Impact of the New Jersey all-payer rate-setting system: an analysis of financial ratios

Although prospective payment may contain costs, many analysts are concerned about the unintended consequences of rate regulation. This article presents the results of a case-study analysis of the New Jersey rate-setting programs during the period 1977-1985. Using measures of profitability, liquidity, and leverage, data for New Jersey, the Northeast, and the United States as a whole are used to contrast the impact of two forms of prospective payment. After attempting alternative cost-containment methods, the New Jersey Department of Health implemented an all-payer system in which prospective rates of compensation were established for DRGs. The new rate-setting system was designed to control costs, improve access to care, maintain quality of services, ensure financial viability of efficient providers, and limit the payment differentials associated with cost shifting. The results of this study have a number of implications for the evaluation of all-payer rate regulation. First, although the New Jersey all-payer system was more successful than the partial-payer program in restraining the rate of increase in cost per case, savings were achieved without adversely affecting the viability of regulated hospitals. Second, the large differentials among payers that were associated with the partial-payer program were reduced dramatically by the all-payer program. Third, using the financial position of inner-city hospitals relative to suburban hospitals as a measure of equity, the all-payer system appeared to be a fairer method of regulating rates.