The origins, development, and passage of medicare's revolutionary prospective payment system

Journal of the History of Medicine and Allied Sciences

Volumn 62, Issue 1, 2007, Pages 21-55

  Mayes, Rick ^a  

^a UNIVERSITY OF RICHMOND   (United States)

Author keywords

Carter; Diagnosis related groups (DRGs); Hospitals; Medicare; Nixon; Prospective payment; Reagan; Social security

Indexed keywords

ARTICLE; COST; DIAGNOSIS RELATED GROUP; ECONOMICS; HISTORY; HOSPITAL COST; HUMAN; LEGAL ASPECT; MEDICARE; NATIONAL HEALTH INSURANCE; POLITICS; PROSPECTIVE PAYMENT; SOCIAL SECURITY; UNITED STATES;

BLUE CROSS; COSTS AND COST ANALYSIS; DIAGNOSIS-RELATED GROUPS; HISTORY, 20TH CENTURY; HOSPITAL COSTS; HUMANS; MEDICARE; NEW JERSEY; POLITICS; PROSPECTIVE PAYMENT SYSTEM; SOCIAL SECURITY; UNITED STATES;

EID: 33845222538     PISSN: 00225045     EISSN: 14684373     Source Type: Journal    
DOI: 10.1093/jhmas/jrj038     Document Type: Article

References (168)

