Grants are available to study insurance for low-income children

WASHINGTON, DC—Funding for research into how to improve health care systems for low-income children is available from the federal Agency for Health Care Policy and Research and the David and Lucile Packard Foundation.

Applications are due April 22. The project is expected to award approximately $6 million over three years, with $2 million going to five to eight projects in the first year. The program is targeting how features of insurance programs and the organization of health care systems affect health care for poor children. Applications can take one or both of two different forms: enrollee-based studies that look at the impact of insurance programs, and community-based studies that examine the effect of a community's health care system and the children it serves.

Additional information is available from AHCPR at (301) 594-6381.

—AHCPR release, Jan. 20.

Maryland hospital rate-setting commission plans to reduce rates by 6% despite hospital opposition

A Maryland commission plans to use its statutory authority to cut hospital rates by an average of 6% over the next three years despite opposition from hospitals, which claim the cuts could force thousands of workers out of jobs, diminish access to health care, and affect the quality of care. If the commission sticks to its proposal, the reduced rates could go into effect April 1.

Calling the plan "totally unacceptable," Calvin M. Pierson, president of the Maryland Hospital Association (MHA), recently offered a counter-proposal to freeze rates for one year.

In 1998, 17 of Maryland’s 50 hospitals lost money, up from 10 in the previous year. According to Mr. Pierson, the rate cuts would "dramatically accelerate this alarming trend." MHA estimates the proposed rate cuts would cost hospitals between $150 million and $200 million a year. The state commission’s estimate is less—about $100 million.

Mr. Pierson says the reduction would reduce the reimbursement of a hospital stay to 3% below the national average.

"If the goal is to provide all Marylanders with access to some of the finest hospital care in the nation, is it reasonable to expect that hospitals can deliver superior care at costs that are below the national average?" Mr. Pierson asks.

While the MHA agrees that hospital costs must be contained, Mr. Pierson argues that "more rational, realistic benchmarks are needed by which costs at Maryland hospitals are judged." He says a one-year rate freeze would save money and give all parties involved more time to hammer out a solution to rising hospital costs.

Under state law, Maryland’s Health Services Cost Review Commission is authorized to set or cut hospital rates for all insurance companies and Medicare and Medicaid without the approval of the state legislature or any other governmental body.

Maryland is the only state that regulates hospital rates directly, rather than letting competitive market forces determine their fees. The hospitals’ rising rates present two major problems for the state’s health care system. The state was granted a waiver in 1977 from federal Medicare and Medicaid hospital reimbursement rates set by the federal Health Care Financing Administration (HCFA). This means HCFA uses the state’s rates to pay Maryland hospitals. To retain that waiver, annual Medicare and Medicaid payments to Maryland must be lower than what they would be under the federal rate-setting system. If Maryland’s hospital costs continue to rise above the national average, the state will lose its waiver, says Robert Murray, the commission’s executive director.

Despite pressure from the hospitals, it is unlikely that the commission will back away from its proposal when it meets next month, says Mr. Murray. "The commission is going to insist on not just freezing rates but reducing them," he warns. Furthermore, these reductions may be realized by revamping the entire rate-setting system, he says.

The commission will consider cutting aggregate hospital rates by 1% in April and an additional 5% by 2001.

Hospitals with particularly high costs could undergo cuts of up to 15% to bring them in line with the national average, Mr. Murray says.

Mr. Murray agrees that the rate cuts would be severe, but argues they are necessary because hospital costs in Maryland have risen to about 3% above the national average and are continuing to increase. Since 1992, hospital costs in the state have grown faster than the national rate, Mr. Murray says.

The commission has previously attempted to ratchet down hospital rates, but hospitals have exploited a gap in the scope of the regulatory system, Mr. Murray says. Hospitals have responded to lower rates, which are for a given unit of time or service provided, by increasing the volume of service provided, he says. Instead of doing one lab test at a rate of $50, for example, a hospital will do two for the same patient.

"We control the price per unit, but we don’t have direct control over the number of units used. The hospitals have gamed the system to try to keep price per case high," he says.

To close the gap, the commission will consider regulating costs per patient case. Cost targets would be set for each hospital on a per case basis. If a hospital exceeds the per case amount, then the commission could lower the hospital’s unit rate. "If a hospital did not meet our targets, we could just hammer it on unit rates until costs fell," Mr. Murray says.

Allowing higher hospital costs would build "a strong argument that our payment system is not as effective as a nonregulated system," he says. The alternative to rate regulation, dismantling the state’s regulatory system, would create a "social and legislative nightmare," says Mr. Murray.

He claims a market system for setting hospital charges would allow fees to shoot up "a hundred percent overnight," with a disproportionate share of the burden shifted to small employers and insurers. Larger insurance companies and health maintenance organizations, by comparison, would have the clout to negotiate discounted hospital fees, he says.

Mr. Murray says another disadvantage of deregulated hospital rates is that the state would lose its current mechanism for financing more than $400 million annually in charity care and bad debt for the state’s 4 million residents under the age of 65 who do not have insurance. Currently, the state sets hospital rates high enough to cover the costs of uninsured residents. This is particularly important in Maryland because none of the state’s hospitals is a public one that can be legally charged with the responsibility of providing free care for indigent persons.

In an unregulated system, it is unlikely that private hospitals would provide uncompensated care, Mr. Murray says.

Contact Mr. Murray at (410) 764-2605 and Mr. Pierson at (410) 321-6200.