One of the most serious consequences of Roemer’s Law was the creation of national health planning.
The National Health Planning and Resources Development Act was enacted in 1974 to require states to establish elaborate bureaucracies to control the growth of hospitals and other health care facilities. These agencies included Health Systems Agencies (HSAs), State Health Planning and Development Agencies (SHPDAs), Statewide Health Coordinating Councils (SHCCs), and a host of other committees and agencies. These efforts were designed to implement Certificate of Need (CON) programs, through which hospitals and other facilities that wished to make capital outlays would have to get prior approval from the agencies.
This law was enacted out of recognition that “the massive infusion of Federal funds into the existing health care system (contributed to) inflationary increases in the cost of health care.” Indeed, the enactment of Medicare and Medicaid in 1965 resulted in a vast increase of federal spending in the health care system:
- In 1965, state and local governments spent $4.3 billion on health care, while the federal government spent only $2.9 billion.
- Two years later, state and local spending rose 28 percent to $5.5 billion, but federal spending went up 234 percent to $9.7 billion.
- By 1970, state expenditures would rise to $9.9 billion, and federal spending would reach $17.7 billion — over six times what had been spent five years earlier.
This, naturally, resulted in enormous health care inflation. The rate of annual increase in health care spending was very close to the increase in Gross Domestic Product in 1965 and 1966, but immediately it began to rise at double the rate.
Rate of Increase in Gross Domestic Product and National Health Expenditures as a percentage from previous year, 1965 – 1970
Source: Katherine R. Levit, et.al., “National Health Expenditures, 1990,” Health Care Financing Review, Fall, 1991.
The panic among the health policy community was stark. The then-HCFA administrator, Stuart Altman, who oversaw the Medicare and Medicaid programs, was interviewed in 2001, as saying:
When I was 32 years old, I became the chief regulator in this country for health care. At that point, we were spending about 7.5 percent of our GDP on health care. The prevailing wisdom was that we were spending too much, and that if we hit 8 percent, our system would collapse. (Stuart Altman, interviewed by Andrew Osterland in CFO Magazine, June, 2001, p.75.)
Two other scholars were equally agitated. Kenneth Friedman and Stuart Rakoff wrote:
The thrust towards greater government regulation of health services arises primarily from a single source; astronomical increases in cost. Total expenditures for health services have more than tripled since 1965, exceeding $118 billion in FY 1975. The proportion of GNP devoted to health care has grown from 5.9 to 8.3 percent. (Kenneth Friedman & Stuart H. Rakoff, Toward a National Health Policy, Lexington Books, Lexington, MA, 1977, p. 108)
So, we have a massive infusion of new money into the health care system, which raised demand for services, which resulted in an astonishing increase in prices. And how do the dunces in health policy respond? They enacted a massive and mandatory health planning system, which is intended to reduce the supply of services — precisely the wrong reaction at a time of high inflation due to rising demand.
But Roemer’s law says that demand is irrelevant. The only thing that counts is supply. So, even with all this new money, it would argue, demand is constant. Inflation in health care is caused solely by providers “inducing” demand to enrich themselves. Reduce the number of suppliers, and you reduce the costs of health care.
Not surprisingly, this approach did not work and health inflation continued unabated. In fact, the year before Health Planning was adopted, the Gross Domestic Product grew faster than health spending (in 1973, the GDP rose 11.7% while NHE rose 10.9%). After it was adopted in 1974, health spending was back on a rampage with the exception of one year.
Rate of Increase in Gross Domestic Product and National Health Expenditures as a percentage from previous year, 1974 – 1982
(Katherine R. Levit, et.al., “National Health Expenditures, 1990,” Health Care Financing Review, Fall, 1991.)
The main law was repealed in 1982, but billions of dollars and years of effort were wasted on an idea that never made any sense in the first place. And no one was ever held to account.