PROVIDER RATE REGULATION

The primary way this model controls health care cost growth is by authorizing a regulatory agency to limit the rate of growth of hospital global budgets over time. A hospital global budget results in cost savings if regulators set the annual updates lower than historical growth rates in hospital spending. The allowed annual growth in global budgets can be set below the projected growth in state incomes (as measured by a state’s Gross State Product (GSP)) to increase the affordability of hospital services.

With a set annual budget, cost increases incurred by a facility beyond its annual revenue cap will result in operating losses and reductions in hospital operating costs or hospital utilization relative to historical levels, will generate additional profits. Both the 100% fixed and semi-variable versions of this model counter the financial incentives of current fee-for-service (FFS) payment systems to increase their patient service capacity and service volumes, a feature of FFS payment models which has contributed to rapid annual increases in the amount spent on hospital care in the U.S. in recent years. 

The global budget model also gives hospitals financial incentives to improve efficiency and reduce the use of unnecessary and low-value hospital care. Hospitals that respond to global budget revenue constraints by reducing their operating costs and utilization can generate financial surpluses under their regulatorily controlled global budget. These surpluses can serve as a source of financial sustainability for hospitals under tighter annual revenue constraints imposed on hospitals by the global budget model. Hospitals can also redeploy any increased profits generated by improved hospital operating efficiency or reduced hospital utilization on primary/preventive care and other health initiatives to help reduce the incidence of illness in the hospital’s patient service area. If these efforts result in better population health and further reductions in hospital use, the hospital can generate additional surpluses which once again can be used to ensure financial solvency or redeployed to improve the health of its service area population.

A state could pass legislation authorizing a regulatory agency (either an existing agency such as a state’s department of health or an independent and dedicated rate setting agency) to both establish and enforce a global budget for all acute care hospitals (or a subset of acute hospitals). The ability to enforce hospital compliance with each hospital’s global budget is solidified by granting the regulatory agency the ability to apply significant fines on hospitals that fail to stay within their annually established global budget cap. As noted, the agency should also have the legislative authority to determine the rate of growth of global budgets on an annual basis. In addition to these powers, the regulatory agency should have the authority to collect all hospital volume, revenue, expense, and other data necessary to operate and enforce this system. This agency should be staffed by individuals with expertise in health economics, health care financing, hospital accounting, data collection/database management as well as expertise in regulatory and legal matters.

This legislation would ideally mandate the participation of all hospitals in the state, or a subset of hospitals (such as hospitals in a particular region of the state or all or a subset of small rural hospitals). To ensure the participation of Medicare in the model, a state will need to negotiate a waiver from national Medicare payment methods (and instead have Medicare pay global budget hospitals per the payment methods established by the state) with the Centers for Medicare/Medicaid Innovation (CMMI). The legislation may also mandate the participation of the state Medicaid program and all commercial payers licensed to operate within the state. Alternatively, the state may attempt to gain the participation of hospitals and payers on a voluntary basis, although past voluntary payment models have generally not been as successful as mandatory rate setting models, because voluntary models routinely break down when payers or hospitals decide it is not in their best interest to continue their participation in the model.  

Three states, Maryland, New York, and Pennsylvania have successfully implemented systems of hospital global budgets.

The Maryland hospital global budget model grew out of the state’s all-payer hospital rate setting methodology which was authorized by state law passed in 1972. This law created the Health Services Cost Review Commission (HSCRC) and gave this independent agency the authority to establish and update hospital rates for all commercial payers in the state. From 1972 to 1977, the HSCRC collected necessary hospital data, developed its rate setting methodology and began setting commercial hospital rates in 1974. The HSCRC received approval from Medicare for a Demonstration Waiver which waived national Medicare hospital payment methods and instead required Medicare to pay per the rate methodology established by the HSCRC.  Medicaid participation was secured by an agreement with the Maryland Department of Health. Beginning in 1976, the HSCRC modified its payment methodology from an itemized FFS payment system (paying hospitals per case, per procedure, per ancillary test and per outpatient visit) by imposing a Volume Adjustment System (VAS).  The VAS was structured to cover each hospital’s fixed costs but pay on the basis of changes in hospital variable costs with changes in hospital volumes relative to base year volumes. This system, which operated from 1976 to 1990 exemplified the “flexible hospital global budget” system discussed in the main paper. This system neutralized the financial incentives implicit in any itemized FFS payment system for hospitals to increase service capacity and the volumes of care (admissions, procedures, tests, and visits) they provided. The system effectively controlled the growth of both hospital costs per case and per capita over this time period. In response to complaints by the Maryland hospital industry, the HSCRC substantially reduced the volume control mechanism of the VAS in 1991 and eliminated the VAS completely in 2000.  After several years of very rapid growth in hospital volumes and per capita hospital expense growth, the HSCRC experimented with a system of 100% fixed hospital global budgets for a group of 10 rural hospitals in the state. During this period, Maryland also experienced erosion in its performance on its Medicare Wavier test (a cost growth test in Maryland relative to Medicare cost growth nationally).  In order to avoid the termination of the state’s Medicare Waiver, it renegotiated its Medicare Waiver with the Centers for Medicare and Medicaid Innovation (CMMI) with the requirement that the state establish 100% fixed hospital global budgets for its remaining 37 hospitals, including the state’s two large Academic Medical Centers. This model was implemented in CY 2014 and has operated under the new terms of the state’s renegotiated waiver ever since.  This model reduced Medicare hospital admissions by seven percent, hospital spending by four percent (nearly $800 million) and overall Medicare Part A and B spending (inclusive of hospital spending) by two percent (nearly $1 billion).   Medicare hospital savings were attributed to slowed growth in emergency department (ED) and other hospital expenditures. Maryland also realized reduced hospital expenditures for commercial beneficiaries, reduced ED visits and inpatient admissions for commercial beneficiaries and reduced admissions and ED visits for Medicaid beneficiaries.  The model’s cost growth performance was in part offset but the migration of care from hospitals to non-hospital providers, which were not covered by the HSCRC regulatory authority.

