State rate review and the relationship between capital expenditures and operating costs

It is commonly assumed that an increase in capital expenditures leads to increased operating costs and a subsequent increase in rates, and thus that state rate review systems must incorporate certificate-of-need type controls over capital expenditures. The results of this study indicate that in those states with comprehensive rate review systems, increased capital expenditures may not lead to higher operating costs and rates; rather, increased wage rates are reflected in higher operating costs and rates. This pass-through of wages, and not capital costs, may have important policy implications.