On public sector options for reducing hospital capacity

The reduction of hospital capacity in the United States has become a major health policy goal because excess hospital capacity is widely believed to contribute to excessive increases in hospital costs. The National Health Policy Planning Guidelines (DHEW, 1975) contain a planning standard of 4.0 hospital beds per 1000 persons as a maximum, accompanied by an 80 percent occupancy rate for short-term community hospitals. When the guidelines were adopted, the United States was experiencing 4.5 hospital beds/1000, with a 75 percent occupancy rate. Therefore, these guidelines imply that a substantial reduction in existing hospital capacity is desirable. In this article, the authors evaluate the most widely discussed public sector options for reducing hospital capacity. They conclude that the case for closing hospitals through direct public sector action is weak. Instead, they favor public sector actions aimed at changing the incentives of decision-makers so that they incur financial penalties for supporting excess capacity. Since this incentive-based approach could prove relatively unattractive politically, it requires a carefully staged implementation to be successful. In the concluding section of this article, the authors propose a sequence of public sector actions which they believe could reduce hospital capacity primarily by changing private incentives.