Regulatory system headed for reform Sentiment for change in rate-setting grows as state trails nation


November 08, 1998|By M. William Salganik | M. William Salganik,SUN STAFF

Once a month, people gather in a nondescript, state-issue conference room in Baltimore to discuss topics such as "the non-hospital-specific portion of the labor market adjuster" and "the 3 percent corridor for undercharges in ancillary services."

Behind the jargon is a complex system that determines how much Marylanders pay for hospital care. Using sets of dense formulas, the Health Services Cost Review Commission sets how much each hospital can charge for each service.

That system could be about to undergo its most serious changes since it was created 25 years ago. Some are likely in the next few months; more dramatic reforms are possible in perhaps a year. The changes could determine whether health costs go up or down, which hospitals prosper and which have to close, and how and whether people without insurance get care.

Some want the rate-setting system junked altogether. In the current competitive environment, "I don't think any government agency can inject as much efficiency into the marketplace as the marketplace could on its own," said Richard Zoretic, chief executive officer of United HealthCare of the Mid-Atlantic.

More are calling for reform. There is no consensus on how, but there is a growing sentiment for change among hospitals, insurers, policy-makers and the rate-setters themselves.

"I think everybody understands the way things have been will no longer be," said Thomas P. Barbera, president of the state's HMO trade group and executive vice president of Mid Atlantic Medical Services Inc., a Rockville managed-care company.

Don S. Hillier, who chairs the rate-setting commission and is trying to figure out how to make it work better, said, "It keeps me awake nights -- and I didn't think I was that kind of guy."

For a long time, the system generated pride, not sleepless nights.

Maryland created its rate-setting system in the 1970s, when costs were rising at a fairly rapid clip everywhere. The market exercised little control, since third-party insurers typically paid more or less whatever hospitals charged. And the cost of an average hospital stay in Maryland was about 25 percent above the national average.

"If ever there was a market that called out for price regulation, this was it," said Carl Schramm, a health economist who served on the cost review commission from 1976 to 1985. Schramm is now president of Greenspring Advisors, a merchant banking firm concentrating on health-related start-up businesses.

From 1976 to 1992, rate regulation drove Maryland's costs from 25 percent above the national average to 13 percent below. At the same time, hospitals, with predictable revenue streams, remained solvent.

And, the commission-set rates -- the rates all insurers and government agencies must pay -- contained an allowance for training residents and for paying for care for the uninsured, so those costs were shared broadly. Hospitals had no incentive to turn away uninsured patients, so Maryland did not have "patient-dumping" controversies or a separate system of charity hospitals.

But over the past few years, the trend has reversed. For six years in a row, Maryland's average cost grew faster than the nation's. Not only is Maryland's price advantage gone, but the cost review commission estimates a Maryland hospital stay currently costs about 3 percent more than the national average.

It isn't that the rate-setting system has changed; it's the world around it that's different.

"In the '70s and '80s, Maryland did an outstanding job on controlling costs, but that was compared to a nation that was totally uncontrolled," said Philip B. Down, chief executive officer of Doctors Community Hospital in Lanham and a member of the cost review commission.

But the advent of managed care upset the apple cart. In the other 49 states, HMOs have been demanding -- and getting -- discounts from hospitals. Costs nationally have been essentially flat, increasing just 0.4 percent on average over the last four years. Over that period, the cost of a hospital stay in Maryland has increased, on average, 3.4 percent a year.

Watching the numbers with increasing discomfort, the regulators have tweaked their formulas with new caps and ceilings and a "systems correction factor." Each time, HMOs have called for more aggressive rate controls, while hospitals have complained they're being squeezed too hard. So far, there has been little impact on cost trends.

Slow responses

Robert Murray, the commission's executive director, says commission actions necessarily produce slow responses. A few hospitals a month get their rates adjusted, so it takes a year after a change before all hospitals have had their rates set by the revised formula.

The commission is now gearing up to tighten its formulas again by spring, and to take targeted action against high-cost hospitals. (Murray last week recommended shutting inpatient care at New Children's Hospital in Baltimore, although the commission deferred action for a month.)

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