~0

HEALTH PLANNING: A PRESCRIPTION FOR HEALTH CARE IN THE U.S.

Gary Armstrong, University of Central Arkansas

The Rise in Health Care Costs and Expenditures

The unprecedented growth in the cost of health care in recent decades

is reflected and documented by a number of economic measures. Four such

yardsticks sufficiently illustrate this rise of costs in the health care

industry.

Consumer Price Index

The Consumer Price Index (CPI) is compiled by the U. S. Department of

Labor to measure the average change in prices of all types of consumer

goods and services. It measures only the effect of price change in the

cost of living of urban families. The table on page 3 (Table I) shows

that the medical care component of the CPI has over the past decade con-

sistently outstripped all other price increases over the same period of

time. It is, in fact, the leading contributor to the overall increase in

prices.

Specifically, hospital costs have quadrupled and physicians' fees

have tripled in only eleven years, 1965-1976.1 In the period from 1950

to 1977, the overall CPI increased 156 percent while health costs soared

836 percent. By way of illustration, a day in an average hospital in

1950 cost $15. By late 1977, the cost of an average day had risen to 2

$184.

Gross National Product

There are three fundamental economic principles that are basic to

all economic systems. First, resources are scarce in relation to human

wants. Secondly, resources have alternative uses in a number of productive

capacities. Thirdly, people have diverse wants and attach varying degrees

of relative importance to them.

With the above as given, the basic problem of choice becomes how to

allocate scarce resources so as best to satisfy human wants. If people

51

want larger and larger amounts of health care, they must be willing to

sacrifice some other goods and services within the economy in order to

reallocate resources to health care.

The gross national product (GNP) is defined to be the total market

value of all final goods and services produced in the economy during one

year. Only 4.6 percent of the GNP in fiscal year 1950 was devoted to

health care. This percentage has been steadily climbing each year as

documented in Figure I. By fiscal year 1976, the percentage of GNP

absorbed by health had reached 8.6 percent and is expected to reach I0

percent easily by 1980. 3 The Department of Defense stands alone as

utilizing more of the nation's output. Because of increasing opportunity

cost (the slope of the production possibilities curve), the trade-off

becomes a more and more difficult one for the nation to make.

National Health Expenditures

The nation's spending for health rises each year and in fiscal 1976

attained the sum of $139.3 billion. This is 14 percent higher than the

$122.2 billion spent in 1975. 4 In the two years after price controls on

the health industry were lifted in 1974, expenditures rose $33.0 billion--

a 31 percent jump.

The share of national health expenditures paid by public funds has

been increasing not only in terms of dollars paid but also as a percentage

of total expenditures. Federal, state, and local governments in 1967 were

responsible for $15.8 billion in expenditures. In 1976, governments spent

$58.8 billion, an increase of 372 percent or an average annual rate of

increase of 16.9 percent. 5 Public funds paid the largest percentage of

health expenditures in 1976 since records have been kept--42 percent.

The remaining 58 percent was paid by individual out-of-pocket payments and

all private health insurance companies.

Per capita expenditures were $638 for 1976, almost double the $325

per person spent in 1970. 6 It has been estimated by the Council on Wage

and Price Stability that Americans now spend approximately I0 percent of 7

their disposable incomes for health on the average. The trends in health

spending delineated above are expected to continue for an undetermined

amount of time.

Insurance Premiums

As a direct consequence of higher medical costs, health insurance

premiums have been forced upward to keep pace with costs and demand.

52

TABLE 1

CONSUMER PRICE INDEX FOR URBAN WAGE EARNERS AND CLERICAL WORKERS, ANNUAL AVERAGES AND CHANGES, 1967-1977

1967=100

ALL ITEMS YEAR Index %

FOOD AND'BEV. HOUSING MEDICAL CARE Index % Index % Index "%

TRANSPORTATION Index

1967 100.0 - 100.0 - 100.0 - 100.0 - 1968 104.2 4.2 103.6 3.6 104.0 4.0 106.1 6.1 1969 109.8 5.4 108.8 5.0 110.4 6.2 113.4 6.9 1970 116.3 5.9 114.7 5.4 118.2 7.1 120.6 6.3 1971 121.3 4.3 118.3 3.1 123.4 4.4 128.4 6.3

1972 125.3 3.3 123.2 4.1 128.1 3.8 132.5 3.2 1973 133.1 6.2 139.5 13 .2 133.7 4.4 137.7 3.9 1974 147.7 11.0 158.7 13 .8 148.8 11.3 150.5 9.3 1975 161.5 9.1 172.1 8.4 164.5 10.6 168.6 12.0 1976 170.5 5.8 177.4 3.1 174.6 6.1 184.7 9.5 1977 181.5 6.5 188.0 6.0 186.5 6.8 202.4 7.1

100.0 - 103.2 3.2 107.2 3.9 112.7 5.1 118.6 5.1

119.9 1.1 123.8 3.3 137.7 1].2 150.6 9.4 165.5 9.9 177.2 7.1

Source: U[S. Bureau of Labor Statist ics.

FIGURE 1

NATIONAL HEALTH EXPENDITURES AS A PERCENT OF GROSS NATIONAL PRODUCT

1950 1955 1960 1965 1970 1975 1980

Source: U.S. Dept. of Health, Education, and Welfare.

53

Higher premiums have a twofold effect. First, there has been an increase

in the direct payments made by individual purchasers of health insurance.

Second, there has been a tremendous increase in the cost of group insurance

plans that are prepaid by employers. Employers find they must compensate

cost increases by limiting wage increases, restricting hiring of marginal

employees, or other cost reducing actions. In many cases, however, the

employer raises product prices and passes the cost to consumers thus fueling

the fires of inflation. In any event, the household is deprived of income

to meet health care costs regardless of their personal utilization of health

services.

THE COMPONENTS OF RISING HEALTH COSTS

There are a wide range of factors which affect the cost of health

care. A brief discussion of six of the crucial areas is considered below.

The Health Care Market

The market for health services is unique in relation to markets for

other goods and services in our economy. The reason lies in the predominant

role the physician plays in the delivery of health services. Although it

is the patient rather than the physician who has the major influence on

his health, the opposite is true of cost.

