Nearly 18 months ago, in January 2014, I wrote in this publication about a historic agreement between the State of Maryland and the Centers for Medicare and Medicaid Services (CMS) that, for the first time on a statewide level, provided a framework that could reduce per capita health care costs, improve the health of communities, and improve the care experience for patients.

Now, midway through year two of a five-year demonstration period that Princeton University health care economist Uwe Reinhardt called “the boldest proposal in the United States in the last half century to grab the problem of cost growth by the horns,” Maryland, with hospitals leading the way, has made remarkable strides in pursuit of that Triple Aim. Included in this progress is significant headway on the agreement’s quality metrics and a savings to Medicare of $116 million thus far. And while there have certainly been challenges in making such a historic change, the progress is undeniable.

There are valuable lessons to be harvested from the early stages of Maryland’s demonstration that inform this purpose and can assist the individual efforts of health care organizations as they embark on similar paths.


Maryland has had a hospital rate regulation system in effect for nearly 40 years, created by a 1977 federal-state compact that required Medicare and Medicaid to pay hospitals the same rates, set by a state commission, as other payers. While this agreement was more expensive for CMS, the system provided tangible benefits in exchange for that investment:

  • The state’s hospital costs dropped from 23.6 percent above the national average to less than the national average
  • Cost-shifting is extremely limited
  • There is no need for public hospitals
  • Maryland’s hospitals retain their reputation for clinical excellence

But this agreement with CMS needed to be modernized because the original version only measured inpatient expenses. As the nation’s hospitals began to shift treatment toward less costly outpatient services, Maryland’s hospitals continued to be measured solely on pricier inpatient costs when compared to national spending trends — not a reasonable comparison in today’s health care marketplace. The details of the revamped agreement took nearly two years to negotiate and its effectiveness is being monitored continuously by CMS and state regulators.

Now, under the auspices of this new contract, Maryland is, as former CMS Principal Deputy Administrator Jonathan Blum said when discussing the agreement nearly 18 months ago, “test[ing] the boundaries of what it means to lower total cost of care and boost total quality of care.”

Progress To Date

CMS, in its push to spur innovation in line with the goals of the Triple Aim, laid out highly aggressive requirements for Maryland’s hospitals to meet over the agreement’s initial five years. These metrics were designed to guarantee CMS concrete returns on its annual investment in Maryland. The requirements are:

  • Limit all-payer hospital per capita spending in Maryland to annual growth of 3.58 percent
  • Reduce total Medicare hospital spending in Maryland by $330 million over five years
  • Limit growth in total Medicare spending per beneficiary in Maryland 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

Based on data available to hospitals, the following chart demonstrates where we stand on those goals as of the end of the first year of this new demonstration:


For four of the five metrics, hospitals are exceeding the target (as an example, prior to the waiver’s passage, hospital revenue growth averaged more than 6 percent; in the first year, it was a scant 1.47 percent). On readmissions, while the rate of reduction is short of the goal, hospitals are reducing readmissions and reducing readmissions faster than the rest of the nation. Overall, the new model is proving successful at bending the cost and quality curves.

So, how was so much progress made in such a short period of time? The answer is complex, but at its heart is the upending of a traditional fee-for-service model in favor of fixed global budgets, where annual hospital revenue is capped. This has proven to be a powerful incentive for hospitals to reduce costs through reducing unnecessary utilization and improving quality.

While the agreement with state regulators called for 80 percent of all hospital revenue to be linked to some type of population-based reimbursement system by year five, hospitals signed agreements with state regulators placing 95 percent under global budgets within the first six months. This “all-in” attitude illustrates the determination of hospitals to get on board with changes that are helping us get patients the right care, at the right time, in the right setting.

The results? Inpatient admissions and inpatient use rates fell more than 4 percent; potentially avoidable utilization fell even further, more than 6 percent. This has translated into $116 million in savings to Medicare in the first year of the demonstration alone.

