The “Secret” Driver of US Health Care Costs: Politicians Wanting to Get Reelected

A pioneering new study provides a first-of-its-kind look into the outsized effect that lobbying and political maneuverings have on health care spending.



Americans spend significantly more on health care than any other country. Why?  Economists’ answers to this question (of which there are many) range from opaque pricing to hospital monopolies to “creeping consolidation” to pharmacy benefit managers to medical licensing to Medicare being unable to negotiate drug prices to abusive IP practices by pharmaceutical firms.


Politics is another, seemingly obvious factor. The federal government is responsible for nearly a third of all health care spending, and the health care industry is the biggest spender of lobbying dollars in Washington: as health spending ballooned from $1 trillion in 1996 to $3.4 trillion in 2016, the industry—led by pharmaceutical firms and hospitals—spent nearly $7 billion on lobbying legislators. And as any person who follows the news even a little can tell, health care is one of the most heavily politicized policy issues in the United States today. Thanks to its complicated and impenetrable nature, the American health care system is also replete with so-called pork barrel projects, meant to appease hesitant legislators by providing money or jobs to their districts, thus potentially aiding in their reelection. 


Despite the clear link between politics and health care, economists and other academic scholars have so far tended to overlook the issue, producing no empirical studies into how politics and lobbying influence the American health system.


Until recently, that is. A pioneering new study, conducted by economists and political scientists from Yale and the University of Wisconsin-Madison, provides a first-of-its-kind look into the outsized effect that political maneuverings have on health care spending. The authors, Zack Cooper, Amanda Kowalski, and Jennifer Wu of Yale University and Eleanor Powell from the University of Wisconsin-Madison, show that there is in fact a close link between health care spending and lobbying by industry groups. They do so by focusing on a little-known pork barrel provision that allowed certain hospitals to receive an increase to their Medicare reimbursement rates.


The program, known as Section 508, was an eleventh-hour addition to the 2003 Medicare Modernization Act (MMA), a “sweetener” that helped secure the votes of reluctant Republican legislators prior to the bill’s passage. It proved to be fairly significant, as Cooper and his coauthors find, but it’s also fairly obscure. Cooper himself only learned about it six years ago, while explaining to his students the difficulties involved in measuring the effect that Medicare has on private prices. One of his students, a former Congressional staffer who worked on Capitol Hill while the MMA was passed, raised her hand and suggested he look into Section 508.


“To me, this highlights the importance of institutional knowledge when doing research,” Cooper tells ProMarket. “Without [the student’s advice], we would never have known that Section 508 is where we should look.” Even then, he says, determining the effects of intricate political dynamics proved to be exceptionally difficult and necessitated the expertise of scholars from both economics and political science. “You really need to absorb a fairly large amount of institutional knowledge in order to engage with the literature and the subject in a meaningful way.”


A 65-Percent Increase in Campaign Contributions from the Health Care Industry


The formula that determines how much Medicare pays hospitals is based on a hospital’s geographical location and its wage index, a measure of local labor costs. Section 508 created a mechanism by which hospitals could apply for a waiver that reclassified them into the wage index of a different geographical area, one that would yield them increased Medicare payments. While there can be legitimate reasons to adjust the payment formula for certain hospitals, Medicare’s hospital payment system has been known to be somewhat of a favorite target when it comes to political bartering, and the 508 program provided the executive branch with wide latitude to hand waivers to specific hospitals “as a reward for votes from particular members of Congress.”


Ultimately, 404 hospitals (of the 4,138 that received Medicare payments in 2004) applied for the 508 waiver, and 120 ended up getting it.


In an attempt to capture the effect of complex political dynamics on health care providers and measure the effect of 508 waivers on the behavior of health care providers, Cooper and his coauthors used a variety of data sources, including material on how hospitals that applied for a 508 waiver were judged, received through Freedom of Information Act requests.


The 508 program, they find, had a significant impact—particularly for hospitals located in districts represented by a Republican member of Congress who voted for the MMA bill. Those were seven times more likely to receive a waiver than hospitals represented by Republican Congress members who voted against it.