Because the average person lacks the expertise to make a diagnosis

of his own illness, the patient as consumer must rely on the physician's

judgement. It is the physician who makes the key decisions regarding

diagnosis, how many of what tests to be performed, hospitalization, surgery,

and prescription of drugs. The patient can, of course, decline to follow

the physician's advice, but the patient cannot obtain the services without

the physician's concurrence.

The actual delivery of care is not by the physician usually, but by

other health professionals such as interns, nurses, pharmacists and tech-

nicians who receive their instructions from the physician and report to

him.

Physicians are free to practice medicine as a voluntary member of

a hospital staff of their own choosing. This phenomenon introduces another

peculiar problem. Hospitals must compete with other hospitals in their

area for physicians who in turn supply the patients to fill the beds.

Hospital competition, therefore, is not concerned with prices since it is

the doctors they wish to attract, not the consumers directly. The non-price

54

competition among hospitals manifests an attitude of "keeping up with the

Joneses" promoting their prestige of having the biggest, the newest, and

the best. Such a technologically biased attitude leads to huge and, often,

unnecessary capital expenditures.

Capital Expenditures, Excess Capacity, and Overutilization

Construction of new or expanded facilities and the purchase of new

technological equipment and additions of new services are the main components

of capital expenditures by health care providers. The impact of additional

expenditures upon the operating costs as well as fixed costs of hospitals is

significant and very direct when debt capital is used to finance in ~hole or

in part, or where future medicare revenue and private insurance payment are

pledged. It is in the area of capital expenditures that effective cost con-

trol measures can be utilized and accomplished through intelligent health

planning.

Technological change and improvement is desirable in every industry

when it results in quality improvements and increased efficiency, and

this relationship is certainly true of the medical field. Unfortunately,

rapid attrition of medical equipment as a result of the advancing ~rontier

of technology is attained at the expense of soaring fixed costs and accom-

panying operating costs of the equipment, thus tending to be cost-raising

rather than cost-saving. The recognition that technology is cost-inducive

is not meant to suggest that technological innovation should be restricted;

physicians and patients alike demand the best medical care available.

The villain lies not in technological advancement itself, but in

the needless duplication of equipment by area health providers competiug

for prestige. Much duplication of equipment cannot be justified on a basis

of cost-benefit analysis. When few providers of an area agree to share such

facilities, costs to consumers become higher than necessary.

The recent proliferation of chemotherapy, cancer radiation therapy,

renal dialysis, open-heart surgery, organ transplants, intensive care

units for heart attack, and CAT scanners among health care providers

nationally and locally have been used as illustrations of the duplication

of complex and expensive innovations where need or demand is insufficient

to make the investment financially feasible. Such underutilization creates

55 pressures to use the equipment. The introduction of new technology thus

seems to create demand-inducing effects.

Duplication is not restricted to advanced medical technology and

equipment exclusively. Many routine hospital services such as laundry,

data processing, dietary, and laboratory procedures may be produced by

individual institutions; some sharing of services has been a recent

major thrust in cost containment efforts, in an effort to reduce redun-

dancy.

The most intensive research into the issue of duplication and induced

utilization of facilities has been in the area of hospital beds. Roemer

and Shain, in studies of relations between capacity and utilization of

hospital beds, observed that hospital beds will be occupied at approximately

the same rate at any known level of beds per I000 persons; they concluded

I! that "beds beget patients, a conclusion which has come to be known as the

"Roemer Effect. ''8 Subsequent studies have confirmed this effect. 9

In 1974 there were 5,977 short-term general and special hospitals

with a total number of 931,000 beds. Only 75 percent of these beds were I0

filled in an average day; the remainder represent excess capacity. The

supply of hospital beds has for some years been increasing at a rate faster

than the rate of growth in population II and has reached a national average

of 4.4 beds per I000 population. 12 The chart below gives a frequency 13

distribution of HSA areas in terms of average beds per I000 population.

Number of Beds per I000 Population HSA Areas Percentase

Less than 4.0 42 18%

4.0 - 4.4 37 17%

4.5 - 4.9 45 20%

More than 5.0 96 44%

A recent survey and evaluation of certificate of need and Section

1122 (Medicare and Medicaid) programs revealed that of the sampled states,

75 percent had approved hospital bed supplies of more than 105 percent of

their projections five years from now.

Perspective, a Blue Cross Blue Shield publication, has determined

that construction costs are running near $I00,000 per bed and rising.

Construction costs are only the initial expense, however; depreciation

and interest costs must be added to the costs of daily operation. The

56

national average expense of providing one day of care to a bed patient

was $150 in 1975, or $54,750 per year. Each empty bed costs the coli~unity 14

as well as other patients $32,850 a year minimum. Roger C. Sonneman,

Vice-President of Amax, IncQrporated and Chairman of the Specia~ Committee

on the Nation's Health Care Needs of the U.S. Chamber of Commerce, estimates

that "on any given day 200,000 hospital beds are empty. "15 Therefore,

according to these figures, 18 million dollars each day is spent to

maintain empty beds--$6~ billion annually.

Someone has to pay the $6~ billion tab for the excess capacity;

hospitals in the end must cover all direct and indirect expenses. The

cost is covered through increased cost to the patients who do occu~y beds.

One explanation of overutilization has been the practice of "defensive

medicine" to avoid malpractice suits. The significance of this phenomenon

is the subject of some present controversy, with some dissension from the 16

view that defensive medicine constitutes an important explanation.

Third-Party Paymsnt

Third-party payment also has some credibility as an explanation of

overutilization. It is estimated that approximately 90 percent of all

Americans are covered by either a government program or private insurance 17

with varying amounts of coverage.

Americans have collectively come to think of health care as a right

belonging to everyone. This view has led to greater and greater utilization

levels each year. Additional strain is imposed as the family physician

gradually is replacing the local clergyman as the sympathetic ear for

problems and reassurance. It is estimated as few as four percent of all

doctors visits are concerned with significant medical problems.

The system of third-party payers in this country is composed of

two sectors: the private health insurance companies and the government

through a multitude of public health programs. This system removes the

impact of medical care costs from the consumer and places it on the

third-party payers. The absence of direct payment by consumers has

important consequences on both the demand for health services and the

prices paid for those services.

