CHAPTER ONE. INTRODUCTION TO AMERICAN HEALTH CARE

John Smith, a retired Iowa City machinist, has advanced Alzheimer's disease. When his wife found she could no longer care for him in their home, her personal trauma was followed by a further shock: Neither Medicare nor the private health insurance paid for by his former employer would cover his $5,000 per month nursing home bills. Mr. Smith will eventually qualify for the state's Medicaid program, but only after the Smiths' life savings have been exhausted and all but a small portion of their retirement income has been "spent down" on medical bills. Mrs. Smith's only "practical" way to secure public support for her husband's care and to avoid poverty is to legally separate from her husband.

The Smiths' circumstances are neither aberrational nor unusual. Catastrophic medical expenses force thousands of the nation's elderly into poverty each year. Nor is the risk of catastrophic medical expenses confined to the elderly. At least 40 million people under the age of 65 had no third party coverage at some time during 2009. Many more had third party coverage for only some of their needs for some portion of the time.

* * *

The Smiths are not the only Americans facing difficult choices. In the halls of Congress, a subcommittee chairman with jurisdiction over federal health programs is given reconciliation instructions to reduce, once again, Medicare and Medicaid expenditures by tens of billions of dollars annually and unwritten instructions from party leaders to do so without the appearance of program cutbacks. His circumstances are not unusual either. Indeed, the dance of federal health legislation is well rehearsed: grand flourishes of reform; sympathetic postures toward the hapless consumer, the beleaguered states, various frustrated providers; and, in the end, a health budget and a federal health policy driven largely by fiscal considerations and partisan politics.

* * *

While both the details and the direction of federal health policy will have considerable impact on the medical director of a publicly funded clinic in Seattle, Washington, her primary concerns are more immediate: convincing a local hospital to provide inpatient and other specialized services to one of her patients, finding temporary help to fill a staff vacancy, and sorting through the seemingly endless paperwork that is the necessary accouterment of American health care financing. These are just today's problems. Tomorrow she will meet first with representatives of the community who will complain of the inadequacies of the clinic, and then with representatives of local government who will warn that their contributions to the clinic's budget may have to be curtailed. Even if these issues can be resolved, the medical director will be constantly reminded that both the organization and the day-to-day operations of

1

her clinic may have to be drastically reworked if it is to survive the onslaught of the "managed care" revolution that is changing virtually every aspect of American health care delivery and financing.

* * *

This textbook begins with these anecdotes not to claim that they present the most serious or the most fundamental problems of contemporary health policy. In fact, the relative importance of these and other problems, and whether they are fundamental or merely symptomatic, are questions that a good portion of these materials will attempt to assess. These anecdotes are intended only to illustrate the range and the seriousness of the problems that face American health care in the 21st century. Other scenes in other places might serve this purpose equally well. An acutely ill diabetic is "escorted" from a Tennessee hospital emergency room and left in the parking lot to die -- apparently because he had not paid his previous bill. An Oregon family pleads on the nightly news for an organ donor for their infant child. An economist speaking to an audience of manufacturers blames rising health care costs and, implicitly, consumers' lack of discipline for flagging productivity and the decline of the nation's competitiveness in international markets.

Modern American health care confronts not simply a single or fundamental problem or, as some critics keep insisting, a pending crisis, but a series of related yet distinct and conflicting problems involving the accessibility and adequacy of the nation's health services; the quality and efficacy of the services that are provided; and the costs of those services to various levels of government, to private third party payers, and to individual consumers. These problems draw us, collectively and individually, into divisive political controversies wherein the definition of the problem that needs to be addressed is often as controversial as the fashioning of the remedy, and the remedy for one problem, as often as not, only exacerbates the solution of another. And even if something is done to reform today's problems, a prospect which is hardly likely, tomorrow will present new issues and challenges to address. American health care is simply that complicated, that controversial, and that important to all of us.

The materials in the chapters to follow describe the manner in which American health care is delivered and financed, identify contemporary health care-related problems, and analyze the manner in which our political and legal systems can and should respond. The remainder of this chapter provides a basic historical account of the development of American health care from its origins in 19th century medicine through the current decade as background for the materials to follow in subsequent chapters; sketches the major political and social forces that have shaped this development; and highlights some recurring themes and problems.

A. THE PHYSICIAN AND AMERICAN MEDICINE

The development of health care in the United States has been in large part defined by the evolution of the American medical profession.

While historians can trace the role of the physician and the practice of medicine as far back as the earliest records of civilization, the story of American medicine essentially begins in the 19th century. The physician of the 1850s had neither a firm intellectual foundation nor a clear social role. Many types of "healers" competed for the public's respect and a share of its

2

pocketbook: midwives, abortionists, eclectics, homeopathics, herbalists, faith healers, and even "patent medicine" and "snake oil" salesmen. In fact, none was particularly successful, therapeutically or otherwise. In part by preference, in part by economic necessity, most people in the 19th century received their medical care in the home from the women of their family, following traditional healing practices.

Only slowly did the edicts of science for the practice of medicine emerge and take hold. If germs, not moral failure or a vindictive deity, caused disease, then a properly trained physician could diagnose an illness, evaluate and prescribe a remedy. If infections could be prevented by antiseptic technique -- the advantages of cleanliness in the operating room were not recognized in this country until the 1870s -- then surgery could be less a heroic, last ditch effort to save life and more a restorative, professional skill. Above all, if science could rationalize medical practice, then both the therapeutic value of medicine and the social and economic status of its practitioners could be greatly enhanced.

The battle of "regular" or "allopathic" medicine for the respect of the public was as slow as that to conquer disease. Nineteenth century Americans were reluctant to accept many scientific developments or the consequent implications for medical practitioners. As early as the late 1700s, a few states had attempted to impose limits on who could practice medicine; but medical licensing legislation, granting exclusive control over treatment and diagnosis of disease and illness to those who were properly credentialed or trained, despite the efforts of local and state medical associations, was highly controversial, suffering several waves of popularity and repeal. Not until the end of the 19th century did all states require all medical practitioners to hold a medical license. And it would not be until the year 1912, we are told by L. J. Henderson, "when for the first time in human history . . . a random patient with a random disease consulting a doctor chosen at random stood better than a 50-50 chance of benefiting from the encounter." Whatever the technical accuracy of this claim, it accurately reflects the legacy of 19th century American medicine.

More critically, even while a scientific foundation for medical practice was being more adequately secured, the social and economic foundations of medical practice remained precarious. Neither the imprimatur of licensing legislation nor the physician's claims to the advances of science had an immediate impact on medicine's nontraditional competitors. The promised miracles of science as applied to medicine and those of the homeopath, or even the quack, were still hard to distinguish in the late 19th century. Indeed, it was at this time of rapid scientific advances that the patent medicine and the cure-all nostrum reached the height of their popularity.

The 20th century physician commanded much more respect than his 19th century counterpart, as scientific medicine became more sophisticated and as the profession became more effectively organized. In the first quarter of 20th century, licensing laws were made stricter and more uniform, allowing allopathic physicians a virtual monopoly over the treatment of illness and disease. And in fashioning medical licensing laws, the states established a political pattern that would be repeated often in future health-related legislation: Most of the control over licensing standards and their application was ceded to the state and local medical associations. In some states, chiropractors, Christian Scientists, and a few other alternative providers also managed to secure the recognition of licensing legislation or at least to escape the reach of medical licensure laws. But in practice as well as in legal doctrine, the alternative

3

provider would be vastly overshadowed in the 20th century by the medical physician.

The most immediate and concrete effect of state medical licensing requirements, however, was not to diminish the popularity of alternative healers but to increase the value of a medical school diploma. One hundred fourteen medical schools were founded between 1875 and 1900. Most were small institutions offering little more than an apprenticeship and a degree. Many physicians, even with growing confidence in their abilities, bitterly claimed that the resulting oversupply of physicians, coupled with the continued competition from alternative providers, made the maintenance of a viable medical practice both professionally and financially unrewarding.

Nonetheless, the connection between medical education requirements and medical licensure eventually allowed the profession to gain control over the supply of physicians and to secure the social and economic status that the profession would enjoy in the twentieth century. Nineteenth century medical education had been a reflection of 19th century medicine: Neither had a strong scientific foundation. Until the last decades of the century, most American physicians had learned their craft as an apprentice to another physician. A few traveled to Europe for more sophisticated training. The proliferation of medical schools in the last several decades of the century did little to improve the quality of American medical education.

In 1909, Abraham Flexner surveyed the nation's medical schools at the behest of the Carnegie Foundation. He found poorly equipped and unsanitary clinics, schools with optional attendance, two-year "diploma mills" that were more a matter of good business for the faculty members who owned them than of good education for their students. As he tactfully put it, he had found "the best in the world side by side with the worst." Flexner recommended that medical education be upgraded following the pattern of European, university-based education, and that medical licensure be limited to physicians who graduated from schools that met these upgraded educational standards. His intention was not only to enhance the quality of medical practice, but also to limit the number of those admitted to the profession. What we needed, according to Flexner, was better but also fewer physicians.

Flexner's much publicized report was more the chronicle than the cause of a process driven by economic realities and by pressure from the increasingly powerful medical profession. Nonetheless, his vision of reform was soon realized. From 166 medical schools in 1904, the year that the AMA founded its Council on Medical Education to establish standards for accrediting medical schools, the number of schools dropped to 133 in 1910 and to 104 in 1915. During this period, the annual number of medical school graduates dropped by more than 50 percent (although by the 1930s, the number of medical school graduates had risen again to pre-Flexner levels). In the schools that remained, both admission and graduation standards were upgraded and standardized. In keeping with the demands of medicine's new scientific basis, both laboratory and clinical work were expanded. By 1920, all states had made accreditation by the Council on Medical Education essentially mandatory. (Later, in the 1950s and 1960s, when internships and residency programs became a regular part of medical training for virtually all physicians, these programs also became subject to the profession's accreditation.) In fact, for the next 50 years, AMA policy and American medical education policy would be virtually synonymous.

The implications of the Flexner-era reforms were enormous. The scientific quality of medical education and practice was improved dramatically. The medical

4

school emerged as an elite, academically-based graduate institution for both training and research that would eventually dominate both education and practice. Its graduates were comparably elevated. In the words of E. Richard Brown, from 1890 to 1925 the medical profession "ascended from ignominy and frustrated ambition to prestige, power, and considerable wealth," largely on the wings of medical education reform. The public commitment to medical education also grew. Student fees could no longer support the expense of more sophisticated laboratories and research facilities, longer training, and expanded teaching clinics and hospitals. Driven by pressure from the medical profession and by the publicity of Flexner and other reformers, both public and private sources made unprecedented investments in what had been previously considered a proprietary enterprise. State legislatures funneled substantial tax revenues into state university medical schools. The Carnegie and Rockefeller foundations and other private philanthropies embarked on major campaigns to fund medical education and research projects, particularly in the elite private universities. The Rockefeller Foundation alone gave $82 million in grants to medical schools between 1915 and 1930.

By the mid-1920s, Flexner's vision had been partially realized. There were fewer and better medical schools producing fewer and better physicians.

There was, of course, a downside to these reforms. First, during this era, five of the seven schools that had admitted African-Americans and all but three of the women's schools were closed. And neither group was welcomed by the new elite schools. In addition, the 20th century American physician-scientist may have been better trained, but that training relied predominantly on a biological understanding of health and disease and encouraged an individual and curative orientation to medical treatment. Just as the lay healer and the alternative provider were subjugated to medicine's dominance, so too was any view that considered the social or economic factors in the causation of disease or illness -- despite the obvious role played by preventive and community techniques in improving health at the turn of the century. (See sidebar infra.) Some critics even have argued that private philanthropy's enthusiastic support of scientific medicine and its practitioners deterred physicians from addressing other causes of ill health occupational injuries, environmental hazards, and the social dislocations that medicine's benefactors had done so much to create.

The most important impact of these reforms in medical education, however, was on the profession itself. By the 1920s, on the eve of the several technological revolutions that would follow, medicine already had become the textbook prototype for a sovereign profession: granted a virtual monopoly over a valued service; allowed to self-regulate its practice and education; and held only to its own self-determined notions of appropriate conduct and ethical behavior, even in its commercial dealings. The medical profession had converted its increasing public respect into growing economic and political power. It had successfully limited competition from other types of healers as well as dissent from within its own ranks. In the years to follow, the medical profession would use its political clout to resist external influence on medical practice and to shape programs for financing health care. Medicine had achieved all this not only because of the growing value of medical services, but also because physicians had successfully organized a cohesive and highly disciplined professional structure. Not surprisingly, through the next several decades, the AMA and the state and local medical associations would be among the most successful actors in the complicated landscape of American health politics.

B. THE DEVELOPMENT OF THE AMERICAN HOSPITAL

5

The 20th century saw Americans turn from traditional healing to medicine and from comfort and palliation in the home to treatment in the physician's office -- and in the hospital.

The early forerunners of the American hospital were public institutions: the infirmaries of public "almshouses" and, later, separate state or local institutions for the sick called "hospitals," but still primarily serving to house the poor and the homeless. In the late 18th and early 19th centuries, private, "voluntary" hospitals, generally financed by bequest or donation, supplemented the public institutions. Voluntary hospitals purported to provide care -- mostly convalescent not curative -- for patients with some prospect of recovery. The incurable, the destitute, the homeless elderly, and those with infectious diseases were sent to the public almshouse. Later, when the hospital qua medical institution emerged, a parallel bifurcation of public institutions for the "undesirable" and private charitable institutions for mainstream medical care also developed.

All 19th century hospitals, however, were institutions for the poor. Patients with adequate means were treated in the physician's office or, most often, in their home. Abysmal hygienic conditions, overcrowded wards, and the primitive state of medical knowledge made the hospital the choice of only the most desperate. Indeed, the poor did not always go willingly to the hospital, although many were forced to apply to the institution's patrons for sponsorship for admission. Even surgery, such as it was, was often practiced outside of the hospital. The average 19th century physician had little contact with either public or private hospitals.

By the late 1800s, however, the increased efficacy of modern medicine and the demands of increasingly sophisticated surgical techniques had enhanced both the medical function of the hospital and its public image. While still primarily an institution for the care of the poor, the hospital had also begun to take on its 20th century persona as the "physician's workshop," particularly as the scientific breakthroughs of the 19th century -- antisepsis, anesthesia, x-ray diagnosis -- became more widely available and widely practiced. The late nineteenth-century hospital also took on an important role in the training of physicians. Physicians fortunate enough to secure a volunteer position in a hospital -- the 19th century physician considered it unethical to charge a fee to a hospital ward patient -- could learn and practice the latest in medical and surgical technique, often under the tutelage of one of the recognized leaders of what was becoming an increasingly hierarchical profession. The result improved the physician's medical skills as well as his reputation with his private -- and paying -- patients.

The evolution of the hospital had a comparable influence over the development of the nursing profession. Mid-nineteenth-century hospitals drew no sharp lines between nursing and domestic service, or between the services of nurses and patients. Particularly in the almshouses, more able "inmates" became nurses and then nursing supervisors. Beginning in England in the 1860s, however, a movement inspired by Florence Nightingale sought to train women to bring the order, cleanliness, and morality associated with middle class femininity to grim hospital wards. Many American hospitals established nursing schools in the 1870s as a response to this movement but also for a more practical reason: Student nurses provided an inexpensive and stable workforce. Students worked 60 to 70 hours a week, in exchange for room, board, and a stipend for books. Discipline was severe and unremitting. The best nursing programs provided little classroom

6

training, and the worst provided none. A small hospital could establish a "school" with as few as five students. After training on the wards, hospitals sent student nurses to care for more wealthy patients in their homes; fees for nursing service were paid directly to the hospital. Still, women sought nursing

7

A SELECTED CHRONOLOGY OF 19TH CENTURY MEDICINE

1789 Maryland adopts legislation allowing the state medical society to license physicians. (The statute is repealed 1838.)

1818 Valentine Mott, a New York physician, performs first successful cardiovascular operation. (The patient survived for one month.)

1846 Ether is first used as an anesthetic during surgery at Massachusetts General Hospital by William Thomas Morton. (That same year, the American Medical Association is founded.) Chloroform soon becomes more widely used.

1873 Texas adopts the first "modern" medical licensing law. (A similar statute in Virginia is upheld as constitutional by the Supreme Court in 1883.)

1881 President Garfield is shot by an assassin and dies three months later. While the original wound may have caused his death, contributing factors include the repeated examination of the wound with unwashed hands and unclean instruments and, on several occasions, the "squeezing" of the wound to encourage suppuration.

1887 The Pennsylvania Hospital first offers service to paying patients, building a private villa, "to meet a demand for a more liberal accommodation for a limited number of patients . . . [so that they might enjoy the comfort] to which they were accustomed . . . and for which they were willing and able to pay."

1890 First use of rubber gloves during surgery (by William Halsted at Johns Hopkins).

1893 Surgeons remove cancer-ridden portion of President Cleveland's upper jaw. The operation is performed on board a yacht on the East River in New York. The successful operation is kept secret until revealed 24 years later.

1901 Rockefeller Institute for Medical Research is established.

1909 Abraham Flexner submits his final report to the Carnegie Foundation.

1911 "I believe firmly that more patients have died from the use of gloves than have ever been saved from infection by their use." W. P. Carr (a prominent Boston surgeon).

8

work because it was one of the few forms of employment available to them, and because the training could be obtained by women of modest means, who could then make a living in private nursing practice.

Efforts to improve these conditions and upgrade the education and status of nurses met resistance from both physicians and hospitals. While some in the medical profession saw the value of better trained and more highly skilled nurses, others were threatened by a fear that trained nurses would "prove restless in their subordination." Further, many hospitals, particularly smaller ones, with a weak financial base, resisted educational reform for nurses. These hospitals perceived that they could not afford a nurse training program that met more rigorous standards and, at the same time, use low-cost student nurses to meet their staffing needs.

Sheer numbers reflect the rapid growth and increasing importance of the American hospital. In 1873 there were only 178 hospitals in the United States. (About one-third were institutions for the mentally ill.) By 1900 there were over 4,000 hospitals. By 1930 there were nearly 7,000. From 35,500 hospital beds in 1900, the American hospital industry grew to 922,000 beds by 1930.

As their numbers grew, their size and distribution varied considerably, but they took on a pattern that would remain largely unchanged for the next fifty years. More hospitals were in the more densely populated Northeast, and most were in urban areas. Most were organized as voluntary or charitable institutions, and many were affiliated with religious groups. A few small institutions were "for-profit" or proprietary enterprises, generally owned by a group of physicians for their exclusive use. Some of the largest were publicly sponsored, and many but not all of these retained their original mission to serve the poor. The largest and most influential hospitals were those affiliated with medical schools.

The transformation from warehouse for the poor to medical institution for the general public was essentially completed by the 1930s. During the first three decades of this century, many techniques were pioneered that became the visible miracles of modern medicine: vascular, neurological, and thoracic surgery; x-ray and other techniques of internal diagnosis; orthopedic repair and replacement. The modern hospital became a source of hope, perhaps even wonder, rather than despair. Both public expectations and public demand increased accordingly.

As hospital-based medicine became more sophisticated, a complex and unique institution emerged, built around a bifurcated organizational structure: an administrative staff to provide the equipment, facilities, and non-physician staff supervision for the convalescence of the patient and the support of the physician; and a medical staff, which was organizationally part of the management structure but in practice a self-regulating organization of private, independent contractors. This institutional structure, along with the physician's legally sanctioned monopoly over medical treatment, allowed the medical profession to insist that all patient care issues within the hospital --admission and discharge, patient management, staff privileges -- be determined by the hospital's staff physicians.

At the same time, physicians and hospitals became more mutually dependent on one another. By the 1930s, seven out of ten physicians had some affiliation with a hospital, and hospital-based practice represented a growing proportion of

9

SIDEBAR: PRIVATE MEDICINE AND PUBLIC HEALTH, ADVANCES IN HEALTH CARE AT THE TURN OF THE CENTURY

Progress in the health of Americans at the turn of the 20th century could be measured in leaps and bounds.

Within a few decades, mortality from tuberculosis, pneumonia, and other respiratory diseases, among the leading causes of death for the previous three centuries, was dramatically reduced. Similar trends were seen for the “childhood” killers: measles, whooping cough, diphtheria, and scarlet fever. Advances in prophylactic vaccination and chemotherapy had given the nation the means to respond to the recurring epidemics of cholera, smallpox, and typhoid that had killed tens of thousands in the 1800s. Even when disease or illness occurred, advances in medicine offered hope that the resulting condition might be treatable and transitory, and rarely, as had often been the case a generation earlier, a life-threatening or disabling condition that could linger through a lifetime.

Prior to 1900, two-thirds of Americans died before the age of 50. Between 1900 and 1930, mortality rates for all age groups between 10 and 35 years of age were halved. Out of ten children born in the early 1800s, two or three died in the first year of their life, five or six died by their sixth birthday, and only three lived to maturity. Even in 1915, one out of ten children would die in the first year of life; by 1930, that number also had been halved. Childbirth in the 19th century had been almost as risky for the mother. By the 1930s, survival could be expected for both mother and child.

Such advances in the human condition must have been visible and startling. Simply put, most Americans could expect to live better and longer. Average life expectancy at birth was less than 35 in the 1800s; it increased to over 45 by 1900, and to over 60 by the 1930s; this trend of increasing life expectancy would moderate but continue uninterrupted for the rest of the century.

Medical historians remind us that medicine per se was only partially responsible for these achievements. The war on infectious disease was fought by public health workers -- sanitarians, health inspectors, public health nurses -- in the streets as much as by physicians at the bedside. The techniques for control of most infectious diseases were less a matter of individual medical care and treatment and more a matter of preventive or public health techniques: mass vaccination programs, identification and isolation of outbreaks, improvements in sanitation and water supply.

Although medicine’s new scientific approach was undeniably a vast improvement over the primitive therapeutics of an earlier century, medicine as practiced by the 20th century physician was -- and still is -- focused largely on the individual patient and the biological causes of an illness or disease. There may be many contributing causes to health problems, not all of which are biological or responsive to individual medical care. Treatment and, in particular, prevention of disease or illness may be achieved by “treating” the environmental, social, or economic causes as well as and, in some cases, better than by treating individual patients.

George Rosen, in his assessment of the combined efforts of individual medical care and public health techniques in the early part of the 20th century, uses the successful campaign against tuberculosis as an illustration:

10

Tuberculosis. . . provides a model of a disease resulting from a complex interaction of biological, socioeconomic, and cultural factors. Although a specific etiologic agent has been known for almost a hundred years, a high degree of prevention and control has not been achieved by a frontal attack on the organism, but by drying up the sources of infection through isolation of patients, pasteurization of milk, by reducing overcrowding in dwellings, improving nutrition, and in general raising living standards and making it possible for people to maintain them by increasing their economic resources.1

In fact, as Rosen points out, mortality and morbidity from many of the “dread” diseases of the 19th century had already begun to decline markedly even before vaccines were available or effective treatment had been developed, simply as a result of improvements in housing, nutrition, and other social and economic conditions.

The point is not to understate the achievements of medicine or the value of medical practitioners. The practice of medicine was becoming increasingly effective in the early 1900s. Americans would soon witness the introduction of sulfonamides and penicillin, and of the other “magic bullets” that would be described as the “antibiotic revolution” of the 20th century. Advances in surgical and obstetric technique would make successful childbirth more commonplace even in complicated cases. Deaths from such conditions as appendicitis, once common, would become rare, avoidable tragedies. But the role of medicine in achieving these visible advances in health care must be viewed in the context of the other social and economic advances of the early 20th century. Protection and maintenance of health requires both good medicine and other conditions, and the lack of either can be significant.

Thomas McKeown in The Role of Medicine: Dream, Mirage, or Nemesis?, again using tuberculosis as the example, made a similar point:

The history of tuberculosis illustrates, perhaps more than that of any other infection, a general point about the contribution of therapy. Effective clinical intervention came late in the history of the disease, and over the whole period of its decline the effect was small in relation to that of other influences. But although the problems presented by tuberculosis in the mid twentieth century were smaller than those in the early nineteenth, it was still a common and often fatal disease with a high level of associated morbidity. In two of its forms, tuberculosis/meningitis and military tuberculosis, it was invariably fatal. The challenge to medical science and practice was to increase the rate of decline of morality, and, if possible, finally remove the threat of the disease which has been a leading cause of infectious deaths for nearly two centuries. In this it was outstandingly successful, and it would be as unreasonable to underestimate this achievement as to overlook the fact that it was preceded, and probably necessarily preceded, by modification of the conditions -- low resistance from malnutrition and heavy exposure from overcrowding -- which had made tuberculosis so formidable.

