1 Havighurst, Health Care Cost-Containment Regulation: Prospects and an Alternative, 3 Am. J. L. & Med. 309 (1977)Google Scholar.

2 Id. at 309-10.

3 While Professor Havighurst does not specifically reference his intellectual antecedents in his Comment, except for a quotation from Charles Schultze, it is clear that they may be found in Chicago and at The Brookings Institute. See, e.g., Noll, Reforming Regulation (1971); Schultze, The Public Use of the Private Interest, Harper’s, May 1977Google Scholar, at 43; Stigler, The Theory of Economic Regulation, 2 The Bell Journal of Economics 3 (1971)Google Scholar.

4 Goldberg, Regulation and Administered Contracts, 7 The Bell Journal of Economics 426, 426 (1976)CrossRefGoogle Scholar.

5 Id. at 426-28.

6 Id. at 426-27.

7 Id. at 427.

8 Id.

9 Goldberg specifically warns that his argument “should not be construed as a brief for wall-to-wall regulation.” Id.

10 Much of the recent literature on regulation appears either in economics-oriented journals, such as The Bell Journal of Economics or The Journal of Law and Economics, or in law reviews (see, e.g., Symposium—Federal Regulatory Agencies: A Response to the Ash Report, 57 Va. L. Rev. 923 (1971) and the discussions of regulation and competition appearing at 82 Yale L.J. 871 (1973)). One of the most respected political science analysts of regulation complains about the paucity of good empirical research about regulatory process. Bernstein, Independent Regulatory Agencies: A Perspective on Their Reform, The Annals of the American Academy of Political and Social Science, March 1972Google Scholar, at 14, 21.

11 An argument can even be made that there is no economic reason to regulate at all, that even the paradigmatic “natural monopoly” does not impel a public policy supporting governmental regulation. See Demsetz, Why Regulate Utilities? 11 J. L. & Econ. 55 (1968)CrossRefGoogle Scholar.

12 More often than not, enabling acts contain no specific economic criteria for regulatory decision making. For example, the Massachusetts Rate Setting Commission has the authority to establish “fair, reasonable and adequate” rates. Mass. Gen. Laws Ann. ch. 6A, § 32 (West Supp. 1977-1978). Is that an economic, political, social, or ethical criterion? Contrast this language with the very specific language governing the Massachusetts determination-of-need program for health care facilities:

Mass. Gen. Laws Ann. ch. Ill, § 25C, para. 2 (West Supp. 1977-1978).

13 Professor Havighurst, for example, refers to the “socially optimal level of spending on health care.” Havighurst, supra note 1, at 316.

14 For this reason, legal analysis tends to focus upon issues of access to and openness of the regulatory process and upon the avoidance of arbitrary action on the part of agencies. Davis, Administrative Law of the Seventies 167-76 (1976); Davis, A New Approach to Delegation, 36 U. Chi. L. Rev. 713 (1969)CrossRefGoogle Scholar; Lazarus, & Onek, The Regulators and the People, 57 Va. L. Rev. 1069, 1092-108 (1971)CrossRefGoogle Scholar.

15 In this context, one of the more pertinent aspects of Goldberg’s argument is his use of an economic model that can be analyzed in political terms. Goldberg, supra note 4, at 445.

16 Havighurst, supra note 1, at 312-13.

17 Id. at 314.

18 See, e.g., Mass. Gen. Laws Ann. ch. 6A, § 37 (West Supp. 1977-1978), which authorizes the Massachusetts Rate Setting Commission to approve hospital charge increases which are justified by (1) cost increases that are a function of inflation in the economy generally, (2) net volume increases, and (3) cost increases that are beyond the reasonable control of the individual hospital; and Massachusetts Rate Setting Commission Regulation 14 CHSR 11 (1977), which sets out in detail the specific criteria which may permit a hospital’s charges to increase. See also the proposed Hospital Cost Containment Act of 1977, H.R. 6575, 95th’ Cong., 1st Sess., introduced by the Carter Administration in April, 1977. Title I of the proposal would, over time, have the effect of limiting hospital revenue increases to changes in the Gross National Product deflator (id, §§ 111, 112), with certain specified exceptions, see, e.g., id. § 124; Title II would establish an annual ceiling, proposed to be $2.5 billion, on capital investment in hospitals.

19 See generally Weiner, “Reasonable Cost” Reimbursement Under Medicare and Medicaid: The Emergence of Public Control, 3 Am. J. L. & Med. 1, 37-42 (1977)Google Scholar.

20 Commonwealth of Massachusetts, Health Care Expenditures in Massachusetts: A White Paper Developed by the Health Planning and Policy Committee 8 (1976).

21 The issue of whether cost-containment regulation does or does not entail rationing may be clouded by the existence of two different approaches to rationing. One approach involves establishing a flat dollar amount for resources flowing into the particular system, whether it be health care generally or the hospital sector specifically. Title II of the Administration’s cost containment bill, see note 18, supra, is one of the rare examples of a proposal to cap the system with a flat dollar amount, although rhetoric expressing concern about the proportion of the Gross National Product going to health care does imply a proposal to limit health care resources to a specific dollar amount based on the GNP. This first approach requires political decisions as to the dollar amount and a process for allocating the specified resources.