Patients are tacitly encouraged to demand health services to the

upper limits of their third-party coverage. One consequence of third-

party reimbursement is that it obstructs the resource allocation function

57

of prices that operates in most markets and people consume greater amounts

of health services than they would if they paid directly out-of-pocket.

The third-party payment system also affects the behavior of hospitals

and physicians. Hospitals are paid by the government or financial inter-

mediaries through what is termed retrospective cost-based reimbursement.

In other words, third-party payments are made on the basis of what the

provider says the cost of providing care at that facility is. Obviously,

this procedure allows for wide variations in costs among providers but

with no distinguishable differences in the quality of care; in most

instances, no differences in quality of care are even claimed.

The problem o~ retrospective cost-based reimbursement cannot be

overemphasized because it is used by virtually all private insurers and

all government payers of which Medicare and Medicaid are the principal

programs. Since reimbursement payments are based on the provider's costs,

the provider does not have an incentive to reduce costs or restrict unneces-

sary expansion because they are practically guaranteed continuing financial

soundness by what is in effect, a subsidization of their business.

In an effort to restrain the abuse of this system, third-party

payers instituted price ceilings on the dollar ~unt paid for specific

levels of care and services through prior contractual arrangements between

providers and payers. Their efforts met with little success as prices set

as maximum payments for procedures became the price floor for providers.

The same problem is encountered by payers in dealing with physicians

who receive their compensation on a "fee for service basis." The physician

does not need to consider the financial impact, in the individual case,

of decisions for additional tests and procedures. In this manner, the

practice of "defensive medicine" is underwritten by third party payment.

The social cost of this system of reimbursement becomes evident in the

eventual rise of premiums paid by government carriers, private insurance

carriers and their clients (plan members and taxpayers).

The Role of Government in Health Care

The government must wear many hats in addition to role of third-

party payer in the health field. Beginning with the initiation of the

Hill-Burton program in the nineteen-forties, the federal government has

been involved in the maintenance and regulation of minimum standards for

the accreditation as well as the reimbursement of health care providers.

58

Resulation. The health care industry has until fairly recently

enjoyed a large degree of exemption from governmental accountability.

Hospitals have been under voluntary regulation since the Joint Commission

on Accreditation of Hospitals (JCAH) was inititated in 1952 as an out-

growth of the former American College of Surgeons. The JCAH certifies

accreditation of hospitals, psychiatric facilities, long-term care

facilities, services for the mentally retarded, and ambulatory hea!tb care

organizations to insure that the facility is in compliance with minimum

standards to maintain high quality of care.

The JCAH became linked to governmental regulation when Congress passed

the 1965 Social Security Amendments that established Medicare. The act

required hospitals to meet JCAH standards to be "deemed," in other words, 18

to be eligible to receive Medicare reimbursement. A number of state

agencies began conducting validation survey inspections to insure that

JCAH certification was warranted. Additional standards are required under

the 1967 National Fire Protection Association's Life Safety Code.

Government Reimbursement. The arrival of two government insurance

programs--Medicare and ~dicaid--had a profound effect on health costs.

The programs were instituted to provide insurance coverage for the aged

and the poor who typically did not carry private health insurance. The price

of hospital care before the inception of Medicare and Medicaid was increasing

about 7.8 percent per year. Following Medicare and Medicaid, daily service

charges increased 16.6 percent the first year, 15.4 percent the second

year, and double-digit increases have been common ever since.

Similarly, physician's fees were rising at an annual rate of 3.5

percent before Medicare and Medicaid and jumped from 6 to 7% percent per

year thereafter. 19 The coincidence of rapid inflation and the initiation

ot Medicare and Medicaid is widely presumed to be the direct result of the

increase in the demand for health services under the program and raises

deep concerns for some people over the prospect of National Health Insur-

ance without comprehensive cost controls.

Labor Costs

The health care industry is a labor-intensive industry. In other

words, health care requires a high percentage of labor to output or

patients. There has been an upward trend in the number of hospital

employees per patient of a 2.5 percent increase annually for over twenty

59

years to the point that the hospital employed 3.1 employees for each

inpatient in 1978 compared with only I.i to I in 195030

The increase in employees has been due to decrease in the number of

hours worked by staff personnel, the increasing complexity of health

services, and the need for highly trained personnel in the proliferating

hospital specialties.

Exactly what effect minimum wage legislation has on labor costs is

subject to debate; however, hospital administrators argue that each rise

in the minimum wage is followed by a rise in all other levels within the

industry and thus maintaining the wage differentials between levels.

Few studies have been directed to this issue, and little is really known

about the alleged phenomenon.

Despite an increase in physical intensity of labor services in the

hospital, the cost intensity of labor has been decreasing. Eugene P.

Moats, International Vice President of the Service Employees International

Union representing over 200,000 hospital workers, notes that " . . less

and less of the hospital dollar (is) spent on labor costs each year.

Payroll expenses have steadily declined as a proportion of total hospital

expenses from 66.5 percent in 1962 to 57.5 percent in 1974. 21 This has

occurred because the other costs of hospital care have been increasing

even faster, thus accounting for the decreasing percentage. The facts

indicate that labor costs are not as crucial to increasing hospital costs

as is vocalized by hospital administrators.

Cultural Influences on Health and Health Care

Life expectancy and infant mortality are two measures frequently

cited when comparing health levels of different countries. The U.S.,

with the highest per capita income in the world, has a death rate double

the Swedish rate for males aged 45 to 55. The U.S. infant mortality rate

at 20 per I000 is one-third higher than the Scandinavian countries and

Netherlands with only 13 per I000 in 1979. 22 One must ask, "What

determines the health level of a population?"

Past a certain level , one can assume that per capita income has at

best only a nominal effect on health. Once income rises to a level that

assures adequate nutrition, housing, water, and waste disposal, further

increases in income have little or no influence on health levels except

where high incomes actually have a detrimental effect. The main question

concerning the effect of income on health in the United States is one of

the distribution of income.

60

Recent research has found that of all socioeconomic variables,

education has the strongest correlation to health. According to Michael

Grossman, more schooling leads to better health. 23 No one has yet

ascertained why or how schooling affects health; however, it may result

in more sensible living habits; it may contribute to more effective use

of medical care; or it may help people absorb new information about health

and health care more rapidly. It has been suggested that schooling may

result in more self-confidence on the job and therefore reduces stress.

