Effects of regulation on hospital costs and input use.

Abstract

IN the first half of this century, most regulations affecting hospitals were designed to promote quality assurance through accreditation and licensure of facilities and personnel. Then health planning, initially on a voluntary basis and subsequently made compulsory, arose from a dual concern for improving access to health services and for correcting alleged malfunctions in the health care marketplace. During the past decade, the growth of hospital expenditures has led to more targeted efforts to regulate specific sources of cost increases. At present, hospitals in the United States must cope with a wide variety, and still growing number, of controls developed by federal, state, and local governmental agencies and by some private organizations, including Blue Cross. The case for hospital regulation is buttressed by a general consensus that the hospital market is far from the competitive ideal.1 The majority of hospitals are nonprofit and therefore may not be as subject to pressures for efficient production as are profit-maximizing firms in competitive industries. Overinsurance also undermines incentives to implement cost-reducing innovations and has probably led to overuse of hospital services.2 Many hospitals are local monopolists and perhaps monopsonists as well. Other structural characteristics of the industry, including medical-staffing privileges, severely limit patient and physician choice of hospital. Finally, given the merit want aspect of health and hospital care, society may not be satisfied with a market solution, even if the above impediments were not important. Regulation offers the appeal of directly attacking the problems that cause