Maryland Inpatient Price Controls – Cost Saving, or Cost Shifting?

Today’s Managing Health Care Costs Indicator is $875 Million

Robert Murray, the executive director of the Maryland Health Services Cost Review Commission, triumphantly declared in the September, 2009 issue of Health Affairs

Maryland’s rate-setting system is one of the most enduring and successful cost containment programs in the United States….The state’s all-payer system has kept hospital cost growth well below the national trend.

Murray went on to suggest that similar price controls across the country could have led to $1.8 trillion dollars in savings from 1976 to 2007.

With these kind of savings, you’d expect hospitals to look very different in Maryland.  There might be less granite or marble, and hospitals might purchase less new equipment.   There would certainly be fewer cranes building new towers!  However, I’ve asked my hospital friends whether Johns Hopkins (Baltimore) looks like it has faced substantial economic hardship, they consistently say “no.”

The recent data released by the Institute of Medicine suggests that while Maryland’s fee schedule regulation has restrained growth in commercial (under age 65) costs, those costs have instead been borne by Medicare.  The state has a Medicare payment waiver that has meant Medicare pays the same hospital rates that commercials payers pay.  In most states, Medicare pays substantially below commercial rates—often dramatically below.

It turns out that the Medicare waiver is paying Maryland Hospitals at a rate much higher than Medicare pays most other states (New York,  California, and Massachusetts are also higher than average, but each has substantially more graduate medical education).

In fact, Maryland has more admissions in its Medicare population compared to national averages ( 22.4% vs. 21.5%), and pays much more per admitted patient ($19,737 vs. $12,811, using the standardized data to adjust for illness and demographics).   Maryland only has price regulation on inpatient care; inpatient care represents over 44%  of total Medicare standardized costs in Maryland, compared under 33% nationally.

While Murray claimed savings of $40 billion over this 32 year period, Medicare paid $875 million extra to Maryland Hospitals in 2009. (excel spreadsheet posted here) 

Price regulation might indeed be a good thing, and if hospitals are functioning as utilities, price regulation might be necessary.  This is a lesson that when we control one price, we should look carefully to see what happens to other prices. Cost shifting is much easier than genuine cost saving.
Annual statewide cost - calculated from 2009 IOM data.  Click to enlarge

Late addendum:
This fall, an alert reader pointed (Christina Daw) pointed out that CMS has not separated out indirect medical education costs- which means that Maryland inpatient costs as I've calculated above are overstated.  I've printed the email below -and will update this when adjusted figures are available.

The indirect medical education payments are 5.5% increase in inpatient payment for every 10% increase in residents - but it's not easy to calculate total impact.

Regarding blog of Sunday, March 13, 2011 "Maryland Inpatient Price Controls..." -- 

Can you clarify how do your findings specifically address the following comment in the Methods section of the IOM document?

Limitations of Maryland Data: The state of Maryland has a unique waiver that exempts it from Medicare’s prospective payment systems for inpatient and outpatient care.  Maryland instead uses an all-payer rate setting commission to determine its payment rates.  Medicare claims for hospitals in other states break out additional payments for indirect medical education (IME) costs and disproportionate share hospital (DSH) adjustments, and we removed those amounts when we standardized payments in those states.  We also eliminated the effects of the adjustment for the hospital wage index.  However, the claims for Maryland’s hospitals do not identify IME or DSH payments, and the only adjustment that we made to those claims was to eliminate the effects of the hospital wage index.  As a result, both the standardized and standardized, risk-adjusted spending figures for Maryland are overstated. CMS is currently working with Maryland’s rate-setting commission to more accurately adjust the state’s spending data and make it more comparable to the rest of the United States.

Thank you.