The most important and influential determinant of health is the

individual himself. The tables on the following page dramatically

illustrate the effect of life style on mortality. Each table lists the

cause of death in the order of importance for the expected number of deaths

per I00,000 for ages 15 through 24 (Tabel 2) and ages 35 through 44 (Table

3).

Americans are the victims of their own lifestyles. The combination

of smoking, drugs, alcohol, over-eating, and stress with a complete lack

of proper and regular exercise results in heart disease, neoplasms and

lung cancer, and cirrhosis of the liver. There are no miracle cures for 24

these killers.

It will be apparent that the emphasis of medical care needs to be

redirected from remedial care exclusively to preventive medicine with

untold savings in lives as well as millions of dollars.25 This approach,

and the limit on capital expenditures for health facilities, are emerging

as the major public policy approaches to containment of health care costs.

APPLYING THE BRAKES TO RISING HEALTH CARE COSTS

Given the much more rapid rates of inflation in health care than

in other sectors of the economy, it is imperative that the health cost

spiral be tamed as soon as possible. It will not be an easy task, but

there is a growing determination evidenced by the government, insurance

companies, employers, and even some health care providers to arrest

further cost rises.

There has recently been advanced a number of proposals aimed at

either increasing the efficiency of the present health care delivery

system, reducing the level of demand placed on the system, and/or a

realignment of financial incentives. Taken together, these measures

represent the potential for substantial improvements in the current

6]

TABLE 2

EXPECTED NUMBER OF DEATHS PER i00,000

FROM AGES 15 THROUGH 24

NON-WHITE CAUSE OF DEATH WHITE MALES MALES

Motor Accidents 807 661 Other Accidents 310 545 Suicide 113 82 Neoplasms 103 82 Homocide 75 771 Influenza and Pneumonia 29 58 ~eart Diseases 28 69

All Causes 1,690 2,777

Table 3

EXPECTED NUMBER OF DEATHS PER i00,000

FROM AGES 35 THROUGH 44

NON-WHITE CAUSE OF DEATH WHITE MALES MALES

Heart Diseases 999 1,831 Neoplasms 507 803

(Lung Cancer) (145) (285) Motor Accidents 351 596 Other Accidents 321 787 Suicide 232 126 Cirrhosis of Liver 188 557 Homocide 98 1,145 Influenza and Pneumonia 79 422

All Causes 3,458 9,203

Calculated from data in HEW Vital Statistics of the United States, vol. 2, Part A, Table I-9: Death Rates for 69 Selected Cuases, by 10-Year Age Groups, Color and Sex (Washington, D.C.: Government Printing Office, 1968).

62

system when implemented within a comprehensive framework of cost-effective,

con~nunity~ide health planning.

The Health Care Market

The role of the physician has traditionally been overemphasized

in the system of health care delivery. An option which would shift

some emphasis from physicians is through institutional licensure as

opposed to individual licensure. Some states individually license as

many as twenty-four separate health occupations. The concept of insti-

tutional licensure would allow health providers such as hospitals and

clinics to be free to hire and use personnel as they saw fit. Extensive

use of physician's assistants, nurse clinicians, nurse practitioners,

pediatric assistants, and the like would be utilized to perform many tasks

that are currently reserved for physicians by law and tradition. Physi-

cians have been shown in many instances to be poorly suited to provide the

primary, preventive, and emergency care as a result of their intensive

training in specialties. Quite often, physician extenders are able

to relate better with patients and their problems, communicate better,

and spend more time with them.

This system would retain the physician as a leader in charge by

virtue of his advanced training and knowledge and would even further

remove him from the delivery of primary care, but a more compassionate

and economical system of health care delivery would result with lowered

cost and improved access.

There has been much discussion in recent years concerning what is

termed the "doctor shortage," leaving the impression that the nation

would soon be unable to meet the health needs of the population. Actually,

there is no shortage of doctors. The number of general practitioners

has been declining as a percentage of the total number of doctors while

the percentage number of specialists has skyrocketed, resulting in a

surplus in some fields, especially surgeons. The shortage, if there is

one, exists at the primary care and emergency care level.

The demand for surgery has been found to be a function of the

number of surgeons in a geographic area. An increase in the number

of surgeons will also result in an increase in price thus maintaining 26

the income level despite a slightly reduced workload.

Professor John Bunker in 1970 compared the number of physicians in

the United States and Great Britain and found that there were twice as

63

many surgeons per capita in this country and twice as many surgeries

being performed here. Some procedures, especially those which indications

are frequently in doubt (such as tonsillectomy), were found to be three

or four times as prevelant here.

It does not seem logical, therefore, for such large numbers of

surgeons to continue to be trained each year. The reason is that thase

responsible for creating new surgical residencies are not the same people

who must contend with the surplus later. Hospital administrators want

as many surgical interns around as possible simply because they are a

good, cheap source of skilled labor.

This excess supply of surgeons contributes to the major share of

unnecessary surgery although a small percentage is due to patient

pressure. It is difficult in many instances to determine if surgery is

justified; however, it does seem to be true that physicians who practice

in prepaid health plans are less likely to recommend surgery than those

practicing on a fee-for-service basis.27

Clearly, a more rational approach to training and utilizing medical

manpower is desperately needed. One alternative is the use of certifica-

tion, rather than licensure. Licensure absolutely prohibits practice by

those not licensed; the certification proposal would merely certify as

to competence and let the public decide whether or not to use.

Hospital Beds.

The supply of hospital beds has for some years been increasing at a

rate faster than the rate of increase in population and has reached a

national average of 4.4 beds per i000 population and plays a major role in

the high cost of medical care.

As cited previously, research by William Roemer has demonstrated

that increased availability of beds tends to induce an increased rate of

bed utilization. This effect is generally presumed to apply to most 28

capital-intensive ancillary services.

It is in response to these problems that Public Law 93-641, the

National Health Planning and Resource Development Act, was enacted. In

corresponding National Health Planning Guidelines, the Department of

Health, Education, and Welfare established the requirement of a reduction

of beds from 4.4 per I000 to 4.0, with some flexibility for special 29

circumstances. This ratio does not include beds in federal hospitals

such as VA hospitals.

