Maryland’s example is no solution to healthcare’s true crises

In the wake of Medicare’s enactment in 1965, healthcare costs in the United States began rising at double-digit rates annually.^a Many policy experts blamed hospital costs, which by 1980 had reached almost 41% of health spending.^b It was believed that if you contained hospital costs, overall health spending would come under control.

In 1974, the State of Maryland embarked on a program to rein in rising healthcare costs by regulating hospital rates, and it has been regulating hospital rates without pause for 49 years. With CMS’s new Advancing All-Payer Health Equity Approaches and Development (AHEAD) program, under the auspices of the CMS Innovation Center, other U.S. states are being encouraged to replicate Maryland’s system, targeted at controlling the total cost of care for the state population through constraints and incentives in hospital payments.^c

A misdirected focus?

But is replicating Maryland’s system the right move?

The evidence based on the author’s research, detailed below, indicates that, despite Maryland’s long history of regulatory oversight of hospital rates, healthcare costs in the state in 2020 were higher, not lower, than the national average, and they have grown at virtually the same rate as the overall national rate over the past 30 years.

Meanwhile, regulatory oversight such as Maryland’s does little or nothing to meaningfully address true crises in U.S. healthcare: affordability, decreased life expectancy and gaps in care for those experiencing homelessness and mental illness.

Comparing Maryland’s cost performance with other states

Maryland’s system has been exhaustively studied, but nearly all of those studies have focused on the rate of increase in hospital revenues in Maryland versus predetermined inflation targets.

The purpose here was not to review this literature, as has been ably done recently by others. Rather it is to examine the effect of Maryland’s system on health spending and ask a fundamental question: Was it worth the effort?^d

To answer this question, this author accessed a comprehensive open-source repository of state health information — the Kaiser Family Foundation’s State Health Facts. In addition to reviewing national norms, Maryland’s healthcare cost performance was compared with that of five other states:

• Two neighbors (north and south) along the I-95 corridor — Pennsylvania and Virginia
• Three others that have extensive histories with multi-specialty group practice and/or managed care — Wisconsin, Minnesota and Oregon.

A counterintuitive set of findings

The analysis disclosed that per capita health spending in Maryland was actually 6% higher than that across the country as a whole for 2020, the most recent available period in the Kaiser Family Foundation’s database. Thirty-three states had lower per capita health spending than Maryland did in 2020.

 In 1990, Maryland’s per capita healthcare spending was only 4% higher than the nation as a whole, so the cost gap has widened in the ensuing 30 years.

Maryland’s higher healthcare spending was attributable neither to more citizens in poverty (except for Minnesota) nor to more older residents (over age 65) than in the five other states mentioned above. On the spending trend line, average annual per capita health spending in Maryland has risen one-tenth of a percent faster than in the country as whole (4.8% per year in Maryland versus 4.7% in the United States) since 1990.

On Maryland’s specific regulatory target, per capita hospital spending was virtually identical to the U.S. average in 2020. Thus, growth in other forms of healthcare spending not controlled by Maryland’s system (e.g., physician services, long-term care, pharmaceuticals) accounted for Maryland’s higher per capita healthcare spend overall.

Maryland spent much more per capita on care in 2021 than the national average for Medicare patients, the historical result of a statutory federal waiver that the federal government approved for Maryland in 1977.^e

The goal of this more generous Medicare rate structure was to alleviate the burden on Maryland businesses by basically freezing and controlling cost shifting to private health plans.

This approach had the following results:

• Maryland spent 28% more per capita on Part A services in 2021 than the national average.
• Maryland’s days per 1,000 for Medicare patients in 2021 were 13% higher than the national average.
• The pattern is replicated on the Medicare Part B side, with Maryland spending 15% more on Part B spending per capita than the national average in 2021.

