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October 1973

The Politics of American Health Care: What Is It Costing You?

The health care crisis is upon us. In response to soaring costs, a jumbled patchwork of insurance programs, and critical problems in delivering medical care, some kind of national health insurance has seemed in recent years to be an idea whose time has finally come in America. For those not protected by insurance--and often for those who are partially protected--illness means financial disaster. The quality of American medical care is at issue too. After twenty years of unprecedentedly high spending for research our public health standards have fallen far behind some countries with fewer resources. We rank seventeenth in infant mortality, according to a United Nations study; thirtieth in life expectancy for males, behind Spain, Greece, and five Communist nations in Eastern Europe. And yet, writes reporter Godfrey Hodgson, for all our troubles, an opportunity to reform American health care has slipped by. How could this be? And where do we go from here?

by Godfrey Hodgson

If someone had asked me five years ago," said Dr. Rashi Fein, "to estimate when the United States would have some clearly universal and comprehensive system of national health insurance, I might have answered: in fifteen years."

"Three years ago," he went on, "my estimate would have been fifteen minus eight, or minus ten, or even minus twelve. But if someone were to ask me today when we will have national health insurance, my answer would be: many years more."

Dr. Fein, of the Harvard Medical School, is one of the most highly respected authorities on health policy in the country; the fact that both the Nixon Administration and Senator Edward Kennedy have consulted him gives some index of his standing. But he is not alone in his judgment "A few years ago," I was told by Dr. John Hogness, president of the Institute of Medicine at the National Academy of Sciences, "the feeling among experts was that we would have national health insurance by 1973. Now the feeling among experts is that it will take three to five years."

"Not in this Congress," said Bill Fullerton, top staff aide on health to Chairman Wilbur Mills of the House Ways and Means Committee. "Not in the next Congress. With the confrontation politics we have now, I don't see the Democrats giving the Republicans something to crow about, and I don't see the Republicans giving the Democrats something to crow about either. My personal view is that the earliest it could come would be the second year of the next Administration."

A simple way of stating what has happened is that after the passage of Medicare in 1965, just about everybody in the world of health policy was persuaded that the United States needed something called national health insurance--even if there was little agreement on what that should mean. Then, rather suddenly in the early 1970s, the mood changed. More cautious views reasserted themselves, both among experts and among politicians. The same reversal of mood which dampened optimism about the possibility of social change through political action generally--in the field of education, for example, or in dealing with poverty and urban problems- has now also begun to shape the debate about health care.

It is not just that congressional enactment of any kind of national health insurance, which only a few years ago seemed to be getting closer and closer, is now becoming more and more remote. Any form of national health insurance enacted in the late 1970s is now likely to be a milder measure, involving less drastic change, than seemed inevitable so recently.

One Democrat the Republicans will be especially anxious not to present with anything to crow about before 1976 is Senator Kennedy. But the strongest push in Congress for a truly radical overhaul of the health care system has come from Kennedy, as chairman of the subcommittee on health of the Senate Labor and Public Welfare Committee. Both liberals and organized labor--through the Committee for National Health Insurance, set up by the late Walter Reuther and backed by George Meany and the AFL-CIO as well--have supported Kennedy's "health security" approach. S.3, the Kennedy-Griffiths bill (it is sponsored in the House by Representative Martha Griffiths, Democrat of Michigan) is the most radical of the half dozen or more health insurance bills now before Congress. It offers the fullest range of benefits with the fewest co-insurances, deductibles, and other snags. It is also the firmest on the principle that if government financing is to be made available to the health care system, it must be used as leverage to secure government control: leverage to keep down rising costs and to make the health system more accountable to government in other respects. And with this intent, one of its key proposals has been that, as Kennedy put it in his book In Critical Condition in 1972, "The Federal government would become the health insurance carrier for the entire nation." "Only the government," he wrote, "can operate such an insurance program in the best interest of all the people. We can no longer afford the health insurance industry in America, and we should not waste vast funds bailing it out."

That is a plain enough position, and little more than a year old. Yet Kennedy will almost certainly have to retreat from that position, and--whatever precise form national health insurance eventually takes--insurance companies will almost certainly have an important share of the pie.

This is not because of any change of heart on Kennedy's part. It is a consequence of the facts of life in Congress. Senator Kennedy has emerged as the leading Democratic spokesman on health issues, but he does not have the votes to pass his health security bill, even in the Senate. The question is academic, in any case, since he cannot bring it to the floor for a vote. That prerogative lies with the Senate Finance Committee, headed by Senator Russell Long, Democrat of Louisiana. And Long has his own bill, artfully contrived to sap the strength of Kennedy's proposals.

Senator Long is in favor of what is called "catastrophic insurance" that is, insurance against catastrophically heavy medical bills. Long proposes that the federal government insure people only against being hospitalized for sixty days and for other medical bills over $2000. Kennedy--unwisely, perhaps, from a tactical point of view--has emphasized, in his book and in hearings, the havoc caused by "medical catastrophes."

"Catastrophic insurance" would be inflationary in its effect. This is because, as things stand now, many people go without treatment that costs more than the upper limit imposed by their conventional insurance policy; with a federal insurance program footing the bill, more expensive treatment would be prescribed and paid for. Moreover, a federal insurance scheme limited to the "catastrophic" end of the scale would do nothing to meet Kennedy's central concern that the public establish control over the costs and procedures of a system that would absorb billions of dollars of public money.

"It calms down the flame," Senator Kennedy told me, "but it really doesn't meet the need. You're going to be bankrupting people anyway. It adds up to an inflationary trend. And I have a philosophic belief that you have to use the lever of financing to do something about quality, and something about control."

Yet the appeal of "catastrophic insurance," as the lesser of evils for politicians and organized medicine if the alternative is a fully federalized system, could be very damaging to hopes of more comprehensive reform. In 1972, the Senate Finance Committee was already deadlocked on Senator Russell Long's "catastrophic insurance" legislation. The coalition against it was maintained by Senator Kennedy and his allies, who insisted that, if passed, the Long bill meant good-bye to any broader national health insurance measure for five years. If Long's bill had been reported out of committee, it would almost certainly have passed on the Senate floor. "There just aren't enough souls in the Senate hardy enough to vote against it," one Kennedy aide said bitterly. And if it had passed the Senate, then all would have depended, as it so often does when the shape of major legislation is at stake, on one man: Chairman Wilbur Mills of the House Ways and Means Committee.

And so, in the summer of 1972, Arkansas Democrat Mills and Massachusetts Democrat Kennedy issued a joint statement. They said they would work together to draft joint legislation on national health insurance. Officially, the line from both the Senator's and the Chairman's staff people is noncommittal: "Work is continuing." But in early 1973 Kennedy and Mills met several times, and they now hope to introduce a joint bill this fall, a bill which would in one major respect be weaker than the Kennedy-Griffiths bill.

Kennedy is trying earnestly to find a compromise he can accept without betraying what he regards as the essential features of S.3. And Mills is trying just as hard to find a bill he can pass. Two main issues remain to be resolved.

One is the method of financing. Realistically, national health insurance can be financed in only three ways: through the federal budget; through Social Security, like Medicare; or through what is known as "mandated" coverage. This last approach, favored by the Nixon Administration, would have the great bulk of premiums paid by individuals and their employers to private insurance companies, so that public funds would be needed only for those who could not obtain coverage through their jobs, or for other special reasons. On financing, Mills and Kennedy have not yet made up their minds. If we had the key to this problem," Senator Kennedy told me, "we'd have the legislation."