64

The reduction would be only about i0 percent of the total number

of beds over the next five years. Further reductions in some areas would

be appropriate. This can be accomplished through a combination of lowering

utilization rates (which has been shown to be affected by the availability

of beds) and raising occupancy rates. The national occupancy rate for

short-term non-federal acute care hospitals was a poor 75 percent in 1974,

indicating the severity of the surplus. 30 The National Guidelines call

for an annual average occupancy of at least 80 percent for each individual 31

Health Systems Agency area-wide. Through the use of an efficient

patient scheduling system, occupancy rates of 90 percent and greater can

be realized without sacrificing quality of care, especially in the larger 32

hospitals (150 beds or more).

The fear expressed by some people concerning the ability of hospitals

to meet emergency demand and to maintain quality of care appears to be

unfounded in reality. Health Maintenance Organizations in many states

have shown that high quality of care can be provided with as few as 2.5 33

to 3.0 beds per I000 population.

Technolo$ical Equipment and Services

The high cost of technological equipment and specialized services

has already been outlined. The key to controlling costs in this area is

to ensure that the level of patient demand justifies its existence. The

unnecessary expense problem occurs as a result of several or even all

providers in a geographic service area possessing duplicate equipment and

services. The patient demand may be inadequate to support but one or two

of the specialized units in the community. The cost of the unused capacity

must be passed on to all patients utilizing the provider's facility.

The National Guidelines have addressed the problem by establishing

separate criteria for eight services singled out as major offenders.

They are: (I) obstetrical services, (2) neonatal special care units,

(3) pediatric inpatient services, (4) open heart surgery, (5) cardiac

catherization, (6) radiation therapy, (7) Computed Tomographic Scanners, 34

and (8) end-stage renal disease.

Alternative Care

Despite the inordinate emphasis on inpatient care in hospitals,

there are alternatives, and these alternatives are growing in popularity.

The most obvious avenue of alternative care is outpatient care instead

of hospitalization. There are a number of minor surgical procedures that

65

are well suited for outpatient utilization with the massive support system

of the hospital in case of unforeseen complications. Outpatients can be

treated without the additional cost of a bed. Batteries of tests can be

run at a fraction of their former cost without hospitalization or pre-

ceeding entry into the hospital. Earlier discharges for patients who

require only a day of testing or therapy can be accomplished. A trend

is slowly emerging for hospitals to utilize and to expand outpatient

facilities, spurred by the fact that they are generally more profitable 35

than inpatient care.

Many people occupy hospital beds who do not utilize any tertiary

care services that they are required to pay for, but who still need periodic

medical attention. Home health care and visiting nurse associations have

been developed to satisfy this need in the patient's home at a substantial

savings. Nursing homes can be and are utilized in some circumstances.

Some of the most innovative developments in health delivery which have

appeared on the scene in only the past year or so are localized evening

medical clinics and emergency care facilities. Their critics have

snobbishly labeled them "MacDonald's Medical Care." They offer significant

advantages over hospital emergency rooms not only through easier and more

convenlent access, but also at substantially lower prices. Since the medi-

cal clinics are open late at night (usually until II p.m.), people who

normally would be forced to miss work to seek medical help no longer face

that problem. Dental clinics have even leased space in department stores

in some areas. The growing public acceptance of these facilities seems to

ensure that more of the same will be forthcoming.

Prospective Cost Reimbursement

The majority of total health care expenditures are paid by third party

payers and as much as 90 percent of hospital charges are paid by the govern-

ment and health insurance companies. These facts illuminate the pivotal

role of third parties in the financing of health care facilities as well as

total health expenditures.

The present payment system primarily uses retrospective cost reimburse-

ment which tends to encourage capital investment by providers and to encourage

greater utilization of health services by consumers. It seems clear that

the time has come to replace the present system with a system that contains

financial incentives for cost control.

66

Such a system, known as prospective cost reimbursement, is currently

in operation in areas of twenty-two states. 36 Prospective rates shift

a larger responsibility and accountability onto providers for their expan-

sion programs. Reimbursements are set "prospectively" based on an assumed

annual occupancy rate thus discouraging additional construction or mainten-

ance of underutilized beds. The system can be simultaneously linked with

effective utilization review to eliminate the tendency unnecessarily to fill

empty Deds. The Social Security Administration recently reported to Congress

that its findings indicate that prospective cost reimbursement " . gen-

erally exerts a modest downward effect on hospital cost increases without

sacrificing the quality of services rendered by the hospital. ''37

Pre-Sur$ical Review

Pre-surgical review of elective surgical procedures has been instituted

in some employee health plans around the country such as District Council 37

of the American Federation of State, Country, and Municipal Employees

(AFSCI~), one of the largest labor organizations in New York City, and the

United Storeworkers Union in New York. The purpose of pre-surgical review

is to eliminate unnecessary surgery for the benefit of the patient and saving

the union and its members money. The cost of administering the District

Council 37 program from February 1972 through March 31, 1976, was $300,000

including consultants' fees and diagnostic tests. Of the 3,721 second opinions

obtained in this time period, 1099 did not confirm a need for surgery with an

estimated cost savings of $2.4 million. 38 A program of mandatory review

promises even greater benefits.

There appears to be a "sentinel effect" associated with the program.

l~e fact that physicians know their recommendations will be reviewed by

peers or a teaching physician may be responsible for a 9 percent reduction in

the number of elective surgeries recommended from 1972-73 while the national

rate of surgery per capita increased. 39 The option to undergo the surgery

or not, as always, ultimately lies with the patient, The implications of

extending pre-surgical review to private insurers and governmental Medicare

and Medicaid programs could save untold millions of dollars each year.

Price Incentives

Third party payers can throttle the demand for more and more health care

by replacing current policies containing "first dollar" coverage with a

deductible coverage policy. People are not inclined to seek medical attention

for minor or non-existant maladies when the cost of tbat attention must come

67

out of their own pocket each time, up to a threshold of $I00, for instance.

The incentives for hospitalization should be eliminated and out-patient

care emphasized and encouraged. Third party payers control the pursestrings

of the health care industry and are in the position to influence providers

to economize and promote efficiency.

