Hospital rate-control is working Legislators have chance to head off inequities built into managed care

February 18, 1996|By Douglas Peddicord

For nearly 20 years, Maryland's Health Services Cost Review Commission has aimed to have all payers pay the same prices for hospital services.

For the consumer and the hospital industry alike, this rate-setting system ensures a measure of fairness in an increasingly competitive health care marketplace.

It means that a given hospital charges the same price for a particular procedure regardless of who pays the bill.

Simply, the cost of an appendectomy should not vary based on whether the patient is covered by Medicare, Blue Cross or an HMO.

While some, especially advocates of managed care, argue that regulation of hospital rates is outmoded, it is hard to argue with the results in Maryland.

The cost of a hospital stay has gone from 23.6 percent above to 8.1 percent below the national average, and Maryland hospitals have outperformed the country as a whole in containing cost increases for 18 of the past 19 years.

The rate-setting system prevents larger insurers, whether government or private, from bullying and distorting the market.

For instance, in every other state Medicare pays hospital rates that are discounted to below actual cost, and the remaining charges are shifted onto private insurers.

By having all payers pay the same prices, the rate-setting commission has encouraged Maryland hospitals to serve patients without regard to insurance coverage, thereby avoiding the two-track system of care seen in most states, where financially strapped governments must operate hospitals to provide care to the poor and uninsured.

But how are the costs of uncompensated care -- technically defined as charity care and bad debt created by patients who renege on payments -- accounted for in the Maryland system? Who pays the bill when the patient doesn't?

To appreciate the importance of the question, it is useful to look at the scope of the problem.

More than 700,000 Maryland residents -- many of whom work for employers who do not offer benefits -- lack health insurance of any kind.

As a result, the HSCRC reports that hospitals in the state provided almost $400 million in uncompensated care in 1994.

The short answer to the question of who pays the bill is that all payers do, in the form of increases to the rates charged by each hospital.

The costs of uncompensated care are built into rates on a hospital-specific basis, reflecting each Maryland hospital's reported costs for charity care and bad debt. But those costs vary widely.

That is because the poor and uninsured tend to go to hospitals near where they live, whether in the inner city or rural Maryland.

And certain facilities, such as the University of Maryland Medical System and the Johns Hopkins Medical Institutions, provide specialized and extraordinarily costly care to people from all over the state, regardless of insurance coverage or ability to pay.

Other hospitals, meanwhile, serve more affluent communities with fewer uninsured people and, on the whole, treat less severe illnesses and injuries.

As a result, the increase to hospital rates caused by the amount of uncompensated care provided ranges from just over 1 percent to more than 27 percent.

So while it is true that all payers are charged the same price at any given hospital, there is significant variation in rates among hospitals in the state.

Because upward rate adjustments occur at the level of individual hospitals, we should return to the question: Who pays for uncompensated care?

Now the answer is this: The insurers who pay for services at a particular hospital also support the uncompensated care provided by that hospital.

Thus, a patient whose treatment at University Hospital is approved by his health plan contributes to the costs of those who cannot pay their bills at University.

Although the financing of uncompensated care through

establishing consistent prices for all payers has proved effective to date, the era of managed care has seen a profound shift in control of the health care dollar.

Where once patients could go to almost any hospital on the recommendation of their doctor, today most must have their care pre-approved and are told what facilities they can use.

Not surprisingly, managed care companies look to pay the lowest possible cost and, with price as a primary criterion for the selection of "in-plan" facilities, hospitals with high uncompensated care adjustments built into their rates are at a disadvantage.

While they cannot discount prices in Maryland's regulated market place, managed care companies can use less expensive hospitals, those with smaller amounts of charity care and bad debt.

Regardless of the needs of the uninsured, a city hospital with a 16 percent uncompensated care rate adjustment looks less attractive on the bottom line than one in Baltimore County or Howard County with only a 5 percent increase in base rates.

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