Total Cost of Care and Hospital Global Budgets

Defining key terms:

  • Total Cost of Care: The process of holding participating states accountable for quality and population health outcomes, while constraining costs of health care services delivered in a state or specified sub-state region. As applied by the CMS Innovation Center, this process takes places across all health care payers, including Medicare, Medicaid, and private health insurers and plans.
  • Hospital Global Budget: When hospitals receive a pre-determined, fixed annual budget. These budgets are for a specific patient population or program. As it is used by the CMS Innovation Center, global budgets are calculated based on a review of Medicare and Medicaid payments in previous years, and updates are calculated to reflect inflation, as well as changes in populations served and services provided.

What is Total Cost of Care? 

The CMS Innovation Center tests different approaches to health care payment and service delivery to maximize provider performance and improve quality of care and patient outcomes. One approach to achieve these goals is through “state total cost of care” pilot programs, in which a state takes responsibility for the health and costs of all residents. Recently, CMS has partnered with states to take accountability for the “total cost of care,” which includes inpatient, outpatient, and other types of services.

As its name suggests, when a state partners with CMS by taking on accountability for the total cost of care, the state uses its authority to assume responsibility for managing the health care costs across all payers, including Medicare, Medicaid, and private coverage. States also assume responsibility for ensuring health providers in their state deliver high quality care, improve population health, offer greater care coordination, and advance health equity by supporting underserved patients.

CMS supports states in implementing these pilot programs by providing start-up funding that supports state infrastructure, as well as activities that can help improve quality and population health outcomes. CMS also supports states by offering tools to manage costs, and waivers to help providers transform their care.

States participating in a total cost of care pilot program can apply different strategies to achieve two primary goals: improving the health of their resident population and reducing avoidable health care related costs. Strategies can include investing in advanced primary care or working with hospitals to improve care through hospital global budgets. As a result, primary care providers and hospitals can help patients better manage their health conditions, reducing the likelihood of an unnecessary or prolonged stays in a hospital or rehabilitation facility.

What is a Hospital Global Budget?

In CMS Innovation Center pilot programs, hospitals that receive a global budget are paid a prospective, predetermined amount based on their historical Medicare and Medicaid spending, with annual updates to account for population changes and inflation. The frequency of these budgetary payments, and the methodology by which they are calculated may vary depending on the type of model being applied. Global budgets can benefit hospitals by removing the uncertainty that often characterizes fee-for service (FFS) payment systems. Under FFS, hospitals and other care providers receive payment for services provided, which can lead to pressures to provide additional services to justify billing. This can lead to a decline in revenue when utilization drops, similar to what was experienced during the COVID-19 public health emergency.

The global budget process allows hospitals to proactively plan - building out strategies that improve their standards of care and improve the health outcomes of their patients. Hospitals operating under a global budget that successfully deliver coordinated care and collaborate more closely with community partners to improve health outcomes may earn bonuses for delivering higher quality care and cost management.

Hospital global budgets can offer all hospitals, including rural and safety net hospitals, funding needed to invest in health promotion and disease prevention programs. Global budgets can modernize hospital tools and facilities, and support strategies that provide high-quality care to patients. This payment approach offers stability for hospital systems during unpredictable times. In states like Maryland, where these strategies are currently being implemented under the Maryland Total Cost of Care Model, the state was better positioned to remain constant in both costs and delivery of care during the COVID-19 public health emergency.

What is the Patient Experience in State Total Cost of Care Approaches?

Patients who receive care from hospitals and primary care providers in states operating under a total cost of care pilot program may have access to additional services, such as health care at home, telehealth, and other community-based interventions. Patients may also experience greater coordination and communication between their providers, which can keep the patient health longer, and avoid unnecessary visits to the emergency room or hospitalization. States operating under a total cost of care pilot program may also be able to offer patients more options for recovery after a hospital stay, such as recovering at home rather than having to remain in the hospital or a rehabilitation facility.

The Maryland Total Cost of Care (TCOC) Model is one example of how the combination of these two strategies can result in significant savings. In this pilot program, a per capita limit is set on Medicare costs in Maryland, and the state is held fully at risk for ensuring that those costs are not exceeded. The Maryland TCOC Model also builds upon the existing Maryland All-Payer Model, which set a limit on per capita hospital expenditures in the State. As a result of the implementation of this pilot program, Maryland is projected to save Medicare over $1 billion by the end of 2023.

Additional Information


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