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several billion dollars a year. Its benefits are regressive; the benefits are greatest for high-income employees in high-wage industries.

In short, the current tax treatment of insurance premiums, particularly the exclusion of employer payments from taxable incomes, is a costly, regressive and inefficient aspect of our tax system.

Let me summarize my remarks about cost inflation. I have emphasized three basic points:

First, the current tax treatment of health insurance premiums substantially increases the demand for shallow insurance and for the comprehensive coverage of small medical bills. This is coverage that individuals would not otherwise want.

Second, such excessive insurance coverage distorts the demand for health care, encouraging expensive procedures that cost more than the patients and the doctors think they are really worth.

Third, the growth of insurance has thus induced hospitals to change the nature of their product. It is this change in the product or the quality or the style or care that has been responsible for the rapid increase in health costs during the last 20 years.

These points have important implications for national health insurance. Whatever form of insurance you propose, you must face squarely the problem of controlling the evolution of the quality and style of medical care.

It is crucial to recognize the nature of this problem. The long-run problem is not to reduce or to limit the growth of medical spending, but to achieve the correct rate of growth of that spending. This must ultimately come down to balancing additional spending on medical care against the alternative uses to which households might put those resources. And this requires comparing the expected gains from additional medical care-gains that are psychological as well as physicalwith the satisfaction that households would enjoy from the alternative spending on food, housing, or recreation.

It is clear that controlling the quality of medical care is not a technical issue that can be solved by bureaucrats. Nor can it be assigned to the process of physician peer review. Although peer review can try to assure the application of accepted standards of care, it cannot be used to establish what those standards should be.

Deciding on the correct quality and style of medical care requires involving the individual household in the decision of how much they want to spend for medical care and how much they want to spend for other things.

Although this direct involvement of households is not possible in determining our Nation's spending on defense or on medical research, it is possible for personal health care services. The form of national health insurance should assure that individual consumers play this crucial role in guiding the growth and form of their health services.

It is important that you develop an approach to national health insurance that is appropriate to the advanced technology of today's medical care and the ever-increasing aflluence of the American people. Too much of the current debate relies on the ideas about the delivery of medical care that have been inherited from a period with quite different technological and economic conditions.

The challenge to public policy is to find new methods of organization and financing that protect families from the risk of financial

hardship, while also making the future development of health care more responsive to the preferences of the people.

Thank you, Mr. Chairman.
[Supplemental material follows:]

SUPPLEMENTARY DATA FOR THE STATEMENT OF MARTIN FELDSTEIN BEFORE THE SUBCOMMITTEE ON HEALTH

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Percent

350

3. Hospital labor costs, 1955–73:

Labor cost per hospital day (up)...
Labor cost as fraction of total hospital costs:

1955

1973
Increase in hospital wage rates, 1955-73 (up).
Increase in all private wage rates, 1955-73 (up).
"Excess" increase in hospital wages.
"Excess" wage increase as percent of total increase in average cost per day.

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Mr. ROSTENKOWSKI. Professor Klarman.

STATEMENT OF HERBERT E. KLARMAN

Mr. KLARMAN. I am Herbert E. Klarman professor of economics at the Graduate School of Public Administration, New York University. I feel highly privileged to appear here today. This is a splendid opportunity for me, a longtime observer and student of the health care scene in this country, to participate in the mutual exchange that characterizes a congressional hearing and to try to convey to this committee what I think about some of the major issues, problems, and possible solutions in the health care field.

Following staff instructions, I have made my statement brief. There is a good deal that has been left out, which may be developed in the question period I look forward to.

At the outset, let me confess to certain biases or assumptions that should be made explicit. One, in my judgment there is no health care crisis in this country today, though we have many serious problems, including those of cost, access, quality, and so on.

Two, some of our present problems reflect, in part past successes, not only failures.

Three, concerning some of the problems facing us, firm empirical knowledge is lacking. More research and close attention to emerging tendencies are, therefore, indicated. This will include the monitoring of the effects of programs, some of which effects are bound to be unexpected.

This statement consists of three parts. The first part has to do with the criteria for national health insurance. The second part has to do with problems that call for early attention with or without national

health insurance, and the third part has to do with the elaboration of certain issues, whatever the day that national health insurance is enacted.

Part I deals, then, with national health insurance, which once again is on this Nation's active political agenda. It belongs there, because the combination of voluntary health insurance, medicare, and medicaid has been largely successful, yet defective in certain respects and inadequate for some individuals and families.

That health care is a so-called right for all is not a new, 1960's notion. It represented a wide consensus across the political spectrum as long ago as 1940, as Edwin Witte reported. What is controversial is how such a right might be implemented.

In a public lecture I delivered in the spring of 1974 at the University of Western Michigan, in Kalamazoo, Mich., I proposed five criteria for a national health insurance program. The first criterion is universal enrollment, not merely the opportunity to enroll. The second one is a broad and deep package of related benefits, in order to encompass

the possible range of substitute services and to cover large expenses. The third criterion is adequate attention to establishing reimbursement mechanisms and formulas for paying the providers of services.

The fourth criterion is ease of compliance by consumers, so that they may be assured of getting what the law promises in print.

The fifth criterion is that of aiming at a single level of health services for all, at least as a longer term target.

This list of criteria is very short, much shorter than usual. Why? For two different reasons.

The first reason is that I view national health insurance narrowly as a financing instrument though with broad consequences, and therefore, as only one of the available instruments for allocating resources to the health care sector and for distributing the use of these resources.

The second reason is that a large number of criteria can only be confusing in any attempt to weigh one criterion against another.

In this same lecture, I suggested that several potential elements of a national health insurance program, such as the question of costsharing or the question of the responsibilities assigned to fiscal intermediaries, might best be left to a process of cumulative factfinding. Moreover, the second item is suitable for political negotiation and accommodation.

