All-Payer Global Budgets: A Cure for Colorado’s Ballooning Hospital Costs?

September 12, 2018
Health Care Costs

At least in theory, it is widely agreed in the health care field that it is better to prevent illness than to treat it. As the saying goes, “An ounce of prevention is worth a pound of cure.” It is generally cheaper to treat high blood pressure now rather than heart failure later. Unfortunately, the prevailing fee-for-service reimbursement model, which pays by procedure, can discourage the adoption of measures designed to keep people healthy and out of the emergency room and intensive care unit.

Hospital systems, in particular, tend not to focus on preventative services that may head off serious illnesses, at least in part because such preemptive treatment may result in fewer admissions and less revenue. Indeed, hospitals in Colorado seem more interested in opening freestanding emergency rooms than primary care clinics.

A recent analysis from the Center for Improving Value in Health Care (CIVHC) compared Colorado health care costs to those of four other states. It found that Colorado’s inpatient hospital costs are 16 percent higher than the four-state average. Oregon, Utah, Minnesota, and Maryland all outperformed Colorado, with Maryland’s inpatient hospital costs falling a full 34 percent below Colorado’s.

Maryland's Story

You may wonder how Maryland has achieved these impressive savings. One likely reason is a system known as all-payer global hospital budgeting.

In the 1970s Maryland created the Health Services Cost Review Commission (HSCRC), an independent agency that sets hospital rates for all payers in the state to this day. Whether the payer is Medicare, Medicaid, private insurance, or self-pay, they all pay the same amount for the same services.

Ordinarily, Medicaid and Medicare reimbursement rates paid to providers are capped by the federal Centers for Medicare & Medicaid Services (CMS) and are typically lower than the amount private insurers pay for a service. To get around this, the HSCRC sought and obtained Medicare and Medicaid waivers that allowed it to set rates for public insurance higher, bringing them in line with private plans, and creating Maryland’s all-payer hospital payment system.

This effectively established parity between public and private insurance rates and curbed a common tendency of hospitals to prefer patients with private insurance, since now everyone pays the same HSCRC rate. It also meant that inefficient hospitals became less sustainable since they were paid a fixed amount per procedure and could no longer inflate charges to compensate. Before rate setting, Maryland’s hospital costs per admission were 23.6 percent above the national average. This dropped to 5.1 percent below average by 2005.

Although Maryland’s all-payer hospital system improved equity and lowered statewide hospital costs, the waivers that had allowed the program to be introduced also meant that CMS paid a higher percentage on Medicare and Medicaid hospital spending in Maryland than in other states. CMS decided that they needed to reduce their spending in the state, and demanded that Maryland come up with a way to lower hospital costs further if they wanted to maintain their waivers. The solution that was settled upon was global hospital budgeting.

In 2010, Maryland implemented a global budgeting pilot program guaranteeing 10 rural hospitals a set amount of revenue, regardless of patient volume. These hospitals no longer needed to keep their beds filled to remain solvent, allowing them to open clinics for chronic disease, enhance transitions of care, and implement behavioral health programs. In 2014, Maryland, in association with CMS, introduced all-payer global hospital budgets to all 46 acute care hospitals in the state. This transition was no doubt eased by the HSCRC’s authority to set rates for all payers, which helped get them on board. In the first two and a half years, the state recorded a 48 percent drop in potentially preventable complications, a 4.5 percent decline in hospital readmission rates, and $429 million in Medicare hospital savings.

Replication in Other States?

Maryland’s experience was successful enough that Pennsylvania and CMS recently announced the Pennsylvania Rural Health Model, which plans to bring all-payer global hospital budgeting to 30 rural hospitals by 2021. The stated goals are a reduction in hospital expenditures as well as increased viability for rural hospitals. Rural hospitals often have difficulty sustaining adequate patient volume to stay in business under fee-for-service models; for instance, in Colorado, 13 rural counties lack even a single hospital. We will see how well the program does at addressing these issues during its first performance year in 2019. Since Pennsylvania does not have a statewide all-payer rate-setting agency like Maryland, it will need to overcome some additional challenges.

Currently, the program is voluntary for both hospitals and payers. The goal is to have global budgeting account for 75 percent of participating hospitals’ net revenues in the first year, increasing to 90 percent in subsequent years. Since Pennsylvania cannot dictate rates to payers in the same way as Maryland does, it anticipates operating its global budgets alongside more traditional reimbursement structures. This is probably more representative of what a global budget system would look like in other states. So, the outcome of the Pennsylvania Rural Health Model will likely have sweeping implications for the wider adoption of all-payer global hospital budgeting.

Although it is still in its infancy relative to other hospital financing methods, all-payer global hospital budgeting shows promise. As Pennsylvania’s program ramps up, we will have to watch closely to see if Maryland’s success can be duplicated elsewhere. If it proves effective, then Colorado, with its high inpatient costs and struggling rural hospitals, would be an excellent candidate for adopting such a system. A Colorado workgroup has begun preparing recommendations on the adoption of an all-payer global budget, particularly in rural areas. Nothing is set in stone, but we may well see some version of an all-payer global hospital budget coming to Colorado in the near future.

Jack Murphy is a Governor's Health Policy Fellow. and MPH student at the University of Colorado Anschutz Medical Campus.

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