The Maryland Model (Part 1): Understanding Maryland’s Medicare Waiver

Blog,Payment Modeling,Strategic Planning,Transformation

This is the first in a three-part series that explores the unique all-payer model for hospital payments in Maryland.  This “Medicare waiver” from the typical Medicare rules and regulations has made the entire State of Maryland a demonstration project in healthcare transformation.  What is it, how is it working and what can we learn from their experience?

What is the Medicare Waiver?

In the 1970s, Maryland negotiated a waiver from the traditional Medicare payment system and related regulations in return for the State agreeing to actively manage healthcare costs by setting rates and cost control goals for hospitals.  In this “all-payer” system, the State’s independent agency, the Health Services Cost Review Commission (HSCRC), sets hospital charges for each organization based on a complex algorithm.  For each hospital, the HSCRC establishes a payment rate for each service that is the same for every payer, including Medicare, Medicaid, and private insurers.  The state’s hospitals must meet certain collective goals or tests that are set by Medicare and the HSCRC to keep the waiver in place.  According to the Maryland Hospital Association, a key advantage of the all-payer system is elimination of cost shifting between payers.  All payers pay their fair share of costs and each payer equitably shares the burden of uncompensated care.

The All-Payer Model

Although service-specific rates were fixed under the decades-old waiver, hospitals could still generate more revenue with increased volume.  That is, until 2014.  In 2014, the State implemented a new model, the “Maryland All-Payer Medicare Model Contract.”  Under the All-Payer Model (“APM”), most hospitals were paid using a Global Budget Revenue (“GBR”) methodology, whereby annual revenues were subject to a fixed cap.[1]  GBR hospitals were held accountable not only to a fixed revenue amount but also for quality performance, including rates for readmissions and hospital-acquired infections. Until 2019, however, the APM impacted only hospital-based inpatient and outpatient services, also referred to as “regulated services.”  Any freestanding or “unregulated” services, including physician services, were not covered by the waiver and remained under a traditional fee-for-service, volume-driven model.

The Total Cost of Care Model

In January 2019, the APM model morphed into the Total Cost of Care (“TCOC”) model.  Under TCOC, hospitals are responsible not only for the cost of care for regulated services via the GBR payment methodology, but also for their attributed Medicare patients’ cost along the entire continuum of care, including physician services, skilled nursing facilities and non-hospital related healthcare services.  The goal is to encourage navigation, prevention, education, and other initiatives that ultimately will avoid the need for expensive acute care, as well as prevent illness and unnecessary readmissions.

TCOC brings more financial risk, whereby hospitals must find new and creative ways to engage patients and coordinate their care to reduce the cost of that care. Success of the TCOC model hinges on the ability of a hospital system to build partnerships and collaborate with community partners who have influence and credibility with the population, particularly those at risk.  Hospitals need to align with private practitioners, skilled nursing facilities, assisted living facilities, government agencies and organizations that provide services that impact social determinants of health—a whole new world for most healthcare systems.

Total Cost of Care is set to run through 2028.  Based on the performance of Maryland hospitals over the five years of the All-Payer Model, this latest version of the Medicare waiver seems to make sense.  Or does it?  The next installment in this series will review the outcomes of the All-Payer Model years as a precursor to the Total Cost of Care model. The last installment will focus on the challenges of the models and the lessons to be learned from the Maryland experiment—lessons that healthcare executives should consider as they strategize for the future.

[1] https://hscrc.maryland.gov/pages/budgets.aspx

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