Global Hospital Budgets in Maryland: When Economics and Altruism Align

“We had more imaging facilities than we really needed. Plus our ER was really crowded. So under a global budget we shut down one of our three imaging centers and converted it into a patient-centered medical home to reduce our ER volume.”

I wanted to pinch myself. Was this the fever dream of a crazy-eyed, hopeless delivery system reform devotee or was I really hearing a hospital executive say this? And how could he get away with it? Was he working hard to wreck his hospital’s finances and put himself out of a job?

No and no. He was an economically rational hospital CEO in Maryland. It is just that in Maryland a new all-payer global hospital payment policy has flipped the script.

Maryland—the land of crabs, the Chesapeake Bay, loyal Orioles fans, and a 1970s era hospital rate-setting scheme that nobody ever got around to unwinding—vaulted to the top of the interest list for pointy-headed health policy types in 2013 when officials renegotiated the terms of their agreement with Medicare. In exchange for continuing a waiver that exempted hospitals in the Old Line state from being paid for their Medicare inpatients based on traditional diagnosis-related groups, every payer—commercial insurers, self-insured businesses, Medicaid, and Medicare—agreed that hospitals would be paid based on a “global budget,” the same amount each hospital got last year, adjusted for inflation and population changes.

Now I was in Maryland hearing hospital CEOs and officials reflect on the first four years of experience under global budgets at a day-long policy academy organized for teams of public sector and hospital leaders by the Johns Hopkins Bloomberg School of Public Health and co-sponsored by the Milbank Memorial Fund.

For payers, global budgeting means expense certainty. Costs, and thus rates, are easier to project. For hospitals, that means having both revenue certainty and a change in business. The rules of the game are fundamentally different. Success no longer consists of filling beds and generating outpatient volume. One must still do right by every patient, but if your revenues are fixed, what can be done to reduce expenses and keep people from having to be treated?

The technical components of global budgeting are daunting—especially in a multi- payer environment. Patients move between payers, communities, and in larger communities, between hospitals. Technology changes and capital investments are required. Budgeting based on historical expenses bakes in the previous (in)efficiencies of each hospital. Small adjustments in these calculations can swing large amounts of money between organizations. The stakes are higher in urban settings with overlapping hospital markets and larger institutions.

However, the hospital executives at the academy did not dwell on these aspects. Instead, they spoke about the revelatory effects of being liberated from fee-for-service medicine. They said their organizations are less focused on protecting revenue and instead fixated on reducing expenses. “When a surgeon comes to me looking for the latest technology,” one said. “I don’t have to reflexively say yes to keep him or her happy and retain that volume. And I am more likely to push them to work with us to make efficient durable medical equipment and supplies decisions in procedures like joint replacement surgeries.”

“We would not go back to fee-for-service, “a CEO flatly declared in a panel.

Freed of short-term revenue concerns, hospitals can also think about their role in the health of the community. One hospital took over the nurse function in the local school district when asked. Officials determined the benefits of reduced traffic to their clinics and emergency rooms were worth it.

These encouraging anecdotes must be informed with objective evaluations, which are just rolling in. Three external analyses—looking at three different sets of hospitals participating in the global budgeting system of a pilot version implemented on a limited basis in 2010—all noted reductions for Medicare patients in hospital admissions and increases in ED visits not resulting in an admission. An analysis by Maryland’s Health Services Review Commission found that through the first three  years of the statewide model, the state met or was on track to meet its primary outcome measures.

Even if one has drunk the punch about global budgeting, is the drink sufficiently nourishing for the long slog of actually doing the work and transitioning to a new economic model?

Comprehensive government oversight is not exactly a policy strategy enjoying widespread support these days. But public and private sector leaders are looking for answers to the perverse incentives of the current reimbursement system. Global budgeting is particularly appealing in rural settings where hospitals do not have overlapping service areas and technology is reducing hospital volumes, threatening the vitality of what is often the largest employer in the region. Pennsylvania, even without the base of Maryland’s all-payer rate-setting system, is two years into implementing a voluntary global budgeting system for its rural hospitals.

And others are watching. The Johns Hopkins policy academy focused on the use of global budgeting to help rural hospitals make the transition to a new role in their communities. It was oversubscribed, with teams of state and hospital officials from 10 states and the Centers for Medicare and Medicaid Innovation attending and hundreds more on the webcast.

The challenges of setting up a global budgeting system should not be underestimated, nor should the fundamental corrosiveness of the incentives of the current hospital financing system that creates profits from suffering. “It is kind of perverse when the CFO of a hospital gets excited about a busy flu season,” one hospital CEO admitted to the attendees. “[But now] we are all excited about getting the flu vaccine rate up.”

And, when economics and altruism align, it is a beautiful thing. As one hospital official said simply, “It is powerful to be able to service your community in a better way.”