State Rate Setting: An Analysis of Some Unresolved Issues

Prologue: The state rate-setting model remains a subject of endless fascination to the health policy world. For its advocates, generally people who believe in a strong, centralized role for government in health care, state rate setting is a solution to the cost spiral, providing support to large, urban teaching hospitals that care for many poor people, and equalizing reimbursement between different third-party payers. Detractors of the model have eschewed it because of concern that centralized decisionmaking is incompatible with the local and individual nature of medical care, because regulation stifles innovation, and because price competition suffers under rate-setting structures, Michael Morrisey is a senior economist at the American Hospital Associations Hospital Research and Educational Trust, Frank Sloan is a professor of economics at Vanderbilt University and director of the Health Policy Center there, Samuel Mitchell is director of research at the Federation of American Hospitals, The authors suggest by the nature of this article that the parameters of the debate over rate setting should be broadened. The question is not whether or not it should be implemented, but given the location and political milieu of any given jurisdiction, what is the likelihood that the stated objectives will be achieved. In other words, a state rate-setting agency is not a state rate-setting agency. Any such entity must fit into a political framework. Rate setting does not perform equally well in every state. The authors' statistical analysis concludes that “there have been only two clear direct hits at a moving cost-containment target— New Jersey and New York. “Juxtaposed against an earlier article in Health Affairs (Summer 1982) by Harold M, Ting and John D, Valiante that identified New Jersey and New York as two states where hospitals are starved for capital funds, this raises yet another issue in the ongoing debate over state rate setting.