Health Reform WK-EDGE All-payer system helps Maryland keep cost growth below federal level
Monday, July 25, 2016

All-payer system helps Maryland keep cost growth below federal level

By Patricia K. Ruiz, J.D.

Since the enactment of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), common goals of cost reduction, improved quality of care, and improved health have been embraced across all states. The exact method for obtaining these goals, however, varies. In Maryland, where an all-payer rate setting has been employed since the 1970s, the Health Services Cost Review Commission (HSCRC) seeks to breathe new life into its payment system under the authority of CMS’ Innovation Center. Under the all-payer rate setting, all third-party payers were held to the same payment rates. The five-year initiative introduces a new model where, in place of the previous limit on per-admission payment. The focus falls on overall per capita expenditures for hospital services and improvements on the quality of care and population health outcomes.

This Strategic Perspective details the origins of Maryland’s all-payer model, discusses the progress the state has made toward crafting a plan that meets and even exceeds the expectations of CMS in exempting the state from the national payment system, and provides a glimpse of where the leaders of the all-payer model are bringing the initiative as the close of the second Performance Year draws near.

Maryland’s Original All-Payer System

Prior to 2014, Maryland employed an all-payer rate setting system, relying on the system’s core infrastructure but making frequent adjustments to fine-tune its effectiveness. “This ‘evolutionary’ approach to ensuring flexibility and making updates on an on-going basis is likely one of the strengths of Maryland’s effort that has allowed the state to preserve its rate setting system longer than peers,” according to Advisory Board, an international best-practices consulting firm. Maryland adopted the rate setting system in 1971 to address poor financial performance and inefficient care delivery, and the HSCRC, an independent state agency, was put in charge of using rate setting to slow the growth of hospital costs, achieve price equity, and ensure access to care. The system affected only inpatient and outpatient hospital services, other provider types were not included. Initially, the rate setting system applied to private insurers only, but in 1977, the state negotiated with the federal government to waive traditional Medicare and Medicaid payment rates and require all third-party payers, including the federal government, to pay the same rate.

Rate-setting mechanisms. In its rate-setting model, Maryland’s goal was to keep health spending sustainable for hospitals and payers alike by tying payments to reasonable costs and keeping rates relatively consistent across payers, Advisory Board noted. The HSCRC collected large amounts of hospital cost data to set rates with each hospital’s rates determined based on their cost data, the health status of the hospital’s patient population, and the amount of uncompensated care provided to that population by the hospital. While each hospital’s rates were slightly different from others, the rates were used by all of the state’s payers, public and private. The HSCRC would set rates in the beginning of the year, collect cost, charge, and payment data throughout the year, and retrospectively reconcile the total charges against the original rates. Starting in 1977, the HSCRC implemented the Volume Adjustment System (VAS), which, by setting lower payment rates for new volumes, limited the amount of revenue growth hospitals could accrue by increasing volume. After implementing these changes, Maryland often softened or limited the VAS adjustments, and the state’s hospitals saw dramatic increases in the number of inpatient and outpatient cases. The Advisory Board noted that the lack of success in controlling volumes contributed to the 2014 updates to the all-payer rate setting model.

Original waiver requirements. Under the original waiver, Medicare and Medicaid reimbursement rates for hospital services were higher in Maryland than anywhere else in the U.S., with some experts estimating the cost difference to account for $1 billion in additional Medicare payments to Maryland providers annually, the Advisory Board explained. Private insurers, however, reimburse the state’s hospitals at lower rates than elsewhere in the U.S. Under its waiver with the federal government, Maryland agreed to limit the cumulative payment growth below the national average for Medicare beginning in 1981.