Spending by private insurers in Maryland was no exception

One would expect that 50 years of Maryland’s restrictions on cost shifting to private health plans would have resulted in much lower per capita spending for the privately insured population than in the country as a whole. However, the biggest surprise from the author’s research was that per capita spending for the commercially insured patient population also exceeded the national average.

Maryland’s per capita spend for those covered by private insurance was 1% higher than the national average in 2020. Maryland private insurance spending per capita was more than 4% higher than in neighboring Pennsylvania, and almost 14% higher than in Virginia. And despite regulating commercial insurers’ largest cost center (hospital care), per capita spending for private insured lives grew 0.3% faster in Maryland than the national average for the 20-year period of 2001 through 2020.

A possible explanation is that compared with Minnesota, Oregon, Pennsylvania, Virginia and Wisconsin, Maryland has the least competitive commercial insurance market. A single carrier (CareFirst Blue Cross) commanded 77% of the small group market and 55% of the large group market in 2021. Maryland also ranked 47th in Medicare Advantage (MA) participation in 2023 versus the rest of the United States — its 24% MA penetration is less than half the national average.^f Maryland’s hospital rate regulation has protected CareFirst’s market and alleviated competitive pressures from other plans.

Summary and implications

The apparent failure of almost 50 years of regulatory control over hospital revenues in Maryland either to produce markedly lower healthcare costs or to dramatically lower rates of escalation in such costs compared with the country as a whole does more than simply belie industry observers’ expectations. It also has broader implications regarding the appropriate focus for healthcare policy.

Simply put, the era of hyperinflation in healthcare costs is over: Health costs have been dead flat as a percentage of U.S. GDP for the past 13 years. So why the policy community remains fixated on controlling the rate of increase in health spending as its principal policy objective is a puzzle.

In my view, the real crises that policymakers need to address are fourfold:

• The problems many Americans face with the affordability of healthcare
• The declining life expectancy of the U.S. population
• Huge gaps in care for the homeless and mentally ill
• The critical and growing shortages of primary care

Notably, some 51% of American adults reported difficulty affording healthcare in 2023, owing either to lack of insurance or patient cost sharing that exceeds their ability to pay.^g

Tasking hospitals to reduce hospital demand through ACO-like “incentive” programs such as Maryland’s new Total Cost of Care Model is a circuitous route to addressing life expectancy declines, deteriorating health status and health equity issues.^h What’s needed to meaningfully address these issues is for policymakers to support direct investments in public health, mental health services, shelter and care for the homeless and improved access to primary care. 

Footnotes

a. Catlin, A.C., and. Cowan, C.A., History of health spending in the United States, 1960-2013, CMS.gov, Nov. 19, 2015.
b. Levit, K.R., et al., “National Health spending trends, 1960-1993,” Health Affairs, Winter 1994.
c. Burns, A., “What is the Centers for Medicare and Medicaid Services’ New AHEAD Model?,” Kaiser Family Foundation, Jan. 2, 2024.
d. Emanuel, E.J., Johnson, D.W., et al., “Meaningful value-based payment reform, part 1: Maryland leads the way,” Health Affairs, Feb. 9, 2022.
e. Maryland Hospital Association, “Waiver 101,” page accessed May 14, 2024.
f. Ochieng, N., et al., “Medicare Advantage in 2023: Enrollment update and key trends,” Kaiser Family Foundation, Aug. 9, 2023.
g. Collins, S.R., Roy, S., and Masitha, R., “Paying for it: How health care costs and medical debt are making Americans sicker and poorer,” The Commonwealth Fund, Oct. 26, 2023; and Simmons-Duffin, S., NPR, WBEZ-Chicago, March 25, 2023.
h. Brown, D.J., “Md. health officials have applied for new federal ‘AHEAD model.’ Here’s what it means.” Maryland Matters, March 20, 2024.

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Acknowledgements

The author received support for this research from the Federation of American Hospitals. He also benefited from comments from Trevor Goldsmith on earlier drafts of this analysis.