Maryland hospital payment model cuts costs and improves quality of care

Unlike most states, Maryland pays for hospital services using annual hospital budgets that are set in advance, fundamentally changing how hospitals are paid.

The majority of hospitals in all other states are paid for each service delivered, a method that provides an incentive to produce more income based on doing more services.

Given that everyone who pays for hospital care is seeking ways to improve hospital quality and to cut costs, Maryland's global budget method could be a model for all states. Journalists covering the rising cost of health care should point out that unlike every other state, Maryland is demonstrating a way to contain costs and to improve the quality of care that patients get in hospitals.

In addition, journalists should write about the Maryland program because the federal Centers for Medicare and Medicaid Services encourages other states to adopt similar global budget methods, also called the total cost of care program. States can use global budgets to reduce avoidable health costs by investing in primary care and to reduce unnecessary and prolonged stays in a hospital or rehabilitation facility, CMS said.

As Sarah True reported in The Baltimore Banner in 2023, hospitals in Maryland are paid under a global budget method. Global budgets are based on the number of patients treated and the number of services provided in the past. The budgets are adjusted according to how well hospitals perform on delivering quality care and on other factors such as inflation and changes in the population being served, True wrote.

Budgetary benefits

The global budget method generated $689 million in net savings to Medicare over the first three years of the program (2019 to 2021), while also improving the quality of care delivered by Maryland's hospitals, according to an April 2024 report from Mathematica, a consulting firm in Princeton, N.J. Mathematica produced the report under a contract with the federal Centers for Medicare and Medicaid Services.

Another name for a global budget is the total cost of care (TCOC) model. Over the first four years of the TCOC program (2019 to 2022), Mathematica reported that total Medicare spending for Medicare Part A and Medicare Part B declined by an average of $292 per beneficiary per year, or 2.1%. At the same time, hospitals improved quality measures while reducing disparities by race, Mathematica added.

Under the TCOC model, Maryland is the only state to use a uniform rate-setting system to pay hospitals the same rates regardless of whether the funds come from Medicare, Medicaid, private health insurers or individuals paying cash, True explained. Since 1977, the state has had a waiver from federal Medicare and Medicaid payment rules as long as Medicare spending does not rise faster than spending rises nationally, she added.

"Under global budgets, hospitals get to keep more revenue by providing less care, which, when paired with quality measures tied to financial rewards, incentivizes hospitals to keep patients healthier and out of the hospital," True explained.

"Maryland is the only state now where hospitals are accountable for the health of their communities," Nicole Stallings, executive vice president at the Maryland Hospital Association, told True. "So this really accelerated the investment that was happening outside of hospital walls."

Mathematica reported that the cost and quality goals of the TCOC model are as follows:

• Reduce total per-capita Medicare fee-for-service spending.
• Reduce preventable hospital admissions.
• Reduce hospital readmissions by reducing within-hospital disparities.
• Improve timely follow-up after acute exacerbations of chronic conditions.
• Improve population health by reducing patients' mean body mass index, diabetes incidence, overdose deaths, severe maternal morbidity and children's asthma-related emergency department visits.

Over the first four years of the program, the global budget model cut hospital spending by 6.1%, hospital admissions by 16.2%, outpatient emergency department visits by 5.9%, and preventable admissions by 16.8%, Mathematica reported. Also, the model narrowed disparities between Black and white beneficiaries for unplanned readmissions, preventable admissions, and timely follow-up.