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Bending the Curve Requires Health Care Reform, Not Just Sick Care Reform
In the Johnson administration our focus was almost entirely on access, rarely on cost. In order to neutralize physician opposition, we agreed to pay doctors their "reasonable, customary and prevailing fees." Medicare's adoption of this payment system brought it into wide use among private insurers, something those insurers had refused to do for two decades because it gave doctors the power to set their own fees.
When hospitals demanded reimbursement on a cost plus basis, LBJ was told it would cost half a billion dollars. "Five hundred million!" Johnson exclaimed, "Do it. Move that damn bill forward now, before we lose it." (It's worth noting that 40 years later, to get pharmaceutical companies to acquiesce in the Medicare prescription drug benefit, President Bush and Congress agreed to let the industry set its own prices.)
To handle increased demand for health care, we pushed through legislation to increase the number of doctors and hospitals. We assumed that we were playing by traditional economic rules: the more doctors and hospitals, the more competition and the more efficient and less costly the services. Within two years we saw how misguided that assumption was: in a 1968 message to Congress on "Health In America", President Johnson sounded the inflation alarm and cited the need to change the fee for service system with "no strong incentives to encourage [doctors] to avoid providing care that is unnecessary," and the fact that "hospitals charge on a cost basis, which places no penalty on inefficient operations."
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