Part 3. A Brief History of Health Care Regulation

For the first roughly seventy years of the last century health care services were regulated primarily by health care organizations themselves (internal hospital medical review committees, hospital industry controlled accreditation agencies-e.g. Joint Commission on the Accreditation of Hospitals and Health Facilities), and state Medical Examining Boards (largely controlled by physicians). The single exception to this rule was the Hill-Burton Act of 1946 which included a degree of federal planning within a program designed to increase the number and improve existing hospital facilities in the United States. Except for this act, federal or state government regulation directed at this sector of the economy was virtually non-existent. Until about 1970 suggesting federal or state regulation of health care organizations was considered “heretical”. (Lawrence Brown, Health Affairs, January 1992)

After the establishment of Medicare and Medicaid in 1965 federal expenditures for health care rose significantly. In 1974 the Congress passed the Health Resources and Planning Development Act of 1974. This federal law replaced the planning provisions in the Hill-Burton law and added significant new regulatory programs. In the panoply of health care regulation which began after 1970 the HRPDA was perhaps the most important. This federal law established Health Systems Agencies throughout the United States. Any hospital that desired to develop a capital project or new service that would cost more than about $250,000 needed to submit an application to a local Health Systems Agency (HSA). The HSA was federally funded but was comprised of a board made up of local community members. The board was prohibited from having a majority of providers. The HSA also had a paid staff that would review the applications and make recommendations to the board regarding local projects. If a particular project was approved it was granted a Certificate of Need (“CON”). Without this approval any hospital who expended funds would not receive Medicare or Medicaid payments. Of course, with the election of the Reagan administration in 1980, federal regulatory activities fell out of favor. “Market” approaches were preferred but without much attention being paid to whether or not competitive markets were desirable or even feasible in health care. In any event, it took the Reagan administration only until 1986 to eliminate the provisions of the HRPDA of 1974 (Miller, Keith, “Federal Programs Set to Expire: The Case of Health Planning”: Public Administration Review, May/June 1988).

At this same time (late 1970s through late 1980s) many states, including Wisconsin, established rate regulation of hospitals. Rate regulation in Wisconsin was voluntary with the Wisconsin Hospital Rate Review Committee (“WHRRC”) from about 1975 until July 1985. In 1983 Tony Earl was elected Governor succeeding Lee Dreyfus. Earl’s administration promoted the development of the Wisconsin Hospital Cost Review Commission (“WHCRC”). Legislation was passed by the Earl Administration to create the WHCRC effective July 1, 1985. Governor Earl was defeated in his attempt for re-election in 1986. Tommy Thompson succeeded Earl and the Legislature eliminated the WHCRC within six months of taking office in 1987. Since that time, Wisconsin hospitals were free to raise prices and make capital expenditures without any public oversight. Wisconsin was the first to end rate regulation of hospitals; however, many states followed Wisconsin’s lead. At the present time only the state of Maryland retains any form of rate regulation of hospitals. (John McDonough, Health Affairs, Jan/Feb 1997).

What happened? In a word: Health Maintenance Organizations. The Nixon Administration created the HMO Act of 1973 to build on a model that had developed during the Second World War by industrial organizations like the Kaiser Shipbuilding Company (Kaiser Permanente Health Care Program). They were considered to be a “market-oriented” approach to the problem of health cost inflation. Examining the HMO movement in any detail is beyond the scope of this brief outline of health regulation. The hospital and medical establishments viewed HMOs as a threat to their hegemony in determining what consumers would pay for their services and how those services would be delivered. Consumers also rebelled against the limitations (e.g. referrals, pre-authorizations, and provider networks) that HMOs used to attempt to limit cost increases. For the most part the only remaining vestige of significant HMO involvement in the Wisconsin marketplace is Dane County where the State Employee Trust Fund (“ETF”) has largely prevented the destruction of the HMO model. However, it is not clear whether or not the Dane County experience, though commendable, delivers the kind of cost containment that is required for economic sustainability.

What can we conclude from this very brief overview? Federal and state governments have made several, noble attempts to slow the rise of health expenditures without changing the underlying perverse incentives. Every one was eliminated in favor of ill-designed and poorly executed strategies that favored private-public hybrids for a product that (from Part 1 of this series) doesn’t meet the criteria for production as a purely private good or service. Where have these private-public hybrid solutions led us? On the demand side they have resulted in high deductible health plans, dramatically increasing copayments and deductibles for consumers, and unsustainable insurance premium increases for consumers, businesses and governments. On the supply side it has resulted in tremendous consolidation of hospitals and physicians into huge organizations that exercise unchallenged authority over some of the largest expenditures that governments, businesses and individuals will ever make. In short, they have led us into a tremendous mess.