Regulating hospital labor costs: a case study in the politics of state rate commissions

With the advent of various attempts to control hospital costs by direct state regulation, labor input costs have become a target of particular attention. This focus is due in part to the unique discretion administrators can exercise over labor factors, and in part to the large absolute part of hospital resources devoted to labor costs, conservatively estimated to be about 55 percent of total budget. This paper examines the impact of state efforts in prospectively setting rates on collective bargaining outcomes in the hospital sector. Specifically, bargaining in New York, Maryland and Connecticut is examined. The paper concludes that government attempts at controlling costs have, in all cases, required the regulatory bodies to consciously exert influence on the collective bargaining process. Further, while such attempts seem to be within the paradigm of multilateral bargaining, there are significant distinguishing features in the role hospital regulatory bodies play in the bargaining process. These variations from the multilateral paradigm may impede the long run ability of rate review efforts to control bargaining outcomes with respect to wages.     

Tension, compression, and shear: directions, stresses, and outcomes of health care cost control

"Control" of health care costs is often portrayed as a struggle between external, "natural" forces pushing costs up and individuals, groups, and societies trying to resist the inevitable. This picture is false. Control includes strenuous efforts by some to raise costs, and by others to resist those increases, and/or to transfer costs to someone else. But all such forces originate in the purposes and interests of individuals and groups. Health care cost control is a struggle among conflicting interests over the priorities of a society, and claims of "inevitability" are simply part of the political rhetoric of that struggle. International experience supports certain conclusions. First, there is no basis for the claim that limits on expenditure growth must threaten the health of (some members of) a society. Second, there is a substantial variety of experience with cost control. Failure in the United States is often presented as evidence of the impossibility of control, but most other countries have succeeded. Finally, control requires the direct confrontation of interests, with substantial build-up of stress. Advocates of expansion are more successful if they can transform compressive forces into efforts to shift the burden onto someone else. Pressures from providers in every country for "privatization" and/or payment by users reflect this recognition of economic interest.     

Prospective payment in perspective

Prospective payment promises improvement for a health care system plagued by inefficiency and rising costs, but is likely to disappoint. Serious efforts to control costs threaten the system's access and quality objectives and will be resisted. Moreover, serious cost containment, whether the result of all-payer regulation or competition, requires a stronger civil service than America seems capable of providing. A comparison with the experience in defense demonstrates the important limitations in applying incentive-based models in policy areas with conflicting goals. The search for panaceas will go on, but there are none.     

POTENTIAL EFFECTS OF PROPOSED PRICE GOUGING LEGISLATION ON THE COST AND SEVERITY OF GASOLINE SUPPLY INTERRUPTIONS

The rise in gasoline prices that followed the devastation causedby Hurricanes Rita and Katrina has led to proposals for federal"price gouging" legislation. This paper analyzes the potentialeconomic costs of such proposals in light of the experiencegained from prior episodes of gasoline supply interruptionsand efforts to impose price controls. Studies of previous spikesin the price of gasoline, including those after Katrina andRita, have consistently found that price increases were dueto the normal operation of supply and demand and not price manipulation.Studies of gasoline price controls find that neither consumersnor the economy benefit, because the apparent monetary savingsto consumers are transformed into costs of waiting or otherforms nonmarket rationing that exceed the monetary savings.Price controls also make shortages worse by reducing the incentiveto provide additional supplies. We apply these lessons to estimatethe additional economic cost that would have been incurred hadprice controls like current legislation been in effect afterthe hurricanes, and conclude that economic damages would havebeen increased by $1.5–2.9 billion during the two-monthperiod of price increases.     

Medicare program; changes to the hospital inpatient prospective payment systems and fiscal year 2008 rates

We are revising the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems, and to implement certain provisions made by the Deficit Reduction Act of 2005 (Pub. L. 109-171), the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (Pub. L. 109-432), and the Pandemic and All Hazards Preparedness Act (Pub. L. 109-417). In addition, in the Addendum to this final rule with comment period, we describe the changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth the rate of increase limits for certain hospitals and hospital units excluded from the IPPS that are paid on a reasonable cost basis subject to these limits, or that have a portion of a prospective payment system payment based on reasonable cost principles. These changes are applicable to discharges occurring on or after October 1, 2007. In this final rule with comment period, as part of our efforts to further refine the diagnosis related group (DRG) system under the IPPS to better recognize severity of illness among patients, for FY 2008, we are adopting a Medicare Severity DRG (MS DRG) classification system for the IPPS. We are also adopting the structure of the MS-DRG system for the LTCH prospective payment system (referred to as MS-LTC-DRGs) for FY 2008. Among the other policy decisions and changes that we are making, we are making changes related to: limited revisions of the reclassification of cases to MS-DRGs, the relative weights for the MS-LTC-DRGs; applications for new technologies and medical services add-on payments; the wage data, including the occupational mix data, used to compute the FY 2008 wage indices; payments to hospitals for the indirect costs of graduate medical education; submission of hospital quality data; provisions governing the application of sanctions relating to the Emergency Medical Treatment and Labor Act of 1986 (EMTALA); provisions governing the disclosure of physician ownership in hospitals and patient safety measures; and provisions relating to services furnished to beneficiaries in custody of penal authorities.     

