The key ways rates are set for hospitals in Maryland

November 08, 1998

Maryland's hospital rate-setting system is called an "all-payer" system because everyone who pays for hospital care -- HMOs, other insurers, Medicare and Medicaid -- pays the same rates.

Those rates, different for each hospital, are set by the Health Services Cost Review Commission. The rates are based on units of service -- a day in a hospital room, an X-ray, and so on. They include an allowance for the cost of training residents and interns and for treating the uninsured, so these "social costs" are shared by all payers, including Medicare and Medicaid.

These are the key ways by which rates are set:

Full-rate reviews. The commission's staff looks at rates for each service offered by the hospital, compared to an average of similar hospitals. (A medium-size suburban hospital, for example, would be compared with other medium-size suburban hospitals with similar programs.) Such reviews have been rare in recent years; they are time-consuming and costly for both the commission and the hospital.

Inflation adjustment system. Rather than undergo a full review each year, most hospitals opt for annual inflation adjustments. The inflation formula is complex, and includes a "bonus" for hospitals that improve their efficiency. As the commission has tightened its formulas to hold costs down, some hospitals have had their rates reduced in the inflation adjustment process.

Banking and unbanking. Hospitals in some cases take rate increases that are smaller than those generated by the inflation adjustment formula. In those cases, they can "bank" the difference and take it later. In a number of recent cases, hospitals have drawn on their bank to prevent rate cuts.

Identifying high-cost hospitals. Twice a year, the commission compares the average charge at all Maryland hospitals, adjusted for such factors as complexity of cases handled. Hospitals more than 5 percent above the statewide average -- a figure which is being reduced to 3 percent as part of cost-control efforts -- are denied inflation adjustments. Instead, they must negotiate "spend-down" agreements that restrict rate increases until their charges drop below the state average.

Alternative rate mechanism. Sometimes, hospitals and insurers will negotiate rates based on the type of case -- say, a coronary bypass -- rather than units of service. The commission allows such rates, but reviews them to make sure that they reflect reasonable charges and are not causing a hidden cross-subsidy between categories of patients.

Pub Date: 11/08/98

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