In New York, a regional global budget model covering nine urban hospitals in Rochester and another model covering eight rural hospitals in the Finger Lakes region operated between 1980 and 1987. These regional models were administered by two quasi-public agencies, the Rochester Area Hospital Corporation (RAHC) and the Finger Lakes Area Hospital Corporation (FLAHC).  These hospital global budget models had strong support from the business community in upstate New York, paving the way for the voluntary participation of the large commercial payers in upstate New York. The New York Department of Health also authorized the state Medicaid program to participate in the model and pay global budget hospitals per the payment methods prescribed by the RAHC and the FLAHC. The participation of Medicare was secured through the approval of a Waiver and Medicare Demonstration Project which waived Medicare national reimbursement methods and instead paid hospitals based on the RAHC and the FLAHC payment methodologies. During its operation, the model successfully controlled hospital per case and per capita spending growth.  Reduced hospital spending in these regions contributed to steady reductions in the growth of private health premiums over this time period. Participating hospitals also experienced significant improvements in their financial performance relative to their pre-model experience and the experience of other hospitals in New York, which were subject to the state’s extremely stringent all-payer rate regulatory system – the New York Prospective Hospital Reimbursement Methodology (or NYPHRM). The model ended in 1987, just after the introduction of Medicare’s Inpatient Prospective Payment System (IPPS) when the participating hospitals in Rochester and the Finger Lakes determined that the IPPS paid hospitals far more generously than the payment levels dictated under their own waivered payment system and left the program. 

More recently, the Commonwealth of Pennsylvania implemented a hospital global budget arrangement specifically for critical access hospitals and other acute care hospitals located in rural counties. A key policy priority of this model is to improve the financial viability and stability of rural hospitals which experienced declining profit margins due to dwindling patient volumes.  The Pennsylvania Rural Health Model and a Waiver from national Medicare payment methods was approved by the CMMI in 2017, began in 2019, and is authorized to operate until 2024.  Under this waiver, Pennsylvania committed to have six hospitals participate in 2019, 18 hospitals in 2020, and 30 hospitals participate each year between 2021 and 2024.  Further, the State committed to having at least 75 percent of hospital’s net patient revenue come from global budgets by 2019 and 90 percent for each year between 2020 and 2024. The Pennsylvania Department of Health (PADOH) is responsible for administering the global budget model. It created the Rural Health Redesign Office (RHRO) within the PADOH, and then the Rural Health Redesign Center Authority (RHRCA), an independent agency, to recruit model participants and provide support to participating hospitals. As this model was recently implemented and implementation may have been impacted by the coronavirus pandemic, there are limited data to assess the effectiveness of the Pennsylvania Rural Health Model. Only five hospitals participated in the first year of the Model, which was below Pennsylvania’s target of six hospitals.  The State failed to achieve its hospital participation goal for 2020 as well.  Medicaid and several of the Commonwealth’s largest commercial payers have agreed to participate in the model on a voluntary basis. While the financial performance of participating hospitals worsened in the first year of the Model, hospitals indicated that regular, global budget helped reduce the impact of seasonality and volume shifts.  Pennsylvania needs more experience with global budgets to determine if it is a viable, long-term solution to support rural hospitals and moderate hospital cost growth over time.