1 George Rosen, Preventive Medicine in the United States 36-37 (1977).

11

Several other points are worth mentioning. The most remarkable progress in health care in the early 20th century was made against the infectious diseases; progress against non-infectious conditions was far less impressive. Indeed, progress against the modern “epidemics” -- heart disease, cancer, and stroke -- as well as the other leading causes of death for Americans in the twentieth century, accidents and homicides, have proven particularly intractable to either medical or public health intervention. Modern Americans now survive the risks of childbirth and the fatal diseases of childhood and live to adulthood more often, but they are also living long enough to expose themselves to the chronic diseases and debilitating conditions characteristic of old age. We also are paying a price for the economic growth that has in part improved our lot. With industrialization has come a new set of health-threatening risks brought on by occupational exposures and environmental deterioration. Poverty and hazardous living conditions, while greatly reduced, continue among us and heavily influence the status of the poor. (Indeed, the 1990s witnessed a resurgence of an old, thought-vanquished foe: tuberculosis.) It is unlikely that either medicine or traditional public health techniques will conquer these problems.

12

annual physician income. Hospitals were even more dependent upon physicians, the more successful of whom could choose among several hospitals for the care of their paying patients. The physician, by standing between the hospital and the patient, had effectively co-opted the hospital's resources and could expect and demand fealty from the hospital's nursing and administrative staff, and even from its management and board of trustees.

Hospital-based medicine also created strong pressures towards intraprofessional loyalty and discipline. As staff privileges and the specialty referrals generated by hospital-based practice became more important to the livelihood of many physicians, they found it increasingly difficult to give even the appearance of disloyalty to the profession or to the ideological commitments of organized medicine (as the physicians who became involved in prepaid group practices and other forms of "contract medicine" in the 1920s and 1930s would quickly learn).

Significantly, by the 1930s, hospital-based medicine was consuming a growing proportion of the nation's health care dollar. In 1929 (the first year for which national health spending data were collected), physician services represented 28 percent of all expenditures for health care. In the next 30 years that proportion would shrink to less than 20 percent. In contrast, hospitals consumed 19 percent of all health spending in 1929; by the 1960s the hospitals' share had grown to 40 percent of all national health expenditures (NHEs) and over 80 percent of all NHEs would be attributable to services that took place within the hospital.

This increase in the importance of hospital services laid the groundwork for major structural changes in health care financing and, eventually, more direct public involvement in health care delivery. As hospitals became more sophisticated, their traditional public and private sponsors found themselves unable to continue supporting them. Even at the turn of the century, some private hospitals had turned to patient-generated revenues to cover expenditures. In 1900, most hospitals had only a small number of paying patients; by the 1920s, approximately one-half of hospital patients were paying fees for their services, and over two-thirds of all hospital income in the United States was being derived from individual patient charges. But by the early years of the Depression, reliance on out-of-pocket payments by patients had proven to be an insufficient basis for financing hospital care. Hospital occupancy had dropped dramatically. Some facilities were forced to close. On the other side of the financial equation, American consumers, already shocked by unprecedented unemployment and widespread financial hardship, faced a further threat of financial ruin: catastrophic medical bills. Thus, from a variety of sources, but most critically from some leaders of the hospital industry, there arose considerable pressure to develop some sort of prepayment or insurance-type financing for hospital care.

C. HEALTH CARE REFORM FROM THE PROGRESSIVE ERA TO THE NEW DEAL

Some amount of political support for public financing of health care had been generated in this country as early as the turn of the 20th century. Many of the industrialized European countries had adopted some form of "sickness insurance." Progressive reformers and some, though not all, labor leaders sought similar programs in the United States. The successful movement to adopt state worker compensation programs to pay workers for losses from industrial accidents (and to limit the liability of their employers) encouraged those who sought

13

broader financing for health services. Mandatory national health insurance was a plank of Theodore Roosevelt's unsuccessful presidential campaign in 1912. The AMA even briefly supported what they labeled "social insurance," although this posture was quickly reversed by more conservative elements within the organization. Political interest, however, waned during World War I (nationalized health insurance, after all, had been "invented" by the Germans) and remained dormant during the laissez-faire politics of the 1920s.

The hardships of the Depression rekindled interest in government financing of health care, as well as other health care reforms. Even earlier, in 1927, the Carnegie Foundation had organized the Committee on the Costs of Medical Care (CCMC), a private commission of leaders from business and government, public health and medical experts, to study and evaluate health and medicine in the United States. In 1932, the CCMC issued a report recommending: 1)the organization of all professional services on a group practice basis; 2) the extension of basic public health services, by both private and public agencies, to all Americans; 3) the establishment of prepayment mechanisms for medical services through either private insurance or government-financed programs; and 4)the establishment of local and state agencies for the study and coordination of medical services.

The CCMC report had carefully downplayed the implications of the recommendations for government involvement in medical care; indeed, it was conspicuously silent about how any of these recommendations would be achieved. Nonetheless, the implications of the report were not lost on the medical profession. The response of the AMA was understandable albeit hyperbolic. The encouragement of group practice, AMA leaders claimed, was no less than "the establishment of medical soviets." Government financing of medical care, voluntary or not, would be the "first step towards socialized medicine."

The AMA's rhetoric highlighted the profession's primary concern and the concern that would be voiced with equal vehemence in the decades to follow about virtually all attempts to reform health care delivery or financing. What organized medicine feared was not just the threat to its economic self-interest, but what it viewed as "socialized medicine," or any inroad, public or private, on the autonomy of the individual practitioner or on the control over medical practice exercised by the profession itself. Most physicians perceived, and later history would validate their perception, that external control and loss of their autonomy would be the necessary incidents of any reform of solo, fee-for-service medicine, or any third party prepayment scheme for financing medical services. Even though many physicians suffered financially during the Depression, most were convinced that any economic advantage that might accrue from third party financing would be offset by the loss of autonomy and professional control. Thus, while physicians later gave ground to private prepayment schemes, they did so reluctantly and only when the traditions and ideology of American medicine were carefully protected.

The vehement opposition of the AMA to government-financed health insurance and to other structural changes in health care delivery of the type proposed by the CCMC also demonstrated much about the politics of health care reform from the 1930s to contemporary times. The perceived concerns of the medical profession for its sovereignty were closely aligned with those of political conservatives, at least to the extent that both opposed further expansion of government authority, particularly from the federal level. Only later when the inherent differences between "private medicine" as viewed by the inherently conservative profession and "private and competitive medicine," as envisioned by

14

SIDEBAR: THE GAUNTLET IS [CAREFULLY] THROWN DOWN . . .

When the Committee on the Costs of Medical Care issued its final report -- and the first national assessment of health and medical care -- its findings were stark and direct: The recently witnessed progress in medicine held out tremendous potential for the American people, but those benefits were poorly and unequally distributed. Many people were denied medical care altogether. Few people, largely due to economic reasons, were receiving what they needed.

The CCMC’s recommendations were equally important but more cautiously stated, with evident concern for the reaction they would inspire (see sidebar infra):

The Committee recommends that medical service, both preventive and therapeutic, should be furnished largely by organized groups of physicians, dentists, nurses, pharmacists, and other associated personnel. Such groups should be organized, preferably around a hospital, for rendering complete home, office and hospital care. The form of organization should encourage the maintenance of high standards and the development or preservation of a personal relation between patient and physician.

The Committee recommends the extension of all basic public health services -- whether provided by governmental or non-governmental agencies -- so that they will be available to the entire population according to its needs. Primarily this extension requires increased financial support for official health departments and full-time trained health officers and members of their staffs whose tenure is dependent only upon professional and administrative competence.

The Committee recommends that the costs of medical care be placed on a group payment basis, through the use of insurance, through the use of taxation, or through the use of both these methods. This is not meant to preclude the continuation of medical service provided on an individual fee basis for those who prefer the present method. Cash benefits, i.e., compensation for wage-loss due to illness, if and when provided, should be separate and distinct from medical services.

The Committee recommends that the study, evaluation, and coordination of medical service be considered important functions for every state and local community, that agencies be formed to exercise these functions, and that the coordination of rural with urban services receive special attention. . . .

The Committee on the Costs of Medical Care, Medical Care for the American People xvi (October 1932).

15

SIDEBAR: THE AMA RESPONDS . . .

In response to rising political support for the CCMC reforms, the AMA sponsored a series of critical reports and public statements emphasizing the evils of what they labeled “sickness insurance.” At the annual meeting of the AMA House of Delegates in 1934, the efforts culminated in what could be regarded as the profession’s manifesto for private insurance.

First: All features of medical service in any method of medical practice should be under the control of the medical profession. No other body or individual is legally or educationally equipped to exercise such control.

Second: No third party must be permitted to come between the patient and his physician in any medical relation. All responsibility for the character of medical service must be borne by the profession.

Third: Patients must have absolute freedom to choose a duly qualified doctor of medicine who will serve them from among all those qualified to practice and who are willing to give service.

Fourth: The method of giving the service must retain a permanent, confidential relation between the patient and a “family physician.” This relation must be the fundamental and dominating feature of any system.

Fifth: All medical phases of all institutions involved in medical service should be under professional control, it being understood that hospital service and medical service should be considered separately. These institutions are but expansions of the equipment of the physician. He is the only one whom the laws of all nations recognize as competent to use them in the delivery of service. The medical profession alone can determine the adequacy and character of such institutions. Their value depends on their operation according to medical standards.

Sixth: However the cost of medical service may be distributed, the immediate cost should be borne by the patient if able to pay at the time the service is rendered.

Seventh: Medical service must have no connection with any cash benefits.

Eighth: Any form of medical service should include within its scope all qualified physicians of the locality covered by its operation who wish to give service under the conditions established.

Ninth: Systems for the relief of low income classes should be limited strictly to those below the “comfort level” standard of incomes.

Tenth: There should be no restrictions on treatment or prescribing not formulated and enforced by the organized medical profession.

16

American Medical Association, Sickness Insurance Problems in the United States (policy statement adopted June 30, 1943).

17

some economic conservatives, became clearer would this alignment begin to diverge. But in the 1930s, notwithstanding Roosevelt's liberal majority, this conservative coalition was formidable. When some officials within the Roosevelt Administration initially, and then again at the beginning of his second term, urged the inclusion of mandatory health insurance as part of the domestic reforms of the New Deal, the opposition marshaled by the medical community and conservative politicians convinced the President that further support of health insurance would jeopardize support for his Social Security, welfare, and other New Deal domestic reforms. As a result, federal health insurance was reduced to a political bargaining chip and then abandoned, a scenario that would be replayed several times in subsequent decades. Ironically, most of the CCMC reforms were eventually adopted. In fact, the agenda suggested by the CCMC -- the reorganization and integration of medical services, the extension of private and public prepayment mechanisms, the collective planning of health care resources -- essentially outlined the central issues that would dominate American health policy debates for the next 40 years.

Health care reform had emerged by the end of the 1930s as an important and complex public policy issue. As the CCMC had recognized, whatever the advantages and potential of health care for the American people, it also had raised fundamental questions of cost, accessibility, and equity; health care had become "essential"; what they did not say but clearly implied was that health care had also become problematic and controversial.

D. THE EMERGENCE OF PRIVATE HEALTH INSURANCE AND THE "BIRTH OF THE BLUES"

The growing concerns for the costs and adequacy of health care, on the one hand, and the strong political opposition to publicly sponsored reforms, on the other, set the stage for the growth of privately initiated prepayment schemes in the 1930s and 1940s.

Much to the chagrin -- and often to the active opposition -- of the medical profession, a number of experiments with "contract medicine" emerged in the 1920s and 1930s. Probably the most important were attempts by employee groups and "medical cooperatives" to form "closed panel" prepayment schemes for physician and other medical services, the forerunners of what would later be called prepaid health plans or health maintenance organizations. A few hospitals attempted similar arrangements, offering coverage for specified hospital benefits in exchange for a fixed annual or monthly premium, protecting the enrolled consumer from the unpredictable threat of hospitalization costs, and offering some measure of economic stability to the contracting hospital.

As these prepayment experiments became more widespread, they encountered both political and legal constraints. Despite the eagerness of the hospital industry to find more suitable sources of financing, most hospitals viewed themselves as "charitable" institutions. The notion of competition between hospitals for the exclusive enrollment of patients threatened both these traditions. Legal questions were also raised concerning the applicability of state insurance laws to these schemes, particularly the organizational and reserve requirements imposed by states on most other forms of insurance. Physicians also opposed hospital-based prepayment plans because they profoundly altered the power relationship between physicians and hospitals.

In an effort to steer these developments in a direction more acceptable to the medical profession and the hospital industry, the increasingly visible

18

American Hospital Association (AHA), along with state and local hospital groups, sought state legislation authorizing tax-exempt hospital "service-benefit" plans and exempting these plans from general insurance laws. They also urged that these plans be exempted from state and federal taxation on their income, property, and premiums. To qualify for tax exemption, "service-benefit" plans had to be structured according to what the industry regarded as proper and ethical standards, including:

1) the assurance that such plans be open to the whole community;2) the requirements that such plans offer "freedom of choice" to both provider and subscriber; that is, any hospital would be allowed the "freedom" to join the plan and any subscriber would have the "freedom" to choose any participating hospital;3) and the requirement that the majority of the directors of these plans be representatives of the hospital industry.

From these efforts emerged what several observers have called the "Birth of the Blues." As states were adopting "service-benefit" authorizing legislation, the AHA was sponsoring the formation of a national Blue Cross Association. Any hospital "service-benefit" plan meeting the membership requirements of the association -- not the least of which was the requirement that members show that 75 percent of the hospitals in their geographic area were participants in the plan -- was entitled to use the name and emblem of Blue Cross. As a result, while theoretically any number of hospital "service-benefit" plans might have been formed in a region, most Blue Cross plans were assured a de facto monopoly over a unique and important form of hospital financing.

Fueled by both the public demand and the hospital industry's interest, Blue Cross plans spread rapidly. By 1938, 1.4 million people had enrolled in 38 plans across the country. By contrast, at that time private indemnity insurance covered only 100,000 people for hospital care. By the end of 1946, nearly one out of five Americans had enrolled in Blue Cross hospital "service-benefit" plans.

American physicians were more reluctant to embrace third party insurance, even "service-benefit" plans tailored to the needs and traditions of medicine. Throughout the 1930s, many individual and organizational efforts were made to discourage participation by physicians in any insurance or prepayment plans. Several states gave judicial or statutory recognition to the "corporate practice of medicine" doctrine, which effectively prohibited any form of medical care financing or delivery that allowed non-physician control over medical practice. By the 1940s, however, physicians in many states were, in the words of Rosemary Stevens, “turning a necessity into a virtue.” In California, Oregon, and Washington, local medical associations established "medical service associations" that paid participating physicians on a pro-rated, fee-for-service basis for services provided to subscribers. In other states, Blue Cross plans underwrote and, in some cases, administered "Blue Shield" plans, incorporating arrangements parallel to those of Blue Cross for physician control, and "freedom of choice" guarantees for both the consumer-subscriber and the participating physician. The official Blue Shield emblem was created in 1946: the initials "A.M.A." over a caduceus emblazoned on a blue shield. Between 1939 and 1945, 26 states enacted special enabling legislation for medical "service-benefit" plans. By 1947, 4.4 million people, 4 percent of the American population, were members of Blue Shield or medical "service-benefit" plans, although nearly two-thirds were in five states.

19

A number of factors encouraged the growth of "service-benefit" plans and, eventually, other forms of private health insurance. First, as concern for the costs of health care continued and the political likelihood of publicly sponsored health care financing dimmed, health insurance became increasingly popular as an employment benefit. This trend was given an additional boost when wage controls were imposed during and after World War II, but fringe benefit increases up to five percent of wages were exempted from these controls. Perhaps more important for long term policy, the Internal Revenue Service ruled in 1943 that employer contributions to group health insurance (expanded in 1954 to cover all employer-purchased health insurance) were exempt from the employee's taxable income.

While these factors fostered continued growth of the Blues, they also sparked the interest of many commercial insurance companies. Until the 1940s, most insurance experts had insisted that indemnity insurance against medical bills was inherently unprofitable. The losses were actuarially unpredictable and biased by what economists call "moral hazard," that is, the insured's ability to influence whether a claim could be made. But the convenience of selling group insurance through employers, the encouragement of various government policies, and the success of the Blues led commercial insurers to enter the health insurance market despite these concerns. During the 1940s, commercial health insurance coverage in the United States jumped dramatically. By 1951, nearly 80 million Americans had hospital insurance coverage, over 40 million through various indemnity policies, a slightly smaller share through Blue Cross plans. By the end of the decade, over 80 percent of the work force had employer-purchased health insurance benefits. By the 1960s a stable pattern had emerged: roughly 80 percent of the non-elderly population had some hospital insurance coverage, most of which was employment-based; slightly less than half of this insurance was provided by some form of "service-benefit" plan, and a slightly larger proportion by private commercial insurers. A small but stable proportion of the health insurance market was held by closed panel, prepaid health plans or health maintenance organizations. About 60 percent of the population had some coverage for physician services -- distributed in a roughly similar pattern.

The competition during the 1940s and 1950s between commercial insurance companies and Blue Cross and Blue Shield plans had a major impact on the character of health care financing in this country. As originally conceived, nonprofit "service-benefit" plans were designed as much for political and social purposes as for economic objectives. The sponsors of Blue Cross and Blue Shield envisioned themselves as providing the private alternative to government financing, securing reimbursement for providers for their services while meeting the public's needs for collective prepayment. Thus, the original Blues offered "community rating" (all subscribers in a geographic area paid the same price), minimal co-payment and deductibles, broad coverage of services, and guaranteed service (enrolled subscribers were assured that they would be accepted by all participating providers). Some plans went further and provided discount rates to low income people and to large families. Blue Cross subscribers also were assured that participating hospitals would accept assignment of claims, that is, accept the Blue Cross payment as payment in full. (Even physicians willing to participate in Blue Shield programs preferred to set their own fees and charge directly to their patients; thus Blue Shield reimbursement generally was paid on an indemnity basis to the patient.)

But while the features of "service-benefit" plans were attractive to providers and to many consumers, other consumers, particularly those at low risk, and some employers, preferred to purchase more limited coverage and indemnity-type insurance and, of course, to receive the resulting reductions in

20

premiums. As one result of the competition with commercial insurers, Blue Cross and Blue Shield plans abandoned some of the features of "service-benefit" plans and began to charge different groups and individuals different rates on an experience basis. Likewise, there was some pressure on indemnity insurance companies to offer policies that more closely resembled the deeper and more comprehensive coverage of typical "service-benefit" plans. As a result, as indemnity insurers and "service-benefit" plans settled into a relatively stable division of the private insurance market, the original distinctions between them somewhat blurred.

The result also was a uniquely American form of health service financing. Unlike virtually every other industrialized country, Americans relied predominantly on private employment-based, insurance-type financing schemes that largely divorced the financing of services from their delivery. Neither "service-benefit" plans nor indemnity insurers integrated the provider into the financing scheme, nor did they often attempt to influence in any substantial way the behavior of physicians, hospitals, or other providers.

The potential for integrating financing and delivery had always been there. As noted earlier, HMOs and other closed panel prepayment schemes had provided successful experiments with direct control over providers as early as the 1930s. Prior to the emergence of the Blues, such programs also had been attempted by a few individual hospitals. For decades the United Mine Workers union ran a program on this model for its workers, owning its own facilities, hiring health personnel, and providing service to meet its members' needs. The largest program of this type was organized by the Kaiser Aluminum Company to provide health services to its workers and their families, and eventually to others in the communities where it operated. Organized medicine, however, strongly opposed such arrangements, perceiving them as a threat to physician autonomy. Further, with the growth of the Blues and indemnity insurance, few employers, unions, or communities felt the need to undertake the challenging job of creating an integrated health service financing and delivery program, particularly in the face of deep provider opposition.

There were two weak links in the pattern of private, employment-based health insurance, weaknesses that would eventually lead to controversy and reform. First, the predominance of fee-for-service reimbursement and the lack of control exercised over provider behavior by third party payers set the stage for rapid increases in costs that would become increasingly problematic by the 1960s and "critical" in the decades to follow. Under the private, insurance-type financing that became predominant in the United States, providers had little incentive even to consider the costs of the services they delivered. In fact, as economists would later insist, the reimbursement arrangements built into most health insurance schemes created economic incentives to provide marginally beneficial and even unnecessary care. But so long as third party payers could raise their premiums to cover these reimbursement costs, there would be little pressure on the commercial insurance companies or the Blues to reform these arrangements. And so long as the consumer, insulated by government subsidy and by employer contributions, was more concerned with the extent of health insurance coverage than with rising premium costs or increases in out-of-pocket payments, political pressure to reform health care financing from the purchasers of insurance would not emerge. The seeds of the cost problem that would eventually dominate health care policy debates were sown into the character of the private third-party financing of health care that developed in the 1940s and the 1950s, but the perception of this "cost problem" or "crisis" would emerge only later.

21

More immediate pressure to reform would come first from the other weak link in this pattern of American health care financing. Private employment-based health insurance had also failed to secure financing for the care of the elderly and the poor.

E. THE EVOLUTION OF THE GOVERNMENT'S ROLE IN HEALTH CARE: PUBLIC HEALTH AND PRIVATE MEDICINE

As noted earlier, there were antecedents for government involvement in health care as far back as the late 1700s. Nonetheless, these efforts were quite limited, confined largely to state and local government, and strictly contained within the boundaries of legitimate "public health" -- in contrast to "private medicine" -- activities.

The federal role, in particular, was quite narrow until nearly the middle of the 20th century. In fact, the first federal quarantine laws were not enacted until the 1870s and then only following an intense congressional debate over the constitutionality of such legislation. The first major federal health-related regulatory program was created in 1906, prohibiting interstate commerce in misbranded or adulterated food and drugs (amended in 1938 to regulate drug safety and in 1962 to require testing of the efficacy of new drugs). (See Chronology of Federal Legislation at end of chapter.)

American politics, however, traditionally demanded that most public health activities, to the extent they were appropriate at all, were the responsibility of the state or local governments. In the second half of the 19th century, numerous government programs to control sewage, maintain water quality, and report and control contagious disease were established, but they were almost exclusively state and local government activities. By the early 1900s, these traditional public health activities had been extended to include more regulatory measures, for instance, compulsory vaccination programs, mandatory testing prior to marriage or for public-contact occupations, inspection and licensing of restaurants and other businesses. Such regulations, however, did not lose their state or local character; the federal role was virtually negligible. Moreover, even at the state and local levels, government authority over health and health care was begrudgingly conceded by 19th and early 20th century Americans. Even when the nation faced epidemics of yellow fever, typhoid, and cholera, the public mistrust and political resistance to remedial public health measures were remarkably persistent.

Understandably, government activities that encroached directly on the practice of "private medicine" were even more proscribed. Most of the exceptions to the rule -- medical licensing laws, public funding for medical education, tax exemption of employer-purchased health insurance, and authorization of "service-benefit" plans -- only demonstrated the distinct political origins of these exceptions. Government might legitimately encourage and protect the practice of medicine without crossing the "public health"/"private medicine" boundary, but government did so almost always at the behest of medical practitioners. And any resulting control over the practice of medicine was generally delegated back to the providers themselves.

The only governmental programs that directly involved provision of medical care were more aptly described as "public" or "welfare medicine": programs that provided care for public wards and for the poor. The 18th century public almshouse gave way to public hospitals in some states and in some urban areas

22

(generally mandated to serve only the poor). State hospitals for the confinement and treatment, such that it was, of the mentally ill, and later, other people with disabilities or contagious diseases, were established in the last half of the 19th century.

At the turn of the century, a few local governments briefly experimented with dispensaries and clinics to provide medical care for the poor. But these programs also were carefully limited to avoid competition with "private medicine." Within similar boundaries, the federal government provided medical care to military personnel, veterans, Native Americans, and other federal wards. Oddly enough, one of the first acts of any kind of the fledgling federal government in 1798 was to establish a program of deductions from seamen's wages to fund national marine hospitals (later renamed the Public Health Service hospitals). The Children's Bureau funded in 1912 and its successor program under the Shepard-Towner Act (funded from 1922 to 1931) provided federal funds for state health activities, including a modest amount of direct medical care for women and children.

