How Did We Get Here?

In order to gain some insight into the present unworkable health care reimbursement environment, it is necessary to review the history of Federal Government intervention in the health care marketplace, and the consequent empowerment of insurance companies.

Before World War II, health care was substantially (in most cases) purchased by individuals on an as needed basis out of personal income or savings. During the War, the federal government applied wage and price freezes, in order to control inflation (and probably motivated by controlling the cost of war materiel, which might otherwise have been priced on a supply and demand basis).

By 1943, there existed significant competition among employers for the few available workers (with approximately 23,000,000 men in arms abroad). Employers were able to convince the government to permit them to buy health insurance for their workers as a perquisite of employment and without taxation to the worker or employer. This "permission" was codified in the Internal Revenue Code, and became the basis for the trend and persistence of employer provided health insurance. The result has been the steady growth of employer funded health insurance products, as well as the expectation of the same by employees.

In 1965, the Democrat controlled Congress and Democratic President Lyndon B. Johnson created Medicare and Medicaid as part of the "Great Society" program. At that time, Medicare was strictly for the elderly (over 65 years), and Medicaid was strictly for the "poor". Subsequent changes have occurred to blur some of those distinctions. Nevertheless, Medicare has remained a Federally funded program targeting the elderly, and Medicaid is a matching program with primary funding by each State.

As initially established and continuing until 1986, Medicare reimbursed providers on the basis of "usual and customary fees", letting the market determine workable fees for non-hospital providers (i.e. physicians and physician groups). Hospitals were reimbursed on a "cost plus" basis (as were many military suppliers at that time). This meant that hospitals simply computed their cost to provide a service and added a small margin for "profit", and those costs were reimbursed by the program.

Because these programs enabled two large subgroups of our population to have immediate access to sophisticated health care at virtually no cost to them, the demand for and the cost of health care services paid by the Federal Government rose rapidly between 1965 and 1985.

In 1986, in an effort to bring these costs under control, the regulations were changed to create a Medicare physician fee schedule (at that time the fees established were based on the existing "usual and customary fees", but were constrained in the future). At about the same time, a hospital fee schedule based on actual expenses by diagnosis (so-called Diagnosis Related Groups or DRG's) was developed to get away from "cost plus" payments (which contained no incentive to control costs).

Over the next decade, Medicare physician "reimbursement" steadily declined in relation to inflation and the real cost of providing services. During that time, other "third party payers" (insurance companies) realized that, if physicians were willing to work for the reduced fees paid by medicare, they would work for an insurance reimbursement only marginally higher. With most consumers covered by either Medicare or private insurance through their employer, the consumer experienced little out of pocket cost, and the insurance companies could repeatedly raise their premiums (paid by employers and not paid by the consumer) with no upper limit, while reducing payment to providers (not paid by the consumer) in parallel with Medicare reductions.

A collateral effect of the establishment of Medicare Fee Schedules was the necessary increase in scrutiny of every transaction occurring between a consumer and a provider, with coding of every diagnosis and every procedure or treatment or service rendered. Needless to say, this created a paperwork burden for every provider to justify every act and fee charged. Today, approximately 50% of every physicians operating cost goes to fulfilling this paperwork burden for the government and the insurance companies.

Clearly, this is a very brief history of the third party intervention in the provision and financing of America's health care services. However, it provides the foundation for my next post which will deal with the question:

"What are the current problems arising out of the historical events?"