When raising hospital prices in a pandemic makes sense

Want to know who raised hospital prices in the middle of the pandemic? Every hospital in Maryland, and the state seems fairly happy with the results.

Maryland is the only state in the country with an all-payer hospital pricing system. Every hospital gets to set just one price for every service. Under a series of CMS waivers dating back to 1977, the all-payer system winds up making Medicare and Medicaid pay higher prices than normal while commercial insurers and self-insured employers pay less than their peers in other states. 

In recent years, the heavily regulated state system took a major step in cost control. It adopted global budgets for its hospitals and capped their annual growth rate at 3%. That’s almost half the increases that public and private payers usually experience.

The caps sometimes force hospitals to actually lower prices during the year to ensure they don’t generate too much revenue. Unlike traditional fee-for-service medicine, where the easiest path for providers to make more money is to order more services, the global budget incentivizes Maryland hospitals to become more efficient. If they prescribe too many medically unnecessary tests and procedures, it might send them over the cap. 

Hospitals under the Maryland system can also raise prices within limits when the demand for services declines.

Last spring, hospitals there, like hospitals everywhere, suffered a collapse in demand as the pandemic-wary public postponed discretionary care.

But rather than wait for the federal bailout, the state’s all-payer regulatory body, the Health Services Cost Review Commission, allowed hospitals to temporarily increase prices by up to 20%. In exchange the hospitals agreed to lower rates later when volumes return to normal and thus remain within overall budget caps. 

A new paper in JAMA evaluated the interim results. It found the state’s hospitals recouped about $450 million in lost revenue through higher prices from May to July last year. Total inpatient revenue fell just 1.6%; outpatient revenue fell 15%. The decline in revenue nationally was considerably higher.

“It pretty much worked in smoothing out the roughest edges of the first few months,” said Joseph Antos, a scholar at the conservative American Enterprise Institute who reviewed the study and sits on Maryland’s HSCRC. “This is a mechanism that works best if the disaster is short term and isn’t that deep.”

This is just the latest evidence suggesting alternative payment models have proven their sea worthiness during the pandemic storm. Physician practices and hospital systems receiving prospective, monthly payments to provide all necessary services—so-called capitation—fared relatively well financially during the pandemic. Rapid adjustment of prices within a tightly regulated global budgeting scheme achieved similar results.

With the pandemic looking like it will drag on for at least another six months, the time has come for payers and providers to finally take payment reform seriously. Both have a lot to gain. 

For providers, both the capitation and the all-payer/global budget models promise greater reliability in their revenue stream and an exit ramp from the fee-for-service treadmill. For payers, both models offer a mechanism for long-term cost control since growth rates for both the capitated rate and the global budget can be set statutorily.

I have never understood why the business community, which pays a third of the nation’s healthcare tab, has never put its considerable political clout behind far-reaching payment reforms. A recent RTI study compared the sources of hospital revenue under Maryland’s all-payer system to a comparable group of hospitals in other states. It found public payers in Maryland paid considerably more of the total tab while private payers paid considerably less.

You’d think findings like that would get someone’s attention in America’s C-suites.



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