THE DEMAND FOR LEGISLATION BY

HEALTH ASSOCIATIONS

After completing this chapter, the reader should be able to

• provide examples of “demand-increasing” legislation favored by health associations,

• describe methods associations have used to discourage price competition,
• explain how the price competition for patients was eliminated with the initial benefit
structure hospitals designed for Blue Cross,
• compare heath professionals as a complement or a substitute depending on who
receive fees for service,
• identify medical association approaches for decreasing competition from substitute
providers,
• assess the political positions of hospital and nurse associations in regard to an increase
of foreign-trained nurses to alleviate nursing shortages,

Health interest groups demand legislation that is in their members’ interests. It is

necessary, however, to go beyond that statement. Health associations, such as the AMA,
have claimed that they are educational organizations, not trade associations
representing the narrow economic interests of their members. 1 Further, such
associations claim that the legislation they favor is in the public’s interest; they are
concerned with quality rather than economic interests. Thus, it is important to be
specific about the types of legislation on which health associations take a position. For
example, do health associations such as the AMA favor measures that increase quality,
regardless of the effect on their members’ incomes, or do they favor only those quality
measures that increase their members’ incomes? It is necessary to use a framework for
examining health legislation. The framework lets us understand which types of
legislation are in the economic interests of health associations’ members. It indicates
the types of legislation health associations favor or oppose, because it is not always
obvious how certain types of legislation promote the economic interests of association
members. The AMA has had a great deal of political influence at both the state and
federal level. Understanding which legislation is preferred and which is opposed by the
AMA explains much of the type of health legislation this country has or has not had,
particularly in the period up to the 1980s. This model also helps to predict the types of
legislation health associations will favor or oppose in the years ahead.

First, it is necessary to describe what is meant by the economic interests of health

association members. After all, some health associations, such as the AHA and the
Association of American Medical Colleges, represent nonprofit organizations. Once the
economic interests of health association members are defined, it becomes possible to
demonstrate how particular legislation works to enhance members’ interests. The
validity of the proposed framework can be tested by how well it predicts the political
positions of the various health associations. Without a definition of interests and a
legislative framework, it would not be obvious how specific legislation promotes the
economic interests of the members of a health association. The final section of this
chapter discusses the implications of the political behavior of health associations on the
financing, quality, and organization of the healthcare delivery system.
The Motivation of Health Associations

Health associations demand legislation that serves the interests of their members.
Without a definition of those interests, however, it would not be obvious how specific
legislation promotes the members’ perception of these interests.

Health professionals and health organizations, such as hospitals, have many goals. Even
within the same profession, individuals place different weights on what they perceive to
be their self-interest. The tendency, therefore, is to make the definition of self-interest
complex. However, if the definition is complex and encompasses this diversity, or if
different motivations are specified for each piece of legislation, then it is not possible to
develop a good predictive model. Although it may seem more realistic to develop a
complex goal statement, it is easier to evaluate the effects of legislation using a simple
one. Besides, unless the membership easily understands the goal that its association is
pursuing, the members may be distressed over the activities in which the association is
engaged. The true test of whether the simply defined goal accurately measures member
self-interest is how well it predicts the association’s legislative behavior.
The legislative goal of associations with individuals as members—whether
physicians, dentists, nurses, or optometrists—is assumed to be maximizing the incomes
of its current members. Health professionals are no different from other individuals;
they will say that they have many goals, and that income is only one of them, but
income is the only goal that all the members have in common. (Goals such as increased
autonomy and control over their practice are highly correlated with increased incomes.
Thus, income is a more general goal.)
Nonprofit institutions—including hospitals, some Blue Cross plans,
medical and dental schools—cannot retain profits. Medical and dental
schools are assumed to be interested in maximizing the prestige of their
institution. Prestige for a medical school is defined as having students who
wish to become professors and researchers themselves, a faculty that is pri-
marily interested in research, and a low student-to-faculty ratio. Little pres-
tige accrues to a medical school that trains students to enter family practice
or to practice in underserved areas.
Until the mid-1980s, when hospitals were reimbursed according to
their costs, hospitals were also interested in maximizing their prestige,
which is indicated by its size and the number of facilities and services it
offers. Administrators of large, prestigious hospitals were held in esteem
by their peers and earned higher incomes. Each hospital attempted to
become a medical center. The availability of a full range of services also
made it easier for the hospital to attract physicians to its staff.
Beginning in the early 1980s, however, hospital objectives began to change. The
payment system for hospital care went from cost-based reim bursement to fixed prices;
hospitals engaged in price competition to increase their volume of patients from
insurers and HMOs; and low-cost substitutes for hospitals, such as outpatient surgery
centers, began to reduce hospital utilization, as did utilization review programs under
managed care. 2
As these changes occurred, hospitals became more concerned with survival than with
emulating major teaching institutions. Even teaching hospitals began to act as though
their futures were in doubt. Hospitals began to minimize their costs, dropped money-
losing services and patients, and gave greater consideration to the profitability of their
investments. To succeed in a more competitive environment, hospitals attempted to
minimize their costs and to act as though they were trying to maximize their profits.
Blue Cross and Blue Shield plans were originally started by hospitals and
physicians, respectively. Hospitals provided the initial capital to Blue Cross plans and
controlled the organization. The same was true for medical societies and Blue Shield
plans. It was not until the 1970s that these nonprofit organizations separated from the
providers that controlled them. Until that time, therefore, the objectives of Blue Cross
and Blue Shield plans were to serve their providers’ interests.