These state and federal programs provided historical precedents for government involvement in both public health and medical care-related activities. They also provided the testing ground for judicial consideration of the constitutional limits on both state and federal government authority over health care, limits that proved to be quite broad. Nonetheless, at least through the first quarter of the 20th century, political constraints severely limited government to "public health" activities, and "public health" generally ended where "private medicine" began.

As with so many other American social and political phenomena, the 1930s marked the watershed for a redefinition of the course of government health policy. As noted in the previous section, the growing importance of medical care, paired with the harsh economic realities of the Depression, spawned various political efforts to adopt federally sponsored health insurance as part of the New Deal reforms. While those efforts were eventually rebuffed, the Social Security programs did include increased federal funding for maternal and child health programs and other federally funded, state-administered public health services. Other New Deal programs also represented modest extensions of the federal role in health care. For instance, the Federal Emergency Relief Administration financed medical care for the unemployed; the Work Projects Administration funded some public clinic and hospital construction.

The 1930s also saw the beginning of what would become a major federal responsibility, the funding of biomedical research. The National Institute for Health (NIH) was established in 1930, to be followed in 1937 by the National Cancer Institute, and thereafter by a succession of research institutes for specific diseases. By the 1950s, federal spending for biomedical research exceeded $70 million; by 1960, $500 million. By the early 1970s, the federal government would be spending several billion dollars annually to conduct and finance biomedical and health services research.

The program that most clearly demonstrated the emergence of federal leadership and the new direction of 20th century health policy, however, was the Hill-Burton hospital survey and construction program enacted in 1946. During the 1930s and the 1940s, there was a growing recognition that American hospitals were poorly and inequitably distributed. Many areas, particularly in the rural South, had no hospitals at all. Moreover, while the growth of prepayment schemes offered some basis for financing hospital services, the high costs of the initial capital investment and of the periodic modernization and replacement of

23

hospital facilities, particularly during a period of rapid technological change, left the traditional sources of hospital capital funding, community fundraising and private philanthropy, inadequate. World War II had also dramatized two realities. As the CCMC had claimed earlier, the health status of many Americans was unimpressive. Reports of the high percentage of American males who flunked their pre-induction draft physicals, as high as 50 percent in some states, frequently claimed that this poor health status was a result of a lack of available medical and hospital care, a dubious but politically volatile observation. The war also gave visibility to many of the new developments of modern medicine: penicillin and other "wonder drugs," restorative surgery, new techniques for the treatment of trauma, burns, and the like. It also tended to legitimize a federal role in the distribution of these medical breakthroughs. For many Americans, military service during World War II meant that for the first time they had access to modern medical care on a regular basis.

Political liberals attempted to convert this public concern into support for nationalized health insurance and other structural reforms in health care delivery. Shortly before his death President Roosevelt was apparently warming to the idea of nationalized health insurance. His successor, Harry Truman, bluntly embraced national health insurance in his first domestic policy message to Congress following the war. (See sidebar infra.) Political conservatives, desperate to find some acceptable alternative as they moved into the second decade of Democratic dominance, found nationalized federal financing an anathema, but were increasingly willing to consider an extended but limited federal role in health care, particularly one that would not directly affront the traditional interest of health care providers.

The final Hill-Burton hospital construction legislation, sponsored by a moderate Republican from Ohio and a conservative Democrat from Alabama, captured these politics. Hill-Burton authorized federal funds for each state to survey their needs and to develop the plans for the development of hospital facilities. It also provided matching funds and loans for the construction of public and nonprofit facilities that met the needs outlined in the state's plan. In later years, the program was expanded to allow the funding of other types of health facilities and, in 1964, the modernization of existing facilities. Funded projects had to comply with a number of requirements outlined in the federal law concerning the safety and adequacy of the facilities, as well as provisions -- largely overlooked -- to provide a reasonable volume of uncompensated care and not to discriminate on the basis of race. (The latter was expanded in 1964 to a general "community service" requirement.)

Hill-Burton represented an unprecedented federal initiative and the first major investment of federal funds into mainstream medical care. In the first 25 years of the program, over half of the hospitals in the country received Hill-Burton assistance to finance facility construction and modernization. Hill-Burton also broke another barrier. For the first time, government agencies were authorized to plan for and allocate health care resources, a foreshadowing of the more comprehensive planning efforts that would follow.

Nonetheless, the regulatory features of Hill-Burton were more symbolic than real. The program was structured and administered more as a conduit for federal assistance than as an attempt to collectively rationalize the distribution of hospital resources. While the federal requirement that states have licensing programs in order to participate in Hill-Burton spurred some interest in state regulation of quality standards, that movement was sidetracked by hospitals and physicians through the creation of a private, provider-dominated program to review and certify the quality of medical care, the Joint

24

Commission on the Accreditation of Hospitals. As they had with virtually all previous state and federal government health programs, providers had once again managed to secure the benefits of government intervention, in this case public financing of their capital costs, without conceding much control over those resources or over their professional activities.

F. AMERICAN HEALTH POLICY FROM THE POST-WAR ERA TO THE 1960s

If there were "glory days" for American medicine, they must have been in the 1950s. In the name of the public's welfare, medicine had successfully claimed the protection of licensing laws, public and philanthropic support for medical education, and freedom from both external control and internal competition. Private but publicly encouraged third party payment schemes were now available, assuring reimbursement for medical services, but carefully structured to avoid "socializing" medical practice. State and federal money was being spent in increasing amounts for public health services, "welfare medicine," biomedical research, and hospital construction. Both individual and institutional providers were able to claim both the cloak of free enterprise and the mantle of service to society in their successful efforts to protect their autonomy and their respected social status.

American medicine also could claim that all these advantages were more than justified by what they now could provide. In the first quarter of the century, American medicine had started on the road to professional sovereignty and economic security on the wings of an unsecured promise of hope: What science had discovered today, medicine would provide, left to its private practice, tomorrow. By the 1950s, the promise had been replaced by an assertion that would become medicine's permanent political banner: "Americans," we were proudly told, "have the best health care in the world."

As an assessment of the nation's technical capability, the claim was quite certainly true. As in other fields, American medical technology had assumed a position of world leadership following World War II. As a description of medical practice, however, American medicine's claim to supremacy was an understandable exaggeration, statistical improvements in health status notwithstanding. Only some Americans had access to the "best medical care in the world." Despite Hill-Burton and the other government efforts, there were still areas of the country that could claim a need for hospital services. More critically, the limited supply of physicians and the unwillingness of many practitioners to practice in "undesirable" areas left a shortage of physician services in many rural areas and, particularly, urban poor areas. Even when medical care was available, the necessary concomitant of better medical care -- higher medical costs -- posed financial barriers, particularly for those who fell into the gaps between private insurance coverage, despite its rapid growth, and the limited government "welfare medicine" programs.

The political irony of American medicine's adamant claim to provide the best medical care in the world was not that its accuracy was disputed; it was that the proposition was so readily accepted. But while for its authors the claim implied that private medicine's sovereignty and privileged status should be left intact, for others it had quite a different meaning. If the best health care in the world is available to many Americans, then those who are denied it are all the more visible, and their calls for remedial measures are increasingly hard to ignore. American politics did not abandon altogether the political constraints that had shaped public policy previously, but for the next several

25

decades those constraints would be continually weakened by the pervasive egalitarian notion that all Americans were entitled to what American medicine

26

SIDEBAR: THE NATIONAL HEALTH INSURANCE DEBATE OF THE 1940s

Prior to the New Deal years, any suggestion that the federal government should sponsor a national health care program would have been regarded as wholly unrealistic. Even when the CCMC report proposed a major reorganization of the delivery and financing of American health care in 1932, it attempted to stay within the long-standing political tenets of American health care reform: maintaining the traditional barrier between public health and private medicine, and strongly implying that any governmental role should be played by state and local actors, not the federal government.

But as Roosevelt's Administration launched a more active role for the federal government in maintaining income security, welfare, and many other domestic matters, the notion of a health care program administered or, at least, financed by the federal government became more politically palatable.During the late 1930s and 1940s, a series of proposals authored by Senator Robert Wagner from New York, Senator James Murray from Montana, and Representative John Dingell from Michigan managed to spark some of the political debate from which the Hill-Burton program eventually emerged in 1946. In its earliest form, the Wagner-Murray-Dingell proposal looked like many of the Roosevelt-sponsored welfare and social services programs (and, for that matter like the Medicaid program adopted in 1965): Federal funding would be provided to state and local governments who would bear primary responsibility for shaping and administering the resulting program. By the mid-1940s, however, and especially during the debates that immediately presaged the Hill-Burton legislation, the Wagner-Murray-Dingell proposal evolved into a form that more closely resembled the New Deal Social Security programs, envisioning a single, national insurance program primarily financed and administered by the federal government.

The Wagner-Murray-Dingell proposal provided the basic outline of the national health insurance program that Harry Truman proposed to Congress in November 1945. In his words:

In my message to Congress of September 6, 1945, there were enumerated in a proposed economic bill of rights certain rights which ought to be assured to every American citizen.

One of them was: "The right to adequate medical care and the opportunity to achieve and enjoy good health." Another was the "right to adequate protection from the economic fears of . . . sickness . . . ."

Millions of our citizens do not now have a full measure of opportunity to achieve and enjoy good health. Millions do not now have protection or security against the economic effects of sickness. The time has arrived for action to help them attain that opportunity and that protection.

. . . .

In the past, the benefits of modern medical science have not been enjoyed by our citizens with any degree of equality. Nor are they today. Nor will they be in the future -- unless Government is bold enough to do something about it.

27

People with low or moderate incomes do not get the same medical attention as those with high incomes. The poor have more sickness, but they get less medical care. People who live in rural areas do not get the same amount or quality of medical attention as those who live in our cities.

Our new economic bill of rights should mean health security for all, regardless of residence, station, or race -- everywhere in the United States.

* * *

Truman then proposed a five part reform plan: a federal hospital construction program; an expansion of federal financing for state and local public health and maternal and child health programs; new federal programs to underwrite medical research and medical education; a program to insure workers against the loss of income during illness and disability, and a federally-sponsored national health insurance program.

I recommend solving the basic problem [of high medical costs] by distributing the costs through an expansion of our existing compulsory social insurance program. This is not socialized medicine.

. . . .

Such a system of prepayment should cover medical, hospital, nursing, and laboratory services. It should also cover dental care -- as fully and for as many of the population as the available personnel and the financial resources of the system permit.

The ability of our people to pay for adequate medical care will be increased if while they are well they pay regularly into a common health fund instead of paying sporadically and unevenly when they are sick. This health fund should be built up nationally, in order to establish the broadest and most stable basis for spreading the costs of illness, and to assure adequate financial support for doctors and hospital everywhere. If we were to reply [sic] on State-by-State action only, many years would elapse before we had any general coverage. Meanwhile health services would continue to be grossly uneven, and disease would continue to cross State boundary lines.

. . . .

. . . [T]he Nation-wide system must be highly decentralized in administration. The local administrative unit must be the keystone of the system so as to provide for local services and adaptation to local needs and conditions. Locally as well as nationally, policy and administration should be guided by advisory committees in which the public and the medical professions are represented. Subject to national standards, methods and rates of paying doctors and hospitals should be adjusted locally. All such rates for doctors should be adequate, and should be appropriately adjusted upward for those who are qualified as specialists.

People should remain free to choose their own physicians and hospitals. The removal of financial barriers between patient and doctor would enlarge the present freedom of choice. The legal requirement on the population to contribute involves no compulsion over the doctor's freedom

28

to decide what services his patient needs. People will remain free to obtain and pay for medical services outside of the health insurance system if they desire, even though they are members of the system . . . .

Likewise physicians should remain free to accept or reject patients. . . .

Our voluntary hospitals and our city, county, and State general hospitals, in the same way, must be free to participate in the system to whatever extent they wish. In any case, they must continue to retain their administrative independence.

. . . .

I am in favor of the broadest possible coverage for this insurance system. I believe that all persons who work for a living and their dependents would be covered under such an insurance plan. . . .

In addition, needy persons and other groups should be covered through appropriate premiums paid for them by public agencies. Increased federal funds should also be made available by the Congress under the public assistance programs to reimburse the States for part of such premiums, as well as for the direct expenditures made by the States in paying for medical services provided by doctors, hospitals, and other agencies to needy persons.

Premiums for present social-insurance benefits are calculated on the first $3,000 of earnings in a year. It might be well to have all such premiums, including those for health, calculated on a somewhat higher amount such as $3,600.

. . . .

We are a rich nation and can afford many things. But ill-health which can be prevented or cured is one thing we cannot afford.

91 Cong. Rec. H 10817-10820 (daily ed. Nov. 19, 1945) (Message From the President).

The political irony is that much of Truman's five part reform proposal was eventually adopted. Within a year, Congress adopted the Hill-Burton program. In the two decades to follow, Congress took a number of steps which expanded substantially the federal role in financing public health, maternal and child health, medical research, and medical education. While no general program of income insurance for workers was ever adopted, the Social Security program was expanded in 1956 to include benefits for (some) disabled workers. What was not adopted by Congress -- then or in later years -- was Truman's proposal to establish a national health insurance scheme.

29

insisted it could provide: the best health care in the world.

The 1950s saw a continuation of the trend of growth of government spending for health care, although, at least at the federal level, there was a hiatus in the creation of new government programs. Congressional debates over public financing of health care continued, although more often those debates focused on the needs of the elderly and the poor. Significantly, President Eisenhower flatly disavowed any support for mandatory federal health insurance, although he advocated the creation of a private, voluntary national program. (Equally indicative of the politics of the 1950s, the President allowed the AMA to hand pick the first Secretary of Health, Education, and Welfare.)

The 1960s, however, saw the return of liberal politics to both Congress and the White House and, coincidentally, the beginning of an era of unprecedented growth in both the economy generally and in federal tax revenues. The result was a literal flood of federal domestic legislation, in which accelerated health spending and new health programs were most prominent.Federal assistance was extended to virtually all health-related services and activities. Public health service funding was increased. New programs of grants to states for alcoholism and drug abuse were created. New federal programs were also established to fund research and services for the mentally retarded. Federal funds were made available directly -- not through state agencies -- to fund comprehensive mental health centers. The initial success with OEO-funded health clinics led to the establishment of a separately funded program to support neighborhood health centers. A similar program to provide migrant health services was also enacted. All told, from 1960 to 1965, federal spending for health-related programs nearly doubled, only to be tripled again in the next five years with the initial implementation of Medicare and Medicaid. By 1970, there were over 250 different health-related programs funded in the federal budget, an annual expenditure of $17.7 billion, nearly 25 percent of all health care spending. In the next decade, that effort would continue to grow in both absolute and relative terms.

Funding for medical education provided an interesting demonstration of the prevailing politics of the era. Traditionally, the AMA had opposed any attempt to provide federal funds for medical education, although the growth of federal funding of biomedical research had indirectly achieved the same result. Beginning in 1960, however, the concern for what was viewed as a "doctor shortage" and the mal-distribution of physicians led to an expansion of the federal role. With the lukewarm support of the AMA, substantial federal funds were made available for medical and other health professional schools. Programs were funded for student grants and loans. By the mid-1960s, each medical school was receiving a flat grant of assistance plus additional funds tied to increases in student body size.

The results were dramatic. Medical school enrollment rose sharply. Between 1960 and 1975, 40 new medical schools were opened. By the late 1970s, the problem of a "doctor shortage" would be replaced by predictions of a "doctor surplus." But the notion of federal funding for medical schools, once a matter of principled opposition for many conservatives and for the medical profession, was no longer seriously questioned.

As Congress was investing more funds in health services and other activities, it also expanded the government's role in various health planning efforts. In 1965, it enacted the Regional Medical Program (RMP). In theory, regional agencies with representatives from medical schools, teaching hospitals, state and local health departments, practitioners, and consumers, were to fund

30

projects coordinating research and the distribution of information from research institutions to medical practitioners, particularly for the "killer diseases," cancer, heart disease, and stroke. In practice, however, RMP programs made little progress towards the coordinated effort that was the original objective of the program. Much like Hill-Burton, RMP agencies became conduits for federal funds, responding primarily to local concerns and politics.

In 1966, Congress enacted the Comprehensive Health Planning Program (CHP) providing for the first time a national network of state and local health planning agencies. Each state was given funds to maintain a state health planning agency, establish a consumer-dominated advisory council, and develop a plan for the distribution of all health resources. The federal law also provided funds for local, nonprofit agencies to develop similar plans for each locality. Functionally, these agencies were to encourage voluntary compliance with their plans and to establish a grand "Partnership for Health" among government, providers, and consumers.

Understandably, the reality of CHP fell far short of these ambitions. The state and local agencies were unable to overcome either political or technical barriers to the establishment of the health planning network envisioned in the original legislation. Chronically understaffed, heavily dependent on private sources for a share of their funding, and with no real regulatory authority to require compliance with their planning efforts, CHP agencies provided the testing grounds for various planning efforts but had little demonstrable impact on the actual distribution of health care resources.

More serious efforts to control health care resources directly were made by states that adopted certificate-of-need (CON) legislation requiring state approval for some categories of capital expenditures by hospitals and some other institutional providers. Some states attempted to coordinate the federally funded CHP planning efforts with the state-authorized CON programs, giving more authority to CHP planning. The federal government also made some not-too-successful efforts to coordinate federal funding decisions under various discretionary programs with the recommendations of CHP agencies. (See further discussion of CON and related programs in Section H infra.) The significance of the planning programs initiated in the 1960s did not lie in their actual impact or the level of federal investment they represented. Their symbolic value, nonetheless, was enormous. However limited they were in authority, they represented a direct government attempt to "plan" the distribution of hospitals and other resources, and indirectly, the distribution and character of health care services. Paired with state CON laws and the planning and regulatory efforts that would be attempted in the 1970s, they were the foundation of the "regulatory" strategy that American politics would consider as one fundamental option for contemporary health care policy.

G. THE ENACTMENT OF MEDICARE AND MEDICAID

The rapid increases in federal spending during the 1960s for various health services and programs, and the initiation of federal and state efforts to plan for the distribution of health facilities marked major shifts in government policy. Nonetheless, the enactment of Medicare and Medicaid in 1965 represented by far the most significant health policy initiatives of the 20th century.Medicare, in particular, irrevocably breached the traditional barrier between private medicine and public health; and it did so directly in the face of an expensive and heavy-handed campaign by organized medicine to prevent its

31

enactment. Political scientists would later argue that the AMA's campaign against Medicare was also at an expense to its public image that it would never fully recover.

As noted earlier, the public financing debate had shifted during the 1950s to focus largely on proposals to finance health care for the elderly, the most visible and politically organized of the groups that could claim an inability to meet the rising costs of health care. In fact, health care financing for the elderly emerged as one of the major domestic issues in the presidential and congressional elections of 1960.

Not surprisingly, shortly before the election, Congress enacted the Kerr-Mills program, offering federal funds to states that extended health benefits to elderly welfare recipients, as well as to some non-welfare elderly who could "spend down" to meet the program eligibility standards. Kerr-Mills provided a rehearsal for many of the problems that would later plague Medicaid. The costs of the program increased much faster than expected; yet even with federal matching, some states were unable, or at least reluctant, to participate. As with all welfare-based programs, coverage varied widely among the states. By 1964, five states with 30 percent of the nation's population were receiving over 60 percent of the Kerr-Mills funds.

In the meantime, a battle ensued in Congress over extending federal assistance to the large portion of the elderly population beyond Kerr-Mills' reach. The White House -- both President Kennedy and later President Johnson made the enactment of Medicare one of their top priorities -- and liberal Democrats were backed by labor, consumer, and elderly groups. They were opposed by conservative Republicans with the support of most business interests, insurers, and health care providers, most particularly the AMA. The struggle for undecided votes and for the support of the political center was heated, even by the tumultuous standards of the early 1960s, and revealed much about the quixotic complexities of American health care politics. Many Southern Democrats, for instance, eschewed party loyalty and opposed Medicare, fearful of the loss of state sovereignty (and patronage) that would be the likely result of a federally funded and federally administered health program for the elderly. Others saw these same characteristics as advantageous, an opportunity for their state to escape some of the growing burdens of state-administered welfare medicine. Still other Southern congressmen were wooed to oppose Medicare by the AMA's suddenly lenient stand on the health hazards of smoking. Some Republicans, on the other hand, were tempted across party lines despite their political and budgetary objections to Medicare and their traditional loyalties by the increasingly sophisticated "senior vote." Above all, no one, regardless of personal or political inclination, wanted to be publicly characterized as unwilling to "do something" about "the problem."

The details of the political machinations during the Medicare debate have been recounted elsewhere, at great length, and in many different voices. All observers unanimously agree on at least one thing: The landslide victory of the Democrats in 1964 was the critical event that assured the passage of some form of federal health insurance for the elderly. Nonetheless, the political circumstances were more in the nature of a temporary break in the political logjam that the public financing debate had represented for several decades. As a result, both the process and the resulting legislation can only be understood in their peculiar historical context.

Ironically, the Social Security Amendments of 1965 went several steps beyond most of the proposals that had been under congressional consideration,

32

establishing three distinct health financing programs: a mandatory federal program to finance hospital and related services for retired Social Security recipients, funded through payroll deductions, Medicare Part A; a voluntary federal program covering physician and outpatient services, financed by a monthly premium supplemented by federal general revenues, Medicare Part B; and a state-administered program to finance health care for the poor, essentially an extension of the Kerr-Mills program to all welfare categories funded by 50-80 percent federal funds, Medicaid.

Whereas the origins of Medicare parts A and B can be traced in detail through highly publicized and lengthy political debates, Medicaid emerged rather unexpectedly from the last-minute Medicare deliberations and with no formal legislative history, apparently part of the political compromise necessary to secure the enactment of Medicare. While Medicare was an extension of the Social Security program, Medicaid was gerrymandered to fit the contours of existing federal welfare programs. Participating states were given a great deal of discretion in determining eligibility standards and the scope and nature of covered services. And since it was affixed to existing federal welfare programs, Medicaid was limited to groups traditionally defined as the "deserving poor": the aged, blind, disabled, and families with dependent children.

Nonetheless, Medicaid was more than an extension of Kerr-Mills to additional categories of the poor. The minimum federal requirements for participating states and, implicitly, the amount of federal oversight they would require were far greater than those under the earlier federal program. More importantly, as originally enacted, the federal Medicaid legislation included a timetable -- later repealed -- requiring participating states to move toward an "ultimate goal" of comprehensive care for all eligible individuals. Medicaid was also more generous than Kerr-Mills in its computation of the federal financial share, an attempt to encourage more states to participate. Medicaid was, in effect, an open-ended federal commitment to share in the expenditures of any state that opted to provide a health care financing program for its poor.

Medicaid and Medicare also represented unprecedented and open-ended commitments to program beneficiaries. Both programs offered federal funding for all services within the scope of their authorization statutes for all people who could meet the programs' eligibility requirements, in contrast to government programs of discretionary authority or with fixed budgetary ceilings. In addition, Medicare and Medicaid were enacted with permanent authorization, suggesting that once enacted these statutory entitlements were a fixed political commitment.

In enacting Medicaid and Medicare, however, Congress quite deliberately did little to change the character of American health care delivery or to exercise control over the practice of medicine. At least as initially enacted, Medicaid and Medicare did little more than add two public third party payers that in large part paralleled the private third party payment schemes that had developed in the 1940s and 1950s, particularly the "service-benefit" plans. The debates over Medicare and the manner in which the program, once enacted, was initially administered were heavily colored by the fear that unless the program was acceptable to most hospitals and physicians, providers would refuse to participate and thereby would undermine the underlying objective of assuring access to health care for the elderly. Significantly, the preamble to the original Medicare statute included a prohibition against federal "supervision or control over the practice of medicine or the manner in which medical services are provided . . . or the administration of any . . . institution, agency, or person [providing medical services.]" More significantly, in implementing the

33

program the federal government gave much of the responsibility for the day-to-day administration of the program, the assessment of quality, and the disbursement of funds to private organizations controlled by providers, as had been demanded by provider representatives. In essence, in adopting Medicare, the federal government attempted to provide access to health care for the elderly by buying them admission into the existing institutions that dominated American health care delivery. As a strategy to overcome the political resistance that had historically blocked federal involvement in health care financing, purchasing access for the elderly into "mainstream medicine" in this manner was a remarkable success. But, in doing so, the government had adopted a strategy that did little to control what services would be provided, or the costs or quality of those services.

