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For decades, hospitals nationwide operated on a fairly straightforward business model--treat patients and charge them for those services; subtract expenses and you have a solid operating margin. If the margin is too narrow or in the red, treat more people or charge them more for your services.
While this was a long-time successful business plan, it's now headed the way of the dodo bird. Hospital care in the 21st century is not that simple. Medical bill payers, including Medicare and some of the country's largest insurance companies, push for providers to reduce costs. But there's a danger in doing that. Does reducing costs mean the quality of care also will go down?
Put another way: Can hospitals care for patients more cheaply without sacrificing their commitment to top-notch care?
The short answer is yes. But the path to cheaper, better care is complicated. And the hospital community is only now beginning to understand how to get there.
Here in Maryland, the way hospitals get paid is unique. Maryland is the only state where a statewide commission regulates hospital prices. It's a system in which all payers--Medicare, insurance companies and individuals--pay the same amount for the same service at the same hospital. It helped control costs and ensure parity for those in need of care since the 1970s.
In January, Maryland and federal leaders agreed to extend Medicare's commitment to pay the same as others in the state for five more years. This was done with an eye toward developing an innovative, cost-efficient healthcare delivery system.
Hospitals' traditional business plans will be turned upside down. No longer will Medicare reward hospitals for treating more people; instead, they will actually receive incentives for keeping people healthy and out of the hospital. The national shift from volume to value is here, and Maryland is at the leading edge of demonstrating its viability.
It seems a bit counter intuitive at first, but it makes a lot of sense when you get into the details. Under the new system, most of Maryland's hospitals will operate on fixed annual budgets, with small periodic increases for inflation. By reducing superfluous diagnostic tests (via shared data and electronic health records, among other means) and trimming unnecessary readmissions (by better coordinating with post-hospital caregivers, for example), hospitals can better control costs and improve care.
One of the pillars of this system is the concept of population health management, where the goal is to provide comprehensive care for people and communities, rather than treating individual illnesses at a given point in time. Maryland's hospitals choose to accept ownership of their community's health by strategically investing in staff and programs to reserve acute care services 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.
It's a bold experiment that, if successful, will provide a road map to reinvent hospitals for the next century.
Carmela Coyle has served as president & CEO of the Maryland Hospital Association (MHA) since July 2008, sharpening the association's focus on advocacy and public policy.
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