Government as the crucible for free market health care: regulation, reimbursement, and reform.

Author:Field, Robert I.

Political debates over economic policy commonly pit the virtues of the free market against those of government oversight. Regulatory policy then becomes an ongoing contest between the public and private sectors, infusing policy debates with a sense that it is necessary to choose between them. On closer examination, this duality is false. On a fundamental level, free-market entrepreneurs and government regulators are not opponents, but aye, on the contrary, partners in a common enterprise. Across a range of major industries, one party could not exist without the other.

In no industry is this interplay more important than in health care. A series of government programs, most initiated during the latter half of the twentieth century, literally created the health care system as it exists in the United States today. Hospitals grew to their present size and technological complexity because of funding provided by the Hill-Burton Act and Medicare. Medicare also funds physician training, as well as reimbursement for many physician-provided services. Pharmaceutical manufacturers rely on the National Institutes of Health to support basic biomedical research that leads to the development of new drugs. A huge tax subsidy for employer-sponsored coverage finances, in large part, the health insurance industry. Without these programs, none of these health care industry segments could have approached its present size or vitality. To ignore this dynamic is to ignore the true nature of American health care and to fundamentally misunderstand the opportunities for reform.

The Patient Protection and Affordable Care Act (PPACA) continues and extends this paradigm. It will expand coverage in large part by facilitating broader demand for individual policies, which will revitalize private insurance markets. It will also extend Medicaid, a program that in most states is administered by private managed care plans, to millions more beneficiaries. Far from representing a government takeover or novel incursion into the health care system, PPACA extends the underlying arrangement that has built and sustains the structure of American health care as it exists today. In the American health care system, private innovation and government intervention represent not opposing forces, but rather partners in a common enterprise.

INTRODUCTION I. GOVERNMENT UNDERPINNINGS OF AMERICAN HEALTH CARE A. The Size and Nature of the Public-Private Partnership in Health Care B. Government-Created Health Care and PPACA II. THE PUBLIC-PRIVATE PARADIGM IN THE LARGER ECONOMY A. Information Technology and the Internet B. Automobiles and Interstate Highways C. Telecommunications and Satellites D. Homebuilding and Federal Mortgage Support E. Government Initiative and Private Innovation III. THE PUBLIC-PRIVATE PARADIGM IN HEALTH CARE A. The Government and the Hospital Industry B. The Government and the Medical Profession C. The Government and the Pharmaceutical Industry D. The Government and Private Health Insurance 1. The Creation of Private Employer-Based Coverage 2. The Creation of Managed Care E. Government-Created Health Care and the Larger Economy IV. PPACA AND MARKET-BASED HEALTH CARE CONCLUSION INTRODUCTION

It is often taken as a truism that America's health care system is rooted in the free market. No other industrialized country looks to private enterprise to drive the provision and financing of care to the same extent. (1) Entrepreneurs devise new products and services, investor-owned insurance companies reimburse for services, and independent practitioners offer services. With the tremendous growth of the health sector in the United States over the past several decades and the ever-expanding array of medical advances it offers, it would be easy to hold out American health care as an example of the fruits of an unfettered market-based system.

However, this assessment would miss a central, indispensable player that makes the market-based system possible. That player is the government, which funds, guides, and nurtures American health care on a fundamental level. In fact, the role of the public sector in American health care is so pervasive and of such longstanding importance that government can be credited with creating and sustaining health care as it exists today.

While the health care system in the United States claims the largest share of private sector involvement of any in the industrialized world, this market-based structure emerged from a series of government programs that launched its key sectors and that continue to shape it. In fact, virtually every major aspect of this system grew out of a government initiative. Moreover, governments at both the federal and the state levels continue to inject more money, directly and indirectly, into the system than all private players combined. (2)

This Article will describe how the government created the private health care sector, how the government continues to sustain it, and how the Patient Protection and Affordable Care Act (PPACA) (3) fits into this historical pattern. Part I describes the paradigm of public-private partnership that characterizes American health care and sets the context for PPACA's structure. Part II describes the paradigm of public-private partnership as it applies in four key industries outside of health care to demonstrate how pervasive this mechanism is in the American economy. Part III applies the paradigm to the creation and growth of four significant health care sectors--hospitals, the medical profession, the pharmaceutical industry, and health insurance. Part IV extends this analysis to PPACA to place its reform approach into perspective. The overall conclusion is that rather than preempting the private health care sector, PPACA will invigorate and expand it.


    1. The Size and Nature of the Public-Private Partnership in Health Care

      Direct government funding of health care totaled almost $1 trillion in 2008 through programs such as Medicare, Medicaid, and veterans' health. (4) In that year, the overall system cost was slightly over $2.3 trillion. (5) However, these government expenditures represent only direct spending, the appropriations that appear in formal government budgets. Substantial additional funding is provided indirectly, in ways that are less apparent but no less forceful in their effect. (6)

      The bulk of indirect government funding of health care is accomplished through tax exemptions that permit large portions of the industry and its customers to avoid assessments on a range of activities. The most substantial of these is the exemption from income tax for health insurance premiums when the coverage is obtained through an employer. That benefit alone was worth over $200 billion in 2006 when both federal and state revenue is considered, (7) and the value rose to $240 billion in 2010. (8) The government also grants exemptions from various forms of taxation to the majority of hospitals and other health care institutions that operate on a nonprofit basis. That benefit was worth over $12 billion in 2002 alone, (9) Indirect government funding of health care also includes the premiums that the federal and state governments pay for the more than two million workers in their employment and those workers' dependents, (10) When combined, direct and indirect government payments cover the cost of almost 60% of the American health care system. (11)

      The most direct beneficiaries of government health care funding are the millions of patients whose care is financed through programs such as Medicare and Medicaid. (12) However, the effects extend much more broadly. A huge swath of the American economy--over one-sixth--is related to health care and therefore benefits from an injection of revenues through government health care programs. (13) Within this economic sector are hospitals, outpatient clinics, physicians, allied health professionals, insurance companies, and pharmaceutical firms--to name only the larger participants. In addition to those components that directly contribute to the actual provision of care, thousands of researchers receive funding to conduct studies in biomedical science, many of which lead to advances in knowledge that benefit private health care entities.

      Each of these players owes a significant portion of its income to government programs. For some, that portion is well over half. (14) What appears on the surface to be a market-based system is actually a huge public-private partnership in which the two sides form a symbiotic pair. (15) Private health care organizations and professionals could not function as they do without government-imposed structure and funding. In the absence of government involvement, the industry would be significantly smaller overall, and the range of medical services available to Americans would be much more limited. (16)

      This is not to say that the United States actually has a government-run system. Even with this large public infrastructure, it is unlikely that the government could maintain the health care system alone. Within the government-crafted structure, private players often take the lead, providing and financing care and manufacturing health care products. Private firms lend energy and vitality to the health care enterprise, along with competition that drives innovation. However, this private component did not arise on its own, and it does not endure based on traditional market principles.

    2. Government-Created Health Care and PPACA

      Failure to understand the government's role in creating and sustaining American health care has warped public debates over the massive health reform legislation enacted in 2010. Opponents have called PPACA a "government takeover" of health care and an attempt at "socializ[ation]" of the health care system)v The clear implication of these charges is that the system in its present form is based in the private sector and that new government...

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