Medicaid can be viewed similarly. The enactment of a federal entitlement program extending health care financing to many -- though not all -- of the nation's poor was also a remarkable political success. But as originally enacted, Medicaid delegated a good portion of the policy making responsibility and all of the day-to-day administrative responsibility to the individual states. The federal Medicaid statute was virtually silent on the amount of control that would be exercised by the federal government or the states over providers in matters relating to cost, utilization, or quality. These issues would emerge as critical problems in the 1970s and 1980s.

H. AMERICAN HEALTH POLICY AND HEALTH POLITICS IN THE 1970s

By the end of the 1960s, a uniquely American system of health care had been established. Most health care services were provided by private physicians, private "community" hospitals, and other private sector providers. There were some health services provided directly by the government, for instance, locally-maintained public hospitals, federal programs for veterans, and other specifically-targeted government programs. But even these efforts were carefully proscribed to avoid encroaching on what was widely regarded as the province of the private provider.

The American scheme of health care financing, on the other hand, was more of a patchwork of private and public arrangements. The vast majority of working Americans relied on some form of private health insurance to finance their health care needs, either individually purchased or, more frequently, available as part of their employment benefits. But the government's role as a third party payer was not insubstantial or peripheral. Through Medicare, the federal government provided health insurance coverage to virtually everyone over the age of 65. Through Medicaid, the state and federal governments provided comparable benefits to many indigent people, although the scope and coverage of the Medicaid programs varied from state to state.

This American system of health care delivery and financing was only a "system" in the loose sense of the term. There was no centralized control or coordination of the distribution of providers or other resources. Notwithstanding the efforts of various health planning programs, most providers, particularly individual physicians, maintained complete control over where they practiced, to whom they provided services, and what they charged. There were virtually no state or federal efforts to regulate the scope, terms, or availability of private health insurance. Most of the delivery and a good portion of the financing of health care operated beyond the bounds of government regulation. Conversely, neither the delivery nor the financing of American

34

health care bore much resemblance to the private market transactions of economic theorists. Consumers did not "shop" for their policies; insurers rarely bargained for discounts; providers did not compete for patients or their pocketbooks. Indeed, in the early 1970s, most Americans would have found the comparison between health care and market place transactions inappropriate. Despite the predominantly private character of both the delivery and financing of their health care, most Americans would have insisted that health care was a unique kind of social service, and certainly not a commercial activity.

Most 1970 Americans would likely have insisted that their system of health care was successful as well. After all, physician, hospital, and related health services were widely available -- at least in comparison to what had been available only a generation earlier. The most serious shortcomings of American health care had been eliminated by Medicare, Medicaid, and the other governmental initiatives of the 1960s. The 1970 American in need of health care could expect to find a highly trained professional supported, if necessary, by an armament of sophisticated diagnostic and therapeutic tools, and ultimately, by the modern American hospital. And while these services were costly, many if not most Americans had some form of third party payer to help finance these services. There was little evidence that the socialized health care systems maintained in most other countries could provide more or better. To the contrary, all indications were that Americans had what Americans had long been promised and now expected: the best health care in the world.

Somewhat ironically, the very success of the unique and uniquely American health care system that emerged from the 1960s set the stage for the health policy controversies that would follow in succeeding decades. If most Americans could expect to receive physician services, hospital services, and the other offerings of modern health care, then any denial of access to these services is all the more controversial. If the government has undertaken to finance the health care needs of the nation's elderly and those of many of its poor, then the claims for assistance for those with comparable needs -- the unemployed, dependents of workers in low paying jobs, the "medically indigent" -- cannot be easily dismissed. The accessibility of health care had been an important political issue in the United States and a subject of intense debate for over half a century, as described in earlier sections. But by the 1970s, access to what was regarded as basic health care had become something qualitatively different. For most Americans, access to basic health care had become the norm and the expectation. Any barrier to access was therefore, by definition, a problem requiring a remedy. Even in subsequent years when health policy debates would turn to cost containment and other competing problems, few voices would openly challenge this fundamental assumption. At least in rhetorical terms, by the beginning of the 1970s access to basic health care had become the "right" of all Americans.

The perceptions of most 1970 Americans concerning the success of their health care system had a similar effect on their expectations regarding the quality of the services that they received. If American health care could offer all of the advantages of modern medicine, why should any patient expect anything less than comprehensive treatment and recovery? At the least, patients should expect that the scope and extent of their treatment will be determined by their needs and the choices of their providers -- and certainly not by financial considerations. By definition, the best health care in the world should provide the highest quality health care. Much as most Americans in the 1970s expected to find health care accessible, most Americans also expected to receive high quality care as well; conversely, any perception that American health care had

35

failed to provide high quality care was, again by definition, a problem requiring some sort of remedial response.

Notwithstanding these attitudes concerning the accessibility and the quality of health care, by the early 1970s all American health policy debates also would be affected by another growing concern, one that would emphasize the underlying dilemmatic character of virtually all health policy issues: the problem of rising health care costs. The 1970s were not the first time in which the rising costs of health care were a subject of public debate in the United States, as evidenced by the CCMC findings in the 1920s and the claims of Truman and others in the decades to follow. But the primary cost-related concern in earlier eras had been the effect of health care costs on the individual patient or consumer. The high costs of health care prevented many people from receiving necessary services and left others with extraordinary bills to pay. In the 1970s, however, the debate over "the cost problem" became both more acute and more convoluted and, as a consequence, all the more difficult to resolve.

First and most importantly, by the beginning of the 1970s, health care spending had begun to rise at extraordinary rates -- a trend that would continue for the next several decades. With the advantages of private and public third party coverage, more people were utilizing the services of providers than ever before. Many patients were receiving more treatment and more intensive treatment. Free from the restraints of either government regulation or market forces, the fees and charges paid for the services of most providers were inflating in both the popular and the economic sense. The net result was startling in both absolute and relative terms. Indeed, from the 1970s on, virtually all American health policy debates would be punctuated by references to the ever-increasing total of national health expenditures (NHEs), figures reflecting the growing share of the American economy annually spent on health care, and dire predictions of what the future would hold unless "the cost problem" was contained.

But while these rapidly rising health care costs increased the intensity of both public and private health policy debates and focused much attention on the needs for health care cost containment, they also complicated the underlying politics of those debates. Even the state legislator who was the most sympathetic to the impact of rising health care costs on the uninsured, would be annually reminded that those same rising costs were making the political and budgetary costs of maintaining, let alone expanding, remedial programs like Medicaid increasingly expensive. Privately insured Americans might be increasingly aware of rising health costs, but the primary focus of their concern would be the rising costs of private insurance premiums and increases in their co-payments, deductibles, and other out-of-pocket payments. Those employers providing health benefits to their employees would have an equally keen concern for the rising costs of health insurance premiums, but might find the impact on out-of-pocket payments somewhat less problematic; many, in fact, would view increasing employee cost-sharing as a preferred remedial strategy. Providers would be among the first to claim that the problem of rising health care costs had reached crisis proportions, but their definition of "the cost problem" would most often assume that the real cost problem is finding some way to increase the level of their reimbursement so as to maintain existing levels of services.

From the 1970s on, the impact of rising health care costs would frequently dominate health policy debates, but that impact would be defined from many different and competing perspectives. There would be occasions upon which the views of many if not most of these perspectives would appear to converge and

36

upon which political momentum for a broad-based, cost containment strategy would build. Indeed, throughout the 1970s and 1980s, both conservative and liberal health policy theorists would devise various schemes for reforming health care with the claim that they could contain health care costs generally and, therefore, simultaneously mitigate the impact of rising costs on the problems of all affected interests. Such proposals, however, would rarely claim more than momentary political appeal. As would be repeatedly demonstrated, the politics of such broader reform strategies are easily sidetracked by political and ideological bickering, interest group politics, and, above all, the divergent and conflicting nature of the various problems created by rising health care costs.

The quixotic health politics of the 1970s and the interplay of the various problems of access, quality, and cost can best be demonstrated by the evolution of government policy concerning Medicare and, in particular, Medicaid. As described in the previous section, Medicaid had a certain Topsy-like character, evolving unexpectedly from the Medicare deliberations, and reflecting both the assumptions and limitations of existing welfare cash-grant programs. Nonetheless, the enactment of Medicaid represented a substantial and unprecedented government commitment. At least as originally envisioned, it created the potential for a nationwide catastrophic health insurance program and the opportunity for the nation's poor to enter the mainstream of American medicine.

As early as 1966, however, even before some states had initiated a Medicaid program, some members of Congress, claiming shock at the costs of the first year's Medicaid budget, were proposing substantial reductions in the scope and funding of the program envisioned under the original Medicaid legislation. In the next several years, Congress adopted a series of amendments that limited the states' discretion to expand their Medicaid programs and that encouraged states to limit or reduce eligibility, the scope of services, and the levels of provider reimbursement. Many states were reluctant to follow the federal lead and attempted to implement rather comprehensive Medicaid programs. Many other states, responding primarily to cost concerns, adopted the federal limitations with enthusiasm. Thus, in the first few years of the program, the political die for the next several decades was effectively cast. In some of the years that followed, Congress would encourage the states to expand their Medicaid programs; in others, it would attempt to re-orient the states towards more cost-effective or efficient services; more often, Congress would signal a growing tolerance of program cutbacks as a means of controlling program costs. The states would respond to each wave of amendments with a hodgepodge of strategies that attempted to stay within politically acceptable cost limitations: limits on services and eligibility, stricter reimbursement policies, efforts to control fraud and utilization, and so on. Some were crudely fashioned and poorly administered. Some actually resulted in substantial program savings; others did not. Almost all tended to make Medicaid increasingly complicated and bureaucratic.

Perhaps the best measure of Medicaid's political status -- and of the politics of the era -- was found in the Social Security Amendments of 1972 which created the Supplemental Security Income program (SSI), federalizing and therefore expanding welfare eligibility for the blind, the disabled, and the elderly, leaving only Aid to Families with Dependent Children (AFDC) as a state-administered welfare cash-grant program. Since Medicaid eligibility had been tied to eligibility for these welfare programs, Congress effectively expanded the number of people eligible for Medicaid by creating SSI, particularly in those states that had maintained welfare eligibility standards far below the

37

newly-created federal SSI standard. But the 1972 amendments also added a new section 209(b) to the Social Security Act, allowing states to retain their pre-1972 welfare eligibility standards for determining Medicaid eligibility for the blind, the disabled, and the elderly, in essence allowing these states to cap the Medicaid eligibility of SSI recipients at their lower, pre-1972 levels, an option many states adopted and some continue to follow several decades later.

Through all this, neither Congress nor any of the states openly retreated from their basic commitment to provide a health financing program for the poor. (The major exception was Arizona which for many years refused to participate in Medicaid, apparently a reflection of the ultraconservative politics of that state.) Whatever Medicaid's status at its political birth, by the 1970s the Medicaid program had became a permanent assumption of both state and federal health policy, a status it would retain through the next several decades of controversy. On the other hand, efforts to maintain and, particularly, expand the Medicaid program were repeatedly compromised by the ever-growing concerns for controlling the program's costs. Throughout the 1970's, even in those states that attempted rate setting, certificate of need, or other more broadly defined health policy initiatives, state health politics and, therefore, state health policy would be dominated by the competing demands to maintain an adequate Medicaid program for the poor and to control the growing costs of that commitment.

Through the 1970s, the evolution of the politics and policy of the Medicare program followed a pattern similar to that of Medicaid, although the particular revenue structure of Medicare somewhat disguised the impact of the growing costs of the program in its early years. (See full discussion of Medicare's revenue structure in Chapter 2.) Medicare was, by all accounts, quickly adopted as a political given. From 1970 on it would be a fundamental assumption of federal health policy that the elderly were entitled to their Medicare benefits, in both the strictly legal and the broader political sense of the term. In fact, Congress would frequently debate the need and wisdom of expanding the scope and coverage of Medicare. Yet congressional deliberations would just as frequently bemoan the growing costs of Medicare and repeatedly attempt to devise ways to slow the growth of the program's budget. In 1972, the same Social Security amendments that created SSI and the state "209(b)" option, added a long list of amendments intended to contain the costs of Medicare, including the creation of Professional Standards Review Organizations (PSROs), the first externally-imposed utilization review requirements on government financed services. Yet at the same time, those 1972 amendments expanded Medicare eligibility to cover over 1.7 million disabled Social Security recipients (who were under the age of 65) and to cover all people, regardless of Social Security status, with end-stage-renal disease (ESRD), the first disease-specific third party payment program, and, in the view of many observers, the first step towards the expansion of Medicare into a generalized national health insurance program.

I. THE RISE OF THE REGULATORY STRATEGY

There was, in fact, some serious debate about creating a national health financing program in the 1970s. Both candidates Richard Nixon and George McGovern included proposals for nationalizing health insurance in their platforms in the presidential campaign of 1972, as did Jimmy Carter and Gerald Ford in 1976. In 1974, Senator Edward Kennedy, the chair of the Senate Finance Committee, and Congressman Wilbur Mills, the chair of the House Ways and Means

38

Committee, appeared ready to force a congressional floor vote on a comprehensive, "cradle to grave" scheme covering all American citizens -- the closest a national health insurance bill has ever come to a congressional vote. (That opportunity quickly dissipated, however, following Mills' abrupt plunge from power in the Spring of 1974.)

Notwithstanding these flirtations with national health insurance, there were two more remarkable and far more important trends that characterized developments in American health policy in the 1970s. First, as health care costs continued to rise rapidly, many private and public third party payers began experimenting with ways to restructure the manner in which providers were reimbursed for their services. Many states discovered that any change in the manner or terms of Medicaid reimbursement that resulted in a reduction of the amount paid Medicaid providers was often the most politically expedient way to reduce Medicaid costs without appearing to retreat from the state's basic commitment to the program's goals. Other states adopted Medicaid reimbursement limits or reforms that were more clearly genuine efforts to contain Medicaid program costs without creating de facto reductions in services, such as creating incentives for more efficient services or setting rates or fee levels on a prospective basis. By the mid-1970s, Congress had also turned to a variety of cost-limiting reforms of the reimbursement of physicians, hospitals, and other Medicare providers. During that same time, many private third party payers, particularly those Blue Cross plans with a large market share, attempted to define more strictly providers' costs, to negotiate discounts and limits, and to adopt other cost-limiting reimbursement methods and practices. There also was an increased interest in both the public and private sectors in health maintenance organizations and other forms of third party financing that integrated financing and services. Few of these 1970-era reimbursement reforms represented dramatic departures from the traditional fee-for-service, cost-based reimbursement that both individual and institutional providers had long demanded and secured. They were, however, evidence of a growing willingness on the part of both private and public third party payers to challenge the authority of providers to dictate the terms of their own reimbursement and the assumptions that underlay traditional forms of reimbursement. By way of contrast, only a decade earlier, during the first enthusiastic days of Medicare and Medicaid implementation most policymakers would have straight-facedly accepted the providers' political demand that the primary goal of any third party payer's reimbursement policy should be to encourage providers to participate in their payment program and to provide more and, presumably, better services. By the mid-1970s, the relationship between providers and third party payers was becoming more openly confrontational. The causal connection between the incentives inherent in traditional forms of provider reimbursement and the growing costs of health care had become a frequent subject of intense debate. These 1970s-era efforts to reform provider reimbursement laid the groundwork for the more radical reforms that would emerge in the 1980s.

The other important trend that characterized American health policy in the 1970s involved various state and federal efforts to impose regulatory controls on health care providers, particularly hospitals. As discussed in earlier sections, until the 1960s few government programs, particularly those that were regulatory in nature, had crossed the line between traditional public health activities and "private medicine." The federal Hill-Burton program and the CHP planning programs of the 1960s were interesting but only minor deviations from this political rule. But as the state and federal governments assumed a significantly larger role in the financing of health care and as the costs of that commitment began to rise rapidly, that line -- and its significance --became increasingly blurred.

39

As noted earlier, some states had begun experimenting with certificate-of-need (CON) controls in the 1960s. By the 1970s, most states were requiring the prior approval of a state planning agency for hospital expenditures for new facilities, expansions of services, or other major capital expenditures. In some states this authority was given to the health planning agencies that had been created under the federal CHP legislation; other states established separate CON commissions resembling public utility agencies. However they were structured, the underlying assumption of CON programs was that by limiting the supply of hospital services to those that were "necessary," the state could control the overall costs of health care, a thesis that was hotly contested on both theoretical and practical grounds.

During those same years, a number of states initiated efforts to regulate the rates charged by hospitals, although in most cases, the direct authority of these rate setting programs was limited to hospital reimbursement for Medicaid patients. In 1971, for example, Massachusetts established a state rate setting commission that calculated the total costs incurred by each of the state's hospitals in a base year and then divided that total by the number of inpatient days of service for that hospital for that year. This per diem rate was then increased by an inflation factor to determine the per diem rate to be paid for services rendered by that hospital to Medicaid patients -- but not other patients -- in subsequent years. The incentives of this prospectively determined Medicaid rate were obvious: Those few hospitals that managed to incur costs lower than projected would receive a kind of bonus; most hospitals, however, would receive a per diem amount for each Medicaid patient that was less than the proportionate share of the hospital's actual costs and, in many cases, less than that paid by Medicare and private payers. Other states tried to achieve comparable results by publicly auditing each hospital's budget, basing Medicaid rates on industry-wide averages, excluding certain "unnecessary" or "inefficient" costs, and a variety of other rate-limiting techniques.

A few states took the more controversial step of imposing similar controls on the rates paid by both public and private payers, the so-called "all-payer" rate setting programs. Between 1970 and the mid-1980s, as many as fifteen different states attempted what could be generally described as "all-payer" programs, although the structure of these programs and the scope of their authority varied widely. Only a very few, for example, were given waivers under the Medicare program to impose the state-determined rates on reimbursement for Medicare patients.

Whether or not the state CON programs of the 1970s had any influence on the growth of hospital services or on the resulting costs of those services has been widely debated. There is little evidence that CON programs had any long term impact on the costs of health care generally. There is some evidence that state hospital rate setting programs, at least in those states that managed to implement "all-payer" programs, had some measurable success in slowing the growth of the state's hospital costs, particularly in the first few years of operation. Most often, however, these state regulatory efforts fell far short of their original ambitions. As with the various reimbursement reforms discussed earlier, the primary long term significance of these state regulatory programs was their demonstration of the political willingness that arose in many states in the 1970s to experiment with some forms of "command and control" regulatory measures.

40

Various federal cost containment and health reform efforts during the 1970s can be characterized the same way. As noted earlier, Congress experimented with various reimbursement reforms, utilization review, and other conditions

41

SIDEBAR: KIDNEY TRANSPLANTS AND KIDNEY DIALYSIS: TRIUMPS OF MODERN TECHNOLOGY AND CHALLENGES TO MEDICAL AND LEGAL DECISIONMAKING

As described in earlier sections, developments in medical technology always have been a driving force in the evolution of American health care. But while each new technology can offer the potential for the next "medical miracle," it can create new ethical, political, and legal controversies as well.

Developments in the treatment of kidney disease in the 1960s were prime examples. Prior to that time, any chronic kidney disease or condition was inevitably fatal. There were some techniques for treating acute infections or other short term kidney disorders. But if the problem was chronic, the kidney eventually failed and the patient died.

In the 1960s, however, there were two promising and extraordinary breakthroughs in medical technology. First, techniques were developed to transplant a kidney from a healthy donor (later from a recently deceased person) to a patient with failing kidney function. The surgical procedures were relatively simple (compared to the transplant of more complicated organs like the liver or heart, procedures that, nonetheless, would be developed in subsequent years). The primary medical problem in developing kidney transplantation was preventing the recipient's body from rejecting the transplanted organ. As various drugs and techniques to suppress the body's immune system were discovered in the mid-1960s, the possibility of replacing a failing kidney with a healthy one, once only a medical pipe dream, became a potential therapeutic option.

During that same period, kidney dialysis techniques also were being developed. A permanent shunt implanted in a patient with a malfunctioning kidney allowed the patient to be attached periodically to a machine which would replicate the cleansing and filtering functions of a healthy kidney. The result was truly a triumph of modern technology: A chronic kidney disease patient with access to a dialysis machine could expect to live an otherwise normal life.

The potential impact of these technological and medical breakthroughs was startling: Hundreds of thousands of people who otherwise would die from kidney failure could be saved. The problems and choices these breakthroughs created, however, were equally startling. The development of the technology to transplant a kidney or, subsequently, other organs raised a number of provocative ethical and legal issues. Most importantly, if there are more potential recipients of an organ transplant than there are available organs -- which is almost inevitably the case -- who decides who can receive an available organ and how is that decision made? Prior to the 1960s, such resource allocation questions rarely had been raised in such stark and highly publicized terms. To the extent that such allocation or "rationing" decisions had been made in the past, they primarily were made tacitly and by individual physicians employing what they regarded as their medical judgment. Following the development of the ability to transplant organs, many experts both within and without medicine began to question whether some more organized and rational decision-making process should be developed to make these decisions.

The development of kidney dialysis raised many of the same questions, with one important difference. Kidney dialysis is a complicated and expensive procedure. Even when the technology was made available in the 1960s, only some

42

institutions could finance and maintain dialysis machines and, as a consequence, only some people could receive the life-saving benefits of dialysis. Others could not. But unlike kidney transplants which require the availability of a donor organ, the primary factor limiting the availability of kidney dialysis is financial. Quite literally, hundreds of thousands of people who would otherwise expect to die could be saved if the resources were made available to purchase and maintain dialysis machines and to pay the costs of dialysis services.

By the early 1970s, the logic of that equation apparently overwhelmed congressional policymakers. With very little opposition, Medicare was amended in 1972 to cover the costs of dialysis (or kidney transplant) for everyone -- regardless of age or condition of disability -- with "end-stage renal disease." Slightly overstated, Congress created a national health insurance program for people with one particular disease. The primary reason they did so is obvious. Congress could legitimately claim that they saved hundreds of thousands of lives. But the same claim could be made if financing were available for many other people with life-threatening conditions or diseases. Why extend government assistance to one group and not others?

A partial answer for what Congress did and did not do may lie in the resulting costs of such decisions. As Medicare funding was made available for dialysis, many hospitals and outpatient clinics purchased dialysis machines. Freestanding dialysis centers became highly profitable enterprises. By 1980, more than 50,000 people were receiving dialysis under Medicare financing at a cost of over $1 billion, far exceeding the original projections for the program. In 1998, there were 75,000 new recipients of dialysis, and a total of nearly 300,000 program beneficiaries; the cost to Medicare was over $12 billion. For a more recent evaluation, see Paul W. Eggers, Medicare's End Stage Renal Disease Program, 22 Health Care Fin. Rev. 55 (2000).

43

imposed on providers participating in Medicaid and Medicare. During one 18-month period in the early 1970s, price controls were temporarily imposed on hospitals under the Economic Stabilization Program, although this was primarily an emergency economic measure and was not driven by health policy considerations.

The high water mark for the regulatory strategy, however, was reached by Congress in 1974 when it enacted the National Health Planning and Resources Development Act (NHPRDA). The NHPRDA was originally intended to consolidate and expand the functions of the pre-existing Hill-Burton, RMP, and CHP programs into a single, federally coordinated scheme of certificate of need, health planning, and capital funding activities. Most of the day-to-day activities were to be carried out by federally funded, local health systems agencies (HSAs) and by a single state agency, assisted by consumer-dominated advisory councils, paralleling the structure of earlier planning programs. But the 1974 legislation authorized the federal Department of Health, Education, and Welfare (DHEW) to supervise and coordinate the activities of these state and local agencies rather extensively; in particular, DHEW was mandated to develop national guidelines for the supply, distribution, and organization of health resources and services. These guidelines were to be adopted and followed by the state and local agencies in making their various regulatory and financing decisions. Had this authority been fully implemented, the NHPRDA guidelines would have represented the first congressionally-authorized statements of national health policy. And these guidelines, taken together with other activities under the NHPRDA, would have set in place the foundation of a federally-coordinated regulatory program for hospitals. Indeed, immediately following the election of Jimmy Carter in 1976, it appeared that the NHPRDA was only the first step towards the establishment of an extensive scheme of federal control of health care delivery and financing.

J. JIMMY CARTER, HOSPITAL COST CONTAINMENT, AND THE DEMISE OF THE REGULATORY STRATEGY

Throughout the presidential campaign of 1976, Jimmy Carter attempted to make what he called the crisis of American health care a major campaign issue. Access to high quality health care should be the right of all Americans, Carter asserted, but millions of people were being denied access to even basic health care. At the same time, annual expenditures for health services were approaching $150 billion and would soon represent nearly 9 percent of the GDP, figures Carter flourished with disbelief. Something had to be done and done very quickly. What Americans needed, Carter argued, was an administration committed to a universal and comprehensive national health insurance program, not just the more conservatively drawn alternatives touted by the incumbent Gerald Ford.

