Maryland's hospital rates may rise extra 2% next year

Regulators are seeking to bolster institutions' financial health

March 01, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

Marylanders could face $120 million in additional hospital charges next year as regulators move to shore up the hospitals' financial health.

State regulators, who are revising the rate-setting formulas, are recommending a statewide rate boost of 2 percent (about $120 million) above the inflation in hospital costs for the year beginning July 1. Rate increases the past two years have been pegged to cost inflation.

Over the two subsequent years, according to the recommendation, increases would be set to bring the average Maryland hospital charge to 2 percent below the national average. Currently, the average charge lags behind the national average by 4.4 percent.

As recently as 1998, the average Maryland hospital bill exceeded the national average by 1 to 2 percent, according to Robert Murray, executive director of the Health Services Cost Review Commission. But several years of tight rate regulation reversed that.

The commission is expected to vote Wednesday on rate-setting guidelines for the next three years.

Keeping Maryland charges below national levels over the past few years has meant a savings to patients and insurers - and to the employers and workers who pay insurance premiums. But the hospitals, after years of tight controls, are "financially vulnerable," said Calvin M. Pierson, president of the Maryland Hospital Association.

Profitability has been running below national benchmarks, he said, restricting the ability of hospitals to raise the money to improve their facilities.

"Now," he said, "it's essential to close the financial gap."

Murray said that's why he and his staff are recommending a larger boost in rates this year. "That's really the intent of this program - to build the bottom line and create access to capital, so the hospitals can make investments," he said.

The current projection of increase for next year in how much it costs hospitals to operate is 3.17 percent, although that will be updated in April with later figures, Murray said. To that, the staff is proposing an extra 1 percent for costs not covered in that figure (such as rapidly increasing costs for agency nurses) and 1 percent to adjust after several years of Maryland rates increasing more slowly than those elsewhere - what Murray calls "a make-up provision."

After years of bitter annual debates between insurers and hospitals about how much rates should go up, the cost review commission went through a rate "reinvention" and a three-year rate plan in 2000.

This year, as it seeks to outline the next three-year plan, the debate has been "less contentious," Murray said.

Harold A. Cohen, a former commission director who serves as a consultant to two insurers, CareFirst BlueCross BlueShield and Kaiser Permanente, said he agreed to an increase for next year of 1 percent above cost inflation. "I thought I was throwing a lot of money at the [hospital] industry," Cohen said. "They still want a lot more money thrown at them."

Cohen thinks the goal over three years should be to keep Maryland charges where they are relative to the national average - 4.4 percent below.

In general, however, Murray said there has been a consensus on the thrust, if not all the details, of the staff recommendations.

"There's a general recognition by the payer community that we did a good job - perhaps better than expected - at controlling revenue," Murray said. "They're saying there is a good reason to add money to the system."

Kenneth Rodgers, director of public finance for Standard & Poor's, said, "Regardless of what figure you look at, Maryland hospitals fall short compared to national ratios."

For example, while S&P has given Johns Hopkins Hospital a solid AA- bond rating, Rodgers said, Hopkins had only 71 days cash on hand at the end of the calendar year, compared with 170 days typical of hospitals with AA- ratings.

Similarly, he said, the average debt-to-capitalization ratio (a measure of how much of total assets is funded by debt) for AA- hospitals is 34 percent, while Hopkins is at 46 percent, showing greater-than-average borrowing.

Slimmer margins and higher debt figures, he said, mean Maryland hospitals are likely to have to pay higher rates than their peers when they finance capital improvements.

In addition to the statewide rate increase, individual hospitals can apply for additional increases if they show their costs are below their peers. Regulators can freeze charges or slow the rate of increase at hospitals with charges higher than their peers.

The formulas used to compare hospitals with their peers are also under review, but any changes would come in a few months. Pierson said the hospital association is hoping to develop a consensus on how to measure such things as labor market costs and complexity of patients.

Since such measures can shift money between urban and rural or teaching and nonteaching hospitals, Pierson said, "In the end, the commission may have to make some difficult decisions."

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