The Rise in Medical Expenditures (4-5)

Why were HMOs and managed care not more prevalent in the 1960s and 1970s?

Organized medicine’s success in including the concept of free choice of provider along with state restrictions retarded the development of HMOs. HMOs preclude their enrollees from choosing any physician in a community, which is a violation of the free choice concept. The government thus could not make capitation payments to HMOs, further entrenching fee-for-service as the primary form of reimbursement.

What have been the federal government’s choices to reduce the greater-than-projected Medicare expenses?

Increased Medicare expenses left the government with three choices: (1) Raise the Medicare payroll tax and income taxes on non-elders; (2) require elders to pay higher premiums along with increased deductibles and co-payments; (3) reduce payments to hospitals and physicians. Although each risks antagonizing an important constituency, government efforts have focused on reducing payments. Some policies (ending free choice of provider and increasing the supply of physicians, requiring acceptance of either all or no Medicare patients) worked better than others (utilization review, restriction on investment in new facilities and equipment, limiting fee increases).

Next: What events occurred during the 1980s in both the public and private sectors to make the delivery of medical services price competitive?

Source: Health Policy Issues: An Economic Perspective (Feldstein)