Public Policy Cornerstones of America’s Financialized Health Care System

I’ve been examining how public policies have facilitated the transformation of America’s health and medical care systems into today’s financialized and commercialized realities. While some new public policies trigger major systemic shifts right out of the gate, others get less attention and take more time to show results. Policies can have predictable or surprising impacts, good or bad. Changes happen not just through new laws, but also through regulations, executive actions, judicial decisions, and more. Over time, memories of them fade and younger folks never learn about how changes happened, taking each as a given.

Many Americans wonder how we got to our current reality where US health and medical care have become so profit oriented and corporatized. No single public policy change decreed that free-market competition (aka: neoliberalism) would rule. The emergence of private equity, consolidated mega-companies, privatization, sky-high deductibles and other cost sharing methods, suppression of health equity and organized labor, and so much more, often happened discretely, quietly, and unnoticed by most.

Out of many public policy changes that transformed our system, I believe these three have had noteworthy significance in moving US health and medical care to our current deplorable state. Many readers will have other legitimate nominees for inclusion, but I don’t have space here to be encyclopedic.

1. How did private equity accumulate the financial resources to capture so much of the US economy, particularly in health and medical care?

Today, private equity investments and ownership penetrate every crack and crevice of US medical care, from hospitals and physician groups to home health care and hospices to veterinarians and autism treatment programs—more than $1 trillion over the past decade. Results have produced bankruptcies, layoffs, closures, loss of local control, higher prices, and diminished quality. Where did private equity get the dough they needed to invade US medical care?

In 1974, President Gerald Ford signed a law known as ERISA (Employee Retirement Income Security Act), which provided federal regulation of private employer pension plans to prevent abuses that had harmed current and retired workers. In 1979, under President Jimmy Carter, the US Department of Labor relaxed a key ERISA provision called the “prudent man” rule to permit ERISA-governed pension plan trustees to invest their accumulated capital into riskier targets, including the small and then slowly growing private equity arena. In 1996, the National Securities Market Improvement Act went further, enabling nearly unlimited private and organizational funds to be invested in private equity and other alternative investment hands.

Today, pension plans, public and private, are the dominant sources of investment capital for private equity globally and in the US, financing the acquisition of community hospitals and other health system assets. According to the American Investment Council, private equity’s lobbying force, fully 89% of public pension plans invest at least some of their holdings in private equity investments equaling about one-third of all private equity investment capital.

Bottom line, two obscure federal policy changes from 1979 and 1996 provided the gasoline that lit private equity fires across the nation, including into US medical care. Whether you like or despise private equity, public policies engineered the PE medical revolution.

2. How did nonprofit universities and academic teaching hospitals develop into the wealthy institutional behemoths that we see today? 

Prior to 1980, when a university or teaching hospital made a discovery or invention that involved federal research funding, mostly from the National Institutes of Health (NIH), the federal government took ownership of the resulting patent. The federal government turned out to be ineffective in turning those patents into new products or technologies, so that by 1980, they had licensed fewer than 5% of their 28,000 held patents.

The 1980 Bayh-Dole Act (aka the Patent and Trademark Law Amendments Act) turned this structure on its head. The law allowed universities, academic teaching hospitals, nonprofit research labs, and small businesses to patent and own (“elect title”) federally funded Intellectual Property (IP) and to license private sector partners (such as pharmaceutical companies) to develop and commercialize usable end products. Profits had to be shared with inventors, and institutional shares had to be “plowed back” into scientific research and education. Also, the federal government retained “march-in” rights to reclaim licenses if an owner failed to bring an invention to the public on “reasonable terms.”

This was a transformational step that turned American academic hospitals and universities into powerhouse innovation engines, generating an estimated $1.3 trillion revenues and 4.2 million jobs into the US economy as of 2024. At least 200 new drugs and vaccines have been developed using university technology transfer, as well as high-definition TV, the nicotine patch, the Google algorithm, and much more.

The law also generated criticism. How many of the new high-priced drugs involved “reasonable terms?” Why has the federal government never enforced its “march-in” rights to challenge high drug prices? Did the law result in the commercialization of American academia, “hollowing out” or side-lining other vital academic missions and priorities? Have the law’s commercial and financial incentives distorted the access and quality of care missions of American major medical care institutions when a single new blockbuster drug can produce more surplus revenues than does its medical care?

And that’s not all. In 1981, the US Internal Revenue Service ruled that a nonprofit California hospital would not lose its NFP status when it undertook profit-making ventures such as “a medical office building, a shopping center, a restaurant, and a contract management consulting firm,” wrote Paul Starr in his 1982 book, The Social Transformation of American Medicine. It even appears that the profit-making subsidiaries of a nonprofit hospital can sell stock to investors, as long as the tax-exempt and taxable organizations are kept separate.”

If it appears difficult to distinguish nonprofit and for-profit medical institutions, that’s not an accident. While the benefits of Bayh-Dole are evident and impressive, as academic medicine has become commercialized, corporatized, and financialized, what has been lost?

3. Why has corporate consolidation spread so rapidly across the US economy and across US health and medical care sectors since the 1980s?

Americans’ instinctive opposition to monopolies, trusts, and oligopolies gained public expression with the passage of the Sherman Antitrust Act of 1890. Over 90 years, it went through changes that strengthened its effectiveness, especially with the establishment of the Federal Trade Commission (FTC) in 1914. Through numerous successes and failures, Americans supported the public value of governmental action to prevent and to remedy harmful corporate consolidation.

In the 1950s, the neoliberal movement based in the economics department of the University of Chicago began challenging this national consensus, arguing that antitrust should only matter when consumers faced higher prices from a merger or takeover, the so-called “consumer welfare standard.” In the 1970s, these ideas blossomed, especially through the advocacy of Robert H. Bork whose 1976 book, The Antitrust Paradox, gained acclaim among Republicans, conservatives, and more than a few Democrats.

In 1982, the new Reagan Administration rewrote the federal “antitrust guidelines” issued by the FTC and the Antitrust Division of the US Department of Justice (DOJ) to establish consumer welfare as the new standard for judges and other officials in evaluating merger cases. No debates in Congress marked the break with 90 years of precedent regarding harmful market power. It was a clean “inside job” with little to no objection. President Joe Biden’s Administration engineered a major break and course correction during his four years under the leadership of Lina Khan at FTC and Jonathan Kanter at DOJ. 

The consumer welfare standard reigned for 40 years as the governing principle for when to challenge corporate takeovers. In that period, we saw the largest wave of mergers and acquisitions since the late 19^th century. As Americans grapple with health and medical care affordability challenges today, researchers increasingly understand that one of the major causes—perhaps the major cause—of health care’s affordability crisis has been the wave of consolidation across the entire medical care sector since the late 1970s.

Four to five decades ago, these and other public policy changes planted the seeds and sprouts for the creation and evolution of today’s corporate health and medical care state. While these and other changes were noted in some media at the time, none generated the controversy they might and should have if our powers of prediction had been sharper. We know and understand so much more today than we did back then. We have no more excuses for inaction.

John E McDonough’s new book, America’s Wrong Turn: US Healthcare in the Neoliberal Era, will be published in August by Johns Hopkins University Press. 

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