In April of 1977, President Carter reaffirmed both his view that "something must be done" and his campaign commitment to nationalize health insurance, but he presented a somewhat reworked agenda for doing so. In his first major message to Congress on health policy, Carter proposed the immediate enactment of a hospital cost containment program that would slow the growth of health care costs over the next several years. As this program brought health spending within acceptable limits, a federal program providing universal health insurance would be gradually phased-in.

In its original form, Carter's proposal to contain hospital costs essentially imposed a mandatory cap on hospital revenues. The Administration had developed a formula which would allow a hospital to collect annually from all sources -- Medicare, Medicaid, private insurers, and out-of-pocket payers -- no

44

more than a fixed percentage increase of what that hospital had collected the previous year. Some hospitals were excepted; adjustments were allowed for facilities which had increased utilization or changes in their patient mix or expanded facilities. But most hospitals would have to contain their actual costs within the federally imposed limits. Carter originally proposed that in FY 1978 most hospitals would be allowed to collect no more than 109 percent of their FY 1977 revenues -- quickly dubbed by the media as Carter's nine percent solution -- allowing a rate of revenue increase that was slightly higher than the rate of inflation projected for that year (but far lower than that projected for hospital expenditures). The Carter Administration also proposed that the allowable rate of increase be gradually lowered over several years, eventually forcing the rate of growth of hospital revenues -- and presumably hospital costs -- to be held to no more than the rate of inflation for the general economy. A more sophisticated scheme of hospital reimbursement and cost containment would then be developed as part of the national health insurance program Carter envisioned would follow -- once costs were properly contained by what was described as his "stopgap" program.

As a matter of policy, Carter's proposal to contain hospital costs, and to contain costs before expanding government-sponsored health financing, was an understandable and defensible strategy. By virtually any measure, the rate of growth of health care costs in the early to mid-1970s had been staggering, even compared to the double-digit rates of inflation plaguing the rest of the economy during those years. (See Table I in Chapter 8.) Yet the rate of growth of inpatient hospital costs had outpaced even that of other health services, exceeding 16 percent per year in both 1975 and 1976. Only during the period when hospital prices had been temporarily frozen under the Economic Stabilization Program in the early 1970s was the rate of increase in hospital spending comparable to that of the rest of the economy -- a fact that only buttressed Carter's argument. For those same years, there were widespread allegations that many hospitals were purchasing expensive and unnecessary equipment and duplicating services already available in their service areas, despite the efforts of state CON and health planning programs. Inpatient hospital costs alone represented only 40 percent of total NHEs; but together with physician and surgical services, laboratory and x-ray costs, and other separately billed hospital services, total hospital spending represented nearly 80 percent of every health care dollar. It was easy for Carter to make the claim that any successful program to contain hospital costs would have a significant impact on overall health care costs. Conversely, unless those costs were contained, virtually all experts warned, not only would Carter's promise to enact national health insurance become unaffordable, but rising health care costs would continue to have a larger and more detrimental effect on the health of the general economy as well.

But Carter's choice of a regulatory strategy to contain these costs, particularly a federally directed regulatory strategy, was much harder to defend, as both a matter of policy and a matter of politics. Virtually all prior federal health policy initiatives had purchased their desired effects with federal funding, not mandated compliance. And most federal programs, even regulatory programs, had given the states a large if not predominant role in their implementation. Carter's original hospital cost containment program proposed to give the states a limited administrative and policymaking role. Moreover, the hospital industry argued that it was already subjected to government control through CON and other health planning activities of the NHPRDA, the utilization review and other conditions imposed under Medicare and Medicaid, and the other influences of federal spending programs. If Carter's hospital cost containment program were also undertaken, they would be converted

45

to something akin to public utilities. Even the day-to-day operations of hospitals, as well as the activities of physicians and other providers who provide services in hospitals, would be heavily influenced by the decisions of federal government policymakers. And, according to Carter's agenda, all this would be followed by the enactment of a nationalized health insurance plan. This was, by any measure, a policy of big government.

It was also, Carter quickly learned, bad politics. Despite Democratic majorities in both houses of Congress, Carter was unable to overcome the combined political resistance of provider interests, traditional conservatives, and other opponents. Even within his own party there were many who were less than enthusiastic about either the specifics of Carter's proposal or its underlying philosophy. And the hospital industry proved to be a formidable lobbyist for its own cause. What legislator, after all, could not count at least one hospital among his or her constituents? Most business interests apparently found the implications of such a massive government program more troubling than those of rising health care costs -- with the exception of health insurers who argued vocally in favor of Carter's plan. Some pro-labor Democrats refused to support their party leader fearing that the hospital costs that would be most immediately contained would be the wages of nurses and other hospital staff workers.

The net result was a case study of political retrenchment, then retreat, and then full-scale surrender. By the Spring of 1978, Carter had been forced to rework his original proposal into a scheme that would impose mandatory caps on only Medicare and Medicaid revenues, not hospital revenue from private sources. This advanced the administration's cause only slightly. In the last few days of the 95th Congress, the Senate in a largely futile gesture voted to approve a four-year scheme of "voluntary" hospital cost containment, to be followed by mandatory caps only if overall hospital spending increases were not below 12 percent by 1983. That bill died for lack of action by the House.

In 1979, President Carter attempted to salvage hospital cost containment by waging a highly visible, "White House-directed" campaign for a scaled down version of his original plan. But even after these efforts and a series of further compromises -- by the Fall of 1979 the Administration was supporting a bill that would have exempted over 60 percent of the nation's hospitals from its mandatory provisions -- hospital cost containment failed to capture the necessary political momentum. On November 15, 1979, Congressman Richard Gephardt, a key Carter supporter, proposed that the House reject the tattered remains of Carter's hospital cost containment proposal and vote to establish a commission to study the problem. By a vote of 321-75, consideration of hospital cost containment was officially terminated.

Equally telling of the status of federal health politics in the mid- to late 1970s was the fate of the 1974 health planning legislation. Apparently the original legislation represented only a temporary consensus; almost as soon as the legislation was enacted, Congress began to retreat from the original design of the program. The 1974 legislation had authorized funding of various resource development and area health service projects, but no funds were ever appropriated for these activities. Even the appropriations for the administration of the state and local planning agencies became increasingly controversial. By the middle of Carter's term, the continuation of the authorization for the NHPRDA became a subject of intense debate, particularly with regard to the federal specifications for the scope and structure of the state certificate-of-need programs that the legislation had originally mandated.

46

In 1977, when Secretary of DHEW Joseph Califano attempted to issue the national health planning guidelines that had been a key element in the original

47

SIDEBAR: THE NATIONAL HEALTH INSURANCE DEBATE OF THE 1970s

As noted in the text, during the campaign of 1976, Jimmy Carter promised the immediate enactment of a comprehensive national health insurance program as the only "real answer" to the crisis of American health care. After taking office, President Carter immediately reaffirmed candidate Carter's promise, but qualified his timetable. Carter claimed that the federal government could afford to finance a national health insurance program only if health care costs could be brought within acceptable limits -- which Carter argued required the adoption of his hospital cost containment program.

By the middle of his term Carter was becoming trapped in his own strategy. He could not convince Congress to adopt hospital cost containment; yet by his own reckoning national health insurance was unaffordable without the prerequisite hospital cost containment program. Carter again tried to remain faithful to his basic commitment while steering a more politically realistic course. In July of 1978, Carter publicly instructed Joseph Califano, then Secretary of DHEW (later DHHS), to begin drafting a national health insurance proposal that would reflect ten basic principles:

1. The plan should assure that all Americans have comprehensive health care coverage, including protection against catastrophic medical expenses.

2. The plan should make quality health care available to all Americans. . . .

3. The plan should assure that all Americans have freedom of choice in the selection of physicians, hospitals, and health delivery systems.

4. The plan must support efforts to control inflation in the economy by reducing unnecessary health care spending. The plan should include aggressive cost containment measures and should also strengthen competitive forces in the health care sector.

5. The plan should be designed so that additional public and private expenditures for improving health benefits and coverage will be substantially offset by savings from greater efficiency in the health care system.

6. The plan will involve no additional federal spending until FY 1983 . . . . Thereafter, the plan should be phased in gradually. . . .

7. The plan should be financed through multiple sources, including government funding and contributions from employers and employees. . . .

8. The plan should include a significant role for the private insurance industry, with appropriate government regulation.

9. The plan should provide resources and develop payment methods to promote such major reforms in delivering health care services as substantially increasing the availability of ambulatory and preventive services, attracting personnel to underserved rural and urban areas, and encouraging the use of prepaid health plans.

10. The plan should assure consumer representation throughout its operation.

48

In June of 1979, Carter unveiled the Administration's plan: the immediate adoption of legislation which would (a) require most employers to purchase federally-approved catastrophic health insurance (covering expenses in excess of $2,500 annually) for their full-time employees; and (b) create a new "HealthCare" program expanding and combining Medicare and Medicaid. This was billed as "Phase I" of the newly-minted Carter strategy, and as the framework from which a more comprehensive national health program could gradually evolve in future years -- presumably as costs were brought under control.

Carter's catastrophic plan gained some support from his conservative critics. Indeed, the basic outline of his "Phase I" scheme was remarkably similar to the health insurance proposal that had been touted by Gerald Ford, Carter's opponent in the 1976 election, as well as that offered by President Nixon in the national health insurance debates of the early 1970s. But Carter's proposal enraged many political liberals, organized labor, and many others within his own party who had made commitments to the immediate enactment of a more comprehensive and universal scheme. Throughout the Fall of 1979, Carter's proposal, as well as a more comprehensive "cradle to grave" bill authored by Senator Edward Kennedy, sparked some intense debates and a flurry of committee hearings in both houses. In the end, however, the result was more smoke than fire. As it had at infrequent intervals in the past, the issue of national health insurance proved capable of attracting the political spotlight, but unable to sustain continuing political interest or to galvanize public or political support around any specific proposal.

49

legislation, the House of Representatives unanimously adopted a resolution condemning the effort and demanded that they be withdrawn. In 1978, the original NHPRDA was allowed to expire altogether and the program was only saved by an end-of-session temporary resolution. After some concessions to its critics and with a restricted budget, the program was reauthorized in 1979, but the original vision of a federally directed health planning program was essentially abandoned. After a series of crippling budget reductions, what was left of the program was formally terminated in 1986.

It is important to note what Congress was and was not doing during the late 1970s. Congress was not signaling that the political importance of health care had diminished or that the need to "do something" had somehow been mitigated. To the contrary, the congressional debates during the late 1970s were replete with references to the growing costs of health care, the number of Americans uninsured, and the many other indications that the critical problems facing American health care had, if anything, become even worse. What Congress was doing, however, was rejecting the "big government" regulatory strategy that underlay the federal health planning program, Carter's cost containment proposal, and, of course, the more comprehensive national financing program that was part of Carter's original vision of reform.

Unfortunately, Congress in the late 1970s also was not redirecting its continuing concern for health care towards any alternative reform strategy. Instead Congress retreated into a thicket of partisan bickering and what later decades would label "gridlock politics." There were no new federal health care reform initiatives adopted during the last three years of Carter's term. A number of the innovative research, education, and other health-related programs spawned during the 1960s and early 1970s were allowed to expire; others were reauthorized but with more limited objectives and at reduced funding levels. Towards the end of his term, Carter made one last futile attempt to fulfill his promise of a national health insurance program, but after a few sparks of political attention, national health insurance was, once again, summarily dropped from the congressional agenda. Ironically, the most focused health policy debate of the mid- to late 1970s involved Congress' repeated affirmation of what it most definitely did not want to do: provide federal funding for abortions. In fact, during the last three years of the 1970s, more time was spent on the floor of Congress debating the precise wording of the prohibition on the use of federal funds for abortion than was spent debating all other health policy issues combined.

There were, of course, many reasons for the rejection of the regulatory strategy that appeared to be developing at the beginning of the decade and for Congress' failure to replace it with any discernible alternative course for federal health policy in the 1970s. Some of these reasons can be traced to the ambivalent political attitudes of most American towards big government, especially big federal government, strategies of any sort, but particularly in matters involving health and health care. Others had more crassly political origins: Hospital cost containment and health planning programs could only have succeeded by controlling the expenditures -- and, therefore, the revenues and profits -- of powerful interest groups. A good portion of the political indecisiveness of the time also can be traced to broader economic and political concerns not directly related to health policy, particularly the failing popularity of Carter and his administration. But however it derived, the overall message was clear and specific: American health care was not to be reformed according to the dictates of federally directed regulatory programs.

50

K. THE ELECTION OF RONALD REAGAN AND ITS IMPACT ON AMERICAN HEALTH POLICY

Despite the political turmoil of the previous decade, American health care at the beginning of the 1980s was remarkably unchanged from what it had been at the beginning of the 1970s. Certainly the basic structural arrangements were the same: Most Americans continued to receive their health care from private physicians, private "community" hospitals, and other private and predominantly autonomous providers. The government was financing services for Medicare and Medicaid recipients and a few other targeted groups. But the majority of 1980 Americans, like their 1970 counterparts, continued to rely on some form of private health insurance, either individually purchased or, more frequently, available as part of their employment compensation.

There also was little indication that American attitudes concerning their system of health care had changed during the previous decade. Most 1980 Americans continued to expect that adequate health care would be available to everyone and, consequently, to demand that "something should be done" when adequate care was denied or unavailable. Surely Americans at the beginning of the 1980s were more acutely aware of the growing costs of such expectations, particularly as the costs of their health care continued to skyrocket, fulfilling and then surpassing the dire predictions of the early 1970s.

Nonetheless, there was little indication that either the general public or the nation's policymakers were eager to contain those costs at the expense of either the accessibility or the quality of American health care. To the contrary, virtually all assessments of American attitudes concerning their health care came to the same conclusion: Americans in the early 1980s wanted to contain the growing costs of health care but also wanted to secure that to which they had been repeatedly told they were entitled: the best health care in the world. Neither the inherent contradictions of such a posture nor the frustrations of the Carter-era politics had managed to change the basic, somewhat contradictory circumstances facing American health care.

What had changed by the early 1980s, and changed rather dramatically, was the immediate political agenda and its apparent direction. Ronald Reagan swept to office in November 1980 with a promise to restructure and redirect the government, particularly the federal government, and to revitalize the private sector. As outlined in his first televised speech to the nation in February of 1981, Reagan wanted to create for Americans what he termed a New Beginning, starting with a significant reduction in income and business taxes, a reduction in government regulation, and an immediate limit on the growth of the federal budget to less than 6 percent a year -- as compared to the average annual growth rate of 13 percent for the previous four years.

This latter proposal was more than a call for fiscal austerity. It reflected Reagan's commitment to both a reduction in federal spending and a drastic reordering of federal spending priorities. For example, Reagan envisioned that military spending would be increased by 50 percent over his first term in office. Reagan also promised that Social Security and what he described as the federal "social safety net" programs for the "truly needy" would be exempted from the impact of the 6 percent limit. On the other hand, spending for most other non-exempt domestic programs would be significantly reduced or repealed altogether or, as Reagan described it, returned to where such social efforts -- and their financing -- properly belonged: the discretion of state governments. In essence, Reagan promised a federal budget which would establish, in concert with the other elements of his agenda, a national

51

government which would be both reduced in magnitude and substantially altered in its character.

To its credit, the incoming Administration proved that Reagan's proposals were more than the usual post-election rhetoric. A "blue book" was quickly produced itemizing the specific federal programs to be reduced or eliminated, describing the regulatory programs that would be restructured or repealed, and explaining the other governmental changes necessary to achieve Reagan's New Beginning. In the parlance of American politics, the Reagan Administration was more than prepared to hit the ground running.

Somewhat oddly, candidate Reagan rarely mentioned American health care, critically or otherwise. Even in his initial inaugural and congressional addresses, President Reagan made only passing references to the problems of American health care and no commitment to any specific health care reform strategy. Rather, the Reagan strategy for health care was woven into the details of his broader economic and political agenda. Nonetheless, the implications for health care were no less significant than those of the national health insurance or health care cost containment schemes proposed by many of Reagan's predecessors. Indeed, had Reagan been fully successful in creating America's New Beginning, he could have correctly claimed that his Administration managed to achieve what so many of his predecessors explicitly promised but failed to do: a radical reformation in the manner in which American health care is financed and delivered. Federal health and health-related programs appeared prominently on Reagan's list of programs to repeal or reduce. Medicare was listed among the basic elements of the "safety net," and therefore exempt from any major budgetary cuts, but some limits on Medicare spending were proposed through a series of "cost-containing" measures. On the other hand, virtually all other non-Medicaid health service, education, research, and public health programs were to be converted into two block grant programs capped in FY 1982 at approximately 75 percent of the FY 1981 levels. The states were to be given broad discretion in determining the scope and nature of such programs and, of course, primary fiscal responsibility if they chose to continue or expand these efforts. Reagan's plan also proposed the repeal of the health planning, PSRO, and other cost containment measures created during the Carter and Nixon years. In addition, Reagan proposed that the National Health Service Corps, public health service hospitals, many federal research efforts, and other programs incompatible with the Administration's vision of a restructured federal government be phased out or eliminated.

The most important implications of Reagan's agenda, however, were those for Medicaid. Reagan proposed to immediately cap FY 1982 Medicaid spending at a 5 percent increase, 10 percent below the level of funding necessary to continue the program at FY 1981 levels. In subsequent years, Reagan proposed that the federal share be increased only by the level of general economic inflation. As with the federal block grants prescribed for other non-exempt federal programs, the states would be given virtually full discretion to determine the scope and nature of the program but also a limit on the level of federal financial support. While the precise fiscal implications of a cap on the federal Medicaid share would vary from state to state, the result of implementing this "Medicaid block grant" would likely have been a reduction of 30-40 percent in Medicaid expenditures in many states by the end of Reagan's first term. In fact, following on the heels of the reimbursement limits, service and eligibility reductions, and the other efforts by the states to contain their growing Medicaid budgets throughout the 1970s, many states may have been forced to dismantle their Medicaid programs altogether.

52

As noted earlier, Reagan made no mention of a general cost containment or health care reform strategy in his initial public pronouncements. There were several references within the details of the "blue book" and by Administration officials to the eventual development of a conservatively drawn proposal to restructure health care financing, including not only Medicaid and Medicare but private third party payment as well. (See discussion of Reagan-era "competition" in sidebar infra.) But the primary focus of the Reagan strategy was not on health care cost containment or on any general reformation of American health care per se -- again, a marked contrast to those strategies espoused by each of Reagan's immediate predecessors. The focus of the Reagan strategy, in keeping with its broader economic and political agenda, was to reduce the federal role in health care, particularly with regard to financing health care for the poor.

Reagan's agenda to reshape the federal government completely dominated the political debate for the first several years of his Administration. Indeed, at least in the early months of 1981, it appeared that Reagan would achieve everything that he set out to do. Within weeks of his inaugural address, the 97th Congress adopted the business and income tax reductions that Reagan had insisted were necessary to the nation's economic recovery -- the largest federal tax reductions in American history. By May of 1981, Congress had agreed to reduce the FY 1982 federal budget by $40 billion (from a projected budget of $750 billion) and to schedule another $100 billion in budget reductions for the following three years -- also reported to be the largest one-time reduction in American history. These initial budget goals were achieved principally by projecting drastic -- but unspecified -- reductions in domestic spending programs, again as Reagan had sought. The process of budget reconciliation that followed, amending each of these programs to achieve the necessary savings, generated somewhat more controversy. In the end, however, Congress authorized program changes that followed the Reagan "blueprint" rather closely. By the Fall of 1981, virtually all domestic programs from agriculture to science and technology to highway construction were drastically cut back -- save the "safety net" Reagan had ordered exempted -- and some were repealed altogether. Many of the regulatory programs targeted by the Reagan agenda were curtailed or eliminated. At the same time, defense spending was scheduled for a series of substantial increases. In less than a year, Reagan had reordered the nature of the federal government in a manner not witnessed since the New Deal.

Even in that first year of dramatic political success, however, Reagan was able to claim only a limited victory in his efforts to reduce the federal role in health care. Congress did agree to limits on spending that would cut nearly $9 billion from the budget for health programs over the next three years, essentially the aggregate reduction that Reagan had originally proposed. But the savings were accomplished by a modified list of program amendments, withholding some of the structural changes that Reagan had sought. Congress declined to adopt fully Reagan's proposal to consolidate most of these programs into two unrestricted block grants. Instead, many pre-existing programs were merged into several grant-type programs that retained some, albeit limited, federal restrictions. A few, most notably the controversial family planning program, were left under federal control. Similarly, Congress reduced funding for the health planning and PSRO programs, but extended their lifetime -- at least temporarily, again in opposition to the Reagan strategy. The Medicare budget was also pared by $1 billion, despite its status as a "safety net" program, largely through modifications in beneficiary cost-sharing and the terms of provider reimbursement, but with no visible reductions in the scope of Medicare coverage.Perhaps most notably, the 97th Congress was especially reluctant to give in to the President's directives concerning the Medicaid program. While the federal Medicaid budget was cut by $1 billion, from a total federal share in FY 1982 of

53

just over $17 billion, Reagan's proposal to permanently limit any increase in the federal share of total Medicaid costs was flatly rejected. Instead, Congress adopted a complicated formula making the states increasingly, but not fully, responsible for increases in program costs above a target limit for the next three years. (Limits that were not reauthorized thereafter.) A number of other programmatic changes were also adopted, increasing the states' discretion in setting limits on their medically needy programs, giving the states more discretion in determining provider reimbursement (including the soon-to-be controversial "Boren Amendment"), and making other "cost-containing" -- but not visibly program reducing -- changes. But the basic structure of the program, the shared federal-state responsibility for its continuation, and its "entitlement" nature were left intact. Medicaid had proven, once again, to be surprisingly resilient, even in the face of a powerful political onslaught.

A similar but somewhat less dramatic scenario was played out in the second session of the 97th Congress in 1982. Faced with an economy slipping into recession and a federal budget deficit projected to reach $100 billion by the end of the year, Reagan adamantly demanded in his State of the Union address that Congress "stay the course" it had established the previous year. With only slight variations from his original script -- including a request for modest increases in federal taxes -- Reagan called for still another round of federal budget reductions, again largely through sizable cuts in domestic spending, especially health programs. In particular, Reagan asked for cutbacks of $4 billion in FY 1983 and $15 billion by the end of his term through further reductions in Medicaid and, for the first time, some reductions in the scope of Medicare coverage.

As it had in 1981, Congress gave the President most of what he wanted in overall budgetary terms, and resisted his leadership only with regard to specific programmatic changes. And again, health programs provided the most notable exceptions. Most of Reagan's proposals to rework Medicaid were rejected. Reagan proposed to cap the FY 1983 budget at FY 1982 levels; Congress instead appropriated an 8 percent increase, a de facto program reduction given the rate at which the program costs had been growing prior to the Reagan years, but still best described as a modest increase under the political circumstances. The most significant change in the program was the authorization, for the first time, for states to impose cost-sharing and "freedom of choice" limits on Medicaid beneficiaries and to require beneficiaries to enroll in prepayment plans under some circumstances. Conversely, Reagan's proposal for reducing the Medicare budget was actually exceeded; and Congress rejected a long list of Medicare service reductions and other changes that more directly affected beneficiaries; instead it authorized the development of new cost-saving methods of provider reimbursement, especially inpatient hospital reimbursement. (See further discussion infra.) Congress also acceded to Reagan's request to repeal the PSRO program, but authorized, over the Administration's objection, a similar Professional Review Organization program to carry out some of the former PSRO functions on a more tightly controlled basis.

This chapter in the story of federal politics is retold here not to emphasize the particular budgetary and programmatic decisions made in 1981 and 1982, but to outline the overall pattern of those events and to note their significance in determining the direction of American health policy in the years that followed. In less than two years Congress, as Reagan demanded, sharply reduced overall federal health spending and reshaped the federal role in financing health research, education, and many other health-related activities. Reagan's New Beginning brought to an abrupt end nearly two decades of an expanding federal role into virtually all aspects of American health care. At

54

least through the remainder of the decade, developments in American health care financing and delivery would depend much more on the decisions of the individual states and, to a lesser extent, local governments and on developments in the private sector, as will be discussed in some detail in Section O to follow.

