OP-ED

The Reagan-Era Health Reform That Scares Both Parties

Twenty-seven years ago, President Ronald Reagan and a Congress split between Republican and Democratic control agreed to a radical new payment scheme for Medicare. The resulting legislation trimmed billions of dollars from the federal budget and caused medical inflation to plummet, yet still maintained quality of care.

Although this stunning achievement led to a permanent change in how both the public and private sector pay for health care, it has gone curiously unmentioned during more than a year of rancorous health reform debate. Nor is it likely to arise at the much-ballyhooed bipartisan summit. The topic simply raises too many squirm-inducing questions. In this instance, conservatives and liberals alike can agree that political discretion is the better part of valor.

For Democrats, the changes in Medicare hospital payments enshrined by the Social Security Amendments of 1983 constitute an unpleasant reminder that reforms targeting cost can be, and have been, successfully  decoupled from those aimed at improving access. Given the public enthusiasm for cost control over access expansion, acknowledging that reality might well deal a fatal blow to decades of liberal efforts to achieve the dream of universal coverage.

For Republicans, however, the reverberations of the Reagan-era Medicare revamp are even more unsettling. The most-revered figure in modern American conservatism agreed to an administered price system that the current guardians of conservative orthodoxy would undoubtedly denounce as socialist, Bolshevik or worse. Even more painfully, the scheme worked. Perhaps most painful of all, Reagan’s reasoning showed a pragmatic view of government much closer to today’s political center than it is to hard-right GOP ideologues.

The 1983 payment change was conceptually simple. Medicare pulled the plug on paying hospitals whatever they billed the government as their costs, plus an additional profit margin piled on. Instead, Medicare paid a fixed price linked to each patient’s clinical condition, or diagnosis-related group (DRG). That price might vary somewhat due to adjustments such as regional wage levels, but it was essentially set in advance; hence the term “prospective payment system” (PPS) to describe the methodology.

As recounted by policy experts Rick Mayes and Robert A. Berenson in their book, “Medicare Prospective Payment and the Shaping of U.S. Health Care“, the effect of prospective payment was dramatic and immediate.  Growth in Medicare hospital payments plummeted from 16.2 percent a year from 1980 through 1983 to just 6.5 percent from 1987 through 1990. Hospitals, no longer paid to pad stays, hurriedly switched gears. Between 1982 and 1988, Medicare hospital days plunged 20 percent.

“Hospitals’ financial health improved with increases in efficiency, and patient outcomes showed no discernible damage,” noted a 2007 Health Affairs review of the Mayes and Berenson book, even as Congress discovered it could use changes in the annual update DRG factor to reduce the federal deficit.

Just as important were the far-reaching changes fomented elsewhere by the Medicare reforms. Reforms of Medicare hospital payment led inevitably to physician payment change. Even more heretically for free-marketeers, the government’s actions spurred a lagging private sector. When hospitals tried to shift costs to private payers, insurers responded to customers’ complaints by tightening oversight of medical utilization and changing  payment in the strategy. The result was that unregulated fee-for-service was replaced by what came to be called “managed care.”

The Reagan administration understood that being for “small government” as a regulator did not mean abandoning efforts to make sure taxpayers got their money’s worth from government-as-purchaser. Prospective payment was the strategy of a prudent purchaser committed to encouraging efficiency. Hospitals were put at financial risk: those who could efficiently deliver care for less than the average price made money; inefficient hospitals lost money. Within that context, DRGs represented deregulation.

That confidence in appropriate use of government power helped the administration withstand a firestorm of criticism when DRGs actually went into effect. Although the term “death panels” was not used, the same idea quickly surfaced. The president of the American Medical Association, for example, declared that doctors were “not going to be allowed to practice medicine…based on their own judgment” and that “rationing of health care” had begun. Other critics spoke of patients discharged “quicker and sicker” to a “no-care zone.”

