plus a modest profit.28 Under Part B, physicians were paid whatever was
“usual, customary, and reasonable” (“UCR”) in the geographic medical
community —that is, whatever the area’s doctors customarily charged for a
particular service.29 Largely because of these policies and the FFS structure
of private insurance, overutilization led to rapid cost inflation.30
Importantly, the separation of providers from payers meant that providers
could over-provide services and overcharge for services provided without
sufficient constraint from patients, who were insulated by their insurance
from the effects of the cost escalation.31
By the 1970s, employers and government officials alike were seeking
reforms to address the growing problem of healthcare cost escalation.32
Many policymakers, including President Richard Nixon, considered
creating a national health insurance system.33 However, by that time, the
employment-based system was deeply entrenched, with powerful
constituencies committed to maintaining it.34 Corporate human resources
much of the incentive of the provider to try to live within its budget, since any additional
cost gets passed on the government.
28. See SHANNON BROWNLEE, OVERTREATED: WHY TOO MUCH MEDICINE IS MAKING US
SICKER AND POORER 31-32 (2007). In the case of nonprofit hospitals the correct term would
29. Avik Roy, Saving Medicare from Itself, 8 NAT. AFF. 35, 39 (2011), available at
http://www.nationalaffairs.com/publications/detail/saving-medicare-from-itself (last visited
Mar. 22, 2015); Thomasson, supra note 10; see also Thomas L. Greaney, Transforming
Medicare Through Physician Payment Reform: An Introduction to the Symposium Issue, 34
ST. LOUIS U. L.J. 749, 752-54 (1990) (discussing how reasonable cost was an accepted
principle from 1961 to 1965). The UCR fee screen system was also utilized by Medicaid and
other third party insurers. O’NEILL, supra note 7 at 10.
30. See BROWNLEE, supra note 28, at 33 (“Every time individual physicians raised their
fees, Medicare and private insurers were forced to raise reimbursements, and soon physician
payments were in an inflationary spiral.”).
31. See Michael H. Bernstein & John T. Seybert, Everyone Pays the Price When
Healthcare Providers Waive Patients’ Co-Insurance Obligations, 21 HEALTH L. 20, 24
(2008) (indicating how providers seek more treatment for a patient than necessary, focusing
on their personal profits and not necessarily the best interests of the patient). Patients often
have to pay deductibles and co-payments, which are supposed to induce cost-consciousness
on the consumer side as well as help to defray the cost of services; but it is generally
acknowledged that these patient payments do little to counter overutilization. Id.
32. See KELTON, supra note 10, at 19 (“Throughout the 1970s, sharp increases in
medical costs spawned various forms of legislation aimed at slowing the pace of health care
inflation. For example, in August 1971, President Nixon imposed wage and price controls in
an effort to contain inflationary pressures.”).
33. See MARIE GOTTSCHALK, THE SHADOW WELFARE STATE: LABOR, BUSINESS, AND
THE POLITICS OF HEALTH CARE IN THE UNITED STATES 68 (2000) (indicating that in 1971, the
Nixon administration proposed to establish an employer mandate which “would require
employers to pay 65 percent of the cost of insurance premiums for employees working 25
hours or more per week,” but the proposal was met with strong opposition to what would
essentially establish a national health insurance system).