Hospital Cost Inflation under State Rate-Setting Programs

Evaluations of the early phases of state efforts to control hospital costs led to discouraging conclusions about the effectiveness of such programs. To determine whether cost regulation has improved since then, we compared the experience of the six states that have comprehensive, legally mandated hospital rate-setting programs with that of the states without such programs during the period from 1970 to 1978. During the last three years of this period, the average annual rate of increase in hospital costs in rate-setting states has been 11.2 per cent, as compared with an average annual rate of increase of 14.3 per cent in states without such programs (P<0.05). We conclude that much of the initial pessimism regarding the effectiveness of hospital rate-setting programs, based on studies that covered earlier reporting periods, may be unwarranted. (N Engl J Med. 1980; 303:664–8.) OVER the past decade, a number of states have established programs to set hospital rates on a prospective basis as a response to rapid increases in health-care expenditures. During this period, several authorities have viewed the evidence on the effectiveness of these programs as inconclusive.^{1 2 3 4} In a recent survey article, for example, Hellinger states: “Although firm conclusions regarding rate-setting programs should not be drawn from existing evaluations, few policy makers feel that state rate-setting commissions are capable of controlling health-care costs.” ⁵ Others have taken a disparaging view of the ability of these regulatory agencies to limit increases in health-care costs.