HMGT 435 WEEK 3 PRO 3

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501

THE ROLE OF GOVERNMENT IN MEDICAL CARE

Government intervention in the financing and delivery of medical services is pervasive. On the financing side, the Affordable Care Act (ACA) provides subsidies and tax credits to individuals, small businesses, and

low-income employees, and employers are required to provide health insurance benefits to their employees. Further, hospital and physician services for the aged are subsidized (Medicare), and a separate payroll tax pays for those sub- sidies. Medicaid, a federal/state matching program, pays for medical services for the poor and near-poor. Further, a large network of state and county hos- pitals is in place; health professional schools are subsidized; loan programs for students in the health professions are guaranteed by the government; employer- paid health insurance is excluded from taxable income; military members, retirees, and their families have access to a separate healthcare program called TRICARE; and medical research is subsidized. In all, government pays for more than 50 percent of total health expenditures.

In addition to these financing programs, extensive government regula- tions influence the financing and delivery of medical services. For example, state licensing boards determine the criteria for entry into different professions, and practice regulations determine which tasks can be performed by which profes- sional groups. In some states, hospital investment is subject to state review, hospital and physician prices under Medicare are regulated, health insurance companies are regulated by the states, and each state mandates which benefits (e.g., in Minnesota, hair transplants) and providers (e.g., in Washington, natu- ropaths) should be included in health insurance sold in that state (Bunce 2013).

The role of government in the financing and delivery of medical ser- vices (and through federal and state regulations) is extensive. To understand the reasons for these different types of government intervention, and at times seemingly contradictory policies, it is necessary to understand the two theories that underlie the government’s objectives.

Public-Interest Theory of Government

The public-interest, or traditional, theory of government can be classified accord- ing to its policy objectives and the policy instruments used to achieve those

31

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 1/26/2023 3:09 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 1907359 ; Paul Feldstein.; Health Policy Issues: An Economic Perspective, Seventh Edition Account: s4264928.main.eds

Health Pol icy Issues: An Economic Perspect ive502

objectives. The objectives of government in the healthcare field are twofold: (1) to redistribute medical resources to those least able to purchase medical services and (2) to improve the economic efficiency by which medical services are purchased and delivered. These traditional objectives of government—redis- tribution and economic efficiency (also referred to as market failure)—can be achieved by using one or more of the following policy instruments: expenditure, taxation, and regulation. (Government provision of services, such as in Veterans Affairs hospitals, is rarely proposed as a policy instrument in the United States.)

These policy instruments—expenditure, taxation, and regulation—can be applied to the purchaser (demand) side or the supplier (provider) side of the market. For example, expenditure policies on the demand side are Medicare and Medicaid, and on the supply side are subsidies for hospital construction and health manpower training programs. Taxation policies on the demand side cover tax-exempt employer-paid health insurance, and on the supply side are tax-exempt bonds for nonprofit hospitals. The individual mandate to buy health insurance is a regulation policy on the demand side; on the supply side are licensing requirements, restrictions on the tasks various healthcare professionals can perform, entry barriers to building a hospital or a new hospice in a region, and regulated provider prices for hospitals and physicians under Medicare.

These policy objectives and instruments—which can be used to classify each type of government health policy according to objectives, the type of policy instrument used, and whether the policy instrument is directed toward the demand side or supply side of the market—are shown in exhibit 31.1. According to the public-interest theory, each policy should achieve one of the two government objectives.

Redistribution Redistribution causes a change in wealth. According to the public-interest theory of government, society makes a value judgment that medical services

Government Policy and Instruments

Government Objectives

Redistribution Efficiency

Improvement

Expenditure { Demand side

Supply side

Taxation (+/–) { Demand side

Supply side

Regulation { Demand side

Supply side

EXHIBIT 31.1 Health Policy

Objectives and Interventions

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should be provided to those with low income and should be financed by taxing those with high income. Redistributive programs typically lower the cost of services to a particular group by enabling members of that group to purchase those services at below-market prices. These benefits are financed by imposing a cost on some other group. Two large redistributive programs are Medicare for the aged and Medicaid for the medically indigent. Any redistributive medi- cal program such as Medicaid should have the redistributive effects shown in exhibit 31.2.

