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Hospital Regulation

Hospital Regulation. 737.01 10 /4/10. Outline. I. Why Regulation? II. Types of Regulation III. Determinants of Regulation IV. Effects of Regulation. I. Why Regulation?.

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Hospital Regulation

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  1. Hospital Regulation 737.01 10/4/10

  2. Outline • I. Why Regulation? • II. Types of Regulation • III. Determinants of Regulation • IV. Effects of Regulation

  3. I. Why Regulation? • Rapidly rising hospital costs after Medicare and Medicaid began in 1966 were seen as excessive because of market failures such as • Imperfect information • Moral hazard effects of insurance • Barriers to entry • Lack of incentives for efficiency • Emerged as most politically palatable possible solution. Other suggestions included • Promotion of market competition among health plans • Single-payer system

  4. II. Types of Regulation • Certificate of need (CON) laws • In order to build a new health care facility or make a major capital investment, must demonstrate need and obtain a “certificate” • Which types of facilities covered and what threshold for capital investment varied from state to state • Why does this seem like an odd way to reduce costs? • It was thought conventional economic theory did not apply because of the lack of price competition because of third-party payers • More construction => excess capacity => higher prices • Fear of medical arms race

  5. II. Types of Regulation • CON laws • History • NY first state in 1964 • 4 more in late 1960s • 25 more in early 1970s • Incentivized by federal government in 1974 • By 1979 only 3 states did not have them • Began to be eliminated or scaled back in 1980s with Medicare PPS and managed care • Still some type of CON programs in 37 states in 1997

  6. II. Types of Regulation • State rate regulation • Rates set by state agencies, hospitals forced to comply • Variation between states in which services and payers these rates applied to • Generally based on hospital budget reviews and projections • Set to cover “allowable” costs at projected volumes • How often reviews conducted varied between states

  7. II. Types of Regulation • State rate regulation • History • NY first in 1969 • 7 more by 1975 • 2 more passed in late 1970s but short-lived • 1 more in 1980s • Repealed in virtually every state beginning in 1986

  8. II. Types of Regulation • Federal rate regulation • Some legislation in the 1970s but mostly took form of encouraging state regulations • Part of Economic Stabilization Program (ESP) from 1971-74 • Medicare Prospective Payment System (PPS) (1983) • Before this, reimbursement by Medicare, Medicaid, and major private plans done based on incurred costs, so no incentive for efficiency. Skyrocketing costs resulted. • The Medicare PPS system reimburses a fixed amount based on the diagnosis – a diagnostic related group (DRG) system – regardless of the cost incurred

  9. III. Determinants of Regulation • Interesting by itself but also to inform identification in studies examining effects of regulation • Proportion of state budget spent on Medicaid positively related to P(rate setting law) and P(CON law) (Cone and Dranove, 1986; Fanara and Greenberg, 1985; Lanning et al., 1991) • Political climate also mattered (Cone and Dranove, 1986; Lanning et al., 1991) • Hospital beds per capita (-), occupancy rate (-), and hospital industry concentration (+) mattered, suggesting hospital industry had political influence (Lanning et al., 1991; Wendling and Werner, 1980).

  10. IV. Effects of Regulation • Costs • Three commonly-used measures: • Cost per patient day: measures efficiency, but could also get more efficient by reducing stay length, so … • Cost per admission: but doesn’t account for any inducement effects, so … • Cost per capita: but largely result of demand so perhaps most susceptible to bias • Salkever and Bice (1979) • State-level panel from 1968-72 • Unable to conclude any substantial effect of CON laws on cost per capita or cost per patient day • Sloan and Steinwald (1980) • Hospital-level data from 1970-75 • Minimal if any effect of CON laws or state and federal rate setting on cost per patient day or cost per admission

  11. IV. Effects of Regulation • Costs • Coelen and Sullivan (1981) • Data from 1969-78 • Dependent variables: hospital-level data on cost per day and cost per admission, county-level data on hospital cost per capita • Little to no evidence of effect of CON laws • Rate-setting laws had negative effects, though the effect was weakest for cost per capita, suggesting volume increases

  12. IV. Effects of Regulation • Costs • Sloan (1981) • State-level panel data from 1963-78 • No clear effects of CON laws on cost per admission or cost per day • Sizeable negative effects of federal and state rate-setting laws • Speculates different results from Sloan and Steinwald (1980) are because of longer time period

  13. IV. Effects of Regulation • Costs • Hadley and Swartz (1989) • Hospital-level data from 1980-84 • State rate-setting reduces costs • Eakin (1991) • Hospital-level data from 1975-76 • Very small effects of CON laws and rate-setting on “allocative efficiency”

  14. IV. Effects of Regulation • Costs • Lanning et al. (1991) • IV approach using hospital-level data from 1969-82 • Rate-setting reduces per capita hospital and non-hospital medical spending • CON laws increase spending • Antel et al. (1995) • State-level data from 1968-90 • Federal price controls from 1971-1974 reduced cost per day, cost per admission, and cost per capita • State rate-setting and CON laws did not reduce costs • Summary: weight of more recent evidence suggests rate-setting – but not CON laws – can be effective in controlling costs

  15. IV. Effects of Regulation • Quantity • Salkever and Bice (1979): CON laws reduced inpatient days per capita via hospital beds per capita • Worthington and Piro (1982): State rate-setting programs increased occupancy rates and length of stay in some cases and had no effect in others • Sloan (1983): Rate-setting programs have no effect on length of patient stay but CON laws have a negative effect (maybe through number of beds?) • Hadley and Swartz (1987, 1989): mixed results • Salkever and Steinwachs (1988): volume increases after rate-setting can be mitigated by per-case (instead of per-service) payment system

  16. IV. Effects of Regulation • Other results for CON laws and state rate-setting • CON laws appear to reduce excess capacity of hospital beds • Very little evidence that regulations actually affect capital investment by hospitals along other dimensions • Some evidence that regulations slow the diffusion of specialty services such as cardiac services

  17. IV. Effects of Regulation • Medicare PPS • Appears to have been somewhat effective in controlling costs • Evidence of “upcoding”, where providers alter the diagnosis code (or add more secondary diagnoses) to increase reimbursement

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