Global Budgets: Testing Ground

Maryland has an unusual history of healthcare regulation. How did that lead to the creation of global budgeting?

Pines: Maryland, for a long time, has been the focus of different payment reform policies and is seen as a test bed. If payment reform works in Maryland, can the programs be disseminated across the country? Particularly with the CMS Innovation Center, which has the ability to change payments without going through the congressional rulemaking process.

Hospitals are regulated by the Health Services Cost Review Commission (HSCRC), which includes setting fixed hospital prices. What makes Maryland different is there are standard rates for patients for hospital care that don’t differ by insurance status. Although Maryland had fixed hospital prices, costs were very high, somewhere near the top 10 in the nation.

It was still an expensive state, so in 2010 they put in a pilot global budget revenue (GBR) program in a handful of rural hospitals, called the Total Patient Revenue. Eight mostly rural hospitals took part in the pilot, which ran through the end of 2013. By 2014, pretty much all hospitals in Maryland went onto global budgets.

How does global budgeting work?

Pines: The unit is the hospital, so it includes the services that fall under it like ambulatory clinics and surgical centers. The hospital gets a target budget at the beginning of the year based on historical patient loads and budgets. If they go over the target, they can’t retain those reimbursements, but if they undershoot, their budget in the future year is reduced.

The incentive is to nail that target where they can maximize their total budget for revenue or, alternatively, to lower costs. If you’ve got to meet a narrow target, really the only way to improve your net income is to lower costs or try to reduce demand for care.

How does global budgeting affect other players in the market?

Galarraga: Each global budget is apportioned among payers based on each payer’s proportion of revenue. Now there is a predictable amount of cost from a payer’s perspective, and the hospital takes on the risk by being accountable for any excess in cost above what was projected. In fee-for-service, if there is excess utilization, the payer takes the risk, and they might transfer that excess in costs in premiums to patients.

From the patient’s perspective, it is still a normal transaction and charge, and they pay co-pays to payers.

What have GBRs’ effect been from a cost savings perspective?

Galarraga: What we are seeing with hospital spending that’s promising under GBR is the five-year goal was to save $330 million in hospital spending under Medicare and they have already reached $538 million in savings in the first three years. But that doesn’t account for non-hospital spending.

Pines: Any time you are trying to reduce costs in one part of the system and there are pockets of fee-for-service, then by the nature of the market, the care will move from the global budgets to fee-for-service because that is where the opportunity is for greater revenue.

In 1983, hospital payments moved to a diagnostic-related grouping system that was a global payment for each hospitalization. What happened after is people started staying for shorter periods of time and there was a big boom in the post-acute market, which was fee-for-service.

The best analogy is squeezing a balloon. If you squeeze one part, another part is going to expand. The only way to do it is grab more of the balloon with the overall goal of reducing the amount of air in there.

The only way to change that is to change the system of payment for overall healthcare services, where it wouldn’t just be hospitals on global budgets but where there would be GBR for other entities, like outpatient clinics. But currently, HSCRC doesn’t have authority to do that in Maryland.

What can be done to rein in costs elsewhere?

Galarraga: One would expect a shift toward non-hospital spending with GBR, but what we are seeing is a disproportionate increase in non-hospital spending, making it tough to meet the state’s goals for total cost of care. When you overly shift from one space to another, there is little to no lowering in total cost of care. You need improvements in cost efficiency across care settings.

In 2019, Maryland is going to roll out the second version of GBR, and the state is going to try to align non-hospital providers with the goals of the GBR model. The huge barrier to accomplishing that is that HSCRC doesn’t have levers it can pull to affect behavior in non-hospital settings.

This creates a lot of pressure on hospitals to take leadership in the state’s healthcare system and influence other settings to help meet performance metrics in cost and quality. Ways they can do that with post-acute care facilities, for example, is having preferred networks. And if providers aren’t performing to meet total cost of care goals, they might risk not being part of a preferred referral network.

If community providers are affiliated with a hospital, there is an organizational framework where hospitals can affect care delivery that helps meet the goals of GBR. But if they aren’t linked, it’s very hard to influence their practice.

The hope is to gather outpatient providers into an alternative payment system that is aligned with the GBR model and to see a better-connected system where everyone is under the same goals of reducing cost and improving quality.

Galarraga: We still need to see what the characteristics of hospitals are that are associated with success or struggle under GBR. Only one hospital has closed since GBR. It has moved to a more ambulatory setting, but it was having issues before GBR.

There is potential for fiscal instability (under GBR), and what we do know from prior research of other countries that have tried to implement it is that local hospitals do tend to struggle a lot and there tends to be a trend toward consolidation. This makes sense because the resources a hospital needs to improve efficiency of operations and care coordination—which is a big part of being successful in GBR and meeting metrics like reducing potentially avoidable admissions—are easier to obtain in a health system than for a local hospital.

What about quality under GBR?

Galarraga: I would argue quality has improved for two hospital-based measures: readmissions and hospital-acquired conditions. Because they are tied to revenue for hospitals, we have seen dramatic improvements.

But I think the quality question hasn’t been answered. If we are reducing hospital utilization in the inpatient setting, what is happening to those patients? Do they still have access to quality care, and are their healthcare needs being met without hospitalization? Are they coming to the emergency room just as frequently but not being admitted? Or have some of the community health interventions and efforts to improve healthcare coordination been successful in making sure patients are still receiving quality care without requiring the prior rates of hospitalization?

Both are possible, but we don’t know the answer to that question. We need more research to really identify if healthcare quality has improved outside of those two quality measures and outside of the inpatient setting.

Pines: There are areas where hospital-acquired conditions, like catheter-associated infections and central line infections, can be reduced through quality improvement efforts, and we have seen that because those can be very costly for hospitals. But what is lacking is a big picture of what happens to people across settings.

On the broader question if this is a fix for the system, what really differentiates the U.S. from other countries isn’t the volume of care provided but the price. All types of care are more expensive in this country, and a lot of what these GBR models do is take away the incentive for fee-for-service in a system where prices are already very high. So it doesn’t necessarily fix the price issues.

Maryland is ahead of other states because prices are similar for all insurance, so you don’t get the price differential by insurance status. But to affect cost, you really have to look carefully at what people are charging. In this country, we spend much more for pharmaceuticals than other countries, in part because the U.S. can’t negotiate with pharmaceutical companies.

How are commercial payers faring under this structure?

Galarraga: We don’t have data on how insurance plans have been faring. What you can expect from a payer’s perspective is more predictability under GBR because there is a cap to their expenditures. Whether that’s positive or negative, I’m not sure. It’s positive because they don’t carry risk, but in a capitalistic society, some insurance payers may prefer to have risk but also have the potential for more profits at the end of the day.

And with patients, if you have a cap in healthcare expenditures for the state and a portion of that for each payer, you would expect there is less risk for premiums to be inflated.

Is there anything employers or brokers can do to make a GBR system successful?

Galarraga: The way the GBR model is structured, the onus is on the hospital to make sure it is successful.

Pines: This is a rapidly evolving area, and the way to address things is to stay involved and remain part of the discussion. Where possible, share data and look at how GBR is affecting the overall costs and affecting individuals and out-of-pocket costs. This is an area where there will be lots of research in the coming years. On the insurance side, they should want to participate in that and design their own studies to see the potential impact on their business models.

Jesse Pines, M.D., director of the George Washington Center for Healthcare Innovation and Policy Research, and Jessica Galarraga, M.D., physician investigator with the MedStar Health Research Institute