Much like traditional
rate-of-return regulation, this rule creates incentives for insurers to spend more on medical care rather than to reduce premiums.
Rate-of-return regulation has worked in the past, and-will work into the future.
(1) Before the divestiture of AT&T in 1984, for example, all 50 states employed
rate-of-return regulation to regulate intrastate telecommunication operations.
Utilities traditionally are regulated by
rate-of-return regulation, under which they pass all of their costs dollar-for-dollar to consumers.
As already briefly mentioned, firms subject to
rate-of-return regulation (also called "cost-of-service" regulation) have distorted incentives when it comes to deploying efficient, low-cost production technology.
Rate-of-return regulation is the formal mechanism by which ACP is typically enforced.
But Senate Bill 622 eased legislative rules and released Qwest from a
rate-of-return regulation that put an earnings cap on the company.
[12] By contrast, the electricity industry is still governed primarily by cost-based regulation (such as
rate-of-return regulation), perhaps because this industry supplies a homogeneous product; therefore cost information is easier to obtain and costs are easier to allocate than in telecommunications and railways, which provide several joint services (such as local, long-distance, mobile communications or freight and passenger transportation).
Under the
rate-of-return regulation, telecommunication prices are set to reflect the embedded or historical costs of providing services to each set of customers.
For much of this time, economists have lamented the shortcomings of
rate-of-return regulation, pointing especially to its weak incentives for cost reduction and innovation.
"Price-Cap versus
Rate-of-Return Regulation in a Stochastic Cost Model." Rand Journal of Economics 23: Winter 1992.
It abandoned older style, cost-plus
rate-of-return regulation in favor of "price cap" regulation, which focused on prices and created incentives for telephone companies to innovate and become more efficient.