 1980s, rising from $36 million a year in 1977 to $308 million in 1991 and an estimated $400 million this year.
The burden fell hardest on urban hospitals in poorer neighborhoods, as they treated most of the charity cases. Their rates shot up, threatening their ability to compete with suburban hospitals.
Today, the rates of UM Medical Center and Liberty Medical Center are marked up 15 percent to cover the cost of charity care. At Hopkins, the figure is 10.6 percent.
But the markup at St. Joseph is just 3.5 percent, and at Greater Baltimore Medical Center, 4.2 percent.
A regulatory task force concluded that the system was unfair, not only to hospitals but to the private and government insurance programs that pay for care. Insurers that send a lot of their subscribers to urban hospitals contribute more to charity care than insurers that direct patients to cheaper suburban hospitals.
Under the new system, the costs of charity care will be shared through a funding pool. Hospitals that perform little charity care will contribute money to the pool while those that do a lot will withdraw funds. This way, all hospitals will have the same markup -- which would be 8.9 percent if the system were in effect now.
Hospitals like Hopkins are eager for the change.
"It seems to me it's the best public policy to ensure that all the institutions are doing their fair share," said Dr. James A. Block, Hopkins' president and chief executive. "And this seems to me a reasonable compromise that meets the needs of the state as well as of the managed care companies and of the hospitals."
The managed care companies, primarily health maintenance organizations, haven't taken an industrywide position on the new system. But they are complaining increasingly about the entire regulatory system, which they believe impedes efficiency. "Fundamental adjustments need to be made in the entire system," said Geni Dunnells, who heads the Maryland Association of HMOs.
Regulatory battles are expected later this year when study groups, authorized by the legislature, meet to consider other changes for the system.
Insurers oppose a proposal to require community surgery centers to absorb a portion of the costs of charity care. And the hospital industry is deeply split over a proposal to have hospitals share the teaching costs of academic medical centers like Hopkins and UM Medical Center.
"That's going to be a war," predicted James A. Oakey, who heads Helix Health.