Efficiency Improvement The second traditional objective of government is to improve the efficiency with which society allocates resources. Inefficiency in resource allocation can occur, for example, when firms in a market have monopoly power or when externalities exist. A firm has monopoly power when it is able to charge a price that exceeds its cost by more than a normal profit. Monopoly is inefficient because it produces a level of service (output) that is too small. The additional benefit to purchasers from consuming a service (as indicated by its price) is greater than the cost of producing that benefit; therefore, more resources should flow into that industry until the additional benefit equals the additional cost of producing it.

Several bases of monopoly power exist: (1) The market may have only one firm, as with a natural monopoly such as an electric company; (2) barriers to entry into a market may exist; (3) firms may collude on raising their prices; and (4) a lack of information may mean consumers are unable to judge the differences in price, quality, and service among suppliers. In each of these situa- tions, the prices charged will exceed the costs of producing the product (which include a normal profit). The appropriate government remedy for decreasing monopoly power is to eliminate barriers to entry into a market, prevent price collusion, and improve dissemination of information among consumers.

The other situation in which the allocation of resources can be improved is when externalities occur—that is, when someone undertakes an action and in so doing affects others who are not part of that transaction. The effects on others could be positive or negative. For example, a utility company using high-sulfur coal to produce electricity also produces air pollution. As a result of the air pol- lution, residents in surrounding communities may have a higher-than-average incidence of respiratory illness. Resources are misallocated because the cost

Low Income High Income

Benefits X

Costs X

EXHIBIT 31.2 Determining the Redistributive Effects of Government Programs

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Health Pol icy Issues: An Economic Perspect ive504

of producing electricity excludes the costs imposed on others. As a result, too much electricity is being generated. If the costs of electricity production also include the costs imposed on others, the price of electricity would be higher and its demand lower. The allocation of resources would be improved if the utility’s costs include production and external costs. The appropriate role of government in such a situation is to determine the costs imposed on others and to tax the utility company an equivalent amount. (This subject is discussed more completely in chapter 33.)

According to the public-interest theory, if a policy does not have redis- tribution as its objective, then its goal should be to achieve greater economic efficiency.

Economic Theory of Regulation

Dissatisfaction with the public-interest theory occurred for several reasons. Instead of simply regulating natural monopolies, government has also regulated competitive industries (e.g., airlines, trucks, taxicabs), as well as various profes- sions. Further, unregulated firms always want to enter regulated markets. To prevent entry into regulated industries, the government establishes entry barri- ers. If the government supposedly reduces prices in regulated markets—hence, the firm’s profitability—why should firms seek to enter a regulated industry?

To reconcile these apparent contradictions with the public-interest theory of government, an alternative theory of government behavior—the economic theory of regulation—was developed (Stigler 1971). (For a more complete discussion of this theory and its applicability to the healthcare field, see Feldstein [2006].) The basic assumption underlying the economic theory is that political markets are no different from economic markets; individuals and firms seek to further their self-interest. Firms undertake investments in private markets to achieve a high rate of return. Why would the same firms not invest in legisla- tion if it also offered a high rate of return? Organized groups are willing to pay a price for legislative benefits. This price is political support, which brings together the suppliers and demanders of legislative benefits.

The Suppliers: Legislators The suppliers of legislative benefits are legislators, and their assumed goal is to maximize their chances for reelection. As the late Senator Everett Dirksen said, “The first law of politics is to get elected; the second law is to be reelected.” To be reelected requires political support, which consists of campaign contribu- tions, votes, and volunteer time. Legislators are assumed to be rational—that is, to make cost–benefit calculations when faced with demands for legisla- tion. However, the legislator’s cost–benefit calculations are not the costs and

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benefits to society of enacting particular legislation. Instead, the benefits are the additional political support the legislator would receive from supporting the legislation, and the costs are the political support she would lose as a result of supporting the legislation. When the benefits to the legislators exceed the costs, they will support the legislation.

The Demanders: Those with a Concentrated Interest Those who have a concentrated interest—that is, those for whom the legisla- tion will have a large economic effect—are more likely to be successful in the legislative marketplace. It becomes worthwhile for the group to incur the costs to organize, represent its interests before legislators, and raise political support to achieve the profits that favorable legislation can provide. For this reason, only those with a concentrated interest will demand legislative benefits.

