It’s the 70’s All Over Again: Hospital Rate Controls Make a Comeback! By Jeff Goldsmith
Disco, Jimmy Carter, polyester leisure suits, soaring gas prices- older folks have lots of fond memories from the 1970’s. And yet a relic from 1970’s health policy- public utility style hospital rate setting- is having a moment in the mid-2020’s.
Led by a coalition of the Centers for Medicare and Medicaid Innovation, policy entrepreneurs at Arnold Ventures, Obama-era technocrats like Zeke Emanuel and, believe it or not, some state hospital associations, hospital rate setting is staging a comeback.
Under CMMI’s new AHEAD program, states are being encouraged to cap hospital revenues through voluntary programs including non-managed care Medicare and Medicaid and at least one private insurer.
It is worth asking: is it worth the effort? In celebration of the fiftieth anniversary of the State of Maryland’s hospital rate setting project, we asked the simple question:
Are health costs in Maryland lower than in the nation as a whole, or neighboring states, after fifty years of controlling hospital rates. They certainly ought to be after all that regulation!
Well, the short answer is: no! Per capital health spending in Maryland is 6% higher than in the nation as a whole, and 14% higher than neighboring Virginia, with no state regulatory apparatus.
Read our JAMA-style analysis of Maryland’s health cost position, including all the data (from KFF’s open source State Health Facts) and what it means below.
Question: Has Maryland’s fifty year program of regulating hospital rates resulted in lower health spending overall or slower health cost growth versus other states or the nation as a whole?
Findings: Maryland’s per capita health costs are 6% higher than the US vs 4% higher in 1990, and have grown at a faster rate than the country as a whole. Maryland’s system was designed to minimize cost shifting to employers, yet per capita private insurance health costs were also higher than the national average and have grown at a faster rate than in the country as a whole.
Meaning: Regulating hospital rates may not be an effective way of containing overall health spending. And with the rate of increase in health costs levelling off, targeting controlling the rate of increase in hospital costs may not be the most sensible policy target.
Abstract
Maryland’s hospital rate control system has been in place for close to fifty years and is a national model of health cost control. Maryland’s system rests on a premise that hospital costs are an effective pivot point for containing overall health spending. Given the fifty year history, it Is reasonable to expect that overall health costs are much lower in Maryland than in states that have not taken this approach, and have risen at a lower rate.
Objective: To evaluate the effectiveness of Maryland’s hospital rate controls in containing overall health spending.
Design and Methods: We accessed a comprehensive open-source compendium of state health data maintained by KFF: State Health Facts. We evaluated key health cost and utilization data for Maryland and five other states-two neighbors and three other states with significant managed care infrastructure , none of which have not regulated hospital rates. We compared per capita health spending for the populations as a whole as well as Medicare spending and spending for private health plans.
Findings: We found that per capita health spending in Maryland was higher than the US and in four of the five states, and grew at a faster rate over the past twenty years. Medicare spending was significantly higher, both for Parts A and B (for beneficiaries that used medical services during the sample years) . But spending for private health plans was also higher and had grown at a faster rate, an unexpected finding given that Maryland’s system was explicitly designed to control cost shifting from public to private plans.
In the wake of Medicare’ enactment in 1965, health costs in the US began rising at double digit rates annually. Many policy experts blamed hospital costs, which were by 1970 close to 40% of health spending. It was believed that if you contained hospital costs, overall health spending would come under control.
In 1974, the State of Maryland embarked on a bold attempt to rein in rising health costs by regulating hospital rates. The Maryland Health Cost Review Commission (MHCRC) has been regulating hospital rates without pause for 49 years, even as other states like New York and Massachusetts abandoned this approach. With the new CMMI AHEAD program1, states are being given a chance to replicate the latest version of Maryland’s system, targeted at controlling the “total cost of care” for the state population.
Given Maryland’s long history of state regulatory oversight of hospital rates, one might reasonably assume that healthcare in Maryland would be notably cheaper than in other states, and that Maryland’s rate of increase in health costs would be lower than in those states.
After fifty years of state regulation, health costs in Maryland in 2020 are higher, not lower, than the national average and have grown at virtually the identical rate to the country as a whole over the past thirty years. More surprising, despite a system geared to freezing cost shifting from public programs to private health plans, private insured patient care costs are ALSO higher than neighboring states and the national average.
Methodology
Maryland’s system has been exhaustively studied, but nearly all of those studies have focused on the rate of increase in hospital revenues in Maryland vs. predetermined inflation targets. The focus of Maryland’s regulation has shifted over time- from revenues per hospital admission to global hospital budgets and, most recently, to “total cost of care” attributable to the hospital (a’la the ACO), layered on top of the global budget.
Our purpose is not to review this literature - this has been ably done recently by others.2 Rather it is to focus on the macroeconomic effect of Maryland’s system on health spending and ask the question: was it worth the effort? To answer this question, this author accessed a comprehensive open source repository of state health information - KFF’s State Health Facts.
