News Release

Hospital Pricing Leverage and State Rate Setting

While Other States Abandoned Rate Setting; Maryland and West Virginia Still Regulate Hospital Rates

Amid growing evidence that rising prices—especially for hospital care—play a key role in rising premiums for privately insured people, policy makers may want to revisit a tool—rate setting—used decades ago by a number of states to constrain hospital costs, according to a new Policy Analysis from the nonprofit, nonpartisan National Institute for Health Care Reform (NIHCR).

Written by researchers at the Center for Studying Health System Change (HSC), the policy analysis describes key design options that state policy makers would need to consider in developing a rate-setting system.

“Over the last decade, some hospitals and systems have gained significant negotiating clout with private insurers. These so-called ‘must-have’ hospitals can and do demand payment rate increases well in excess of growth in their cost of doing business,” according to the analysis. For example, in 2000, hospital prices paid by private insurers on average exceeded hospitals’ costs by 16 percent—by 2009, that gap had grown to 34 percent, the analysis found.

“Hospital rate setting, as practiced in the 1970s and 1980s, sought mainly to correct the inherent flaws of the then-dominant hospital payment method—cost reimbursement. Akin to giving providers a blank check, cost reimbursement provided no incentives for hospitals to operate efficiently. Many states considered multi-payer hospital rate setting, and eight eventually enacted laws authorizing public agencies to regulate hospital rates,” according to the analysis Two states—Maryland and West Virginia—continue to regulate hospital rates.

Studies indicate that rate setting slowed aggregate total hospital spending in New Jersey, New York, Massachusetts, Maryland, New Jersey and Washington—one exception was Connecticut, which reportedly lacked authority to enforce payer and hospital compliance with approved rates. West Virginia adopted hospital rate setting later than other states—in 1985—and its regulatory experiences have not been included in evaluations of rate-setting systems.

The Policy Analysis—Addressing Hospital Pricing Leverage Through Regulation: State Rate Setting—is available here—and was written by Anna S. Sommers, Ph.D., an HSC senior researcher; Chapin White, Ph.D., an HSC senior researcher; and Paul B. Ginsburg, Ph.D., HSC president and NIHCR research director.

According to the analysis, state policy makers contemplating the design of a new rate-setting system will face key design questions, including:

  • Should rate setting be limited to private insurers or also include Medicaid and Medicare?
  • Should rate setting apply only to inpatient hospital care or should outpatient and physician services be regulated as well?
  • Which entity should assume rate-setting authority, and how should it be funded?
  • How should payment rates be set, should a unit of payment be specified, and should constraints be placed on hospital revenue or discharge volume?
  • How can rate setting support payment innovations? “To some policy makers, rate setting represents an unacceptable intrusion into the marketplace, but the status quo may be even more unpalatable. If prices paid by private insurers continue to grow at high rates, private health insurance premiums will increase accordingly, making health insurance less affordable for more Americans,” the analysis concludes.

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The National Institute for Health Care Reform (NIHCR)is a nonpartisan, nonprofit 501 (c)(3)organization created by the International Union, UAW; Chrysler Group LLC; Ford Motor Company; and General Motors. Between 2009 and 2013, NIHCR contracted with the Center for Studying Health System Change (HSC) to conduct high-quality, objective research and policy analyses of the organization, financing and delivery of health care in the United States. HSC ceased operations on Dec. 31, 2013, after merging with Mathematica Policy Research, which assumed the HSC contract to complete NIHCR projects.