Determinants of Hospital Costs: Outputs, Inputs and Regulation in the 1980s (Urban Institute Reports)

Hospitals costs started the 1980s growing at more than 15 percent a year. Between 1983 and 1985 the annual growth rate dropped to less than 6 percent a year. Since then, growth in hospital costs has again accelerated. Between 1983 and 1985 the Medicare program, which dominates the hospital market, introduced two major reforms in the way hospitals were reimbursed, which changed the payment method from essentially full cost reimbursement to a fixed-in-advance payment per case. The regulatory changes were intended to control costs. Were they successful? If so, why has the trend reversed and what does the change imply about hospital profitability? The authors address these and related questions with an econometric analysis based on detailed annual data on almost 1300 short-term, general, nonfederal hospitals in the continental United States over the eight-year period 1980-1988.