Overview

Healthcare costs in the United States are significantly greater than in other countries because we pay higher prices for the healthcare services we receive, not because we use more services or have higher quality care. A primary reason for these high prices is the consolidation of healthcare providers, especially hospitals, into large regional and national health systems. While The Source offers policymakers a range of administrative and litigation tools to better oversee future market consolidation, in many markets, existing competition remains insufficient to constrain the pricing power of dominant insurers and providers.

State Implementation

The overview map shows the states that are currently implementing one or more of the policy options (states implementing more than one option show the higher level policy option).

Rate Regulatory Handbook: A Guide for State Implementation of Cost Constraint Models

Overview

Healthcare costs in the United States are significantly greater than in other countries because we pay higher prices for the healthcare services we receive, not because we use more services or have higher quality care but because Americans pay higher prices for the services they receive. A primary reason for these high prices is the consolidation of healthcare providers, especially hospitals, into large regional and national health systems. In many markets, existing competition remains insufficient to constrain the pricing power of dominant health systems and federal and state antitrust action can, at best, forestall future hospital consolidation. This page describes a range of policy options that states have to counter the market power of consolidated hospitals and health systems, constrain price and revenue growth, incentivize improved hospital operating efficiency, and achieve other important policy goals.

Rate Regulatory Handbook

Rate Regulatory Handbook: A Guide for State Implementation of Cost Constraint Models

This handbook was written to guide state regulators in efforts to initiate and operate a state or regional hospital rate setting system with participation and compliance enforced by law and regulation. Our focus for the implementation of rate regulation is on the hospital industry because it accounts for the largest proportion of health care expenditures and hospital prices have been growing more rapidly than any other sector. State-based and regional hospital rate setting models were widely used in the 1970s and 1980s when hospital rate setting was at the center of the policy paradigm for controlling hospital cost growth. Since that time, the popularity of hospital rate setting has waned considerably, and only the state of Maryland continues to operate its system of all-payer hospital rate regulation. Nonetheless, the option of creating a professional, politically neutral, expert, and effective cost-containment agency may become increasingly attractive from both a political and a fiscal perspective.

This Handbook contains the following sections:

  1. a discussion of three low-intensity rate setting models: i) caps on prices in state employee health benefit plans, ii) caps on prices for services provided out-of-network, and iii) hospital global budgets,
  2. an articulation of the key characteristics of successful past rate setting systems, including a discussion of how future rate setting systems should be structured;
  3. an analysis of how rate setting can promote competition on non-price domains,
  4. a discussion of the benefits and weaknesses of past hospital rate setting approaches and how to address them, and
  5. the tenets of successful rate setting systems.

The appendices to this report include a step-by-step operational description of a model of “Flexible” Hospital Global Budgets (HGBs) and other detailed information that policymakers can use when in establishing their own rate-setting systems.

APPENDIX I (PDF) describes the proposed flexible hospital global budget (HGB) model. It includes a description of how the selection of the payment bases can place an appropriate level of financial risk on hospitals. It details how “flexible” global budgets give hospitals financial incentives to control costs without the incentive to overly restrict care that exists in “fixed” global budget systems. It describes eleven key characteristics of effective global budget systems and includes recommendations of operational features to implement the flexible HGB model while minimizing the risk of regulatory capture or failure. It concludes with an illustration of how a state could establish and operate a system of HGBs that includes a discussion of:

  1. a list of the sources of all data used in the development of the Global Budget;
  2. a general discussion of how the Global Budget operates;
  3. descriptions and illustrations of the development of the rate base, adjustments to the base, and volume adjustments; and
  4. a discussion of policy and operating issues with recommendations of ways in which these issues can be addressed or resolved.

APPENDIX II (PDF) details the steps required to implement a rate-setting system, including a discussion of a 3-5 year, phased implementation process:

  1. Establish rate agency (Year 1).
  2. Collect and analyze data (Year 1-2).
  3. Develop methods for setting and updating rates (Year 1-2).
  4. Implement prospective rate methods, including compliance and monitoring (Years 2 and beyond).
  5. Implement a quality-of-care improvement system (Years 3 and beyond).

APPENDIX III (PDF) Includes sample job descriptions for rate setting staff

APPENDIX IV (PDF) provides a glossary of key terms used in Maryland and other past rate setting enabling statutes and policy documents

APPENDIX V (PDF) gives a prototype contractual hospital global budget agreement of a hospital with a rate setting agency or commission