The second major issue--the role of insurance companies--has now been resolved. But Kennedy has made an important concession. He is wary of the danger that, whatever regulatory controls Congress sets up over the health insurance industry, "in all too short a time the controlled end up controlling." That is why he favored eliminating the role of the private health insurance industry completely. He now believes, however, that "there may be some role, actuarial or procedural, some arrangement that could be worked out that would give them some role." One point, in short, is now clear. In order to get a version of national health insurance that Mills would report out of committee, Kennedy will have to accommodate, in some way, the commercial health insurance industry. America, one might say with Senator Kennedy, may not be able to afford the health insurance industry; but Senator Kennedy cannot afford to do without the health insurance industry.




The prospect of Senator Kennedy's crusade for national health insurance being transformed into a canny Kennedy-Mills compromise with Aetna, Connecticut General, or even W. Clement Stone (the Chicago insurance man with the "positive mental attitude" who was, so far as we know, Mr. Nixon's biggest campaign contributor in both 1968 and 1972), is distressing for those who believe that the American health care system needs radical reform.

There are other indications, too, that the middle ground both of academic debate and practical politics has taken a step back toward the cautious center. But this recent shift should be seen in perspective: it comes after some startlingly rapid strides to the left.

Between 1968 and 1970--which is to say, almost overnight, as major shifts in political attitudes are measured--certain ideas about health policy that had been considered daring even on the liberal Left suddenly became widely acceptable. There were two in particular: the idea that the federal government should guarantee the availability of health care to all citizens through a national health insurance system, and the idea that government should actively encourage the replacement of at least some fee-for-service practice by prepaid group health arrangements. As late as 1965, even liberal reformers limited themselves to the complaint that not enough health care was available to enough people. But by 1970, to say that the American health care system was in crisis had indeed become something of a cliche.

In early 1970, President Nixon announced to a press conference that "we face a massive crisis in this [health] area. Unless action is taken within the next two or three years...we will have a breakdown in our medical system." That was well over three years ago and to date there has been no legislative action commensurate with such a prophecy. But neither has there been anything that could truly be called a breakdown.

No doubt at the time the President believed exactly what he said. His assessment was supported by the somber report sent to him by Robert Finch, his first Secretary of Health, Education, and Welfare, and Roger Egeberg, his first Assistant Secretary for Health and Scientific Affairs. The report posed the alternatives in the starkest terms. "What is at stake," it concluded, "is the pluralistic, independent, voluntary nature of our health care system. We will lose it to pressures for monolithic, government-dominated medical care unless we can make the system work for everyone." And this was no idiosyncratic view of Finch's. Two years later his successor at HEW, Elliot Richardson, produced a White Paper which, he insisted, "seeks to modify the entire SYSTEM of health care" (his italics).

The Nixon Administration's policies, even more than its rhetoric, showed its conversion at that time to the argument that the system needed fundamental change. Each of its two main proposals marked a clear breach with the shibboleths of organized medicine. One official who had worked at HEW for a decade said to me with awe in his voice: "The atmosphere around here changed so much in three or four years that you had a Republican President saying, and a Republican Administration doing, things that would have raised the roof if Kennedy or Johnson had done them."

One of the two main thrusts of the Administration's strategy was to encourage the spread of Health Maintenance Organizations (HMO's). The HMO concept was co opted from the prepaid group health idea, of which the California-based Kaiser Permanente plan is the best-known example. The essence of the group health idea is that, instead of paying medical bills when they fall due, you pay a flat annual sum to join a group which contracts to provide all the medical care you may need. Typically, the group either maintains its own hospitals, or makes arrangements with particular hospitals to provide services; it also employs physicians and other staff. The whole idea has long been anathema to organized medicine. For one thing, it turns the rugged, individualist, fee-for-service, small-businessman physician into an employee. Secondly, with the specific incentive of fee-for-service removed, group health schemes have shown consistently lower rates of utilization of advanced medical technology, thus stimulating a passionate debate among medical academics as to whether group health did too little, or fee-for-service doctors did too much.

The notion that Health Maintenance Organizations "might provide a check on the provision of unnecessary services, inflation and inequitable distribution" of doctors received a boost from the work of Dr. Paul Ellwood, Jr., of the American Rehabilitation Foundation in Minneapolis, on the grounds that HMO's would "align [the physician's] economic interests with those of the consumer." In a paper called "The Health Maintenance Strategy," first drafted in March, 1970, and revised in June and October that year, Ellwood and his Colleagues seemed to be consciously selling HMO's as an alternative to national health insurance. "The Nixon Administration must make a major decision on its strategy for dealing with the much-proclaimed health crisis in America. It can either rely on continued or increased Federal intervention...or promote a health maintenance industry...the health maintenance strategy offers...a feasible alternative to a nationalized health system."

This argument was apparently persuasive, for in a speech early in 1971, Mrs. Beverlee Myers, an assistant administrator at HEW, laid down the prerequisites for the types of HMO the federal government would encourage. Significantly, Mrs. Myers defined HMO's more widely than liberals would have liked: besides the Kaiser-Permanente model, with its own hospitals and other specialized facilities, she included organizations modeled on the San Joaquin Medical Care Foundation in California, that is to say, group practice arrangements, set up by doctors, which RETAINED fee-for-service.

One can get the flavor of some of the organizations which qualify as HMO's under the Administration's definition by reading a long article published by Fortune this spring in which the profit-making possibilities of HMO's are glowingly discussed. Their profit ratio, the article argues, could be as high as that of oil companies, and one doctor who successfully sold stock in his HMO received the highest accolade Fortune has to bestow: "a fast-moving entrepreneur." "The most blatant forms of entrepreneurial practice qualify as HMO's under the Administration's proposals," comments Dr. Victor Sidel, of Montefiore Hospital in the Bronx, New York. And Dr. Max Fine, of the Committee for National Health Insurance, described to me with horror the style of some of the HMO's that flourish in Southern California. "They send loudspeaker trucks round the streets," he said. "They offer fried chicken to anyone who joins the group. And they send solicitors round door to door, and pay them three dollars a head for every patient they sign up." One such group health outfit advertises in medical journals, offering free use of a company-owned Mercedes to any doctor who will join. Sports cars for the doctors, and fried chicken for the patients: that was hardly the vision of group health pioneers.

Both with HMO's and with national health insurance, the Republicans borrowed a liberal idea and made something very different out of it. National health insurance, in fact, has become one of those phrases, like the word "liberal," whose meaning has exploded, so that little pieces of it are littered all over the political landscape. There is a world of difference between the health scheme Labor and Senator Kennedy had in mind, and what Republicans have proposed.

There is the matter of the insurance companies. When Elliot Richardson was Secretary of HEW, he admitted in congressional testimony that his version of national health insurance would have the effect of swelling the premium income of private health insurance companies from $23 billion to $30 billion in the first year, or by some 30 percent. Dr. Fine calculates that even this is a substantial underestimate, and that the Administration's plan would have produced a windfall for the insurance companies (including Blue Cross and Blue Shield) of no less than $12 billion--more than 50 percent above its current premium income. The fact that in spite of these remarkable expectations the insurance industry opposes any form of national health insurance as an entering wedge of federal regulation, gives some idea of how ideological, and how profitable, the insurance business may be taken to be.

But liberals' objections to the Administration's proposals are not limited to the observation that they would enrich the insurance industry lavishly. The National Health Insurance Partnership, as the Administration called its national health insurance proposals, would limit the government's role to a minimum. It would merely require that the carrying of a stipulated minimum employer-employee health insurance coverage be made a mandatory condition of all employment. Those who were not covered in this way would be picked up either by a family health insurance plan, replacing Medicaid for the poor; or by "pool coverage," arranged in some not too clearly specified way for the unemployed, the self employed, and the employees of small businesses. The government would also, under the Administration's plan, set national health insurance standards. And here the contrast between coverage proposed in the Kennedy-Griffiths bill and the modest benefits (and thickets of exceptions) promised by the Administration's bill is so great as to be ludicrous.




