Home | Business News | Browse by Publication | R | Regulation

The competitive revolution: recent efforts to rationalize health care are now facing a political backlash. (Health & Medicine).

Article Excerpt
IN THE LAST 25 YEARS, U.S. HEALTH CARE AND health policy have evolved in surprising and fascinating ways. The main surprise was the competitive revolution in health care markets, stimulated by subtle, unrelated policy changes and the rapid growth of managed care. The grand health care reform plans, such as the health planning initiatives of the 1960s and the Clinton administration's attempt at national health insurance, turned out to be surprising failures.

The grand reform plans were motivated partly by a belief that people consume so much medical care that a significant fraction has no real benefit. From that perspective, substantial reductions in health care could enhance efficiency, even if done in a fairly crude way. But there is increasing evidence that recent technological progress, especially for pharmaceuticals, has cost-effectively increased life expectancy. Even though the United States spends a lot on health care, spending more may not be nearly so inefficient as was once thought.

The last five years have not only been characterized by a large increase in expenditures on pharmaceuticals but also growing state regulation of health insurance, particularly managed care. That is part of a general backlash, supported by organized medicine, many politicians, and the news media, against the competitive revolution. Future developments may include expanded federal regulation (the "Patient's Bill of Rights") and physician collusion.

IN THE BEGINNING

U.S. health care has always been heavily regulated, especially since the rise of organized medicine in the early twentieth century. By the 1930s, organized medicine had effective control of physician supply. Further, it was able to restrain competition and discourage innovative, pro-competitive health plans.

Early in the twentieth century, regulation of health care was not so important because health care was not terribly effective. Indeed, some medical historians believe that medical care was, on balance, harmful to health until about 1910. In any case, care was inexpensive and insurance was rare.

Tax subsidies and technology That changed with World War II, which brought high income taxes and wage controls. Employers added health insurance to evade the wage controls. Adding further impetus, in 1943 the IRS held that employer-provided health insurance premiums were nontaxable. The enormous tax subsidy of health insurance caused it to soar in popularity. The tax subsidy continues today as a major cause of high health care costs and inefficiency.

Over the same time period, medical care has become more productive, with the introduction of penicillin in 1939, followed by the streptomycin family of antibiotics. Technical progress has continued and accelerated in recent years.

As a result of the tax subsidy, insurance, and technical progress, spending on health care grew rapidly until the early 1990s. However, from 1993 through 1999, health care spending remained almost constant -- at about 13 percent of GDP. Rapid growth of managed care, leading to what I call the competitive revolution, is widely credited with that pause.

Hospital planning The first major initiative of the postwar period was the 1966 introduction of public health insurance -- Medicare and Medicaid. Naturally, the programs increased health care spending. At about the same time, the tradition of local hospital planning and regulation reached its zenith. A few years later, hospital planning and cooperation (or collusion) became national policy under the 1974 National Health Planning and Resources Development Act (NHPRDA).

There is a long history of collusion and cooperation among hospitals, partly nurtured by local hospital planning agencies. For example, in the 1980s, planners in Delaware bragged that a low hospital bed-to-population ratio "has been achieved through the voluntary cooperation and joint planning efforts among Delaware hospitals." Collusion among hospitals typically focuses on easily observable elements of non-price competition, such as the number of beds or the services offered, rather than on prices. For example, in 1975 the three Modesto, Calif., hospitals agreed to allocate several services among themselves.

Entry limitation for hospital care has a long history. In many locales, the existing hospitals have long cooperated through formal or informal local hospital planning committees. Physicians, the hospitals themselves, and major donors dominated the committees, so when the committees disapproved, it was difficult for nonprofit hospitals to enter or expand. Also, the planning groups generally opposed entry...