State rate-setting and its effects on the cost of nursing-home care

The paper uses data from nursing-home cost reports to analyze the effectiveness of different approaches to nursing-home reimbursement. Our research has produced considerable evidence on the effect of states' efforts to reduce the rate of increase in nursing-home costs. First, homes in states with flat-rate reimbursement systems were found to have lower rates of increase than homes in other states, while there were no consistent differences between the results of prospective and retrospective systems. Second, efficiency incentives, inflation-projection methods, and the level of ceilings on rates appear to be very important, regardless of the general reimbursement method. For example, prospective systems with weak efficiency incentives, generous inflation adjustments, and high percentile ceilings have lesser cost-containment effects than prospective systems with stringent inflation allowances and low percentile ceilings. There is also evidence that the inherent weakness of the cost-containment incentives in retrospective systems can be offset by low percentile ceilings and efficiency bonuses.     

Competition versus regulation: some empirical evidence

In response to dramatic rises in health care costs, policymakers have been debating the relative merits of regulatory and competitive strategies as a means of containing costs. One major activity espoused by proponents of competition is the growth of health maintenance organizations (HMOs) which, in their opinion, will result in the market better determining efficient levels of utilization and costs. Extending this argument, the larger the percent of the population in a market area who enroll in HMOs, the greater the market-forcing effect of HMOs in reducing overall hospital expenditures; that is, if HMOs are providing lower-cost care, then the fee-for-service system will be forced to reduce costs in order to be competitive. The authors studied the 25 largest SMSAs from 1971-1981, and controlling for environmental conditions in each market, they examined the impact of both HMO growth and regulatory activity on costs and utilization. They conclude that neither competition nor regulation had a significant impact in reducing overall hospital costs. While there may have been some impact in specific communities, no generalizable effect could be observed. However, the authors did find that increases in costs and utilization were essentially driven by supply factors such as the number of hospital beds or medical specialists in a given community.     

The meaning of regulatory costs

Regulatory costs are an essential aspect of the efficiency and quality of regulations. Moreover, they are a genuine loss of welfare which have a negative impact on national income. Surprisingly, regulatory costs are often neglected or misinterpreted in regulatory assessments, except—though only recently—for administrative compliance costs. One important reason is the lack of a clear and consistent definition as well as a practical and exhaustive typology of regulatory costs. This conceptual paper presents a cost taxonomy that takes into account all costs of regulation. We identify 16 direct and two indirect regulatory cost types. The former are costs borne by society in preparing and implementing regulations. For the government, they consist of information, decision-making, drawing-up, planning, administrative start-up, operational, monitoring, and enforcement costs. Citizens and businesses, on the other hand, incur rent-seeking, information, planning, three types of compliance, delay and enforcement costs. The indirect costs comprise the efficiency loss plus, in the event of poorly designed or market-based regulation, also transaction costs. The neglect of any of these costs may lead to the underestimation of costs in absolute or relative terms and thus to inefficient regulatory choices.     

Power and cost containment in a Danish public hospital

The assumption that hospital decision-making is hierarchical in character underpins the policy formulation process in public as well as pluralist national health care systems. This article's analysis of decision-making in a Danish public hospital reinforces the contrary assertion: that effective authority in acute-care hospitals rests in an amorphous power relationship among the hospital's several occupational groups, in which physicians clearly have the upper hand. After a brief introduction to this Danish hospital, the article develops a detailed portrait of its informal power structure and of the different occupational groups' permanent power-maximizing strategies. Subsequently, the article assesses the impact of these strategies upon two recent efforts to contain the hospital's costs: a decision to close an expensive specialty clinic, and an attempt to shrink the hospital's size by transferring less sick elderly patients to a newly created rehabilitation facility. The study's findings suggest that efforts to impose hospital cost containment by exclusively political means are unlikely to succeed.     

