Payment reform is considered essential to the transformation underway across the United States. Catalyst for Payment Reform (CPR) indicates that almost 90% of all private sector payments are still provided on the basis of fee-for-service. CPR defines payment reform as “payment methods that reflect or support provider performance, especially the quality and safety of care that providers deliver, and are designed to spur provider efficiency and reduce unnecessary spending.”

One example of the exception to CFR’s statistics is Maryland. As announced earlier this year, the Centers for Medicare & Medicaid Services (CMS) has approved Maryland’s plan to reform hospital rate setting. The stated goal is the triple aim of better health, better care and lower costs for Maryland residents. With this plan, Maryland guarantees a savings to Medicare of $330 million in total hospital costs.

The model is key…and has never been done on such a large scale. Maryland will transform its hospital reimbursement system from a per admission reimbursement system to one based on population basedreimbursement for hospital services. The plan will limit the state’s per capita hospital cost growth to 3.58% per year, which is the state’s 10-year average gross state product. In short, the state will set hospital rates and budgets to meet its financial targets, while over five years shifting virtually all of their hospital payments into global payment models.

The model’s per capita cap design approach will put great pressure on the health care system to improve outcomes and quality, focus on care coordination and overall population health, as well as reducing avoidable costs. Quality targets are built in, to reduce hospital acquired infections and readmissions. The plan includes stakeholders and medical schools in the planning to sustain the transformation.

Maryland has the unique ability to take on this challenge given its current all-payer hospital reimbursement system. This system is based on a federal waiver approved nearly forty years ago. Under the waiver, every payer in the state — private insurers, self-insured employers, Medicare, Medicaid or someone who simply shows up on a hospital’s doorstep — pays the same for a hospital stay, an emergency room visit or an inpatient test or procedure. Although the program initially reduced costs, over time, Maryland’s per capita Medicare hospital costs became among the highest in the country. (Considered in terms of cost shifting, the higher rates for Medicare and Medicaid to cover the uninsured was part of the arrangement to lessen the cost shifting and rate negotiations of commercial payers.)

We can only speculate on the various effects that this change will have on the hospital providers and residents of Maryland. With the targets set, a strong incentive exists to find efficiencies.  However, perverse incentives that can affect quality of care also may be present. The state’s Health Services Cost Review Commission has significant opportunity to influence these issues.

Still, what is clear is that this Maryland initiative has the potential to take over our collective attention.  Maryland’s jump into the great foray of  payment reform is just one teaser for the unknown – the outer limits of what health care payments, service and quality is and should be.  Marylanders are all in it together!