Reducing Cultural Demand

The fact that the major health problems facing this country today are

preventable was presented earlier. The common denominator in most of the

morbidity and premature mortality is the individual's behavior or lifestyle.

People believe the consequences of poor habits will not affect them but some-

one else, which further complicates an already complex problem of convincing

people to stop killing themselves piecemeal.

No one can deny the fact that billions of dollars could be saved indirectly

and directly if our present knowledge of health and disease could be utilized

in progr~m~ of primary, secondary, and tertiary prevention. If no one smoked

cigarettes or consumed alcohol and everyone exercised regularly, maintained

optimal weight on a low fat, low refined carbohydrate, high fiber-content

diet, reduced stress, obtained adequate rest and recreation, understood the

needs of infants and children for proper nutrition and nurturing of their

intellectual and affective development, had available to them, and would

use, genetic and family counseling, drank flouridated water, followed the

doctor's orders for medication and self-care once disease was detected, and

used available health services at the appropriate time for screening examina-

tions and health-education-preventive medicine programs, we would find that

not only billions of dollars would be saved, but the quality of life would 40

be improved.

It is obvious that Americans cannot be forced to take measures for the

maintenance or improvement of their health; therefore, a direct attack on

the primary cause should be made through determined efforts toward education.

The recognition of this problem prompted Congress to include public health

education as one of ten national health priorities in Public Law 93-641, the

National Health Planning and Resource Development Act of 1974.

Environmental elements have a direct impact on health and health care.

Polluted air and water pose severe health hazards to large populations of

people although some efforts are being undertaken to diminish these hazards

through the work of agencies such as the Environmental Protection Agency.

Accidental death and disability prevention activities in the work-place

are administered under the umbrella of the Occupational Health and Safety

Administration.

68

It is appropriate to reiterate at this time that more doctors and greater

use of high cost hospital technologies do not improve health, but individual's

behavior and lifestyles do. We have met the enemy and it is us~

Health Maintenance Orsanizations

A Health Maintenance Organization (HMO) is defined by the Department

of Health, Education, and Welfare as an "organized system of health care

which provides a comprehensive health maintenance and treatment service for

an enrolled group of persons through a prepaid aggregate fixed sum or capita-

tion arrangement. ''41

There are, therefore, two basic types of N~Os: the foundation and the

prepaid group practice. The foundation retains the fee-for-service mechanism

and freedom of choice by both physician and patient. The prepaid group

practice is more important for the purposes of cost control. It operates on

the principle of prepayment while the individual is well in order to cover

his expenses when he needs medical treatment of any kind and not just a

particular symptom or procedure which is listed in an insurance policy.

The prepaid organization is not a new and untried phenomenon. There are

some which have been in operation for fifteen years and more. Unions and

managements alike have undertaken ~O~ as a means of lowering the cost of

health benefits and to provide greater comprehensive care.

The growing popularity of this form of HMO is attributed to its appeal 42

to physicians and patients, according to Caldwell B. Esselstyn, M.D.

~O's appeal to doctors because of: (I) the ability to practice within

a group of cooperative doctors who want to see each other succeed; (2) the

ease of consultation at no extra cost to the patient; (3) when absent, the

personal physician's assurance that his patient will be taken care of by a

colleague; (4) regular hours and time off for continuing education, sickness,

and vacation without loss of income; (5) delegation of business management with

business training; and (6) the competitive earnings that are possible with

attractive fringe benefits including retirement.

HMO's appeal to patients because: (I) practically all services are

available under one roof or in one system; (2) they are given an opportunity

to select from doctors who have been pre-selected by other doctors; (3) if

personal physician is not available, a colleague is available; (4) there is

twenty-four hour, seven day a week coverage; (5) there is nominal out-of-pocket

expense; (6) preventive services are emphasized; and (7) there is a consumer

voice in the non-professional plan policies.

69

A number of utilization studies of matched populations have indicated

that, even after adjusting the data for age, sex, and other factors, ~O's

use 30 to 50 percent fewer hospital days and cost I0 to 30 percent less per 43

capita than do traditional fee-for-service providers. A recent study

comparing I0 HMO~ and I0 matched populations showed that hospital use in

group practice plans was two-and-one-half times lower than in fee-for-

service systems, and that there were no discernable differences between them 44 on factors relating to quality and access.

The conclusion is that HMO~ represent a viable and efficient alternative

to the traditional health care delivery system offering more comprehensive

care at a reduced cost to participants and a more efficient allocation of

resources.

THE EVOLUTION OF HEALTH PLANNING IN THE U.S.

Forerunners of the N@tional Health Plannin~ and Resource pevelopmen~Act

The current legislation relating to health planning was the result of a

reluctant evolutionary process which was initiated in 1946 with the passage 45 of the Hill-Burton Act.

Hill-Burton Act

Congress first touched the previously virgin territory of health planning

with the Hill-Burton Act, also known as the Hospital Survey and Construction

Act. It was primarily a program to provide financial assistance for the

construction of local community hospitals and other related facilities.

Federal grants were provided in accordance with a state plan that had been

developed by a designated state agency under the general supervision of the

federal authority. The program was quite successful in the overall improvement

of mandatory standards for hospital care and increasing the adequacy as well

as the accessibility of health care facilities available.

The planning phase of the Act was deficient in respect to the quantita-

tive methodology utilized to determine the feasibility of construction

with little, or, in most cases D no interaction with consumers or state and

local planning agencies.

Comprehensive . Health Plannin~ and Health Service ~ Amendment of 1966

The next major evolutionary legislation to be passed by Congress was

the Comprehensive Health Planning and Health Services Amendment, referred

to as CHP for short. It provided that the categorical funds for the various

70

public health services available to the states would be given in

block grants instead. In effect, it gave the states wider discretion

in the programs they chose to spend Federal money.

After much debate over the intention of the law, new area-wide

comprehensive health planning agencies were established. These

new agencies which replaced the former agencies under Hill-Burton

were composed of a majority of consumers to give an active voice

to the people served by the agency in the hope that the planning

function would not be dominated by the health care providers. Un-

fortunately, many agencies became merely consultants to the providers

on the financing of their capital expansion projects.

In sum, the CHP failed in the fole of an effective health

planner in cost control and facility planning because planning was

not linked to financial decision-making. As health costs continued

to soar in the early seventies, the stage was set for health planning

with "teeth."

