Mandating Cost-Savings for Hospitals

Thom Lambert —  22 March 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 My favorite recent example of this is OSHA’s ultimately repealed (thank goodness!)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.

Thom Lambert


I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

One response to Mandating Cost-Savings for Hospitals


    Just an occassional reader, but a possible reason for the change in Government regulation on private rooms,

    Some Health Insurance policies require semi-private rooms. If the Government required that all new hospitals be built with only private rooms, the health insurance industry would be forced to change these policies.

    In some cases, these policies become ‘gotchas’ for the patients. My local hospital is very small (25 beds). They charge the same price for a stay in a private room as they do for a semi-private room. They prefer to fill their private rooms first because they know it makes for happier patients. It is also easier for them to comply with rules like HIPPIA (spelling?).

    A few years ago, my mother had to spend a couple days in the hospital. The hospital put her in a private room over our objections. The insurance company refused to pay for her room because it wasn’t “semi-private”. We then sat down with the hospital, they rebilled the insurance company to “fix the billing error” and got their money.

    It’s all a game, and not a very fun one at that.