able to accommodate improvements, and that it is certainly within the domain of public policy to speed whatever improvements seem feasible.)

Many of the system's ardent defenders are the parties who have a vested stake in alleging a superior track record. Their statements ought therefore to be taken with the appropriate grains of salt, as everyone in this room surely knows. There may, however, be something to the point that Americans have been far too swift in humbling themselves before the rest of the world--that other nations that have gone down many of the allegedly remedial avenues now being proposed in this country have failed to compile a health-status record even as good as ours. An interesting case in point is the health system of West Germany. (A paper describing that system has been left with the Committee's staff.) Residents of that nation have for many decades enjoyed virtually universal, comprehensive health-insurance coverage without any cost-sharing on the part of the insured. By and large, that nation's health-care delivery system is similar to ours, although hospital-based physicians are salaried and private physicians have no hospitalized patients. Remarkably, West Germany fares considerably worse on such widely used health status indicators as infant mortality rates and maternal death rates. (See the tables appended hereto.) Indeed, on the latter statistic the West German average is roughly equal to the shockingly high ratio reserved for the non-white community in this country.

The point of the preceding paragraph is not to assert that the West German health system has failed society or to imply that no improvements are feasible in our system. The point has simply been to raise the caveat that health services are not the only input into the production of a nation's health status, and that the introduction of health-insurance coverage in this country, a redistribution of access to health services, and even a drastic reorganization of the American health-care delivery system may or may not trigger marked improvements in those indicators of health status on which Americans have so long condemned themselves, or generate many of the benefits expected from these changes.

OBJECTIVE 2 AND ITS UNDERLYING ASSUMPTIONS

An alternative, single motive for the introduction of national health insurance might be simply to place into the hands of low-income families the financial wherewithal to purchase adequate health services and to redistribute the overall costs of illness in the nation from those afflicted with illness to those blessed by good health. A compulsory, universal and comprehensive health-insurance system with premiums that are unrelated to the risk represented by insured individuals would accomplish that objective. (A sufficiently generous income redistribution system, such as a negative income tax, might be designed to achieve that objective as well. The fear here might be that the poor would not necessarily spend these transfer payments on health services in the manner intended by policymakers.)

Strictly speaking, one could view this objective as the most important mandate for national health insurance and still adhere to the supposition that there is nothing inherently wrong with the organization of the nation's health-care delivery system as such. One could even believe that the nation's existing health insurance industry has a spotless record. (A private health insurance industry would, of course, naturally tend to categorize individuals by actuarial risk class and set premia accordingly.) With some necessary oversimplification, the Canadian and West German health-insurance systems can be said to have been erected on primarily these notions. These systems are not bona fide insurance systems, nor do they seek to intervene purposefully into the organization of health-care delivery.

Implicit in the proposition of objective 2 is the assumption that lack of ability to pay for health services serves as an important barrier to adequate health care. That assumption in turn implies that one holds the demand for many types of health services to be price-elastic (sensitive to the out-of-pocket expenses consumers pay at point of consumption). Adherents to objective 2 part ways with the pure-insurance school (those favoring objective 1) on the policy implications they derive from the putative high price-elasticity. Adherents to the pureinsurance school see in high price-elasticity the rationale for co-insurance and deductibles. Adherents to objective 2 typically reject cost-sharing on the part of patients, presumably because they deem the consumption of truly unnecessary health services to be a trivial problem and do not wish to see coinsurance deter

consumers from using needed health services. Precisely what health services are "necessary" or "unnecessary" is, unfortunately, a question on which the experts invited to this Committee are unlikely to agree.

In connection with the issue of coinsurance it may be observed that some opponents to cost-sharing appear to rest their case on mutually inconsistent assumptions. Thus, on the one hand they reject cost sharing on the ground that financial barriers (however small) may deter some consumers from seeking needed health care. On the other hand, they suggest that the demand for health services is typically quite insensitive to out-of-pocket expenses in the first place, and that cost-sharing can at best yield only marginal savings in health-care utilization. It is difficult to reconcile these assumptions, unless one is willing to accept the argument that those very few services the demand for which is pricesensitive also tend to be much "needed" services. Since the question of coinsurance is likely to come up time and again before this Committee, members may wish to inquire from opponents of cost-sharing on what set of assumptions they rest their case.

