Reagan, Deregulation and America’s Exceptional Rise in Health Care Costs

The following originally appeared on The Upshot (copyright 2018, The New York Times Company). Research for this piece was supported by the Laura and John Arnold Foundation.

Why did American health care costs start skyrocketing compared with those of other advanced nations starting in the early 1980s?

At the same time this was happening, American longevity gains were failing to keep up with peer countries. In addressing these twin mysteries in a recent article, experts suggested two main reasons: The United States didn’t impose the same types of government cost controls on health care that other nations did, and we invested less in social programs that also promote health.

Many readers have since commented that it had to do with the Reagan-era zeitgeist, or increasing obesity. In the intervening weeks, I have spoken with many more health care experts — about their ideas as well as those of readers — and several, while believing the article essentially covered the answers, offered intriguing new observations.

The 1980s divergence in health costs, some readers and experts observed, coincided with a broad push toward deregulation.

Gary Gaumer, an associate professor at Simmons College School of Business, pointed to changes in how hospitals and doctors were paid. Before the early 1980s, payments by Medicare and other insurers were tied to costs. If it cost a hospital, say, $5,000 for a patient’s surgery, that’s what the hospital was paid, plus a bit more for reasonable profit.

But then payers (private insurers and government health care programs like Medicare) began to shift financial risk to providers like hospitals and doctors. It started with a law that began affecting most hospitals in 1983, changing how Medicare paid hospitals to a fixed price per visit, regardless of the actual costs. This approach later spread to other Medicare services and other payers, including private insurers. If providers could get costs down, they made money. If they couldn’t, they lost money.

“Hospitals and other providers began to behave more like businesses,” Mr. Gaumer said. “And the culture of health care delivery began to change.”

To lessen risk, hospitals sought revenue at every turn, starting new programs and offering new services — such as providing new outpatient services that previously involved longer hospital stays. Health care organizations became more concerned with growing in scale to absorb the higher level of risk, which helped push health care spending ever higher.


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