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A podcast hosted by FAH’s Chip Kahn that shines a light on everything hospitals; from the advancements in patient care to how a hospital benefits its community.
Jeff Goldsmith (00:03):
The idea that the hospital was a leverage point for containing overall health costs has become far less salient as a policy hook than it was when Maryland began doing this. We know where the pressure in health costs are right now. They're in pharmaceuticals. They're in outpatient care, a significant percentage of which isn't in the hospital. So if you're trying to contain overall health costs, it is not as persuasive an idea to cap hospital rates under some type of a public utility model as it was 40 years ago.
Speaker 2 (00:42):
Welcome to Hospitals in Focus from the Federation of American Hospitals. Here's your host, Chip Kahn.
Chip Kahn (00:52):
Today we're discussing the implications for broader health policy of Maryland's hospital rate-setting system, the focus of a recent paper published in HFM Magazine. This 50-year-old program, rather than a harbinger to the future, is the last state rate-setting scheme standing, yet today some would have us return to this 1970s framework to drive hospital payments across the nation. In 1974, 9 years after the enactment of Medicare, Maryland adopted a first-of-its-kind all-payer hospital model to address health spending in one of the costliest states in the union. Maryland's hospital rate scheme has been sustained in part due to the additional Medicare funds available to grease the skids, an additional 20.6 billion through 2017 alone. According to the HFM paper, Maryland's healthcare costs remain higher than the national average. Despite these efforts in Maryland, the scheme is now the poster child for CMS's All-Payer Health Equity Approaches and Development pilot program, otherwise known as AHEAD, a program based on participating state, global budgets and formulaic growth targets.
(02:12):
How did this happen? What does it mean for solving America's access to hospital care and other services? And why, despite the track record, is the federal government looking to try and replicate this 50-year experiment? Joining us today is Jeff Goldsmith, president of Health Futures Inc., and the author of this recently published paper, Maryland's Healthcare Cost Control System" Is It Worth Replicating? Jeff, thank you so much for joining us today.
Jeff Goldsmith (02:41):
Hey. It's good to be with you, Chip.
Chip Kahn (02:42):
To get started, Jeff, let's dive in with your paper and tell us what the Maryland hospital rate-setting scheme does and has achieved over the extension of its life.
Jeff Goldsmith (02:55):
Well, I think the theory behind this system was that hospital spending was so significant a piece of overall health spending that if you could control it through a public utility style rate-setting model, which is basically what Maryland did, you could significantly retard the rate of growth in health spending, which at the time in the '70s was growing at a double digit rate. So the theory was if you contained the growth in spending on the hospital, overall health costs would come under control.
(03:26):
Well, I'd watched Maryland's system on and off for most of my career, which is most of that 50 years, and I was curious about how effective it had been in reducing Maryland's overall health costs compared to the rest of the country. And so I spent an afternoon on Kaiser Family Foundation's, KFF's, State Health Facts, poking around and looking at where Maryland stood, and what I found really surprised me. After 50 years of state hospital rate controls, overall health costs in Maryland were 6% higher per capita than the national average. Not lower, but higher. And in neighboring Virginia, one of the states that I compared Maryland to, per capita health spending was 15% lower than Maryland with no rate controls. 33 states had lower per capita health spending than Maryland did in 2020, which was the last year in the data.
(04:24):
When I began looking into this, I was really surprised. The fact that Maryland's costs were higher was attributable neither to larger number of poor people, a little bit below the national average, nor larger numbers of older people, significantly lower than the national average. Medicare spending in Maryland is between 35 and 40% higher than in other states. And that is because of a federal waiver that was granted in the 1980s to enable equalization of spending between Medicare and private insurers. So Medicare is spending about $2 billion more on that waiver than they would if Maryland's hospitals were paid per DRG or APG. And that is despite the fact that utilization on the Maryland Medicare population is lower than the rest of those countries. Same on the outpatient or Part B side.
(05:21):
But to me, the big surprise in all of this was the point of Maryland's system was to equalize rates between Medicare and private payers so that Maryland's businesses did not pay more than Medicare and that utilization would be controlled across private and public programs. The big surprise for me was Maryland's private insurance per capita spending was also higher than the national average and that the rate of growth in private insurance spending, despite the constraint on cost shifting, was higher from 2001 to 2020 than the national average. So I was just like, "Well, wait a minute. Why is this?"
(06:07):
Well, one possible reason is that Maryland's health insurance markets are considerably less competitive than in another states. It's not quite a single payer state, but it's close. 70% of the small group market is CareFirst, which is Maryland's BlueCross plan and 55% of the large group market. And the other thing I found out is that it was 46th or 47th in the country in the percentage of Medicare beneficiaries enrolled in Medicare Advantage. Whether you believe Medicare Advantage... Medicare Advantage is having some problems right now politically, but if you believe that Medicare Advantage is important, Maryland has less than half the MA penetration that the rest of the country does. So if the point of all of this was to have more affordable healthcare, it's not clear to me that that is the case. And if you were a business wanting to locate somewhere in the mid-Atlantic region, despite the fact that Maryland has been constraining hospital rates for pretty much 50 years, you'd be better off locating in Virginia.
