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The Rise in Medical Expenditures (2-3)


Why has employer-paid health insurance been an important stimulant of demand for health insurance?
The high inflation rate of the 70s began pushing employees into upper tax brackets. Employers responded by supplanting salary increases with additional health insurance, which is not taxable. This had the effect of stimulating demand and increasing prices.

How did hospital payment methods in the 1960s and 1970s affect hospitals’ incentives for efficiency and investment policy?
Medicare’s cost-plus-2% reimbursement for services gave hospitals little incentive for efficiency and great reason to expand services even if that meant duplicating services available in nearby hospitals. Meanwhile, physicians pressured hospitals to invest in new technology so that they would not have to refer patients elsewhere, and possibly lose them. Typically, patients covered by hospital insurance were hospitalized for diagnostic workups. Less expensive outpatient services were usually not covered.

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

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

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