Three regulatory mechanisms have been used to control the rise in hospital costs: assessments of patients' records by professional standards review organizations (PSROs), approval of capital expenditures by certificate-of-need agencies, and limits on hospital reimbursement by state rate-setting groups. The available evidence indicates that neither PSROs nor certificate-of-need programs have exerted an appreciable influence on costs. However, rate setting through mandatory "prospective reimbursement" appears to slow the growth of hospital expenditures and seems to be the only regulatory tool that has been effective. Any regulatory process that markedly restrains expenditures can ultimately be expected to affect patient care adversely and to create social and political tension within the health-care system.