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Written by researchers at the Center for Studying Health System Change (HSC), the policy analysis describes key design options that state policy makers would need to consider in developing a rate-setting system.
“Over the last decade, some hospitals and systems have gained significant negotiating clout with private insurers. These so-called ‘must-have’ hospitals can and do demand payment rate increases well in excess of growth in their cost of doing business,” according to the analysis. For example, in 2000, hospital prices paid by private insurers on average exceeded hospitals’ costs by 16 percentby 2009, that gap had grown to 34 percent, the analysis found.
“Hospital rate setting, as practiced in the 1970s and 1980s, sought mainly to correct the inherent flaws of the then-dominant hospital payment method—cost reimbursement. Akin to giving providers a blank check, cost reimbursement provided no incentives for hospitals to operate efficiently. Many states considered multi-payer hospital rate setting, and eight eventually enacted laws authorizing public agencies to regulate hospital rates,” according to the analysis Two statesMaryland and West Virginiacontinue to regulate hospital rates .
Studies indicate that rate setting slowed aggregate total hospital spending in New Jersey, New York, Massachusetts, Maryland, New Jersey and Washington—one exception was Connecticut, which reportedly lacked authority to enforce payer and hospital compliance with approved rates. West Virginia adopted hospital rate setting later than other states—in 1985—and its regulatory experiences have not been included in evaluations of rate-setting systems.
The Policy Analysis—Addressing Hospital Pricing Leverage Through Regulation: State Rate Setting—is available online at www.nihcr.org/State_Rate_Setting.html and was written by Anna S. Sommers, Ph.D., an HSC senior researcher; Chapin White, Ph.D., an HSC senior researcher; and Paul B. Ginsburg, Ph.D., HSC president and NIHCR research director.
According to the analysis, state policy makers contemplating the design of a new rate-setting system will face key design questions, including:
The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nations changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.