The long term significance of these events also can be described in terms of what Congress was unwilling or, at least, unable to do despite the urgings of a President who was dramatically successful in achieving most of his other political objectives. Medicaid was subjected to several rounds of cost-containing adjustments, but it was not restructured as Reagan had demanded or changed in any other substantial way. And even Reagan was reluctant to visibly advocate any major reform or structural change in the Medicare program. Instead, Congress and the Administration worked a remarkable political finesse: A series of reductions in Medicare spending were scheduled for future years and the Administration was authorized to develop reforms in the existing Medicare reimbursement methodology that would achieve the necessary savings -- most of which would require subsequent congressional approval. As it turned out, this political ploy was probably more successful than its authors ever imagined; it set the stage for the most significant federal health policy development of the mid-1980s, the adoption of Medicare's DRG reimbursement scheme. (See discussion infra.) But with this important exception, Congress left unchanged the structure of the programs that lay at the heart of the federal role in American health policy, Medicare and Medicaid, even at a time when the terms and direction of federal policy were altered fundamentally in so many other ways. The long term implications of this choice were somewhat overshadowed by the immediate impact of the Medicare and Medicaid budget reductions and the other changes in federal health policy adopted in 1981 and 1982. But throughout the remainder of the 1980s and into the 1990s, congressional and other federal policymakers would be continually confronted with the implications of failing to reform these increasingly expensive but quite obviously politically popular programs. And, of course, federal policymakers would also be confronted with another problem that had been essentially unaddressed despite the budgetary and other policy changes made in the early Reagan years: the growing costs of health care generally.

L. AMERICAN HEALTH POLICY -- AND POLITICS -- IN THE MID-1980s

The federal political climate had evolved substantially by the beginning of 1983. The off-year elections in the Fall of 1982 gave the Democrats a much stronger hold on the House of Representatives, although the Republicans maintained a slim majority in the Senate. And by the end of 1982, President Reagan's ability to marshal enthusiastic public support for his political efforts had waned, as neither the economic prosperity that Reagan had predicted nor, ironically, the balanced federal budget that Reagan and Congress had claimed they had achieved had materialized. The President still set the initial agenda for the political debate and wielded a powerful influence over its outcome. But from 1983 on, congressional deliberations lacked the ideological and political focus that Reagan's leadership had provided in those first years of his Administration. To the contrary, for the remainder of his six years in office, Reagan was locked in a political struggle with Congress that was virtually the mirror image of that during his first two years -- and not unlike the frustrating political battles of the Carter years.

The overall result for federal policy was not unexpected. Congressional debates tended to jump from issue to issue on a largely ad hoc basis, primarily

55

SIDEBAR: THE NATIONAL HEALTH INSURANCE DEBATE OF THE 1980s (THAT WASN'T): COMPETITION

In contrast to many of his predecessors, Reagan did not include a national health insurance proposal on his political agenda -- and for obvious reasons. At least as national health insurance usually has been formulated in this country, such a federal program would represent the exact antithesis of what Reagan so adamantly sought. Reagan can claim some initial role in the process that led to the adoption of the Medicare catastrophic legislation in 1988. (See discussion infra.) In fact, the "catastrophic" program that he called for in his 1986 State of the Union address could be described as a conservatively fashioned alternative to a more broad-based national health insurance reform scheme. But with that exception, Reagan fought hard and consistently throughout his eight years in office to limit, not expand, the federal role in health care financing and to redirect the primary responsibility for such matters to the states and to the private sector.

In doing so, Reagan chose to forego another conservatively fashioned alternative. Over the last several decades, a number of conservative theorists have devised various market-oriented or "competition" strategies for the reform of health care financing. The scope and details of these strategies vary. (For further description, see Chapter 8.) But the core ideas generally focus on the replacement of existing regulatory controls with properly designed government efforts to enforce competition among providers and payers, the promotion of individual choice by patients and consumers, and the reliance on private market mechanisms rather than public policymaking for the determination of resource allocation decisions. As such, advocates of "competition" schemes clearly reject the principles that underlie most traditional national health insurance or other regulatory strategies.

But the advocates of "competition" also reject many of the assumptions that underlie the private but not particularly competitive arrangements by which American health care traditionally has been delivered and financed. Under most "competition" schemes, for example, providers would be expected to compete -- on the basis of the price and quality of their services -- and, in a more general sense, behave in a much more commercial or businesslike manner. Insurers and other third party payers also would be expected to compete among themselves, to offer a broader range of options than is currently available, and to bargain more aggressively in their dealing with various providers. And while some advocates claim that the traditional autonomy of private practitioners could be retained under "competition," most admit that the market forces unleashed by "competition" might entirely restructure the existing relationships between institutional and individual providers and between providers and payers.

Advocates of "competition" claim that all this will be more than justified by the ultimate outcome: Market forces will both contain the rising costs of health care and allow for the proper distribution of health care resources. In fact, in this regard the objectives of those who advocate a "healthy dose of competition" are little different than those of advocates of many more traditional health care reform schemes. But at the political heart of the "competition" strategy lies perhaps the most compelling political justification for such an approach: A competitively designed reform strategy fits rather neatly with traditional American preferences for private market arrangements and avoids the political distrust so often engendered by proposals for national health insurance or other "big government" reforms.

56

"Competition" also appeared to fit rather neatly with the objectives of Reagan's New Beginning. Yet despite some early hints that the Administration would develop its own version of a competitively designed scheme to reform health financing, such an effort never materialized. In early 1984, a bill drafted by Reagan officials was "floated" through Congress, but the Administration quickly disavowed any interest in pursuing its enactment. Various "competition" proposals were occasionally touted by individual members of Congress, but such proposals, like many other broad-based reform measures, were quickly lost in the political confusion and budget-driven politics that dominated the mid-1980s. Various competition proposals were among the various options that were floated through Congress during the Bush administration, but no serious action was taken on any of them. Indeed, and with some political irony, the first real airing of the merits of "competition" in reforming the financing of American health care did not take place until the mid-1990s when the Clinton Administration began its effort to adopt a somewhat hybrid -- and, some would say, a somewhat mislabeled -- scheme of reform described as "managed competition." For a description and full discussion, see Chapter 8.

57

governed by political compromise and practical considerations and, particularly, short term budgetary concerns. There were few sweeping changes in the direction of federal policy, one way or the other. Somewhat oddly, however, this political climate forced Congress to act on several specific health policy issues in a manner that had not been previously possible.

The first and most politically significant action was the adoption of a radical new scheme for the reimbursement of inpatient hospital services under the Medicare program. As noted earlier in this chapter, throughout the 1970s Congress, many of the states, and a few private insurers had experimented with reimbursement reform in their efforts to control rising costs. Nonetheless, providers had managed to resist any reform that would substantially deviate from traditional fee-for-service, cost- or charge-based reimbursement. In particular, Medicare's reasonable cost hospital reimbursement methodology had been changed little since the inception of the program, despite the obvious cost-increasing incentives in that approach. In the Fall of 1982, however, Congress broke this historic mold, authorizing the Medicare program to develop a new system of hospital reimbursement based on the prospectively determined, industry-wide average cost per case. With surprising rapidity, the Administration returned its recommendations and with even more surprising speed, Congress modified these recommendations and in the Spring of 1983 mandated Medicare payments to hospitals based on prospectively determined, diagnosis-related groups -- or PPS/DRGs.

The details of PPS/DRG reimbursement are described more thoroughly in Chapter 4. But in general terms, DRG reimbursement represents a significant departure from traditional hospital reimbursement. Under PPS/DRG reimbursement, a hospital is no longer given a payment for a particular patient that reflects either the hospital's own costs or the costs of that patient's care. In most circumstances, a hospital receives a lump-sum payment based on the diagnosis of the patient at admission. In essence, the hospital bears the risk of any expenditure beyond that amount. Less clear, but with even more long-term significance, the PPS/DRG reimbursement scheme adopted in 1983 allowed for annual adjustments to the level of PPS/DRG payments, but final authority for the approval of suc

h adjustments was retained by Congress; that authority was not fully delegated to the Medicare program administration or linked to any particular inflation index or other factor. (Hospitals would quickly learn the significance of this. In FY 1986, the first year of full DRG implementation, Congress limited the increase in the DRG payment levels to less than 1 percent over the rates calculated for FY 1985.)

Many conservative theorists have cast the adoption of PPS/DRG reimbursement as a dramatic step towards more market-orientation in federal health policy; through PPS/DRG reimbursement, Medicare pays a rate of compensation that is more akin to a price than to an effort to reimburse all providers for their costs. Many liberals, on the other hand, have claimed that the adoption of PPS/DRG reimbursement was a kind of "backdoor victory" for the proponents of regulation, providing the government with the kind of control over hospitals and their expenditures that they had sought but had been denied during the Carter years. But the enactment of Medicare PPS/DRG reimbursement was not an ideological or even a partisan political victory. It was primarily a political compromise, born of necessity and budgetary demands. The budgetary commitments of the early 1980s had left Congress with little choice but to "do something" to comply with the Medicare budget reductions scheduled for the mid-1980s. At the same time, the program's actuarial experts were publicizing reports that even further savings would have to be found to avoid a bankruptcy in the Medicare

58

Part A Trust Fund by the end of the decade. (See discussion in Chapter 2.) Yet neither the Congress nor the Administration had been willing even to consider reducing the size or the coverage of Medicare in order to limit Medicare's growing costs. And, of course, there was little prospect for any dramatic change in the rate at which health care costs had been increasing for nearly two decades. Quite literally, Congress had no choice but to do what it had been so hesitant to do before: contain the program's costs by imposing substantial limits on the level of provider reimbursement. In that regard, whether the adoption of PPS/DRG reimbursement is viewed as a victory for conservative or liberal political forces or a compromise that served both their interests, it surely must be regarded as an unprecedented political loss for providers and their traditional allies.

For many of the same reasons, the complicated politics of the mid-1980s led to a similar setback for individual providers a year later. In 1984, Congress again attempted to slow the growth of the Medicare budget by mandating that the Part B premium be adjusted to represent no less than 25 percent of Part B costs (a limit that expired in 1987) and by enacting a series of changes in physician reimbursement. The most notable were a 15-month freeze on increases in Part B payments, a requirement that all physicians declare whether they were "participating" or "nonparticipating," and a schedule of additional limits that would treat "participating" physicians more favorably in future years. (For a full explanation of these terms, see Chapter 5.) Despite the political promise that these measures would be temporary, the freeze was extended the following year. "Participating" physicians were not allowed Part B increases until May of 1986; "nonparticipating" physicians were not allowed increases until January of 1987. Once again, Congress had broken a long-standing political mold and attempted to extract savings from Medicare, largely at the expense of provider interests, but primarily due to budgetary pressures and the absence of any more focused or comprehensive strategy.

The odd political climate of the mid-1980s created another twist in the dynamics of health policy decision making. Part of Reagan's success in the early 1980s was due to his insistence that Congress adhere strictly to the budget reconciliation process that Congress had adopted but not followed completely during the 1970s. By forcing Congress to open each legislative session with the adoption of a budget resolution and then one or more "reconciliation bills," amending existing programs to conform to that year's projected budget, Reagan was able quickly to translate much of his agenda into federal policy -- so long as he could dictate the terms of the resolution and the details of the reconciliation legislation. But as Reagan's ability to dominate Congress slackened in the mid-1980s, the battles over each year's budget resolution and, particularly, the terms of the reconciliation legislation that followed, became more protracted and chaotic; in some years the entire legislative session was consumed by the budget reconciliation process, a process originally intended to streamline and rationalize congressional decision making. Nonetheless, budget reconciliation did have the effect of forcing federal decision makers and, to a lesser extent, the public, to confront more directly both the costs of each program and the effect of those costs on the overall federal budget. As a result, throughout the 1980s and into the 1990s, most federal policy debates, including many relating to health policy issues, took place within the context of the deliberations over the initial budget resolution and the reconciliation legislation that followed.

Obviously the budgetary focus of the reconciliation process created part of the pressure that led to the adoption of the Medicare reimbursement reforms in the mid-1980s and many other cost-conscious health policy decisions. On the

59

other hand, as the political struggles in Congress became more factionalized in the mid-1980s, that budgetary focus was on some occasions compromised and on a few occasions entirely abandoned. For example, in the first legislative session of the 99th Congress, which began in January of 1985, the effort to adopt reconciliation legislation virtually gridlocked. The final Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was not completed until April of 1986, four months into the second session of the 99th Congress (at a time when the 1986 reconciliation process should have been well underway.) In its final form, COBRA included a number of cost-cutting amendments for the Medicare program, but to secure its passage, congressional leaders also had to amend COBRA to include a series of measures that would have quite the opposite effect, including a delay in the timetable for implementation of the PPS/DRG reimbursement scheme and an increase in PPS/DRG payments to "disproportionate share" hospitals and rural hospitals. In its final form COBRA also included a stringent "anti-dumping" requirement for hospitals participating in Medicare, and a requirement that employers provide continuation of health benefits to laid-off workers for up to 18 months following their discharge, both measures that had been previously rejected when considered apart from the reconciliation process.

The brokering necessary to complete reconciliation also led to important -- and unexpected -- changes in the Medicaid program. Throughout the mid-1980s, congressional liberals fought a surprisingly successful behind-the-scenes campaign to expand Medicaid eligibility and to win back many of the program's cutbacks adopted in the early 1980s, primarily by insisting that such amendments were the price of their support for various budget reconciliation efforts.The oddest twist in federal health politics in the 1980s, however, came at the end of the Reagan era. As described above, there were few major changes in the direction of federal health policy during the mid-1980s and almost no efforts to contain overall health care costs or otherwise restructure American health care financing and delivery. The political spotlight was occasionally focused on proposals to provide additional health insurance coverage for the unemployed, to finance long term care, and even for nationalizing health insurance, but for the most part such proposals were met with little enthusiasm or quickly lost in the budget-driven politics of the era.

The major exception was the adoption, at least for a brief period of time, of a catastrophic health insurance program. In his State of the Union address in 1986, President Reagan publicly instructed his Secretary of Health and Human Services, Otis Bowen, to develop a plan to protect all Americans from the potential catastrophic costs of health care, primarily by encouraging private insurers to offer extended "last dollar" insurance coverage. Whether Reagan's one-sentence reference was intended to be taken literally is not clear -- it was, after all, one of the few public statements by Reagan during his eight years in office indicating that he had any specific interest in national health policy. But Bowen accepted the President's orders as a serious mandate, although he somewhat rewrote Reagan's specific instructions. Within months he was leading a highly visible campaign for what he termed a catastrophic health insurance plan for the nation's elderly. Essentially, Bowen's plan was to raise the Medicare monthly premium and in return to put a fixed ceiling on the out-of-pocket liability of Medicare beneficiaries and to create new coverage for prescription drugs.

The 100th Congress met Bowen's enthusiasm with an enthusiasm of its own. Conservatives were eager to show that they could be both fiscally responsible and responsive to an identified public need. Liberals were eager to build as much as they could on what they could claim was an Administration-backed proposal to expand federal support for health care. Throughout 1987 there was

60

little doubt that some "catastrophic" program would eventually be enacted, but the scope of its coverage, the details of its financing, and the additional programmatic changes that would be included were extensively debated.

The Medicare Catastrophic Coverage Act of 1988 was adopted by a vote of 328-72 in the House and 86-11 in the Senate. The final legislation was not as broad as Reagan had originally suggested, but was heralded nonetheless as what it most surely was: the largest expansion of the Medicare program since its inception in 1965. Most of the cost-sharing and durational limitations on Medicare-covered institutional services were eliminated, an upper limit was placed on a beneficiary's Part B cost-sharing liability, and the scope of Medicare coverage was expanded to cover some previously excluded services including respite care, mammography screening, and, most significantly, outpatient prescription drugs. In addition, the Act also indirectly aided many Medicare beneficiaries by eliminating some of the "spousal impoverishment" and other restrictions on eligibility for nursing home services previously imposed under the Medicaid program. Congressional experts estimated that nearly $6 billion in new benefits would be available to the nation's elderly in 1989, and over $30 billion within four years.

To pay for the costs of these new benefits, the legislation mandated an increase in the Medicare monthly premium (starting at $4 in 1989) and a surtax on the income tax liability of Medicare beneficiaries. Almost immediately after the 1988 legislation went into effect, many Medicare beneficiaries, incensed by this new tax liability, inundated Congress with a flood of protest (ranging from tens of thousands of letters to acts of civil disobedience on the Capitol steps). The same Congress that had so eagerly debated how to enact "catastrophic" in 1988 spent much of 1989 debating how to repeal the tax and scale back the program. In the final hours, both proponents and opponents eschewed any middle ground and in December of 1989 the Medicare Catastrophic Coverage Repeal Act was adopted by an even more overwhelming vote than the one that had adopted the "catastrophic" program the year before.

The repeal of the 1988 catastrophic legislation cast a lingering shadow over American health policymaking in the years that followed. By the early 1990s, policymakers were being constantly reminded that the Medicare revenue structure would be unable to support the program beyond the end of the century. (See Chapter 3 for details.) Yet all debate over possible remedies would be constrained by reminders of the political backlash to the premium increases and the surtax in 1989. The 1989 repeal also reinstated the oddly crafted cost-sharing requirements, limits on coverage, and other shortcoming of Medicare. The politics of 1988 had demonstrated that there was overwhelming political support for "doing something" about them; the politics of 1989, however, had demonstrated that even overwhelming support to increase or even rationalize benefits may not translate into political support to pay for those changes -- an important and sobering political lesson. By the end of the 1980s, there were many barriers to addressing the problems plaguing American health care. The memory of the quick rise and even quicker fall of the catastrophic legislation would make future efforts to surmount them all the more difficult.

M. THE (FIRST) GEORGE BUSH YEARS

George H.W. Bush's political fate was inextricably tied to his timing. He was escorted into office on the arm of a popular president ending an eight year reign. But he also arrived at a time when his party could command control of

61

neither house of Congress, the economy was sliding in recession, and public confidence in the federal government's ability to function effectively was ebbing as well. Bush campaigned with the promise that he would continue the pursuit of the Reagan agenda, with only a few "kinder and gentler" adjustments. Instead, he was immediately sidetracked and forced to confront a whole series of problems, some of which were new, such as the savings and loan crisis; but many of which derived from matters than had been raised but left unanswered during the Reagan years, not the least of which was an annual federal budget deficit that was predicted to exceed $200 billion by the end of Bush's first year in office.

To his credit, President Bush was able to bring an element of compromise to the budget deliberations, at least in his first several years of office. The process was virtually unchanged: The annual budget reconciliation process continued to dominate congressional deliberations and was completed only after protracted and, in most cases, chaotic negotiations. Many important substantive decisions were made as last-minute compromises to secure a few critical votes; other apparently "done deals" were unbundled for the same reason. All but the broadest outlines of these bills were virtually impossible to track. The entire budgeting process was further complicated by the apparent dictates of the Gramm-Rudman-Hollings "anti-deficit" legislation enacted in the mid-1980s, which appeared to authorize automatic budget cuts if actual federal spending exceeded estimated revenues. But the outcome was an improvement over that in the last several years of the Reagan Administration. Congress and the President were able to complete the 1989 budgetary legislation (and do so before the 1989 legislative session had expired) with at least an air of bipartisan cooperation. And, in doing so, they were able to agree on some important restrictions on Medicare Part A and, in particular, Part B reimbursement. Most significantly, the 1989 reconciliation legislation authorized some of the most serious reforms of Medicare Part B reimbursement since the inception of the program: the use of a resource-based, relative value scale (RB-RVS) reimbursement scheme for Medicare Part B physician payments; the use of a scheme for adjusting reimbursement increases to make up for increases in the volume of services rendered by physicians; and stricter limits on the ability of physicians to balance bill Medicare patients from whom they do not accept assignment. (For a full explanation, see Chapter 5.) At the same time, the 1989 budget legislation added some expansion of Medicaid coverage, requiring states to cover pregnant women and children under the age of six in families within 133 percent of the federal poverty level.

The 1990 budget deliberations were a kind of watershed for the politics of compromise. After a lengthy series of "budget summits," Bush and the Democratically controlled Congress agreed on a compromise budget, only to find that agreement unravel as congressional politics returned to the factionalized and, in some cases, intra-party bickering of the mid-1980s. In the end, Congress was just able to finesse the dictates of the Gramm-Rudman-Hollings legislation and forge a budget that they claimed would reduce federal spending by over $500 billion during the next five years -- although it would do much less to reduce the growing federal deficit than the original compromise budget had proposed. Roughly $150 billion of the savings in the final 1990 budget would come from increases in federal taxes -- forcing President Bush to renege on his "no new taxes" pledge in the 1988 campaign, a decision that later cost Bush much support from within his own party.

Medicaid and, particularly, Medicare reform were primary topics of debate during 1990, although less in programmatic terms and more as line items in the overall budget. Taken together the two programs had grown to over 10 percent of

62

the federal budget by 1990 and had become, despite the cost-containing efforts in the 1980s, the fastest growing and most visible of what were considered discretionary items in the federal budget. Over $40 billion in Medicare cuts were included in the 1990 reconciliation legislation. The deductible for Part B was increased from $75 to $100; increases in the monthly Part B premium were scheduled through 1995 in an attempt to make total premiums match 25 percent of total Part B costs. Payments to both hospitals and doctors were again reduced, in large part by rachetting-down the annual cost-related adjustments. Somewhat surprisingly, the federal contribution to Medicaid was not revised in any substantial way and, despite concern over containing the growth of the federal budget, congressional liberals were again able to use their leverage during the reconciliation process to expand Medicaid eligibility for pregnant women and children. (See Chapter 3 for details).

Another important rider to the reconciliation legislation was a series of federal controls over so-called "Medi-Gap" insurance policies, private insurance that purports to provide supplemental coverage to Medicare beneficiaries. The 1990 legislation required that Medicare beneficiaries be allowed to purchase Medi-Gap insurance within six months of eligibility, regardless of health status, imposed civil penalties on policies that duplicate Medicare coverage, required insurers to pay rebates if policies failed to return specified percentages of each premium dollar, and authorized the creation of federal rules for simplification and standardization of Medi-Gap policies. (See discussion in Chapter 3.)

The combative legislative machinations of 1989 and 1990 seemed to exhaust its participants. Throughout the remainder of Bush's term, neither the Administration nor the congressional leadership appeared either able or willing to re-open the battles of the prior years. In both the first and second terms of the 102nd Congress, budget reconciliation bills were passed that did little more than carry out the terms of the budget agreements of 1989 and 1990 and did nothing to stem the increasing growth of the federal deficit -- which was predicted to exceed $300 billion annually, nearly a fourth of the federal budget by the end of 1992. Quite literally, the 102nd Congress made no major decisions concerning health policy or, for that matter, anything else. There was a flurry of congressional interest in various proposals for reform of health care financing in the Spring of 1992; but, in the end, this proved to be little more than a brief rehearsal of the much more serious debate of national health care reform that would follow the elections of 1992.

N. BILL CLINTON, "MANAGED COMPETITION," AND FEDERAL HEALTH POLITICS IN THE 1990s

Bill Clinton, like many of his liberal predecessors, made health care reform a major part of his 1992 campaign. In the Spring of 1993, with much fanfare, the new president established a task force chaired by his wife, Hillary Rodham Clinton, to develop the Administration's reform strategy. Following months of complex and highly politicized deliberations, the commission presented Congress with its proposal for "managed competition," a scheme that envisioned the enrollment of virtually all Americans in heavily regulated but ostensibly private health plans. (For a more detailed description, see Chapter 8.)

At first, President Clinton's proposal appeared to have broad political

support. But as the details on "managed competition" were revealed, his proposal aroused considerable opposition from private insurers, employers, political and ideological conservatives, and, significantly, from the many Americans who were

63

persuaded that "managed competition" would gain them little and cost them much, especially what the opponents of Clinton's plan called their "freedom of choice." In the end, the opposition was overwhelming and the support was ephemeral. Indeed, what first appeared to be a political certainty -- in mid-1993 most critics were predicting that the 103rd Congress would have little choice but to enact some form of national health care reform -- became in the end yet another reminder of the quixotic nature of American support for national health care reform. By the end of 1994, many of those same critics were citing the rejection of "managed competition" as clear proof that no federally mandated, "big picture" health care reform could be adopted under present -- or forseeable -- political circumstances.

