What could have been…

How’s this for a public policy counterfactual: What would our healthcare costs look like today if the biggest government insurance program had spent the last 50 years regulating the costs of care?  Turns out we were one congressman’s pen stroke away from living in that world.

I recently stumbled upon this New Yorker piece from February by historian Julian Zelizer.  It’s an adaptation of his book “The Fierce Urgency of Now,” which tells the story of the arduous passage of Medicare.  Medicare’s legislative journey is reminiscent of the Affordable Care Act’s: a compromised effort at universal healthcare nonetheless attacked as socialized medicine by ideological and industry opponents.

As Zelizer explains, the key congressional leader in allowing Medicare to pass was House Ways and Means Chairman Wilbur Mills, a Democrat from Arkansas.  After the bill passed the House and Senate, Mills saw amendments from Senate liberals as the last remaining threat to the bill, and was determined to remove these threats in conference committee:

[I]n the conference committee, Mills systematically knocked down each amendment. He made only one major compromise, that hospitals and doctors would determine the “reasonable charges” for costs rather than the government doing so through regulated prices. He incorrectly assumed that this would not result in huge costs.

That’s how close we were to Medicare regulating health service fees.  The government-regulated pricing that Mills rejected is known as all-payer rate setting, which is how the state of Maryland pays for healthcare services.  Medicare would have determined what price to provide for each service, and doctors and hospitals would have to take it or leave it.

When compounded year over year, the cost of Medicare today could have been exponentially lower today if Mills hadn’t cut government rate setting out of the Medicare bill.  CMS estimates that Maryland’s rate-setting system alone saves Medicare $330 million over five years.  Imagine the savings if we paid for health services that way nationwide…

This wouldn’t just mean savings for Medicare, either.  Costs would likely be substantially lower across the whole health system, as the prices Medicare pays tend to spill over into the private insurance market.  Private insurers essentially piggyback off of Medicare pricing, negotiating fees with hospitals equal to the Medicare rate plus a percentage more.  For instance, one study found that a $1.00 decrease in Medicare reimbursement for a certain service leads to a $1.16 decrease in private insurance reimbursement for that service.  Medicare and private insurance fees thus appear to move in sync.

So Mills’s miscalculation about how best to control health costs had unappreciated drastic long-term consequences, fueling our ballooned health expenditures today, which account for 17 percent of our national GDP.  Maybe Mills worried about regulatory capture over the price-setting process.  More likely, he was sensitive to the AMA’s attacks of socialized medicine and overzealous government intervention in the healthcare system.

All-payer rate setting is coming back into the national conversation about how to bend our healthcare cost curve today.  Maryland Governor Martin O’Malley is trying to make it an issue in the presidential campaign, pointing to his state’s success in controlling health costs.  But in reading Zelizer’s account of Medicare’s enactment, it’s hard to fathom how close we were to having that kind of cost containment as our national norm for the last half century.

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