Health Planning With "Teeth"

A movement was begun during the late sixties in three or four

states to stem the tide of additional new hospital construction, and

it quickly caught on in most states in the early seventies.46 This

movement was the passage ofstate certificate-of-need (CON) legislation

which required health planning agencies in existence under CHP to

review the "need" as defined in the legislation for additional beds,

services, or facilities. Much variation is apparent among the dif-

ferent states on the minimum capital expenditure amount required

for review, the type of health facilities included, and the review

process itself as well as the amount of power delegated in these

matters to the local health planning agency.

In Arkansas, the certificate-of-need program was enacted in

1975 for the purpose of preventing the unnecessary duplication

of health services, or facilities, to help contain health costs, and

to assist development of alternative approaches to health care delivery. The

71

reviewable activities under the program are: (I) capital expenditures of

$I00,000 or more, (2~ any increase in bed capacity, (3) new services which

are to be offered but which were not offered on a regular basis within the

past twelve month period, and (4) the construction, establishment, and

development of a new health facility. 47

Non-compliance by a provider is subject to licensure revocation and

denial of third-party reimbursement for any portion of charges attributable

to expenses related to disapproved or unapproved expenditures.

Congress incorporated health planning into the Social Security

An~endments of 1972 (P.L. 92-603). Specifically, it is Section 1122 of the

amendments which seeks to insure that Federal money is not spent to support

unnecessary capital expenditure projects for health care facilities, and

to reduce incentives for unneeded capital investments. States which parti-

cipate in the program must sign an 1122 agreement with the Department of

Health, Education, and Welfare.

The law requires a review to be administered under local health plan-

ning agencies for (I) all expenditures exceeding $I00,000, (2) any change

in bed capacity, and (3) any change in the services of a facility. All

final decisions are made by the Secretary of DHEW. 48

If a health provider initiates any of the above named activities with-

out agency approval, any Federal reimbursements to the facility, such as

Medicare payments, will be terminated as related to the unapproved expendi-

ture.

Only West Virginia, as of September 30, 1975, had neither CON law

nor signed a Section 1122 agreement. Although the denial of reimbursement

is an intimidating incentive for compliance, most capital financing arrange-

ments are contingent upon agency approval.

THE NATIONAL HEALTH PLANNING AND

RESOURCES DEVELOPMENT ACT OF 1974

The current state of the art of health planning is embodied in the

National Health Planning and Resources Development Act of 1974 (P.L.

93-641) passed by Congress to supersede the former Comprehensive Health

Planning Act and discontinue the Hill-Burton program. In their stead,

72

205 local Health Systems Agencies (HSA) were instituted to conduct and

carry out the purposes and programs contained in the Act.

Each health systems agency is required to have a majority of consumers

as members of the governing board with the remaining positions for health

providers. Elected state and local political representatives are to parti-

cipate but are restricted to no more than 30 percent of the total board's

composition.

The responsibilities of the HSAs can be grouped into four major areas:

(I) review of new institutional health services, (2) review of existing

health services, (3) regulation of rates for provision of health care, and 49

(4) review of proposed uses of funds provided by Federal programs.

Review of New Institutional Care

The enactment of P.L. 93-641 required that the State Health Planning

and Development Agency (SHPDA) must administer a state certificate-of-need

program for new institutional health services. The local HSA must make the

initial review and recommend approval/disapproval to the SHPDA which has

final authority of review.

Pursuant to the HSA review of new institutional services is the

development of a Health Systems Plan, usually based on a five year horizon,

establishing the parameters for the utilization of area health resources

which in turn are integrated into a State Health Coordinating Council (SHCC).

The DHEW is directed to furnish guidelines to assist HSAh through the issuance

of national health planning goals and additional standards addressing such

issues as improvement of health status, health promotion and disease pre-

vention, access to care, and the availability and distribution of health

resources.

The first set of guidelines was released as the "National Guidelines

for Health Planning" in March 28, 1978, issue of the Federal Resister.

All Health Systems Plans developed after December 31, 1978 must not exceed

these guidelines unless a specific adjustment is justified as delineated

in the National Guidelines. A brief synopsis of the standards is given

below:

(I)

(2)

(3)

General hospital bed supply should not exceed 4 per I000 population.

General hospitals should have a minimum annual average occupancy of 80 percent.

Obstetrical services should have an annual average occupancy rate of at least 75 percent and 1,500 births per year.

13

(4) Neonatal special care units should not exceed 4 per I000 population with a minimum of 15 beds per unit.

(5) Pediatric inpatient services should have a minimum of 20 beds per pediatric unit.

(6) Pediatric inpatient services should have a minimum average annual occupancy rate of 65 percent for units of 20-30 beds; 70 percent for 40-70 beds and; 75 percent for 80 or more beds.

(7)

(8)

(9)

~10)

( l l )

Open heart surgery units should have a minimum of 200 procedures annually within three years after initiation.

Cardiac catheterization units should perform a minimum of 300 cardiac caths annually within three years of initiation.

Radiation therapy units should serve a population of at least 150,000 persons and treat 300 cancer cases within three years of initiation.

Computed Tomographic Scanners (CT or CAT Scanners) should oper- ate at a minimum of 2,500 medically necessary procedures per year for the second year of operation.

End Stage Renal Disease (ESRD) services should conform to previous DHEW regulations.

Review of Existin$ Health Services

The National Health Planning and Resources Development Act introduced

a totally new concept in health planning: HSA review of all existing

health services to determine their appropriateness within the HSA area at

least every five years and to complete the first cycle of reviews within

three years of full designation of the agency. The SHPDA is also required

to review health services in the state at least every five years based on

HSA recommendations.

The "appropriateness" of a service is not clearly defined but is

left to be determined in accordance with the social, economic, geographic,

and political factors of the community on a systemwide basis. The purpose

of the reviews is to identify existing problems and to correct these prob-

lems to match the particular health needs of the community.

Rate Resulation for Provision of Health Care

An important area of cost control is the reimbursement of providers

for services rendered. The Act authorizes a maximum of six SHPDA's to

receive Federal grants for the purpose of demonstrating the effectiveness

of alternative reimbursement mechanisms. The program is to be implemented

in conjunction with existing activities of the Social Security Administration.

