The Rise in Medical Expenditures (6)

What events occurred during the 1980s in both the public and private sectors to make the delivery of medical services price competitive?

The HMO Act of 1974 legitimized HMOs; the lifting of restrictive federal qualifications in the 1980s allowed HMOs to flourish.  Meanwhile, federal subsidies to medical schools increased the supply of physicians and exerted downward pressure on prices. The introduction of DRG payments incented hospitals to reduce length of stay and to monitor physician practices that increased costs.

Meanwhile, as the United States emerged from a recession, businesses eager to continue their recovery pressured insurers to better control the cost and use of services. Other practices, such as increased deductibles and copayments, prior authorization and length-of-stay reviews, and application of antitrust laws also contributed to a reduction of prices.

The Rise in Medical Expenditures (4-5)

Why were HMOs and managed care not more prevalent in the 1960s and 1970s?

Organized medicine’s success in including the concept of free choice of provider along with state restrictions retarded the development of HMOs. HMOs preclude their enrollees from choosing any physician in a community, which is a violation of the free choice concept. The government thus could not make capitation payments to HMOs, further entrenching fee-for-service as the primary form of reimbursement.

What have been the federal government’s choices to reduce the greater-than-projected Medicare expenses?

Increased Medicare expenses left the government with three choices: (1) Raise the Medicare payroll tax and income taxes on non-elders; (2) require elders to pay higher premiums along with increased deductibles and co-payments; (3) reduce payments to hospitals and physicians. Although each risks antagonizing an important constituency, government efforts have focused on reducing payments. Some policies (ending free choice of provider and increasing the supply of physicians, requiring acceptance of either all or no Medicare patients) worked better than others (utilization review, restriction on investment in new facilities and equipment, limiting fee increases).

Next: What events occurred during the 1980s in both the public and private sectors to make the delivery of medical services price competitive?

Source: Health Policy Issues: An Economic Perspective (Feldstein)

The Rise in Medical Expenditures (2-3)

Why has employer-paid health insurance been an important stimulant of demand for health insurance?

The high inflation rate of the 70s began pushing employees into upper tax brackets. Employers responded by supplanting salary increases with additional health insurance, which is not taxable. This had the effect of stimulating demand and increasing prices.

How did hospital payment methods in the 1960s and 1970s affect hospitals’ incentives for efficiency and investment policy?

Medicare’s cost-plus-2% reimbursement for services gave hospitals little incentive for efficiency and great reason to expand services even if that meant duplicating services available in nearby hospitals. Meanwhile, physicians pressured hospitals to invest in new technology so that they would not have to refer patients elsewhere, and possibly lose them. Typically, patients covered by hospital insurance were hospitalized for diagnostic workups. Less expensive outpatient services were usually not covered.

Next: Why were HMOs and managed care not more prevalent in the 1960s and 1970s?

Source: Health Policy Issues: An Economic Perspective (Feldstein)

The Rise in Medical Expenditures (1)

Paul J. Feldstein is Professor and Robert Gumbiner Chair in Health Care Management at the Paul Merage School of Business, University of California-Irvine. Feldstein has written six books and over sixty articles about health care, including Health Policy Issues: An Economic Perspective, a standard text in Public Health and Health Care Administration programs. Over the next few months, HealthMatters will publish responses to the discussion questions in Professor Feldstein's book, starting with:

What are some of the reasons for the increase in demand for medical services since 1965?

A) Medicare lowered out-of-pocket prices for elders, leading to an increase to an increase in demand for hospital and physician services.

B) In the late 1960s and 1970s, growth in income, the high marginal tax rate, and inflation (which pushed people into higher tax brackets) stimulated growth in private insurance. Employers took advantage of a tax subsidy to provide more before-tax insurance, which in turn stimulated demand.

C) As out-of-pocket expenses declined, patient incentive to worry about price declined, thus increasing use of services.

D) Advances in medical technology not only allowed patients with previously untreatable diseases hope for recovery, it increased their use of medical services.

E) The arrival of new diseases (such as AIDS).

Next: Why has employer-paid health insurance been an important stimulant of demand for health insurance?