Public Policies to Increase Hospital Competition, Improve Quality of Inpatient Care and Lower Health Care Costs

This report provides an assessment of three state policies that are targeted at the hospital industry in Illinois. The authors take a close look at tax exemptions for not-for-profit hospitals, the Medicaid hospital assessment program, and the Certificate of Need laws. The authors discuss strategies to alter the policies in a way that could lower costs and create a more competitive, higher quality hospital industry. Three state policies targeted at the hospital industry in Illinois are assessed: tax exemptions for not-for-profit hospitals, the Medicaid hospital assessment program, and the Certificate of Need (CON) law. While state policymakers have recently altered each of these policies, the steps taken can be improved upon, and by so doing Illinois can have a more competitive, lower cost and higher quality hospital industry. The most obvious change based on the evidence is to eliminate the CON law. Many studies have shown that greater competition in the hospital industry leads to lower prices for consumers. There is little theoretical or empirical justification for limiting such competition in Illinois. Another way to increase the competitiveness of the hospital industry in Illinois, and thus lower prices and increase quality, is to eliminate the tax exemption that provides a substantial cost advantage to not-for-profit hospitals and limits the ability of for profit firms to compete. The tax exemption can be eliminated on other grounds, too. It is poorly targeted to those most in need; it allows hospitals instead of legislators or community residents to decide what the community benefit should be; and the most salient community benefit it is intended to provide is disappearing because of the large decrease in the number of uninsured persons that will result from full implementation of the Affordable Care Act. Finally, the Medicaid hospital assessment needs significant modification. While it clearly brings in federal revenue for the state, it distorts incentives for hospitals in terms of how many patients to treat, and how they should be treated. The hospital assessment system, and the hospital reimbursement structure that has arisen from it, is also non-transparent and prevents easy assessment of the adequacy of payments. More importantly, the hospital assessment and reimbursement system helps preserve the status quo and dampens competition by providing existing hospitals with fixed payments that would not readily adjust to changes in hospital size, patient base or other organizational characteristics.