Medicare program; changes to the hospital inpatient prospective payment systems and fiscal year 2004 rates. Final rule

We are revising the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital costs to implement changes arising from our continuing experience with these systems. In addition, in the Addendum to this final rule, we are describing changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 2003. We also are setting forth rate-of-increase limits as well as policy changes for hospitals and hospital units excluded from the IPPS that are paid on a cost basis subject to these limits. Among other changes that we are making are: changes to the classification of cases to the diagnosis-related groups (DRGS); changes to the long-term care (LTC)-DRGs and relative weights; the introduction of updated wage data used to compute the wage index; the approval of new technologies for add-on payments; changes to the policies governing postacute care transfers; payments to hospitals for the direct and indirect costs of graduate medical education; pass-through payments for nursing and allied health education programs; determination of hospital beds and patient days for payment adjustment purposes; and payments to critical access hospitals (CAHs).     

Medicare program; changes to the hospital inpatient prospective payment systems and fiscal year 2006 rates. Final rule

We are revising the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems. In addition, in the Addendum to this final rule, we describe the changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth rate-of-increase limits as well as policy changes for hospitals and hospital units excluded from the IPPS that are paid in full or in part on a reasonable cost basis subject to these limits. These changes are applicable to discharges occurring on or after October 1, 2005, with one exception: The changes relating to submittal of hospital wage data by a campus or campuses of a multicampus hospital system (that is, the changes to Sec. 412.230(d)(2) of the regulations) are effective on August 12, 2005. Among the policy changes that we are making are changes relating to: The classification of cases to the diagnosis-related groups (DRGs); the long-term care (LTC)-DRGs and relative weights; the wage data, including the occupational mix data, used to compute the wage index; rebasing and revision of the hospital market basket; applications for new technologies and medical services add-on payments; policies governing postacute care transfers, payments to hospitals for the direct and indirect costs of graduate medical education, submission of hospital quality data, payment adjustment for low-volume hospitals, changes in the requirements for provider-based facilities; and changes in the requirements for critical access hospitals (CAHs).     

Implementing regulatory reform: the saga of Michigan's debedding experiment

This paper traces the implementation of Michigan's program for hospital bed reduction through four phases in the critical first 30 months following enactment: standard-setting, plan development, plan approval, and legislative oversight. Procedural complexity and goal conflict complicated implementation from the start: what began as a simple proposal to close unneeded beds soon became enmeshed in efforts to address long-standing issues of equity in access to care. A combination of administrative, political, and economic factors peculiar to Michigan, as well as the more generic problems incurred in applying a regulatory approach to containing medical care costs, contributed to the difficulties encountered in implementing bed reduction. Long-range prospects for the program depend upon whether the modest results it is likely to achieve are deemed to be worth the costs incurred in administering it.     

Hospital rate regulation: American and foreign comparisons

Rate regulation in the United States usually is inspired by widespread indignant pressures to protect the public against venal exploitation. Rate regulation of American hospitals does not ride such a wave of outrage but is motivated by the need to restrain Medicaid spending and insurance premium increases in some states. Hospital rate regulation in America lacks strong political support, makes many politically prudent concessions to hospitals, and is often threatened by repeal. Since Americans distrust regulators and since individual scrutiny of so many hospitals is burdensome and contentious, they often seek automatic formulae that will produce equitable results by rational calculation. In contrast, rate regulation in Europe is a method of refereeing between hospitals and alert third parties. Hospitals' prospective budgets are always scrutinized by regulators. Guidelines are transmitted by government to link public policy to hospital payment, and the regulators apply the guidelines to each hospital's individual situation. The system results in less contention and more stability in European than in American regulation. Certain features of European hospital practice have kept hospital costs high, but the regulators are now reducing annual increases in costs below America's. In order to reduce cost increases further, Europe is moving toward global budgeting and public grants of hospitals' operating costs, instead of regulation of unit rates. However, regulators may still be essential to scrutinize hospital prospective budgets and to investigate the merits of the claims by individual establishments.     

Paying for the Medicare program

Although the hospital insurance (HI) trust fund acted as a source of strength for the old-age, survivors, and disability insurance program during its recent financial crises, projections by HCFA and CBO reveal that the Medicare program will experience financing problems of its own within the next decade. No one would argue that Medicare's financing problems should be solved simply by raising more money. However, the prospect of insolvency in the HI trust fund and the increasing strain on general revenues from the Supplementary Medical Insurance trust fund require policymakers to survey the options for increasing Medicare revenues while cost-control devices are being developed. Indeed, even if cost-control efforts are completely successful, additional revenues may be needed in the future to finance new initiatives in the Medicare program. Therefore, this paper will look briefly at current efforts to regain control of soaring hospital and physician costs and then examine some of the more feasible options for increasing Medicare revenues.     

