The economics and institutions of regulation and reform in the United States hospital industry, 1980-1996

Research objective. This study analyzes the experiences of regulation and deregulation in three industries: hospitals, airlines, and telecommunications. Lessons from the three industries are applied to current debates over medical care regulation, where policy debates have proceeded with little discussion of the knowledge gained from other industries.; Study design. Regulated industries share many common characteristics, the most prevalent of which are moral hazard, non-price competition, information and uncertainty, physician agency, public good externalities, and market concentration. This study adopts an administered contracts framework for analyzing regulation, wherein regulation is treated as one means of organizing complex transactions. The ex ante governance features and the ex post performance features of regulation are reviewed. Regulation and reform in the hospital industry is compared to regulation and reform in airlines and telecommunication. Statistical analysis of hospital costs in regulated and unregulated states from 1980 to 1996 is performed in order to update the hospital regulation literature to include periods of deregulation. The econometric model specifies a first-difference Cobb-Douglas model of change in hospital total variable operating costs. The population studied is a four-year panel of 1,144 urban hospitals, including data for 1980, 1984, 1991, and 1996.; Principal findings. Hospital regulation, like regulation in airlines and telecommunications, had a diminishing effect on growth in hospital operating costs between 1980 and 1996. Regulated states in the 1980--84 time period had rates of inflation in operating costs 7 percent lower than unregulated states. However, the effect tapered off over time. The regulatory effect in the 1984--91 and 1991--96 periods was not statistically different from zero, whereas the competition effect (markets served by 10 or more hospitals) was significant and negative in all years, with the absolute magnitude of the coefficient increasing over time. Thus, relative to competition, regulation was not effective at controlling inflation in hospital operating costs from the mid 1980s through the mid 1990s. Although the diminishing effectiveness of regulation may have been expected, the increasingly large effect of competition is noteworthy. The regulation and reform experiences of the hospital industry resemble those of other formerly regulated industries. New regulations that propose to regulate economic aspects of health plan operations should look carefully at the experiences of other regulated industries.