The Efficiency policies are built off traditional efficiency evaluations (the Inter-Hospital Cost Comparison or ICC) that the HSCRC has utilized over the course of all-payer rate setting in the State, but they also incorporate new, unprecedented evaluations of Total Cost of Care (TCOC) that better align the Commission’s efficiency policies with the incentives of Maryland’s TCOC Model. In so doing, the policies allow the Commission to adjust hospitals’ permanent rate structures based on objective efficiency standards that balance hospital cost efficiency and TCOC effectiveness.
Since 2018, the Commission has developed formulaic and transparent methodologies that: a) establish an absolute standard so that the Commission may reset a hospital’s rate structure to align with its current services (Full Rate Application); b) identify and addresses relative efficiency performance in order to bring hospitals closer to peer average standards over time through scaled inflation (Integrated Efficiency Policy); and c) provide predictable rate updates for major new capital projects (Capital Financing Policy).
Full Rate Application Policy Overview:
Historically, the HSCRC has had a full rate application methodology to assess hospitals’ efficiency. The methodology allowed staff to review a hospital’s entire regulated rate structure and was employed:
- When a hospital submitted a full rate application for an increased rate structure; or
- When the HSCRC staff identified a hospital with high-cost inefficiency in order to reduce the hospital’s rate structure.
The policy ensures the HSCRC is abiding by its legal mandate that:
- Total costs of hospital services offered by or through a facility are reasonable
- The combined rates are related reasonably to the combined costs of facility
- Rates are set equitably among all purchasers or classes of purchasers of health care facility services without undue discrimination or preference
- Rate determinations are completed within 150 days of hospitals filing a full rate application
The full process is outlined in Md. Code, Health-Gen. §19-222 and COMAR 10.37.10.03 et seq
Full rate application assessments have historically been based on a hospital’s cost per case efficiency relative to a peer group standard, i.e., a hospitals’ revenue base compared to average peer group cost per case with profit removed PLUS a productivity adjustment. However, given the incentives of the TCOC Model and the broader cost accountability hospitals now face, the Full Rate Application Policy also incorporates evaluations of TCOC.
Integrated Efficiency Policy Overview:
The Integrated Efficiency policy is established by the HSCRC to simultaneously evaluate whether hospitals are “technically efficient” on a cost per case basis AND are effective in controlling total cost per capita. Those hospitals identified as particular high in both these categories are considered presumptively inefficient, while those that are low in both these categories are presumptively efficient.
Presumptively inefficient hospitals are not granted access to a portion of inflation as part of the annual update factor. They are free to file a rate application if they so desire or avail themselves of the Revenue for Reform policy, which allows hospitals to “buyout” from efficiency reductions if revenue is redirected to approved, community health investments (for more information, please review Revenue for Reform policy). Presumptively efficient and effective hospitals are granted the opportunities to request slightly higher revenue through an expedited adjustment to their GBR agreement.
Integrated Efficiency Policy
Revenue for Reform:
The Integrated Efficiency policy, which may withhold a portion of annual inflation for presumptively inefficient hospitals, uses the Inter-hospital Cost Comparison (ICC) to compare a hospital’s revenue to its Hospital Approved Revenue, i.e., the statewide average cost per case with profit removed PLUS a productivity adjustment. Since retained revenue generally results in higher regulated profits, retained revenue will make the hospital appear inefficient even if that retained revenue is being spent on productive population health investments that are in line with the purpose of the Maryland Model but not recorded in regulated cost centers.
Under the Revenue for Reform policy proposal, a hospitals’ Integrated Efficiency penalty may be reduced by the amount of qualified population spending that the hospital demonstrates. For instance, if the hospital would have received a $10 million dollar reduction in its Annual Update Factor because of having inflation withheld but had spent $7 million in qualified population health spending, then the hospital would receive an efficiency cut of only $3 million ($10 million efficiency adjustment - $7 million in a qualifying population health safe harbor).
Revenue for Reform Policy
Capital Policy Overview:
The HSCRC Capital Policy provides predictable rate updates for new large scale capital projects. Funding is capped at 100 percent of depreciation, 70 percent of interest, thus ensuring that hospitals expend funding from its capital reserves when implanting large scale capital projects. The policy takes into consideration hospitals’ capital cost efficiency, Integrated Efficiency as measured by hospitals’ cost per case efficiency and total cost of care efficiency, as well as hospitals’ levels of potentially avoidable utilization and excess capacity. The purpose is to provide efficient hospitals rate support for “large” capital projects. Other capital projects should be funded through the Global Budgets.