The latter assessment proved to be the more accurate. Following the failure of "managed competition," broadly defined health care reform proposals virtually disappeared from the congressional agenda of the 1990s and Congress returned to where it had left off in the late 1980s, regarding health care primarily as a budgetary issue and considering new health-related initiatives only on ad hoc basis with little ideological or even political direction.

First and foremost was the continuation of the budget-conscious debate over the nature and extent of the federal commitment to Medicare and Medicaid. Medicare, in particular, became a central focus of congressional concern. As the program continued to be a prime target of efforts to balance the federal budget, a more immediate problem emerged: By the mid-1990s, experts were predicting that the annual Part A expenditures would soon exceed Part A revenues and cause the bankruptcy of the Part A trust fund -- as early as the end of the decade. (For a detailed discussion of the Medicare Part A revenue structure and the budgetary crisis of the 1990s, see Chapter 3.) As a result, even while battling over the fate of "managed competition," Congress managed to enact budget reconciliation legislation in late 1993 that included over $50 billion (spread over five years) in Medicare spending reductions, largely by limiting future increases in reimbursement to providers. Congress attempted to achieve even more extensive reductions in the 1995 budget reconciliation legislation that would have required an additional $270 billion in Medicare cuts by the year 2000, but the legislation was vetoed by President Clinton. There were a series of efforts to adopt those same proposals as separate measures in the Spring of 1996, but none was successful.

More successful efforts to limit Medicare spending were achieved in 1997 as part of the landmark budget reconciliation adopted that year. Savings of over $115 billion over five years were projected from a series of reimbursement limits, increases in Part B premiums, the expansion of authority for creating managed care options for beneficiaries under a new Medicare Part C, and the authorization for a pilot project to allow beneficiaries to use their Medicare benefits through medical savings plans.

Many policy experts heralded the 1997 legislation as the most significant changes in Medicare since the creation of the program in 1965. And together with the unexpected economic boom of the late 1990s, the $115 billion reductions managed to vastly improve the financial status of the program by the end of the decade. In fact, by 1999, Congress was rescinding some of the harsher limits on provider reimbursement, adding over $20 billion to Medicare program costs through a series of reimbursement "givebacks". Nonetheless, the cost-containing efforts of the 1990s had only postponed the Part A trust fund crisis and much of Congress' budget-balancing success was due to the robust economy in the late 1990s that had unexpectedly increased federal revenues. As a result, even in the light of this short-term success, containing Medicare costs and,

64

SIDEBAR: THE TOBACCO SETTLEMENT -- A PUBLIC HEALTH VICTORY OR A NEW REVENUE STREAM FOR THE STATES?

In November of 1998, the attorneys general from 46 states and the representatives from all of the major tobacco companies entered into an agreement -- the Master Settlement Agreement -- settling a multitude of lawsuits brought by the states against "Big Tobacco." On the face of it, the MSA was a one-sided victory for the states. The suits, alleging various state law claims ranging from violation of the antitrust laws to third-party subrogation rights arising from the states' Medicaid payments for smokers, were dropped in return for Big Tobacco's agreement to pay in excess of $200 billion, to comply with various limits on tobacco advertising, and to undertake various efforts to discourage underage smoking. The MSA set out a complicated formula for determining the annual payments to be made by each company to each state. But the bottom line was anything but complicated: Starting in 1999 and running for at least 25 years each state could expect to receive an annual payment measured in hundreds of millions of dollars. For many states the tobacco payments would rival in magnitude the revenues collected from traditional sources of taxes.

One qualification of this apparent victory that was lost in the public attention focused on the $200 billion payment involved some of the less-publicized provisions of the agreement. The payments by Big Tobacco were conditioned on the maintenance of tobacco sales in each state at 1999 levels. Under the terms of the MSA, each tobacco company's annual payment would be reduced to the extent that sales of its product were reduced in that year. The MSA also required the states to enact legislation imposing a tax on any tobacco company that was not a party to the agreement (principally new companies or foreign companies) that would match the contribution that that company would have to make if it were party to the agreement. In essence, the agreement -- and the lucrative payments to the states -- only survive if tobacco sales continue. Moreover, the MSA explicitly allows the tobacco companies to raise their prices to offset their state payments. Said differently, the MSA creates a kind of off-budget taxing scheme for each state, with the revenues collected by the tobacco companies and given to the state, all with the understanding that it is in everyone's best interest to continue the deal.

Everyone, that is, except present and future smokers. While most of the original lawsuits claimed the costs to the Medicaid program as the measure of the states' damages, the MSA in no way ties the revenues received to the Medicaid program, smoking cessation, or, for that matter anything else. The states are free to use the tobacco payments to fund new programs, refinance old ones, or lower existing taxes. In fact, if they want to continue to receive the funds, they have every incentive not to fund smoking cessation programs.

For a good discussion of the MSA, the negotiations that led to it, and some of its problematic terms, see Arthur B. LaFrance, The Changing Face of Law and Medicine in the New Millenium: Smoking, Mirrors, and Public Policy, 26 American Journal of Law & Medicine 187 (2000).

The most significant unknown in this political equation may be the other pending lawsuits against Big Tobacco. While the MSA settled all existing and future lawsuits by the states (and some private class actions), the federal government was not a party to the settlement and there are several pending lawsuits and administrative agency actions that may affect the financial stability of the industry, assuming the Bush Administration and its successors

65

intend to pursue these activities vigorously. More importantly, there are a number of pending private lawsuits against Big Tobacco. The tobacco industry's track record in defending lawsuits by individual smokers had been perfect until the 1990s: No plaintiff had ever recovered a dollar in damages from Big Tobacco. After a series of exposés concerning Big Tobacco's attempts to cover-up what it knew about the health risks of tobacco -- fueled by the public release of confidential industry documents by a disgruntled paralegal -- a new wave of individual lawsuits were filed and, in July 2000, a jury in Florida awarded $145 billion to a class of smoker-plaintiffs who had alleged that Big Tobacco should be strictly liable for its "defective and unreasonable dangerous" product. Whether this case will stand on appeal or whether it will be followed by others is impossible to predict. But even if these cases are only partially successful, they potentially jeopardize the financial viability of the tobacco industry and, therefore, the agreement which depends on that viability.

For a well-written and complete history of the legal battles of Big Tobacco, see Richard Kluger, Ashes to Ashes (1997). For updates on pending litigation and other information on the MSA, see http://www.library.ucsf.edu/tobacco/.

In any event, the MSA, the creation of a new and significant stream of revenue for the state legislatures, and the obvious ties between tobacco, smoking, and the delivery and financing of health care created one of the most intriguing legal and political stories of the 1990s.

66

perhaps, reworking its structure, continued to be prime foci of congressional deliberations throughout Clinton's presidency.

Much the same can be said about Medicaid in the 1990s. Medicaid was a frequent topic of debate for both budgetary and ideological reasons throughout the decade. The 1993 reconciliation legislation included various reimbursement limits and other cost-containing measures projected to reduce annual federal spending by $5 billion. More notably, the Republican-dominated 104th Congress attempted to include Medicaid in its efforts to "end welfare as we know it." The ill-fated 1995 budget reconciliation legislation would have included $163 billion in Medicaid budget cuts (over seven years) and would have restructured Medicaid as a budget-capped block grant, surely ending Medicaid "as we know it". Indeed, President Clinton cited the proposed changes in Medicaid as prominent among his reasons for vetoing the legislation. When the "end welfare" scheme was adopted in 1996, the Medicaid provisions were excluded, apparently as part of the political compromise that secured liberal support for the welfare plan. (For a full discussion of the Medicaid block grant proposal and other attempts to reform Medicaid in the 1990s, see Chapter 3.)

Relatively minor Medicaid spending cuts -- as compared to those extracted from the Medicare program -- were included in the 1997 budget reconciliation legislation. Nonetheless, some of the changes were significant. Limits were imposed on the federal share of Medicaid reimbursement to hospitals under the "disproportionate share" exception. The so-called Boren Amendment that had previously limited state discretion to limit reimbursement to hospitals and nursing homes was repealed. Again, however, efforts to put an overall cap on federal participation in Medicaid were rejected, as were other attempts to restructure the program. Even while cutting its costs, moreover, Congress exhibited some ambivalence about its future role in Medicaid. The 1997 legislation included additional federal funds to help states enroll Medicaid beneficiaries in Part B of Medicare and an expansion of the discretion of the states to enroll Medicaid beneficiaries in managed care arrangements. It also created a new $25 billion Children's Health Initiative Program (CHIP), essentially allowing states to create new programs to provide health financing for uninsured children who are ineligible for Medicaid. (For details, see Chapter 3.)

Medicare and Medicaid were not, of course, the only health-related issues on the congressional agenda in the 1990s. Congress did on occasion reach beyond these budget-driven debates and address other problems. In 1996, amidst the on-going battles over other welfare and budget reconciliation, Congress adopted the Health Insurance Portability and Accountability Act (HIPAA), limiting the discretion of private insurers to deny coverage to people who had been previously insured. The 1996 legislation also created new protections for medical information, protections that would later prove to be much more controversial than they initially appeared. In that same year Congress also adopted the Newborns' and Mothers' Protection Act, requiring private insurers to cover inpatient hospital care following childbirth for at least 48 hours. (For a more detailed discussion of these laws, see Chapter 2.) In 1996, Congress also funded a new program for grants to cities and states to provide services to AIDS patients. Starting in the mid-1990s and continuing through several waves of public interest, Congress continually debated the need to regulate managed care plans and to enact something called a patients' bill of rights. (See discussion in Chapter 8.)

Neither the budget-driven decisions concerning Medicare and Medicaid nor the other congressional efforts during the 1990s should be discounted or

67

overlooked. Modifications in the way in which providers are reimbursed under Medicare and Medicaid can have substantial effects on the availability of health care to the beneficiaries of those programs. The same can be said for changes in beneficiaries' premiums, programs coverage, or other matters that can be labeled "minor" in only the most relative terms. Similarly, the HIPAA legislation and the few other initiatives adopted in the 1990s did little to restructure or reform privately financed health care, but they still affected a small but significant number of Americans and, perhaps most significantly, serve as reminders that a concern for adequacy of the health care available to Americans is rarely far from the political consciousness of the American public -- or their political representatives.

But what did -- and did not -- happen in Washington D.C. in the last

decade of the 20th century also was significant in a somewhat broader sense. Even prior to the 1990s, there had been a significant change in the role of the federal government in directing the future of American health care. In the 1960s and through most of the 1970s, the federal role had been rapidly expanding not only in terms of the extent of federal financing of health care but also in terms of federal regulation or, at least, federal influence over health care funded from all sources. During those years many experts were confidently predicting that federal involvement in health care would continue to expand in a kind of straight line progression from Medicare, Medicaid, and the other existing federal health programs to the eventual adoption of some sort of nationally directed health care strategy. Such predictions, however, did not anticipate either the resurgence of conservative politics in the 1980s or the confounding influence of the rapidly increasing federal budget deficits of those years. Americans did not abandon their support for federal health programs. To the contrary, political support for existing programs and, on occasion, new federal efforts was remarkably persistent. Yet, at the same time, virtually all federal health programs were constantly battered by the annual budgetary storms and, on occasion, increasingly influential voices calling for a reexamination of the federal commitment to their continuation. As one result, by the beginning of the 1990s, no one could accurately chart the future direction of federal health policy or federal health politics -- one way or the other. Even as the budget deficits of the early 1990s gave way to the budget surpluses of the late 1990s, in the most basic sense, the nature and extent of federal involvement in health care delivery and financing had become open questions.

O. THE RENEWAL OF THE ROLE OF THE STATES IN AMERICAN HEALTH CARE IN THE 1990s

As the federal government's responsibility for health care was reexamined during the 1990s, a significant portion of the political spotlight shifted from Washington D.C. to the various state capitols. As chronicled earlier in this chapter, throughout the 1960s and 1970s, as Medicaid and other federal programs became a continually expanding source of fiscal support for state health programs, the states were increasingly under the direction of federal leadership in administering federally funded programs and, in some cases, related programs. Most states accepted this direction reluctantly. Federal requirements concerning the administration of Medicaid and other health programs were a constant source of political friction. The federally mandated planning programs spawned in the 1970s were particularly controversial. But few states were willing to avoid compliance with federal dictates at the expense of a loss of federal fiscal support. Predictably, in the early 1980s, many states applauded President Reagan's agenda when it was cast in terms of greater autonomy for the individual states in health care and other domestic matters; but, just as predictably, many

68

state officials, even members of Reagan's own party, were among the most active opponents of Reagan's efforts when the budgetary consequences of that autonomy became more clear. Throughout the 1980s, most states remained in this awkward political posture: frequently protesting the extent of federal control over state health programs and calling for more flexibility and discretion; yet eagerly -- and in some cases stealthily -- seeking ways to shift more of the fiscal burden of their health related programs to the federal budget. And by recasting their state's health-related problems as issues in need of a federally funded although, preferably, state-administered remedies, state officials were in a position to blame federal inaction, not their own, if those remedies failed to emerge. The recurrent predictions that the federal government would eventually adopt some sort of national health strategy also provided many state leaders, regardless of their political or ideological preferences, with a convenient catch-all response to virtually any health care-related query: "Let's wait to see what the feds are going to do about that." In effect, if not in form, the states were reinforcing the popular political image of the federal government as primarily responsible for the future direction of American health care.

By the mid-1990s, that odd political posture was no longer realistic. The rejection of Clinton's "managed competition" proposal in 1994 demonstrated that the prospect of some nationally directed health care strategy was as unlikely as it ever had been. After 1994, state level discussions of "what the feds will do about that" often concerned not the likelihood of some sweeping new federal initiative but the extent to which Congress might further restrict the availability of federal funding for Medicaid and state health programs or otherwise cede policymaking authority to the states. The underlying irony of the Medicaid and other federal budget-cutting reforms that were considered in the 1990s was that Congress could claim it was going to give the states exactly what they had been asking for for nearly three decades: real flexibility in administering their programs. This flexibility, however, was often packaged with what the states had been trying so hard to prevent: real reductions in federal fiscal support. The net political effect was more subtle but equally sobering for state officials. With more autonomy comes more bottom-line responsibility for the results of the difficult choices and trade-offs that inevitably follow. The states have always struggled to maintain Medicaid and other state financed programs within politically acceptable limits. In the 1990s, however, that struggle took on a new intensity and did so under circumstances where the political heat generated by that intensity could not be deflected as easily to the federal level as it often had been in the past.

The results were mixed, especially for the state Medicaid programs. Some states simply cut back Medicaid spending by imposing limits on eligibility, coverage, or reimbursement. Other states exercised their newly acquired autonomy in quite different ways, experimenting with various managed care and other innovative reforms that at least purported to continue prior levels of coverage and eligibility and, in a few cases, to expand coverage for the state's uninsured. But the overall picture had one predominant theme: In the 1990s, the states took on a much greater responsibility for both structuring and financing Medicaid and for many other state administered health programs.

For virtually the same reasons, in the 1990s the states also took on an increased level of responsibility for regulating the delivery and financing of privately financed health care. The states still shared this responsibility with the federal government. Among other things, many of the state initiatives had to be crafted around various federal regulatory efforts like the HIPAA. State efforts also had to avoid conflicting with the limits on their regulatory

69

discretion imposed by the preemption provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Private health care also continued to be influenced indirectly by federal decisions concerning Medicare reimbursement and coverage. But as the federal government retreated from many of the regulatory efforts adopted in the 1970s and repeatedly resisted efforts to adopt some sort of nationally directed health care strategy, a good portion of the political pressure to reform privately financed health care was refocused on the states.

Again, as with Medicaid and state health financing programs, the results were mixed. Some states only replicated the pattern set by the federal government: withdrawing from earlier efforts to regulate or control privately financed health care and showing little interest in devising any alternative, state-directed strategy. On the other hand, a number of states adopted reform measures attempting to remedy various shortcomings in the private health insurance market, to expand the coverage for the states' uninsured, or to otherwise regulate the delivery or financing of care within their borders. A few states -- accepting the label as "states that couldn't wait" -- even took bold steps toward adopting their own "national" health insurance or alternatively designed reformatory schemes. (For examples of these state efforts, see Chapter 8.)

None of these developments signaled a complete or permanent shift of political authority from the national government to the states in matters relating to health care. If there is a political lesson to be learned from the last several decades of American health policy, it is that neither the direction of public policy nor the locus of decision making are permanently fixed. Either can shift rather rapidly or unexpectedly. Nonetheless, the realignment of the state and federal roles was one of two important trends that highlighted developments in American health care in the 1990s.

P. AMERICAN HEALTH CARE IN THE 1990s: MANAGED CARE AND OTHER PRIVATE SECTOR INITIATIVES

The other important trend in the 1990s had to do with developments in the private sector. As discussed in several of the previous sections, the structural arrangements for the delivery and financing of American health care had fallen into a relatively stable pattern, at least following the developmental years of the 1940s and 1950s. At least through the early 1980s, most Americans could expect to receive their primary care from the physician of their choice and by a hospital generally regarded as a "community hospital," supported by a network of more specialized providers. With the exception of a few public clinics and hospitals, most of these providers were private and, just as importantly, most were relatively autonomous. On the other hand, while private and autonomous, few American health care providers were competitive in the classic economic sense; more generally, few were businesslike, at least compared to other commercial activities, either in the way they were organized or in the manner that they carried out their affairs.

Through the 1980s, many of these same characteristics were true of the entities that provided third party financing for most Americans. Most Americans relied on some form of private health financing arrangement, although the enactment of Medicare and Medicaid in the 1960s created a substantial governmental role in the financing of health care. A few of these arrangements integrated the delivery and financing of care. But most third party payers were just that: insurance-type arrangements that provided reimbursement for the

70

services that Americans received but that exercised very little control over the delivery of those services. And while American third party payers have always been more competitive than their provider counterparts, at least through the early 1980s, service-benefit plans like Blue Cross and Blue Shield, a handful of health maintenance organizations, and the traditional indemnity insurers had divided the private financing market into relatively stable shares and rarely engaged in serious price or product competition or other market-like commercial practices. With the tax exemption of employer-purchased health benefits insulating them from the costs of their coverage, most Americans had little incentive to seek out alternative arrangements; most third party payers, so long as they could increase premiums to cover the ever-increasing costs of that coverage, had little incentive to offer or pursue alternative arrangements.

By the end of the 1980s, however, there were some important and noticeable changes in these established patterns. As costs continued to rise and government reimbursement for publicly financed hospital care became more stringent, many "community hospitals" were struggling to find ways to contain their costs and increase their revenues. Some hospitals merged or affiliated with other institutions and, in some cases, formed multi-hospital systems. For-profit hospitals, once relegated to a relatively minor role in providing American health care, began to grow and many public and nonprofit institutions, while retaining their legal status, began adopting many of the more business-like practices of their for-profit counterparts and offering a broader range of services. More generally, hospitals became more cost- and revenue-conscious, at least compared to their earlier counterparts. And as one important result, hospitals began to increase the level of administrative control over the care they provided and, as a consequence, over the behavior of their staff physicians. What was once compared -- somewhat unfairly -- to a hotel within which space and equipment for medical practice were made available to physicians became an institution in which the non-medical management played a larger role in supervising the admission, discharge, and other medical decisions concerning patient care.

At roughly the same time, there was even more noticeable and growing change in the traditional picture of American health care financing. As the costs of health care rose rapidly through the 1970s and the 1980s, much public and private attention was given to the experience of health maintenance organizations (HMOs) and other alternative financing arrangements that claimed greater success in controlling their costs, as compared to more traditional insurance reimbursement schemes. The apparent reason for the success of health maintenance organizations was the integration of the delivery of health care with the financing of health care under one organizational umbrella -- and the concomitant economic incentives for that organization to provide care efficiently or, at least, more economically. Group Health of Puget Sound provided a prototypical example: The HMO owned and operated its own hospitals and clinics, maintained a staff of salaried physicians, and offered comprehensive coverage to its enrollees so long as they agreed to receive those services exclusively from the HMO's providers. Other HMO-type organizations relied more heavily on contractual relationships with separately organized medical groups or hospitals, but still maintained a much greater degree of control over the care that they financed; in many cases, they also gave providers some sort of financial incentive to control their utilization -- and, therefore, costs.

The popularity of integrating delivery and financing, paired with the pressures to "do something" about the rising costs of health care unleashed an unprecedented wave of innovation and change within the health insurance

71

industry. Much as indemnity insurers and the Blues were forced to emulate one another's practices in the 1950s and, in doing so, blurred the original distinctions between service-benefit policies and indemnity policies, traditional financing entities began offering a variety of "insurance products" and arrangements, virtually eliminating what had previously been fairly clear distinctions between them. By the end of the 1980s, many consumers were being offered an array of options: various types of HMOs, preferred provider organizations, point-of-service option plans, and so on. Some of these arrangements were designed to gain the advantages of integration without the loss of the consumer's "freedom-of-choice" that was inherent in fully integrated HMOs. Others were more obviously designed to appeal to the sentiments of physicians by retaining their "freedom-of-choice" and some form of the fee-for-service reimbursement that had so long been sacramental to the profession. But all were variants on one or more elements that were inherent in the integration of delivery and financing: either limiting the consumer's choice of providers, providing direct or indirect financial incentives to providers to economize, or building in some form of administrative control over the delivery of care. (For a more detailed description of these alternative arrangements and their distribution, see Chapter 2.)

These changes in the financing arrangements also unleashed a second wave of innovation and change among providers in the 1990s. Faced with increased pressure from both government and private payers to accept limits on reimbursement, administrative control over utilization, and other changes in their traditional practices, many individual and institutional providers began forming extended group practices, physician/hospital organizations, and other multi-provider organizations. In some cases, this primarily served to increase their bargaining power with various payers. In other cases, such multi-provider organizations attempted to insulate their participants from the pressure to affiliate with one or more integrated financing arrangements. In some areas, these provider organizations formed their own financing schemes to compete directly with other third party payers.

By the mid-1990s, these changes in the delivery and financing of American health care were being heralded as indicia of a "managed care" revolution. That is to say, driven by both governmental and market pressures to control their costs, both providers and third party payers were attempting, in a wide range of ways, to control or manage the delivery of health care -- in the most fundamental sense of the term. The most visible evidence of this revolution could be found in those areas of the country where HMOs and other integrated arrangements were flourishing and, in a few regions, virtually replacing traditional financing arrangements; but even in those areas where Blue Cross and Blue Shield plans and indemnity insurers retained a significant share of the market, they frequently offered HMO-type options, including "managed care"-type provisions in their traditionally structured policies and, perhaps most importantly, contracting with and reimbursing providers in a manner that reflected a more rigorous "managed care" attitude. The "managed care" revolution also had a dramatic impact on publicly funded programs as well. As described in earlier sections, throughout the 1990s the federal government accelerated its efforts to enroll Medicare beneficiaries in HMOs and other prepaid delivery schemes. At the same time, virtually all states turned to managed care arrangements in their efforts to maintain their Medicaid programs within acceptable budgetary limits; some states also initiated various managed care-type plans to finance health care for the state's uninsured.

By the end of the 1990s, however, managed care had become less of a solution and more of a problem. Although the rates of increase in health care

72

costs for both privately and publicly funded health care did moderate in the mid- to late 1990s, by the end of the decade, it appeared that those costs were beginning to rise more rapidly and experts were projecting even higher rates of increases in the first decade of the 21st century. Apparently the advantages wrought from the adoption of managed care strategies and other changes in the 1990s had run their course. Moreover, the aspect of managed care drawing the most political attention was not its potential for controlling costs but that for denying care and adding a layer of unwanted administrative decision making between patients and their providers. Some insurers predicted that they would soon be marketing "unmanaged" coverage, presumably meaning that they would they would be selling policies more akin to the traditional fee-for-service arrangements that many insurers had abandoned in the early 1990s. Many employers who had previously restructured their employee benefits around managed care plans were experimenting with fixed contribution arrangements, cafeteria plans, and other alternatives. More generally, even those who continued to be enthusiastic about the need for the types of control of health care that are implicit in managed care arrangements, began to distance themselves from the prototypical arrangements around which most managed care plans had been structured in the 1990s and to look to other possibilities for linking the delivery of health care with its financing.