The other factor that prevented the derailing of DRGs was the bleakness of the status quo. The much-overused word “crisis” genuinely applied. In 1967, Medicare served 19 million beneficiaries and paid $4.7 billion for their care. By 1985, Medicare expenditures had grown 30 times as fast as the population covered, reaching $72.3 billion for 31.1 million beneficiaries. The pain was real, persistent and getting worse.

At the same time, Social Security was literally on the verge of bankruptcy. Faced with that prospect, Congress  had to act. Prospective  payment, with little public notice, was snuck into “save Social Security” legislation, with the provider community threatened with far worse consequences if the deal for DRGs fell apart.

Today, policymakers seem less sensitive to the demands a crisis puts upon us as a nation and more attuned to the arguments advanced by special interests. Even in the extreme example of the 9/11 terrorist attacks,  Congress has been slow to take simple steps to adequately protect chemical plants because of concerns about government regulation. If the vivid memory of the crumpling World Trade Center towers is inadequate
to override ideological concerns, why should more abstract issues, such as the growing numbers of the uninsured, fare any better?

Moreover, we are also quicker than ever to seize upon alarming anecdotes as if they were fact, and we are able to spread those anecdotes instantly via the Web. Even the rumor of short-term pain is unbearable; long-term gain is inconceivable if measured in months or even years. Like DRGs, comparative effectiveness research is a way to use the power of government to promote private sector efficiency. It’s the kind of idea
that centrists from both parties could rally around at a bipartisan summit; after all, it was part of both the John McCain and Barack Obama presidential campaign platforms.

Unfortunately, in today’s political environment the right wing of the GOP is very far from being Ronald Reagan Republicans.

Michael Millenson is a Highland Park, IL-based consultant, a visiting scholar at the Kellogg School of Management and the author of Demanding Medical Excellence: Doctors and Accountability in the Information Age.

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31 replies »

  1. Twenty-seven years ago, President Ronald Reagan and a Congress split between Republican and Democratic control agreed to a radical new payment scheme for Medicare. The resulting legislation trimmed billions of dollars from the federal budget and caused medical inflation to plummet, yet still maintained quality of care.

  2. Why is no one talking about tort reform? As a former nurse I know that many expensive procedures are CYA.

  3. “The electorate can handle the truth and wants to hear it.”
    If that were true for a majority of the “public” then policians would not lie so much. “The truth! You can’t handle the truth!”

  4. Peter: Rest assured. I know Republican politicians have been at their reprehensible worst regarding healthcare legislation, but Democratic members of Congress could do much better than they have.
    In addition, distortion of reality for any reason is unnecessary. It is ultimately always damaging to the interests if the USA electorate. The electorate can handle the truth and wants to hear it.

  5. “too many lies told by all politicians.”
    “Death Panels”? Hopefully you’re including those “politicians.
    “That combined with the ever-present false propaganda on any aspect of the healthcare system that is constantly reinforced by mainstream media.”
    Fox News?

  6. Peter: I agree with you regarding the desired outcome, but politicians should make an effort to be straightforward and honest about reality, rather than make up stories, as seems to be the norm.
    I do not have a very good take on Secretary Sebelius. I assume she is intelligent and knowledgeable about the issues, but also a typically dutiful Cabinet member who is effusive in praise of the “boss” and perhaps too willing to accede to the demands of individuals such as Mr. Emanuel.
    I frankly do not think that the issue is so much lack of attention span on the part of the electorate as it is unwillingness to pay attention due to too many lies told by all politicians.
    That combined with the ever-present false propaganda on any aspect of the healthcare system that is constantly reinforced by mainstream media. The result is more or less complete confusion about the issues among average voters.