Diffuse Costs When legislative benefits are provided to one group, others must bear the costs. When only one group has a concentrated interest in the legislation, that group is more likely to be successful if the costs to finance those benefits are not obvious and can be spread over a large number of people. When this occurs, the costs are said to be diffuse. For example, assume that ten firms are in an industry, and if legislation is enacted that limits imports that compete with their products, they will be able to raise their prices, thereby receiving $300 million in legislative benefits. These firms have a concentrated interest ($300 million) in trying to enact such legislation. The costs of these legislative benefits are financed by a small increase in the price of the product amounting to $1 per person.

Often, the fact that legislation raises their costs is not obvious to con- sumers. Further, even if consumers were aware of the legislation’s effect, it would not be worthwhile for them to organize and represent their interests to forestall a price increase of only $1 a year. The costs of trying to prevent the price increase would exceed the potential savings.

It is easier (less costly) for providers than for consumers to organize, provide political support, and impose a diffuse cost on others. For this reason, much legislation has affected entry into the healthcare professions, which tasks are reserved for certain professions, how (and which) providers are paid under public medical programs, why subsidies for medical education are given to schools and not to students (otherwise, schools would have to compete for students), and so on. Most health issues have been relatively technical, such as the training of health professionals, certification of their quality, methods of payment, controls on hospital capital investment, and so forth. The higher medical prices resulting from regulations that benefit physicians, for example, by successfully placing limits on nurses’ scope of practice, have been diffuse and not visible to consumers.

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Entry Barriers to Regulated Markets The economic theory of regulation provides an explanation for these dissatisfac- tions with the public-interest theory. Firms in competitive markets seek regula- tion to earn higher profits than would be available without regulation. Prices in regulated markets (e.g., interstate air travel) were always higher than those in unregulated markets (e.g., intrastate air travel), enabling regulated firms to earn greater profits. These higher prices gave unregulated firms an incentive to try to enter regulated markets. Government, on behalf of the regulated industry, imposed barriers to prevent low-priced competitors from gaining entry. Other- wise, the regulated firms could not earn more than a competitive rate of return.

Through legislation, firms try to receive the monopoly profits they are unable to achieve through market competition.

Opposing Concentrated Interests When only one group has a concentrated interest in the outcome of legislation and the costs are diffuse, legislators will respond to the political support provided by the group that seeks to have favorable legislation enacted. When there are opposing groups, each with a concentrated interest in the outcome, legislators are likely to reach a compromise between the competing demanders of legisla- tive benefits. Rather than balancing the gain in political support from one group against the loss from the other, legislators prefer to receive political support from both groups and impose diffuse costs on those offering little political support.

Visible Redistributive Effects When the beneficiaries are specific population groups, such as the aged, the redistributive effects of legislation are meant to be visible. Medicare is an example. By making clear which population groups will benefit, legislators hope to receive their political support. The costs (taxes) of financing such vis- ible redistributive programs, however, are still designed to be diffuse so as not to generate political opposition from others.

A small, diffuse tax imposed on many people, such as a sales or a pay- roll tax, is the only way large sums of money can be raised to finance vis- ible redistributive programs with little opposition. These taxes are regressive; the tax represents a greater portion of income from low-income employees and consumers. Economists have determined that payroll taxes, even when imposed on the employer, are borne mostly by the employee. (The employer is only interested in the total cost of an employee; thus, the employee eventu- ally receives a lower wage than he would have received if these costs had not been imposed.) Imposing part of the tax on the employer, however, gives the impression that employees are paying a smaller portion of it than they really are. The remainder of the tax is shifted forward to consumers in the form of higher prices for the goods and services they purchase, which is also regressive.

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Medicare: A Case Study of the Success of Concentrated Interests The concentrated interests of medical providers and the subsequent diffuse (small) costs imposed on consumers explain much of the legislative history of the financing and delivery of medical services until the early 1960s. The enact- ment and design of Medicare illustrate the real purpose of visible redistribution policy: to redistribute wealth—that is, increase benefits to politically powerful groups without their paying the full costs of those benefits by shifting the costs to the less politically powerful.

Throughout the 1950s and early 1960s, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) unions had a con- centrated interest in their retirees’ medical costs that placed them in opposition to the American Medical Association (AMA). Employers had not prefunded union retirees’ medical costs, but instead paid them as part of current labor expenses. If union retirees’ medical expenses could be shifted away from the employer, those funds would be available to spend as higher wages to union employees.

To ensure that their union retirees would be eligible for Medicare, AFL- CIO insisted that eligibility be based on having paid into the Social Security system while working, and that the new Medicare program (hospital services) be financed by a separate Medicare payroll tax to be included as part of the Social Security tax. Although the current retirees had not contributed to the proposed Medicare program, they were to become immediately eligible because they had paid Social Security taxes. The use of the Social Security system to determine eligibility became the central issue in the debate over Medicare (Feldstein 2006).