During the period when Blue Cross and Blue Shield were controlled by their respective
providers, their methods of provider payment and their benefit structure were in
accordance with the economic interests of hospitals and physicians. These policies also
coincided with the interests of theorganizations’ managers. Nonprofit organizations
wanted to grow. A larger organization provides management with greater responsibility,
and that justifies higher incomes. Like any nonprofit bureaucracy, these organizations
also had some form of satisfying behavior as a goal; namely, extra personnel, larger
facilities, and higher wages than if these organizations were in a very competitive
industry.
As the healthcare sector became more competitive in the early 1980s,
competition between Blue Cross and Blue Shield plans and commercial insurance
companies increased. To survive in this new marketplace, Blue Cross and Blue Shield
plans began to merge. Starting in the early 1990s, Blue Cross plans, such as California
Blue Cross, began converting them selves into for-profit organizations. The behavior of
both nonprofit and for-profit Blue Cross plans became similar to for-profit insurance
companies. By attempting to minimize costs, increase market share, and respond to
employer demands on benefit design, Blue Cross and Blue Shield acted as though they
were attempting to maximize profits. An adversarial relationship began to replace the
previously cooperative association with hospitals and physicians. 3 In analyzing the
legislative behavior of Blue Cross and Blue Shield plans, it is important to keep in mind
the periods when their objectives differed.

Although differences existed in the objectives of health associations

representing health professionals, hospitals, medical and dental schools,and Blue Cross
and Blue Shield plans, the members of these associationsall tried to make as much
money as possible. They would then retain it forthemselves, as did health professionals,
or spend it to achieve prestige goals,as medical schools did and hospitals previously did.
The incomes of employees of prestigious institutions are likely to exceed those of less
prestigiousinstitutions. Thus, the objective underlying the demand for legislation isthe
same for each health association. Each association attempts to achievefor its members
through legislation what cannot be achieved through a competitive market, namely, a
monopoly position. Increased monopoly powerand the ability to price as a monopolist
seller of services was, and is, thebest way for an association to achieve its goal.
Framework for Analyzing Legislative Behavior

There are five types of legislation that health associations demand on behalfof their
members: demand-increasing legislation, legislation to secure the highest method of
reimbursement, legislation to reduce the price and/or increase the quantity of
complements, legislation to decrease the availability of and/or increase the price of
substitutes, and legislation to limit increases in supply. As government policy shifted
from increasing to decreasing health expenditures (given the concern over the Medicare
Trust Fund deficit and rising Medicare Part B expenditures) the emphasis devoted to
each of these types of legislation by health interest groups has changed over time.

This model has several caveats. The above model should predict an association’s
political position on legislation according to the earlier definition of its members’
interests. However, it may occasionally be observed that an association takes a political
position different than what is expected. Before concluding that the above framework is
inaccurate, the following must be determined.
Is the association’s preferred position no longer politically possible? No health
professional association favors reexamination for licensure. Some of its members may
not be able to pass the exam. If the examination is made so simple that all members can
pass, then nonmembers would claim they should be allowed to enter the profession
because they could pass the examination. If there is a great deal of pressure from the
media, for example, for reexamination, the profession may propose a less costly
alternative—continuing education. The association would not normally propose
continuing education, as it imposes some costs on its members, but to fore stall an even
more costly policy the association comes out in favor of it. Thus, the association’s policy
on continuing education, although not its preferred position, is consistent with the
model’s predictions.
Another example where it may appear that an association’s political
position diverges from its members’ interests occurs when the cost of tak-
ing a position exceeds its potential benefits. The AHA’s position on the
applicability of minimum wage laws to hospital employees is an example.
Minimum wage laws increase the cost of labor to hospitals. For many years
the AHA was successful in exempting hospitals from such legislation. As
hospital wages began to increase, most hospital employees earned in excess of the
minimum wage. Thus, the law’s applicability to hospitals would have had a small effect.
When removal of the hospital exemption was once again proposed, the AHA decided
not to oppose it. Not only would the effect have been small, but the AHA determined
that the legislation would have passed over its objections. The AHA decided that it
would be a needless loss of political capital to oppose it.
Except for these caveats mentioned, health associations are expected to act in
accordance with their members’ economic interests. The five types of legislation each
association either favors or opposes are based on the above economic framework.
Demand-Increasing Legislation

An association favors demand-increasing legislation because an increase inmdemand,

with a given supply, will result in an increase in price, an increase in total revenue, and
consequently, an increase in incomes or net revenues.
The most obvious way to increase the demand for the services of an
association’s members is to have the government subsidize the purchase of insurance
for the provider’s services. Health providers, however, do not want the government to
insure everyone. Instead, the providers’ demand for insurance subsidies was always
proposed in relation to specific population groups in society, such as people with low
incomes. The reason for selective government subsidies is twofold. First, people with
higher incomes presumably have private insurance coverage or can afford to purchase a
provider’s services. The greatest increase in demand would result from extending
coverage to those unable to pay. Second, extending government subsidies to those
currently able to pay for the services would greatly increase the cost of the program to
the government. A greater commitment of government expenditures would result in the
government’s developing a concentrated interest in controlling the provider’s prices,
utilization, and expenditures. Thus, when health associations favor demand subsidies,
they are always in relation to specific population groups or services rather than to the
population at large.