The American health system: a contentious environment in the 21st century

Physician Executive, Jan, 1996 by Thomas P. Weil

The 1982 legislation that authorized selective contracting in California was implemented by a "czar" who coolly exploited hospitals, excess capacity and the inherent craving by administrators for increased market share by insisting on sealed bids for MediCal business. He dramatically rejected a couple of bids to demonstrate that state government would force the providers to accept reduced reimbursement rates. In no other state, except possibly New York for short periods, has such power over hospital reimbursement rates been concentrated in the hands of one public official.

This brief historical overview suggests that it may be misleading to always equate competition in the health field with a weak role of state government. California's political proclivity for vesting, at least for short periods, sizable rate-setting and other directive powers in the hands of public officials insulated from the usual protests and pressures of providers has been at least as important in launching and sustaining its competitive model.

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Ironically, maybe the problem is that public officials in traditional rate-setting states have lacked the political will to act as aggressively as California did. Rate-setting methodologies may contain costs less impressively than does competition not because they cannot do so, but because the pluralistic politics in these states encourage compromise on payment rates that the public, providers, and payers can agree upon. This amounts to a collective decision-making process that avoids letting cost containment chips fall where they may.

What is unexpected in evaluating the efficacy of various states, cost containment efforts is that the average annual growth in health expenditures during the 1980-91 period in California differed marginally from those Maryland and New York and that roughly a third of the residents in these three states now are HMO subscribers (table, above). After adjusting the 1993 average hospital discharge cost in California, Maryland, and New York by the volume of ambulatory care visits, case mix intensity, the Medicare wage index, and the number of admissions per 1,000 persons, significant differences are noted. The 55 percent greater per capita hospital cost in New York is at least partially explained by the state's having 34 percent more paid hours per adjusted discharge (corrected for differences in ambulatory care services).

California has gone further than most states in melding together a few key regulatory measures with a long history of competitive strategies and, as a result, has been impressive in containing hospital costs. However, with an uninsured population soon to reach 25 percent (more than 70 million persons), a tattered "safety net" for the vulnerable, widespread stress because of various demographic factors, and a number of health and educational institutions approaching fiscal collapse, the state is hardly the model one might select to use throughout the nation. Conversely, if the New York health industry emulated the efficiencies illustrated by the paid hours in California, it would eliminate approximately 200,000 full-time equivalent positions. Such layoffs, even achieved over a decade, would cause significant social, economic, and political ramifications, offering just another example of why the health field is predicted to be particularly contentious in the 21 st Century.