Meaningful Value-Based Payment Reform, Part 2: Expanding The Maryland Model To Other States

Last October, the Center for Medicare and Medicaid Innovation (CMMI) issued a white paper that assessed the performance of its payment models to date and established a framework for implementing future initiatives. There were six “successes” that saved money and/or improved quality. Most were niche changes, such as the non-emergent ambulance transportation program and home health value-based purchasing model, that can never scale to produce substantial improvements and transform the health care system. As a recent review showed, the important exception was Maryland’s « All-Payer » program. It establishes uniform treatment prices within global hospital budgets that encompass total hospital and non-hospital care costs. Part 1 of our article details the history and performance of Maryland’s All-Payer model.

Going forward, CMMI wants to streamline and reduce the number of payment models it offers. In doing so, it wants to broaden participation and simplify enrollment. It also wants new models to promote health equity as well as improve quality and reduce costs. These are the right parameters for payment reform. To accomplish its goals, CMMI should design new payment models that are

• big—statewide,
• mandatory—providers need to participate,
• administratively simple—minimize gaming, and
• long-term—at least five to seven years.

Moreover, new models should reallocate resources to enhance primary care services and access in low-income communities.

The Maryland All-Payer model with global budgets meets all these criteria. Importantly, it shifts incumbent health care payers and providers into value-based care delivery gradually but inexorably. How can Maryland’s model be extended to other states?

Payment Is The Problem

US health care has a distribution, not a funding challenge. With health care expenditures approaching 20 percent of national GDP, there is ample funding within the US system to provide great health care services to everyone in the country. The health care system, however, uses its abundant resources inefficiently and ineffectively. The system needs to shift resources from acute-care services into primary care, prevention, health promotion, disease management and behavioral health services. It also needs to invest more health care resources in low-income rural and urban communities to improve social determinants of health, care access, individual health status, and community wellbeing.

Incremental improvements on broken payment models cannot achieve the transformative changes the system requires to deliver true value-based care services. Potential solutions must account for deeply entrenched and counter-productive provider behaviors and their downstream effects on cost. Price variation for identical health care services within and across markets and hospitals is a unique and deviant feature of US health care. In other wealthy countries, health care providers largely receive uniform prices for health care services. Even in countries with competing health plans, such as the Netherlands and Germany, physicians, hospitals, and other providers receive the same prices for services regardless of who pays or a patient’s socio-economic circumstances.  

Conversely, in the US prices vary wildly within a state and even hospital. For instance, a routine diagnostic colonoscopy in Virginia averages $2,763 but ranges between $208 and $10,563 across the state, a more than 50-fold variation. Within any given hospital, a range of prices exist for different insurers. For example, at Memorial Regional Hospital in Hollywood, Florida, a colonoscopy ranges from $550 to $6,400, with dozens of insurers each paying different prices, many of which are more than four times the Medicare rate.

Amid nationwide growth in hospital consolidation that gives hospitals increasingly strong market power relative to private insurers, the issue is likely to get worse. Variable pricing for identical health services enables providers with market power to negotiate higher prices with commercial insurers. These payment dynamics incentivize hospitals and doctors to design service locations and offerings that attract more high-paying, high-margin commercially insured patients and fewer Medicaid and uninsured patients. Collectively, these provider behaviors exacerbate the significant maldistribution of health care facilities, practitioners, and services, with an abundance in affluent communities and a paucity in low-income communities.

Advantages Of Expanding The Maryland Model

Maryland’s All-Payer model with global budgets reduces incentives for providers to game their payer mixes. Combining uniform payment mechanics within global budgets requires the same price regardless of patient and payer, thereby increasing potential cost savings by incentivizing providers to proactively manage care, promote community health, reduce unnecessary utilization and lower acute admissions. In addition, the adoption of Maryland-like payment models would accelerate the adoption of innovative health care services, including virtual care delivery, hospital at home, enhanced primary care services and risk-based contracting. It would also restrain private equity investment in rolling up providers and companies focusing on revenue cycle management that depend upon and exploit the fee-for service system.

Over time, this leveling of incentives should lead to both more appropriate care delivery and a more equitable distribution of facilities and practitioners. In addition, the Maryland model offers advantages for each actor in the health care system. From the perspective of commercial payers and employers, health care prices and costs are lower and cost growth slowed. From the public payers’ perspective, cost growth also declines. 

From the provider perspective, these models achieve cost savings over time through delivery of higher-value services. Importantly, global budgeting liberates providers from fee-for-service models that incentivize volume-driven medicine.

For patients, procedure price transparency embedded within the payment model invites comparative shopping for routine treatments. Higher-cost facilities, like academic and prestige medical centers, or those in highly concentrated markets, must justify their higher prices by demonstrating superior quality, safety, and outcomes.

For policymakers, uniform payment tied to global budgets and quality metrics provides a pathway for long-term cost control. More states following in Maryland’s footsteps would hasten the industry’s transition to value-based care delivery. In addition, if more states established global budgets at rates below projected economic growth, as Maryland does, health care’s share of the total economy would decline over time. This would liberate resources to increase wages, invest in productive industries, and fund vital public needs.

