State Hospital Rate-Setting Revisited

In an attempt to control rapid growth in hospital costs, beginning in the mid-1970s several states implemented rate-setting programs to regulate hospital payments. In seven states, rate-setting was in effect for a substantial period of time (14 years or more). While most of these programs were discontinued by the mid-1990s, two are still active. In five of the seven states, the rates of increase in hospital costs were lower than the corresponding national rates during the periods in which the regulation programs were in place. Four of the states—Maryland, Massachusetts, New York, and New Jersey—had some of the lowest rates of hospital cost increases among all the states. This indicates that hospital rate regulation may be a useful approach in managing a major component of health care spending.