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INTERESTSANDIDEASINHEALTHPOLICY: THEFATEOFHOSPITALRATESETTINGINFOURSTATES by JohnE.McDonough Adissertationsubmittedinpartialfulfillment oftherequirementsforthedegreeof DoctorofPublicHealth (HealthPolicy) inTheUniversityofMichigan 1996 DoctoralCommittee: AssociateProfessorCatherineMcLaughlin,Co-Chair AssociateProfessorBarryRabe,Co-chair AssociateProfessorJohnTierney,BostonCollege ProfessorWilliamWeissert 3o f- 90S22/s ABSTRACT INTERESTSANDIDEASINHEALTHPOLICY: THEFATEOFHOSPITALRATESETTINGINFOURSTATES by JohnEdwardMcDonough Co-Chairs:CatherineMcLaughlin,BarryRabe Fromitsoncepre-eminentpositioninstatehealthpolicy,hospitalratesettinghas declinedinusetoahandfulofstatestoday. Thisstudyexaminesprospectivehospitalrate settinginfourstatesthatestablishedaggressiveprograms. Thedecisionstoderegulateby MassachusettsandNewJerseystategovernments,alongwithananticipateddecisionin NewYorkin1996,areexamined. Marylandstategovernment'schoicenottoderegulate isalsoexplored. Tworivaltheoriesareusedaspotentialexplainersofthese developments:thetheoryofeconomicregulationemphasizingtheroleofinterestgroups, andthepunctuatedequihbriummodelofpolicychangeemphasizingpolicyideas. Results:Hypothesesofthetheoryofeconomicregulationarenotsupported. Whileshiftsininterestgroupsupportforregulationprecededderegulation,clearevidence thatratesettingbenefitedhospitalsmorethanconsumerswasnotfound;publicofficials, werenotfoundtoonlyrespondtointerestgroupagendas. Hypothesesofthepunctuated equihbriummodelaresupported. Identifiable"policyideas"couldbeclearlyassociated withrateregulationandthemovetoderegulation;clearinstitutionalchangeisassociated witheachderegulation. Newactorswereidentifiedwhohelpedtounderminetherate setting"policymonopoly." Factorsassociatedwithderegulationinclude:1)aconflictwithgrowingmanaged caresystemsinratesettingstates;2)politicalchangefromDemocratictoRepublican controlinkeygovernmentalpowercenters; 3)regulatoryfailureandincreasingly Byzantinereimbursementrulesthatunderminedsupport;and4)changedinterestgroup supportforderegulation. Maryland'srecordstandsincontrasttothederegulatedstates. Lessonsfromratesettinginclude:1)deregulationsignifiesanevolutiontomore advancedformsofprospectivepayment,chieflycapitationinsteadofperdiemorpercase methods;2)thedeclineindicatesashifttoadifferentroleforstategovernmentinhealth regulation,includinganexplicitrejectionofthepublicutilitymodel;3)ratesetting's historydemonstratesthebroadabilityofregulatedentitiestomanipulatereimbursement systems;and4)theexperienceindicatessomestrengthsinstategovernmenttomaintain systemstocontrolcostsandimproveaccess. ©JohnE.McDonough 1996 AllRightsReserved ToHelenandJosephMcDonough withlove. ACKNOWLEDGMENTS Ihadsomeverygoodhelpalongwithwaywiththisdissertation. Majorthanksgoto myDissertationCommitteeCo-chairs,CatherineMcLaughlinandBarryRabeoftheUniversity ofMichiganSchoolofPublicHealthwhohavebeenmostpatientandsupportive. Special thankstoWilliamWeissertwhointroducedmetothepunctuatedequilibriummodelandhelped toshapethestructureofthisstudy. ThanksalsotoJohnTierneyofBostonCollege,who introducedmetogreatpoliticalmodelsandideasandwonthestrongallegianceofmy