Expansion Of The Maryland Model To Other States

Maryland’s All-Payer models, first with Global Budgets for hospital expenditure (2014-2018) and now for Total Costs of Care (2019-2026), save money without compromising quality. Maryland has a broad mix of health care markets: urban Baltimore; suburbs of Washington, D.C., small cities on the state’s eastern shore; and rural towns in the Appalachian Mountains. While every state has a different mix of markets, Maryland’s success across heterogeneous markets indicates that this payment system could be replicable in many states. Applying Maryland’s payment reform mechanics more broadly could lower total—that is, combined public and private payer— costs and cost growth, and equitably expand care access while maintaining or slightly improving outcomes.

States choosing to follow in Maryland’s footsteps could experiment with hospital-only global budgets before shifting to total cost of care budgets. The initial success of Maryland’s hospital-only model enabled its Health Department to bring together a multi-stakeholder group including physicians, post-acute and behavioral health providers, payers and consumers to support expanding the global budget to cover the total cost of care. Ultimately, effective global budgets depend on applying growth limits to all hospital and non-hospital spending.

Maryland Model V. Medicare-For-All

Importantly, broader state-based payment reforms based on the Maryland model would generate many of the outcomes that Medicare-for-All advocates aspire to achieve. The all-payer approach reduces administrative waste by decreasing the number of hospital staff needed to negotiate and administer multiple pricing schedules with public and private payers. Global budgeting, which allows hospital prices to rise when in-patient utilization falls, incentivizes providers to invest in primary care, behavioral health, and other care management services that reduce hospitalizations.

What uniform payment within global budgets does not do is disrupt the private insurance market, which serves 160 million Americans—a market that, despite the criticism it may generate, Americans seem reluctant to abandon. Maryland has a robust private insurance marketplace with nearly 60 percent of the state enrolled in commercial plans. For insurers, uniform payment fosters competition based on service provision and benefit design. It makes the financial basis for their narrowed networks transparent.

Unresolved Issues

If the Maryland model has so many advantages, why haven’t other states pursued equivalent reforms? Historically, an All-Payer model would have initially increased the Centers for Medicare and Medicaid Service’s (CMS’s) costs even as it would have lowered total health care costs and cost trends. In addition, CMS and CMMI have not encouraged states to try the All-Payer model with global budgets. 

Most importantly, while the All-Payer model does not eliminate the private insurance market, it is not an incremental reform. It fundamentally reconfigures health care’s supply-demand dynamics. Consequently, entrenched incumbents who benefit from the current system’s dysfunction are not going to easily accept it. Without strong encouragement from CMS and CMMI, few states will initiate this type of reform process in the face of almost certain opposition from wealthy, powerful hospitals.   

The beauty of CMMI’s mandate is that it can tailor the composition of its waivers to the market dynamics of individual states. Rate setting could be done within state as Maryland does or through CMS. Some states may want to use the waiver to reconfigure the nature and distribution of existing facilities (e.g., repurpose existing hospitals, expand access to primary care services, integrate mental health services, etc.) to promote broader and more effective community health networks in medically underserved areas.

Another obvious question relates to the imposition of uniform pricing and its impact on a state’s health care market dynamics. It may be too disruptive to move immediately to uniform prices within hospitals, even if this is a reliable long-term goal. An intermediate step might be to standardize prices within hospitals for Medicare, Medicaid, and CHIP patients while capping commercial rates that payers and providers negotiate. This intermediate approach would create beneficial economics for hospitals with favorable payer mixes—taxing these hospitals and using the proceeds to fund higher payments to hospitals with less favorable payer mixes could be one method for achieving a more equitable allocation of health care resources.

This is connected to another implication of the All-Payer model. Uniform pricing creates a windfall for employers: with All-Payer models, commercial prices for treatment services should decline as prices for Medicare, Medicaid and CHIP patients increase. But this may not happen if attempts to negotiate capped commercial rates are met with resistance by providers. Again, capping commercial rates would be an optimal, transitory solution. The savings would flow to employers. Whether the government should recoup some of those savings to support higher Medicaid rates, insist on increases in wages, or allow employers to do whatever they want with the savings are open issues for the political process.

Clearly, the government will need sufficient funding to offset implementation and increased Medicaid costs. Over time, global budgets will generate most of the required savings. Some state programs also may require intermediate measures to fund transformational payment and delivery reforms. The benefits to both private and public payers will come from the long-term, gradual decline in the spending growth rate. 

Looking Ahead

Given the political difficulties in passing comprehensive payment reform, like Medicare-for-All proposals, further experimentation with versions of the Maryland payment model merits consideration. CMMI should proactively pursue negotiations with states to implement waivers for Maryland-like payment models. States are the laboratories of democracy. Maryland’s unique payment mechanics exemplify this American tradition.

Achieving the same or better health care for lower costs would be a boon to the US economy. It would lead to higher wages, increased productivity and more investment in promising innovations. America will not be able to change the way it delivers care until it changes the way it pays for care. Movement toward uniform payment models within global budgets paves the way for health care transformation.

Authors’ Note

Dr. Emanuel reported personal fees, nonfinancial support, or both from companies, organizations, and professional health care meetings and being a venture partner at Oak HC/FT; a partner at Embedded Healthcare LLC, ReCovery Partners LLC, and COVID-19 Recovery Consulting; and an unpaid board member of Village MD and Oncology Analytics. Dr. Emanuel owns no stock in pharmaceutical, medical device companies, or health insurers.

Merrill Goozner’s journalism work in 2019-2022 included payments from the following organizations that are directly involved in health care: American College of Healthcare Executives (honoraria); 4SightHealth (freelance writing fees); Lown Institute (travel reimbursement).