Hospital Rate Setting in the United States: History, Evidence, and a Stepwise Path for States

Abstract

Since the mid-1990s, hospital consolidation has given health systems the power to raise commercial prices. Such consolidation has undermined the competitiveness of hospital markets, resulting in managed care, antitrust enforcement, and voluntary payment models being unable to limit price increases. It has also contributed to rising health care costs that have made health care increasingly unaffordable for individuals, families, and workers. In the 1970s and 1980s, hospital prices were also rapidly increasing and some states concluded that the problem could not be corrected by purchasers acting individually. These states turned to public-utility-style rate-setting systems to set prices for hospital services that
applied to all payer categories. This report examines what those systems achieved, why most were repealed, and what states can learn from them. The states with mandatory rate-setting systems reduced cost growth relative to unregulated states, narrowed payment differences across payers, and stabilized the finances of hospitals, particularly those serving low-income populations. Although most systems were repealed in the 1990s due to a variety of factors, Maryland avoided these problems through the broad delegation of regulatory authority to its commission, a formula-based rate-setting approach, general oversight designed to deter gaming, and an expert, well-resourced agency. Drawing on these lessons, the report describes a path for states to reconsider hospital rate setting, including a stepwise path to implementation.