For decades, American hospitals have operated under a peculiar system where the same procedure might cost vastly different amounts depending on who's paying. Medicare negotiates one rate, Medicaid another, and private insurers each strike their own deals—often wildly higher. This fragmented pricing creates administrative chaos, cost-shifting, and perverse incentives that ripple through the entire healthcare system.

Maryland chose a different path. Since 1977, the state has required all hospitals to charge the same price to every payer—whether Medicare, Medicaid, or private insurance. This all-payer rate setting model makes Maryland a living laboratory for healthcare policy, offering lessons about what happens when you fundamentally restructure how hospitals get paid.

The results have been striking enough that federal policymakers have repeatedly extended Maryland's exemption from standard Medicare payment rules. Understanding how this system works—and what it has achieved—reveals important truths about the relationship between payment design, hospital behavior, and health outcomes.

At the heart of Maryland's system sits the Health Services Cost Review Commission (HSCRC), an independent state agency with unusual power. The commission sets the rates that every hospital can charge for every service, creating a comprehensive price list that applies uniformly across all payers. No private negotiations, no secret deals, no cost-shifting between different insurance types.

The commission doesn't simply pick numbers arbitrarily. It analyzes each hospital's costs, patient population, and service mix to establish rates that cover reasonable expenses while controlling overall growth. Hospitals submit detailed financial data, and the commission adjusts rates annually based on inflation, efficiency improvements, and policy priorities. This creates transparency that's essentially impossible in the rest of American healthcare.

The practical effect transforms hospital economics. When a hospital treats a Medicaid patient in most states, it often loses money because Medicaid pays below cost. Hospitals then try to make up the difference by charging private insurers more—the classic cost-shift. In Maryland, this dynamic disappears. Every patient generates revenue based on their actual care needs, not their insurance status.

This architecture also eliminates much of the administrative complexity that plagues American healthcare. Hospitals don't need armies of contract negotiators battling with dozens of insurance companies. Insurers can't demand special discounts or threaten to exclude hospitals from networks. The commission sets the rules, everyone follows them, and the system focuses on delivering care rather than gaming payment structures.

Takeaway

Payment transparency changes hospital behavior fundamentally—when every patient generates predictable revenue regardless of insurance type, hospitals can focus on clinical decisions rather than financial optimization.

Maryland's system underwent a radical transformation in 2014 when it shifted from rate-setting to global hospital budgets. Instead of just controlling prices per service, the state now caps total hospital revenue regardless of how many patients they treat. This seemingly technical change fundamentally rewired hospital incentives.

Under traditional fee-for-service payment, hospitals make more money by doing more—more tests, more procedures, more admissions. Even with controlled prices, this volume incentive remains powerful. Global budgets eliminate it entirely. A hospital receives essentially the same total revenue whether it performs 10,000 surgeries or 11,000. Suddenly, preventing hospitalizations becomes financially attractive rather than financially punishing.

The transition required careful design. The commission established baseline budgets based on historical spending, then allowed them to grow at controlled rates tied to state economic growth. Hospitals that kept patients healthier and out of the hospital could still meet their budgets while reducing costs. The model explicitly rewards efficiency and prevention rather than treatment volume.

This evolution reflects a broader insight about healthcare economics. Price controls alone don't address the fundamental problem that American healthcare rewards sickness over health. Maryland's global budget model attempts something more ambitious: aligning hospital finances with population health improvement. It's an ongoing experiment in whether large healthcare institutions can transform from treating disease to preventing it.

Takeaway

Controlling prices addresses one problem, but controlling total spending addresses a deeper one—global budgets force hospitals to consider whether each additional service actually benefits patients or just generates revenue.

The evidence suggests Maryland's experiment has produced meaningful results. Hospital cost growth in Maryland has consistently tracked below national averages since the global budget system launched. Between 2014 and 2019, Medicare spending per beneficiary grew significantly slower in Maryland than in comparable states, generating billions in estimated savings.

Quality metrics tell an encouraging story as well. Hospital readmission rates—a key indicator of care quality—declined substantially after the global budget transition. Potentially preventable complications fell. Hospitals invested in care coordination, chronic disease management, and partnerships with community organizations because keeping patients healthy now served their financial interests.

Yet honest assessment requires acknowledging complexities. Some improvements might have occurred anyway as part of broader national trends. Rural hospitals face particular challenges under fixed budgets when their patient volumes fluctuate unpredictably. And the system's success depends heavily on the commission's sophisticated regulatory capacity—expertise that might not transfer easily to other states.

The COVID-19 pandemic provided an unexpected stress test. While hospitals nationwide faced financial devastation from canceled elective procedures, Maryland's global budget model provided stability. Hospitals continued receiving their budgeted revenue even as patient volumes collapsed, preventing the layoffs and closures that struck healthcare systems elsewhere. This resilience demonstrated an underappreciated benefit of separating hospital revenue from treatment volume.

Takeaway

Maryland's results show that fundamental payment redesign can bend the cost curve while improving quality—but success requires sustained regulatory sophistication and willingness to adjust the model as problems emerge.

Maryland's four-decade experiment demonstrates that American healthcare's fragmented payment system isn't inevitable. Unified pricing and global budgets can control costs, improve quality, and create stability—all while hospitals remain financially viable. The model proves that thoughtful regulation can align institutional incentives with public health goals.

The lessons extend beyond Maryland's borders. States considering healthcare reform can study both the model's successes and its implementation challenges. Federal policymakers evaluating Medicare payment innovation have a real-world laboratory showing what's possible when volume incentives disappear.

Healthcare payment determines healthcare behavior. Maryland chose to design payment that rewards health rather than treatment volume, and the results suggest that choice matters enormously for both costs and outcomes.