classmatesforhisintelligenceandapproachtopolitics. Specialthanksgotothe60interviewsubjectsinMaryland,Massachusetts,NewJersey andNewYork, Whethertheyknewmebeforehandornot,theyopeneduptheirthoughtsto meinwaysthatInevercouldhavepredictedbeforehand—andtheirmarvelouslycandid quotesthatIhaveusedliberallythroughoutthisstudyaretheproofoftheiropenness. The participantsarelistedinthestudy'sappendix. Thanksalsotofunderswhogamemetheresourcestocompletethisstudyinsucha rapidperiodoftime. TheseincludetheHealthCareFinancingAdministrationoftheU.S. DepartmentofHealthandHumanServices,andtheMichiganBlueCrossandBlueShield Foundation. Theirsupportwasinvaluableinenablingmetocompletetheinterviewsquickly, allofwhichweredoneinpersonbytheauthorinthesubject'sstate. ThanksalsotothePew CharitableTrustfortheirsupportofthisdoctoralprogram Finally,thankstomychildren,DevlinandAmy,whoputupwithintolerableabsences anddistractionsduring24monthsofcoursework,andduringanother18monthsof dissertationmadness. I'dliketosaynow,'TmgoingtoDisneyworld",butthatmayjusthave towaitforanotherre-electioncampaigntogobyfirst. iii r^ PREFACE ProfessorLeonWyszewianskitoldmeearlyinmygraduatestudiesattheUniversityof MichiganSchoolofPublicHealththatmuchdoctoraleducationconsistsof"gettingthingsour ofyoursystemthathavebeenhangingaroundtherefortoolong." Welcometomydoctoral dissertation. Atleasttohispoint,thereshouldbelittledisappointment. Since1985,1haveservedasastaterepresentativefortheCommonwealthof Massachusetts,representinginnercityBostonneighborhoods. Byaseriesofcoincidences- includingsupportingthewinningsideinaSpeaker'sfight--1becameamemberoftheJoint CommitteeonHealthCarein1985asthesoleBostonrepresentative. AsItoldpeopleatthe time,IbarelyknewthedifferencethenbetweenMedicareandMedicaid. IntheCommonwealth'shealthpolicycirclesinthatperiod,keyinterestwasfocusedon thestrategizingandbattlesrelatedtotheall-payerhospitalrateregulationsystem Ifyouwere connectedtoahospital,youwantedmaximumflexibilitytoincreasechargestosustainyour institution. Ifyouwereassociatedwithinsurers,laborunions,orthebusinessgroupsthat involvedthemselveswiththeissue,youwantedtokeepthepressureatthemaximumpossible leveltolowercostsinthemostexpensivehospitalsystemintheworld. Ifyouwerea consumeroraprogressivelegislator,youwantedtokeeycostsdowntoexpandaccess,andt« laythegroundworkforfuturebattlesforuniversalcoverage. Forsixyears,Iengrossedmyselfinlearningtheinsandoutsofanimpossiblycomplex regulatorymodel,tryingtorationalizeitandmakeitwork,tryingtoholdontoaroadmapof thepromisedtoleadusalltoauniversalentitlementtocareforallMassachusettsresidents.In 1991,itallfellapart. First,anewlyelectedGovernorsetadirectionformarketorientedhealth economics. Then,someofthekeyinterestgroupsthathadsustainedtheregulatorysystemfor iv solongbegantomoveawayfromtheirpriorpositionsofsupport. Finally,theHouseand Senaterejectedmyargumentsinfavorofeitheranalternativeregulatorymodel(Maryland's) orasinglepayeralternative,andembracedthelogicofderegulationandthemarket. Atthat time,weweretheonly oneofthefourmajorratesettingstatesthatmovedinthisdirection, thoughNewJerseyfollowedinthenextyear. Before,during,andafterthatlegislativeconflict,thecuriousinterplaybetweeninterest