OBJECTIVE 3 AND ITS UNDERLYING ASSUMPTION

Those who would like to see the nation's health-insurance system evolve into an insurance-plus-redistributive scheme rather than a pure insurance scheme typically feel that merely granting the lower-income strata financial access to health services may not be sufficient if health-care provider facilities fail to locate in the areas where such families concentrate (e.g., urban centers or the rural hinterland). Thus one finds demands for a redistribution of purchasing power commonly accompanied by demands for a reorganization of the health-care delivery system. These demand sare based on the popular conception that our existing system is in a perennial state of crisis and certainly incapable of accommodating the additional demands likely to be placed upon it through the introduction of health insurance. While a mere expansion of the existing system along traditional lines might be an expedient solution, the shortcomings of the existing system are held to be sufficiently serious to rule out so simple a policy response. National health insurance is thus seen both as a source of potential problems on the delivery side and as a vehicle through which these problems can be solved.

As noted earlier, the catalogue of commonly stated grievances about the existing American health system is long and varied. However, with some simplification the misgivings that have at one time or another been voiced in this respect can be distilled into the following summary:

1. It is held that the existing provider system, composed as it is of several hundred thousand more or less independent decision-makers ("firms"), is really a "nonsystem" that lacks effective planning and coordination. This lack of coordination is said to have resulted in: Widespread duplication of costly facilities, equipment, and patient record systems, and hence unnecessarily high costs of health care; a maldistribution of medical resources, with a relative abundance of facilities in affluent urban areas and a corresponding lack of facilities in the poorer urban or rural areas; and lack of comprehensiveness and continuity of

care.

2. It is held that current legal restrictions on medical practice, and in particular current license laws covering both medical and paramedical manpower, tend to Discourage experimentation with the use of paramedical personnel (physician assistants, nurses, medical technicians) for tasks now requiring scarce and expensive physician time; and discourage entry of labor into the health-care sector since current licensure laws effectively rule out the prospect of upward mobility in the health-manpower hierarchy.

While it is conceded that licensure laws do protect the consumer from unqualified personnel, it is felt that this benefit is not sufficient to offset their stifling effect on cost-reducing innovations in the organization of medical-care delivery. 3. It is suggested that the financial arrangements currently accompanying the delivery of health services, i.e., the emphasis on payment (fee or charge) perservice, combined with the fact that the consumers are typically more fully insured for inpatient than for outpatient care tends to: Deter consumers not covered by third-party payment from seeking relatively inexpensive preventive care in the early stages of a medical condition, thus necessitating more expensive therapeutic care later on; encourage consumers (and their physicians) to substitute costly (but insured) hospital services for less costly (but uninsured) ambulatory care; bar some consumers (the lower-middle class) from access to needed

care altogether; and encourage providers to overprescribe or oversupply health sevices to those consumers who can afford to purchase medical care.

4. With respect to the hospital sector in particular, it is held that the prevalent full-cost reimbursement formula, combined with the fact that a hospital's prestige increases to some extent with the complexity of cases it can handle tends to encourage the acquisition of costly facilities and equipment that are not fully used.

In addition, it is sometimes argued that the pervasive control by the medical profession over almost all facets of the health-care delivery process-e.g. the physician's voice in the management of hospitals-has tended to make the health system more responsive to the intellectual interests of the profession than to the medical needs of consumers. This allegation is sometimes accompanied by the argument that, by virtue of their training, physicians are ill-equipped to manage properly so complex a system as the United States health-care sector and that a restructured delivery system should provide for expanded lay control over the allocation of medical resources.

It will have been noticed that the criticisms enumerated above tend to fall into two major categories: those concerned primarily with the quality of the health care received by the American people as a whole, and those concerned with the Efficiency (or costs) with which that care is being produced. In other words, almost all proposals for a restructuring of the American health-care delivery system seek to accomplish improvements along either or both of these dimensions. As an economist I feel poorly equipped to address myself to the problem of quality. The following remarks will therefore be confined to questions related to the economic efficiency of the health-care delivery system.