We chose five states to compare Maryland’s health cost performance to over time and currently - two neighbors (north and south) along the I-95 corridor, Pennsylvania and Virginia, and three other states with extensive multi-specialty group practice and/or managed care history- Wisconsin, Minnesota and Oregon. We examined not only the core demographic characteristics (poverty and age structure) in these six states, but also key indicators of healthcare utilization and spending for different segments of the population.
We also looked at key characteristics of the health insurance marketplace (competitive structure and Medicare Advantage penetration) in these six states. In all cases, we used the most recent information in the KFF State Health Facts database for each indicator - 2020, 2021 or 2022 - and in some cases compared to available historical data to get a sense of long term cost trends.
Findings
1) Healthcare in Maryland is More Expensive than in the Nation as a Whole
Health costs in Maryland, measured by per capita health spending for all citizens in 2020 (the latest available data from KFF’s repository) , actually are six percent higher than the country as a whole, and higher than three of our six comparison states. Pennsylvania’s health spending was 7% higher than in Maryland, but Virginia spent 15% lower, with no hospital rate controls in place.
Interestingly, in 1990, Maryland’s per capita health spending was only 4% higher than the nation as a whole, so the cost gap has widened in the ensuing thirty years. Maryland’s higher health spending was attributable neither to more citizens in poverty (except for Minnesota) nor to more older residents (over age 65) than in those other states. Thirty-three states had lower per capita health spending than Maryland did in 2020.
Per capita hospital spending in Maryland was virtually identical to the US average in 2020. Pennsylvania’s per capita hospital spend was 8% higher, but Virginia’s was 12% lower, again with no help from hospital rate controls. So growth in other forms of health spending not controlled by MHCRC (physician services, long term care, pharmaceuticals, etc.) accounted for Maryland’s higher per capita health spend overall.
2) Per Capita Health Spending Growth in Maryland has been Virtually Identical with the rest of the country for forty years
Since 1990, average annual per capita health spending in Maryland has risen exactly one-tenth of a percent faster than in the country as whole (4.8% per year in Maryland vs. 4.7% in the US) and faster than in all five of our comparison states.
3) Maryland Spends Significantly More than the Country on Medicare Patients
Maryland spent much more per capita caring for Medicare patients in 2021 than the nation as a whole (for beneficiaries that actually used services during the year). That is the historical result of 1980 legislation sponsored by Maryland’s Senator Barbara Mikulski, which set forth the terms of a Medicare/Medicaid waiver for Maryland’s rate control system. The goal of a more generous Medicare rate structure was to move toward a unified hospital rate that did not burden Maryland businesses (e.g., that basically froze and controlled cost shifting to private health plans).
The most recent estimate of the disparity between what Maryland spends on Medicare patients and what they would have spent if Maryland hospitals had simply been paid the national PPS rates was $1.440 billion in 2017, up from $1.080 billion in 2013.3 This net Medicare subsidy is surely higher now.
The gap in Medicare spend between Maryland and other states is particularly large for Part A (hospital inpatient) Medicare. Per admission hospital rates were the principal focus of Maryland’s system for its first forty years. In 2021, Maryland spent 28% more per capita on Part A services (for those beneficiaries who used care during the year) than the national average. Maryland’s days per 1000 for Medicare patients in 2021 were 13% higher than the national average and 70% higher than in Oregon, which has a very effective Medicare Advantage oriented care system.
The pattern is replicated on the Medicare Part B side, with Maryland spending 15% more on Part B spending per capita than the national average in 2021 (for patients that used services during the year). Maryland’s per capita Part B spending was almost 26% higher than Virginia and 23% higher than Pennsylvania. Maryland hospitals are almost certainly generating positive Medicare margins vs. their colleagues in the rest of the country thanks to the legacy of the Mikulski waiver.
4) The biggest surprise: despite the constraints on cost shifting built into Maryland’s system, per capita spending for the commercially insured patient population ALSO exceeded the national average.
One would expect that forty plus years of Maryland’s restrictions on cost shifting to private health plans made possible by the generous Medicare waiver would have resulted in much lower per capita spending for the privately insured population than in the country as a whole. That is not the case. Maryland’s per capita spend for those covered by private insurance was 1% higher than the national average in 2020.
Maryland private insurance spending per capita was more than 4% higher than in neighboring Pennsylvania, and almost 14% higher than in Virginia. Maryland’s private insurance per capita spend was a trace lower than Wisconsin’s, but between 4-5% higher than Minnesota and Oregon. And despite constraining commercial insurers’ largest cost center (hospital care), per capita spending for private insured lives grew 0.3% faster in Maryland than the national average for the twenty-year period 2001-2020, and faster than all of the comparator states.
A possible explanation is that Maryland has the least competitive commercial insurance market of any of the six states. A single carrier (CareFirst Blue Cross) commands almost 70% of the small group market and 55% of the large group market. Maryland also ranked 46th in Medicare Advantage participation of its citizens vs the rest of the US. For those who believe that Medicare Advantage does contain health costs, Maryland’s 24% MA penetration is half the national average. Maryland’s hospital rate regulation has protected CareFirst’s market and alleviated competitive pressures from other plans.
