Hospital costs in Md. rise 4.5% Rising patient bills trigger state formula to rein in increases

'Correction' begins in April

As panel cites profits, institutions warn lost money hurts services

March 06, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

The cost of a hospital stay in Maryland went up nearly twice as fast as the national average last year, the state's hospital rate-setters announced yesterday -- triggering a new "correction factor" that will squeeze hospital rates by nearly 4 percent.

The formula begins in April, but not every hospital will be affected.

Hospitals warned that the pressure on rates would threaten the quality of care and make it difficult for them to finance needed improvements, but regulators -- supported by insurers -- pointed to hospital profits in defending the less generous rate-setting formula.

"The hospitals are making record profits, and they have failed to beat the national rate of increase four years in a row," Robert Murray, executive director of the rate-setting commission, said at yesterday's meeting.

While the cost of a hospital stay here is still about 3 percent below the national average, regulators fear that the trend could wipe out the benefits of two decades of rate control. When Maryland's Health Services Cost Review Commission was created in 1976, Maryland's costs were 24 percent above the national average. But for the past decade, Maryland's costs have been below the U.S. average.

The cost of a hospital stay in Maryland increased 4.52 percent in fiscal 1996, a commission report said yesterday, compared with a national average of 2.31 percent.

The report also showed Maryland hospitals made a record $290.2 million in profits, or 6.2 percent of total revenues. The dollar figure was up slightly from the previous year, but the percentage figure dropped slightly, because revenues were ,X higher. For the second year in a row, nearly every hospital in the state was in the black.

Six hospitals posted margins of more than 10 percent: Good Samaritan (20.0 percent), Franklin Square (14.2), Calvert County Mercy (13.7), Frederick Memorial (12.7) and Suburban (10.6). The five-hospital Helix system, which includes Good Samaritan and Franklin Square, had an overall margin of 10.6 percent and total profits of $56.7 million.

The Johns Hopkins system had profits of $28.7 million, or 4.3 percent of revenue. The state's other academic medical center, the University of Maryland Medical System, had the same margin, for profits of $17.0 million.

Although the commission's correction factor goes into effect in April, it will not be immediately apparent. Maryland hospitals apply for rate changes at various times of the year.

Based largely on the difference between the state and national rates of increase, the commission's formula, approved a year ago, will make hospital rates 3.86 percent lower than they would have been -- taking about $200 million in revenue out of a $5 billion system, Murray said.

That doesn't mean each hospital's rates will be cut. In figuring rate changes, the hospitals get an allowance for inflation and a "bonus" for cases they treat at a cost below the state average.

The hospital association estimated that about half of the state's 50 hospitals would receive an increase this year, but the rest would receive no increase or a cut in rates. Using different projections, the commission estimated that only 12 hospitals would receive rate cuts -- and they could postpone the reduction by not applying for an inflation adjustment this year.

The latest report provides new ammunition for critics of the commission, who say the current health marketplace can restrain costs better than state regulators. New York, Massachusetts and New Jersey have dismantled similar boards, leaving Maryland the only state with a rate-setting panel.

In allowing the new formula to go into effect, the commission turned down a plea from the Maryland Hospital Association to soften its impact. Under MHA's proposal, no hospitals would have been cut this year.

"We have a problem, and we have a system in place that was designed to deal with a situation like this," said Commissioner Dean E. Farley. "Maryland went up more than anticipated, and that's what's driving the correction factor."

Tim Kares, senior director of finance for Johns Hopkins Bayview Medical Center, said the correction factor would cost the Hopkins system tens of millions of dollars in revenue. "We support the spirit of this type of action, but we have to be careful because of the potential impact," he said.

Since capital obligations cannot be changed quickly, he said, the likely result is staff reductions.

Kevin Kelbly, chief financial officer for Carroll County General Hospital, said the rate tightening would force "some very difficult trade-offs in terms of standards of care," and might prevent his hospital from going ahead with a planned bond sale in the fall to modernize its facilities.

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