Fiscal Fitness: How States Cope

Unique nonpayment approach could save Maryland Medicaid $89 million annually

Instead of denying payment outright for preventable conditions as other states do, Maryland is taking a unique approach by instead adjusting payments. The goal is to reduce the statewide averages of these conditions, with the bar raised from year to year, and significant cost savings are expected.

"It seems that most states, and CMS [the Centers for Medicare & Medicaid Services], are just eliminating payment on a case-by-case basis for the presence of certain secondary diagnoses," says Robert Murray, executive director of the Maryland Health Services Cost Review Commission. "Our philosophy is a bit different. We think that the nonpayment approach is very limiting."

Mr. Murray notes that Maryland's payment system is unique. "The agency sets payment rates for hospital services that apply to all payers, including Medicaid," he explains. "So, the Medicaid program is just wrapped into whatever we do here, and what we do affects not just Medicaid but Medicare and private patients as well."

During fiscal year 2008, hospital-based preventable complications were present in about 53,000 of Maryland's total 800,000 inpatient cases. This represented about $500 million in potentially preventable hospital payments overall. Since Medicaid represents about 17% of the total hospital market, Medicaid could potentially save $89 million per year.

Mr. Murray says in the first year or two, he expects to see savings of about $9 million. "But eventually, we'd expect to be able to change hospital behavior enough to reduce a lion's share of these preventable complications," he says. "We think this approach will be very powerful."

The reasoning behind Maryland's approach is that inevitably there will be cases where, despite the best efforts of clinicians or hospitals, one of the complications on the nonpayment list occurs. "Virtually nothing is really 100% preventable. And when this type of thing happens, it really alienates clinicians," says Mr. Murray.

In addition, the list of complications that are most highly preventable is actually very small. "So by having a nonpayment policy, you really limit how broad your initiative can be," says Mr. Murray. He points to CMS' Hospital-Acquired Conditions and Never Events initiative, which covers 11 complications. Most, such as an object left in a patient during surgery, are very rare events.

"They aren't representative of the broader type of complications we would all wish to prevent across the industry," says Mr. Murray. "And there isn't much savings to be had as a result. CMS estimated they would save some $21 million over a base of $120 billion in hospital payments. So the case-by-case payment reduction approach seemed very regressive and limiting to us."

Instead, Maryland has concentrated on rewarding and penalizing hospitals, through its unique all-payer hospital payment system. This is based on the hospital's performance, in a given year, on 49 different categories of hospital-acquired complications. The initiative started July 1, 2009, with payment rewards and penalties being applied to hospital rates as of July 1, 2010.

Actual numbers vs. averages

The actual number of complications in a given hospital, by category, is compared to an expected statewide average rate. This is adjusted to reflect that hospital's mix of patients. Then, each hospital's results are compiled across all 49 complication categories. An overall rate of complication is determined for that facility, so that hospitals can be ranked.

Hospitals with higher rates get rate penalties at the time of their annual inflation adjustment. Those with lower overall complication rates get rewards. "We are allocating about $75 million across hospitals," says Mr. Murray. "So, in a given year, a 300-bed hospital with maybe $300 million in revenue per year that was really a good performer could generate about $1 million in rewards."

With this approach, a much broader array of complication categories can be looked at. "For each category, we find there is a range of performance. Some have risk-adjusted complication rates well below the state average, and some are way high," says Mr. Murray. "Even for complication categories that are, say, 60% preventable, we can see that some hospitals are doing something really different that is beneficial, compared to others."

In addition, hospitals and physicians prefer to be rewarded or penalized based on the overall average of their performance, instead of discrete payment cuts made case by case.

"With our set of 49 complications, we think this could affect some 53,000 cases in the state each year, out of total annual admissions of about 750,000," says Mr. Murray. "The extra charges associated with these complications on these 53,000 cases is about $522 million per year. Total inpatient revenue per year is about $9 billion, by comparison."

The system is not a per-case payment system like CMS's, although DRGs are used. The DRGs assigned to each patient determine the overall revenue that each hospital gets to "keep" for the year. When hospitals eliminate a complication, they may see that a DRG assignment changes. Therefore, they would get a lower-weighted DRG for that case.

This will affect the hospital's overall revenue. However, under the system, removal of complications wouldn't automatically be accompanied by a payment reduction. That occurs only about 40% of the time, while reimbursement stays the same 60% of the time.

"So, this approach creates a significant profit opportunity for hospitals," says Mr. Murray. "We do expect some savings. But more importantly, our goal is to provide hospitals and their clinicians with a tool that helps them identify where they are high. They can then investigate what others in the system are doing to achieve lower rates."

At the same time, payment incentives provide an extra inducement that helps to change overall behavior. "We can apply the payment incentives very broadly through our all-payer rate system. We think this combination of approaches will ultimately be very powerful," says Mr. Murray.

For more information, contact Mr. Murray at (410) 764-2514 or