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Regulation and internal control in hospitals.

JN all the recent discussions of hospital regulation, one important question remains unanswered: How can hospitals comply with cost controls? Confronted by prospective reimbursement limits and investment '"caps," hospital administrators and trustees must somehow eliminate underutilized beds, stop surgeons from performing too many hysterectomies, and force radiologists to go without tomographic scanners. Unfortunately, hospitals are not used to this sort of thing, nor are physicians accustomed to being cost conscious. Any regulatory intervention which merely sets limits on hospital costs in effect entrusts a great deal of institutional change to the hospital alone. If these internal changes are not forthcoming, cost controls may produce only long queues, litigation, cream skimming, and bad medical care. Hospital cost containment, I shall argue, is ultimately a problem in internal management control. My main task is to elucidate the critical elements of this internal control problem. The plan of this paper is as follows: In the next section I explain why the hospital's response to a regulatory constraint depends critically upon the properties of its internal resource allocation scheme. The following section then argues that under the current system of hospital internal organization, cost containment regulation may have serious adverse consequences. In a subsequent section I then explore what critical economic and institutional changes may be necessary to resolve this internal control problem. In a concluding section I return to public policy implications.