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How Maryland controls health-care costs

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Maggie Mahar reports on a health-care program that's controlling costs in Maryland:

In 1977, Maryland decided that, rather than leaving prices to the vagaries of a marketplace where insurers and hospitals negotiate behind closed doors, it would delegate the task of setting reimbursement rates for acute-care hospitals to an independent agency, the Maryland Health Services Cost Review Commission.

When setting rates, the Commission takes into account differences in labor markets and how much a hospital pays in wages; the amount of charity care the hospital does; and whether it treats a large number of severely ill patients. For example, the Commission sets the price of an overnight stay at St. Joseph Medical Center in suburban Towson at $984, while letting Johns Hopkins, in Baltimore Maryland, charge $1,555. For a basic chest X-ray, St. Joseph's asks $81 and Hopkins' is allowed to charge $155. The differences reflect Hopkins's higher costs as a teaching hospital and the fact that it cares for generally sicker patients.

Such adjustments are never perfect, but in this case, it appears that the Commission is treating hospitals equitably. Since the program started, the Wall Street Journal reports that Maryland hospitals have enjoyed a steady profit margin, unlike hospitals in other states that often make more money during boom years and less during a recession. Statewide hospital profit margins average 2.5% to 3% — just enough of a surplus to give hospitals maneuvering room when setting budgets. Before the commission was established, Maryland hospitals were losing money covering the uninsured.

What is most remarkable is how state regulation of prices has contained costs. When the program began in 1977, the state’s hospital costs were 25% higher than the national average. Today, Maryland’s hospital costs are 2% lower than the national average. Meanwhile, over the same span, Maryland boasts the nation's second-slowest increase in hospital costs.

This is much more central planning than what's being considered in the health-care reform bill, yet I was just in Maryland the other day and the state certainly didn't seem like it had collapsed into iron-fisted tyranny. Weird.

By Ezra Klein  |  March 2, 2010; 2:41 PM ET
Categories:  Health Reform  
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Comments

Yay! Finally finally finally a post on Maryland!

Amazing to me that this gets ignored in all the discussion.

Posted by: AZProgressive | March 2, 2010 2:46 PM | Report abuse

Funny, but in Maryland Medicare and Medicaid are required to pay full price, thereby eliminating the forced cost shifting that providers in other states are forced to implement.

That cost shifting is something Klein regularly tries sweeping under the rug. For instance, he didn't mention in *this* story, did he? And yet, it's a big factor in the way Maryland health care is run.

Posted by: msoja | March 2, 2010 2:55 PM | Report abuse

Silly Ezra, everyone knows that statist socialism communist government intervention can't actually control costs without a level of rationing that makes North Korea look good by comparison. Clearly, the numbers are a figment of the liberal media's imagination.

Posted by: etdean1 | March 2, 2010 2:55 PM | Report abuse

So, what impact does this have on the cost of health insurance in Maryland? Lower group costs? Lower individual costs?

Posted by: jimotto | March 2, 2010 2:59 PM | Report abuse

wouldn't it be GREAT if reform actually did this???

Posted by: visionbrkr | March 2, 2010 3:00 PM | Report abuse

msoja, where are Medicare/Medicaid payments for Maryland relative to the rest of the country? Is it that Medicare/Medicaid are paying "full price" or is it that doctors/hospitals are charging less? If they're "keeping costs down", that sounds to me more like the latter than the former.

Posted by: MosBen | March 2, 2010 3:12 PM | Report abuse

How many more decades and how many more trillions of dollars will it take before people can get beyond their ideology to do something like this at the national level?

Posted by: vvf2 | March 2, 2010 3:13 PM | Report abuse

Maryland is a single state....one state practicing centralized control over its healthcare costs IS DEFINITIVELY LESS CENTRAL PLANNING THAN WHAT OUR FEDERAL GOVERNMENT IS PLANNING!!!

Are you even serious?

Did you graduate high school Ezra?

I DO support every state in the United States doing something like this----in fact all 58 states that Obama campaigned in back in 2008!!!!

I don't support the federal government creeping its powers over its citizen's access to healthcare.


http://latimesblogs.latimes.com/washington/2008/05/barack-obama-wa.html?cid=114052082

Posted by: FastEddieO007 | March 2, 2010 3:14 PM | Report abuse

@ FastEddieO007

Sigh...Central planning of health care would be good, but there is not much of this in the bill. 50 state exchanges instead of a national exchange, relying on private insurance without a public option, etc.

"I don't support the federal government creeping its powers over its citizen's access to healthcare."

I don't think I have read anything so bassackwards for a long time. Providing subsidies to low and moderate income people, building new community health centers, expanding medicaid, etc. are the ways that access to health care is expanded in this bill.

Posted by: srw3 | March 2, 2010 3:22 PM | Report abuse

The main concern about having a central entity set prices is that there is then no (or only a weak) mechanism for signaling where investment in new technologies and procedures should be made. The likely outcome is reduced medical innovation (though nobody know whether the reduction would be significant or not). Maryland centrally fixing it's prices doesn't have a big enough impact on the total US market to move the needle much on that score, so the arguments against central pricing in Maryland are pretty weak.

But that's not the case for the entire US market.

Posted by: TWAndrews | March 2, 2010 3:27 PM | Report abuse

--"[W]here are Medicare/Medicaid payments for Maryland relative to the rest of the country?"--

Why don't you ask Klein? He's the health care "expert" here. All I did was read the story he linked and relay the important bit he left out. Goes to Klein's honesty, or lack thereof, I'd say.