Medicare program; changes to the hospital inpatient prospective payment systems and fiscal year 1997 rates--HCFA. Final rule

We are revising the Medicare hospital inpatient prospective payment systems for operating costs and capital-related costs to implement necessary changes arising from our continuing experience with the systems. In addition, in the addendum to this final rule, we are describing changes in the amounts and factors necessary to determine prospective payment rates for Medicare hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 1996. We are also setting forth rate-of-increase limits as well as policy changes for hospitals and hospital units excluded from the prospective payment systems.     

Employers: passive purchasers or provocateurs?

This article addresses the potential role of business leadership in diverse efforts to reform health care financing: exploring managers efforts to alter health care markets in their role as large purchasers of health insurance, their potential contributions to future national policy proposals, and their involvement with community-level activities to control local health costs and quality. I argue that managers' leadership in market restructuring and community health initiatives will be difficult to reproduce in the realm of major national health policy initiatives due to constraints related to ideas, interests, and organization.     

Medicare program; changes to the hospital inpatient prospective payment systems and fiscal year 2000 rates. Department of Health and Human Services (HHS), Health Care Financing Administration (HCFA). Final rule

We are revising the Medicare hospital inpatient prospective payment systems for operating costs and capital-related costs to implement changes arising from our continuing experience with the systems. In addition, in the addendum to this final rule, we describe changes in the amounts and factors necessary to determine rates for Medicare hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 1999. We also set forth rate-of-increase limits as well as policy changes for hospitals and hospital units excluded from the prospective payment systems. Finally, we are revising certain policies governing payment to hospitals for the direct costs of graduate medical education.     

Cross-subsidies and payment for hospital care

This study uses hospital data from the 1979 American Hospital Association Reimbursement Survey in a multivariate framework to assess the impact of discounts and third-party reimbursement on hospital costs and profitability. Three central issues are addressed: (1) Is a differential payment justified for Medicare, Medicaid, and/or Blue Cross on the basis of differential costs? (2) Have the cost-containment efforts of the dominant payers reduced total payments to hospitals? and (3) What part of the overall savings in payments to hospitals is in the form of reduced costs rather than reduced profits? On the basis of the evidence in this study, we find (1) that the differential payment is not justified; (2) that the cost-containment efforts of the dominant payers have reduced total payments to hospitals somewhat, but a substantial amount of cost-shifting remains; and (3) that the savings is in profits, rather than in costs.     

Medicare program; changes to the hospital inpatient prospective payment systems and fiscal year 1994 rates--HCFA. Final rule with comment period

We are revising the Medicare hospital inpatient prospective payment systems for operating costs and capital-related costs to implement necessary changes arising from our continuing experience with the system. In addition, in the addendum to this final rule with comment period, we are describing changes in the amounts and factors necessary to determine prospective payment rates for Medicare hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 1993, unless the statute provides otherwise. We are also setting forth rate-of-increase limits for hospitals and hospital units excluded from the prospective payment systems. Finally, we are implementing certain changes in the hospital inpatient prospective payment systems resulting from the enactment of the Omnibus Budget Reconciliation Act of 1993 on August 10, 1993.     

How physicians' organizations compete: protectionism and efficiency

This article develops a framework that distinguishes four types of competitive strategies that physicians' organizations can adopt in their interactions with health plans. Two types of strategies protect physicians' incomes and autonomy from incursion and control by insurers; the other two enhance the efficiency of health care markets by controlling costs and embedding physicians' caregiving in a community of professionals. The mix of strategies that each organization adopts at any given time depends on the market conditions and regulatory policies it faces, as well as its organizational capacity. The article reviews recent developments in the field that indicate that today's markets and regulations create neither the pressures nor the capacity for physicians' organizations to adopt strategies that enhance efficiency. The managed care backlash has led to a relaxation of pressures to control costs, and the lack of a business case for quality has discouraged embedded caregiving. These developments instead have encouraged and enabled physicians' organizations to adopt strategies that protect their members from the bargaining power and micromanagement of health plans. The article therefore proposes changes in purchasing and regulatory policies to alter the pressures and improve the capacity of physicians' organizations to pursue efficiency and eschew protectionism.