The cost of an average hospital stay in Maryland jumped 3.4 percent last year -- nearly four times as much as the national rate of 0.9 percent -- according to a report yesterday to the state's hospital rate-setting commission.
The Health Services Cost Review Commission responded by approving a formula designed to hold the increase in cost per case in the state to zero next year.
Hospitals supported the formula change, but the Maryland Association of Health Maintenance Organizations called for cutting the per-case cost by 2.5 percent.
"The time is ripe for the commission to start turning the ship," said Jack Keane, a consultant for the HMO association.
The commission staff report, covering the fiscal year that ended June 30, is the fifth in a row in which Maryland's costs have risen faster than national benchmarks.
At the same time, the report showed the third consecutive year of record hospital profit margins.
The net profit margin, from all sources of revenue, was 6.6 percent, up from 6.2 percent the previous year. The operating profit, from regulated hospital operations, was 6.5 percent, up from 5.7 percent in fiscal 1996.
Profits have been dropping, however, in the current fiscal year.
Until the past five years, rate regulation had held Maryland costs well below those in other states. From 1977 to 1992, according to the report, Maryland had the lowest increase in cost-per-case of any state. In 1992, Maryland costs were about 12 percent below the national average.
Now, that gap is gone. The latest report shows Maryland virtually at the national average -- actually, one-sixth of 1 percent below it.
"As new chairman, this is not the kind of news I wanted to see the first report I had to sign," said Don S. Hillier, the commission chairman.
"Over the last five years, the nation has started to respond to competitive forces," Hillier said, as HMOs aggressively bargain discounts from hospitals and pressure for shorter stays. Maryland hospitals had been cutting costs for years under the pressure of commission limits on rates, he said, "but now the nation has caught up to Maryland."
"We need to redouble our efforts, to show our approach can do as well or better" than national market forces, Hillier said.
Under the formula approved by the commission yesterday, hospital rates will rise by an average of 1.7 percent, but the rate-setters project that a continuation in the trend of shorter hospital stays would mean no increase in the cost for an average case.
While the average will be 1.7 percent, the formula is used to calculate an individual rate for each hospital, based on factors such as measures of its efficiency, how much charity care it provides and the inflation rate.
Yesterday's report on per-case costs last year reflects rates approved by the commission two years ago, when rate increases averaged nearly 4 percent, according to Robert Murray, the commission's executive director.
Continued poor performance against national benchmarks led the commission to modify the formula to squeeze rates last year, but its action was delayed as hospitals and HMOs battled over what was fair. It finally adopted its changes in September, and rate increases since then have averaged 1.2 percent.
While that action came too late to be reflected in the report covering the year ended June 30, Hillier said, "recent statistics we've seen are encouraging," with the rate of per-case cost increase and hospital profits both dropping.
Commission members expressed some fear yesterday that its latest action might not be enough to match or beat the national average over the next year.
Hospitals, however, said a number of other market trends -- such as the movement of Medicare and Medicaid enrollees into HMOs -- would help hold down costs.
"There is a margin of safety" in the formula, said James J. Xinis, president and chief executive officer of Calvert Memorial Hospital. "We don't want to fail."
Ronald R. Peterson, president of the Johns Hopkins Health System, supported the formula but said it "will present some serious challenges for hospital managers" because "hospitals in Maryland are facing a rapidly changing competitive financial environment."
Costs are rising, he said, for labor, for new technology and for new medications.
The HMO association's Keane said, "Hospitals everywhere are under those pressures," but are holding rates down more effectively than Maryland hospitals.
Pub Date: 4/02/98