Q. AMERICAN HEALTH CARE IN THE 21ST CENTURY

What American health care will look like in the first decade of the 21st century is impossible to predict. Clearly there have been significant changes in the manner by which American health care is delivered and financed in the last decade. The basic structural arrangements which could be described in rather stable patterns through the 1970s and 1980s were subject to several waves of innovation and an increased level of competition in the 1990s. The net result changed the face of both publicly and privately financed health care in ways that might have been unimaginable several decades ago. There is much reason to believe that both the public and private sector will continue to evolve in this manner in the years to come. The era of the "managed care" revolution could well be the first chapter in a much more fundamental "privately initiated health care revolution," one in which American health care delivery and financing are influenced even more by private market decisions and less by the decisions of state and federal policymakers. On the other hand, such surges of change have characterized American health care before, only to be followed by equally dramatic changes but in quite different and unexpected directions. Just as importantly, while some fundamental elements of American health care have significantly changed in recent years, others have retained their traditional cast. For example, most Americans still receive their health financing through their employment and with the advantages of federal tax exemption. Most conservative theorists have argued that consumer choice, a key element in what they regard as a properly competitive market for health financing arrangements, must be freed from the influences of tax exemption and the employment-linkage, especially if the future is to see a continuation of the privately initiated changes that characterized the last decade. Yet Americans are likely to resist fiercely any effort to change these foundational elements of private financing, however consistent they may be with some of the changes that have already taken place. Similarly, while the American public has apparently agreed to some dramatic changes in both Medicare and Medicaid in the 1990s, it is not clear that that same public will accept further inroads into the manner in which these or other government health programs have traditionally been structured and financed.

73

What makes predictions of these future developments so difficult is what has always complicated both American health policy and its underlying politics: the odd, somewhat contradictory, but strongly held attitudes of Americans about their health care. Americans in the first decade of the 21st century, just as Americans in earlier decades, expect their health care, whether provided through markets or systems or a mix of both, to be accessible, of high quality, and affordable. Americans also have long exhibited a strong egalitarian impulse concerning health care; they are concerned not only with the adequacy of the health care available to them and their families, but with that available to others in their community. Few Americans can express these attitudes in terms of an organized political or economic ideology, or even in terms that acknowledge the conflicts and trade-offs inherent in their expectations. In fact, most Americans can only express these attitudes in anecdotal terms or in terms biased by their own experiences in seeking or providing care, in dealing with various private or public bureaucracies, or, in most recent years, in dealing with the realities of health care that is more and more frequently "managed." But whether their attitudes concerning health care are organized or even consistent, they are strongly held. Whatever else the era of "managed care" has brought to American health care, if Americans perceive the net result as health care denied, "managed care" will go the way of the "Partnership for Health" in the 1960s and Jimmy Carter's "nine percent solution" in the 1970s. Americans may have an inherent distrust of "big government" solutions to what they perceive as problems in health care, but they will not tolerate privately designed alternatives any better if those alternatives fall short of their expectations or run counter to their odd, uniquely American values and attitudes.

The remainder of this textbook will describe American health care in the 21st century in more detail, identify contemporary health care-related problems, and analyze the manner in which our legal and political institutions can and should respond.

74

APPENDIX: CHRONOLOGY OF FEDERAL INVOLVEMENT IN HEALTH CARE

1796 Congress refused to give the federal government authority to quarantine people with contagious diseases.

1798 Congress established the National Marine Health Service (now the Public Health Service) financed by compulsory deductions of 20 cents a month from seamen's wages.

1879 First federal quarantine program established. (Allowed to expire in 1884.)

1887 Public Health Service opened one-room lab in Staten Island marine hospital to do research on bacteria, vaccines, and quarantine techniques; forerunner of National Institutes of Health, 50 years later.

1902 Biologics Control Act enacted to regulate quality of vaccines and sera.

1906 Food and Drug Act enacted to prevent manufacture, sale, or transportation of (harmful) food, drugs, medicine, or liquor.

1908 Federal workmen's compensation law passed; Wisconsin led 10 states in 1911 in passing first implementing legislation.

1912 President Theodore Roosevelt (up for re-election) was first presidential candidate to endorse the concept of national health insurance and wrote it into the Progressive Party's platform; it was formally supported by the American Medical Association.

1912 Children's Bureau established.

1917 Public Health Service facilities authorized to provide medical care to World War I veterans with service-connected disabilities; extended in 1933 to include medical and domiciliary care to all veterans of any war since 1897, regardless of whether disabilities were service connected.

1918 Chamberlain-Kahn Act authorized the first federal grants to states for public health services (for control of venereal disease).

1921 First authorization of the Indian Health Service (as a separate federal program).

1922 Shepard-Towner Act authorized grants for state programs of maternal and children services. (Expired 1931.)

1933 Federal Emergency Relief Administration provided limited medical, dental, and nursing services for the medically indigent.

1935 Social Security Act enacted to provide retirement and death benefits, a federal/state unemployment compensation system, federal

75

grants to states in developing public health programs, and cash benefits to dependent children, the blind, and, in 1952, the disabled. No general health benefits program were included.

1935 Works Project Administration created including projects to construct and improve local hospitals.

1936 Department of Agriculture made medical prepayment plans available to low income farmers who were borrowing from the Federal Security Administration; repealed in 1946.

1937 Railroad Retirement Act enacted, similar to Social Security but amended to include survivors and dependents and to cover maternity and sickness benefits for disabilities.

1938 National Institute of Cancer created.

1939 Survivors' benefits added to Social Security; the word "insurance" introduced into the old-age provisions.

1941 Lanham Act provided for wartime emergency building of hospitals, health centers, and clinics.

1942 National War Labor Board imposed wage freeze, but allowed to exempt increases in the form of fringe benefits including health insurance.

1943 Emergency Maternity and Infant Care Program authorized, administered by Children's Bureau through state health departments, for wives and dependents of military men; first national uniform service program paying for health care provided by private providers; program ended in 1949.

1943 Internal Revenue Service exempted employer-purchased group health insurance from taxable gross income. (Codified in 1954.)

1945 Harry Truman was first president to present an official administration proposal for national health insurance to Congress.

1946 Hospital Survey & Construction Act (Hill-Burton program) enacted to assist states in constructing hospitals; 1954 amendment added long term facilities, rehabilitation centers, and outpatient departments; Hill-Harris amendments of 1964 allowed funding for modernization and use of funds to subsidize planning by voluntary health agencies.

1949 President Truman attempted to coordinate federal social services by forming the Federal Security Agency; President Eisenhower granted it cabinet status as the Department of Health, Education & Welfare in 1953.

1954 Internal Revenue Code amended to exempt employer-purchased health benefits from taxable income.

1956 Government financing of health services extended to military dependents in civilian medical facilities; later named CHAMPUS (Civilian Health & Medical Program of the Uniformed Services).

1960 Federal employees health benefits program authorized.

76

1960 Kerr-Mills program authorized to provide federal matching funds for medical care of elderly public assistance recipients; by 1965 all 50 states had such programs. Program also provided for assistance to aged, "medically indigent" elderly who were not eligible for public assistance.

1962 Migrant Health Act enacted to provide federal funding for health services for migrants.

1963 Social Security Amendments of 1963, 1965 and 1967 assisted states and local health departments by paying up to 75 percent of the costs of various maternal and child health programs.

1963 Health Professions Educational Assistance Act provided first federal subsidy of health professions education; followed by Nurse Training Act of 1964, and Allied Health Professions Personnel Training Act of 1966.

1964 Economic Opportunity Act provided funding for three neighborhood health centers in Boston, New York City & Denver; five others funded in 1965; 1966 amendment provided $50 million to develop Comprehensive Health Service Projects in urban or rural areas of poverty.

1964 Mental Retardation Facilities and Community Mental Health Centers Construction Act enacted.

1965 Medicare and Medicaid authorized.

1965 Appalachian Regional Development Act enacted to fund projects to provide comprehensive health care for the Appalachian poor.

1965 Heart Disease, Cancer, & Stroke Amendments to Public Health Service Act created Regional Medical Programs to provide planning grants and operational grants for projects associated with the diseases listed in act.

1966 Comprehensive Health Planning & Public Health Service Amendments (also known as Partnership for Health Act) provided federal grants for state and area-wide health planning and grants to states to support health services.

1967 Early and Periodic Screening, Diagnosis and Treatment Program (EPSDT) created to provide screening and health services for Medicaid-eligible children.

1967 Federal program authorized to license and regulate clinical laboratories.

1970 Occupational Safety & Health Administration (OSHA) created to establish and enforce worker safety and health standards.

1970 Family Planning Services & Population Research Act enacted to establish nationwide program of family planning and research.

77

1970 Medical Facilities Construction & Modernization Amendments extended Hill-Burton program for three years (over President Nixon's veto.)

1970 Emergency Health Personnel Act established authority for National Health Service Corps.

1971 Comprehensive Health Manpower Training Act authorized $2.9 billion over three years for construction and operation of medical schools and to provide loans and scholarships for students in various health professions.

1971 Economic Stabilization Program (Cost of Living Council) initiated controls on wages and prices including those in hospitals. (Expired in 1974.)

1972 The largest set of Social Security amendments in U.S. history passed by 92nd Congress. 1.7 million disabled added to Medicare eligibility and Medicare expanded to include anyone with end-stage renal disease. Medicare beneficiaries authorized for first time to opt for benefits from an HMO, prepaid group practice, or other capitated scheme. Professional Standards Review Organizations authorized to review medical necessity, quality of care, and cost of Medicare and Medicaid services. Supplemental Security Income program created to federalize cash assistance for the aged, blind, and permanently and totally disabled.

1972 Both presidential candidates (Nixon and McGovern) included broad national health insurance proposals in their party platforms.

1973 Health Maintenance Organization Act provided $375 million in federal subsidies over five years to prepaid group practices; all employers with 25 or more employees providing health insurance as a benefit required to make HMO enrollment available where HMOs exist.

1973-75 Ninety separate bills dealing in some manner with national health insurance were introduced in 93rd Congress.

1974 Employee Retirement Income Security Act (ERISA) enacted; major thrust was regulation of employee pension plans, but also covered "welfare" plans providing benefits for health care, disability, insurance, and other nonwage benefits.

1974 National Health Planning & Resources Act created a system of state and local health planning programs.

1974 National Arthritis Act created the National Institutes of Arthritis, Metabolism, & Digestive Disease.

1976 HMO Act amendments relaxed requirements for HMOs to qualify for federal support; 1978 amendments extended HMO assistance program for three years; in 1981 most restrictive requirements were eliminated.

1976 Health Professions Educational Assistance Act required medical school students who receive federal scholarships to serve a specified time in rural and inner-city areas; required medical schools with teaching hospitals to provide more medical residencies in primary medicine; established authority for Area Health Education

78

Programs (AHECs).

1976 Office of Inspector General created in DHEW to investigate fraud and inefficiency in all DHEW funded programs.

1976 National Consumer Health Information and Health Promotion Act enacted to set national goals for health information and to create various consumer health education programs.

1976 Amendments to federal appropriations for Department of Labor and DHEW programs restrict use of federal funds for abortions. In subsequent years, similar restrictions imposed on Department of Defense and all other federal health programs.

1977 Medicare and Medicaid Anti-fraud & Abuse Amendments to the Social Security Act enacted to mandate uniform reporting of financial data by providers and to upgrade criminal penalties for fraud and abuse.

1977 President's Commission on Mental Health created to review the nation's mental health needs.

1977 Congress enacts legislation delaying the FDA's proposal to ban the artificial sweetener saccharin. (In subsequent years the delay is extended until the FDA proposal is eventually dropped.)

1977 Medicaid and Medicare amendments authorized payments to physician assistants and nurse practitioners in rural and underserved areas.

1978 President Carter issues 10 principles for national health insurance. Implementing legislation presented to Congress in 1979; a number of other proposals are also debated, but no final action taken.

1978 Authorization for federal health planning expires (and program is extended temporarily as a "rider" to the DHEW appropriations legislation).

1980 DHEW split into two cabinet level departments: the Department of Health and Human Services and the Department of Education.

1980 Legislation enacted to create a "voluntary" system of certification for "Medi-Gap" health insurance policies.

1981 Omnibus Reconciliation Act (OBRA) mandated significant reductions in funding and other changes in virtually all federal health programs. Included among changes were the elimination of funding for U.S. Public Health Service hospitals and clinics and the repeal of the entitlement to medical care for merchant seamen (first established in 1798).

1982 Tax Equity and Fiscal Responsibility Act (TEFRA) mandated further reductions in many federal health programs, including Medicaid and Medicare. The PSRO program was replaced with Professional Review Organizations (PRO) program; Medicare mandated as secondary payor to any employer-sponsored health insurance; DHHS required to develop plan for prospective reimbursement of hospitals.

1983 Social Security Amendments (following recommendations by a

79

bipartisan commission) enacted major revisions of Social Security financing. Also included was a mandate for Medicare prospective payment scheme based on diagnostic-related group (DRGs).

1983 Congressional deadlock over future of federal health planning program resulted in expiration of the program's authorization. The program was refunded as part of a continuing resolution -- a practice that was continued until the program was finally eliminated altogether in 1986.

1984 Deficit Reduction Act (DEFRA) included a number of amendments to Medicaid and Medicare designed to limit expenditures. The most notable amendment was a freeze on increases in rates of Medicare physician reimbursement for 15 months and financial incentives to encourage physicians to accept assignment. (The rate freeze/incentives were extended for an additional year in 1985.)

1984 Child Health Assurance Program required states to expand their Medicaid programs to include more low income pregnant women and children.

1984 "Baby Doe" provisions added to legislation funding state child abuse programs.

1984 Legislation enacted to ease distribution of organs for transplant.

1984 Legislation enacted to make generic versions of many expensive brand name drugs more widely available.

1985 Federal support for health professions training reauthorized (at levels far below prior years).

1985 Congress overrides President Reagan's veto of a bill reauthorizing research activities within the National Institutes of Health.

1985 Legislation created to promote development of "orphan drugs." (Reauthorized in 1988.)

1985 Emergency Deficit Control Act ("Gramm-Rudman-Hollings Act") required limits on federal spending and a balanced budget by FY 1991. Medicaid and maternal and child health program exempted from required cuts in spending. Medicare reductions limited to no more than 2 percent per year.

1986 Consolidated Omnibus Budget Reconciliation Act (COBRA) (originally intended for FY 1986) included a number of changes in Medicaid and Medicare and other health programs including:

-- controversial "adjustments" in DRG reimbursement (e.g., raising reimbursement for "disproportionate share" hospitals and reducing reimbursement for medical education);

-- very limited increases in reimbursement for physicians participating in Medicare; a maximum ceiling on reimbursement for nonparticipating physicians serving Medicare patients;

-- federal penalties for hospitals that transfer poor patients or

80

deny care in emergencies;

-- requirement that employers continue to provide health coverage to workers after leaving employment (at the worker's expense) for 18 months and to spouses and dependents following a worker's death or divorce for up to three years.

1986 Sixth Omnibus Budget Reconciliation Act (SOBRA) (for FY 1987) enacted four months following COBRA included further efforts to reduce Medicare spending but also some significant expansion of Medicaid eligibility.

1986 Congress adopted another broad-ranging package of health programs in 1986 (apart from the two reconciliation bills adopted that year); included among these measures were:

-- a system of no-fault compensation for children injured by vaccines;

-- a computerized system of records for physician discipline and malpractice;

-- the final repeal of the authorization for the health planning programs created in 1974;

-- a repeal of most of the federal assistance programs for HMOs.

1986 Legislation enacted reauthorizing direct federal funding for community health centers. (The program had expired in 1984 and had been funded temporarily under a continuing resolution.)

1986 Manufacturers of smokeless tobacco products required to print warning labels on their packages.

1986 President Reagan vetoed legislation to establish a national advisory council on health promotion.

1987 Omnibus Budget Reconciliation Act (OBRA) (for FY 1988) scheduled (over two years) nearly $6 billion in Medicare spending reductions, primarily by limiting increases in hospital and physician reimbursement. Also expanded Medicaid eligibility for (non-welfare- eligible) pregnant women and for children.

1987 National Health Service Corps reauthorized.

1988 Medicare Catastrophic Coverage Act eliminated many cost-sharing requirements for Part A and created new coverage for prescription drugs and other previously excluded services.

1988 Legislation enacted imposing federal standards on virtually all clinical laboratories.

1988 Legislation enacted authorizing over $600 million for AIDS education and testing. A national AIDS advisory commission was also created. (Also included were provisions reauthorizing federal programs providing aid for health professions education, the program to encourage organ transplant, and the program for health care to the

81

homeless.)

1988 Federal programs for community and migrant health care reauthorized.

1988 1973 HMO Act reworked to relax federal regulation of plans and reduce requirements imposed on employers.

1989 Medicare Catastrophic Coverage Repeal Act repealed most of the 1988 "catastrophic" program (except the limits on Medicaid eligibility).

1989 Budget Reconciliation Act of 1989 (for FY 1990) included a series of Medicare reforms, most notably adoption of resource based, relative value scale fee schedule, volume performance standards, and upper limits on balance billing by physicians under Part B. It also included an expansion of Medicaid coverage for pregnant women and for children up through age six in families within 133 percent of the federal poverty level.

1990 Budget Reconciliation Act of 1990 (for FY 1991) included:

-- A series of Medicare reforms intended to save over $40 billion in 5 years including: an increase in the Part B deductible was raised from $75 to $100; annual increases in the Part B premium were scheduled through 1995 (intended to make total premiums equal 25 percent of Part B expenditures); and severe limits on annual increases and other adjustments to Part A and Part B reimbursement;

-- A requirement that states provide Medicaid coverage for all children born after September 30, 1983 by the year 2002;

-- A requirement that the states expand their Part B "buy-in" for poor elderly;

-- Medi-Gap insurance regulation including limits on exclusions for pre-existing conditions, requirements for uniformity in policies, civil penalties for duplicative services, mandatory rebates if policies failed to return specified percentages of each premium dollar, and rules for "simplification" and standardization of policies.

1990 Legislation enacted requiring the overhaul of the FDA program for approving the safety of medical devices (originally authorized in 1976).

1990 National Health Services Corp reauthorized (through 1993).

1990 Program for payment of cost of childhood vaccines and compensation for victims of adverse reactions to vaccinations reauthorized.

1990 First major program of federal support for AIDS-related services authorized (and appropriated $875 million in FY 1991).

1991 Legislation enacted to limit the discretion of the states to obtain their Medicaid matching funds by accepting donations from Medicaid providers or through taxes on providers.

1991 1990 legislation amended to allow drug manufacturers to give

82

discounts to Veteran Affair's hospital without giving same discounts to Medicaid programs.

1992 (No major health care legislation enacted.)

1993 Budget Reconciliation Act of 1993 included various limits on coverage and reimbursement under both Medicare and Medicaid. It also made permanent a child immunization program to cover vaccines for Medicaid-eligible and other uninsured children.

1993 Legislation enacted to allow federal funding of fetal tissue research (effectively lifting prior ban).

1993 Family and Medical Leave Act of 1993 required employers to allow employees to take up to 12 weeks of unpaid leave for birth or adoption of a child or illness of a child, spouse, parent, or the employee.

1994 (No major health care legislation enacted.)

1995 Medicare Select (allowing Medicare recipients to purchase supplemental coverage from managed care plans) authorized.

1995 Self-employed tax deduction for health financing premiums expanded from 25 to 30 percent.

1996 Major revision of federal SSI, food stamps, and AFDC programs enacted, but with only minor changes in Medicaid (although provisions converting Medicaid to a block grant were included in earlier versions of the bill.)

1996 Newborns' and Mothers' Protection Act of 1996 enacted (as a rider on an appropriations bill) regulating certain practices concerning prenatal and delivery services; in particular it prohibited a health plan from restricting inpatient hospital benefits to less than 48 hours following a normal birth or 96 hours following a Caesarian delivery.

1996 Health Insurance Portability and Accountability Act of 1996 enacted requiring private insurers to offer group and, in some cases, individual policies to people who have had prior coverage, prohibiting the use of pre-existing condition exclusions, and imposing other requirements on private health financing arrangements. Other provisions of the legislation authorized up to 750,000 people (over four years) to establish tax deductible medical savings accounts.

1996 "Ryan White Act" providing grants to cities and states for services to AIDS patients authorized (for five years).

1997 Tax Payer Relief and Balanced Budget Act of 1997 added new Part C to Medicare, expanding options for enrollment in managed care plans; scheduled $110 billion (over five years) in reimbursement cost- savings; and set Part B premiums at 25 percent of program costs through FY 2003. Also included were $10 billion in Medicaid spending reductions by limiting reimbursement for "disproportionate share" hospitals, the repeal of the Boren Amendment, and expanded

83

authorization for states' discretion to enroll beneficiaries in managed care plans.

1997 Legislation reorganizing Food and Drug Administration and attempting to streamline the regulatory process for approval of drugs.

1998 Appropriations bill includes rider requiring ERISA governed plans that cover mastectomy to also provide coverage for breast reconstruction.

1999 Balanced Budget Refinement Act included Medicare reimbursement "givebacks" -- a series of modifications in the scheduled reimbursement limits for hospitals, home health agencies, and various other Medicare providers.

1999 Work Incentives Improvement Act included provisions which allow disabled people who lose their Social Security or welfare benefits because they return to work to keep their Medicare or Medicaid eligibility.

84

BIBLIOGRAPHY

Annas, G. J., Judging Medicine (1988).Annas, G. J., The Rights of Patients (2d ed. 1989).Brieger, G., Medical America in the Nineteenth Century: Readings from the Literature (1972).Brieger, G., Theory and Practice in American Medicine (1976).Brown, E.R., Rockefeller Medicine Men (1979).Carlson, R., The End of Medicine (1975).The Committee on the Cost of Medical Care: Medical Care for the American People (1932) (Final report; for all the studies, see Falk et al.).Daniels, N., Just Health Care (1985).Derbyshire, R., Medical Licensure in the United States (1969).Doyal, L., The Political Economy of Health (1979).Earle, A., Surgery in America (2d ed. 1983).Elias, S. & Annas, G. J., Reproductive Genetics & the Law (1987).Evans, R., Strained Mercy: The Economics of Canadian Health Care (1984).Falk, I., Rorem, C., Ring, M., The Costs of Medical Care (1933, rep. 1972).Fein, R., Medical Care, Medical Cost: The Search for a Health Insurance Policy (1986).Flexner, A., Medical Education in the United States and Canada (1910).Freidson, E., Profession of Medicine (1970).Fuchs, V., Who Shall Live? (1974).Fuchs, V., The Future of Health Policy (1993).Grossinger, R., Planet Medicine (rev. ed. 1982).Hackney, R., Rethinking Health Care Policy: The New Politics of State Regulation (1998)Hall, M., Health Care Corporate Law (1993).Harris, R., A Sacred Trust (1966).Illich, I., Limits to Medicine (5th ed. 1976).Lagemann, C., Nursing History: New Prospectives and Possibilities (1983).Law, S., Blue Cross: What Went Wrong? (1974).Law, S. & Polan, S., Pain and Profit: The Politics of Malpractice (1978).Ludmerer, K., Learning to Heal: The Development of American Medical Education (1985).Luft, H., Health Maintenance Organizations (1981).McKeown, T., The Role of Medicine: Dream, Mirage, or Nemesis? (1979).Melosh, B., The Physician's Hand (1982).Navarro, V., Medicine Under Capitalism (2d ed. 1977).A New Approach to the Economics of Health Care (M. Olsen, ed. 1981).President's Commission on the Health Needs of the Nation, Report to the President, Building America's Health (1952).Reed, L., Blue Cross and Medical Service Plans (1947).Reverby, S. & Rosner, D., Health Care in America: Essays in Social History (1979).Rodwin, M., Medicine, Money, & Morals (1993).Roemer, M., Ambulatory Health Services in America: Past, Present, and Future (1981).Rosen, G., Preventive Medicine in the United States (1977).Rosen, G., The Structure of American Medical Practice 1875-1941 (C. Rosenberg ed. 1983).Rosenberg, C., The Care of Strangers: The Rise of America's Hospital System (1987).Rothman, D., Strangers at the Bedside (1991).

85

Smith, P. & Kaluzny, A., The White Labyrinth (1986).Starr, P., The Social Transformation of American Medicine (1982).Stevens, R., American Medicine and the Public Interest (1971).Stevens, R. & Stevens, R., Welfare Medicine in America: A Case Study of the Medicaid Program (1974).Williams, S. & Torrens, P., Introduction to Health Services (4th ed. 1993).Wilson, F. & Neuhauser, D., Health Services in the United States (rev. ed. 1976).Wing, K., The Law & the Public's Health (4th ed. 1995).Vogel, M., The Invention of the Modern Hospital: Boston 1870-1930 (1980).Young, J., The Toadstool Millionaires: A Social History of Patent Medicines in America Before Federal Regulation (1961).

86