New Waiver, New Focus

Maryland initiated negotiations to update its waiver in 2012, at a time when care was increasingly shifting to outpatient settings, and the state was threatened with the possibility of failing to meet its Medicare cost-per-case spending targets, a key condition of its original waiver with CMS. Maryland and CMS agreed to a new five-year waiver to begin January 1, 2014. The waiver exempted Maryland from the requirements of the inpatient prospective payment system (IPPS), the outpatient prospective payment system (OPPS), the Medicare Readmissions Reduction Program, the Medicare Hospital Acquired Conditions Program, Medicare Hospital Value Based Purchasing, and Meaningful Use. The five-year demonstration is being conducted under the authority of the CMS Innovation Center, which was created by the ACA to test payment and service delivery models and may serve as a model for other states interested in developing all-payer payment systems.

2014 waiver requirements. Under the new waiver, Maryland agreed to shift permanently away from its then statutory waiver, which focused on Medicare payment-per-admission in exchange for a model based on Medicare per-capita total hospital cost growth. The waiver requires Maryland to generate $330 million in Medicare savings over a five-year performance period, which would be measured by comparing the state’s Medicare per capita total hospital cost growth to the national Medicare per capita total hospital cost growth. Under the waiver, Maryland also must limit annual all-payer per capita total hospital cost growth to 3.58 percent, the 10-year compound annual growth rate in per capita gross state product. Over the performance period, Maryland is tasked with shifting virtually all of its hospital revenue into global payment models.

Quality targets. In addition to cost goals, the waiver also sets specific quality targets to promote better care and better health to benefit Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP). As a condition of the waiver, Maryland must reduce the aggregate Medicare 30-day unadjusted all-cause, all-site hospital readmission rate for Medicare fee-for-service beneficiaries to the point where Maryland hospitals achieve equal or less than the national readmission rate for Medicare beneficiaries at the end of Performance Year 5. The waiver also requires Maryland to achieve an aggregate 30.0 percent reduction across all 65 potentially preventable conditions (PPC) that make up the state’s hospital acquired condition (HAC) program. Additionally, the state is required to submit annual reports demonstrating its performance along various population health measures. If Maryland fails on any of these areas, the state will transition over two years to the national Medicare payment system.

Proposal for new model. Prior to the start of Performance Year 4, Maryland will submit a proposal for a new model that, at a minimum, will limit the Medicare per-beneficiary total cost of care growth rate. Sole discretion to approve the proposed model rests with CMS, and a separate agreement executed by Maryland and CMS will be required. The new model will take effect at the start of 2019.

Benefits of all-payer system. In a 2014 presentation entitled “Taking Payment Reform ‘Global’: How Maryland’s Hospital Rate Waiver Will Change Hospital Financial Incentives and Rewards through Global Budgeting,” then-chair of the HSCRC John M. Colmers listed the following as the benefits of an all-payer system:

  • cost containment;
  • equitable funding of uncompensated care;
  • stable and predictable payment system for hospitals;
  • elimination of cost shifting;
  • fair share of graduate medical education paid by all payers;
  • increased transparency;
  • enhanced link between hospital quality to payment; and
  • increased local access to regulators.

“The hypothesis is that by applying an all-payer approach to controlling the aggregate spending per capita for hospital services, we can accelerate movement toward the three-part aim. The incentives established under this system will begin to align the direction and activities of other components of the health care system in support of improved health of the population, improvements in the patient experience of care, and lower per capita cost,” Colmers told the Urban Institute.

Progress as Close of Performance Year 3 Draws Near

The close of Performance Year 3 is drawing near, and by the end of 2016, Maryland must submit its all-payer model proposal to CMS. The All-Payer Hospital System Modernization Advisory Council is in the process of discussing and resolving its recommendations for both development and implementation. Since 2014, the HSCRC has made considerable strides toward implementation of a successful all-payer system, Colmers said.

