Deregulation Improves the Health of N.J. Hospitals' Bottom Lines

Financial impact of a competitive payment system on New Jersey hospitals

From 1994 to 1997, researchers at the Harvard University School of Public Health, Boston, studied the effects of deregulation on New Jersey hospitals.

In 1992 New Jersey eliminated its statewide system for setting hospital reimbursement rates in favor of letting the marketplace determine prices for hospital services. It also altered its system of reimbursements to hospitals for uncompensated care.

Investigators from the Harvard University School of Public Health used objective financial data to compare the financial health of New Jersey hospitals in the three years before and the three years after passage of the deregulation legislation.

Key Findings

  • Overall, the study found that elimination of statewide rate setting and the implementation of a market-based pricing system were financial windfalls for hospitals.
  • Hospitals did not reduce markups to payors meant to cover the financial burden of uncompensated care (uncollectible charges and charity care), despite new funding that was meant to cover such care.
  • Hospitals reported operating profits that were 50 percent higher following deregulation than in the period before.
  • The introduction of market forces appears to have had only limited ability to contain costs.
  • Rural hospitals were more likely than others to improve their financial position, while inner-city and urban hospitals were more likely to do worse or to improve less.
  • Hospital investment income almost doubled in the period following deregulation, while the volume of inpatient stays declined, largely because of the increased penetration of managed care.

Funding

The Robert Wood Johnson Foundation (RWJF) supported the project with a grant of $89,184 between January 1994 and May 1997.

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