  7. “The point is that Democratic politicians – including Secretary Sebelius in her latest pronouncements, likely highly “encouraged” by Rahm Emanuel or similar White House politicos – do harm to any realistic assessment of alternatives to the current healthcare system through this nonsense about the “greed” and “immorality” of the insurers or their executives.”
    Maybe, but insurance rates are the only window insured patients see when it comes to health costs. Americans have shown they don’t want long explanations or complicated discussions about healthcare, they simply don’t have the attention span for it. A big part of the solution is to decouple private insurance from healthcare so that big money payors like Medicare/Medicaid can force all parts of the system to fall inline to better cost/efficiency/quality management.

  8. “It has become increasingly apparent that insurers are simply the most convenient whipping boy for your enmity to the “market economy” in general.”
    There is truth to this statement. In fact the attacks from Democratic politicians which focus on profits, CEO pay, etc. completely miss the point of why private healthcare insurance fails to fulfill a positive role in the healthcare system.
    Anyone who has a decent and fundamental understanding of theoretical – in the sense of simplifying economic models of reality – economics along with an understanding of the basic nature of competitively-determined versus administered markets knows that the problem with private healthcare insurance is in its inherent contradictions. I have pointed this out at various earlier junctures, so not worth repeating any more.
    There is no question about that fact, so what should always and clearly be stressed.
    The point is that Democratic politicians – including Secretary Sebelius in her latest pronouncements, likely highly “encouraged” by Rahm Emanuel or similar White House politicos – do harm to any realistic assessment of alternatives to the current healthcare system through this nonsense about the “greed” and “immorality” of the insurers or their executives.

  9. Look: to make a satisfactory display of one’s caring, egalitarian ethos, one needs a proper target.

  10. I may be one opinion in a sea of millions, but I am so sick of reading about Ronald Reagan and what he meant both positive or negative to American politics. He, to me, is the poster child of puppet presidencies, and I really hope people step back and think what this man really provided for this country. I think in some way he offered some common sense to dealing with issues, but, come on, the man was manipulated by others behind the scenes, and you have to look at his supporters who paint this picture of a man bigger than Lincoln and Washington. And, you know what is more pathetic than Reagan? The fact I am commenting about it at a site that is allegedly focused on health care issues!
    Maybe I missed the point of this posting. But, maybe this site is missing the point of truly trying to reform health care issues. HEY, MAYBE THE EFFORTS TO REFORMING HEALTH CARE ARE BEYOND THE SCOPE OF POLITICIANS! Yeah, and maybe monkeys are prying my anus apart to flee out into the countryside!
    Wayne’s World. Definitely a good movie!

  11. That’s funny, archon, your crowd has no notion that they are all quickly morphing into despised “indigent” beings. Maybe at some point they’ll become deeply disturbed about having to finance their own “indigent” health care, and implode trying to process the circular reference to “indigent”. Would be interesting to see which railroad track they storm at that time.

  12. Is that a crowd I see forming and coming up quickly behind you? But what’s that noise? Good God, man, you’re standing in the middle of a railroad track!

  13. “It has become increasingly apparent that insurers are simply the most convenient whipping boy for your enmity to the “market economy” in general.”
    No, insurers are part of the system you call the “market economy” for healthcare. Clearly “A Look Inside: The Massachusetts Health Reform Law” and how “pricing” has no connection to any reasonable “market forces” shows the whole system deserves my “enmity”.
    “it is not readily apparent why you would propose that we fund insurance coverage for the indigent.”
    No, I propose we fund HEALTHCARE for everyone AND manage the costs, but not necessarily through private insurance. This is not about keeping insurers fat with guaranteed profits and bonuses nor is it about making sure specialists accumulate vaction properties and strip malls or hospital CEOs build their personal vision of the Taj Mahal.
    I’m not proposing we give them better “coverage” in insurance terms, I propose we give them needed healthcare. What treatments would you deny the “indigent”, which is a term that can be applied more and more broadly in healthcare, that you wouldn’t provide anyone else?
    “Surely, more health -care- could be provided more cost-effectively by putting the money directly into the “safety net.” And there wouldn’t be any insurer profits or CEO compensation to get excited about.”
    How “cost effectively” when the system is not concerned about costs? Cost effective for insurers for sure, but not tax payers. All businesses can be cost effective by unloading off their books those costs they deem society should pay for, especially when they lobby politicians to make it law. As long as we frame “healthcare” as “insurance” we won’t address any of these problems because we’ll always try to preserve the function of insurance first, regardless how it inhibits access to healthcare.

