Rate Regulation Revisited: Managing Regulatory Failure and Regulatory Capture in Health Care

Abstract

Concern over high and rapidly rising hospital prices has increased interest in government regulation of health care prices. However, regulation of health care faces two potential weaknesses: regulatory failure (intrusive regulations that can increase an industry’s cost both directly and by reducing incentives to improve operating efficiency, pursue innovation, or address equity and disparities) and regulatory capture (regulators serving the interests of the regulated industry rather than the public interest). To investigate the threats posed by regulatory failure and capture and to identify approaches that can minimize or ameliorate the effects of these two phenomena, we conducted a review of published literature and consideration of past regulatory strategies and structural features. We found that although the dangers of regulatory failure and capture are real, they are manageable. The use of structural features that protect the independence of regulatory agencies, coupled with development of fully transparent pricing systems that are not overly complex, can help prevent or reduce the incidence of regulatory capture and failure. 

This project was funded by the Commonwealth Fund.

Read the report