Insurance in particular, has been extremely slow in using its purchasing leverage to install cost containment strategies. BHI has been reluctant to participate in State hospital rate review programs and there has been no innovation by BHI in the area of physician services.

The fault, of course, does not rest solely with BHI but in part reflects the enabling legislation which has really constrained the Federal program management, although my own personal view is that there has not been the kind of aggressiveness in the administration of these programs that could exploit what capacity exists, particularly since the passage of Public Law 92-603.

While only nine States have to date installed rate review programs for hospital reimbursement, these programs are remarkably varied in approach. Their variation reflects at least in part the rather immature state of the art of hospital rate review, but it also reflects differences in local conditions and historical revolution.

The Rhode Island reimbursement system makes sense mainly because 90 percent of all hospital income flows through programs administered by Blue Cross and because Blue Cross of Rhode Island has been under strong public pressure to bargain hard for subscribers and these are conditions that do not apply in all States. The point is that different approaches are needed for different States. The Canadian experience with national health insurance further supports this principle.

Here again, I believe the natural tendency of Federal programs to seek a common denominator would be a handicap.

A third consideration is the need to integrate regulatory strategy. It is essential that programs like PSRA and States certificate of need programs be closely coordinated with the financing systems for institutions and physicians if any of these programs are to work. The PSRO program and certificate of need are now and will most certainly continue to be State and local in character. This coordination is so important that any national health insurance legislation should explicitly provide for linkage of these programs. I might add, provided that it is demonstrated that these programs are effective. I am referring specifically to the PSRO's which are as yet untested.

The final and most important consideration in the cost-containment objective is that authority to set rates of reimbursement should be vested only in an agency that has a strong fiscal stake in the outcome. This is not meant to imply that the sole concern of the agency should be fiscal. Rather, the rate setting authority should be vested in an agency that must balance economic consideration with concern for access to quality care. The intent here should be to avoid the narrow focus on saving money that characterized some present State approaches to medicaid reimbursement which I believe would be mitigated if those agencies were responsible for administering a broader, more comprehensive line of coverage, as in the case of Rhode Island and other States like Maryland and Connecticut, where the full hospital income is concerned with the rate of the agency and not just Blue Cross or medicaid.

Unless the State or States are faced with a ceiling on Federal expenditures or some other mechanism for placing them substantially

at risk we face the hazard that in their approach to rate setting they may become quite permissive and develop a preoccupation with protecting each provider, however inefficient, rather than a preoccupation with the efficiency and effectiveness of the system as a whole, a phenomenon that is well known in the regulation of public utilities.

The fourth objective is to provide for the capacity and flexibility to permit changes in the delivery system. In terms of effective reform, the health care delivery system is a bit like the weather; much talkd about but rarely modified. Major reforms in the use of manpower, alternatives to hospitalization, treatment of gerontological diseases, provision of primary care, and enhancing the role of patients and parents as providers of care are all yet to come. Traditionally, our highly pragmatic society embraces reform only after its success has been demonstrated often through natural experiments. Since provider reimbursement is an increasingly critical factor in the decision to alter the delivery system, the rigidity that has characterized Medicare reimbursement could be an obstacle to the flexibility needed. An example of this is the approach to reimbursement for services provided by physician extenders. It is clearly too soon to lock ourselves into an approach that might have an effect of freezing the delivery system into its current mode.

Additionally, the States have developed quite different patterns. already in the mix of institutions providing services. State, county, and municipal hospitals play a more prominent role in some States than others and operate in quite different financing arrangements. The same thing is true for rural, inner-city community health centers and emergency medical systems. Since many of the programs are funded by a project grant, their coordination with the main stream of health care financing would be simpler at the State rate than at the Federal level. In essence, the medical market place is a local and regional one and the major participants-physicians, hospitals, and beneficiaries are organized to express themselves at these levels.

It is obvious from the above discussion that I favor a significant role for the States in the administration of NHI. This view is not, however, without qualification. The States have a long way to go to improve the quality of their staffing and it would be unrealistic to expect all States to perform equally well. An additional problem is the disproportionate influence that providers and carriers have with some State legislatures in relation to consumers.

While I would be willing to accept some lack of uniformity as a way of achieving flexibility and pluralistic solutions, I firmly believe there is a need for Federal minimum standards for benefits, reporting systems, and other activities. By coupling such minimum Federal standards with an expenditure ceiling for each State. the Statecan be given the flexibility to make its own investments in the delivery system, and to work out its own reimbursement schemes with providers. If a State is unwilling or unable to meet Federal minimum requirements, the Federal Government should stand ready to assume administrative responsibility.

The degree of flexibility proposed also permits using the tremendous expertise that already exists among the third party community.

In implementing their NHI system, many of the Canadian Provinces adopted such a flexible approach. In Ontario, for example, private carriers continued to administer the payment systems until the Provincial government felt it had the expertise and capacity to take it

over.

The expectation that NHI administration as well as financing will be federalized has discouraged a number of States from investing in more effective administrative and regulatory efforts. Evidence of an interest by the Congress in a more prominent State role might help encourage the progress that is needed today as well as in the future. My hope is that this committee will provide such evidence. Thank you. I will be happy to respond to questions.

Mr. PREYER [presiding]. Thank you very much. At this time we would like to hear from Professor Falk.

STATEMENT OF ISIDORE S. FALK

Mr. FALK. Mr. Chairman, I am Isidore S. Falk, professor emeritus of public health at the Yale University School of Medicine, a member of the Executive Committee, Health Security Action Council, and chairman of the Technical Subcommittee of the Committee for National Health Insurance. I appear before the committee in these capacities. I have already submitted a document which contains my testimony. I would like, Mr. Chairman, that that be included in the record while I proceed merely to give you a considerably abbreviated version of its contents.

