Maryland’s Unique Approach to Healthcare Payments and Its Effect on Medicare Advantage Plans

Medicare Advantage (MA) plans, which are offered by Medicare-approved private companies, are designed with limits for out-of-pocket costs that patients pay for covered services.  The popularity of these plans varies widely across the country. In some states, like Florida and Minnesota, more than half of eligible beneficiaries are enrolled in Medicare Advantage. But these plans are significantly less popular in Maryland and Vermont, which have all-payer health care payment models.  Under this type of model, a central body sets the rates on hospital services and establishes limits on revenue growth to curb healthcare costs.  This in turn, reduces bills incurred by patients, businesses, commercial payers, Medicaid, and Medicare.

Amit Jain, MD, associate professor at the Johns Hopkins School of Medicine; Joseph Levy, PhD, assistant professor at the Johns Hopkins Bloomberg School of Public Health; Dan Polsky, PhD, Bloomberg Distinguished Professor of Health Economics and executive director of the Hopkins Business of Health Initiative; and Kelly Anderson, PhD, assistant professor at the University of Colorado Skaggs School of Pharmacy and Pharmaceutical Sciences, were among the authors of a Health Affairs article, published on March 18, 2022, that took a closer look at Maryland’s model and its impacts on Medicare Advantage in the state.

Maryland’s story and healthcare cost outcomes

For a bit of history, in 1971, the Maryland legislature passed a law establishing hospital rate regulation. Three years later, the Health Services Cost Review Commission (HSCRC), an independent agency appointed by the Governor, was given authority to set the hospital rates for all payers in the state.  At the time, the federal government set the payment rates for Medicare and Medicaid, so HSCRC negotiated for a waiver to bring them to HSCRC’s established rates.  Since 2014, Maryland has experimented with newer models to implement this scheme, all with the goal of limiting costs while improving quality of care.

With hospitals not permitted to set their own charges nor negotiate payment rates with payers, they are beholden to limit unnecessary expenses.  This incentivizes them to direct attention to preventive services and to curb frivolous tests and procedures.  As a result of the preset rates, commercial insurers pay 11-15 percent less in Maryland than in other states. However, Medicare pays 33-44 percent more for inpatient care (such as a hospitalization following surgery) and 58-66 percent more for outpatient care (such as a visit to a doctor’s office), under Maryland’s rate scheme than had it adhered to its own federally set rates (under the traditional fee-for-service model).  Despite these costs to Medicare, they seem to be offset by the decline in Maryland’s rate of hospital admissions which dropped from 102 per 1,000 people in 2014 to 94 in 2018. (National averages hovered between 104 and 105 during that period.)  Maryland’s model saved Medicare an estimated $365 million in 2019.  This is in accord with previous studies which have shown that efforts to improve the quality of care and avoid unnecessary hospitalizations lead to the greatest savings.

Medicare Advantage in Maryland

Back to Medicare Advantage plans.  In other states, payers have the leeway to negotiate rates for MA services which can be cheaper than competing commercial plans.  But in Maryland, because of the HSCRC set rates, they cannot.  From the MA plans’ point-of-view, they anticipate having to pay healthcare fees higher than the national average.  Thus, this affects affordability of MA plans in Maryland.  Whereas their counterparts in other states have far more options for zero-premium plans, most Marylanders cannot get access to these cheaper options.  This explains why Medicare Advantage plans are not appealing to most eligible Marylanders.

There is still a great deal of uncertainty about how Medicare Advantage plans will be adopted amid Maryland’s all-payer model.  HSCRC is trying to work out ideas to provide Marylanders greater access to affordable MA plans to limit their out-of-pocket bills and to promote more cost-efficient care.  However, in the grand scheme, the evidence of whether privately-run MA is better than traditional, government-run Medicare remains inconclusive.