Regulating the cost of institutional healthcare through competitive bidding.

A system for prospective rate setting based on the theory of auctions is proposed. In order to guarantee that competition will achieve public health goals, the State Health Planning and Development Agency will issue a limited number of patient day certificates. Hospitals can obtain these certificates by offering bids in the form of rate increases. Hospitals offering low rate increases will receive patient day certificates with authorized rate increases equal to their own proposed rate increases plus a bonus. Hospitals offering high rate increases will receive only a base rate increase equal to the smallest rate increase offered by any hospital. This approach enjoys the cost minimizing benefits of competition while restraining hospital capital expenditures.