Study Says New Laws Slow Rise in State’s Hospital Costs

New state and federal laws aimed at curbing the nation’s rising medical expenditures have succeeded in putting a clamp on spiraling hospital costs in California, according to a study published today in the Journal of the American Medical Assn.

The conclusion that California’s experiment in health-care cost containment has been successful in reducing hospital expenditures sounds an optimistic note at a time when many experts have branded the reforms a failure.

“For the first time, we are seeing that competition is forcing hospitals to reduce the rate of increase in costs. Previous studies on earlier data showed just the opposite,” said Jack Zwanziger, an economist and co-author of the study done by the UCLA School of Public Health and Rand Corp.

The study is based on data collected from 330 hospitals throughout California between 1980 and 1985. Its primary purpose was to evaluate how hospital costs and revenues have been affected by landmark state legislation that restructured the state’s health-care system to encourage price competition in an industry that historically has not competed on price.

Alarmed by growing health-care costs, the California Legislature in 1982 passed the trend-setting law that allows insurers, including the state Medi-Cal program, an exemption from antitrust action so that they could negotiate lower costs of care from certain doctors and hospitals. The law was heralded as the first practical test of health-care competition in the nation.

The measure triggered spectacular growth in health maintenance and preferred provider organizations, known as HMOs and PPOs. But many health-care experts have expressed disappointment that, overall, health-care costs have continued to soar.

An official at the Health Insurance Assn. of America has likened the reforms to “putting a Band-Aid on a hemorrhage.”

But UCLA economist Glenn Melnick said his study isolates the reform’s effect on hospital costs and revenues in this state.

“It is very significant,” he said, “that our study shows that total hospital costs were slowed and that they actually declined in hospitals in competitive markets in California, when they had been averaging an increase of 10% a year before 1982.”

The chief factor in restraining hospital costs in California was the 1982 law, the study reports. “To a lesser extent,” the study said, costs have been lowered by the overhaul in 1983 of the federal Medicare program, which set strict limits on the reimbursement of hospital costs.

“California is being looked to as the lab of pro-competition policy,” Melnick said. “California leads the nation in the adoption and spread of pro-competitive, managed care programs to contain hospital costs.”

Previous studies on hospital costs were based on data from the late ‘70s and early ‘80s, Melnick said. These studies reported, surprisingly, that greater competition led to higher hospital costs--mainly because, with health insurance covering the bills, price of service was not a factor for consumers.

But the new study’s conclusions follow the basic economic theory that holds that competition induces lower costs as sellers battle for buyers.

“Pro-competition policies are having dramatic and potentially far-reaching effects on the nature of hospital competition, leading to increased competition based on price,” the study concluded.

Shift Noted

In addition to documenting a dramatic slackening in the rate of increase in hospital costs and revenues, the study shows a significant shift from inpatient hospital care to outpatient clinic services.

Still to be determined, researchers noted, is whether consumers have benefited as hospitals have cut expenses, and specifically whether quality of care and accessibility has suffered.

Among the study’s major findings:

- Costs among 330 California hospitals, adjusted for inflation, rose an average 4.5% annually between 1980 and 1982 but actually decreased 0.4% annually from 1983 to 1985 as the new laws took hold.

- Hospital usage, measured by the average number of patient days, declined at a annual rate of 1.3% during the earlier period, but that decline accelerated to 5% after the laws changed.

- Between the two periods, growth in hospital net revenue slowed to 3.5% annually from 5.7%.

- Hospital costs fell most dramatically after 1982 in highly competitive urban areas, which typically have many hospitals.

The study reported “spectacular” growth in PPOs and HMOs since 1982, when California legalized price-based contracting with hospitals.

CLAMPING COSTS--Average annual percent change in costs for hospitals in high-competition market area.

‘80-’82: Before 1982 reforms ‘82-’86: After reforms Source: UCLA School of Public Health and Rand Corp.