But since you asked so nice, it appears Maryland's Medicare per person rates ARE higher than the national average, but then, that's kinda what you'd expect when Maryland doesn't allow Medicare its usual cost cheating.

At the PDF, see the chart, page 3:

http://mhcc.maryland.gov/spotlight/hospitalspending1007.pdf

Note, as that document 'splains, there may be other mitigating factors that explain Maryland's "success" in keep cost growth down.

Posted by: msoja | March 2, 2010 3:32 PM | Report abuse

it also explains that it hasn't kept costs down below where everyone else is. WHat its done is taken the egregious price swings out which I guess is a positive too.

Posted by: visionbrkr | March 2, 2010 3:44 PM | Report abuse

i should amend that to say "it hasn't kept costs drastically below where everyone else is". The report does state that costs in MD are 2% below the national average now when before they were 25% above.

Posted by: visionbrkr | March 2, 2010 3:48 PM | Report abuse

I support enacting a modular version of the current proposed healthcare bill at every state house...I do not support giving the federal government that kind of power over our citizens lives. Than our public healthcare system would be inline with our public education system. I can live with that. Certain states will perform better than others, but if certain states start failing, there will be built-in protections and modularity to protect the country.

I fear federalizing our healthcare since it risks the overall health of our Republic in a way that has never been tried before.

Posted by: FastEddieO007 | March 2, 2010 4:00 PM | Report abuse

han our public healthcare system would be inline with our public education system. I can live with that.

That bringing our healthcare system inline with our public education system is a true testament to how awful our current healthcare system is.

Posted by: TWAndrews | March 2, 2010 4:17 PM | Report abuse

I can live with the Governor of Maryland becoming a dictator because I know I can rely on an arrogant President Obama to put him in their place. I cannot live with a President Obama or for that matter a President Bush becoming a dictator, because no one can stop them.

How about allowing the federal government give an average of 10 billion dollars of Medicaid funding for every state that employs an effective cost growth reduction system like this?!?!? Do we have a deal___ That would be WAY BETTER than this federal monstrosity being proposed!!!

Posted by: FastEddieO007 | March 2, 2010 4:18 PM | Report abuse

This is quite a significant post and I hope it gets followed to a logical end.

This is the nearest to equivalent of PUC for utilities in setting up the tariff. It works. Based on Ezra's reporting here, it may be late to entertain any such ideas in the current HCR (apart from the Commission which will have say on Medicare).

The question here is can 'profit making' and 'tariff controlling commission' live together or not. Utilities market shows yes and this Maryland experience too.

The next question to address is of 'market signaling' for innovation / where to invest. That is a serious issue with this mechanism as TWAnrews says.

But any given time it is no brainier that between 'bankruptcy of Fed' and not so perfect innovation strategy; public will prefer the later.

Posted by: umesh409 | March 2, 2010 4:56 PM | Report abuse

Part 3 of her series contains some information that undermines a lot of what she wrote in Part 2, which Ezra linked to. She notes that total healthcare spending in Maryland is growing at a rate precisely equal to the national average. She seems to think this is a good thing, but what it actually means is that if every state switched to a Maryland system, the rate of spending growth would still be precisely the same. Maryland is not controlling medical costs, it's just pushing them out of hospitals.

To put it another way, half of the states without a Maryland system do better at cost control than Maryland does.

Posted by: tomtildrum | March 2, 2010 5:40 PM | Report abuse

"This is much more central planning than what's being considered in the health-care reform bill,"

Don't be so impatient, Ezra. You're all newbies at this game yet. Baby steps to central planning first, death panels on down the line a bit. Before you know it, you'll have that Social Security and Medicare monster whipped.

Posted by: bgmma50 | March 2, 2010 9:17 PM | Report abuse

This is basically the Marxist theory of pricing. http://en.wikipedia.org/wiki/Labor_theory_of_value

Why should a hospital having more sick patients justify a 2x difference in the cost of an x-ray? If Hopkins is giving a better x-ray, maybe I'd go there to pay for it. But as a consumer, if I was spending from my $5000 HSA, I'd get the $81 x-ray. If my insurance is paying for it, I'd go to Hopkins. This is one reason health care costs continue to grow under the current payment system.

I'd like to see a Federal law that requires all hospitals to publish all of their prices. Ohio's law requires something like this: http://www.eastohioregionalhospital.com/pricelist.asp

It makes it clear that prices for specific services in MD aren't particularly good.

Posted by: staticvars | March 3, 2010 10:19 AM | Report abuse

Re insurance premiums in Maryland: According to a 2009 article by Emory University’s Elena Conis,

“The savings and financial stability engendered by the system also receive credit for granting the state the lowest health insurance premiums (as a fraction of income) in the country."

Part 3 of the post does not undermine part 2.
(You'll find part 3 on www.healthbeatblog.org, February 10.

While total healthy care spending in Maryland is about average, the rate of growth of health care spend (which is the key problem in the U.S.) is lower than in 32 states.

Morever, given its location and demographics, one would expect Maryland to be one of the most expensive states. It is located in the Boston-D.C. corridor where health care costs (and doctors' fees) tend to be high. It has a large poor population --many sick people and they get more care that the poor in many states because Medicaid pays the same rates as private insurers. This gives the poor much greater access to care.

The fact that Medicaid and Medicare pay hospitals as much as private insurers adds to total health care spending, making it even more suprising that Maryland's total bill is about average.

In addition Maryland is home to Johns Hopkins Medical Center--a world class medical center that draws very sick patients.

Finally, when Maryland started this program, its hospital spending was 25% above average--it is now 2% below average.

Posted by: mahar1 | March 3, 2010 2:03 PM | Report abuse

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