The rates set by our Commission (the Maryland Health Services Cost Review Commission – the Hospital Rate Setting agency in the State) do vary by hospital. They reflect differences in the cost structures of different facilities. Once a rate is established for a particular service at a given hospital however, all patients and all-payers must pay on the basis of that rate.

We have a statutory (and I would argue economic) requirement to establish rates that reflect underlying costs. But the Commission also is required to certify that the costs of a hospital are reasonable. So the approach we take is first to establish standards of reasonableness for the cost structure of a given facility – we generally use as a benchmark the average costs of “peer” hospitals. Once the reasonable cost standards have been established, then the Commission sets the final rates based on those cost standards, by establishing a uniform markup of about 20%. Part of that markup includes a provision to finance uncompensated care (it runs about 8% currently). Of course we have the absolute lowest markup in the US because of this – and the hospitals here cannot cost-shift.

These rates are then for the most part just updated each and every year by an inflation adjustment (comparable to the CMS market basket – but we use our own formula). So it is a completely prospective system – we aren’t going back and re-establishing rates each year based on reported costs. We do however, re-align rates to ensure that consistent relationship of rates to reported costs.

We also use DRGs (All patient refined -DRGs) similar to CMS to provide incentives to control utilization per case, but we use DRGs as constraints on overall hospital revenues – not for payment. We think this approach provides us with some advantages over the CMS per case payment system in the areas of patient equity (each patient pays for the services he or she uses) and also incentives (we have aligned the incentives across both payers and hospitals with this approach – both have incentive to manage utilization at the case level). We also believe that DRG constraints should reflect actual resource use so we use the Hospital Specific Relative Values (HSRV) method to establish DRG weights.

So from the Commission’s standpoint – we believe it is most appropriate to establish rates (and DRG amounts) that reflect costs – markets work best when prices reflect cost and resources are allocated most efficiently. But you don’t want to simply pass-through costs. There needs to be some standard of reasonableness applied.

With this approach – in Maryland at least – the rates of urban facilities are higher than the rates of rural facilities (largely reflecting regional variations in wages). Rates vary for other systematic or structural reasons as well – such as for hospitals with graduate medical education programs, hospitals who serve large number of indigent patients, etc.

Hope that helps.

Robert Murray

2) Would paying the same rates to hospitals in rural vs urban areas be practical? Arent the costs of doing business radically different within some states, say New York City vs Syracuse to cite one geographic example. Wouldnt there have to be some adjustments, even apolitical ones?
Thanks
Brad