Since the amount that hospitals received as part of the program varies widely, Cooper and his coauthors focus on the 29 hospitals that received the biggest payment increase. While hospitals that received the waiver saw an average Medicare payment increase of 6.5 percent, the 29 hospitals that received the biggest payments experienced an increase of 10 percent, allowing them to receive hundreds of millions of dollars in Medicare payments. On average, these 29 hospitals increased spending by $1.25 billion between 2005 and 2010.


None of these 29 hospitals are for-profit institutions. The money that they received through the 508 program was spent on treating more patients, hiring more staff, and investing in new technology. Yet the authors find no evidence that any of this led to improved outcomes or quality. “More care does not necessarily mean better care,” says Cooper. “They didn’t miraculously start doing a better job treating heart attacks.”


Nevertheless, the CEOs of recipient hospitals saw substantial benefits from the 508 program, enjoying pay increases of nearly half a million dollars (or 81 percent) each. “The increase in CEO pay once Medicare payments increased was much higher than I expected,” says Cooper. He adds: “The CEOs that got this payment increase didn’t do anything. They did not run their hospitals significantly more efficiently or offer better quality. They just sat there when the sausages got made, and yet they benefited enormously.”


Politicians also benefited. Section 508 was originally set to expire after three years, yet hospitals, enamored of the significant windfall provided by the program, formed an organization called the Section 508 Hospital Coalition and lobbied Congress to extend it. The program was ultimately reauthorized in 2007 and extended through 2012. In the years between its passage and reauthorization, the study finds, legislators who had a Section 508 hospital in their district registered a 22-percent increase in total campaign contributions and a 65-percent increase in contributions from donors in the health care industry.   


“If you told me six years ago that we’d be able to find that when a hospital had a payment increase, a member of Congress representing that hospital got a funding increase, I would have laughed you out of the room,” says Cooper. “But the data started to speak, and speak very clearly.”


“The Scope of This is Probably Fairly Massive”


Section 508 ended up costing billions more than the $900 million it was originally budgeted for. But it’s just one example out of many: from the Affordable Care Act to the failed Graham-Cassidy bill, pork barrel projects are an inseparable part of attempts to pass health care bills in Congress, as the inefficiencies of America’s health care and political systems feed off each other.


“The scope of this is probably fairly massive,” says Cooper. “The reach of Congress into health care is extraordinary. There’s almost nothing that isn’t political.”


While none of these programs are particularly troubling on their own, says Cooper, “in aggregate they are quite terrible. They create really skewed incentives for legislators, because the gains to their constituencies are quite large and since they’re financed by an entire country, the marginal tax increase to the individual across the US is quite small. The challenge is that it’s politically impossible to get rid of them, and so you have the accumulation of all these small changes and we end up basically institutionalizing really silly decisions. They metastasize, increase spending, and end up causing wide-scale changes that last for years and years.”


In a narrow sense, he says, “our paper shows that when you increase spending, everybody benefits in the short-term: more patients get treated, more nurses get hired, hospitals invest in technology, CEOs get higher pay. But over time, you’re essentially propping up a very inefficient system and divert resources that could be used in a multitude of other areas.”


One of the remedies the authors point to is the creation of a Federal Reserve–like independent body of experts charged with controlling Medicare spending, which would limit the ability of politicians to use it as a political bargaining tool. A similar attempt has already been made and failed, when the ACA created the Independent Payment Advisory Board. The IPAB, considered by Obama officials to be “the most important institutional change” within the bill, was meant to contain costs by creating a 15-member policy body isolated from partisan divisions and interest group pressure. But it encountered bipartisan resistance and as a result never got off the ground. 


When asked why economists have so far been reluctant to study the influence of political bargaining on health care, Cooper points to the necessarily multidisciplinary nature of such studies. “Politics is one of those issues that can have an outsized effect, but when it comes to issues that span multiple disciplines, it can be hard to study because it gets out of the comfort zone for scholars,” he says.


“As a discipline, I think economists have struggled to look outside the technocratic drivers of health spending,” he adds. “We focus on things like competition and the diffusion of new technologies and incentivizing providers, because that’s where we’re comfortable. I think this shows that, in some instances, to do really innovative research, you have to get outside of your usual disciplinary comfort zone.”


Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.  

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