Maryland Puts Hospitals on a Budget, for Efficiency's Sake

Mercy Medical Center’s emergency department treats 70,000 patients a year. About 20,000 of them arrive at the Baltimore hospital with minor complaints, such as cuts needing stitches, that could be taken care of elsewhere at a much lower cost. Thomas Mullen, Mercy’s chief executive, says the hospital considered opening an urgent-care unit for lesser injuries, but the economics of running a hospital made it hard to justify the investment. “If I did it, we would lose revenue,” he says, “so why would we do it?”

Mullen may now have a good reason to try. In a novel agreement with the federal government, Maryland will attempt to control rising medical costs over the next five years by limiting the total amount hospitals can charge to treat patients each year. The state will also change how hospitals are paid by private health plans and government insurance like Medicare. The current system bills for each service provided—an incentive for doctors to order tests and treatments. Under the new plan, hospitals on fixed budgets will have to decide whether those treatments are worth the cost. If it works, it will save Medicare an estimated $330 million over the course of the trial.