1. See Theodore Marmor, Political Analysis and American Medical Care (Cambridge: Cambridge University Press, 1983), 61-75.
2. Paul Starr, The Social Transformation of American Medicine: The Rise of a Sovereign Profession and the Making of a Vast Industry (New York: Basic Books, 1982), 379.
3. Lawrence Brown, Politics & Health Care Organization: HMOs as Federal Policy (Washington, D.C.: The Brookings Institution, 1983), 12-13.
4. Starr, The Social Transformation of American Medicine, 385.
5. Starr, The Social Transformation of American Medicine, 385. Ibid.
6. See Herman Somers and Anne Somers, Medicare and the Hospitals: Issues and Prospects (Washington, D.C.: The Brookings Institution, 1967), 32-34.
7. See Jeff Goldsmith, "Death of a Paradigm: The Challenge of Competition," Health Aff., 1984, 3, 5-19.
8. See George Whetsell, "The History and Evolution of Hospital Payment Systems: How Did We Get Here?," Nurs. Adm. Q., 1999, 23, 1-4.
9. William Hsiao, oral history interview with the author, 22 October 2002.
10. Michael Bromberg, oral history interview with the author, 23 July 2002.
11. As quoted in Linda Demkovich, "Devising New Medicare Payment Plan May Prove Easier than Selling It," Natl. J., 1982, 14, 1981-85, 1981.
12. Rosemary Stevens, In Sickness and in Wealth: American Hospitals in the Twentieth Century (Baltimore, Md.: Johns Hopkins University Press, 1998), 284-93.
13. Marian Gomick, Joan Warren, Paul Eggerset, et al., "Thirty Years of Medicare: Impact on the Covered Population," Health Care Financ. Rev., 1996, 18, 179-237, 184.
14. See Jonathan Oberlander, The Political Life of Medicare (Chicago: University of Chicago Press, 2003), 74-106.
15. The monthly premiums of participating senior citizens contributed only 50% of Part B's total costs. Moreover, the elderly's share of Part B's costs had dropped to 25% by 1983, because the increase in their premium rate was limited to the percent increase in OASI benefits, which rose much more slowly than increases in medical costs.
16. Theodore Marmor, The Politics of Medicare, 2nd ed. (New York: Aldine de Gruyter, 2000), 96-99;
17. Starr, The Social Transformation of American Medicine, 374-76.
18. Marmor, The Politics of Medicare, 374-77.
19. Judith Feder, "The Social Security Administration and Medicare: A Strategy of Implementation," in Toward a National Health Policy: Public Policy and the Control of Health-Care Costs, ed. Kenneth Friedman and Stuart Rakoff (Lexington, Mass.: Lexington Books, 1977).
20. See also Judith Feder, Medicare: The Politics of Federal Hospital Insurance (Lexington, Mass.: Lexington Books, 1977), 149.
21. Starr, The Social Transformation of American Medicine, 385.
22. Stevens, In Sickness and in Wealth, 284.
23. Email exchange with Clif Gaus, former Associate Administrator of Policy, Planning & Research, HCFA, 11 February 2003.
24. Executive Office of the President's Council on Wage and Price Stability Staff Report, "The Rapid Rise of Hospital Costs" (Washington, D.C.: Government Printing Office, 1977), 9-11.
25. For more information on these dynamics, see Martin Feldstein, Hospital Costs and Health Insurance (Cambridge, Mass.: Harvard University Press, 1981), 176, 306.
26. See also Congressional Budget Office, "Expenditures for Health Care: Federal Programs and Their Effects" (Washington, D.C.: Government Printing Office, 1977), 5;
27. and Feder, Medicare: The Politics of Federal Hospital Insurance, 143: "The Medicare law promised to pay for medical care for the elderly without interfering in its delivery. But this promise ignored a basic economic fact: How care is paid for significantly influences the quantity and quality of care delivered. Thus a payment program necessarily interferes in the practice of medicine. If an agreement to pay for care has no strings attached, it removes any fiscal constraints on physicians' and hospitals' development and delivery of medical services."
28. See Peter Hammer, Deborah Haas-Wilson, Mark Peterson, William Sage, eds., Uncertain Times: Kenneth Arrow and the Changing Economics of Health Care (Durham, N.C.: Duke University Press, 2003).
29. Uncertain Times: Kenneth Arrow and the Changing Economics of Health Care, 2003. Ibid.
30. See Staff Report, "Medicare and Medicaid: Problems, Issues, and Alternatives," Senate Committee on Finance, 9Ist Congress, ist Session (Feb. 1970), 4.
31. "Summary of Major Provisions of P.L. 89-97, the Social Security Amendments of 1965," House Committee on Ways and Means, House of Representatives, 89th Congress, ist Session (Sept. 1965), part F, "Statistical Data," 20-21.
32. See also "Administration of Medicare Cost-Saving Experiments," Hearings before the Subcommittee on Oversight, Committee on Ways and Means, House of Representatives, 94th Congress, 2nd Session (14-17 May 1976);
