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Maryland Controls Hospital Prices; Now Wants to Cap Overall Hospital Spending

Posted Sep 12 2013 12:00am

I was not aware that there have been a few states exercising price control over their hospitals with Maryland having the longest track record. A recent article in the New York Times provided the details (see: Lessons in Maryland for Costs at Hospitals ). Below is an excerpt from it:

Western Maryland Healthcare System is one of 10 rural hospitals that agreed with the state’s Health Services Cost Review Commission to accept a guaranteed budget every year to take charge of the health care of the community they serve. If revenue comes in under the budget one year, the hospitals are allowed to increase prices the next to make up for the deficit. If revenue exceeds the budget, however, they must reduce prices to give the surplus back.The system, adopted by Western Maryland in 2010, helps spur innovation. But it was only possible because Maryland has a commission that sets the fee that hospitals can charge patients regardless of whether they are covered by Medicare or private insurance, or are uninsured. Everyone pays roughly the same. Price controls are not unique to Maryland. Medicare has regulated prices for decades. Other states — including New York, New Jersey and Connecticut — experimented with them in the 1970s, only to drop them in the 1980s and ’90s when, for a time, managed care seemed to keep a lid on prices. In West Virginia, price controls have been in place since the 1980s.

Maryland has the longest track record, however. Price controls were put in place in the mid-1970s, when hospital costs had been rising at an alarming pace. They addressed “the price dominance of hospitals, which are often monopolies or oligopolies and have a lot of price-setting power.”....At a stroke, the controls turned hospitals into something like public utilities ....From 1977 to 2010, Maryland’s price-regulated hospitals experienced the slowest rise in costs per patient in the country.... Before the advent of price controls, the cost per each patient admitted into a Maryland hospital exceeded the national average by 26 percent. In 2011, it was 4 percent lower. What’s more, costs are more evenly spread. On average, hospitals across the country charge private patients about 44 percent more than patients on Medicare and Medicaid. The uninsured...must pay a sticker price that includes a 220 percent markup over costs, on average. This, hospitals say, makes up for uncompensated care and the fact that Medicare and Medicaid pay almost 8 percent less than cost. In Maryland, Medicare and Medicaid get only a 6 percent volume discount compared to private payers. And the sticker price markup over costs is only 33 percent. All hospitals contribute proportionately to a pot to cover uncompensated care — and this cost is incorporated into their regulated rates. Unsurprisingly, health insurance in Maryland is among the cheapest in the country. 

In general, I have not been supportive of price controls in any business sector. However, I don't really feel qualified to critique what is happening in Maryland regarding hospital price controls and now a cap on spending of some hospitals. Here is an excerpt from another newspaper on this same topic (see: Maryland already sets hospitals’ prices. Now it wants to cap their spending ):

In a world of constantly rising health-care costs, Maryland has long stood alone. Through a novel system that gave regulators unusual leverage to set prices, the state delivered care at a price that grew more slowly than elsewhere in the country — even at some of the nation’s most renowned hospitals. But after saving an estimated $45 billion for consumers over four decades, the system is in danger of running aground. Hospital expenses have risen so relentlessly in recent years that the original price controls now appear unsustainable.In its place, Maryland officials are pressing for an expansion of the state’s authority over its hospitals.The new system would not only set prices for the procedures they perform but also cap the growth in their overall spending. The proposal has ignited a debate in Annapolis and beyond over how far the government should go in reining in sky-rocketing health-care bills. Advocates for the plan say it is the most effective way to curb costs and that it could serve as a model for the rest of the country.“Maryland wants to really hold health-care costs accountable,” said John McDonough, a health policy professor at Harvard University. “So far, no state has ever done that.”But critics say the near-collapse of the state’s old system proves the perils of heavy-handed regulations.

I will try to keep an eye on what is going on in Maryland. Perhaps some of the readers of the blog will also want to weigh in with their own comments.

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