Addressing hospital pricing leverage through regulation

Abstract

Although U.S. health care spending growth has slowed in recent years, health spending continues to outpace growth of the overall economy and workers’ wages. There are clear signs that rising prices paid to medical providers—especially for hospital care—play a significant role in rising premiums for privately insured people. 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. During the 1970s and ’80s, some states used rate-setting systems to constrain hospital prices. Two states—Maryland and West Virginia—continue to regulate hospital rates. State policy makers considering rate setting as an option to help constrain health care spending growth face a number of design choices, including which payers to include, which services to include, and how to set payment rates or regulate payment methods. To succeed, an authority charged with regulating rates will need a governance structure that helps insulate regulators from inevitable political pressures. Policy makers also will need to consider how a rate-setting system can accommodate broader payment reforms that promote efficiency and improve quality of care, such as episode bundling and rewards for quality.