Uncompensated Care and the Collapse of Hospital Payment Regulation: An Illustration of the Tinbergen Rule

The primary objective of “all-payer†rate setting—regulatory regimes through which states set hospital payment rates for all insurers—was to control costs through consistent, centrally regulated payments. These regimes were often linked, however, to an ancillary goal of financing care for the uninsured. We show that the surcharge mechanism used to achieve this secondary objective decreased the stability of these payment regimes. This instability reflected a feedback loop from surcharge rates to insurance coverage and back to the quantities of uncompensated care in need of financing. Instability was exacerbated when Health Maintenance Organizations were exempted from surcharge collections, creating a regulatory arbitrage opportunity. Legal challenges connected to the incidence of uncompensated care surcharges contributed to the abandonment of all-payer rate regulation by several states. These developments illustrate the wisdom of the Tinbergen Rule, which recommends that independent policy objectives be met with independent policy instruments.