Politics and Health Care Spending in the United States

Zack Cooper, Amanda E Kowalski, Eleanor N Powell, Jennifer Wu

NBER Working Paper No. 23748
Issued in August 2017, Revised in January 2020
NBER Program(s):Health Care Program

We study the interplay between congressional politics and health care spending in the U.S. by examining events leading up to and following the passage of the 2003 Medicare Modernization Act (MMA). The MMA, which Congress narrowly approved, created prescription drug coverage for seniors. We focus on a provision in the law - Section 508 - which allowed hospitals to apply for Medicare payment increases that were awarded based on rules written after the MMA was passed. This paper provides evidence of a feedback loop that illustrates why provisions, like Section 508, which are common, get added to laws, raise spending, and then become exceedingly hard to eliminate. We present evidence that the Section 508 program was used to win political support for the MMA. We find that Representatives who voted ‘Yea’ to the MMA were more likely to have a hospital in their district awarded a Section 508 waiver. The Section 508 program led to large increases in health spending (approximately 18 percent at treated hospitals) and the creation of hundreds of local jobs. The Section 508 program was slated to expire three years after it was introduced. However, millions were spent lobbying to extend the program. After the program was extended, we observe that members of Congress with recipient-hospitals in their district received large increases in campaign contributions. Ultimately, the marginal increase in health spending generated by the Section 508 program dramatically exceeded what Congress initially authorized for the program and dwarfed the amount spent on lobbying to extend the program.

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Document Object Identifier (DOI): 10.3386/w23748

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