A second approach involves identifying those factors that are considered to justify an increased investment of resources. The system in Massachusetts is of this type. See note 18, supra. Once the factors are identified, whatever dollar amounts they produce are held to be acceptable. (The GNP-based approach could fall into this model if it were viewed as saying that increased investment in health care resources is acceptable so long as it is directly related to increases in the GNP). In this approach, the actual dollars are not fixed for extended periods of time (usually no more than a year), and negotiation over the factors to be recognized can occur continuously.

22 Havighurst, supra note 1, at 314.

23 An analogy is the Massachsetts charge and budget review program administered by the Massachusetts Rate Setting Commission, referred to in note 18, supra. This program is organized to determine an acceptable level of total patient care charges, see 1976 Mass. Acts ch. 409, § 5, on the basis of which unit charges are developed. The acceptable figure is an aggregated “bottom-line” figure representing total allowable revenue resources available to a hospital. The Massachusetts Rate Setting Commission does not require the hospital to expend the revenue in specific areas or for specific purposes. Those decisions, within the parameters of the allowable revenue figures, are to be made by each hospital’s administration.

24 See Weiner, State Regulation and Health Technology, in Technology and the Quality of Health Care 407, 421-23 (Egdahl & Gertman eds. to be published).

25 Havighurst, supra note 1, at 314-15.

26 Id. at 319.

27 There are at least two approaches to defining “the public interest.” It may be equated with the interests of only one group in the regulatory process (consider, e.g., recent tendencies to equate consumer interests with the “public interest,” or, in a somewhat different context, the famous equation of the interests of General Motors with the interests of the United States). Or it may be determined by the regulatory agency weighing and melding the various conflicting interests surrounding it (including its own predilections as a bureaucratic interest). The two approaches become one if, in the first approach, the agency is viewed as placing full weight on the interests of one group and none on the others’ interests. It is important, in analyzing an agency’s process of defining objectives, to identify its approach to weighing and balancing interests.

28 The providers are, of course, never a monolith. Sensitive regulatory agencies—and analysts of same—need to be aware of discrete differences of interest among members of the supplier class. See, e.g., Geller, A Modest Proposal for Modest Reform of the Federal Communications Commission, 63 Geo. L.J. 705 (1975)Google Scholar, noting different interests among members of the communications industry and suggesting a certain level of competition among those interests for the favor of the Federal Communications Commission.

29 The consumers tend ordinarily to be represented, if at all, by third party payers, particularly the governmental health care programs, such as Medicare and Medicaid.

30 A peculiar feature of hospital regulation is that there are actually two classes of affected providers: hospitals and physicians. One could view the regulatory strategy of forcing “providers”—both classes—to make the discrete rationing decisions as in part aimed at minimizing the number of actors directly involved with the agency: as a result of the strategy, the hospital tends to represent both itself and the physicians before the agency and to take on the responsibility of dealing directly with the physicians.

31 Title XV of the Public Health Service Act, added by P.L. 93-641, § 3, 88 Stat. 2227 (codified at 42 U.S.C. §§ 300k-300t (Supp. V 1975)). Title XVI of the Public Health Service Act, inserted by P.L. 93-641, § 4, is not germane to the discussion in the text.

32 HSAs may be private nonprofit organizations, public regional planning bodies, or single units of general local government. Public Health Service Act, Title XV, § 1512(b)(c), 88 Stat. 2232 (codified at 42 U.S.C. § 300Z-1 (b)(c)). Of the 205 HSAs that to date have received conditional or full designation from HEW, 180 are private nonprofit organizations, 4 are units of local government, and 21 are regional planning agencies. (Personal communications from the Boston University Center for Health Planning based upon information obtained from HEW’s Bureau of Health Planning and Resource Development.) Regardless of form, HSAs must have a governing body that meets explicit requirements. A majority (but not more than 60 percent) of its members are to be (1) residents of the area served by the HSA, (2) consumers of health care, and (3) “broadly representative of the social, economic, linguistic and racial populations, geographic areas of the health service area, and major purchasers of health care.” The remainder are to be residents of the area and “providers of health care who represent (I) physicians (particularly practicing physicians), dentists, nurses, and other health professionals, (II) health care institutions (particularly hospitals, long-term care facilities, and health maintenance organizations), (III) health care insurers, (IV) health professional schools; and (V) the allied health professions.” Government representation and a balance between metropolitan and nonmetropolitan areas also are required. Id. Title XV, § 1512(b)(3)(c), 88 Stat. 2233 (codified at 42 U.S.C. § 300Z(b)(3)(c) (Supp. V 1975)).