  14. No, Peter, the broader question has to be to what extent it is reasonable to expect the self-sufficient to share their income with the indigent. It has become increasingly apparent that insurers are simply the most convenient whipping boy for your enmity to the “market economy” in general. But given your detestation of insurers, it is not readily apparent why you would propose that we fund insurance coverage for the indigent. Unless you load the policies with deductibles and co-pays, you will be giving them better coverage than Medicare recipients. If you give them the same benefits provided by Medicare, they won’t be able (or willing) to fund the gaps (and they are substantial) in coverage. The typical Medicare recipient is paying about $300 a month to fund those gaps. Cover the indigent for everything with no gaps, and you are not only giving them coverage better than that typically provided by employers, but you aggravate the problems that arise when people perceive that their health care is “free.” Surely, more health -care- could be provided more cost-effectively by putting the money directly into the “safety net.” And there wouldn’t be any insurer profits or CEO compensation to get excited about.

  15. “And how many of your workers’s paradises, Peter, fund the opportunity to acquire a decent home for 3% down?”
    I’m sorry archon, I thought this discussion was about healthcare. But it seems that THIS capitalist’s paradise was able to put people into inflated appraised homes who had no business being there (at least with the fraudulent contracts they were hoodwinked into signing) while the lenders bundled the faulty risk to someone else as AAA, then when the ponzi scheme fell apart had taxes from “workers” bail them out and preserve their bonuses while “workers” pensions, jobs and lives were destroyed. Maybe you’ve got an appropriate French phrase for that.

  16. It still appears that the answers to cutting Health Insurance premiums is to starve them.After all, No ONE is ever turned Away from Health Care. Right? Really;How true is that Statement regarding For Profit Facilities ? If it was true, why haven’t more people dropped Private Insurance?
    Health Insurance is different than the operation of Government.However, they share a common thread of being self perpetual and inherently wasteful. Contracts that are agreed to between Insurance and the Providers. Do not have the interests of its subscribers in mind. Also employer based insurance is designed to keep the the subscriber in line;when complaints arise.
    The interesting aspect is the insurance Fraud sections of the contracts that prohibit a provider from charging less than what Inflated insurance Rates would require of a person. Although, I understand that proof of inability to pay for some could be wavered.
    The Failure to provide a Free and open Market Society in Insurance and Health Care. Is exactly, what has caused the U.S. to run nearly Dead Last in quality of Care; among 40 industrialized Nations.

  17. And how many of your workers’s paradises, Peter, fund the opportunity to acquire a decent home for 3% down?

  18. “First among these is the proposition that we can afford to guarantee, to virtually every American, a broad policy of insurance of the sort outlined in HR 3200.”
    Certainly not with the present cost/price/use/sickness structure. That would have to be part of reform. But we can’t guarantee to even insured Americans continued broad coverage if the present cost structure continues. Interesting you use “insurance” instead of “healthcare” as if the two were interchangable. Maybe you could give us your trimmed down version of coverage for the “unwashed masses”.
    “Next, that we can slash the costs of health care by eliminating insurer profits and administrative costs.”
    Do you think hospitals, drug makers or individual medical providers would say the same about their part in the system? I just wish insurers would add value for the profits instead of being glad at taking their quoted 5% off the top of ever increasing health bills. At least providers give us something valuable, if not overpriced, for the money paid.
    “Then there is the thought that we can properly offload onto the insurers the costs of funding the medical needs of the uninsurable.”
    Just give me the cream, we have investors and well bonused execs after all.
    Your pretense would be the assumtion that insurance IS healthcare. Actually insurance, at least in this country, is an obstruction to healthcare.
    “I am, however, “all ears” regarding proposed solutions.”
    There is no “solution”, if you mean a piece of legislation that will get rid of the problem. Healthcare is a constantly changing “problem” where constant management and change is necessary. Even countries that have figured out how to provide healthcare for all their citizens (with or without insurance) at half what the U.S. does are still challenged every day to match need with cost. There are “solutions” working in other countries but this country’s citizenry has decided that they don’t want any solution that will cost them anything, that’s the political problem that needs to be solved first.

