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The Washington Post April 1, 1993

The Last Time We Reinvented Health Care

By Joseph A. Califano Jr.

As the president, Hillary Rodham Clinton and Congress set out to reinvent health care in America, they are wise to consult widely, since we got into much of the current mess by acting on the best of intentions without foreseeing the worst of unintended effects. The hand of government in shaping health care grew strong in the 1960s -- and herein lie the most important lessons for the Clintons and Congress. In 1960 Congress passed the Kerr-Mills Act -- sponsored by the powerful Oklahoma senator and the Arkansas congressman who chaired the House Ways and Means Committee -- to get health care to poor rural Americans. The legislation required the federal government to pay 50 percent to 80 percent of the funds states spent for medical assistance to the needy aged, with the poorest states targeted to receive the highest federal match. The Kerr-Mills package covered everything from hospital, surgical and physician care to drugs and (a special need of the elderly rural poor) false teeth. To the dismay of Kerr and Mills, by 1964 five large industrial states (California, New York, Massachusetts, Michigan and Pennsylvania) with only 32 percent of the over-65 population, grabbed 90 percent of the Kerr-Mills dollars. When Lyndon Johnson asked Congress to enact Medicare for the elderly, he seized upon the angry frustration of Ways and Means Committee Chairman Wilbur Mills. Johnson and Mills cooked up the idea that Kerr-Mills could be changed to cover welfare recipients and other "medically indigent" individuals without regard to age. That, Johnson told Mills, would get funds to "poor mamas and babies" in rural and southern states, and limit the share going to big industrial states. To enhance the attractiveness of the program, Johnson added coverage of nursing home care. Thus was Medicaid born, with little appreciation of the imminent aging of America (accelerated by the health care provided by Medicare and Medicaid) or the separation of family generations that a mobile society would encourage. LBJ and Wilbur Mills would turn in their graves to learn that today Medicaid spends almost a third of its $ 140 billion on nursing homes, having created a $ 75 billion-a-year industry -- up from less than a billion dollars in 1965, when the program was enacted. And they would chortle to learn that Medicaid is eating up the budgets of the big industrial states.

The ripple of unexpected consequences did not end there. To pry Medicare and Medicaid out of the Senate Finance Committee, Johnson had to agree to pay hospitals on a cost-plus basis, and doctors' fees that were "reasonable," "customary" and "prevailing" in their communities, thereby giving physicians the power to raise their own fees. When LBJ asked what that compromise would cost, he was told, "Half a billion dollars." "Only $ 500 million," Johnson snapped, "Get the bill out!" His single-minded focus on access for the poor and elderly led him to grossly underestimate the price of giving hospitals and doctors the keys to the federal Treasury. The next unpleasant surprise came from our well-intentioned effort to increase the number of physicians. We feared that with too few physicians to handle the increased demand from the new federal programs, the price of their scarce services would rise. Over the opposition of the American Medical Association, we rammed through legislation to increase competition by doubling the number of doctors graduating from medical school each year from 8,000 to 16,000. We have since discovered that more doctors only mean more care and higher health care costs. Even our determination to democratize access to the best medicine by training more specialists bit back, as we have learned that more specialists mean more referrals to specialists and a spiraling medical bill. To arrest booming costs, LBJ and every president since have sought reform of the health care system, trying everything from price controls to promoting health maintenance organizations and managed care. To hold down doctors' fees, Medicare established a list of procedures for reimbursement, capping the amount to be paid for each one. That effort created gigantic insurance company bureaucracies to play catch-up with doctors who simply created additional procedures and performed them more frequently. When the Johnson administration ended, there were 2,000 medical procedure payment codes. Today, there are about 7,000, most with subcategories. Stunned by the explosion in high-ticket technology and the expansion of hospitals well beyond necessary capacity (prompted by the Hill-Burton Act, which financed hospital construction, and by Medicare, which reimbursed capital costs), in 1974 Congress passed the Health Planning Act, requiring hospitals to obtain certificates of need before they could increase the number of beds, build new wings or buy new equipment. Surprised again! When the government tried to eliminate almost a half-million unnecessary hospital beds, the cumbersome certificate-of-need program became an incentive for hospitals to resist. They feared that if circumstances changed (say, because of an AIDS or TB epidemic), they would never get permission to expand. Next came the attempt to hold down hospital costs by creating Diagnosis Related Groups (DRGs), to limit lengths of stay and intensity of care for Medicare hospitalizations. The result: Doctors ratcheted patients up to the highest-intensity care they could, and hospitals hiked up charges to private plans that don't have DRG limits in order to compensate for the Medicare shortfall.

A current fashion is managed care. By curbing unnecessary hospitalization, surgery and tests, managed care has helped contain costs, but it has also been a driving force in making America's health care system the world's most expensive to administer (at a cost close to $ 200 billion annually). The point of this recital is not to show how Congress and past administrations have played "Abbott and Costello Go to the Doctor" for the past 30 years, or even to purge myself by confessing my own long list of sins and miscalculations in health care policy tinkering. The point is to alert the Clintons, who embody the first real chance since Lyndon Johnson to make health care available to more Americans, and Congress, which has the best shot in a generation to do something sensible in this area, that the principle of "caveat emptor" applies to reinventions of the health care system finely tuned by the best and brightest policy wonks. The writer was special assistant for domestic affairs to President Lyndon B. Johnson and secretary of health, education and welfare under President Carter. He is now president of the Center on Addiction and Substance Abuse at Columbia University.