Why Maryland — Not California — Pulled Off the ‘Boldest Proposal’ in Health Care

For a year, a dozen of California’s most powerful health care leaders had been privately meeting to talk a revolution.

The CEOs of hospital giants like Dignity Health, Sharp HealthCare and Sutter Health. The leaders of major insurers like Anthem Blue Cross, Blue Shield and Kaiser Permanente. Even public officials like Health and Human Services Agency Secretary Diana Dooley and Insurance Commissioner Dave Jones.

All brought together by UC-Berkeley professors in January 2012 to debate the future of California health care.

And in February 2013, they issued their prescription: It was time for the Golden State to move away from fee-for-service payments and adopt “global budgets” instead. To stop encouraging providers to maximize their volumes and start pushing them to compete on value by paying one lump sum that covered all costs.

“For the first time, the key actors who deliver and pay for our health care have come together to support a roadmap for fundamental change in how we buy and provide health care services,” Stephen Shortell, chair of the Berkeley Health Care Forum and dean of the School of Public Health, said at the time. “They agreed that fee-for-service must be put to bed and that they support actions to move towards global budgets that will facilitate major innovations in delivering better, more coordinated care.”

Policymakers and pundits across the state hailed the call to action. Yet for all the focus — for all the camaraderie — California ended up not pursuing global budgets.

But 3,000 miles away, Maryland did.

In January 2014, after months of private negotiations with CMS, the state began its own ambitious shift away from fee-for-service health care. Within six months, every hospital in the state had voluntarily opted into Maryland’s own global budget program.

“This is without any question the boldest proposal in the United States in the last half century to grab the problem of cost growth by the horns,” Princeton economist Uwe Reinhardt said at the time.

Looking Closer

Why did one state press pause on global budgets even as another moved forward? It’s not so much what California did wrong, but what Maryland had already been doing — for decades.

Maryland was among four states that had agreed to a rate-setting waiver with Medicare in the 1970s, but the only state that had stuck with it. Under the terms of the deal, hospitals were paid the same by all payers — including Medicare — so long as the state was able to meet certain cost targets. Meanwhile, Medicare paid Maryland hospitals a higher reimbursement rate than it paid to hospitals in other states.

But by 2011, the terms of the waiver had become difficult for the state’s hospitals, Maryland’s former health secretary Joshua Sharfstein tells California Healthline.

“It was an unstable situation,” Sharfstein says. As inpatient reimbursement rates steadily fell, hospitals felt pushed to ramp up their volumes. The arrangement didn’t include outpatient services, which were steadily increasing as a portion of hospitals’ businesses, and threatened to skew Maryland’s ability to meet cost targets. And there was some concern that Medicare would end the arrangement, which motivated policymakers to begin negotiating on an updated waiver.

The terms took months to negotiate. But almost two years later, Maryland’s reporting results — and they look good.

Writing in the New England Journal of Medicine last week, researchers reported the program saved Medicare $116 million in 2014, more than one-third of the $330 million Maryland promised to save CMS over five years. In addition, during the initiative’s first year, all-payer spending growth per capita was about 1.45%, more than two percentage points below CMS’ annual target. State hospitals also have made important quality strides, reducing hospital-acquired conditions by more than 25% year-over-year.

How did Maryland do so much, so quickly? “The answer is complex, but at its heart is the upending of a traditional fee-for-service model in favor of fixed global budgets, where annual hospital revenue is capped,” Maryland Hospital Association CEO Carmela Coyle writes in Health Affairs. “This has proven to be a powerful incentive for hospitals to reduce costs through reducing unnecessary utilization and improving quality.”

For instance, hospitals in Maryland have invested in population health initiatives, like hiring more care coordinators and creating primary care centers. Some organizations partnered with community organizations to tackle social determinants of health, like lack of sufficient food or housing.

Lessons From the Program

Can other states ape Maryland’s approach? Sharfstein tells California Healthline that there’s clear interest, and CMS is also helping convene conversations.

But some officials aren’t too sure. While California has historically been a fertile breeding ground for payment reform, its providers don’t have the decades of experience operating under an all-payer-rate-setting initiative.

And a California Hospital Association spokesperson points out that it’s difficult to make state-to-state comparisons; for example, California hospitals see much lower reimbursement for Medicaid patients than Maryland hospitals do.

Meanwhile, Coyle told Politico Pro that it isn’t clear that the model “would necessarily be successful in other states.”

Another factor is that the state’s hospital market — for better or worse — might not be as dynamic as it used to be.

“It just does not create a lot of competition,” Thomas Scully, a former CMS administrator and currently a general partner at an investment firm, told Politico Pro. “As a person who’s investing in health care companies, Maryland’s generally not a place where people want to invest heavily.”

Still, global budgets are steadily increasing in California. A conceptual agreement to renew the state’s 1115 Medicaid waiver includes a provision to adopt global payments for safety-net providers.

And more providers are pursuing global budgets with Blue Shield of California — which has 27 accountable care organization arrangements in place across the state — a spokesperson for the insurer tells California Healthline.

“That said, to be successful, this model requires significant commitment in terms of time and resources, from all partners,” Blue Shield’s spokesperson adds, “so organizations entering these kinds of arrangements need to prepare up front to invest in the process.”

Around the nation

Here’s what else is happening on the road to reform.

The value of Medicaid. Republican presidential candidates like Carly Fiorina have suggested that being covered by Medicaid is worse than being uninsured, but Harold Pollack writes at healthinsurance.org that criticism of the program is undeserved.

Prescription-drug cost reform. Candidates are increasingly proposing ideas to lower prescription drug costs, but it’s unclear if any of their proposals will actually work, Dylan Scott writes at STAT News. 

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