Chip Kahn (07:11):
It is important to stress here, and I'd like to get your take on it, that the reason for this reform years ago was healthcare costs. And in recent years they've tried to apply a cap which deals with healthcare costs, but the real focus is on hospitals and hospital payment. Where's the disconnect here?
Jeff Goldsmith (07:34):
Well, I mean, I think in 1980, hospitals accounted for almost 42% of total health spending in the country. That number might even have been higher in Maryland, but I don't have the data. By 2022, hospitals were only 30% of health spending. So the idea that the hospital was a leverage point for containing overall health costs has become far less salient as a policy hook than it was when Maryland began doing this. We know where the pressure in health costs are right now. They're in pharmaceuticals. They're in outpatient care, a significant percentage of which isn't in the hospital. So if you're trying to contain overall health costs, it is not as persuasive an idea to cap hospital rates under some type of a public utility model as it was 40 years ago.
Chip Kahn (08:26):
So that would tell us in terms of this AHEAD program that its aspirations to depend on states and what states can do could be problematic considering what we have from this natural experiment in Maryland.
Jeff Goldsmith (08:41):
Well, I looked at the AHEAD program. I mean, it's obviously designed to encourage states to do what Maryland did, but when you look at the design of the program, it isn't an all-payer system at all. And one of the arguments in favor of Maryland was that it applied to everybody. That's not going to be the case with AHEAD. AHEAD requires one commercial payer. If you've got a state like Maryland where there's a dominant payer, that dominant payer participates and you've got something. If you're in a state like Virginia or California or New York where there's a bunch of payers and you only have one and regular Medicaid, not necessarily Medicaid Advantage, Medicaid Managed Care, because those are private payers, not self-funded employers, because the states have no authority over them, and not Medicare Advantage. So the AHEAD program is really... It's not an all-payer model, I guess, is my point. And therefore it isn't going to have the leverage that Maryland did, presumably had, to constrain overall health costs. So I'm not persuaded that AHEAD is going to be a very effective program given those constraints.
Chip Kahn (09:47):
Jeff, let's come back to your paper for a moment. And one of the findings I think that has strong implications here was this comparison across states. Could you talk a little bit more about what your key findings were? You've given us a teaser on them, but in terms of comparing how successful Maryland's been versus other states just with the methodologies that have been applied in Maryland.
Jeff Goldsmith (10:12):
Right. Well, I mean, I looked at two clusters of states. I looked at Maryland's neighbors along the I-95 Corridor, Pennsylvania and Virginia. And I also looked at three states with very different health systems and frankly socioeconomic frameworks that had large multi-specialty group practices and a lot of managed care as a dominant structure. And that was really the surprise for me is that Maryland didn't look very good in that comparison. There were some circumstances where Pennsylvania was a little more expensive, but for the most part, Virginia kicked Maryland's butt in most of these comparisons. And Virginia, where I live, does not have a all-payer rate-setting system. It also does not have quasi-monopoly on the private insurance side. The conclusion that I drew from this by looking at five other states is that states where there's more competition have done a more effective job of containing overall health spending than states that have used a public utility style rate-control approach as Maryland has.
Chip Kahn (11:15):
It's interesting. Back in the '70s and '80s, and fortunately or unfortunately both of you were around to see that period, there was this great debate between regulation versus competition. And I'm not sure whether it was ever completely settled. Obviously, there's a lot of regulation in hospital care and hospital payment still, but when you look at that sort of dichotomy, clearly the rate-setting approach in Maryland was on one side of it. Looking at those states that we're describing, it seems like if you've got more competition, at least between big systems and big insurers, but you have a mix, that probably will get you as far as any kind of rate-setting system would.
Jeff Goldsmith (12:02):
It isn't just competition between hospitals or between health plans, but also competition between the hospital and other forms of care delivery. And I think that's... We've seen a huge drop in hospital inpatient utilization in the last 40 years. That's one of the reasons why the hospital is far less central to the overall health spending framework than it was four years ago. So I think it's a much more complex healthcare market now than it was when this regulatory approach was launched. But I think the other piece of this is the underlying assumption was that if you could control revenues somehow you could squeeze out a lot of unnecessary healthcare utilization. And the idea that there's like 30% waste in the healthcare system and if you just found the right set of incentives or the right set of controls, you could squeeze that waste out.
