Alternative Methods of Reimbursing Hospitals, and the Impact of Certificate-of-Need and Rate Regulation for the Hospital Sector

Abstract

At present 94 percent of hospital revenues are received from third party insurance agencies, while 58 percent of these revenues come from various levels of government [17]. As third party insurance has grown so has medical expenditures in general, and hospital expenditures in particular. The former has grown from 4.5 percent of GNP in 1955 to 9 percent in 1980. Moreover, the fraction of medical expenditures devoted to hospital care has grown from 31 percent in 1950 to over 45 percent in 1980 [47]. The response by state and federal governments has been an effort to contain medical costs through direct regulation. In this paper we provide a systematic analysis of the effects of two common regulatory programs; state Certificate-of-need laws (CON) and rate regulation. The CON laws require that state regulatory agencies approve both the entry of new hospitals and the large capital expenditures by existing hospitals. By 1979, almost all states had enacted these laws; however, considerable variation in the specifics of CON regulation exists [22]. At the federal level, these CON laws have been supplemented by Section 1122 of the Social Security Act. Hospitals are now no longer reimbursed by the federal government if they have not received prior approval by the state regulatory agencies for capital expenditures in excess of $100,000. Together, if effective, these regulations limit the entry of new hospitals and the expansion of existing hospital facilities. Limits on hospital revenues were covered by the Economic Stabilization Program (ESP) from August, 1971 to April, 1974. Since 1974 several Blue Cross Insurance Plans and state agencies have introduced prospective reimbursement [25]. These programs reimburse hospitals on the basis of estimates of future costs; however, a wide variety of reimbursement schemes exist. Some third party insurance plans reimburse hospitals on a per case basis, others on a fee-for-service basis, and still others on a per diem basis [41, 102].' Together, if effective these regulations limit hospital reimbursement. In spite of the research into the effect of CON laws and rate regulation on the hospital sector, there are numerous conflicting empirical results. For example, although Coelen and