Editor’s note: For more on this topic, see Robert Murray’s Health Affairs Blog post.

In January, the State of Maryland and the Centers for Medicare and Medicaid Services (CMS) signed a historic agreement that, for the first time on a statewide level, provides the framework of a system that can deliver on the elusive Triple Aim of health care — reducing costs, enhancing quality and patient experience, and improving health.

The parameters of the agreement include principles upon which all stakeholders agree, the most important being that quality, not quantity, is what matters. The incentives are no longer to treat conditions, but to treat each person as a whole.

This agreement builds on Maryland’s legacy as a health care pioneer. More than 35 years ago, the state signed its first deal with the federal government to regulate hospital prices through a statewide commission — an “all-payer” system that helped control costs and ensured parity for those in need of care by ensuring that everyone pays the same price for the same service at the same hospital. Now, the state is once again forging a new way forward.

If it is successful, many believe that Maryland’s system could serve as a model for the nation. CMS will work closely with Maryland’s hospitals to ensure that the aggressive quality and financial metrics outlined in the agreement are met. The federal agency is doing so with the firm belief that there truly is a way to deliver better health care and reduce costs for all, and that Maryland’s plan may be the roadmap.


Hospital rate regulation in Maryland began with an act of the Maryland General Assembly in 1971 that outlined three goals: constrain hospital cost growth; ensure that hospitals have the financial ability to provide efficient, high-quality services; and ensure that hospitals’ revenue is generated equitably. To achieve those goals, the legislature created the Health Services Cost Review Commission, an independent agency given broad responsibilities regarding the public disclosure of hospitals’ financial data and, in 1974, charged with setting hospital service rates.

The uniform rates originally required that all payers be charged the same price for the same service at the same site. However, Medicare and Medicaid continued to pay hospitals under their own rules. This ran counter to the principle of equity espoused by the Commission, which began negotiating with federal authorities to remedy the situation. In 1977, with the promise to reduce cost growth, the state obtained its first waiver requiring Medicare and Medicaid to pay hospitals the same rates approved by the Commission.

Largely, the system worked well. The state’s hospital costs dropped from 23.6 percent above the national average to less than the national average, cost-shifting does not exist, there is no need for public hospitals, and Maryland’s hospitals have retained their reputation for clinical excellence. Since the waiver began, it has saved the state more than $45 billion in health care costs.

But recently, it became clear that the waiver needed to be modernized. To preserve the old waiver, the state had to demonstrate that its Medicare costs were growing more slowly in Maryland than the rest of the country. The critical flaw in that model, however, was that it only measured inpatient expenses. As hospitals nationwide began to shift treatment toward less expensive outpatient services, Maryland’s hospitals continued to be measured solely on pricier inpatient costs which, of course, didn’t compare as favorably to the nation as a whole. Also, the original waiver did not include any goals for improving quality, a priority for Maryland’s hospitals as well as CMS.

During the past two years, Maryland’s health care leaders have been working with CMS representatives to reform the waiver, a complex process that ultimately sought to create metrics that would account for the total cost of caring for a patient beyond just a hospital stay.

Without change, experts agreed, the waiver would be lost and costs would rise for all as the state reverted to the traditional Medicare payment system. Medicare, in its ongoing effort to encourage innovative, cost-efficient health care delivery systems like the one in Maryland, had its own incentives to maintain and update the program.

On Jan. 10, CMS Principal Deputy Administrator Jonathan Blum stood with Maryland Gov. Martin O’Malley and hospital leaders in a Baltimore hospital and touted the merits of the new waiver agreement. “We want Maryland to be the basis for other states … to test the boundaries of what it means to lower total cost of care and boost total quality of care,” Blum said.

Where we stand

The five-year agreement outlines very specific requirements that the state’s hospitals must meet. Broadly, they are:

  • Limit hospital spending in Maryland to an annual growth cap of 3.58 percent per capita
  • Reduce total Medicare hospital spending in Maryland by $330 million over five years
  • Limit total growth in Medicare spending per beneficiary to no more than national growth
  • Reduce the readmissions rate in Maryland to the national average within five years
  • Reduce infections and other hospital-acquired conditions by 30 percent within five years

These are highly aggressive goals, especially for large, complex organizations that need time to effect change on a large scale. The new waiver agreement began Jan. 1, so an appropriate analogy for many of Maryland’s hospitals is that they are trying to change the tires on a moving car. It’s not like a hospital can shut down for six months, reconfigure its physical space, retrain staff, and develop new policies and procedures. All of this is happening in real time, and there is no dress rehearsal. Health care leaders throughout the country have their eyes on Maryland’s live performance.

Despite the challenges, Maryland is not without the tools needed to help it achieve the waiver’s goals. Its experience with the old system, which would not have been possible without the collaboration of hospitals, state agencies, and insurers, provides a strong base upon which to build the new partnerships that are vital to future success. As an example of current efforts, 10 of Maryland’s hospitals participate in a program that provides them with fixed annual budgets, independent of the number of people treated and the services provided to them. This creates a natural incentive to eliminate superfluous tests and reduce unnecessary readmissions. Operating under this model, these hospitals have already begun to make many of the changes needed to meet the new waiver’s goals.

But even more important than the cooperative efforts of the past is a shared vision of the future. Because this new model is based on values common to all stakeholders, there is a renewed sense of purpose in Maryland’s health care community that is stirring the creative juices of the state’s health care providers and encouraging bold experimentation.

What’s next?

To meet the waiver’s requirements, hospitals will have to do nothing short of radically transform the traditional definition of a “hospital.” Soon, nearly every hospital in the state will shift from a fee for service model to a fixed annual budget like the 10 “pilot” hospitals have already done. That change will generate financial rewards for something that would have been anathema to hospitals’ business models just a few years ago — keeping people out of their beds.

Ready or not, the national shift from “volume to value” has begun, and Maryland is at the leading edge of demonstrating its viability.

With cost reduction and quality improvement as the driving forces of the agreement, Maryland’s hospitals are embarking on a journey that will take them far from simple, tried-and-true practices, like increasing volume, to ensure financial solvency. As this transformation begins, hospitals will begin to look very different. Sometimes, they might seem more like primary care providers; other times, they might look like local health departments; in some cases, they might resemble community resource centers, like health clubs or dietary support groups.

All of this will be done with the ultimate goal of providing comprehensive care for people and communities, rather than treating individual illnesses at a given point in time. Hospitals are making the choice to accept ownership of their community’s health by strategically investing in staff and programs to make sure that acute care services are reserved for those who truly need them, and that other needs are addressed in an appropriate setting: the right care, in the right place, at the right time.

Partnerships with health departments, long-term care facilities, and primary care physicians are being created, reinvigorated, or altered. Incentives for hospital executives are being modified. Hospital culture will shift so that patient engagement does not end upon discharge. Information and data that at one time might have been considered proprietary will have to be shared. New job classes will be created.

Being first is always harder. In this new era of health care, the goals are crystal clear — healthier communities, lower costs, and improved quality — but there is no map for Maryland to follow. This has never been tried before on this scale and under such scrutiny. Rather, Maryland is drawing a map for others.

The reward for the next five years of work and ingenuity is a health care environment that doctors dream about, that hospitals can facilitate, and that Marylanders want and deserve.