INTRODUCTION
THE FOUR MAJOR ACTORS
The health care sector of the nation’s economy is a 3 trillion dollar system that finances, organizes, and provides health care services for the people of the United States. Four major actors can be found on this stage (Table 16-1).
The purchasers supply the funds. These include individual health care consumers, businesses that pay for the health insurance of their employees, and the government, which pays for care through public programs such as Medicare and Medicaid and through various tax subsidies. All purchasers of health care are ultimately individuals, because individuals finance businesses by purchasing their products and fund the government by paying taxes. Nonetheless, businesses and the government assume special importance as the nation’s organized purchasers of health care.
The insurers receive money from the purchasers and pay the providers. Traditional insurers take money from purchasers (individuals or businesses), assume risk, and pay providers when policyholders require medical care. Yet some insurers are the same as purchasers; the government can be viewed as an insurer or purchaser in the Medicare and Medicaid programs, and businesses that self-insure their employees can similarly occupy both roles. (In previous chapters, the term “payer” refers to both purchasers and insurers.)
The providers, including hospitals, physicians, Accountable Care Organizations (ACOs), nurses, nurse practitioners, physician assistants, pharmacists, social workers, nursing homes, home care agencies, and pharmacies, among others, actually provide the care. While health maintenance organizations (HMOs) are generally insurers, some are also providers, owning hospitals and employing physicians.
The suppliers are the pharmaceutical, medical supply, and computer industries, which manufacture equipment, supplies, electronic health records, and medications used by providers to treat patients.
Insurers, providers, and suppliers make up the health care industry. Each dollar spent on health care represents an expense to the purchasers and a gain to the health care industry. In the past, purchasers viewed this expense as an investment, money spent to improve the health of the population and thereby the economic and social vitality of the nation. But over the past 40 years, a fundamental conflict has intensified between the purchasers and the health care industry: The purchasers wish to reduce, and the health care industry to increase, the number of dollars spent on health care. We will now explore the changing relationships among purchasers, insurers, providers, and suppliers.
THE YEARS 1945 TO 1970: THE PROVIDER–INSURER PACT
Independent hospitals and small private physician offices populated the US health delivery system (see Chapter 6). Some large institutions combined hospital and physician care (e.g., the Kaiser–Permanente system, the Mayo Clinic, and urban medical school complexes), but these were the exception (Starr, 1982). Competition among health care providers was minimal because most geographic areas did not have an excess of facilities and personnel. The health care financing system included hundreds of private insurance companies, joined by the governmental Medicare and Medicaid programs enacted in 1965. The United States had a relatively dispersed health care industry.
Bert Neighbor was a 63-year-old man, who developed abdominal pain in 1962. Because he was well insured under Blue Cross, his physician placed him in Metropolitan Hospital for diagnostic studies. On the sixth hospital day, a colon cancer was surgically removed. On the 15th day, Mr. Neighbor went home. The hospital sent its $1,200 bill to Blue Cross, which paid the entire bill. In calculating Mr. Neighbor’s bill, Metropolitan Hospital included part of the cost of the 80-bed new building under construction.
At a subsequent meeting of the Blue Cross board of directors, the hospital administrator (also a Blue Cross director) was asked whether it was reasonable to include the cost of capital improvements when preparing a bill. Other Blue Cross directors, also hospital administrators with construction plans, argued that it was proper, and the matter was dropped. In the same meeting, the directors voted a 34% increase in Blue Cross premiums. Sixteen years later, a study revealed that the metropolitan area had 300 excess hospital beds, with hospital occupancy down from 82 to 60%.
A defining characteristic of the health care industry was an alliance of insurers and providers. This provider–insurer pact was cemented with the creation of Blue Cross and Blue Shield, the nation’s largest health insurance system for half a century (see Chapter 2). Blue Cross was formed by the American Hospital Association, and Blue Shield was run by state medical societies affiliated with the American Medical Association. In the case of the Blues, the provider–insurer relationship was more than a political alliance; it involved legal control of insurers by providers. As in the example of Metropolitan Hospital, the providers set generous rules of payment, and the Blues made the payments without asking too many questions (Law, 1974). Commercial insurers usually played by the same payment rules.
By the 1960s, the power of the provider–insurer pact was so great that the hospitals and Blue Cross virtually wrote the provider payment provisions of Medicare and Medicaid, guaranteeing that physicians and hospitals would be well paid (Law, 1974). With open-ended payment policies, the costs of health care inflated at a rapid pace.
The disinterest of the chief organized purchaser (business) stemmed from two sources: the healthy economy and the tax subsidy for health insurance. From 1945 through 1970, US business controlled domestic and foreign markets with little foreign competition. Labor unions in certain industries had gained generous wages and fringe benefits, and business could afford these costs because profits were high and world economic growth was robust (Kuttner, 1980; Kennedy, 1987). The cost of health insurance for employees was a tiny fraction of total business expenses. Moreover, payments by business for employee health insurance were considered a tax-deductible business expense, thereby cushioning any economic drain on business (Reinhardt, 1993). For these reasons, increasing costs generated by providers and paid by insurers were passed on to business, which with few complaints paid higher and higher premiums for employees’ health insurance, and thereby underwrote the expanding health care system. No countervailing forces put the brakes on the enthusiasm that united providers and the public in support of a medical industry that strived to translate the proliferation of biomedical breakthroughs into an improvement in people’s lives.