  19. Let me (ahem) be perfectly clear about this: I make no pretense to being a health care “wonk.” My occasional comments have been directed, for the most part, to what I see as the more objectionable aspects of the “progressive” proposals before us. First among these is the proposition that we can afford to guarantee, to virtually every American, a broad policy of insurance of the sort outlined in HR 3200. Next, that we can slash the costs of health care by eliminating insurer profits and administrative costs. Then there is the thought that we can properly offload onto the insurers the costs of funding the medical needs of the uninsurable. This is tantamount to expropriation, and would inflict great harm upon the guiltless. I have also made a few comments about the absence of an aggressive strategy to eliminate the abuses identified by Dr.Gawande. Beyond expanding and improving the “safety net,” and approving (with Sen. Gregg) the “indivual mandate,” I otherwise have little to affirmatively propose. I am, however, “all ears” regarding proposed solutions. To return to the topic at hand, as set forth by the OP, I believe it is a bit disingenuous to propose that “comparative effectiveness research” would serve as a catalyst for a “bipartisan” solution, were the Repuplicans not so ornery. Not to rub it in, but I really think that, to get your half loaf, you must now offer more than partisan talking points.

  20. This government is broke. It can guarantee nothing. The future is the past. You’ll have to pay to play. Drop your insurance and keep the cash, if you can. Pay for the little stuff. If you get something big, go to a teaching hospital. Go to the ER as often as need for care. Do not send these people in power the means to control you, your money.

  21. archon41 – But they have. Just take a look at what Paul Ryan is pushing in his budget for Medicare/Medicaid. It is really just what Bush was pushing except for even more reliance on private savings accounts/tax credits for healthcare yet it has all these vagaries about ensuring access to everyone, defining a minimum level of guaranteed benefits, etc. Rest of the stuff is more standard ($250k cap on torts, etc). That basically is a summation of what the House GOP is putting forth on healthcare.
    On other things, there are some of the supply-siders biggest dreams including no capital gains, no estate taxes, and a radically reduced upper tax bracket of 25% which would be the lowest since the income tax rate was enacted.
    As for regulation, there is a ton of stuff missing. Nothing on anything on how to address the issues with increasing food security as the US increasingly imports a rising amount of its food supply and most glaringly almost nothing on financial reform. Nothing on OTC derivatives, proprietary desk trading, increased capital requirements, etc. Just the status quo largely.
    I think it is a far assessment to say that what the House GOP is putting out there is very radical in some ways including some of the biggest shifts in taxation policy in nearly 100 years.

  22. Click on the link below to see and hear the song “Red Party Folly” performed on You Tube by Los Angeles artist Joseph Somers. It is dedicated to the Blue Dog Democrats who are siding with the Republicans to hinder passage of the public health plan. It is sung to the tune of “Red River Valley” and contains sing-along lyrics with bouncing ball.
    http://www.youtube.com/watch?v=skfYpPcn4Nk

  23. The gentleman’s argument is that the “right wing,” having veered so far into extremism as to leave Reagan far to their left, will refuse to rally around “comparative effectiveness research,” presumably because of their abhorrence of anything smacking of “regulation.” That doesn’t seem to me to speak well of the numerous repositories of “progressive” sweetness and light who have expressed skepticism about the results to be expected from “comparative effectiveness research.” To propose this as a real solution to much of anything is, I suggest, a bit much.
    Frank, you would have to have endured the Carter years to understand.