33 Id. § 1521, 88 Stat. 2242 (codified at 42 U.S.C. § 300m (Supp. V 1975)).

34 Id. § 1524, 88 Stat. 2247 (codified at 42 U.S.C. § 300m-3 (Supp. V 1975)).

35 Id. § 1513(b)(2), 88 Stat. 2236 (codified at 42 U.S.C. § 300Z-2(b)(2) (Supp. V 1975)).

36 Id. § 1524(c)(2), 88 Stat. 2248 (codified at 42 U.S.C. § 300m-3(c)(2) (Supp. V 1975)).

37 Id. § 1513(b)(2), 88 Stat. 2236 (codified at 42 U.S.C. § 300/-2(b)(2) (Supp. V 1975)).

38 Despite the option of an HSA being a public regional planning body or a general unit of local government, most are private nonprofit organizations. See note 32 supra.

39 At least 60 percent of the members of the SHCC are appointed by the state governor from lists submitted by HSAs whose areas are wholly or partially within the state. Public Health Service Act, Title XV, § 1524(b)(1), 88 Stat. 2247 (codified at 42 U.S.C. § 300m- 3(b)(1) (Supp. V 1975)).

40 Title XV of the Public Health Service Act establishes two types of authority that could be considered regulatory in nature. One, certificate of need, is exercised by the SHPDA, id. § 1523(a)(4)(B), 88 Stat. 2246 (codified at 42 U.S.C. § 300m-2(a)(4)(B) (Supp. V 1975)), which is the only agency in the planning structure not responsible for adopting a plan. The other is the right of the HSAs to disapprove of applications, emanating from the area, for certain federal program funds, although any HSA disapproval is subject to review and reversal by the Secretary of HEW. Id. § 1513(e), 88 Stat. 2238 (codified at 42 U.S.C. 300/-2(c) (Supp. V 1975)).

41 The concept of the planning process “working well” is as yet undefined. See the remainder of this part for additional comments relevant to this concept.

42 For an excellent discussion of a number of issues involved in linking planning and regulation, see Bauer, The Arranged Marriage of Health Planning and Regulation For Cost Containment Under P.L. 93-641—Some Issues To Be Faced (1977).

43 The principal “due process”-type statutory requirements applicable to HSAs appear in the requirements (1) that governing body meetings be conducted in public, with adequate notice to the public, and that the governing body make its records and data available, upon request, to the public, Public Health Service Act, § 1512(b)(3)(viii), 88 Stat. 2234 (codified at 42 U.S.C. § 300/-l(b)(3)(B)(viii) (Supp. V 1975)); and (2) that public notice be given and public hearings be conducted with respect to proposed health systems plans before adoption of a final document, id. § 1513(b)(2), 88 Stat. 2236 (codified at 42 U.S.C. § 300/-2(b)(2) (Supp. V 1975)).

44 See in this context the Opinion of the Attorney General of Maryland providing an answer to an inquiry about the relationship of the Maryland Health Services Cost Review Commission to the Comprehensive Health Planning Agency, [1976] 2 Medicare and Medicaid Guide (CCH) ¶ 14,725.69.

45 See, e.g., testimony of Governor Michael S. Dukakis of Massachusetts before the Health Subcommittee of the Senate Human Resources Committee, May 24, 1977. HEW Seeks Agency with Power to Limit Cost of Health Care, New York Times, Feb. 16, 1977, at Al, col. 3.

46 Havighurst does not present any evidence that savings in health insurance premiums through bargaining for reductions in coverage are provided, dollar for dollar, to employees in wages or other fringe benefits. To the extent such savings are not passed on dollar for dollar, even without changes in the tax laws the employer has an incentive for reducing premium expense.

47 Much publicity was generated by General Motors’s announcement in March 1976 that it was paying more to Blue Cross for employee health insurance coverage than it was spending on steel purchases from United States Steel. Statement of Victor Zink, Director of Employee Benefits and Services, before U.S. Senate Committee on Labor and Public Welfare, Subcommittee on Health, April 19, 1976. Private communications between this author and local General Motors representatives in Massachusetts revealed that the company took the position that its local representatives should become more actively involved in initiatives focusing on changes that would constrain health insurance premium increases.

48 See, e.g., references to negotiations between the United Auto Workers and General Motors, Health Lawyers News Report, September 1976, at 4; Health Care Expenditures in Massachusetts, supra note 20, at 1.

49 See, e.g., Posner, Theories of Economic Regulation, 5 Bell Journal of Economics and Management 335 (1974)CrossRefGoogle Scholar.

50 Havighurst, supra note 1, at 320.

51 Id. It is interesting that Professor Havighurst recognizes HMO-type approaches to be a “kind of rationing,” although he prefers that to governmental rationing because it is “consensual” in nature. If consensual rationing can be as stringent as government rationing, it is undoubtedly to be preferred.

52 For an introductory exploration of these kinds of questions, see Kingsdale, Marrying Regulatory and Competitive Approaches to Health Care Cost Containment (to be published in the Journal of Health Politics, Policy and Law).