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.

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