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Still that just seemed like a problem of scale to us. Now it seems much more difficult because, as with costs, medical care insurance systems are inherently hard to administer. That is because the things that you have to determine are so subjective.

If you are dealing with social security, all you have to find out is is the person 65? Did the man die? How much did they pay into the system?

With your disability programs, of course, you are getting into trouble there because whether a person is disabled or not is a matter of judgment. But when you get to health insurance, you are then dealing with an enormous number of subjective decisions. Was the care necessary? Was it appropriate? Should the person really have been in the hospital for 5 or 6 days or 2 days or 10 days?

And when you consider that medical care is an art, to some extent, rather than a science, and the number of those decisions you have to make and then you look at that times 200 million people, you have an administrative problem that is absolutely overwhelming.

So that at least leads me to a couple of conclusions. One is that whatever is done should be done on a relatively small scale at the start so we can work out the administrative difficulties. Perhaps, more important, I do not think we can successfully run a national health insurance program on a fee-for-service program. Whatever the merits of the fee-for-service system, I don't think we can get there from here and will have to go to some other kind of lump sum payment system, such as a capitation payment. I don't see how we could run the other


Finally, there is the role of the States. I suppose when you get to the Federal Government, as I did, your figure the States have to solve their own problems and you have enough to deal with in the Federal Government. We give far too little attention to the role of the States.

Medicaid, of course, is a State program. Thinking now about the administrative problems of national health insurance, it is clear that the States have to have a major role. In one field alone, long-term care, nursing homes, it is clear that the States are the major actors. We cannot design in my view a national health insurance system without them. We cannot just figure out what the role of the Federal Government is and then fit the States in.

If it isn't designed with the States in mind, and there are others that can speak far more knowledgeably than I, again I don't think we are going to make it.

Mr. Chairman, thank you very much. I will go on later.
Mr. ROSTENKOWSKI. Thank you, Professor Butler.
[The prepared statement follows:]


Mr. Chairman, Members of the Subcommittee on Health, the discussion today is on the Role of Government in American Health. My prepared remarks will be short so that we will have as much time as possible for informal exchange. My purpose is to describe briefly the current role of government, the future decisions to be made about that role, and some common assumptions that turn out not to be as true as we might expect.

At the risk of going over ground already familiar to the members of the subcommittee, it might be worth while to review a few basic facts about medical care and government expenditures.

For the Fiscal Year just ended, total medical care expenditures for the nation will be in the range of $115 to $120 billion. Last year they were $104 billion. That is about 8% of the gross national product, and makes medical care one of the two or three largest industries in the United States. This year medical costs are inflating at about a 12% rate, twice the general rate of inflation.

The government's share of medical expenditures has, of course, increased enormously since the passage of Medicare and Medicaid in 1965. Total government expenditures, Federal and State, are about 40% of the total. Federal expenditures alone are 27%.

The biggest single item in medical care expenditures, about 40%, is hospital costs. The Federal and state governments pay more than half of these costs. Not surprisingly, costs of care for older persons over 65 are much higher than for other age groups and are about 10 times as high as for those under 10 years of age.

That is the dollar picture.

Turning to the present role of Government, the Federal Government is involved in almost every aspect of medical care.

Paying medical bills for the elderly, the poor and the disabled is the biggest single item. The 23 million beneficiaries under Medicare now have bills paid by the Federal Government at an annual rate of about $15 billion. Payments to states for 25 million poor people covered by Medicaid programs amount to $7 billion, with the states paying an equal amount.

Financing the training of manpower, principally physicians and nurses ($1 billion).

Promoting regulation and organization of the health industry to improve the distribution and quality of services, and control costs ($600 million); constructing facilities ($1 billion).

Supporting biomedical research, at an annual rate of about $2.5 billion.

Caring for persons to whom the Federal Government has a special responsibility, such as veterans, military personnel and merchant seamen ($8 billion).

State and local governments, in addition to financing and administering the Medicaid program, provide most of the long term care and mental health care, and run most of the institutions serving the poor.

In considering national health insurance and the future role of Government, the question is not whether whole new functions should be taken on but rather how much the current functions are to be expanded and how that is to be done. Specifically, decisions have to be made about:

Medicaid-Should it become a uniform program throughout the country rather than a collection of state programs, should it be expanded to include new groups of people (e.g. laid off workers receiving unemployment compensation), and should the state or Federal government run it?

