Maryland health officials have reached an unprecedented deal to limit medical spending and abandon decades of expensively paying hospitals for each extra procedure they perform.
If the plan works, Maryland hospitals will be financially rewarded for keeping people out of the hospital a once unimaginable arrangement.
"This is without any question the boldest proposal in the United States in the last half century to grab the problem of cost growth by the horns," said Uwe Reinhardt, a health care economist at Princeton University.
After months of negotiations with state and the federal officials, the hospitals also agreed that their revenue from all sources private insurance, government and employers will rise no faster than growth in the overall state economy.
Maryland regulators with the power to cap spending will enforce the agreement, which could serve as a model for other states and eventually the nation.
Enforcement muscle gives Maryland's deal a better chance to succeed than a similar measure passed last year in Massachusetts.
Gov. Martin O'Malley, a Democrat, is scheduled to announce the plan on Friday.
Hospital spending in Maryland grew twice as fast as the state's overall economy in the last decade, as hospitals added 18,000 jobs.
Starting this year, hospitals have agreed that their average spending per Maryland resident will grow by no more than half that rate. Specifically, statewide hospital revenue for inpatient as well as outpatient care will rise no more than 3.58 percent annually the state's rate of per capita economic growth since 2002.
Carmela Coyle, CEO of the Maryland Hospital Association, called the plan "historic" and "a challenge," adding: "We needed to move away from a fee-for-service-driven health care system, where the incentive was to do more to be paid more, and instead move to a system where the incentives are aligned to what we all feel needs to be done."
The agreement had to be blessed by the federal Department of Health and Human Services, which runs the Medicare program offering coverage to seniors and helps fund Medicaid care for the poor.
In a unique arrangement dating to the 1970s, HHS lets Maryland set prices paid to hospitals by Medicare and Medicaid as well as by everybody else. While many argue the scheme has saved money, Medicare still pays Maryland hospitals substantially more than what it pays hospitals elsewhere.
To get HHS' approval, Maryland officials promised to slow Medicare spending growth more than in the rest of the country over the next five years, generating $330 million in federal savings.
Hospitals also agreed to sharply cut infections acquired inside the hospital and expensive readmissions of patients discharged up to a month earlier.
The fact that doctors and other community caregivers aren't part of the agreement, however, could hinder coordination, said Joseph Antos, a health economist at the American Enterprise Institute.
"This has some policy objectives, some measurable financial goals, that I think are very difficult to meet," Antos said. "It doesn't necessarily give the hospitals enough tools or the will to make all this work out."
But hospitals may have concluded that the Maryland plan offers more stability than possible alternatives.
Elsewhere, insurers and employers are starting to pit hospitals against each other, presenting the risk of "a fierce price war like the airlines," Princeton's Reinhardt said. "You could tell the hospitals in Maryland, 'Don't bellyache. You're no worse off than everyone else out there.' "