Mandating Cost-Savings for Hospitals

Cite this Article
Thomas A. Lambert, Mandating Cost-Savings for Hospitals, Truth on the Market (March 22, 2006),

It drives me nuts when the government attempts to justify rules mandating particular business practices on grounds that they reduce costs for the businesses being regulated. My favorite recent example of this is OSHA’s ultimately repealed (thank goodness!) ergonomics standard. The agency sought to justify the extraordinarily intrusive rule on grounds that it would save employers $9.1 billion per year (after compliance costs) in reduced sickdays and workers’ compensation costs. Of course, the agency never bothered to explain why, in light of these cost-savings, the government needed to force compliance.

Today’s W$J reports on a new standard purportedly designed to save businesses money. The standard would ban semi-private (i.e., shared) patient rooms in newly constructed hospitals. When I initially read the headline, “New Standards for Hospitals Call for Patients to Get Private Rooms,� my first thought was that mandating private rooms is senseless in an age of upward-spiraling health care costs. A main point of the article, though, is that the standards at issue will cut health care costs by, for example, reducing the incidence of disease transmission, patient falls, medicine mix-ups, and empty beds (no need to segregate rooms by gender). Indeed, a representative of the group that authored the standard explains that hospitals with all private rooms “pay for themselves very quickly and are much less expensive to operate� in the long run.

If that’s really the case, why should regulators require new hospitals to have only private rooms? The Journal indicates that such regulation is on the horizon, for the guidelines at issue “are used by more than 40 state governments to set regulations, approve construction plans and license hospitals to operate.�

Are regulators in a good position to determine the most cost-effective way to run a hospital? I think not. As Josh noted yesterday (and as F.A. Hayek famously observed), the notion that centralized regulators are better able than the “man on the spot” to make cost-saving business decisions is hubristic — and almost always wrong. If the drafters of the new hospital standards truly believe that the practices they’re pushing can really lower health-care costs, then they should share that information with hospitals. But there’s no reason for bureaucrats to force hospitals to make cost-saving decisions.