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Maryland's High Court Rules on Hospital Rates

The Health Services Cost Review Commission (HSCRC) sets hospital rates in Maryland. The underlying methodology used by the HSCRC is based upon a full review of a given hospital's costs and charges. However, the HSCRC has for years also heavily relied upon an "alternative" methodology, known as the Inflation Adjustment System (IAS). In fact, the vast majority of Maryland hospitals have historically opted to have their rates set via the IAS in lieu of full rate reviews.

A Maryland HMO trade association, the Maryland Association of Health Maintenance Organizations, brought suit challenging the IAS. The HMOs argued that the IAS was a flawed methodology because it took into account "system-wide inflation factors" rather than "hospital-specific" data. The HMOs also argued that the IAS was never formally adopted as a regulation, and thus in violation of the State's Administrative Procedures Act.

A. HSCRC's Authority The Court of Appeals of Maryland recently rejected this challenge, finding that the IAS was within the HSCRC's statutory mandate to assure that the total costs of all hospital services are reasonable, and that aggregate hospital rates are related reasonably to aggregate costs.

The court's decision is significant because it provides the imprimatur of Maryland's highest court on the HSCRC's general methodologic approach. The decision also gives the HSCRC broad latitude to develop a wide range of rate setting approaches, and to allow many, if not all, Maryland hospitals to utilize such alternatives.

B. Rule-Making

The court further held that the process utilized by the HSCRC to adopt the IAS, despite the lack of formal rulemaking, was adequate to protect the rights of the parties involved. The court determined that the IAS could be characterized as a "methodology" to be applied on a case-by-case basis, and was not a change in the HSCRC's policies or standards.

This conclusion is important, not only to health care providers, but to all industries governed by State law. In fact, this case is another in a series of recent Maryland appellate decisions that allow State agencies greater freedom to implement policies without promulgating regulations.

While the legal impact of this case in regard to defining the HSCRC's authority may be far-reaching, the practical effects of this case on hospital rates are not significant. The HSCRC has recently redesigned the Maryland hospital rate setting system, doing away with the IAS. Nevertheless, the redesigned system is an alternative approach that applies inflation concepts in lieu of individual hospital rate reviews, and, therefore, appears to be within the HSCRC's authority as determined by Maryland's highest court.


March 21, 2000




Rosen, Barry F.


Health Care