THE 1970S: TENSIONS DEVELOP
Jerry Neighbor, Bert Neighbor’s son, developed abdominal pain in 1978. Because Blue Cross no longer paid for in-hospital diagnostic testing, his physician ordered outpatient x-ray studies. When colon cancer was discovered, Jerry Neighbor was admitted to Metropolitan Hospital on the morning of his surgery. His total hospital stay was 9 days, 6 days shorter than his father’s stay in 1962. Since 1962, medical care costs had risen by approximately 10% per year. Blue Cross paid Metropolitan Hospital $460 for each of the 9 days Jerry Neighbor spent in the hospital, for a total cost of $4,140. The Blue Cross board of directors, which in 1977 included for the first time more business than hospital representatives, submitted a formal proposal to the regional health planning agency to reduce the number of hospital beds in the region, in order to keep hospital costs down. The planning agency board had a majority of hospital and physician representatives, and they voted the proposal down.
In the early 1970s, the United States fell from its postwar position of economic dominance, as Western Europe and Japan gobbled up markets (not only abroad but in the United States itself) formerly controlled by US companies. The United States’ share of world industrial production was dropping, from 60% in 1950 to 30% in 1980. Except for a few years during the mid-1980s, inflation or unemployment plagued the United States from 1970 until the early 1990s.
The new economic reality was a critical motor of change in the health care system. With less money in their respective pockets, individual health care consumers, business, and government became concerned with the accelerating flow of dollars into health care. Prominent business-oriented journals published major critiques of the health care industry and its rising costs (Bergthold, 1990). These developments produced tensions within the health industry itself.
Faced with Blue Cross premium increases of 25 to 50% in a single year, Blue Cross subscribers protested at state hearings in eastern and midwestern states and challenged hospital control over Blue Cross boards (Law, 1974). Some state governments began to regulate hospital construction, and a few states initiated hospital rate regulation. The federal government established a network of health planning agencies, in an attempt to slow hospital growth. Thus, the purchasers took on an additional role as health care regulators. But the health care industry resisted these attempts by purchasers to control health care costs. Medical inflation continued at a rate far above that of inflation in the general economy (Starr, 1982).
Nonetheless, these early initiatives from the purchasers made an impact on the provider–insurer pact. As pressure mounted on insurers not to increase premiums, insurers demanded that services be provided at lower cost. Blue Cross legally separated from the American Hospital Association in 1972 (Law, 1974). State medical societies were forced to relinquish some of their control over Blue Shield plans. Conflicts erupted between providers and insurers as the latter imposed utilization review procedures to reduce the length of hospital stays. Hospitals, which had hitherto purchased the newest diagnostic and surgical technology desired by physicians or their medical staff, began to deny such requests because insurers would no longer guarantee their reimbursement. Moreover, the glut of hospital beds and specialty physicians, which had been produced by the attractive payments of the 1960s and the influence of the biomedical model on medical education (see Chapter 5), turned on itself as half-empty hospitals and half-busy surgeons began to compete with one another for patients. Strains were showing within the provider–insurer pact. But major change was awaiting the arrival of the powerful purchaser: business.
THE 1980S: THE REVOLT OF THE PURCHASERS
In 1989, Ryan Neighbor, Jerry Neighbor’s brother, became concerned when he noticed blood in his stools; he decided to see a physician. Six months earlier, his company had increased the annual health insurance deductible to $1,000, which could be avoided by joining one of the HMOs offered by the company. Ryan Neighbor opted for the Blue Cross HMO, but his family physician was not involved in that HMO, and Mr. Neighbor had to pick another physician from the HMO’s list. The physician diagnosed colon cancer; Ryan Neighbor was not allowed to see the surgeon who had operated on his brother but was sent to a Blue Cross HMO surgeon. While Mr. Neighbor respected Metropolitan Hospital, his surgery was scheduled at Crosstown Hospital; Blue Cross had refused to sign a contract with Metropolitan when the hospital failed to negotiate down from its $1,800 per diem rate. Ryan Neighbor’s entire Crosstown Hospital stay was 5 days, and the HMO paid the hospital $7,500, based on its $1,500 per diem contract.
The late 1980s produced a severe shock: The cost of employer-sponsored health plans jumped 18.6% in 1988 and 20.4% in 1989 (Cantor et al., 1991). Between 1976 and 1988, the percentage of total payroll spent on health benefits almost doubled from 5% to 9.7% (Bergthold, 1991). In another development, many large corporations began to self-insure. Rather than paying money to insurance companies to cover their employees, employers increasingly took on the health insurance function themselves and used insurance companies only for claims processing and related administrative tasks. In 1991, 40% of employees receiving employer-sponsored health benefits were in self-insured plans. Self-insurance placed employers at risk for health care expenditures and forced them to pay more attention to the health care issue (Bergthold, 1990). Business, the major private purchaser of health care, threw its clout behind managed care, particularly HMOs, as a cost-control device. By shifting from fee-for-service to capitated reimbursement, managed care could transfer a portion of the health expenditure risk from purchasers and insurers to providers (see Chapter 4).
Individual health care consumers, in their role as purchasers, also showed some clout during the late 1980s. Because employers were shifting health care payments to employees, labor unions began to complain about health care costs, and major strikes took place over the issue of health benefits. More than 70% of people polled in a 1992 Louis Harris survey favored health care cost controls. The growing tendency of private health insurers to reduce their risks by dramatic premium increases and policy cancellations for policyholders with chronic illnesses created a series of horror stories in the media that turned health insurance companies into unpopular institutions.
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