structures and medical equipment ... and a pro rata share for whatever its
operating costs might be.”^31 With guaranteed reimbursements securing a
rate of return, it is little wonder that investor-owned hospital growth took
off. Medicare adopted the Blue Shield UCR-style physician
reimbursement, paying physicians according to “customary, prevailing,
and reasonable (called ‘CPR’)” fees, with only slightly more rigid
restrictions.
“In effect, then, in return for acquiescing in the passage of Medicare
into law in 1965, healthcare providers extracted the key to the U.S.
Treasury from Congress,” argues Reinhardt.^32 With reimbursement—and
not payment—the watchword, annual Medicare outlays immediately, and
annually like a metronome, vastly surpassed predicted aggregates.
Ironically, it would be stalwart Republican presidents (Nixon, Ford,
Reagan, and George H. W. Bush) who “sought to bring the hospital and
physician sectors to their knees, in ways that Democrats would never dare
to do.”^33 In the late 1970s, the Carter Administration agreed to the
“Voluntary Effort” of the hospital industry to control costs, but this naïve
promise failed to make an impact.
Twenty years of “reimbursement” came to an end during the Reagan
Administration, when Medicare rules were changed to a more business-
oriented methodology. “The very idea of retrospective full-cost
reimbursement, an approach that would look strange to anyone accustomed
to normal business principles, particularly vexed the administration.”^34
Researchers and policymakers, therefore, arranged medical conditions into
slightly over five hundred “diagnosis-related groups,” or “DRGs,”
permitting the remuneration of hospitals based upon a preset fixed sum
per case, allowing a “fair profit.” This was truly revolutionary, and has
been copied by countries around the world, and even private insurers in the
United States.
Reimbursing hospitals by a DRG case–based accounting system was the
opening salvo by the federal government in ending the decades-old
approach of hospitals and physicians charging (and receiving) limitless
sums of money for guideline-free “customary” care. With economists and
statisticians gaining power, Medicare funded a major study on the
“relative costs” of providing various physician services, aiming to identify
the time, skill, and risk involved in treating a large number of distinct