33. "History of the Rising Costs of the Medicare and Medicaid Programs and Attempts to Control These Costs, 1966-1975," Department of Health, Education, and Welfare (Washington, D.C.: Government Printing Office, 1976).
34. "History of the Rising Costs of the Medicare and Medicaid Programs and Attempts to Control These Costs, 1966-1975," 1976. Ibid.
35. Jonathan Oberlander, "Medicare: The End of Consensus," paper presented at the Annual Meeting of the American Political Science Association, Boston, Mass. (3-6 Sept. 1998), 4.
36. Edward Berkowitz, Robert Ball (Madison, Wisc.: University of Wisconsin Press, 2004), 205.
37. Stuart Altman, oral history interview with the author, 22 July 2002.
38. Margaret Sulvetta, "Achieving Cost Control in the Hospital Outpatient Department," Health Care Financ. Rev. Annu. Suppl., 1991, 13, 95-106, 95.
39. James Mongan, oral history interview with the author, 4 October 2002.
40. See Marsha Gold, Karyen Chu, Suzanne Felt, Mary Harrington, and Timothy Lake, "Effects of Selected Cost-Containment Efforts: 1971-1983," Health Care Financ. Rev., 1993, 14, 183-89.
41. Altman, oral history interview with the author.
42. See Robert Hackey, "Groping for Autonomy: The Federal Government and American Hospitals: 1950-1990," J. Econ. Issues, 1999, 33, 625-46.
43. See William Dowling, "Prospective Reimbursement of Hospitals," Inquiry, 1974, 11, 163-80.
44. William Dowling, "Prospective Reimbursement of Hospitals," Inquiry, 1974, 11, 163-80. Ibid.
45. John Thompson, oral history interview with Lewis E. Weeks, Jr. (July 1989, Ann Arbor, Mich.), 46, manuscript in possession of author.
46. Ibid., 46-47.
47. Ibid., 47.
48. Richard Averill, oral history interview with the author, 19 March 2003.
49. William White, ed., Compelled by Data: John D. Thompson (New Haven, Conn.: Yale University Press, 2003), 72, 85.
50. Thompson, oral history interview with Weeks, 45.
51. Ronald Mills, Robert Fetter, Donald Riedel, and Richard Averill, "AUTOGRP: An Interactive Computer System for the Analysis of Health Care Data," Med. Care, 1976, 14, 603-15.
52. Thompson, oral history interview with Weeks, 48.
53. Ibid., 49.
54. Ibid.
55. See Robert Fetter, Youngsoo Shin, Jean Freeman, Richard Averill, and John Thompson, "Case Mix Definition by Diagnosis-Related Groups," Med. Care, 1980, 18, vii-53.
56. Robert Fetter, Youngsoo Shin, Jean Freeman, Richard Averill, and John Thompson, Med. Care, Ibid., 33.
57. Office of Technology Assessment, Diagnosis Related Groups and the Medicare Program: Working Paper (Washington, D.C.: Government Printing Office, 1983), 6-7.
58. Diagnosis Related Groups and the Medicare Program: Working Paper. Ibid., 7.
59. Diagnosis Related Groups and the Medicare Program: Working Paper. Ibid., 6-7.
60. Fetter, Shin, Freeman, Averill, and Thompson, "Case Mix Definition by Diagnosis-Related Groups," 33-341 "The SHARE methodology was not equipped to address the problems of i) defining and measuring hospital case mix, productivity and effectiveness; 2) providing incentives for better management; 3) avoiding business gamesmanship; 4) fostering communications between the hospital financial systems and physicians."
61. James Morone and Andrew Dunham, "The Waning of Professional Dominance: DRGs and the Hospitals," Health Aff., 1984, 3, 73-87, 77.
62. James Morone and Andrew Dunham, "The Waning of Professional Dominance: DRGs and the Hospitals," Health Aff., 1984, 3, 73-87, Ibid.
63. Office of Technology Assessment, Diagnosis Related Groups and the Medicare Program: Working Paper, 34.
64. Morone and Dunham, "The Waning of Professional Dominance," 80.
65. Morone and Dunham, "The Waning of Professional Dominance," 80. Ibid.
66. Thompson, oral history interview with Weeks, 51.
67. Office of Technology Assessment, Diagnosis Related Groups and the Medicare Program: Working Paper, 34-35.
68. Starr, The Social Transformation of American Medicine, 406.
69. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 189.
70. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 189. Ibid.
71. Congressional Quarterly, CQ Almanac, 1977 (Washington, D.C.: Congressional Quarterly, 1977), 499-500.
72. Hackey, "Groping for Autonomy," 640-41.
73. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 189.
74. Quoted in Stevens, In Sickness and in Wealth, 309.
75. John Iglehart, "Hospitals, Public Policy, and the Future: An Interview with John Alexander McMahon," Health Aff., 1984, 3, 20-34, 25.
76. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 190.
77. Dan Rostenkowski, oral history interview with the author, 25 June 2002.
78. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 191.
79. Feder, Medicare: The Politics of Federal Hospital Insurance, vii.
80. "Recollections (Discussions) by Social Security Administration Officials' Knowledge and/or Involvement in Certain Stages of Early Implementation of the Medicare Program" (Calendar Year 1966), SSA Regional Office, Atlanta, Georgia, 25 September 1992, 20, provided to the author by Arthur Hess.
81. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 192.
82. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," Ibid., 190.
83. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," Ibid., 191.
84. Paul Feldstein, The Politics of Health Legislation: An Economic Perspective (Chicago: Health Administration Press, 2001), 153.
85. Iglehart, "Hospitals, Public Policy, and the Future: An Interview with John Alexander McMahon," 26;
86. Don Moran, oral history interview with the author, 28 October 2002.
87. Starr, The Social Transformation of American Medicine, 414.
88. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 192.
89. See Linda Demkovich, "Who Can Do a Better Job of Controlling Hospital Costs?," Natl. J., 1979, 11, 219-23.
90. Iglehart, "Hospitals, Public Policy, and the Future," 25.
91. Iglehart, "Hospitals, Public Policy, and the Future," Ibid., 26.
92. Starr, The Social Transformation of American Medicine 380
93. See Congressional Budget Office, Hospital Cost Containment Model: A Technical Analysis (Washington, D.C.: Government Printing Office, 1981).
94. Iglehart, "Hospitals, Public Policy, and the Future: An Interview with John Alexander McMahon," 25-26.
95. Oberlander, The Political Life of Medicare, 123.
96. Oberlander, The Political Life of Medicare, 123. Ibid.
97. Allen Dobson, oral history interview with the author, 11 October 2002.
98. Oberlander, The Political Life of Medicare, 123.
99. Linda Demkovich, "Relying on the Market - the Reagan Approach to Containing Medical Costs," Natl. J., 1982, 14, 194-97, 194.
100. Robert Rubin, oral history interview with Edward Berkowitz, 16 August 1995.
101. Ibid.
102. Julian Pettengill, oral history interview with the author, 29 October 2002.
103. John Iglehart, "Health Policy Report: Medicare's Uncertain Future," N. Engl. J. Med., 1982, 306, 1308-12, 1308. "Our current fiscal crisis, which is, I assure you, a real, not a fictitious crisis, is forcing us to examine very carefully what health services we pay for, and how we pay for them. The problem becomes even more evident when we look down the road to a nation with a growing population of elderly citizens and a Medicare trust fund which is sure to go broke within a short period of time if we don't take appropriate action. In fact, the entirety of the Social Security system is in real trouble."
104. Sheila Burke, oral history interview with the author, 2 October 2002.
105. Paul Rettig, oral history interview with Edward Berkowitz, 14 August 1995.
106. Ibid.
107. Morone and Dunham, "The Waning of Professional Dominance," 80.
108. Bruce Vladeck, oral history interview with the author, 14 August 2002.
109. Richard Averill, oral history interview with the author, 19 March 2003.
110. See Social Security Board of Trustees, Summary of the 1982 Annual Reports of the Social Security Board of Trustees: Old-Age, Survivors, and Disability Program (Washington, D.C.: Office of the Actuary Social Security Administration, I April 1982).
111. Iglehart, "Health Policy Report," 1309.
112. Summary of the 1982 Annual Reports of the Social Security Boards of Trustees.
113. Carolyne Davis, oral history interview with Edward Berkowitz, 8 November 1995.
114. Medicare Board of Trustees, Federal Hospital Insurance Trust Fund, 1983 Annual Report, Federal Hospital Insurance Trust Fund, House of Representatives, 98th Cong., ist Sess., Doc. No. 98-75 (Washington, D.C.: Government Printing Office, 1983), 19-20.
115. John Iglehart, "Medicare Begins New Prospective Payment of Hospitals," N. Engl. J. Med., 1983, 308, 1428-32.
116. Tax Equity and Fiscal Responsibility Act, 1982, P.L. 97-248.
117. Daniel Palazzolo, Done Deal? The Politics of the 1997 Budget Agreement (New York: Chatham House Publishers, 1999), 27.
118. David Abernethy, oral history interview with the author, 19 June 2002;
119. Lawrence Brown, "Technocratic Corporatism and Administrative Reform in Medicare," J. Health Polit. Policy Law, 1985, 10, 579-99, 593.
120. See Congressional Budget Office, Analysis of Medicare Hospital Reimbursement Changes in the Tax Equity and Fiscal Responsibility Act of 1982 (Washington, D.C.: Government Printing Office, 1983), 3.
121. Office of Technology Assessment, Diagnosis Related Groups (DRGs) and the Medicare Program: Working Paper, 23.
122. Paul Ginsburg, oral history interview with Edward Berkowitz, 22 August 1995.
123. John Iglehart, "The New Era of Prospective Payment for Hospitals," N. Engl. J. Med., 1983, 308, 1288-92, 1288.
124. Robert Rubin, oral history interview with the author, 23 August 2002.
125. Bruce Vladeck, oral history interview with the author, 14 August 2002.
