PROVIDER RATE REGULATION

Health care costs in the United States are far higher than in other wealthy countries, and the gap is driven mainly by prices rather than by the volume or quality of care Americans receive. A central reason prices climb is the consolidation of hospitals and health systems into dominant regional and national organizations. Where competition can be restored or preserved, antitrust and market oversight tools are the first line of response. But in many markets consolidation is already entrenched, and competition alone will not discipline the prices that dominant providers can command. In those markets, states have a further option: regulating the rates that hospitals and other providers may charge. This page gathers resources for state policymakers considering that path, beginning with background on how the United States arrived here, then moving to model legislation, a series of papers on how rate setting has worked in practice, and an implementation handbook for states ready to design their own systems. This work was made possible through the generous support of the Arnold Foundation.

For readers approaching rate regulation for the first time, these two papers provide essential background. The first asks why the United States has tolerated decades of runaway hospital price growth and what it would take to change course. The second reviews the history of state rate setting, drawing out what earlier systems accomplished, where they fell short, and what those lessons mean for states acting today. Together they explain why rate regulation is back on the table and what a serious effort would need to get right.

The model legislation offers a starting point for states that want to establish a rate regulation system. It creates a rate setting commission and directs it to adopt price ceilings for hospital services, benchmarked to Medicare rates and set per diagnosis-related group (DRG) for inpatient care and per ambulatory payment classification (APC) for outpatient care. Those ceilings apply to the commercial market, and the commission is given authority to set the schedule by which commercial prices converge to the benchmark over a defined period, for example ten years. The legislation requires each hospital to demonstrate that every price charged and accepted as payment in full for a given service fell below the applicable threshold, regardless of how payment is arranged with the payer. States can use the language as a foundation for their own drafting or as a reference point for evaluating bills already under consideration. Download the full text to explore the provisions.

Maryland is the only state that has operated an all-payer hospital rate setting system continuously since the 1970s, which makes its experience the richest available guide for states weighing this approach today. In this four-part series, Robert Murray examines how Maryland’s system works and what it means for states now, how a modern rate setting program can be built in stages, and how two complementary programs, quality-based payment incentives and uncompensated care financing, fit alongside the core rate setting function. These papers give policymakers a practical picture of what a rate setting system requires and how its pieces reinforce one another.