Abolition of State-Regulated Hospital Payment Rates Has Minor Impact

During 1994 and 1995, researchers from the Massachusetts Health Research Institute examined the effects of Chapter 495 on the health care market in Worcester, Mass.

Chapter 495 is a 1992 state health care reform law that changed the state's hospital payment system from state-regulated revenues to privately negotiated rates.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO).

Key Findings

  • The elimination of the rate-setting system was almost irrelevant in comparison to the impact of Medicare's reduction in its rate of payment increase and the ratcheting-down effect of HMOs on hospital utilization.

  • HMO enrollment growth had a significant impact on hospitals' financial status, and much of that effect occurred when the state's rate-setting system was still in place; smaller hospitals lost patients and money.

  • Medicare payment policy created significant competitive advantages for teaching hospitals.

  • Increased competition resulted in consolidation of providers and higher charges for consumers who were not part of large managed care plans.

  • Hospital profits were higher during the regulated years.