Health insurance for all citizens.-Should it be provided and if so, how? Should it be phased in by groups (e.g. children first?) Should it be limited to coverage for higher cost illness only (catastrophe insurance) or be comprehensive?

Regulation. How will the flow of money into the system be redirected for the purpose of improving the availability of services, controlling costs and improving quality?

Manpower and facilities.-How will they be geared to increased demand for services resulting from more insurance and technological development?

Research. How can it be coordinated with insurance coverage? For example, with Medicare currently covering kidney dialysis and transplantation, what priority should be given to research on chronic kidney disease, and how? Should dollars be spent on the development of an artificial heart, considering the costs under national health insurance of inplanting such a device in perhaps 50,000 people per year?

Federal beneficiaries.—Should veterans, military dependents and merchant seamen be brought in under a national health insurance system and if so, what should happen to the Veterans hospitals and Public Health Service hospitals?

The Role of the States.-What will the state function be in all these respects? Perhaps most important, to what extent will the states continue to have a major role in paying medical bills, giving them an incentive to be concerned with effective cost control and regulation?

These are some of the issues that cannot be avoided in any consideration of national health insurance and the role of government in health. They are so numer

ous and complex that rather than discuss any particular issue in detail it might be more useful to respond to specific questions from the members of the Subcommittee on points of particular interest to them.

There are, however, a number of common assumptions about health and medical care which I would like to review with you because they are directly relevant to these issues. I mention them because they represent what I and at least some others took to be facts about medical care and government's role when we began working on health policy in HEW a few years ago. It turns out that in some cases they are less true than we thought and in other cases just not so at all. We made these assumptions:


Not so.-Other influences on health, such as nutrition, employment, stress, personal life style, and the environment are too strong. The health of particular individuals will be improved, and perhaps the health of some groups, such as the rural poor, but overall national measures of health such as average life expectancy will not be changed.

This has enormous implications for national health policy. It means that the government role in medical care, which is what we have been discussing, is only a small piece of government's role in promoting health. Programs to provide income, employment, housing, education, a better environment, safer roads and cars and so on are all in a sense health programs. This leads into a discussion of how government can set priorities among these programs, which is far too broad a subject for today's agenda. But it does put national health insurance in perspective. National health insurance in any form should be viewed as a way of achieving greater equity in the provision of medical care, or of providing income protection against medical costs, or of controlling medical care for some other public purpose. We should not expect such a program to make us a healthier nation.


Not as true as we would hope.-For all the advances in medicine in the past 50 years, particularly in the treatment of infectious disease, the medical art is still a limited one, due largely to our relatively primitive state of scientific knowledge of life processes. We know surprisingly little about the efficacy of many forms of treatment and there are major legal, ethical and technical obstacles to obtaining such information.

This is of growing significance as government pays more and more of the bill for care. A major governmental undertaking will need to be launched to review in whatever ways possible the efficacy of treatment and to tie those findings to governmental payment systems, including national health insurance.


Less and less the case.-The portion of medical care going to the treatment of chronic illness is rapidly increasing, with the disappearance of infectious disease as the prime concern of medicine. The number of effective preventive procedures as distinguished from measures to manage chronic problems is remarkably small, and as the nation's population becomes older the trend will continue.

The significance for governmental policy is that health insurance programs will have to be integrated more closely with income maintenance and other programs for those in the society we now classify variously as "disabled," "chroncially ill," "unemployable," "handicapped" and "dependent," often referring to the same person with the same problem.


Not so. Without question these factors have an impact on inflation in costs, which is currently running at about 12% annually, but the major cost problem is far more fundamental. The combination of a growing technology and an independent source of financing in the form of health insurance makes medical care expenditures inherently uncontrollable, given the present fee-for-service payment system. Each year the product delivered, say a day of hospital care, tends to expand through the addition of new services and new equipment. Since the needs for

care, especially among the chronically ill, are almost unlimited, the possibilities for inflation in cost are similarly unlimited.

For government, this means that if cost control is a major objective, it probably cannot be achieved under the present payment system, at least not without a high degree of governmental interventoni into day-to-day practice procedures. To the extent that a national health insurance plan expands the amount of insurance currently in force, without modifying the payment system, the cost problem should continue to be at least as bad as it is now. Limiting the supply of physicians, hospital beds and other resources then becomes one of the few cost control weapons left to government and it may not be effective.