In thinking about ways to reorganize the health-care delivery system it is convenient to divide that system somewhat arbitrarily into two distinct (though much related) components, namely:

A. The technology of health-care production and delivery (by which is meant the organization of medical resources within health-care provider facilities, the distribution of available resources among facilities, and the geographic distribution of provider facilities); and

B. The financial flows accompanying the delivery of health services from providers to consumers.

Proposals for a reorganization of the technology of health-care production generally seek to bring about one or a combination of the following four changes: 1. The consolidation of small, independent provider facilities into larger units, with the aim of reaping potential economics of scale in health-care production.

2. The substitution of relatively more abundant and/or less costly productive factors for relatively scarcer and/or more costly inputs.

3. Increased division of labor and specialization of functions among some types of facilities (especially in the hospital sector) and the integration of specialized units into a coordinated, comprehensive, and efficient delivery system through either full-fledged regional planning or at least the more centralized control inherent in the HMO concept.

4. A significant redistribution of physician manpower among medical specialties (away from specialist services to primary care) and among geographic regions (away from the suburbs of metropolitan areas and toward low-income centers and rural areas).

In some societies, such changes could be attempted simply through regulatory edicts. At one time or another, proposals to resort to direct regulation of healthcare providers have come forth in this country as well. Once again, in a statement of this sort there is not room for an extended discussion of the merits and demerits of direct regulation of the health-care sector. (See, however, the Institute of Medicine's Controls on Health Care, 1975.) One is, however, not encouraged by the long-run performance of direct regulation in other areas of the nation's economic activities. The impact of public regulation on the nation's transportation industry certainly should give policymakers pause. It seems more in keeping with the American temperament to influence the provider system through manipulation of the financial flows accompanying the delivery of health services. The financial flows accompanying the delivery of health services furnish an important nexus between a national health-insurance system and the nation's health-care delivery system. Since the insurance mechanism interposes a third party between the providers and the consumers of health services, that financial mechanism can clearly be so designed as to influence both parties-in particular,

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to influence the manner in which the production of health services is organized. A rather bold attempt to use the insurance mechanism in this way was incorporated in an early version of the Kennedy-Griffith bill which would have provided for a massive shift away from the traditional fee-for-service reimbursement of physicians (and full-cost reimbursement of hospitals) toward prepayment to providers (HMO's) in return for a promise to deliver comprehensive care when and where needed. The theory was that health-care providers who operate under a prepayment formula have every incentive to prescribe the most efficient bundle of health services capable of treating a given medical condition and to produce whatever services are prescribed in as efficient (least-cost) manner as possible. Whether a nationwide system of health-maintenance organizations would actually service these goals is as yet an open question inviting sustained empirical analysis. A priori it can be argued that if an HMO is permitted to package one year's costs into the next year's capitation premium, the incentive to minimize the cost of health maintenance may be considerably blunted. How acceptable the prepayment regime will ultimately be to the typical American physician and patient also remains an open empirical question.

Whatever the merits and demerits of the HMO concept will ultimately turn out to be, as a practical matter the designers of the nation's health insurance system ought probably to be prepared to work primarily with the traditional feefor-service system. Such a system was incorporated into the Canadian health insurance program and it has also now been widely adopted in West Germany, after decades of experimentation with capitation payments. There is every reason to believe that it will predominate in the United States for decades to come.

The question policymakers must resolve at the outset is whether the determination of the fee schedules to be used under national health insurance are to be left to the good offices of physicians individually and collectively-as is the case where physicians are reimbursed on the basis of "customary local fees”—or whether these fee schedules are to be subject to strong public control. If the former approach is adopted, as might well be the case in the United States, policymakers willingly forego a potentially powerful lever through which the delivery system can be influenced. If the latter approach is used, policymakers ought to explore ways in which that fee schedule can be developed to serve society's interests.

Without dwelling at length on the potential role of fee schedules in a national health insurance system, it may be worth mentioning at least two concrete ways in which these schedules could be used to reshape the health-care delivery system. First, under a national health insurance system it may be possible to introduce interregional differences in the absolute level of fees with the objective of encouraging a redistribution of medical manpower toward currently under-doctored areas. Relative to the customary local fees now paid under part B of Medicare, the new fee schedules should enhance hourly physician remuneration in lowincome urban centers and rural areas and depress it in areas traditionally preferred by physicians. Lest it be argued that such a policy would not be administratively feasible, it may be noted that medical fees in West Germany, for example, are calibrated toward precisely this objective. The degree of success attained under the West German system merits further investigation.