The principle of national health insurance dates back to the 1930s. It was temporarily interred when congressional efforts to enact the Wagner-Murray-Dingell bill (first proposed in 1943 after Senator Robert Wagner had sponsored a similar bill in 1939) ended in 1950, in the face of fierce opposition from the American Medical Association. The AMA assessed its members twenty-five dollars a head that year to fight "the enslavement of the medical profession."

For nearly two decades the idea lay dormant. Public attention to the problem during the 1950s and the early 1960s focused on two efforts, one congressional, the other undertaken by private enterprise. Politicians abandoned any attempt to involve the government in making medical care available to the general population, and concentrated instead on taking care of the special problems of the old and the very poor. Ideologically, the thrust for the two programs eventually enacted in 1965 came from different directions. Medicare--free medical care for the aged under Social Security--was a liberal program. But Medicaid--federal assistance to the states to provide medical care for the indigent--was attractive to conservatives and states righters, concerned about the growing burden of providing medical care for welfare recipients.

One important reason for political indifference to the medical needs of working- and middle-class people in those years was the rapid spread of private health insurance, both with commercial insurance companies and with the "nonprofit" Blue Cross and Blue Shield plans. By 1971, more than 76 million Americans were covered by Blue Cross hospitalization insurance; and of these about 66 million had Blue Shield policies for doctors' and surgeons' bills. (By contrast, only some 8 million people belonged to group health plans organized by the Group Health Association of America, of whom some 2 million belonged to the largest plan, Kaiser-Permanente.) Spread of health insurance came about largely because hospitals, and, to a lesser extent, the doctors, wanted to be assured of payment. Nevertheless the proportion of private hospital expenditure paid by insurance (excluding all government payments) rose from 34.6 percent in 1950 to 73.7 percent in 1968. Inadequate as it was, the spread of private health insurance for years precluded any clamorous demand for national health insurance.

Walter Reuther, shortly before his death, revived public discussion of national health insurance. In the Bronfman lecture to the American Public Health Association in Detroit on November 14, 1968, less than two weeks after President Nixon was elected, he called for "an appropriate system of national health insurance that will provide an adequate and workable financial mechanism to make high quality comprehensive health care available to every American." In January, 1969, Senator Kennedy announced that he intended to sponsor a measure to enact such a system. And then, abruptly, everybody was talking about national health insurance again. As Dr. William McKissick reported in the New England Journal of Medicine:

"The year 1969 witnessed advocacy of universal health insurance from political quarters that ranged from Representative John Dingell...to the American Medical Association...Governor Rockefeller, the Aetna Life Insurance Company, Senator Javits, Senator Kennedy...Walter Reuther..."

and, he might have added, Reuther's adversaries in the AFL-CIO. When President Nixon was converted to the cause, it seemed truly an idea whose time had come.

A bureaucratic detail pinpoints the change in official Administration attitudes toward health care reform better than all the volumes of congressional testimony and the task force reports of the time. For years, every draft of health legislation ritually included boiler-plate language which, it was believed by congressmen and federal officials, had to be inserted to placate the AMA. Section 1801 of the Social Security Act of l965, which enacted Medicare, is an example: "Nothing in this title," it proclaimed a trifle disingenuously, "shall be construed to authorize any Federal officer or employee to exercise any control over the practice of medicine or the manner in which medical services are provided."

Suddenly, in the changed climate of l968 and subsequent years, nobody felt the need to write in clauses like that anymore. And not only that. Robert Ball, who quit this year as commissioner of the Social Security Administration, made the point to me that, after 1968 or 1969, most experts would have regarded it as a grave deficiency in legislation if it did not attempt to exercise some control over "the manner in which medical services are provided."




Why did the field of debate about national health policy and the role of the federal government shift so sharply to the left after 1968?

In a single word, the answer given by all the experts I talked to was: Medicare. The impact of the enactment of Medicare and Medicaid in 1965 was both financial and psychological.

The fact that hospitals and doctors were reimbursed on a cost basis, under both programs, accelerated the inflation of medical costs. Medicare and Medicaid went into effect in 1966. Within two years, cost inflation had reached the proportions of a crisis. And that steep, sudden inflation exposed other weaknesses in the health system, and triggered a general reassessment of long-accepted assumptions and values.

At the same time, once the federal government was involved in paying for health care, essentially for the first time, it became both possible and necessary to ask how much further it should be involved. As Wilbur Cohen, Secretary of HEW at the time Medicare was enacted in 1965, put it to me: "The passage of Medicare broke the back of the ideological controversy over the government's role, and opened up the possibility of discussing changes in the delivery system." Robert Ball agrees:

"There has been a most remarkable change in atmosphere. I went all through the fight for Medicare, and it would have been unthinkable at that time to get stronger legislation in terms of affecting the delivery of health care. When Medicare came in it was accepted as an economic measure, as something that would protect people against the costs of medical care. It was considered as part of the pension system. The great change which began fairly soon was that people began to feel that there was a real responsibility to do something about cost; to do something about quality; and to do something about organization. Medicare was a terrific catalyst."

It wasn't long before it became plain that the cost overruns on Medicare were going to be spectacular. Between l966 and 1968, everything went up; hospital bills, doctors' fees, laboratory charges, insurance premiums, and even--though more modestly- nurses' and orderlies' wages. (At Massachusetts General Hospital in Boston, for example, nurses' wages went up 100 percent between 1959 and 1969; but over the same period interns' salaries went up 1650 percent!) Over the decade of the 1960s, hospital charges rose four times as fast as all other items in the Consumer Price Index; physicians' fees rose twice as fast. And that increase was heavily concentrated in the brief period after the introduction of Medicare. The rate of inflation of hospital costs, for example, increased from an average of 6.9 percent between l950 and 1960 to an annual average of 14.8 percent between March, 1966, and March, l970.

Some economists [See Endnote 1] have argued that the primary reason for inflation was increased demand from patients. But the Nixon Administration's own White Paper in 1971 commented that "while undoubtedly there were improvements in the quality of care for at least some of the population, more than 75% of the increase in expenditures for hospital care, and nearly 70% of the increase for physician services, were the consequence of inflation."

By 1969, some hospitals were charging as much as $150 a day for basic care--in effect for little more than a bed, food, and attention from a nurse when she had a moment. John de Lury, of the New York sanitation workers' union, gave a state legislative hearing a harrowing illustration of what the full cost could come to:

"A ten-year-old boy was admitted to the hospital at 3:20 A.M. The boy died at 10:34 the same night. The family of this child was charged $105.80 for drugs, $184.80 for X rays, $220.00 for inhalation therapy, $655.50 for laboratory work. The total bill for the child was $1717.80."

With the government reimbursing whatever hospitals and doctors charged, the cost of both Medicare and Medicaid spiraled out of control. Less than ONE YEAR after Medicare came into operation, Congress had to increase by 25 percent the Social Security tax budgeted to pay for it. The actuarial estimates of both utilization and cost presented to Congress by the Administration when the program was under construction proved to be hopelessly understated. Cost overruns, projected over the next twenty-five years, added up to a stupendous $131 billion.

Medicaid was soon in worse trouble than Medicare. Two reporters, generally sympathetic to the program, wrote that "starting in late l966 Medicaid hit New York's medical marketplace like a flash-flood." In January, 1967, the federal budget, assuming that Medicaid would be in operation in forty-eight states by the end of the year, predicted that it would cost $2.25 billion. A year later, however, although only thirty-seven states were receiving Medicaid, the actual cost came to $3.54 billion.

In human terms, there is no question that both Medicare and Medicaid have done incalculable good. Medicare, covering about 21 million people, paid portions of bills for roughly half of them last year; allowing for various overlaps among programs, Medicaid paid a part of the bills last year for about 16 million of the many more people who were eligible. No one can put a cash value on the lives that have been prolonged and the suffering saved as a result. But there is no denying that by pouring money into the medical system on a cost reimbursement basis, Medicare and Medicaid set off a wild inflation in costs.