(12:53):
I think what we're learning is that 30% was really a myth. Buzz Cooper wrote a book about this in 2016 called Poverty and the Myths of Health Reform is that the real waste was in care that was unnecessary because people did not get the care that they needed at the right time or at the right level. Here in Virginia, for example, the University of Virginia, there's 75 people in the hospital right now that are not acutely ill, but they're in the hospital and in a very expensive hospital because there's no mental health beds available for them to be cared for, no long-term care beds available for them to be cared for. So one of the other things that's happened in that ensuing 40 years is that the rest of the health system that was designed to take care of people that couldn't be managed at home has withered away, and it's left the acute care hospital, which is a very expensive piece of our overall healthcare apparatus, as pretty much the only resource in a community to take care of people. That's not efficient use of resources.
(14:00):
And then during the Obama administration, you had this explosion of experiments to try and change how care is paid for to try and drive out that 30%, most of which have not been successful. It's clear to me that if you are going to really affect the cost of care, it isn't by tinkering with the payment system where the leverage is. We're actually going to have to do something about the social determinants of health. We're actually going to have to rebuild our mental health system. We're going to have to rebuild our long-term care system. 36% of baby boomers are living alone. What are they going to do when they begin falling apart in earnest? You don't want them in the hospital emergency room and you don't want to blame the hospital when they show up. So I think we've got a lot of work to do. And the idea that you can get to a more efficient system by tinkering with healthcare payment models is something that I think an even larger point we're really going to have to come to terms with.
Chip Kahn (15:02):
At the end of the day, hospitals really are just simply aggregators of cost inputs and bear the costs when pharmaceuticals or medical supply companies raise their prices. And obviously employment is a big issue. 60% of hospital costs are related to its workforce. This leaves hospitals in a very challenging position, particularly in an inflationary environment and an environment in which there are all kinds of stresses on workforce. Considering what you just said, it sounds like alternative payment models and caps, let's say, really aren't the way to cut costs in the grand scheme of things and that we've got to find other alternatives.
Jeff Goldsmith (15:48):
Well, we had an explosion of technological enthusiasm around Obamacare. Both of us were big fans of the expansion of coverage that took place under Obamacare, but there was also a lot of hope that we'd find new ways of paying for care as well that would moderate the rate of increase in health costs. And I think those have been, to put it mildly, extremely disappointing. And I think we've been beating around the bush about trying to actually get our hands around the demand for care, the factors that drive people into institutions or that make them sick. And if we're not willing to spend the resources on that, we can fiddle around all we want with incentives to doctors and hospitals and we're not going to affect the overall cost of care.
(16:39):
I think the only way to bring the cost of care down is to create a responsive system driven by primary care that actually catches problems before they blow up into acute illness. And we've done a terrible job as a society in doing this. That's where I think the puck is. If we want to skate to where the puck is going to be, that's where it's going to be.
Chip Kahn (17:01):
It is interesting that in recent years, really for the last 13 years, health spending overall has plateaued at about, I think, 17% of GDP, at that range. You've outlined it. And in conclusion, I mean, what we ought to do, but in conclusion, from your standpoint, what's the bumper sticker regarding 21st century solutions to this access issue and trying to get the base of costs down?
Jeff Goldsmith (17:31):
I mean, you said it. Percentage of GDP devoted to healthcare almost tripled between the enactment of Medicare and 1980. So the rate of growth in health spending was, I think, at crisis levels during that period of time. That percentage of GDP devoted to healthcare has been dead flat for 13 years. So the idea of targeting, reducing the rate of growth in spending doesn't make sense in the contemporary healthcare landscape. So it seems to me, apropos of what we said earlier, that if you actually want to do something about cost, you're going to have to create a much more effective primary care health system. You're going to have to rebuild mental health services so that the hospital emergency room is not the only resource. And we're going to have to really address the crisis of homelessness. I mean, a lot of the social determinants stuff that people have been talking about, it's been occurring around the edges, but it needs to be in the center.
Chip Kahn (18:33):
Jeff, this has just been so illuminating, and really appreciate this discussion. I think your paper is very provocative. It provides a lot of warning signs. And I should say, to be fair to the AHEAD pilot program, it does have a primary care component, as well as its regulatory component.
Jeff Goldsmith (18:56):
Correct.
Chip Kahn (18:57):
And maybe with your wisdom and the wisdom of others, they'll push the program more in that direction rather than trying to be hospital-centric in terms of cutting growth rates. So with that, appreciate so much your participation.
Jeff Goldsmith (19:13):
You bet, Chip. It's been fun.
Speaker 2 (19:18):
Thanks for listening to Hospitals in Focus from the Federation of American Hospitals. Learn more at fah.org. Follow the federation on social media at FAHHospitals. And follow Chip at ChipKahn. Please rate, review and subscribe to Hospitals in Focus. Join us next time for more in-depth conversations with healthcare leaders.