Health Care Reform: Beware of Interest Groups Bearing Gifts

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

May 12, 2009

A Rip van Winkle who dozed off in 1977 and awoke to read today’s newspapers might feel he had not missed a thing. Then, as today, leading members of the health care industry were promising voluntarily to rein in the growth of health care spending. The industry promised parsimony to avoid legislation that might regulate their incomes. Recalling that episode—and what happened in its aftermath—may dampen the frisson of naive excitement rippling through the punditocracy over the seeming willingness of recipients of health care spending to cut their own incomes.

Back in the mid 1970s, as today, health care spending was outpacing income growth—by 3.2 percentage points in 1976. General inflation was high and rising. Health care spending had risen to a then-unthinkable 8 percent of gross domestic product. Controlling hospital spending, nearly half of personal health care spending, seemed a good way to cope with general inflation. And, so, the just-inaugurated President Carter in April 1977 proposed a program of mandatory hospital cost containment. The proposal immediately encountered stiff political headwinds, but received active consideration throughout 1977 from four Congressional committees.

Then, at year end, several groups including the American Medical Association, Blue-Cross/Blue-Shield, the Health Insurance Association, and the Health Industry Manufacturers Association announced a ‘voluntary effort’ to, among other things, lower the growth of hospital spending—by 2 percentage points in the next two years and by 1½ percentage points after that. They also promised to boost hospital productivity and to improve the review of the appropriateness of hospital admissions. How was this all to be done? Well, they didn’t really say. It was voluntary, you see.

However vague the voluntary effort may have been, one thing was clear. It put the Carter administration’ hospital cost control plan into the political equivalent of a persistent vegetative state. Some further hearings were held in 1978. By year end, the Carter administration was asking the nation’s hospitals voluntarily to limit the growth of spending in 1979. In 1979, the House of Representatives effectively killed the cost control effort by approving a substitute plan with no mandatory limits. Instead, it called for a national commission to—you guessed it—study the problem of rising spending.

This history seems as if it was torn from today’s headlines. The signers of today’s promise include the American Medical Association, America’s Health Insurance Plans, the Pharmaceutical Research and Manufacturers Association, and the American Hospital Association. They promise to lower the growth of health care spending by 1½ percentage points a year. And the way they propose to do that is to ‘develop consensus proposals…through changes made in all sectors of the health system.” And, they assure us, they are “committed to taking action in public-private partnerships.”

Well, maybe. But one should remember what happened during and after the earlier ‘voluntary effort.’ In 1977 and 1978, when hospital cost control was under consideration, health care spending barely exceeded the growth of GDP. All participants in the voluntary effort wanted to keep the government out of their hair. They succeeded politically. But they failed to slow health care spending—in the next seven years, health care spending outpaced income growth by 3.2 percentage points, the same as in 1976.

If we are to learn from history, rather than simply repeat it, there are some simple but vitally important lessons. The first is to welcome the stated willingness of representatives of the health care industry to tackle rising health care spending. Even if cooperation is partly a ploy to minimize federal regulation of their business, it reflects a demonstrable fact—the open and inclusive way the Obama administration is pursuing health system reform is bearing fruit. Unlike the Clinton administration, which hatched its plan with little input from private interests nor members of Congress, the Obama team has made the development of legislation the responsibility of the people who will have to vote on it—the legislators. It has reached out to private groups. And in so doing, it has made the sort of take-no-prisoners attitude that doomed the Clinton plan simply unacceptable.

The second lesson is that willingness to talk about cost control is not enough. The representatives of hospitals, insurers, and drug companies have a fiduciary responsibility to represent the private interests of their members and shareholders. The public interest in creating incentives that will guide individuals to demand and businesses to provide health care to all Americans in an efficient way belongs to elected officials. No voluntary effort can do that job.