Changes in the Effects of Mandatory Rate Regulation On Growth in Hospital Operating Costs, 1980–1996

Abstract

We conduct a panel data fixed effects analysis of hospital costs from 1980 through 1996. Consistent with the findings of similar studies, hospitals residing in all-payer rate regulated states in 1984 and 1991 had operating costs approximately 3 to 4 percentage points lower than their less regulated counterparts. However, by 1996, the effect of rate regulation on hospital costs was reduced to approximately -0.4 percent, a result that narrowly achieves statistical significance (p = 0.09). Hospitals residing in relatively concentrated markets, measured by the Herfindahl-Hirschman Index, were more likely to have higher operating costs, an effect that increased in magnitude over time. The results support the conclusion that hospitals in markets with comparatively less rate regulation or more competition have lower operating costs than their regulated or less competitive counterparts.