The AMA was willing to have government assistance go to those unable to afford medical services, which would have increased the demand for phy- sicians. Thus, the AMA favored a means-tested program funded by general tax revenues because it was concerned that including the nonpoor in the new program would merely substitute government payment for private payment. The AMA believed such a program would cost too much, leading to controls on hospital and physician fees.

With the landslide victory of President Johnson in 1964, AFL-CIO achieved its objective. Once Social Security financing was used to determine Medicare eligibility, Medicare Part B (physician services) was added, financed by general tax revenues. Although AFL-CIO won on the financing mecha- nism, Congress acceded to the demands of the AMA (as well as the American Hospital Association) on all other aspects of the legislation. The system of payment to hospitals and physicians promoted inefficiency (cost-plus payments to hospitals), and restrictions limiting competition were placed on alternative delivery systems.

This historic conflict between opposing concentrated interests in medical care left both sides victorious, and it illustrates how the power of government can be used to benefit politically important groups. As a result of Medicare, a

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massive redistribution of wealth took place in society. The beneficiaries were the aged, union members, and medical providers, and the benefits were financed by a diffuse, regressive tax (the Medicare payroll tax) on a large group—the working population, who also paid higher prices for their medical services and more income taxes to finance Medicare Part B. Medicare was designed to be both inefficient and inequitable simply because it was in the economic interests of those with concentrated interests.

Medicaid and Medicare To understand the two main redistributive programs in the United States, one must recognize the differences in the sources of political support. Medicaid is a means-tested program for the poor funded from general tax revenues. Because the poor (who have low voting participation rates) are unable to pro- vide legislators with political support, the support for Medicaid comes from the middle class (who must agree to higher taxes to provide the poor with medical benefits). The inadequacy of Medicaid in every state, the conditions necessary to achieve Medicaid eligibility, the low levels of eligibility, and ben- eficiaries’ lack of access to medical providers are related to the generosity (or lack thereof) of the middle class. The beneficiaries of Medicare, on the other hand, are the elderly (who generally have the highest voting participation rate of any age group). The aged, together with their adult children, provide the political support for the program. As the cost of Medicare has risen, govern- ment has raised the Medicare payroll tax and lowered payments to providers rather than reduce benefits to this politically powerful group.1

The political necessity of keeping costs diffuse explains why Medicare and producer regulation were financed using regressive taxes—either payroll taxes or higher prices for medical services. Spreading the costs over large populations keeps those costs diffuse, with the net effect being that low-income people pay the costs and high-income people (e.g., physicians, well-to-do elderly) receive the benefits. Determining who receives the benefits and who bears the costs, according to the economic theory, is not based on income (see exhibit 31.2), but rather on which groups are able to offer political support (the beneficiaries) and which groups are unable to do so (those who bear the costs). Regressive taxes typically are used to finance producer regulation and provide benefits to specific population groups.

Changes in Health Policies Health policies change over time because groups who previously bore a diffuse cost develop a concentrated interest. Until the 1960s, medical societies were the main groups with a concentrated interest in the financing and delivery of medical services. Thus, the delivery system was structured to benefit physi- cians. The physician-to-population ratio remained constant for 15 years (until

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the mid-1960s) at 141 per 100,000 (see exhibit 4.1), state restrictions were imposed on health maintenance organizations (HMOs) to limit their develop- ment, advertising was prohibited, and restrictions were placed on other health professionals to limit their ability to compete with physicians. Financing mecha- nisms also benefited physicians; until the 1980s, capitation payment for HMOs was prohibited under Medicare and Medicaid, and competitors to physicians were excluded from reimbursement under public and private insurance systems.

As the costs of medical care continued to increase rapidly for govern- ment and employers, their previously diffuse costs became concentrated. Under Medicare, the federal government was faced with the choice of raising taxes or reducing benefits to the aged, both of which would have cost the John- son administration political support. Successive administrations developed a concentrated interest in lowering the rate of increase in medical expenditures. Similarly, large employers worried that rising medical costs were making them less competitive internationally. The pressures for cost containment increased as the costs of an inefficient delivery and payment system grew larger. Rising medical expenditures are no longer a diffuse cost to large purchasers of medi- cal services.