The rise, however, had begun long before Medicare was enacted. The rapid spread of health insurance, both with commercial companies and with Blue Cross/Blue Shield, had been triggering an inflationary effect since the middle 1950s. Private insurance policies worked on a cost reimbursement basis, like Medicare, and far from having any deflationary control over medical practice, often encouraged EXPENSIVE treatment. Many policies, for example, would pay for certain kinds of treatment only in a hospital, a proviso that naturally encouraged needless hospitalization.

Secondly, the acceleration of Medicare-induced inflation coincided with the general inflation of the late 1960s. Half of the inflation of medical costs, Wilbur Cohen believes, is due to the general inflation, which in turn he blames on the Vietnam War.

In any case, a flood of new money--Medicare and Medicaid are now paying for well over a third of all health care--was poured into the system at a moment when medical costs had been rising more quickly than most other costs. No serious attempt was made either to increase the number of providers or to hold down costs by imposing controls. The result was predictable.

The inflationary effect worked differently in the two cases of doctors' fees and hospital bills. In the case of physicians' fees, what happened was what economists call a "demand-pull" inflation. Since the supply of doctors remained virtually stable, greatly increased demand meant that doctors could increase their fees (sometimes directly sometimes by splitting procedures and thereby charging more for what would have been one appointment) and still be sure of the same volume of patients.

Some have argued that hospital costs too, rose mainly in response to demand-pull, as an army of new users descended on overstressed resources. The argument is attractive to hospital administrators because, if accepted, its logical corollary is that even more money should be spent on hospitals--something administrators approve of for various reasons. But while admissions to hospitals rose by 21 percent over the period from 1961 to 1969, the supply of hospital beds rose even faster, by 25 percent. Medicare and Medicaid did indeed drive hospital costs up, but not by stimulating an excess of demand over supply. In the hospitals, there was cost-push inflation.

In October, 1968, two economists, Paul S. Feldstein and Saul Waldman, correctly summarized what had happened in the Social Security Bulletin:

"In Medicare's first year, the financial position of the hospitals improved considerably, possibly as the result of the following factors:

(a) increases in occupancy rates;

(b) reimbursement to hospitals for the cost of services to some aged patients, previously provided free or at reduced charges;

(c) reduction of losses from uncollectibles...

(d) payment to voluntary and government hospitals under Medicare of an allowance amounting to 2% of allowable costs...

(e) receipt of additional revenue from higher charges."

Why did charges go up? Feldstein and Waldman offered two alternative explanations:

"1. Hospital management may have miscalculated the effect of Medicare and believed higher charges to non-Medicare patients would be needed because it expected less than adequate reimbursement under Medicare.

2. Hospital management may have decided that the early Medicare period, which was a period of unusual change in hospital finances and accounting, was a convenient time to adjust their charge schedules." [They also added a third point: some large hospitals remained in deficit even after increasing charges].

That is a gentle way of putting it. Bill Fullerton, in Wilbur Mills's office, spelled it out more bluntly. "After Medicare," he told me, "the hospitals got paid more than before: they got full cost. And that meant that, despite all their protestations to the contrary, for the first time they were really making money. I talk to plenty of hospital administrators, and they say, 'I have a little list of things I want to do for the hospital. When Medicare came along, I could start checking them off.'"

John de Lury put it even less kindly, and still accurately:

"The hospitals with the high patient costs are the newer ones, those on the make, with brilliant reputations, with teaching affiliations. Above all they are the ones with programs of vast expansion and edifice complexes. Their rates are high to support their vast ambitions, and they are making us pay through the nose."

The strategic accommodation accepted by the Johnson Administration in 1965, in order to pass Medicare, was with the hospital people: with the American Hospital Association and with Blue Cross. (In most American cities, hospital trustees, senior medical staff, and Blue Cross boards are so intertwined that it can truthfully be said the deal was made with a single interest: "the hospital people") Two main concessions were made. Medicare was to be financed by reimbursing costs. And the hospitals were to be allowed to choose their own "fiscal intermediaries" to check, audit, and authorize disbursement. Some chose private insurance companies. More chose Blue Cross. Given the coinciding interests, attitudes, and personal contacts of many hospital administrators and of the Blue Cross people who were supposed to be riding herd on them, it is not too harsh to say that "the hospital people" were given their own ticket to write.

They could, and did, expand their buildings, take on new staff, invest in fancy electronic equipment, make generous settlements with the unions--and could be paid whatever the bill came to by the feds, just as long as the friendly fellows at Blue Cross or at the insurance company said it was OK. The result was a bonanza not only for doctors and hospitals but for insurers, electronic data processors, surgical dressing manufacturers, drug companies, and all the other interests which feed at the $70-billion trough of the medical-industrial complex. It was no accident that in the years immediately following passage of Medicare, the hottest of the hot stocks on Wall Street were those of profit-making nursing homes for old people. The promoter of the hottest of them all, the tactfully named Four Season Nursing Centers, has just pleaded guilty to the biggest stock fraud in American history: $200 million.

What made the Medicare bonanza so attractive was this no-loss proposition: the federal government was footing the bill, and the providers were adding it up. As two Tufts Medical School professors wrote in 1970: "Medicare has proved a better mechanism for insuring the providers than the patients."

Government audits have tightened up recently, and have shown how inadequate both sections of the insurance industry, the profit-making companies and Blue Cross/Blue Shield, proved at controlling costs. Massachusetts Blue Cross, for example, was given a 15 percent increase in premiums by the regulatory authority on December 1, 1970, and then filed for a further 33 percent increase on May 10, 1971. In the previous two years, modest investigation revealed the executive payroll had almost doubled. Blue Cross of Chicago was criticized by HEW auditors for using Medicare money to pay for first-class air travel and entertainment for its executives. And so it went in the commercial companies, too. In certain cases, federal auditors found that insurance companies acting as fiscal intermediaries programmed their computers to omit from cost-control checking procedures hospitals in which the companies had invested.

Two particularly baroque tales illustrate just how free and easy the spending was: the episode of the monogrammed golf balls, and the rags-to-riches saga of the Medicare Billionaire.




In Virginia, Blue Cross was named as the "intermediary" for Medicare, Part A (hospital services), and Blue Shield was the ''fiscal agent" on behalf of the state for Medicaid. They were charged by the law with deciding which "providers"--mainly hospitals in this case--should be paid how much; on a "reasonable cost basis." They were then to receive, disburse, and account for the money, and apply safeguards against "unnecessary utilization of services." The government auditors' report suggests that this hardly turned out to be the main problem.

The "Virginia Blues" took on staff until the federal auditors found, two years later, that staffing was "about 23% in excess of requirements." They bought two big IBM machines, so that while the workload increased by 22.3 percent, money spent on data-processing jumped 1409.8 percent. Yet, the auditors found, the system remained "basically ineffective." Other expenditures seemed even harder to justify. Soon after getting the Medicare contract, the Virginia Blues built a new office building, and spent more than a million dollars on new furniture for it...from the furniture company whose sales manager was chairman of the state Blue Cross board of trustees' building committee. He did not, however, let that position influence him into giving Blue Cross undue bargains. With no competitive bidding, Blue Cross paid $1750 each for secretaries' desks.

Medicare was also billed for at least part of the cost of entertainment for Blue Cross executives and their "clients"--it would be interesting to know whether "clients" means insurees or doctors--including "cocktails, beer, wine, alcoholic beverages, tickets for stage plays and football games and golf fees." A portion of the cost of a company picnic was charged to Medicare, including 1050 buffet dinners, two bartenders, bingo prizes, and the rental of six ponies.

The Social Security Administration's auditors commented (dryly) that "since alcoholic beverages are not considered stimulants of production and do not help to disseminate technical information, they cannot be considered allowable costs to the Medicare program."