126. Charles "Chip" Kahn, oral history interview with Edward Berkowitz, 22 August 2002: "In TEFRA you had the per diem limits. And in a sense, they were so horrendous in terms of how they were going to affect hospitals that they drove the hospitals into being willing to accept DRGs. But from the standpoint of [Senator] David Durenberger and a cadre of members of Congress - and Sheila Burke I think was a part of this, too, although I don't know how well she conceptualized it - Dave [Durenberger] and these others had a notion that they wanted to use Medicare as a change agent. And rather than the cost containment approach where you have broad-based government intervention, they wanted to use Medicare as the big purchaser to have a payment scheme or schemes that were designed to align the incentives for providers appropriately."
127. Oberlander, The Political Life of Medicare, 124.
128. Iglehart, "The New Era of Prospective Payment for Hospitals," 1292.
129. Jack Owen, oral history interview with the author, I October 2002.
130. Rick Pollack, oral history interview with the author, 27 December 2002.
131. Section 101(c) of the Tax Equity and Fiscal Responsibility Act, 1982, P.L. 97-248.
132. U.S. Department of Health and Human Services, Report to Congress: Hospital Prospective Payment for Medicare (Washington, D.C.: Government Printing Office, 1982), I.
133. Judith Lave, oral history interview with the author, 30 July 2002.
134. David Smith, Paying for Medicare: The Politics of Reform (New York: Aldine de Gruyter, 1992), 33.
135. David Smith, Paying for Medicare: The Politics of Reform. Ibid., 44.
136. David Smith, Paying for Medicare: The Politics of Reform. Ibid., 44-45.
137. Gold, Chu, Felt, Harrington, and Lake, "Effects of Selected Cost-Containment Efforts: 1971-1993," 193-94.
138. Robert Rubin oral history interview with Edward Berkowitz, 16 August 1995: "DRGs were an example of [using] financial or economic incentives for getting people to do the correct thing versus coercing them, the difference between the carrot and the stick."
139. Ibid.
140. See also Richard Averill and Michael Kalison, "Prospective Payment by DRG," Healthc. Financ. Manage., 1983, 13, 12-16;
141. Richard Averill and David Sparrow, "TEFRA's Two-Part Strategy Will Reduce Medicare's Financial Liability to Hospitals," Healthc. Financ. Manage., 1983, 13, 72-77.
142. Don Moran, oral history interview with the author, 28 October 2002.
143. John Salmon, oral history interview with the author, 28 June 2002.
144. Smith, Paying for Medicare, 50.
145. Paul Rettig, oral history interview with Edward Berkowitz, 14 August 1995.
146. Iglehart, "Medicare Begins New Prospective Payment of Hospitals," 1430.
147. Owen, oral history interview with the author.
148. Ibid.
149. Rubin, oral history interview with the author; Pollack, oral history interview with the author; Owen, oral history interview with the author.
150. Owen, oral history interview with the author.
151. Demkovich, "Who Says Congress Can't Move Fast?," 705.
152. Demkovich, "Who Says Congress Can't Move Fast?," 705. Ibid.
153. Iglehart, "Medicare Begins New Prospective Payment of Hospitals," 1429.
154. Smith, Paying for Medicare, 52.
155. Rubin, oral history interview with the author.
156. Dobson, oral history interview with the author.
157. Rubin, oral history interview with the author.
158. Smith, Paying for Medicare, 55.
159. See Timothy Clark, "Congress Avoiding Political Abyss By Approving Social Security Changes," Natl. J., 1983, 35, 611-15.
160. See also Paul Light, Still Artful Work: The Continuing Politics of Social Security Reform (New York: McGraw-Hill, 1995), I: "This is a story about a legislative miracle. Under extreme time pressure in 1983 (and largely because of it), Congress and the President finally passed a Social Security rescue bill. Two years in the making, the legislation arrived just moments before the Social Security trust fund was to run dry. Without the S170-billion package of tax increases and benefit cuts, millions of checks would have been delayed."
161. Iglehart, "Medicare Begins New Prospective Payment of Hospitals," 1429: "A remarkable reality of the process in both chambers was how few legislators were actually involved in designing the legislation. For the most part, professional staff members made the key decisions."
162. For more on the Social Security crisis, see Joseph White and Aaron Wildavsky, The Deficit and the Public Interest (Berkeley, Calif: University of California Press, 1989), ch. 14,
163. "A Triumph of Governance: Social Security"; Paul Light, Artful Work: The Politics of Social Security Reform (New York: Random House, 1985).
164. Rettig, oral history interview with Edward Berkowitz.
165. Iglehart, "Medicare Begins New Prospective Payment of Hospitals," 1430.
166. Burke, oral history interview with the author.
167. Morone and Dunham, "The Waning of Professional Dominance," 74.
168. Rick Mayes, "Causal Chains and Cost Shifting: How Medicare's Rescue Inadvertently Triggered the Managed Care Revolution," J. Policy Hist., 2004, 16, 144-74.