Mr. PREYER. Without objection, the full statement of Professor Falk is admitted into the record [see p. 13911.

Mr. FALK. Mr. Chairman and members of the subcommittee, I was pleased to have your invitation to participate in these extensive hearings on national health insurance, being greatly impressed by their comprehensiveness.

I assume the hearings have already made clear that design of a good system must have a duality of objectives: both better financing of medical care and also system improvement-because system improvement is required for adequate and yet economical financing, and adequate and assured financing is required to effect needed system improvement.

Further, I assume it is clear to you why we, in the Committee for National Health Insurance, believe that a good system must be a service program and not merely a financing or indemnifying system. Most private health insurance and indeed most public medical care programs merely guarantee payment of bills or indemnification for expenditures. The health security program designed by our committee and spelled out in H.R. 21 and S. 3 is a service benefit and not an indemnity benefit program, it is focused on the dual objectives to which I have referred and it incorporates a wide variety of provisions for system improvement and not merely provisions for financing.

Our primary social goal is the availability of all needed services to everybody in the Nation, as far as this is practical initially and with increasing comprehensiveness of the services as expansion of

resources and services makes feasible. Since we must start with what we have, the progression must be on an evolutionary course.

I have thought it would be helpful to the committee to lay details aside and to summarize for you: on the one hand, the goals that we envisage, the broad policies that we believe should govern the design of a national health insurance, and the system that should evolve; and, on the other hand, some mistakes of policy and undertaking that should not be made.

One: As an article of social policy, the whole population should be eligible for all the benefits of the program, according to the need for halth care, without financial tests or barriers; that is, with no required insurance contributions history, no means tests, and with no payments to be made by the patient at the time service is received. Two: The program should embrace within the spectrum of its benefits the availability of all useful and promising health and medical care services.

Three: As a corollary of national eligibility for services, the financing of the program should be national, with as equitable allocation of the costs as may be feasible, and with built-in provisions not only for quality assurance but also for national cost controls on budget bases which are geared to trends in the national economy as a whole.

Four: While the financing and fiscal management should be national, indeed "monolithic" as in our national social insurance, the availability and provision of the medical services should be private and "pluralistic" through self-elected diversities among personal providers of service as to their location, organization, selection of professional activities, and methods of compensation, subject however to requirements to assure the worth of the services supported by the public funds.

Five: Alternative patterns of organization for the provision of services should not only be permitted but even encouraged, especially toward the development of organized provisions for the availability of comprehensive care on a prepayment basis and especially through group practice of the providers of care.

Six: The financial resources should include special earmarked provisions of adequate dimension to support improvements in the availability of medical care, especially with respect to shortages and maldistributions of health manpower and of facilities for primary and ambulatory services, and in organization for the delivery of

care.

Seven: Administration of the public program should involve not only the public authority but also representatives of consumers as well as of providers of the services at all levels from policymaking to ombudsman, with mandatory provisions to assure periodic public accounting of program operations, performances, and evaluations. It is no oversight that there is not explicit provision here with respect to the role of private insurance carriers. Massive national exing little in efficient administration and less in quality and cost condistorts sensible patterns of service and expenditure, while contributing little in efficient adminitration and less in quality and cost control that couldn't be done at least as well and probably better and at lesser cost by public administration without it. Whether there is or

is not a place in the health security pattern for the insurance industry is not a question of logic or necessity but of political feasibility. Since no major proposal proposes a rollback of medical care prices and costs to the levels of prior years, the national health care expenditures with no new program or initially with any new major program have to be substantially the same. The outlook is that the total expenditures will continue to escalate at higher rates than the economy generally and, rising from about $135 billion this year, will reach $200 billion by the end of this decade-unless adequate measures are taken to contain escalation that contributes nothing to national health care.

Sponsors of some proposals present only particular elements of the cost as by showing how much their program would require in new funding from Federal general revenue, while remaining silent about other and vastly larger national costs; and they are almost invariably silent about the invitation for future cost escalations inherent in their programs. Thus, a partial or limited proposals may per se have a seemingly small price tag; but it may nevertheless cost the Nation too much. Contrariwise, a comprehensive proposal which intends to substitute for a large part of current services and for their costs, may have a relatively large price tag, but may nevertheless be sensible and acceptable.

There are two basic reasons for these conclusions: There is no end in sight to the steep escalation we have been experience because there is no natural ceiling on what can be spent for health and medical care and because the forces for such escalation are inherent within the present medical-care system.

The health security program is especially useful to illustrate the problems of financing because it intends the availability of substantially all-qualifying services as they are needed, without barriers of deductibles or copayments at the time services are needed.

The costs to be incurred under this program, within annual budgets for the total expenditures and for the major constituent parts, would be initially about 66-70 percent of the then current level of expenditures for personal health services when the program first becomes operational; and, in the course of time, they would move toward 80 percent or more of such a figure, escalated annually not by the recent and current rates for health care expenditures but by budgeting the same annual percentage as for the economy in general. This is the crucial proposal in the health security program for adequate cost containment: That medical care expenditures will be limited by the general economy's level, not by the unrestrained demands of the physicians, the hospitals, et cetera.

There are two other essential considerations in this formulation. The first is that, on a vast amount of evidence, the fiscal considerations assume no net increase in costs from instituting the program, except by reason of population growth or escalation in the economy generally. The feasible expansions of services for underserved frac tions of the population and for underused categories of service can and would be offset by the savings and economies which the program design makes possible. It would effect economies through more adequate provision of preventive care and of ambulatory services, through orderly referral arrangements, from primary practitioners