Finally there were the golf balls. Medicare was charged with one-third of $2138.50 paid for thirteen dozen golf balls imprinted with the Blue Cross/Blue Shield monogram. Teachers and social workers are not the only ones who sometimes benefit more from programs intended to help the poor than the poor themselves do.




Shortly after his first inauguration, President Nixon announced the names of a select group of trustees for the Nixon Foundation. Most of them were either well known to be old friends of the new President, or at least heavy campaign contributors. More than one owed a good deal to the medical-industrial complex; W. Clement Stone, for example, or Elmer Bobst the Vitamin King. But one name was then quite obscure: that of H. Ross Perot.

By the end of 1969, after his elevation to the board of the Nixon Foundation, H. Ross Perot had become a world celebrity by chartering two jets (one of them modestly christened "Peace on Earth") and flying off to Southeast Asia in a well publicized attempt to ransom American POW's. By 1970, with stock of the Electronic Data Systems Corporation, which he controlled, selling at over $150 a share on the New York Stock Exchange, Perot's personal wealth was authoritatively estimated at $1.5 billion. No American, Fortune magazine guessed admiringly, had ever made so much money so quickly. But then neither Henry Ford nor John D. Rockefeller, nor even Paul Getty, had had federal Medicare funds to help him.

Perot, at one time an IBM software salesman made his big leap in 1965 when Texas Blue Cross and Blue Shield subcontracted the data-processing work arising under their Medicare contract to the company he had founded in 1962, the Electronic Data Systems Corporation (EDS). Perot was at that time, and remained for almost a year afterwards, a part-time employee of Texas Blue Cross; he was manager of their data processing department at a salary of $20,000 a year. Until then, EDS had been small beer. Its turnover had never exceeded $500,000 a year. The Blue Cross contract was worth $5 million; the contract ran for three years, even though Blue Cross's contract with the government, on which it depended, was for only one year. There was no competitive bidding, and while the contract between the Social Security Administration and the Texas Blues had a provision for the examination of records, the contract between Blue Cross and EDS did not. To get ready to handle this tempting contract, EDS had enjoyed a vital helping hand: a loan of $8 million from the Republic National Bank of Dallas, whose chief executive officer was the chairman of Blue Cross.

Once into Medicare and Medicaid work, Perot and EDS never had to look back. The corporation's gross revenue rose from $1.6 million in 1966 to $47.6 million in 1970. The rate of profit on that revenue rose from 15 percent in 1966 to 41 percent in 1969, and then fell back to a mere 29 percent in 1970. By 1971, EDS was doing the electronic data-processing work for Medicare in nine states, including four out of the biggest five. Two-thirds of its gross revenues have come from Medicare and Medicaid. EDS stoutly maintains that it has processed Medicare and Medicaid claims more cheaply than they would otherwise have been processed, and this may be true. In any case, on its own showing, EDS made profits of up to 41 percent on turnover, two-thirds of which came straight out of public funds which were supposed to be disbursed on a "reasonable cost basis." In other words, in a perfectly legal manner, and in less than five years, Ross Perot was able to make himself a very wealthy man in a way that would be regarded in many other countries as incredible: by owning stock in a company that helped other private organizations decide whether the government should or should not pay out public funds for the medical care of the old and the poor.

In an atmosphere where such things were possible, it was probably inevitable that attention should turn from the mechanics of the health care system to its ethics. While the escalation of costs forced even conservatives to concede that the system faced crisis, liberals--who had largely confined themselves to quantitative and economic issues in the past--began to make more searching criticisms.

"The cost question turned the spotlight on the other deficiencies of the system," said Karl Yordy of the National Institute of Medicine. "It was not only the increase in costs produced by the fact that Medicare was on a cost-reimbursing basis," thinks Dr. Jack Geiger, the head of the State University of New York's new medical school at Stony Brook, "it was the rise in costs, plus the failure to deliver health care, that revealed the inadequacies of the system. The push for a reassessment of the system came from the fact that the cost of health care, and the difficulty of finding primary sources of health care, were beginning to hit the white middle class."

Whatever the reason, four new, interrelated lines of criticism began to be heard in the late 1960s with increasing force. Each probed more deeply than the last into the substructure of assumptions that underlay the American medical system.

* A new skepticism appeared about the value of technology in medicine; a new willingness to question an equation that had been virtually unchallenged for a generation; the assumption that good medical care means advanced medical technology.

* Institutions, and in particular the dominant institution of modern medicine in America, the hospital, became objects of increased suspicion.

* The physician's professional authority began to be challenged as never before.

* Ultimately, even the traditional ethics of medicine were called into question on issues of social and political responsibility.




For over twenty years, from 1948 to 1968, Congress had been persuaded to pour money steadily into medical research. Most politicians were aware that "health" was an issue with their constituents. But once the AMA seemed to block any reform of the health care delivery system, the only politically prudent way of showing concern for the health issue was by voting money for research. A formidable coalition pressed the good work forward. It consisted of lobbyists, led by two indomitable ladies, Mary Lasker and Florence Mahoney, and others less free from self-interest; congressmen and senators, led by Representative John Fogarty of Rhode Island and Senator Lister Hill of Alabama; and research administrators. These lobbyists succeeded in increasing congressional appropriations for medical research, channeled through the National Institutes of Health (NIH), from $7 million in 1947 to over $1 billion twenty years later. In sixteen out of those twenty years, Congress actually reversed its normal, stern, budget-cutting inclinations of those years, and appropriated more money than the Administration was asking for. [See Endnote 2]. Not coincidentally, in the late 1950s and the early 1960s, the public began to read more and more about the wonders of arcane medical technology: about miracle drugs, and magic surgery and electronic aids to diagnosis, and eventually about "space age medicine."

Dr. Jack Geiger was strategically situated to observe this phenomenon. He had run OEO-funded health centers in Mississippi and Boston before heading up SUNY's new medical school at Stony Brook. But before going to medical school he had been a science reporter for UPI, where it was his job to chronicle the marvels of the new medical technology. As a result of that experience he is convinced that inflated propaganda during those years led eventually to a backlash of skepticism about what technology could achieve in medicine.

"There was endless publicity about the cure for cancer, the cure for heart disease, and so on," Geiger said, putting audible quotation marks around the word "cure." "People began to feel it was only a matter of time before the brilliant, dedicated doctors discovered a cure for death."

He was hardly exaggerating. In 1961, President Kennedy was interviewed on NBC's Today show by Dave Garroway, who asked him: "Will we eventually cure everybody? Will the health of the nation approach perfection someday, by care and research?" And it wasn't only gushing television interviewers who seemed in the early 1960s to assume that research would "cure everybody" someday. For Mary Lasker, Stephen Strickland has written, "the conquest of disease was...an obtainable goal," while many senators thought that conquest was "assured, if not imminent."

And yet, after twenty years of these unprecedentedly high expenditures on research, American medicine, far from "curing everybody," was unable to prevent public health standards from slipping behind those of many other countries with far smaller resources. By the time the l970 United Nations Demographic Yearbook was published, the United States was seventeenth in the international league table in infant mortality, behind Hong Kong, Western Samoa, and Fiji as well as most countries of Western Europe. Twelve countries, plus two of the constituent republics of the Soviet Union, the Ukraine and Byelorussia, claimed a higher life expectancy for females, and another six came within one year of the U.S. figure of seventy-four years; while in life expectancy for males, in spite of all the money spent on research into cancer, heart disease, and stroke, the United States ranked thirtieth, behind Spain, Greece, and five countries in Communist Eastern Europe. [See Endnote 3].

A reaction against the prevailing faith in technology was to be expected, and it came. Doctors and laymen began to wonder whether American medicine was not placing too heavy an emphasis on drugs, surgery, and research, at the expense of primary and preventive health care. Medical academics began to show a new interest in foreign medical practice. The National Health Service in Britain, once beyond the American pale because it was "socialized medicine," has probably been more comprehensively studied in the last five years by American than by British scholars. Scandinavian public health has attracted almost as much attention.