  24. I was born in 1985 so I’m not too familiar with Reagan, but it seems like for such a hero and beloved guy nobody really cared much for his policies.

  25. the old adage..”you get what you pay for” is so true for health care..If the payment system is geared to pay for hospital admissions ,guess what you will get..more admissions..we need to change what we pay for..primary care that includes specialists should be incentived..Hospitals that show a drop in admissions should be transitioned through to the new environment..
    Your point about managed care..money was sucked out of the health care system because insurers ate up the hospitals when negotiating rates..let’s call this revenue shifting from health care to wall street..

  26. Michael:
    I understand where you are coming from but the question remains: how many more years do we have to wait until Congress and CMS develop the political will to fix the underlying problems that are still associated with Medicare PPS? It has been 27 years since the introduction of PPS but we are still waiting for effective solutions (e.g., payment policies that have more teeth than Medicare’s recently enacted “Never Events” policy.) Perhaps you saw last week’s NY Times article on long term acute care hospitals [http://www.nytimes.com/2010/02/10/health/policy/10care.html%5D, a scandal that has been fueled partly by Medicare’s dysfunctional hospital payment system.
    Don’t get me wrong, in 1983 Medicare PPS was a real game changer, just as rotary telephones and Windows 95 were game changers when they were introduced. But they are grossly inadequate for the world we live in today.

  27. PPS was a shock to the system by government as purchaser that radically changed the way doctors and hospitals thought about hospital stays and the way the private sector paid for care and thought about payment.
    It was not a panacea, but it did work. The fact that we did not go on as a nation to better, more nuanced, more quality-based payment schemes is due to the lack of a crisis large enough to overcome the resistance from providers once they figured out how to adjust to prospective payment.
    Getting “average cost,” for example, was enough to cause hospitals that were above average DRG cost to panic initially; putting in lowest cost would have been impossible politically. And that’s the point: politically possible actions that are bold and helpful (if not what we wonks would like as optimal) can succeed with bipartisan support.

  28. bevMD
    I may be wrong on the actual number, but the effect was a huge charge increase. What did you charge? What do you recall? Was that your only critique of my post?

  29. Yes, the introduction of the landmark 1983 Medicare payment scheme “worked” in the sense that it helped reduce the rate of cost growth but it is still a very flawed payment system. Among other problems, Medicare payments are based on the average cost of treatment per DRG, not the lowest cost. And of course, the system still does almost nothing to discourage avoidable hospital re-admissions (the absurdly high re-admission rate for heart failure patients is a good illustration of this problem). You could construct a very compelling critique of the payment system based solely on the PowerPoint slides that Robert Berenson (one of the co-authors of the book cited in this post) has authored over the past 10 years (just Google “Berenson” and “Medicare PPS” and you’ll see what I mean). Which is why I’ve never understood how Berenson (and Mr. Millenson, whose work I generally do respect) apparently still thinks that the Medicare PPS glass is half full rather than half empty.

  30. Uh, MD; I ran a hospital lab and we never charged $100 for a CBC. Don’t let the facts get in the way of your oratory.

  31. Why did the cost grow 30 times faster than the population covered?
    Because the patterns of utilization by patients changed. Doctors did not troll the streets to pull in patients.
    Because Congress hung every benefit under the sun of Medicare like a Christmas tree. Scooters. Home health. PEG tubes. Vegetative life everlasting.
    New and very expensive technology that no one should ever die without. Helpful or not.
    In 1983, due to this same legislation, the charge for a CBC went from $6 to $100. But Medicare only paid for $6.
    Think politics. For the privelege of stealing care, Congress gave permission to charge everyone else more. This is the famous “cost shift”.
    There is always a consequence for political expediance. It usually costs a lot more than is “saved”.

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