Redefining rate regulation in a competitive environment

Neither rate regulation nor market competition alone is likely to contain health care spending in the long run. We need an approach to cost containment that can simultaneously address the major causes of rising health expenditures: higher prices, greater intensity, and new technologies. Whereas rate regulation and market competition have been viewed as alternative strategies, an innovative approach would include a rate-regulatory system that is compatible with an evolving competitive market. We discuss the Maryland hospital rate-setting system as an illustration of the compatibility of a regulatory approach within a competitive market. In addition, we consider the feasibility of expanding a hospital rate-setting system nationwide and to the nonhospital sectors.