These comparative studies came back with some disturbing information. One study [See Endnote 4] found, for example, that twice as much surgery was performed in proportion to population in the United States as in England and Wales. This might have been taken as comforting proof of the old-fashioned reluctance of British surgeons to operate--except for the awkward fact that rates of surgery in American group health plans also turned out to be half those reported for Blue Shield fee-for service practice. In other words, those American surgeons who earn a fee every time they operate perform twice as many operations as British surgeons. And worse, When American surgeons had a financial incentive to operate, they did so twice as often as when they had none. Another study showed that the incidence of tonsillectomies in California was twice as high as it was in Sweden, a country with outstandingly high standards of health care for children. Numerous other studies, not on an international comparative basis (a study of New York teamsters' and their families' health, for example), supported the suggestion that a disturbingly high proportion of elective surgery was unnecessarily performed.

Another trend fed the new skepticism: a galloping increase in specialization within the health professions. "Virtually all the attributes and the attending problems of modern American medicine," the medical sociologist Rosemary Stevens wrote in 1970, "spring from the gigantic technological achievements...which both precipitated and were facilitated by functional specialization." The general practitioner was becoming extinct. By 1970, there were twice as many men and women training for a single surgical specialty--orthopedic surgery--as for general practice. By 1968, 70 percent of all the physicians in the country claimed to be specialists. A majority of doctors, perhaps, continued to equate increased specialization with increased skill. And yet there was a growing awareness that while specialization, like research, had undoubtedly raised the standard of the best treatment--in the sense that sophisticated diagnosis, medication, and surgery were available--progress in these fields had failed to bring a commensurate improvement in standards of overall care, in contrast to those of other countries.

In 1969, for only the second time in two decades, Congress slashed the NIH budget. The cuts were a consequence of two unrelated events: the Vietnam squeeze on domestic spending and stinging criticisms of NIH's financial management by a House subcommittee headed by Representative L. H. Fountain, Democrat of North Carolina. The cuts, while not very large, signaled a change of mood. By the end of the 1960s, the prevailing disposition in Congress, and among those in the general public who thought about medical policy, was to concede that research remained important, but to insist that improving the delivery and reducing the cost, of health care must have priority over the litany of "cancer, heart disease and stroke."

A similar sequence can be traced in attitudes toward the hospital as an institution. Most of the high technology medicine is practiced in hospitals, so that for a time they, and their fund-raising efforts, benefited from the prestige of the new miracles that were being performed in them. Moreover, with the proliferation of specialists, many thoughtful analysts envisioned a greatly expanded role for hospitals as medical centers, coordinating the diagnosis and treatment of both in-patients and outpatients.

But by the end of the decade, attitudes toward hospitals were changing. Too many people were being hospitalized, partly because of technological trends, but even more because of the way insurance policies were being written. The average cost of hospitalization increased by 75 percent between 1966 and 1969.

Just at this moment, for largely professional reasons, a new wave of liberal and radical medical academics (many of them students of "social medicine," a new discipline for which universities and medical schools were setting up departments during these very years) wanted to see the hospitals' role diminished. "The principle of the hospital as the center of care, including ambulatory care, is being challenged," wrote Dr. Jack Geiger at about this time. "People shouldn't go to the hospital unless they have to," said Dr. Victor Sidel of Montefiore in the Bronx. "Why not?" I asked. "Because hospitals are dangerous places." He went on to explain that hospitalization may serve as a depressant where patient morale is concerned, and that the danger of infection persists in even the best-run modern hospital.

Hospitals were also being assailed from without. They were being attacked by poor people, especially poor black people, and by their radical allies, black and white. The charge was that at best they were unresponsive to community needs, and, at worst, arrogant and racist. The attack was made at many levels: in sophisticated academic argument; as part of radical confrontation tactics; and in the heat of spontaneous outbursts of anger and despair.

In 1970, Barbara and John Ehrenreich, who had been associated with a group of radical medical reformers called the Health Policy Advisory Center (Health-PAC), distilled the radical critique into a forceful and provocative book, The American Health Empire. Their thesis is one of alluring simplicity. Liberals, they say, are always lamenting the lack of system in the American health industry, or complaining that "the system doesn't work." They are wrong, say the Ehrenreichs. There is indeed a health system in America, and it works efficiently enough. The catch is that its primary objective is not to provide good health care for the American people. The FIRST priority of the system, say the Ehrenreichs, is to make money; and this the health industry does in a highly efficient manner, for doctors, drug manufacturers, insurance companies, and the rest of the medical-industrial complex, including "nonprofit hospitals, which take their profits in power, in salaries for administrators and medical staff, and in real estate."

The second priority, the book goes on to argue, is research, which the industry needs to make profits, and which requires the clinical data provided by patients, especially in hospitals. The third priority is training more doctors, to perpetuate the system. Here, too, a supply of patients, preferably poor patients with "interesting" conditions, is required. [See Endnote 5]. Some doctors will go on to do research Some will teach. Most will make money, for themselves and for the medical industrial complex. And, incidentally, they will have to provide health care for the American people.

This cynical but compelling analysis is supported by a historical interpretation. The Ehrenreichs argue that a three-stage revolution of scale has occurred in American medicine, analogous to the development from small business to corporation to giant multinational conglomerate. First, the individual doctor in private practice began to give way to the hospital: by 1969 less than 29 percent of the nation's health expenditures went to individual doctors. Then, even before this process had run its course, individual hospitals became dependent on the medical schools and teaching hospitals. In the last twenty years, almost all hospitals and health centers in New York, and a very large number of doctors in practice, have come under the medical and organizational influence of Columbia-Presbyterian, Einstein-Montefiore, and the city's five other major teaching hospital complexes. The same process has occurred in Baltimore, Philadelphia, Boston, Houston, Los Angeles, and other major cities. The resulting networks of affiliated institutions the Ehrenreichs call "health empires," and they argue that these empires have an institutional compulsion to expand, in order to attract the talent and the money--both from the federal government and from private foundations and bequests--they need to stay on top.

Radicals like the Ehrenreichs generally argue that these newly emerging giant medical institutions carry within them the seeds of their own destruction. Almost all of them are located in the inner city--Columbia-Presbyterian, for example, on the fringes of Harlem--where the contrast between their wealth and privilege and conditions in the surrounding community will inevitably lead to dialectical contradictions and ultimately to conflict.

To a limited extent, the people of the ghettos began to verify this prediction. However, just as in ghetto rioting between 1964 and 1968, small, local businesses were attacked while major symbols of social and economic power--like the General Motors building, an oasis in the flames of Detroit--were left untouched, old, poor hospitals bore the brunt of the trouble, not the rich, expanding medical complexes. Confrontations have occurred between administrators and insurgents in several big city hospitals: Lincoln Hospital in the Bronx, Cook County in Chicago, San Francisco General, and D.C. General in Washington, for example. The insurgents in each case were young, mainly white, middle-class radical doctors; or community militants; or some combination of these.




The suspicion that, for all its technical achievement, American medicine was falling away from both professional ethics and the concept of social responsibility was not confined to radicals or to the young. Consider, for example, the following harsh judgment on the quality of treatment dispensed to recipients of Medicaid:

"The task force, along with what is possibly a majority in the health profession and certainly a majority of the population interprets the recent Federal enactments [those, that is, establishing Medicaid] as intending that access to basic medical care shall be a right or entitlement....That right or entitlement is not fulfilled when millions in the population...are given a kind of service that is woefully inferior by every standard known to man or doctor."

That statement is taken from no radical diatribe. It is a quotation from the official report of a task force set up by the Nixon Administration to study Medicaid, with staff support from HEW, and chaired by the president of the Blue Cross Association of Chicago, Walter McNerney. In a paper written in 1972, Dr. Victor Sidel summed up the anguished reassessment that had been taking place in a thousand lectures, papers, and medical conferences: "Everything that we have learned about how clever we are, how important we are, how relevant we are, how trusted we are, how self-sacrificing we are, will have to be re-examined."