Again not so.-The very nature of health insurance makes it difficult to administer if claims against the system are seriously reviewed. A very high number of claims are made annually, particularly if drugs are covered. Since standards about whether care is necessary in a particular situation tend to be highly subjective, given that medicine is at least as much an "art" as a science, controversy is possible over almost any denial of a claim. Further complication occurs because a denial of claims will occur in most instances after the care is given, thereby causing possible financial hardship to the patient.

The question for government then becomes not whether private insurers or a governmental agency should administer national health insurance but whether anyone could run such a system based on the current kind of claims review process. This suggests that at least government should experiment with various administrative forms before committing itself irrevocably to one or the other. It also suggests that alternative simpler methods of payment, such as a lump sum payment per person per year (capitation), may be necessary purely for administrative reasons.


Hardly. If administration of any part of national health insurance is to be decentralized and given to the states, a major overhaul of state mechanisms will be required to avoid the administrative disasters that befell some Medicaid programs. If the Federal government is to take over prime responsibility for long term care, such as nursing homes which now account for a third of Medicaid expenditures, the fiscal implications will be enormous and a Federal program to monitor the quality of care in such institutions will be a necessity. Whatever the decision, integration of existing state and local social service programs with national health insurance will be required.

I know that the Subcommittee has been reviewing these and other questions about the role of government in health and I appreciate having the opportunity to discuss them with you.

Thank you.



Dr. BELLIN. Thank you very much.

Before starting my formal statement, I do want to say it was refreshing to hear the comments of Professor Butler. I know that the Subcommittee on Health is aware of the fact that comments so candid are not that common in public testimony and he said a number of things that deserve serious contemplation, although I must disagree slightly with him with respect to the capitation approach.

Mr. BUTLER. I will be mentioning this in my formal testimony. Dr. BELLIN. I defer to others today who wish to inventory the health benefits that ought to be included in a national health insurance plan. I want to focus only on the field of quality and cost controls.

Publicly funded health programs have gone awry in this country not because this or that health benefit was included or excluded, but because of inadequate quality and cost controls. Make no mistake. Unless we move fast now on the basis of what experience since 1966 should have taught us, we shall be compelled to witness a quality and cost ripoff of national health insurance which will make the previously publicized abuses under medicaid and medicare by comparison appear like chocolate cake.

To be sure, the professional standard review organization (PSRO) is being touted as the mechanism to impose workable quality and cost controls upon publicly funded health care services. I am currently at work with the advocates of the PSRO in New York City, to make Manhattan's prototypical Manhattan PSRO succeed. But I would argue that the PSRO prognosis is guarded at best, and for the following reasons:

One: The PSRO is functionally the ongoing responsibility of the local medical society. The constituency of the local medical society is the membership of the local practicing physicians.

Two: The operative in-house review of the quality of hospital care continues to remain under the control of the hospital staff.

Evidently many of us have yet to derive the appropriate conclusions from the farcical performance of the medicare hospital utilization review (UR) committees since 1966. I shan't rehash in detail what my colleagues in the New York City Department of Health and I have been writing and preaching since our earliest official association in 1967 with New York City medicaid. Rather, I shall share with you certain principles, or truisms, or managerial cliches that we have extracted from 9 years of nonromanticized experiences.

Now to these principles:

One: Most health care professionals, if given a choice, prefer to do good professional work, rather than bad professional work.

Two: Most health care professionals are not saints.

Three: Therefore, some health care professionals-no fewer than 5 to 10 percent-normally succumb to the temptation of the easy moneys available in badly controlled publicly funded health care program. To earn these easy moneys, these health care professionals will do bad professional work.

Four: Bad professional work means one, two, or a mix of three nonexclusive forms of abuse:

a. fraud, that is billing and collecting for phantom services (least important statistically);

b. overutilization, that is, providing reimbursable services justified neither for preventive nor for therapeutic reasons (probably most important statistically).

Five: Professional societies conventionally insist that the percentage of aberrant professionals and the magnitude of abuse are terribly exaggerated by governmental agencies and by the mass media.

Six: Professional societies conventionally insist that their own traditional mechanisms of professional peer review are adequate to control most aberrant professionals.

Seven: It is irrelevant whether such claims by professional societies are advanced in good faith or not.

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