As of July 1, 2014, all hospitals in Maryland transitioned to a global budget revenue (GBR) structure. Global budgets change how hospitals are paid by moving from fee-for-service to a capitated rate to manage the hospital needs for a specific population. Global budgets reverse economic incentives: Under traditional fee-for-service, the incentive is to increase volume as each additional patient or service results in additional revenue. Under global budgets, however, the incentive is to reduce volume, presumably through interventions that improve population health and lower the need for hospital care, in which each marginal patient becomes a “cost” with no additional revenue. Maryland global hospital budgets are seen as a potential generalizable model for US hospital payments and is a key demonstration project under study by the Center for Medicare and Medicaid Services Innovation, which has the authority to rapidly expand successful payment models across the nation circumventing the congressional rule-making process.

Although the GBR model has demonstrated favorable findings on reducing hospital costs and use since its implementation, the economic changes taking place under GBR are more complex than its hospital-based measures. In response to the unique fiscal dynamics taking place in Maryland, with a major shift to non-hospital spending, it will be important for state policy makers to:

• Expand GBR incentives to align non-hospital providers with the model’s performance goals.
• Form postacute care collaborations to identify and swiftly respond to its cost and quality trends.
• Closely monitor hospital solvency and secure access to care through certificate of need programs.

The Emergence Of The Global Budget Revenue Model

Historically, Maryland has been the United States’ testing ground for new payment models. Maryland’s unique Centers for Medicare and Medicaid Services (CMS) waiver on Medicare reimbursements makes it a viable environment to experiment with health care reforms. The state has used an all-payer model since the 1970s, in which the Health Services Cost Review Commission (HSCRC)—a state regulatory agency—was established with the jurisdiction to set prices for hospital services for all payers. Higher Medicare reimbursements under Maryland’s CMS waiver, which was established in 1977, allows the state to set standard price controls and circumvent cost shifting onto private payers. Unlike other states that experimented with all-payer models in the 1970s, Maryland’s model withstood the tests of time, largely because its waiver was written into federal statute. However, despite longstanding hospital price controls, Maryland has become a high-cost state with costs per Medicare beneficiary ranking among the top 10 most expensive nationally, and Medicare hospital admission rates consistently exceeding national benchmarks. This is in result of strong incentives to increase hospital volume and expand capacity, which has occurred during the past three decades, with the HSCRC’s original rate setting based on units of service and, in 2001, the elimination of its volume adjustment increasing profit potential from marginal revenue. The GBR experiment, with its bold performance metrics on cost and quality, is the state’s final opportunity to deliver improvements in health care delivery to retain its waiver with CMS. Moreover, it is the first statewide initiative in the US that transforms hospital payments to incentivize investments in population health.

The Early Years Of Global Budgeting

Meeting CMS Performance Measures

In the first three years of GBR, Maryland altered its course and started reducing hospital costs and use. Annual per capita all-payer hospital spending growth has been contained at an average of 1.4 percent, well below the CMS target of 3.6 percent. This has already saved Medicare an estimated $538 million, exceeding its five-year benchmark of $330 million in savings. Additionally, acute care admissions and gross hospital expenditures fell 2.7 percent (by 15,397 admissions) and 2.3 percent (by $233 million) respectively, between fiscal years 2015 and 2016. Simultaneously, quality has improved with a 6.1 percent reduction in readmissions (CMS three-year target: -4.9 percent) and a 43.3 percent reduction in hospital-acquired conditions (CMS three-year target: -19.3 percent).

The Cost Shift Into The Non-Hospital Sector

Although the state’s progress to date is noteworthy, slowing hospital expenditure growth and meeting CMS quality measures are not the whole story. Several challenges have emerged. Specifically, containing Medicare’s all-provider spending growth has proven to be difficult, with total cost of care growth exceeding national rates by 0.7 percent in 2015. Higher overall costs are driven by non-hospital spending, which grew under the GBR environment by 4.2 percent as of 2016, vastly exceeding the national rate of 1.9 percent and offsetting savings in hospital spending (Exhibit 1). Non-hospital spending includes postacute, long-term, and outpatient care. In response to the capitation of hospital costs, there has been a proliferation of alternative non-hospital sites across the state, including ambulatory surgery and urgent care centers, and an increase in use of skilled nursing facilities. These sites remain fee-for-service and are not included in global payments nor regulated by the HSCRC. As a result, instead of GBR reducing overall costs, costs appear to have shifted from hospitals to the less regulated outpatient fee-for-service environment. In response to this challenge, the HSCRC has proposed in its progression plan to CMS to expand the GBR model to include value-based reimbursements for non-hospital health care providers. Remodeling of the GBR model will be needed to align incentives across the health care continuum, such that all players have a stake in the delivery of quality and cost-efficient care, to address the cost-shifting bubble.

Exhibit 1: State And National Trends In Medicare Spending Growth By Health Care Sector

Source: Maryland Hospital Association Financial Metrics Report using the Centers for Medicare and Medicaid Services data.

Hospital Fiscal Stability

GBR has also increased fiscal instability for some Maryland hospitals. While average hospital operating margins decreased by only 0.2 percent in 2016, the change in margins varied greatly, -6.5 percent to +16.8 percent, among longstanding Maryland hospitals. The variation in GBR’s impact on fiscal solvency requires close monitoring. Maryland’s hospital market may consolidate as a result of financial pressures of GBR, which may reduce access to important hospital services, particularly in rural communities. A similar phenomenon took place internationally with the decline of local hospitals after the introduction of global budgets. To secure access to care, the state should consider bailout plans for local hospitals that provide quality service but are unable to remain solvent under GBR’s payment rules. It will also be important for the state to use certificate-of-need laws to oversee the potential loss of needed hospital services during mergers or acquisitions.

Future Prospects For Maryland’s Global Budgets

With the new administration, health care policy has certainly moved into uncertain territory. Nonetheless, the platform of the administration supports innovative state experiments in health care delivery, and, as long as CMS’s annual tests for the GBR model continue to be met, Maryland’s reform will remain.

There are several ways that policies around global hospital budgets should be improved in its second phase. Most importantly, and already proposed in the HSCRC’s progression plan for 2019, is the expansion of the model to formulate incentives for non-hospital providers to meet GBR performance goals. This is a challenge since the HSCRC’s authority is restricted to hospitals, but employing new shared-savings strategies from the Medicare Access and CHIP Reauthorization Act of 2015 creates a viable avenue to align outpatient providers with the cost and quality goals of the model. Second is a close collaboration with CMS for state access to real-time skilled nursing facility and rehabilitation data to provide the opportunity to identify postacute care cost and quality trends, which has become increasingly relevant with the shift to non-hospital care. And third is to closely monitor hospital solvency and secure access to health services through certificate-of-need programs. It is with this level of maturation that the GBR model may ultimately be able to achieve its ambitious triple aim of reducing total costs of care, improving quality, and advancing population health.