The Maryland Total Cost of Care (TCOC) model, one of the nation’s most innovative advanced alternative payment models, is about to enter year three. This demonstration and partnership with Centers for Medicare and Medicaid Services (CMS) is testing hospital global budgets, as evolved from its 2014 beginnings, and is guided by the state’s Health Services Cost Review Commission (HSCRC).
We believe the COVID-19 pandemic represents an important opportunity to assess this global budget model under stress—with implications for future health care financing. One of us (Chris L. Peterson) served as the principal deputy director of payment reform and provider alignment at the HSCRC from 2016 to 2020. The other (Dale N. Schumacher) has represented hospital medical staff in prospective payment negotiations with the HSCRC and has published analyses of Maryland hospital performance. In this post, we describe how the TCOC model has provided flexibility and stability to Maryland’s private-sector hospitals during the first five months of the pandemic. As we will show, Maryland hospitals fared better than most prospective payment system hospitals nationally, crystalizing the need for health care financing, in general, to move away from fee-for-service. Health care experts recognize Maryland’s hospital global budgeting, also known as population-based revenue, as a resilient alternative to current payment systems. Here, we document how the state adjusted its policies, in collaboration with Center for Medicare and Medicaid Innovation (CMMI), to successfully respond to the pandemic’s volume impacts and ensure hospitals’ financial stability.
The Global Budget Process
Since the 1970s, the HSCRC has had the authority to determine how much each Maryland hospital charges for each inpatient and outpatient hospital service. Beginning in 2014, the state’s agreement with CMS no longer focuses on individual prices but on setting each hospital’s annual revenue from all payers. In that sense, the Commission is a long way from its pure rate-setting beginnings of the 1970s. Each hospital’s global budget is now based on its 2013 revenue, increased by annual adjustments for population growth, inflation, market shifts, and the hospital’s quality of care. Giving hospitals a known, fixed annual revenue, allowed them to switch their focus from driving up volume (and costs) to limiting avoidable admissions and readmissions, reducing hospital complications and mortality, and managing their expenses and the health of the population. Under the state’s initial five-year contract with CMMI to implement hospital global budgets (2014–18), the state saved Medicare $1.4 billion in hospital spending. Under the new TCOC contract agreed to by CMMI and the state of Maryland, hospital global budgets continue, with additional focus on population health and opportunities to bring physicians and other providers under voluntary risk-based models.
While the Commission sets an annual global budget for the hospitals, a fee-for-service payment system remains as the vehicle through which hospitals receive their revenue. At each hospital, all payers, including Medicare and Medicaid, face the same charge for each service, but the charges differ from hospital to hospital. The Commission provides hospitals limited flexibility to adjust their prices across all cost centers to conform with their global budgets. If a hospital’s volume falls during the year, it is allowed to increase its prices by 5 percent (and higher upon request) to meet its global budget. Similarly, if a hospital’s volume rises during the year, it is allowed to decrease its prices by 5 percent (or more upon request) to meet its global budget. These “rate corridors” provide flexibility for hospitals and ensure state regulators can monitor the causes behind volume changes that may be beyond reasonable expectations of reducing avoidable use. Hospitals face financial penalties if they miss their semi-annual global budget targets.
Hospitals benefit under this system because their revenue is predictable, and they are incentivized to better manage their expenses and reduce potentially avoidable use through better population health and post-hospitalization care management. Payers and consumers benefit because of the increased quality and lower revenue growth trends. However, Maryland’s unique global-budget mechanics can cause higher prices over time for individual consumers in hospitals where volumes have declined—particularly for Medicare hospital outpatient services, where a 20 percent coinsurance exists. This is an issue the Commission seeks to address, potentially through potential changes to Medicare Part B cost sharing, which was also mentioned as a possibility in CMS’s new CHART model.
Maryland Hospital Global Budgets During COVID-19
In the spring of 2020, as COVID-19 cases began to spread nationally and shelter-in-place orders took effect, two key concerns emerged around hospitals’ financial viability. First, there was the trough: the short-term loss in volumes that were too large for hospitals to make up through rate increases. Then came the potential surge: the longer-term threat of a huge volume of COVID-19 cases that could potentially overwhelm the hospitals’ capacity and their fixed global budgets.
Due to assertive practices within Maryland, the state largely avoided an overwhelming surge in COVID-19 hospitalizations. At peak surge in mid-May, Maryland had a statewide intensive care unit (ICU) occupancy rate of approximately 83 percent. This varied by region and hospital, and some hospital volumes were less than anticipated. Expansions approved by the state and implemented by public-minded hospitals made this capacity possible. Concurrently, there are concerns that the pandemic response has caused an errant urge to establish additional ICU beds diverting resources from prevention, personal protective equipment, and palliative care. As of mid-June 2020, hospital revenues were returning to historical levels overall; compared with prior-year revenue, Maryland hospitals’ average revenue was 106.4 percent for inpatient services and 85.2 percent for outpatient services. The remainder of this blog post will focus on the effects of the initial volume trough and how hospitals have fared given Maryland’s unique system.