74

Review of Proposed Uses of Federal Fund 9

Health Systems Agencies are instructed to review for approval/

disapproval of each proposed use of Federal funds such as those available

through grants, contracts, loans, and loan guarantees for programs for

the development, expansion, or support of health resources.

FOOTNOTES

75

i. Robert M. Gibson and Marjorie Smith Mueller, National Health Expenditures, Fiscal 1976," Social Security Bulletin (April, 1977), p. 13.

2. Robert Runde, "New Compresses for Swollen Health Costs," Money (January, 1978), p. 71.

3. "The Relationship Between the HSA Facility Review Function and the Expenditure of Tax Dollars," staff monograph of the Central Arkansas Health Systems Agency, Inc. (1978), p. 3.

4. Ibid., Gibson and Mueller, p. 3.

5. Ibid.

6. Ibid., and Statistical Abstract of the United States: 1976, U. S. Bureau of Census (Washington, D.C.: U.S. Government Printing Office, 1976), p. 73.

7. The Complex Puzzle of Risin 8 Health Care Costs: Can the Private Sector Fit It Together? A summary of hearings held in New York, Chicago, Philadelphia, Houston, Miami, and San Francisco by the Council on Wage and Price Stability with the Council report, "The Problem of Rising Health Care Costs." (Washington, D.C.: U.S. Government Printing Office, 1976), p. 89.

8. Milton Roemer and M. Shain, "Hospital Utilization Under Insurance," (Chicago: American Hospital Association, 1959).

9. A Policy Statement: Controlling the Supply of Hospital Beds, Institute of Medicine (Washington, D.C.: National Academy of Sciences, 1976), p. 7.

I0. Statistical Abstract, p. 81.

ii. Controlling the Supply, p. 7.

12. Statistical Abstract, p. 81

13. Controlling the Supply, p. 25.

14. "The Hospitals' Plight: What's the Answer?" Perspective (Spring, 1977), p. 5.

15. Complex Puzzle, p. 8.

16. Perspective, p. 5.

17. Aaron Wildavsky, "Doing Better and Feeling Worse: The Political Pathology of Health Policy," Deadalus: The Journal of the American Academy of Arts and Sciences (Winter, 1977), p. 109.

76

18. John E. Affeldt, "JCAH: The Best Game In Town," Hospital Progress (September, 1978), p. 52.

19. Paul Feldstein, "The Present Medical Care System in the U.S.: An Economic Problem," M~chigan Business Papers (Nun~er 60, 1974), p. 4.

20. Victor R. Fuchs, Who Shall Live? (New York: Basic Books, Inc., 1974), p. 91 and Statistical Abstract (1972 and 1978), p. 73 and p. iii.

21. Complex Puzzle, p. 7.

22. Ibid., Fuchs, p. 15 and 16.

23. Ibid., pp. 46-47.

24. N. B. Belloc and L. Breslow have isolated seven basic health habits which increase life expectancy when practiced regularly, see "The Relationship of Physical Health Status and Health Planning," Preventive Medicine (Augus~ 1972), pp. 409-421.

25. John H. Knowles, "The Responsibility of the Individual," Deadalus: The Journal of the American Academy of Arts and Sciences (Winter, 1977), p. 61.

26. Victor R. Fuchs, "The Supply of Surgeons and the Demand for Operations," The Journal of Human Resources (Supplement, 1978), pp. 35-55.

27. Ibid., Fuchs, p. 74.

28. Ibld., Roemer and Shain.

29. U.S. Department of Health, Education, and Welfare, Public Health Service, "National Guidelines for Health Planning," Federal Register (Volume 43, number 60, March 28, 1978), p. 130&5.

30. Statistical Abstract, p. 81.

31. "National Guidelines," p. 13046.

32. John R. Griffith, Walton M. Hancock, and Fred Munson, "Practical Ways to Contain Hospital Costs," Harvard Business Review (November/ December, 1973), pp. 134-135.

33. Controlling the Supply, p. 27.

34. "National Guidelines," pp. 13046-13050.

35. Ibid., Fuchs, p. 91.

36. U.S. Department of HEW, Public Health Service, Health Resource Administration, Health Resource Studies: An Analysis of State and Regional Health Regulations (Washington, D.C.: U.S. Government Printing Office, 1975), p. 2.

77

37. Statement of James B. Cardwell, Commissioner of Social Security, before the Subcommittee on Oversight, Committee on Ways and Means, House of Representatives (Hay 17, 1976), p. 9.

38. Eugene G. McCarthy, "Mandatory and Voluntary Second Opinion Programs in Greater New York Area and National Implications," Dorothy R. Eisenburg Lecture, Harvard Medical School (June 12, 1977).

39. Ibld.

40. For further reference and reading on preventive education, see John H. Knowles, "The Responsibility of the Individual," Daedalus (Winter, 1977), and Anne R. Somers, "Consumer Health Education--To Know or To Die," Hospitals (May I, 1976), pp. 52-56.

41. U.S. Department of Health, Education, and Welfare, Health Services and Mental Health Administration, Health Maintenance Or~anizationsT-Th ~ Basic Facts (Rockville, Maryland, 1976), p. I.

42. Proceedings of the 19th Annual Stephen Wilson Pharmacy Seminar at Wayne State University in Detroit, Michigan (February 22, 1972), p. 25.

43. Ibid., Knowles, p. 56, and M.Corbin. and A. Krute, "Some Aspects of Medicare Experience with Group Practice Plans," Social Security Bulletin (March, 1975), pp. 3-11.

44. Clifton R. Gaus, pp. 11-12, 19.

45. This discussion of the history of health planning is drawn from Symond R. Gottlieb's "A Brief History of Health Planning in the U.S.," Regulating Health Facilities Construction, ed. Clark C. Havighurst (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1974), pp. 7-25.

46. William J. Curran, "A National Survey and Analysis of State Certificate of Need Laws for Health Facilities," Regulating Health Facilities Construction, pp. 85-111.

47. Central Arkansas Health Systems Agency, Inc., "Section 1122 and Certificate of Need: A Comparison," mimeographed.

48. Ibid.

49. Ibid., Gottlieb, p. 29.