groupagendasandpolicyideashadfascinatedandperplexedme. IrecallreadingFeldstein's ThePoliticsofHealthLegislationin1990or1991andbecomingthoroughlyconvincedofhis argumentthattheselfinterestmodelcouldexplainnearlyeverythingwhilethepublicinterest modelwaspracticallyuseless. InthecontextoftheStateHouse,interestgroupsandlobbyists wereeverywhereandtheirinfluenceseemedboundless. Bycontrast,thehealthservices researchers,whomIhadbeguntomeetthroughtheNationalCenterforHealthServices Researchstartingin1985,werenowhere. Theirresearchseemtobenoticedandembraced onlywhenitconcurredwithbeliefsalreadyheld,andignoredandscornedintheopposite instances. InthecourseofmydoctoralstudiesattheUniversityofMichigan,Iexploredmany ideasandopportunitiesforresearchbeforewindingmywaybacktotheissuesandthemesthat havebeenwithmethroughoutmylegislativecareer. Theprocesshasledmetofindingsand conclusionsthataredifferentthanthosethatIheldwhenIfirstshowedupattheSchoolof PublicHealthinAnnArborinSeptember,1992. Inbrief,someoftheworstpredictionsabouttheeffectsofderegulationneveroccurred, andsomeofthepositivepredictionshavecometopass. Wehaveseenconsiderablereshaping ofthehospitalsector,butwithoutthemassiveclosingsthatwerepredicted. Costsarestill high,butnotashighastheywereattheendofregulation. Hospitalshaveshiftedtheirfocus fromgamingstategovernmenttodeterminingtheirownfatesbasedontheirabilitytosurvive inafastchangingandmercilessmarket. Accesshasworsenedconsiderably,butnot v necessarilybecauseofthemovetoderegulation. Overall,whatIfoughtsohardagainsthas beenamixedblessing,butonbalance,abenefit. Meanwhile,interestsdonotappearquiteasfearsomeastheydidinpriordays. Tobe sure,theyarenottobeignored,provoked,ormessedwithunnecessarily~whenstrong groupsarestronglyunited,theycanstillkillalmostanythingintheirpaths,astheyrecentlydid tomylatestproposalforaminimalhealthcareemployermandate. Buttheycanalsobe understood,workedwith,andhelpedinwaysthatmakerealprogresspossible. Most importantly,whenpolicyideasareonthetableincompellingandimmediateways,itisoften theinterestswhomustlearntoaccommodateandadapt. It'snotjustideasthatmatterin healthpolicy,butit'snotjustinterestseither. Thisstudyistheresultofmypilgrim'sprogressingrapplingwiththemeaningofstate rateregulation'sdemise,andwiththeeternalinterplaybetweeninterestsandideas,centeredon thedynamicandhyperactivefieldofhealthcarepolicy. vi TABLEOFCONTENTS DEDICATION U ACKNOWLEDGMENTS „ iii PREFACE iv LISTOFTABLES ix LISTOFFIGURES xi LISTOFAPPENDICES xii CHAPTER L INTERESTSANDIDEASINHEALTHPOLICY:ANOVERVIEW OFTHE STUDY 1 GeneralStatementofObjectives 3 SpecificAims/TheoreticalModels 4 OrganizationoftheStudy 9 Applied/PolicySignificance 10 H. LITERATUREOVERVIEW 15 ABriefHistoryofRateSetting 15 AReviewofRateSetting'sPerformance 18 ParadigmShift:FromRegulationtoCompetition 25 TheoreticalFrameworks 28 HI. RESEARCHMETHODOLOGY 53 TheoreticalPropositions 54 ResearchDesign/ModelSpecification 58 DataSourcesandCollectionProtocol 60 AnalysisStrategy 62 ValidityandReliability 63 FinalReport 64 rV. THEBACKGROUNDANDCONTEXTOFTHESTATES 67 PriorResearchonRateSettingintheSubject 68 vii