A second objective that might be pursued with officially administered fee schedules relates to the issue of health-manpower substitution. Current policies are to encourage the substitution of paramedical personnel (physician extenders and allied health manpower) for the time of physicians in the production of health services. Toward that objective, the public sector has subsidized the training of increased numbers of physician substitutes without, however, providing physicians with strong incentives to engage in the desired health-manpower substitution. Bluntly put, upward flexibility of medical fees has enabled even phycicians who make wasteful use of their time to earn attractive incomes. Why such physicians would engage in more extensive task delegation is certainly not obvious.

Under a national health insurance system, attempts could be made to set the relative fees for particular medical services so as to provide physicians with strong financial incentives toward more extensive task delegation. More specifically, fees for services whose production could safely be delegated predominantly to lower skilled (and less expensive) manpower should be set in the fee

2 Actually, the reimbursement scheme adopted in West Germany resembles what would be known in the United States as a "medical foundation" with each foundation covering one entire state. In this connection, see the attached paper on the West German health system.

schedule on the assumption that they are so delegated in every instance. Clearly, under such a schedule a physician who performed a delegatible service himself would effectively price out his own time at the imputed wages of a physician assistant. One suspects that, over time, such a fee schedule would tend to encourage physicians towards greater efficiency in the use of their own time. It would clearly also serve to reduce the overall transfer of income that society at large has to make to the medical-care sector in return for the receipt of medical services. (For a more extended discussion on the potential role of fee schedules in a national health insurance system, see "Alternative Reimbursement Schemes for Non-Institutional Providers of Health Care," a paper left with the Committee's

staff.)

CONCLUDING REMARKS

Since this is the first in a series of panel discussions on the issues surrounding national health insurance in this country, the objective of this statement has been to offer one potentially useful framework within which these issues can be discussed in orderly fashion. The objective has decidedly not been to furnish the Committee with a blueprint for an "optimal" national health insurance system. A plethora of such proposals already exists. At the very most, the author of this statement would be prepared to recommend a few quite general guidelines for the design of a health insurance system. These recommendations are:

1. Whatever the particular form of national health insurance may be, Congress should offer the American public at least one comprehensive health insurance policy whose provisions are easily understood by the average American and whose language removes any uncertainty concerning the maximum financial risk to which the insured is exposed. Congress may either mandate that each private insurance company offer such a policy, or facilitate the public provision of such policies, perhaps in competition with the private sector. Whatever the case may be, a minimum goal for national health insurance should surely be to free American citizens from unnecessary anxiety.

2. It is important that, at the outset, the public sector (or its intermediaries) gain effective control over the determination of the fee schedules on which noninsitutional providers of health care are reimbursed under national health insurance. Failure to gain control over these fee schedules would mean foregoing one of the more important fiscal levers policymakers can have over the organization of health-care delivery.

3. Congress should shy away from attempts to couple with national health insurance bold attempts to introduce direct regulatory control over the healthcare delivery system. This recommendation is based not only on the lack of a good performance record of public regulation elsewhere. More important is the fact that the ultimate impact of many of the organizational changes now being proposed is ill understood at this time. No social scientist with integrity could, for example, assert at this time that group medical practice is unambiguously superior to fee-for-service reimbursement, that salaried physicians practice medicine superior to that of fee-for-service practitioners, or that health-manpower substitution will ultimately reduce the cost of health services in this country. Until more is known about these issues, it is probably best to defer drastic changes of this sort and to design this Nation's future health insurance system primarily towards objectives 1 and 2 listed earlier.

4. In designing a national health insurance program, policymakers should search the experiences of other nations for potential lessons. It is surprising, indeed, that in recent debates over national health insurance the highly relevant experiences of Canada. France and West Germany are hardly ever referenced. These countries now operate national health insurance systems not unlike those most compatible with the American setting. Furthermore these countries have implemented a good many of the changes now proposed as panaceas for the shortcomings of the American system. In some instances these changes have yielded expected improvements; in others, there were unexpected and often undesirable side effects. In addition to the health services research now underway on aspects of this country's health system, much can be learned from cross-national comparisons.

Mr. ROSTENKOWSKI. I think the Chair owes the panel an explanation of what is happening here.

When the bells ring, we have to answer a quorum, when the bells ring on three occasions. Something took place on the floor of the