This document provides a brief history of health care reform efforts in the United States from the 1970s through the 1990s. It describes proposals and actions at both the national and New Jersey state levels, including Nixon's proposals for limited reform and Medicaid expansion, the establishment of hospital rate setting in New Jersey, implementation of diagnosis-related groups (DRGs) for inpatient payments, and Clinton's failed attempt at comprehensive reform in the 1990s. The overarching theme is the rise in health care costs driving attempts to control costs through various payment mechanisms at both the state and national levels over this period.

1. A Brief History of Health
Care Reform
Healthcare Retrospect Part 2: Skyrocketing Costs and
the Emergence of Rate Setting
John J. Dalton, FHFMA
Senior Advisor Emeritus

2. 1970s - National
• 1971 - President Richard M. Nixon proposes
limited health insurance reform—a private health
insurance employer mandate and federalization
of Medicaid for the poor with dependent minor
children.
• 1972 - Nixon signs the Social Security
Amendments of 1972 extending Medicare to
those under 65 who have been severely disabled
for over two years or have end stage renal
disease (ESRD), and gradually raising the
Medicare Part A payroll tax from 1.1% to 1.45%
in 1986.

3. 1970s - National
• 1974 - Nixon proposes more comprehensive health
insurance reform—an employer mandate to offer
private health insurance and replacement of Medicaid
by state-run health insurance plans available to all
with income-based premiums and cost sharing.
Opposed by the AMA, it also drew criticism from labor
and seniors due to its cost-sharing provisions.
• 1976 - Democratic presidential candidate Jimmy
Carter proposes health care reform that includes key
features of Senator Ted Kennedy's universal national
health insurance bill. Three years later, a more limited
proposal to support an employer mandate to provide
catastrophic-only private health insurance and
enhancement of Medicare by adding catastrophic
coverage was abandoned due to skyrocketing health
care costs and the deteriorating economy.

4. 1970s - New Jersey
• 1971 – Under pressure due to rising costs, Republican
Governor William Cahill enacts the Health Care Facilities
Planning Act, establishing a Certificate of Need planning
process, and authorizing the Departments of Health and
Insurance to set inpatient payment rates for Blue Cross
and Medicaid.
• Initially, the Department of Health delegates rate setting
to the New Jersey Hospital Association, and a “budget
review” process is set up.
• Two years in, NJPIRG issues a blistering report describing
NJHA’s process as “the fox guarding the chicken coop,”
and the state is directed to take over the rate-setting
process.

5. 1970s - New Jersey
• September 1974 - Haskins & Sells (now Deloitte) is
awarded a contract to implement a cost reporting and
rate setting system to set 1975 rates for New Jersey’s
hospitals. John Dalton is assigned as Project Manager
to get it done, working for Sister Cathleen Maloney, SC,
CPA, Chief of the Rate Setting Program.
• January 1975 – hospital cost reporting (SHARE, now
Ch. 160) and rate setting system is implemented, and
inpatient per diem payment rates set for 108 acute
care hospitals. Hospitals complain that the system
does not adequately reflect their uniqueness and
advocate for change.

6. 1970s - New Jersey
• 1976 – following presentations by Professors John
Devereaux Thompson and Robert Fetter of Yale
University, New Jersey applies for a Medicare Sec.
1115 waiver to implement an inpatient payment
system for all payors based on Diagnosis-Related
Groupings (DRGs).
• With a $4M grant, the Medicare waiver and enabling
legislation (Chapter 83), New Jersey began
implementing the country’s first prospective payment
system where payment per inpatient case was based
on illness primarily as defined by specific ICD-9
diagnosis and procedure codes.
• Clinical information was merged with other
information, including, patient demographic data, to
be "grouped" into the applicable DRGs.

7. 1970s - New Jersey
An early schematic
depicting the process
of arriving at a DRG
assignment. Initially,
there were 383 DRGs
in 25 Major Diagnostic
Categories (MDCs).

8. 1970s - New Jersey
• Hospitals advocated for inclusion of all
uncompensated care in the prospective
payment rates, both charity care (can’t pays)
and bad debt (won’t pays). DRGs went live
beginning in 1979 with both included as
elements of allowable cost.
• Although payment per case incentivized
hospitals to focus on reducing length of stay,
inclusion of bad debt as an element of
allowable cost ultimately led to the 1989 loss
of the Medicare waiver and the 1993 court
decision in favor of ERISA plans that
deregulated payment rates.

9. 1980s
• 1983 – DRGs go national as Medicare implements its Inpatient
Prospective Payment System (IPPS); refinements continue to be
made as hospitals are paid on a per case basis for inpatient care.
• 1985 – after “60 Minutes” broadcasts an episode titled "The
Billfold Biopsy" about patient dumping at Parkland Medical Center,
the Texas legislature passes a law requiring counties to provide for
the health care of indigent residents. 20 states pass similar
measures.
• 1986 - Congress passes the Emergency Medical Treatment and
Active Labor Act (EMTALA) requiring that all patients seeking care
in an ER be evaluated and treated until stabilized before any
transfer. The hospital to which a stabilized patient is to be sent
must agree to accept the patient (who must consent to the
transfer if possible) and adequate medical records must
accompany the patient.

10. 1980s
• 1986 – In his State of the Union Address, President
Ronald Reagan proposes expansion of Medicare to
cover catastrophic illnesses.
• 1988 – With near unanimous ayes, Congress passes
the Medicare Catastrophic Coverage Act, limiting out-
of-pocket payments to $2,000/yr. for inpatient care.
The expanded coverage would be funded by a
$4.92/month Part A premium increase and higher
premiums for seniors earning more than $35,000/yr.
• 1989 – faced with strong opposition from WOOPies
(Well-Off Older Persons), both the House and Senate
voted overwhelmingly to repeal it just 18 months
after enactment.

11. 1990s
• 1992 – Presidential candidate Bill Clinton
campaigns heavily on health care reform. After
taking office, he appoints First Lady Hillary Clinton
to head up a multifaceted task force to devise a
plan.
• 1993 - the Jackson Hole Group - about 100
academics; executives from the insurance,
hospital and pharmaceutical industries;
physicians; representatives of business and
assorted policy makers – produces a complex
proposal for “managed competition” to provide
universal health care for all Americans.

12. 1990s
Bogged down by its complexity
and opposed by the health
insurance industry’s “Harry &
Louise” TV ads, HR 1200, the
Health Security Act was DOA
when it reached Congress.

13. Contact Information
BESLER Consulting
3 Independence Way, Suite 201
Princeton, New Jersey 08540
Phone: 609.514.1400
Toll Free: 877.4BESLER
Fax: 609.514.1410
www.besler.com