Besides speeches, reports, and articles, the wave of dissatisfaction with medical practice manifested itself in a variety of ways, on the part of both doctors and their patients. Doctors demanded peer review of each other's professional performance. Many medical experts argued for the development of a paraprofessional class, to relieve doctors of some part of their medical monopoly. Most significantly, malpractice suits against doctors rose sharply, and courts increasingly had a tendency to find for the plaintiffs, the patients.

Writing in the Spring, 1973, issue of The Public Interest, sociologist Nathan Glazer discussed this last phenomenon and expressed a concern felt by many Americans in the years of the great medical bonanza. He pointed out that the incidence of malpractice suits in England or in Sweden had not greatly increased, and asked

"why the best-paid doctors in the world--at least some of them--seem to find it necessary to engage in barely legal or illegal practices in order to force their incomes higher? Or is it indeed because they are the best-paid doctors in the world that so many have engaged in profiteering at the public expense?...Is it possible that the somewhat greater distance between healing and monetary payment that generally prevails in England and Sweden contributes to a morally healthier medical profession?"

In that same article, reviewing recent academic studies of the American health system, Professor Glazer reports a "recent backlash of defense for the American health system."

If, in the late 1960s, congressional faith in Unlimited research expenditure wavered under the influence of a new concern with the human problems of health care delivery, and a new skepticism about technology, that skepticism was rather short lived. The "dread disease lobby" soon reasserted itself. In January, 1971, President Nixon proposed (with the support, incidentally, of Senator Kennedy) to set up a new, separate National Cancer Institute. He advocated it with the old can-do rhetoric about the need for the kind of effort "that split the atom and took man to the moon." The rest of the medical research community was strong enough to prevent this dismemberment of NIH. But by the end of 1971, Congress enacted, and the President signed, a new Cancer Act, authorizing $1.6 billion over three years for a new "assault" on cancer. At the medical schools, the high tide of radicalism is said to have crested.




Even before its attention was distracted and its energies paralyzed by Watergate, the Administration had lost any sense of urgency about national health insurance. Indeed it had all but abandoned its plans in their original form. Before he left HEW on his way to the Justice Department via the Pentagon, Elliot Richardson had his staff prepare what came to be called the Mega proposal. This was a secret plan for comprehensive "simplification and reform" of the more than 300 HEW categorical social programs. In general, the plan followed the lines of the Administration's general philosophy of revenue-sharing and "the New Federalism"--not to mention its desire to cut back domestic spending.

The health section, which soon leaked out, proved of special interest. For one thing, it contained a harshly explicit critique of the Administration's own national health insurance proposals. "Many billions," it said, would be needed to convert these into a "true universal entitlement plan with a comprehensive benefit plan." In its place, the Mega paper suggested a new concept: Maximum Liability Health Insurance. In effect this was a much liberalized version of the concept of "catastrophic insurance." The government would provide cover from the "catastrophic" end of the scale down to a maximum liability fixed for each individual according to his income. Below that level he would be on his own, at liberty either to pay his own bills or to insure himself in the market.

This scheme derived largely from the theories of Dr. Martin Feldstein, the Harvard economist who worked as a consultant on the Mega proposal. Feldstein has now spelled out the maximum liability concept under another name ("major risk insurance," or MRI) in an article in the June, 1973, issue of the AMA magazine, Prism.

"Every family would receive a comprehensive insurance policy with an annual direct expense limit...scaled so that families with higher incomes would be responsible for larger amounts of their medical bills...the expense limit might start at $300 per year for a family with an income below $3,000. It might be ten percent of the income of persons earning between $3,000 and $10,000 and $1,000 for incomes above that level. MRI could be improved by introducing a coinsurance feature above that basic deductible...."[See Endnote 6].

Feldstein argues that his scheme would not only prevent financial hardship for individuals but would also save billions of dollars in public money, both by removing the existing tax deductions for medical expenses (though of course these could be removed in conjunction with any other reform) and by making people "more cost conscious in spending their own money and this in turn would help to check inflation."

Feldstein is an economist, but his analysis seems almost oblivious to noneconomic factors. In one of his papers, he attributes rising costs primarily to rising demand on the part of patients, brushing aside the degree to which it is doctors, and not patients, who make the effective decisions about the demand for treatment. He argues that the best way to measure the benefits of hospital care is in dollars! In short, he, and others of his school, analyze the medical system as if it were a marketplace like any other. They advocate "deductibles," "coinsurance," and other devices to make the patient spend his own money when he needs medical care precisely because such devices help to turn medical decisions into economic ones.

The revival of respect for essentially economic prescriptions for the health care crisis was to be expected. But it marked the end of a period in which economic problems caused a revaluation of the noneconomic deficiencies of the medical system.





Both the shift to the left in the late 1960s and the subsequent reaction can be explained by factors intrinsic to the health care system--up to a point. There is, as I have tried to show, a great deal of evidence that the way Medicare and Medicaid were introduced led to a rapid rise in medical inflation, and that inflation led to reassessment, to a sense of crisis, and to a change in the whole climate for reform of the system. The reaction can also be explained in terms of developments within the world of medicine. If rapidly rising costs led to a sense of crisis, then it can hardly be irrelevant that inflation of health costs has slowed down. Harry Schwartz, in his spirited 1972 book called The Case for American Medicine, claims that "between August 1971 and August 1972, the medical price index rose only 2.2%, substantially less than the cost of living rose in the same period." Checking with other health economists, I found that there is some dispute about the extent to which government policy from Phase I to Phase IV braked the inflation of medical costs, but it is not disputed that the sharp rise of the late 1960s is now over. Indeed, to the extent that the sharp inflation was caused by fee increases that would not be repeated for some time to come, it would be odd if the rate of inflation had not slackened off. And again, to the extent that the rise in costs created a new propensity to ask fundamental questions about the system, the passing of the wave in medical costs would naturally be expected to presage some calming of the clamor for reform.

But I suspect that something larger is also involved. The striking thing is how closely the changes in political and intellectual attitudes to the health care system have mirrored the changes in other areas of American life.

A parallel from the history of higher education may illustrate what I mean. In August, 1967, Christopher Jencks and David Riesman finished writing a book about American universities, which they called The Academic Revolution. In January, 1969, they sat down to write a preface to the second edition. In the intervening seventeen months, all hell had broken loose on American campuses. The "revolution" of their title, to the extent that it was more than merely metaphorical, had been a slow, gradual affair, transforming universities over a couple of decades. Now, to the embarrassment of Jencks and Riesman, people were rushing out to buy their book in the hope of getting some understanding of what looked like an all-too literal academic revolution.

This experience set Jencks and Riesman to measuring, in their second preface, the sheer speed of change in American attitudes to higher education since they had started studying it at the end of the l950s. Then, they recalled,

"both educators and laymen seemed appallingly complacent about American higher education...the only widespread complaints about higher education were that Americans needed more of it...Almost all educators accepted the legitimacy and authority of the academic profession a few years ago, even when they criticized specific aspects of its operation. Today all this has changed...the public is becoming more skeptical about educators' claims...educators are far less sure than they were that their traditions and values are worth defending...a small but growing minority seems convinced that the academic system...is not just blemished but fundamentally rotten."

Change only a few words--"educators" into "doctors," "academic" into Medical," and so on--and this could stand as a summary of what happened in American medicine in the late 1960s. It was as true of American medicine as of higher education in the 1950s and the early 1960s--probably more true--that "the only widespread complaints were that Americans needed more of it."

