Rising Hospital Costs Can Be Restrained by Regulating Payments and Improving Management

HRD-80-72: Published: Sep 19, 1980. Publicly Released: Sep 19, 1980.

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GAO examined the impact on rising hospital costs in nine States having prospective rate-setting programs. Prospective rate-setting programs depart from the traditional cost-based retrospective method of paying for hospital services, and instead, make payments based on rates determined before the services are provided.

Twenty-six States have adopted various prospective ratesetting programs These programs are designed to help control rising hospital costs by providing for an external authority to regulate the prices that hospitals may charge and/or that third parties must pay for specified services. States with such programs were more successful in controlling the growth rate in expenditures per case. Hospital officials in prospective ratesetting States believe they have been able to contain cost increases primarily as a result of improved hospital budgeting practices. The presence of an outside review authority forces hospital managers to closely review, and be prepared to justify, planned expenditures. Even though prospective ratesetting programs have restrained hospital expenditures and revenue increases, hospitals generally have not yet adopted cost containing management techniques. Hospitals in States with prospective payment programs do not use cost containment management practices, such as shared services, energy conservation, and individualized testing, to a significantly greater degree than hospitals in States without a program. The Health Care Financing Administration has made numerous grants to State health planning and development agencies to demonstrate the effectiveness of ratesetting as a means of controlling health care cost increases, however, it has limited authority under Medicare to participate in prospective ratesetting programs.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should amend the Social Security Act to permit the full participation of the Health Care Financing Administration's Medicare program in existing prospective ratesetting programs.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: If Congress amends the Social Security Act to expand the Health Care Financing Administration's authority for Medicare participation in prospective ratesetting programs, the Secretary of the Department of Health and Human Services should increase the number of programs in which the Health Care Financing Administration is actively participating by making Medicare payments and permitting Medicaid payments based on program determined rates. The Secretary should promote and encourage greater use of cost containment management techniques. The Secretary should monitor the impact of prospective ratesetting programs on hospital cost increases and periodically report the results to Congress.

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