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Removing a Constraint on Hospital Utilization: A Natural Experiment in Maryland

Noah S. Kalman, MD; Bradley G. Hammill, MS; Robert B. Murray, MA, MBA; and Kevin A. Schulman, MD
In 2001, Maryland began to reimburse hospitals for excess volume at full case rates. The authors investigated the impact on hospital utilization and finances.
Additional factors may have influenced the growth in hospital utilization. The repeal of the payment adjustment, negotiated by the HSCRC with hospitals and payers in Maryland, was undertaken in exchange for tight overall case-rate inflation for 2001 through 2003. Similarly tight case-rate updates had been implemented in 1999 and 2000 in response to the 1997 Balanced Budget Amendment. Although these small rate updates limited per case cost growth, it likely enhanced the relative profitability of additional patient volume (because incremental volume has no fixed costs to cover) compared with the profitability of baseline patient volume. Indeed, inpatient and outpatient volume grew faster in 1999 and 2000 than in 1997 and 1998. Generous case-rate increases from 2004 through 2007, combined with a strong economy that expanded the potential demand for hospital services, further increased the profitability of additional patients. For outpatient services in particular, the repeal of a small ambulatory surgery constraint program released a restriction on outpatient service growth. Overall, these factors could have provided extra inducement for hospitals to admit and treat more patients.

Hospital Finances

Commensurate with the increase in hospital utilization, the rate of growth in hospital operating revenue and operating costs accelerated with full case rates. Operating revenue growth outpaced utilization growth, which would be expected given case-rate inflation approved by the HSCRC on top of larger patient volumes. That operating costs had greater increases than operating revenue demonstrated that hospitals’ cost inflation exceeded case-rate inflation. Such cost increases in response to more generous payments are consistent with converse research indicating that hospitals reduced operating costs in response to payment cuts.11‑14 Contrary to expectations, operating profit trends had a significant 1-year decrease in value of nearly 50% post policy repeal, and operating profit trends as a percentage of operating revenue had a significant 1-year decrease in value of 3.1%. These results can be attributed to the extremely tight overall case rate updates between 1999 and 2003. Although the tight updates did initially impact operating profits, operating profit as a percentage of operating revenue returned to historical levels over time (Figure 3, Panel C).


The HSCRC data allow comparisons of trends over many years, increasing the statistical power of the data. Furthermore, the database maintains consistent reporting fields over the 18-year period. Although it is a relatively small state, Maryland has a range of hospital types, including academic medical centers, community hospitals, and safety net hospitals in both rural and urban areas.

Our analysis did not include other state or national trends as a control group for the observed change, nor did it explicitly control for population growth, macroeconomic trends, or changes in insurance coverage or health status. However, the growth in admissions nationally remained relatively constant,15 diminishing the likelihood that a national policy change or national business cycle had an impact. Furthermore, population growth in Maryland remained relatively constant, indicating that population growth did not account for the increase in admissions.16 This limits the likelihood that changes in the time series are attributable to endogenous factors not recorded in the analysis.

Certain reported hospital-level measures, specifically operating revenue, operating costs, and operating profit, included hospital operations unrelated to direct patient care. This made the analysis of the impact of the policy change more difficult. In addition, the reported effects of the policy change may not be uniform across all hospitals, because hospitals varied in their response to the policy change. The inclusion of some hospitals in multihospital health systems could have further altered the observed financial impact.

Lastly, the HSCRC reintroduced the 85% payment adjustment policy in 2009. Although hospital volume has recently declined, we were unable to assess whether the reinstatement of the payment adjustment policy had a statistically significant impact on hospital behavior, given the policy’s recent reimplementation. Future research is required to examine this effect once sufficient time points have been reported.

Policy Implications

In the 1990s, Maryland’s 85% payment adjustment policy limited the financial incentive of case-based payment systems for hospitals to increase utilization. With the policy change to reimburse full case rates for increases in hospital services, hospitals unsurprisingly responded to this incentive change by increasing utilization, operating revenue, and operating costs faster than baseline growth. Policy makers should be concerned that Maryland’s payment incentives in the 2000s, which mirror those of Medicare, led to changes in hospital infrastructure and strategy that have long-term consequences. In the 8 years with full case rates, hospital operating costs in Maryland more than doubled. If the baseline operating cost trajectory had remained the same, hospital operating costs in the state would have been 25% lower in 2008.

On a national level, efforts to bend the healthcare cost curve, such as bundled payments and accountable care organizations, rely on financial incentives to change behavior. However, Medicare has focused on containing costs without understanding hospitals’ underlying cost structure. Indeed, neither of these new programs addresses the incentives created by the current average costbased payment system. Policy makers may consider Maryland’s payment adjustment policy as a potential tool to address these incentives.


The 1990s Maryland payment adjustment policy intended to deliver payments that more accurately reflected hospitals’ mix of fixed and variable costs and to limit the incentive for hospitals to increase service volume.17 The policy’s repeal made reimbursement for incremental volume more generous, similar to Medicare’s current payment structure. We observed significant acceleration in the growth trends of inpatient and outpatient utilization, as well as operating costs, associated with full case rates. The payment adjustment policy of the 1990s appeared to restrict the growth in hospital costs in Maryland and may prove a useful method to limit hospital cost growth nationally.

Author Affiliations: Duke Clinical Research Institute, Duke University, Durham, North Carolina (NSK, BGH, KAS); Department of Medicine, Duke University School of Medicine, Durham, NC (NSK, KAS); Global Health Payment, LLC, Towson, MD (RBM).

Source of Funding: This work was supported internally by departmental funds.

Author Disclosures: The authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (NSK, BGH, RBM, KAS); acquisition of data (NSK); analysis and interpretation of data (NSK, BGH, RBM, KAS); drafting of the manuscript (NSK); critical revision of the manuscript for important intellectual content (NSK, BGH, RBM, KAS); statistical analysis (NSK, BGH); supervision (KAS).

Address correspondence to: Kevin A. Schulman, MD, Duke Clinical Research Institute, PO Box 17969, Durham, NC 27715. E-mail: kevin
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