Significant progress and upcoming challenges. “The single most important progress, to HSCRC staff’s great credit, was getting all 46 hospitals in the state on a global budget of some form by July [2014],” said Colmers. “It essentially means locking down a hospital’s revenue to a known dollar amount irrespective of the volume generated. So, all 46 hospitals have entered into a contractual relationship with the state, an evergreen [automatically renewing] contract with specific components to it.”

draft strategic blueprint by the HSCRC Advisory Council outlines the all-payer model results to date. In 2014 and 2015, Maryland performed very well, the Advisory Council reported, with federal updates to Medicare rates for calendar year (CY) 2014 and 2015 very low. Maryland experienced success in keeping hospital per-Medicare beneficiary cost growth below the national growth rate without needing to shift costs to the private sector. For CY 2014, nonhospital Medicare spending growth per beneficiary also fell below national levels. In CY 2015, however, nonhospital spending growth per beneficiary rose faster than national levels, leading to a reduction in the annual total cost of care savings for Medicare. While Maryland is still ahead of its savings requirements, the results for 2015 show the need for increased implementation of care redesign in alignment with nonhospital providers to enhance care while reducing potentially avoidable hospitalizations, the Advisory Council noted, as well as the need for increased focus on the total cost of care.

The draft strategic blueprint identified other challenges the HSCRC faces going forward, including the need to address the remaining 44 percent of Medicare cost that is not in the global hospital budgets, doing so in a way that is synchronized with the current global hospital budgets and all-payer values. The blueprint notes that Maryland still does not have strong alignment tools and programs to overcome fragmentation between the global budget revenue payment model and the largely fee-for-service payment model for physicians, post-acute and long-term care facilities, and other community providers. In the meantime, nonhospital costs are increasing.

Plan for submission to CMS. In its plan for submission to CMS, the Advisory Council will broaden the focus of cost control from the per capita costs and quality improvement for hospitals to a broader context encompassing the cost and quality of a broad range of health services. “An important choice is whether this much broader focus for the second five-year period of the All-Payer Model will apply only to Medicare or to other payers as well,” the Advisory Council stated. In the most recent HSCRC Advisory Council meeting, the group also reviewed the draft strategic blueprint for its proposal to CMS. The draft is an attempt to reflect the concept set forth in the initial application of the all-payer model as well as recommendations by the Advisory Council, multiple work groups, and other stakeholder feedback collected since the start of the demonstration.

In addition to reporting the success experienced in the first two Performance Years, the blueprint detailed a care redesign amendment to the current all-payer model. The amendment would allow Maryland to create programs on an ongoing basis within the framework of the amendment. The amendment, which would begin implementation in 2017:

  1. allows hospitals and their care partners to access unidentified comprehensive Medicare data and beneficiary-identified Medicare data to accelerate a broader, more intense focus on care coordination and total cost of care;
  2. provides approvals to implement care redesign and possible supporting payment mechanisms that create alignment between hospitals and physicians as well as other community providers (with initial focus on improved episodes of care but over time adding redesign and alignment programs based on the needs and input of patients, delivery systems, and payers);
  3. creates the next steps toward total cost of care, delivery system transformation, and supporting payment mechanisms, allowing Maryland to easily transition into the next phase; and
  4. leverages the opportunity to qualify for alternative payment model (APM) status under the Medicare Access and CHIP Reauthorization Act (MACRA) (P.L. 114-10), anticipating federal MACRA requirements by advocating for and creating programs specific to Maryland that offer a pathway to risk for large numbers of diverse clinician types in different settings.


Despite the alignment of the values behind Maryland’s all-payer rate setting system and the goals of the ACA, when asked if he believes the model will be adopted nationwide, Colmers said he does not care. “The precise model isn’t likely to be replicable elsewhere. I can’t imagine others doing it and don’t care if they do. Where I think we could be of value to Medicare and to others [is in] understanding the types of things that hospitals and physicians and other providers do in response to an all-payer constraint. . . . It’s not the precise mechanism of rate setting and all that; it’s about whether you can create the incentives to create the types of things you want markets to produce and get people to do things differently. To me, that is the most interesting thing.”

MainStory: StrategicPerspectives AgencyNews CHIPNews DemonstrationProjectNews HospitalReadmissionNews InpatientFacilityNews MedicaidNews MedicarePartANews MedicarePartBNews MedicarePartCNews MedicarePartDNews ProviderPaymentNews QualityNews VBPNews NewsFeed

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