5) Access and Affordability in Maryland Does Not Compare Favorably to Other States
The presumed goal of hospital rate controls is to make care coverage more affordable. Maryland’s 6% uninsured rate in 2022 was two points below the national average of 8%, which latter rate owes much to states like Texas-16.6%-and Florida-11.2%- that did not expand Medicaid. Maryland’s uninsured rate was lower than Oregon’s but at or above than the other four states we sampled. Maryland compares unfavorably to other states in the Northeast, notably New York with 4.9% uninsured and Massachusetts with 2.4% uninsured. Additionally, 7.3% of Maryland’s population reported difficulty finding a physician due to cost in 2021, a rate identical to Oregon’s, but higher than the four other states.
Discussion
We expected that nearly fifty years of state regulatory control over hospital revenues would have produced markedly lower health costs in Maryland than in the country as a whole. That is not the case. We would also have expected Maryland’s system to have produced dramatically lower rates of escalation in health costs than in the country as a whole. That is also not the case.
Finally, one would have expected that forty plus years of constraint on hospital cost shifting to private health plans would have produced much lower commercial insured per capita spending. In fact, private employers’ per capita costs are higher in Maryland than elsewhere and have grown at a faster rate.
In 2022, US health spending amounted to 17.3% of GDP, equal to healthcare’s share of GDP in 2011 when the ACA/Obamacare coverage was implemented4. Hospital spending in 2022 was 30% of GDP, 11 full percentage points less than forty years earlier, and rose by only 2.2% (2022 vs. 2021), half the rate of overall inflation during the year.
The era of hyperinflation in health costs is over. So why the policy community remains fixated on controlling the rate of increase in health spending as its principal policy objective is a puzzle. In our view, the real crises are affordability5, declining life expectancy6and huge gaps in care for the mentally ill and those requiring primary care. 51% of American adults report difficulty affording healthcare in 2023, owing either to lack of insurance or patient cost sharing that exceed their ability to pay.
Controlling the rate of increase in hospital charges appears to be a far less effective method of addressing the affordability problem than imposing broader restrictions on the share of family income subject to deductibles and copayments and providing further incentives to cover the estimated 26.5 million Americans who still lacked health insurance coverage in 2022 - a number surely higher now with post-COVID Medicaid eligibility redeterminations.
Tasking hospitals to fill care gaps that ultimately generate hospital demand through ACO-like “incentive” programs such as Maryland’s TCOC (Total Cost of Care) program is a circuitous route to addressing life expectancy declines or care gaps, compared with direct investments in public health, mental health services, shelter and care for the homeless and primary care. This defect also applies to CMMI’s new AHEAD program, modeled on Maryland TCOC program. There are far more direct and obvious methods of achieving health gains than a complex shadow capitation model based on “attributed lives” connected to hospitals.
The Maryland hospital rate control system is a relic of the 1970’s, incrementally re-engineered with each new fad in cost control. Replicating Maryland’s approach in other states, as AHEAD is intended to do, is a sadly inadequate framework for addressing the pressing affordability and access problems of the US health system.
This work was funded by the Federation of American Hospitals
Author owns HCA common stock and bonds in his IRA but otherwise has no conflicts of interest to report.
1 Burns, A. What is the Centers for Medicare and Medicaid Services New AHEAD Model? Accessed March 5, 2024 https://www.kff.org/affordable-care-act/issue-brief/what-is-the-centers-for-medicare-and-medicaid-services-new-ahead-model/
2 Emanuel E, Johnson D, Guido M and Goozner M. Meaningful Value-Based Payment Reform, Part 1: Maryland Leads the Way. Health Aff, Millwood) Feb 9, 2022. doi: 10.13777/forefront.20220205.211264
3 Holtz-Eakin D, Strohman A. The National Implications of Maryland’s All-Payer System. American Action Forum, March 2, 2020. Accessed March 5, 2024 https://www.americanactionforum.org/research/the-national-implications-of-marylands-all-payer-system/
4 Hartman M, Martin AB, Whittle L, Catlin A. National Health Care Spending in 2022: Growth Similar to Prepandemic Rates. Health Aff (Millwood) 2023; 43(1) https://www.healthaffairs.org/doi/10.1377/hlthaff.2023.01360
5 Commonwealth Fund. “Paying for It: How Health Care Costs and Medical Debt are Making Americans Sicker and Poorer”, October 26, 2023. Accessed March 5, 2024 https://www.commonwealthfund.org/publications/surveys/2023/oct/paying-for-it-costs-debt-americans-sicker-poorer-2023-affordability-survey
6 “’Live Free and Die’ The Sad State of U.S. Life Expectancy” NPR, Mar 25, 2023. Accessed March 5, 2024 at: https://www.npr.org/sections/health-shots/2023/03/25/1164819944/live-free-and-die-the-sad-state-of-u-s-life-expectancy