These results are highly encouraging and demonstrate that the historic trajectories in health care spending and quality can be bent toward new, preferable destinations. Still, the challenge for Maryland’s hospitals remains to show, conclusively, that these early returns can be sustained over time.

Lessons Learned

Dramatic changes have occurred in just 18 months, as hospitals have refashioned their staff, their staff’s responsibilities and, in some cases, their physical space, to meet the demands of a new era and new incentives. Valuable lessons can be distilled from their efforts.

It’s Hard Work

This is hard work, from both a policy and clinical standpoint. Transforming from a traditional fee-for-service model has taken dozens of meetings of state-level work groups to create and refine policies that reflect the agreement’s goals. More importantly, Maryland’s hospitals have completely changed their business model and the way in which care is delivered. Individual hospitals have been feverishly investing in new care coordination partnerships, population health initiatives, and staff development to drive patients to the most appropriate care in the most appropriate setting. This is difficult, long-term transformation.

It’s Counterintuitive

For health care leaders accustomed to the fee-for-service world, it’s challenging to step outside that box. Hospitals will be paid the same revenue no matter how many people they treat? Reducing volume is actually beneficial? It’s a hospital’s job to make sure patients’ needs are met after they leave? In Maryland, the answers are yes, yes, and yes. Culture change on an institutional level is much different than policy change at a state level, and the ease of trickle-down implementation for each organization shows wide variation.

The Pace Is Intense

Because so much change has occurred in such a short time, it’s difficult to digest and analyze the individual steps to determine which have been most effective. That means there’s a lot of experimentation, without definitive correlations between individual initiatives and improved outcomes. That’s OK — the analysis is coming, but for now, patients and payers are seeing the positive effects of the new model. Patients are receiving more thorough after-care and improved inpatient and outpatient care, payers are saving money, and communities are healthier.

Investment Is Needed Now To Be Successful Later

Prior to the shift to fixed annual budgets, when Maryland’s hospitals operated under traditional fee-for-service models, annual revenue increases were determined largely based on utilization growth and inflation. Now, the system must account for myriad other factors, including the inherent and substantial risk in caring for an unknown number of patients with unpredictable care needs within a fixed global budget. Insurance organizations refer to these unknown, but expected, costs as “actuarial risk.” Because hospitals are now fully accountable for managing this risk under a global budget, resources must be available to mitigate the long-term risk.

The Tricky Part Is Yet To Come

While hospitals have made significant progress on these metrics, hospitals are only one piece of the overall health care landscape. Other providers—doctors, post-acute care facilities, and others—still operate under a strict fee-for-service model. To truly transform health care, it will take cooperation and buy-in from the entire continuum. This will include physician gainsharing and other initiatives that bring providers in line with the goals of the CMS agreement.

What’s Next

Three big additions are needed to make the model successful under the five-year demonstration agreement.

The first is an internal cost reduction program through which a portion of the savings that hospitals realize under global budgets will be redirected to doctors, to financially incentivize quality improvement and care redesign. Creating alignment with physicians will be key to future success.

The second is a statewide data infrastructure to assist all hospitals with care coordination, a central component of population health management. Some funding for this initiative is being allocated, but it will take months, if not years, for a fully functional and effective system to be operational.

The third is a plan for when the fee-for-service and global budget models are reconciled. As it stands, Maryland’s model is a hybrid. While total annual revenue is capped, the mechanism to obtain that revenue is still through fee-for-service billing. As population health programs become more widespread, inpatient volume is projected to both decrease and become more acute. This will lead to higher per-patient costs (even though total revenue is held in check). In their place, Maryland’s hospitals are striving for models of care based on the total cost of caring for patients and communities — value-based care. That’s where the nation is going, and Maryland’s experiment is at the forefront.

For now, however, the early results are encouraging. And the new health care environment being created in Maryland—one never tested on such a large scale and under such scrutiny—is the right thing to do for the patients and communities that hospitals have the privilege to serve.