Regulation as the crucible of private markets: Implications for health care reform

Regulation permeates all aspects of health care. It has been characterized as an external constraint and a burden on productivity. However, quite to the contrary, government regulation in its broadest sense is the crucible that has created American health care and permitted it to flourish. A taxonomy of regulation reveals three paradigms. Under the first, states have primacy over traditional industry segments, including professionals, institutions, and insurance. Under the second, federal agencies have primacy over interstate concerns and emerging technologies, such as foods, drugs, and information technology. Under the third, huge federal funding programs support and guide major industry segments. These include support for biomedical research, funding for hospital construction, tax subsidies for private insurance, and insurance for selected populations. The last paradigm has literally created the modern system. Pharmaceutical firms rely on NIH to fund basic research that has no immediate payback, hospitals rely on Medicare and historically relied on Hill-Burton funding, many medical specialties rely on Medicare reimbursement, and the system of private health insurance relies on the tax deduction for employer-paid premiums. Without these government programs, none of these industry segments would exist in its present form or size. The implication for health reform is that major federal funding and oversight is needed to effectuate a transformation. Health care's economic role, representing one-sixth of the economy and almost ten percent of all jobs, suggests that the present economic downturn will encourage political acceptance of such an initiative.