That ‘70s show

Health policy edition.

If you grew up in the 1970s, you might look back wistfully on your avocado green refrigerator, matching green shag carpet, summer vacations out of your station wagon, the Muppet Show, and maybe your orange AMF Roadmaster Runaway bike with the sleek black vinyl banana seat. Minnesotans of a slightly older vintage might remember the era with less nostalgia, recalling the triumvirate of inflation, recession, and unemployment that reigned over a lackluster economy.

It wasn’t until the end of Reagan’s second term that Washington finally ditched the combined economic policy failures of Nixon, Ford, and Carter. While Minnesota lawmakers followed many of the federal missteps of the 1970s, they have not been as quick to correct their errors. This is especially true in health care.

Federal Controls on Health Care

The policy follies began in 1970 when Congress passed the Economic Stabilization Act (ESA), a law that delegated unprecedented discretion to the president during peacetime to impose controls on America’s economy. The law infamously led farmers to kill price-controlled chickens when the uncontrolled increase in grain prices made feeding them unprofitable. In the health care sector, the ESA generally set a limit on price increases at 6 percent.

In February 1973, Congress heeded President Nixon’s call to pass the HMO Act of 1973. Health Maintenance Organizations (HMOs), he argued, better foster “cost-consciousness.” To kickstart HMOs, the law provided grants and loans to nonprofit HMOs, preempted state laws that limit HMOs, and mandated employers to provide an HMO option alongside traditional insurance.

Next came the National Health Planning and Resources Development Act of 1974 in which Congress mandated all states to require health care providers to get state approval through a certificate of need (CON) before building new or expanding existing facilities. The idea was based on a “if you build it, they will come” belief that increasing the supply will automatically increase utilization, regardless of the need.

Minnesota Doubles Down

Meanwhile, Minnesota policymakers took these federal initiatives to another level, imposing even tighter controls on the health care sector.

In 1976, the state attempted to control nursing home prices by requiring them to charge private payers the same rate as residents subsidized by Medicaid. Because the state sets Medicaid rates, the practical effect of this ruling was that the state took over price setting for nearly the entire nursing home population. Minnesota and neighboring North Dakota are the only states in the country with such a strict price control on nursing homes.

On top of the federal policy that limited federal HMO grants and loans to nonprofits, Minnesota law required all HMOs to be nonprofits when they were first authorized in 1973. At the time, 40 states required HMOs to be nonprofits. But by 1999, Minnesota was the only state left that banned for-profit HMOs.

Finally, after running a CON program from 1971 to 1984 in line with federal law, Minnesota concluded CON was not working well enough. To better lock down supply, the state adopted a far stricter moratorium on hospital capacity expansions that required legislative approval for any expansion. This followed a similar moratorium on nursing home bed expansion in 1983.  

Policies Failed

Each of these policies was largely aimed at controlling costs and inflation. None of them worked. Overall, national health expenditures as a percent of GDP rose from 6.9 percent of GDP in 1970 to 8.9 percent in 1980.

As Milton Friedman explained in Newsweek in 1971, price controls might freeze the stated price but this won’t stop actual price changes from happening. They’ll just be concealed in the form of changes in discounts, service, and quality. And when price freezes end, prices will jump. That’s exactly what happened.

Minneapolis-based Interstudy, a health policy think tank under federal contract to study HMOs, expressed initial concerns that the HMO Act’s limiting of grants and loans to nonprofits introduced market distortions. Minnesota law cemented that distortion. Despite the federal preference for nonprofits, HMOs experienced only moderate growth in the 1970s and the eventual expansion of HMOs in the 1980s largely depended on for-profit models.

Minnesota Retained Control as Feds Loosened

This record of failure prompted the federal government to begin repealing and curtailing these policies. Minnesota, on the other hand, adopted even stricter controls on the health care sector.

As the Feds terminated the ESA’s price controls by 1974, Minnesota policy makers made the nursing home rate equalization program permanent. Federal preferences for HMOs were gradually phased out during the ‘80s, including the mandate on employer participation. Minnesota continued to require HMOs to be nonprofits. Congress also repealed the CON program mandate in 1986 and 11 states followed suit, including Minnesota–but only because the state’s stricter moratoria on hospital and nursing home expansions had already made CON unnecessary.

Freeing Minnesota’s Health Care Sector

In 2017, Minnesota lawmakers finally began to release their hold on these 1970s era government controls on health care pricing and supply. The implementation of the Affordable Care Act, otherwise known as Obamacare, severely disrupted the state’s individual health insurance market. Insurer losses led premiums to spike and pushed both Blue Cross Blue Shield and PreferredOne to flee the market. As part of an individual health insurance market rescue package led by Republicans in the Minnesota House and Senate, the legislature repealed the state’s 40-plus year restriction on for-profit HMOs.

The COVID-19 pandemic is now exposing how strict controls have harmed health care facilities. Early on in April 2020, Gov. Tim Walz gave the Commissioner of Health the authority to temporarily waive or modify the moratoria on hospitals and nursing homes. Clearly, the strictness of the law posed an obstacle to protecting people from the pandemic. However, one must ask whether the Executive Order was too little too late. If the moratoria never existed, the capacity or the nimbleness to increase capacity quickly may have already been in place.

There is no question Minnesota’s nursing homes struggled to protect their residents. Minnesota nursing homes had the fifth highest percentage of COVID-19 deaths as a percent of confirmed CO- VID-19 cases in 2021 as of November, according to data from the Centers for Medicare & Medicaid Services. Minnesota posted the second highest percent of nursing homes—over 50 percent—re- porting a shortage of nursing staff.

Future investigations on how nursing homes responded to COVID-19 may also inform whether rate equalization has undermined their quality of care. Prices and quality tend to be linked, which has long raised concerns over whether rate equalization impacts the quality of care. As Milton Friedman noted, the impact of a price freeze can be concealed by changes in quality.