Hospital Rate Setting: This Way to Salvation?

Abstract

Hospital rate setting is a new type of regulatory activity rapidly spreading in the United States. Between 1970 and 1975 the number of rate setting programs grew from two to twenty-seven. These programs, most of which are administered by Blue Cross plans or state governments, now control the hospital rates or charges to one or more major type of payer in twenty-three states, and affect to some degree more than 25 percent of the nation's acute care hospitals (U.S. Dept. HEW, 1975). The federal government's involvement in hospital rate setting has up to now been minimal. Both Congress and the executive branch have been moving cautiously, made sensitive, perhaps, by the misfortunes that attended the massive switch to cost-based reimbursement when the Medicare program was introduced in 1966. This time, the federal government is closely scrutinizing experience in the states before adopting new methods of hospital reimbursement for Medicare or in plans for the administration of national health insurance. Congress has, however, offered positive inducements to the states to develop rate regulation. Both the 1972 Amendments to the Social Security Act and the 1974 National Health Resources Planning and Development Act provide for federal support of new state and regional experiments in hospital rate setting and for the evaluation of results of programs in current operation. So far there is no conclusive evidence that rate-setting programs constitute an important means of containing hospital costs. This paper reviews highlights in the state and regional experience as of 1975. After outlining the nature of rate setting and the impetus behind the movement, it examines some of the major issues that implementation has brought to the fore. In particular, we will