Should the US adopt global budgets for hospitals? Have some states done this already?

While I leave the answer to the first question for another day, the answer to the second question is ‘yes’. Done, Herring and Wu (2019) explain’s Maryland’s approach to global capitation payments for hospitals covering both inpatient and outpatient hospital services.

Maryland is the only state that still operates an all‐payer rate‐setting system for hospitals, with origins in the early 1970s, as a way to control rapid hospital cost inflation. The Health Services Cost Review Commission (HSCRC) was established in 1971 as an independent regulatory body with authority to publicly disclose hospital operating performance data and to set hospital payment rates for commercial payers and, since 1977, for public payers.

…The TPR [Total Patient Revenue] program established a revenue target for each hospital, covering the care for the entire population in the hospital’s service area…Hospital budgets were calculated prospectively for the fiscal year 2011 based on the previous year’s utilization in each hospital’s catchment area

…In practice, the TPR program functioned as a “shadow capitation” payment system, as hospitals continued to charge payers based on the DRG rates set by HSCRC but then adjusted their prices monthly within a ±5 percent corridor (or, if approved with justification by the HSCRC, within a ±10 percent corridor) to have total spending equal the initial budget.

…hospitals were eligible to receive additional “scaling revenue” if they performed well on the Hospital Consumer Assessment of Health Plans and Systems (HCAHPS)14 and clinical process of care results as measured by the state’s already ongoing Quality‐Based Reimbursement Program, which added a pay‐for‐performance dimension to the global budget program

To examine the impact of the TPR program, the authors use a difference-in-difference design to measure TPR’s impact on the number of inpatient days, inpatient admissions. The authors also examine the number of outpatient encounters stratified by emergency department (ED) vs. non-ED encounters. They use the fact that the TPR was first rolled out to 8 rural hospitals before it was implemented statewide. They write:

Overall, we find a decrease of roughly 9 percent in outpatient encounters, and this reduction is driven almost entirely by a 15 percent decrease in non‐ED visits, including outpatient clinic visits and outpatient surgeries. 

Although the authors hypothesized that hospital days would fall more than hospital admissions, the study was not able to identify any statistically significant change in inpatient days or admissions. Unsurprisingly, TPR had no effect on ED use.

Note that physician fees–even for services performed in the hospital–were not included in the global budget. Thus, there could be misalignment of hospital and physician incentives that reduced the scope for hospital‐physician coordination.

A response to this paper by Roberts (2019) argues that despite the fairly modest changes in utilization, global budgets may be worthwhile because (i) there was cost savings, (ii) global budgets provide stability and a revenue floor for rural hospitals, and (iii) beginning in 2019 Maryland will capitate inpatient and outpatient spending for Medicare beneficiaries,

1 Comment

  1. Interesting analysis that raises a few questions. How were hospital operating margins affected? Costs need to be controlled but hospitals also need to survive. How was patient access to care affected? Some utilization is in excess of need, but not all. How modest were the changes in utilization? Were the decreases in cost sufficient to offset the increased administrative costs of the program (both for the government and providers)?

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