Other professional organizations, such as the associations for psycholo- gists, chiropractors, podiatrists, nurse practitioners, and nurse anesthetists, saw the potentially greater revenues their members could receive if they were better able to compete with physicians. These groups developed a concentrated inter- est in securing payment for their members under public and private insurance systems and in expanding their scope of practice. The increase in opposing concentrated interests weakened the political influence of organized medicine.

Political Markets Compared with Economic Markets

The usefulness of the different theories of government should be judged by their predictive ability. While it is unlikely that any one theory can explain all or even a high percentage of all legislation, a theory is necessary to try to understand why certain types of legislation are passed and why others are not, unless one believes that all legislation is ad hoc. Organizing our observations in some meaningful manner is natural. The criteria for selecting one theory over another should be based on pragmatic grounds; which approach is better at explaining events under a broad range of circumstances? To reject a theory, it is necessary to have a better theory.

Similarities Between Political and Economic Markets The economic theory of government assumes that human behavior is no differ- ent in political markets than in private markets. Individuals, groups, firms, and

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legislators seek to enhance their self-interests; they are assumed to be rational in assessing the benefits and costs of their actions. This behavioral assumption enables us to predict that firms in competitive markets will try to produce their products and services as efficiently as possible to keep their costs down, and that they will set their prices to make as much profit as possible. They will be motivated to enter markets in which the profit potential is greatest and, similarly, to leave markets in which the profit potential is low.

Including political markets is merely an extension of the earlier discus- sion. Individuals and firms attempt to use the power of the state to further their own interests. Firms try to gain competitive advantages in private markets by investing in technology and advertising. Why shouldn’t they also make political investments to use the powers of government to increase or maintain profit?

The actions of groups of individuals are no different from those of firms. Many people would like to use the power of the state to assist them in accom- plishing what they cannot otherwise achieve. For some, this may mean using the state to help them impose their religious or social preferences on others. Still other groups would like to use the state to provide them with monetary benefits—such as low-cost education for their children, pension payments in excess of their contributions, and subsidized medical benefits—that they could not earn in the market and that others would not voluntarily provide to them.

It is usually with regard to our public servants that the assumption of acting in one’s self-interest becomes difficult to accept. After all, why would a person run for office if not to serve the public interest? However, success in the electoral process requires legislators to behave in a manner that enhances their reelection prospects. Political support, votes, and contributions are the bases for reelection. Legislators must therefore understand the sources of such support and the requirements for receiving it. A hungry man quickly realizes that if money buys food, he must have money to eat. Legislators act no dif- ferently from others.

Differences Between Political and Economic Markets Political markets have several characteristics that differentiate them from eco- nomic markets. These differences make it possible for organized interests to benefit at the expense of majorities. First, individuals are not as informed about political issues as they are about the goods and services on which they spend their own funds.

Second, in private markets individuals make separate decisions regarding each item they purchase. They do not have to choose between sets of packages, such as different combinations of automobile models and home sizes. Yet in political markets, their choices are between two sets of votes by competing legislators on a wide variety of issues.

Third, voting participation rates differ by age group. The young do not vote; however policies are enacted that impose costs on them. Future

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generations depend on current generations and voters to protect their interests. However, as has been the case many times, such as with respect to the federal deficit, Social Security, and Medicare, their interests have been sacrificed to current voters.

Fourth, legislators use different decision criteria from those used in the private sector. A firm or an individual making an investment considers both the benefits and the costs of that investment. Legislators, however, have a dif- ferent time horizon, which not only affects the emphasis they place on costs and benefits but also affects when each is incurred. Because members of the House of Representatives run for reelection every two years, they are likely to favor programs that provide immediate benefits (presumably just before the election) while delaying the costs until after the election or years later.

Fifth, from the legislator’s perspective, the program does not even have to meet the criterion that the benefits exceed the costs, only that the imme- diate benefits exceed any immediate costs. Future legislators can worry about future costs.

For these reasons, organized groups are able to receive legislative benefits while imposing the costs of those benefits on the remainder of the population. For those bearing the costs, it may be perfectly rational not to oppose such legislation. As long as the cost of changing political outcomes exceeds the lost wealth imposed by the legislation, it is rational for voters to lose some wealth rather than to organize and bear the cost of trying to change the legislative outcome.

At times, self-interest legislation may be in the public interest. When this occurs, however, it is a by-product of the outcome rather than its intended effect.