For state Fiscal Year (FY) 2020 (July 1, 2019 through June 30, 2020), hospitals’ all-payer global budget revenue targets totaled approximately $18 billion. Before the quarantine began, Maryland hospitals were charging prices to successfully match their FY20 global budget revenue (GBR). However, when the quarantine began in mid-March, with nearly $5 billion of revenue left to charge in the fiscal year, volumes plummeted substantially. To attain their FY20 GBRs, hospitals would have needed to increase their fee-for-service prices by approximately 30 percent, which was not an option the Commission seriously considered given the cost-sharing concerns this would have created.
However, the Commission did approve temporary corridor relief, allowing hospitals to charge up to an additional 10 percent higher prices for hospital services. This adjustment would apply to all payers and all hospital patients. This is in contrast to the federal Medicare policy, which increased Prospective Payment Systems hospital payments by 20 percent but only for Medicare patients with COVID-19. Even with this and other technical adjustments, HSCRC staff estimated that hospitals would be undercharged on their FY20 global budgets by $1 billion.
Exhibit 1: Count of hospitals by projected undercharge at June 30, 2020
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Source: 575th Meeting of the Health Services Cost Review Commission, July 8, 2020, page 155.
The promise of a hospital global budget is that the hospital is essentially guaranteed a level of revenue. (Maryland’s hospital global budgets do not apply to physician services, even those provided in the hospital. Maryland hospitals are challenged like the rest of the country with the effect of decreasing volumes under the physician fee-for-service.) In collaboration with CMS, the Commission had to decide how to fulfill that promise without dramatically increasing prices for payers, employers, and consumers.
The Commission’s first step was to eliminate any undercharge penalty that would typically apply for a hospital not attaining its global budget at the end of the fiscal year. Second, hospitals were permitted to carry their FY20 undercharge into FY21 and to spread the recapture of that revenue over time so prices would not dramatically increase. Third, as of May 15, 2020, an estimated $500 million in grant money was provided to Maryland hospitals from the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act. These funds were treated as a debit to the undercharge credit, thus reducing by approximately half the amounts that would otherwise be paid by Medicare, Medicaid, and other payers, employers, and consumers through hospital price increases.
This approach ensured hospitals would receive their global budget dollars—just not in FY20. The Commission was willing to provide additional rate-corridor relief for hospitals that demonstrated cash-flow hardship (for example, projecting to have less than 75 days cash on hand). However, given the stable cash position of Maryland hospitals, few made the request.
CMS Contributes To Financial Stability In COVID-19 Response
CMS leadership cites COVID-19’s financial effects on health care providers as another reason to move away from fee-for-service payments. CMS took significant steps to be responsive nationally. When the quarantine was instituted, if fee-for-service providers were on a system of population-based revenue rather than fee-for-service, they would have received more stable financing, as with Maryland hospitals. For this very reason, the state’s CY20 performance under its TCOC contract will likely exceed its annual spending guardrail in terms of per capita growth compared to national Medicare expenditures.
One of the primary financial tests of the state’s contract with CMS is that Medicare TCOC spending for any particular year cannot exceed the national Medicare fee-for-service growth rate by more than one percentage point. For the first time since beginning hospital global budgets in 2014, the state is likely to exceed this “guardrail” test for CY20 because of COVID-19 and the funding the model has provided to Maryland hospitals. If Maryland hospitals obtain the $500 million undercharge from their global budgets, and fee-for-service hospitals around the country do not make up for their lost volume, that translates in Maryland’s $18 billion system to a growth rate nearly 3 percent above the national rate due to COVID-19. In other words, with national comparators having a revenue shortfall and with Maryland’s budget flexibility and stability, Maryland could well exceed its comparative guardrail.
Fortunately, the TCOC contract provides allowances for “Exogenous Factors…outside the State’s control.” COVID-19 is a classic example of an exogenous factor; however, it is solely at CMS’s discretion to grant such relief. Since operating under hospital global budgets, the state has never failed to meet any of its financial or quality targets. The state’s final financial performance for CY20 will not be known until early next year, with any decisions about exogenous factors occurring after the next presidential inauguration.
In Maryland, the transition from hospital fee-for-service to a population-based revenue system is proceeding successfully. In terms of Medicare savings, the state’s performance in CY2019 was the best yet since hospital global budgets were implemented in 2014. The arrival of COVID-19 in 2020, however, has been a system test. Maryland has managed the challenges well in collaboration with the CMMI, the hospitals, and other stakeholders, although the ultimate impact of COVID-19 remains to be seen. Pennsylvania and Vermont are now implementing global budget variations. On August 11, 2020, the CMMI introduced the new Community Health Access and Rural Transformation (CHART) Model, which was built on experience from Maryland and could more broadly enable hospital global budgets.
COVID-19 elevates attention to health care access, quality, and cost. The pandemic has laid bare the limitations of the fee-for-service payment system. Given its uniqueness and many-year evolution and refinement, the Maryland TCOC’s hospital global budget system is a case study for the CMMI’s broader movement away from fee-for-service. COVID-19 stressed Maryland’s global budget program and, with state flexibility provided by the CMMI, hospitals have fared relatively well.
The authors thank Jean James, Rockburn Institute, for her expansive and exacting support in the production of this blog post.