Policy and Structural Change in the Health Care Industry

• Date: 01 December 1985
• Author: Stephen Martin,John Goddeeris
• DOI: 10.1177/0003603X8503000406
• Published date: 01 December 1985
• Subject Matter: Article

The Antitrust Bulletin/Winter

1985

Policy and structural change

in the health care industry

BY STEPHEN MARTIN* and

JOHN

GODDEERIS**

I.

Introduction

949

In the period since World War II, the share

of

expenditures on

health care in U.S. gross national product (GNP) has more than

doubled, rising to nearly

11

percent in

1983

(see table 1). This

increase in size has been accompanied by a rapid increase in cost:

the medical care component

of

the consumer price index has risen

about 25 percent faster than the general price level over this

period. These rapid increases have evoked considerable public

debate; the real increases in the cost

of

medical care are fre-

quently regarded as evidence

of

poor performance, from a social

point

of

view, in the provision

of

health care.

In this debate, attention has focused on the unique institu-

tions which characterize the health care field. On the supply side,

the provision

of

health care has been dominated by nonprofit

hospitals. Hospitals have been the subject

of

aparticular form

of

industrial planning, under which capital expansion programs

of

more

than

modest size require a publicly granted certificate

of

need. IAt the same time, the fact that major insurance programs

based reimbursement on cost reduced the incentives for producers

••

Michigan State University.

Michigan State University.

ISee Joskow, Controlling Hospital Costs: The Role

of

Govern-

ment Regulation ch. 5 (1981), for a concise discussion of the certificate-

of-need system, which varies somewhat from state to state.

Certificate-of-need systems became prominent in the

1970s;

through

most

of

the postwar period expansion of hospital capacity has been

federally subsidized under the Hill-Burton program.

© 1986by Federal Legal Publications, Inc.

950 The antitrust bulletin

(hospitals and other health care providers) to operate at minimum

cost. On the demand side, those same third-party payment

insurance programs reduced the incentives

of

consumers (patients

but also physicians) to seek the least expensive sort of care. Also

unique is the role of physicians, who supply health care services

while having an important influence on demand.

Because of perceived inefficiencies in the production

of

health

care, pressure for institutional change has come from government

and the private sector, which has found the bill for health benefits

to be a burdensome increase in the cost of operation." An

important policy change took place in October 1983, when

Medicare initiated the "diagnosis-related group" system

of

hospi-

tal reimbursement. Under this system, the amount ahospital

receives for treating apatient depends on the type

of

illness, not

on the cost of treatment. No longer are hospitals assured that all

incurred costs will be reimbursed. Contemporaneously, private

health plans have incorporated copayment systems' into their

benefit packages, in an attempt to induce the consumers

of

health

care to seek the least-cost mode of treatment. 4

These institutional changes have accelerated trends which

were already apparent in the provision of health care, including

the spread

of

for-profit hospitals and the organization

of

both

for-profit and not-for-profit hospitals into hospital chains. Hospi-

tals are diversifying into related fields (insurance), and integrating

vertically (for example, developing "private label" medical sup-

plies, and building relationships with nursing homes). Health care

is, increasingly, moving out of the hospital and into the home and

2See Richards, Business Examines Health Care, 58

HOSPITALS

61

(January

1, 1984);

and

Rosenbaum, Chrysler, Hit Hard by Costs,

Studies Health Care System, New York Times, March 3, 1984, at 1.

3As under the familiar "deductible" system for

auto

insurance, a

covered employee is required to pay the first (say) $200

of

amedical bill;

or, the patient might pay a fixed percentage (say 20 percent)

of

the total

bill.

4Greenhouse, Hospital Suppliers Strike Back, New York Times,

March 31, 1985, §3, at 1.