A Brief History of Health Care Reform

Healthcare Retrospect Part 2: Skyrocketing Costs and the Emergence of Rate Setting

John J. Dalton, FHFMASenior Advisor Emeritus

1970s - National• 1971 - President Richard M. Nixon proposes

limited health insurance reform—a private health insurance employer mandate and federalization of Medicaid for the poor with dependent minor children.• 1972 - Nixon signs the Social Security

Amendments of 1972 extending Medicare to those under 65 who have been severely disabled for over two years or have end stage renal disease (ESRD), and gradually raising the Medicare Part A payroll tax from 1.1% to 1.45% in 1986.

1970s - National• 1974 - Nixon proposes more comprehensive health

insurance reform—an employer mandate to offer private health insurance and replacement of Medicaid by state-run health insurance plans available to all with income-based premiums and cost sharing. Opposed by the AMA, it also drew criticism from labor and seniors due to its cost-sharing provisions.• 1976 - Democratic presidential candidate Jimmy Carter

proposes health care reform that includes key features of Senator Ted Kennedy's universal national health insurance bill. Three years later, a more limited proposal to support an employer mandate to provide catastrophic-only private health insurance and enhancement of Medicare by adding catastrophic coverage was abandoned due to skyrocketing health care costs and the deteriorating economy.

1970s - New Jersey• 1971 – Under pressure due to rising costs, Republican

Governor William Cahill enacts the Health Care Facilities Planning Act, establishing a Certificate of Need planning process, and authorizing the Departments of Health and Insurance to set inpatient payment rates for Blue Cross and Medicaid.• Initially, the Department of Health delegates rate setting

to the New Jersey Hospital Association, and a “budget review” process is set up.• Two years in, NJPIRG issues a blistering report describing

NJHA’s process as “the fox guarding the chicken coop,” and the state is directed to take over the rate-setting process.

1970s - New Jersey• September 1974 - Haskins & Sells (now Deloitte) is

awarded a contract to implement a cost reporting and rate setting system to set 1975 rates for New Jersey’s hospitals. John Dalton is assigned as Project Manager to get it done, working for Sister Cathleen Maloney, SC, CPA, Chief of the Rate Setting Program.• January 1975 – hospital cost reporting (SHARE, now

Ch. 160) and rate setting system is implemented, and inpatient per diem payment rates set for 108 acute care hospitals. Hospitals complain that the system does not adequately reflect their uniqueness and advocate for change.

1970s - New Jersey• 1976 – following presentations by Professors John

Devereaux Thompson and Robert Fetter of Yale University, New Jersey applies for a Medicare Sec. 1115 waiver to implement an inpatient payment system for all payors based on Diagnosis-Related Groupings (DRGs). • With a $4M grant, the Medicare waiver and enabling

legislation (Chapter 83), New Jersey began implementing the country’s first prospective payment system where payment per inpatient case was based on illness primarily as defined by specific ICD-9 diagnosis and procedure codes.• Clinical information was merged with other information,

including, patient demographic data, to be "grouped" into the applicable DRGs.

1970s - New Jersey

An early schematic depicting the process of arriving at a DRG assignment. Initially, there were 383 DRGs in 25 Major Diagnostic Categories (MDCs).

1970s - New Jersey• Hospitals advocated for inclusion of all

uncompensated care in the prospective payment rates, both charity care (can’t pays) and bad debt (won’t pays). DRGs went live beginning in 1979 with both included as elements of allowable cost. • Although payment per case incentivized

hospitals to focus on reducing length of stay, inclusion of bad debt as an element of allowable cost ultimately led to the 1989 loss of the Medicare waiver and the 1993 court decision in favor of ERISA plans that deregulated payment rates.

1980s• 1983 – DRGs go national as Medicare implements its Inpatient

Prospective Payment System (IPPS); refinements continue to be made as hospitals are paid on a per case basis for inpatient care.

• 1985 – after “60 Minutes” broadcasts an episode titled "The Billfold Biopsy" about patient dumping at Parkland Medical Center, the Texas legislature passes a law requiring counties to provide for the health care of indigent residents. 20 states pass similar measures.

• 1986 - Congress passes the Emergency Medical Treatment and Active Labor Act (EMTALA) requiring that all patients seeking care in an ER be evaluated and treated until stabilized before any transfer. The hospital to which a stabilized patient is to be sent must agree to accept the patient (who must consent to the transfer if possible) and adequate medical records must accompany the patient.

1980s

• 1986 – In his State of the Union Address, President Ronald Reagan proposes expansion of Medicare to cover catastrophic illnesses.• 1988 – With near unanimous ayes, Congress passes the

Medicare Catastrophic Coverage Act, limiting out-of-pocket payments to $2,000/yr. for inpatient care. The expanded coverage would be funded by a $4.92/month Part A premium increase and higher premiums for seniors earning more than $35,000/yr.• 1989 – faced with strong opposition from WOOPies (Well-

Off Older Persons), both the House and Senate voted overwhelmingly to repeal it just 18 months after enactment.

1990s• 1992 – Presidential candidate Bill Clinton

campaigns heavily on health care reform. After taking office, he appoints First Lady Hillary Clinton to head up a multifaceted task force to devise a plan.• 1993 - the Jackson Hole Group - about 100

academics; executives from the insurance, hospital and pharmaceutical industries; physicians; representatives of business and assorted policy makers – produces a complex proposal for “managed competition” to provide universal health care for all Americans.

1990s

Bogged down by its complexity and opposed by the health insurance industry’s “Harry & Louise” TV ads, HR 1200, the Health Security Act was DOA when it reached Congress.

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