Summary

The public-interest theory of government and economic theory of regula- tion provide opposing predictions of the redistributive and efficiency effects of government legislation, as shown in exhibit 31.3. To determine which of these contrasting theories is a more accurate description of government, we must match the actual outcomes of legislation to each theory’s predictions. Do the benefits of redistributive programs go to those with low income, and are they financed by taxes that impose a larger burden on those with higher income? Does the government try to improve the allocation of resources by reducing barriers to entry and, in markets in which information is limited, by monitoring the quality of physicians and other medical services and making this information available to the public?

The economic theory of regulation provides a better explanation of why health policies are enacted and why they have changed over time. An

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Health Pol icy Issues: An Economic Perspect ive512

indication of the inadequacy of the public-interest theory is the difficulty in placing demand-side and supply-side policies for each of the three policy instru- ments—expenditure, taxation, and regulation (described in exhibit 31.1)—into a redistribution or efficiency improvement framework. The economic theory predicts that government is not concerned with efficiency issues. Redistribution is the main objective of government, but the purpose is to redistribute wealth to those who are able to offer political support from those who are unable to do so. Thus, medical licensing boards are inadequately staffed, have never required reexamination for relicensure, and have failed to monitor practicing physicians because organized medicine has been opposed to any approaches seeking to increase quality that would adversely affect physicians’ income. Regressive taxes are used to finance programs such as Medicare and the ACA’s employer mandate, not because legislators are unaware of their regressive nature, but because the taxes are designed to be diffuse and not obvious to those with low income (who actually bear the burden of the benefits provided to those who have a concentrated interest).

The structure and financing of medical services is rational; the partici- pants act according to their calculations of costs and benefits. Viewed in its entirety, however, health policy is uncoordinated and seemingly contradic- tory. Health policies are inequitable and inefficient; low-income people end up subsidizing those with higher income. These results, however, are the consequences of a rational system. The outcomes were the result of policies enacted by legislators.

Discussion Questions

1. What were the dissatisfactions with the public-interest theory of government?

Theories of Government

Objective of Government

Redistribution Efficiency Improvement

Public-interest theory

Assist those with low income Remove (and prevent) monop- oly abuses and protect environ- ment (externalities)

Economic theory of regulation

Provide benefits to those able to deliver political support and finance it from those offering little political support

Efficiency objective unimport- ant; more likely to protect industries to provide them with redistributive benefits

EXHIBIT 31.3 Health Policy

Objectives Under Different

Theories of Government

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Chapter 31: The Role of Government in Medical Care 513

2. Contrast the benefit–cost calculations of legislators under the public- interest theory of government and the economic theory of regulation.

3. Why are concentrated interests and diffuse costs important in predicting legislative outcomes?

4. Contrast the predictions of the public-interest and economic theories regarding redistributive policies.

5. Evaluate the following policies according to the two differing theories: a. Medicare and Medicaid beneficiaries, taxation, and generosity of

benefits b. The performance of state licensing boards in monitoring physician

quality 6. In what ways are political and economic markets similar? 7. In what ways are political and economic markets different?

Note

1. The political support offered by providers, such as hospitals and physicians, is important in determining how such redistributive legislation is designed. Providers benefit because such programs increase demand by those with low income. However, medical societies have opposed government coverage of entire population groups (e.g., the aged) regardless of income level because government payment would merely substitute for private payment for those who are not poor. Physicians were concerned that if government covered everyone or all of the aged, regardless of income, the cost of such programs would rise and the government would eventually control physician fees. This was the AMA’s basic reason for opposing Medicare. To gain the political support of physicians, Congress acceded to physicians’ preferences when Medicare was established by permitting them to decide whether or not to accept the government payment for treating Medicare patients. Medicaid was not controversial because it covered those with low income; hospitals were paid for their costs, and physicians were paid fee-for-service and could allocate their time as they wished. As the federal and state governments experienced large expenditure increases under each of these programs, government developed a concentrated interest in controlling hospital and medical spending.

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References

Bunce, V. 2013. Health Insurance Mandates in the States 2012. Alexandria, VA: Council for Affordable Health Insurance.

Feldstein, P. J. 2006. The Politics of Health Legislation: An Economic Perspective, 3rd ed. Chicago: Health Administration Press.

Stigler, G. J. 1971. “The Theory of Economic Regulation.” Bell Journal of Economics 2 (1): 3–21.

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