Nevertheless, it is none too soon to start exploring the future role of facilities owned and operated by government, including Veterans' Administration hospitals and municipal institutions.

To my mind, the absence of a health care crisis does not permit us to defer indefinitely the enactment of a national health insurance program. Certain urgent problems, such as the financing of outpatient care in hospitals, may not be attended to because everybody expects national health insurance to take care of them.

Part II of this statement deals with problems calling for early attention. Certain problems in health care are so serious that they would demand early action without waiting for national health insurance, if enough were known about suitable remedies, it seems to me that two problems, both on the supply side of the equation, meet the criteria of seriousness and knowledge. I refer to the supply of short-term hospital beds and to methods of reimbursing hospitals.

With or without national health insurance, it makes sense to begin to move toward limiting and curtailing the supply of general hospital beds. Hospital care is the largest and most expensive item of expenditure for health care; under conditions of prepayment, the number of hospital beds used is equal, by and large, to the number in operation; and there is no evidence to suggest that more hospital care improves health status.

Limiting and curtailing the supply of hospital beds is a sound policy to be applied promptly by health planning agencies at local and regional levels. My reason for advocating this policy is not that the occupancy rate of hospitals is low, nor that some patients occupy hospital beds without medical need, but, rather, that a policy of lower hospital bed use will do no individual harm and can achieve substantial savings. As low a bed saving as 10 percent would yield a reduction in expenditures of $3 billion a year.

Whether the proposed policy can be carried out successfully will depend, in my opinion, largely on the provisions of suitable hospital staff appointments for the physicians who are directly affected by a decision to build fewer beds or not to build at all.

As for hospital reimbursement, it is widely recognized that paying individual hospitals at cost determined on a retroactive basis is conducive to rising cost. Moreover, although cost reimbursement is the general method of payment, the formulas that are applied differ among the three major sources of direct payment-Blue Cross plans, medicare, medicaid. By itself no single source of payment has enough influence to offset the disincentive effects of retroactive cost reimbursement.

Accordingly, as suggested earlier in my list of criteria, it is necessary to establish mechanisms for paying individual hospitals in behalf of all major third-party payers. Such an agency, with jurisdiction over a local or regional area, would have to negotiate rates on a prospective basis, since automatic formulas linked to index numbers have not worked out in the past. Such negotiations can take a hospital's proposed budget for the coming year as the point of departure.

Both of these steps, limiting the number of beds and establishing effective reimbursement mechanisms, are indicated because, with or without national health insurance, the post-World War II movement toward third-party payment cannot--and should not be reversed.

Part III of the statement deals with other important issues. Here I should like to invite the committee's attention to three problem areas: long-term care, health planning, and certain aspects of regulation.

All pending bills on national health insurance agree in neglecting or excluding long-term care. I believe that long-term care should be included under a national health insurance program. Why? Such care is usually health related. It is costly, often paid for by medicaid; and its inclusion would permit consideration of alternative modes of care, not only institutional care.

At present the entire field of long-term care is covered by a noxious fog of scandal. The data base is skimpy and analytical studies are few. Notwithstanding, some things are known,

Nursing home care is different from hospital care in that a physician is not directly involved in placing the patient. The patient or relative or friend is able to judge the quality of nursing home care, unlike hospital care. Therefore, it is not necessary to pay nursing homes at individual rates, the way hospitals are paid.

It is also apparent that prolonged institutionalization is essentially irreversible. It follows institutional care must be timely in order to be effective. Information, referral, and followup networks are required in every local area.

For all these services in behalf of long-term patients financing is necessary, but it is not sufficient. It is also necessary to organize and operate such services. Where experienced organizations exist, they can take the lead; elsewhere it will be necessary to experiment and evaluate performance.

With respect to health planning, the new law establishes numerous area and State-wide agencies and consolidates old grant and loan programs to help pay for construction. The act is long and detailed.

In a public lecture I delivered at the University of Missouri in January 1975 I suggested that the primary reason for health planning are the numerous instances in which the interests of the individual health care institution and those of the community may diverge, as in the case of hospital staff appointments for physicians. I noted, too, that it is much more difficult technically to plan for health services at the local level than nationally. Yet, since health services are mostly provided at the local health level, health planning must be geared to the local situation, that is, to solving concrete local problems. However, the local agency could advantageously make use of outside, Federal assistance.

in the past decade local health planning has been hampered by the unreliability and instability of Federal funding through project grants. The absence of national policies and guidelines for health planning has led to a constant search for innovative ideas and periodic fads. The requirement of consumer representation, in the absence of substantive concerns, has led to a preoccupation with the mechanism and process of planning and to the neglect of real health care problems.

What is required, in addition to more steady funding, is a fostering of institutional capabilities for health planning. Such organizations at the local or regional level will require a good many full counts from the U.S. Census. They can use the example of leadership from the Federal Government in working on susbtantive problems. They will require a good deal of technical assistance in the form of concrete ideas on ways to enhance the flexibility and versatility of health facilities and personnel; monitoring natural experiments and learning their lessons; and elucidating for the intelligent public the policy implications of empirical research findings and even of pertinent theoretical propositions. In certain circumstances the Federal Government is also expected to serve as the superseding decisionmaker.

Reflecting on this lecture, delivered only 6 months ago, I should like to emphasize three points.

1. To be useful, health planning must deal with substantive problems and abandon the preoccupation with mechanism and process.

2. Problems are usually specific to a local area. These are likely to differ among areas.

3. A need has been created for educating and training large numbers of health planning staff. It is not evident who will perform this task and how.

Let me conclude with a comment on one, perhaps unusual aspect of Government regulation in health care. Although process is no substi

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