The crisis of confidence of the late 1960s, in short, seems to have followed the same course in the universities as it did in medicine, and in fact as it did in the life of other social institutions as well. Doubt, criticism, crisis, radical challenges to old assumptions and established structures of authority and a willingness even on the part of conservatives to move out of entrenched positions and accept a surprising degree of change: these were the characteristics of the years from l966 to l970. Then the old assumptions, the defenders of the status quo and the doubts about the doubts began to have their turn once again.

The reasons for this pattern, I am suggesting, lie only partly inside the medical system itself, in the consequences of Medicare, or in the operation of demand-pull and cost-push. For, much as some of its leaders would like it to, the medical system does not in the end operate in isolation from the general mood of American life. In the most specific ways, medical institutions, like other institutions, felt the impact not only of liberal reform but also of the Vietnam War, of inflation, the civil rights movement, feminism, student dissent, and ghetto anger. It also felt the reaction to the great national crisis of the 1960s: the disillusionment with rising federal budgets, the impatience of the white middle class with strident radicalism, the counterattack of organized interest groups, and the stubbornness with which conservative intellectuals have patched up intellectual defenses of the free enterprise status quo.

Yet most of the things that were wrong with American medicine when President Nixon thought the system faced imminent breakdown are wrong with it now. Americans still spend far more on their health than people anywhere else in the world, and live shorter lives than do the inhabitants of many of the countries Americans' ancestors emigrated from in the nineteenth century.




What are the prospects for change at this time? The initiative for health care reform having passed to Congress, the eventual shape of national health insurance will emerge from the tete-a-tetes between Senator Kennedy and Chairman Mills. Even if they do succeed in drafting a bill by the fall, it will have to wait in line behind both tax and trade legislation in what have become overcrowded sea-lanes leading to the Ways and Means Committee. Even if legislation is drafted late this year, it is realistic to guess that it would not become law before, say, 1977. Perhaps five years have been lost.

This is not the result of any obstructionist desire on the part of Wilbur Mills. The chairman may be an old gray fox, a pragmatist who keeps his cards up against his chest until he plays them. But he is also a positive man, a master craftsman of consensus. He personally wants to pass a historic--which means a substantial- national health insurance bill before he retires. He has steered thousands of pieces of legislation through Congress. But Medicare was to have been his monument. He sees that monument as slightly tarnished, by inflation and by the suggestion of incompleteness. National health insurance would be a fitting crown for one of the great congressional careers.

Mills does not think such a bill can be passed unless it includes a role--some role, however limited--for the insurance industry. On the other great issue, the method of financing, the evidence is that neither Kennedy nor Mills has yet committed himself. And there are good reasons why they should not commit themselves yet. The deficit is so high that it would be hard to finance a major measure through the budget. Social Security is so high that it would be hard to increase that for a while. And the "mandated" employer-employee approach has several disadvantages--not least that it belongs to the Republicans. No wonder many experts are turning toward some gradualist approach to national health insurance. They want to crawl up to it unobserved, and wave the flag only when there is a victory to announce.

One such gradualist tactic would start with the catastrophic approach and transform it bit by bit. If the Long bill took effect, not at $2000 and sixty days, but at $100 and a week, we would wake up one morning to find that Congress had amended it into national health insurance. In theory, Martin Feldstein's idea of starting at the top and working down could be extended piecemeal even more effectively. A third approach, which both Mills's and Kennedy's staff have examined, would be to start with mothers and children--for example, with federal coverage of prenatal care, delivery, and postnatal care up to the age of five. That would have numerous advantages. Good health care in the first five years of life is cheap--it need cost no more than $5-7 billion a year, Dr. Rashi Fein calculates. It also reduces the need for more expensive care later in life. And motherhood is notoriously hard to oppose politically.

Senator Kennedy admits the attraction of such gradualist ideas. But for him they all suffer from the same philosophic weakness. They give the government no leverage to reform the health care system as a whole and they therefore risk repeating the experience of Medicare. His personal preference is for Social Security as a method of financing, and for an interesting reason. His thinking goes back to what was perhaps the most important single cause of the mood of reaction we have been witnessing recently: the feeling on the part of many middle-class people that they were left out by the liberal reforms of the 1960s. Again, it is worth noticing that the argument is in no way specific to the medical field; it applies to social policy as a whole. Kennedy told me:

"I think there's one lesson we learned in the 1960s and that is that programs which are directed toward alleviating social needs ought to be targeted in a universal way. What is the most successful social program we have in this country? Social Security. And why? Because it's universal. A policeman in Boston, for example, isn't going to be against a particular program that helps the blacks, so long as he's being helped too. Once he feels the pressures on him are being taken care of, I think he's enormously tolerant of doing something for the disadvantaged--so long as he feels that things are moving along for him too."

That is the language of consensus politics. It is, interestingly, identical with the view of Irving Kristol, who, through his editorship of the journal The Public Interest and friendship with Ambassador Daniel Patrick Moynihan, had a considerable influence on the social policies of the first Nixon Administration. And it may well be true that it will take a return to consensus politics, on Capitol Hill and perhaps in the White House too, if the Democrats can recapture it, before a major national health insurance measure is passed.

But the important weakness in the American health care system which the crisis of the late 1960s revealed was not the organizational and financial crisis which a cautious, compromise brand of national health insurance would deal with. It was the entrepreneurial concept of the doctor's social role, the intimate relationship, in Nathan Glazer's formulation between healing and monetary reward, which has prevented a real, indeed a brilliant, improvement in medical technique from being translated into commensurate improvement in medical care. Cleansed of the entrepreneurial temptations which the Administration's interpretation has allowed, the Health Maintenance Organization could develop into the key institution in a transformation of the economic structure of medicine which would diminish the conflict between the doctor's and the patient's interests. Probably the best hope of spreading the HMO system would be by linking it with a national health insurance system; and there are certainly ways in which this could be done. But it is clear that in the crisis of the 1960s an opportunity for reforming one of the least attractive aspects of American life arrived, and was lost.


ENDNOTES:

1. For example, Dr. Martin Feldstein, in The Rising Cost of Hospital Care, National Center for Health Services Research and Development, 1971.

2. The operation of the medical research lobby was analyzed by Elizabeth Drew in The Atlantic of December, 1967. Mrs. Drew pointed out that cancer, heart disease, and stroke, which received the lion's share of congressional attention, happen to be the major medical threats to elderly, middle-class males, the demographic category to which all the key congressional figures belonged. The story has also been well told in detail by Stephen P. Strickland in Politics, Science and Dread Disease (Harvard University Press, 1972).

3. These international rankings are not absolutely precise, for two reasons. National statistics do not all date from the same year. And not all territories included in the U.N. data are sovereign nations. I have, for example, excluded Northern Ireland and the Ukraine (both of which have higher life expectancy than the United States). Interestingly, two U.S. dependencies, Puerto Rico and the Ryuku Islands, also have higher male life expectancy than the United States.

4. By Dr. John Bunker, New England Journal of Medicine, 1970.

5. The revelation in 1972 that a federally sponsored research project in Tuskegee, Alabama, had been paying black syphilis patients to forgo treatment in the interests of research illustrated how far medical researchers were prepared to go. It also stimulated debate among civil libertarians and on Capitol Hill about defining new canons of research ethics.

6. The Rising Cost of Hospital Care, National Center for Health Services Research and Development, in 1971. Feldstein complains that "the role of increasing demand as the primary cause" of cost increases "is not generally understood," in spite of the fact that he has taken the trouble to demonstrate it with "a formal mathematical model." Yet at times he seems a little confused on this point himself: he concludes his paper by saying that "our current methods of hospital insurance have encouraged hospitals... to increase the sophistication and expensiveness of their product more rapidly than the public actually wants." The trouble, in fact, has come from a special type of "demand," usually known to those unfamiliar with Feldstein's formal mathematical model as "supply."


Copyright © 1973, Godfrey Hodgson. All rights reserved.
The Atlantic Monthly, October, 1973, issue. Volume 232, Number 4 (pages 45-61).

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