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Regulation of prices and investment in hospitals in the United States

In: Handbook of Health Economics


  • Salkever, David S.


With the spread of cost-based hospital payment systems in the United States in the 1960s, and the implementation of the Medicare and Medicaid programs in 1966, rapidly rising hospital costs imposed unexpected pressures on Federal and state budgets and generated a demand for regulatory interventions. Large numbers of states responded with regulatory controls on hospital investment and a significant minority of states enacted hospital price regulation (rate-setting) laws. As strong hospital sector inflation continued into the 1970s, Federal efforts to regulate prices (through the Economic Stabilization Program) and to encourage additional state regulation were also enacted. This chapter reviews the economic research on the impact of these regulatory interventions, focusing on econometric studies in particular. Several conclusions emerge from this review. First, studies of adoption of regulation show that pressure on state budgets and pro-regulation political views were more influential than "provider capture" or "rent-seeking" factors. Second, cost-containment impacts of state rate-setting programs varied over time, with changes in the national health care economy and major Federal policy thrusts. Third, there is little evidence that investment controls reduced the rate of cost growth though inconsistent reports of constraining effects on numbers of beds and diffusion of some specialized services did appear. Fourth, econometric studies of the Medicare Prospective Payment System (PPS) supported the presumption that PPS would constrain the growth in cost per case, but concomitant increases in case-mix intensity and declines in admissions raised questions about (1) the extent to which PPS truly induced efficiency gains and (2) the adequacy of our analytic models of hospital behavior. Fifth, as cost-based payment was replaced by prospective payment in Medicare, Medicaid and the private sector, and as managed care encouraged price competition, the evidence of regulatory cost savings dwindled and rate regulation virtually disappeared. While investment regulation is still widespread, its role and effect in the new hospital marketplace is still unclear.

Suggested Citation

  • Salkever, David S., 2000. "Regulation of prices and investment in hospitals in the United States," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 28, pages 1489-1535 Elsevier.
  • Handle: RePEc:eee:heachp:1-28

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    Cited by:

    1. Shigeoka, Hitoshi & Fushimi, Kiyohide, 2014. "Supplier-induced demand for newborn treatment: Evidence from Japan," Journal of Health Economics, Elsevier, vol. 35(C), pages 162-178.
    2. Jill R. Horwitz & Daniel Polsky, 2014. "Cross Border Effects of State Health Technology Regulation," NBER Working Papers 19801, National Bureau of Economic Research, Inc.
    3. Mikkers, Misja, 2016. "The Dutch Healthcare System in International Perspective," Other publications TiSEM 800704a0-24ee-4830-8659-2, Tilburg University, School of Economics and Management.
    4. David, Guy & Lindrooth, Richard C. & Helmchen, Lorens A. & Burns, Lawton R., 2014. "Do hospitals cross-subsidize?," Journal of Health Economics, Elsevier, vol. 37(C), pages 198-218.
    5. He, Daifeng & Mellor, Jennifer M., 2012. "Hospital volume responses to Medicare's Outpatient Prospective Payment System: Evidence from Florida," Journal of Health Economics, Elsevier, vol. 31(5), pages 730-743.
    6. Ron Borzekowski, 2002. "Health care finance and the early adoption of hospital information systems," Finance and Economics Discussion Series 2002-41, Board of Governors of the Federal Reserve System (U.S.).
    7. Polsky, Daniel & David, Guy & Yang, Jianing & Kinosian, Bruce & Werner, Rachel M., 2014. "The effect of entry regulation in the health care sector: The case of home health," Journal of Public Economics, Elsevier, vol. 110(C), pages 1-14.

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health


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