Phase in health insurance benefits as health services and facilities become available to avoid further inflationary pressures on the cost of medical care.

• Apply all needed cost-saving techniques such as peer review systems, certificate-of-need, prospective rate review, standard cost reporting and other incentives.

Increase public and private sector financing-grants and loans-for construction and start-up costs of ambulatory health centers. These centers would stress preventive care, health education and health maintenance to keep people well, and early diagnosis and treatment to minimize the impact and cost of illness and disability.

Expand grant programs and loan forgiveness for medical students and allied health workers who serve in areas which now are short of such talent.

Conclusion

Realistically, quality hospital and medical services will always be costly. The aim of cost containment is to assure a maximum return in health care for every dollar invested-and it is to this goal that the health insurance business commits itself, working together with health providers, consumers, and government.

IV. THE ROLE OF HEALTH INSURERS IN

PROMOTING QUALITY CONTROLS

The health insurance business has a deep interest in measuring, controlling and improving the quality of health care.

Any program of quality control requires the establishment of criteria against which to measure performance of the system. Such criteria cannot be inflexible but must adapt to changing needs and demands.

In addition, different methodologies must be used in measuring different parameters of care. The three major methodologies have been:

1. An appraisal of structure wherein the adequacy of organization, rules and policies governing professional work, staff qualifications, and physical facilities are evaluated. This assumes that given good

facilities and standards, good health care will follow. This is the approach of hospital accreditation, hospital licensure, and the standards adopted by public and private third party payment programs to determine whether charges by a facility are covered.

2. An assessment of process entails an evaluation of the degree to which services of physicians and other health professionals conform to accepted standards, to determine the propriety, adequacy and timeliness of a means of treatment. This is the process of peer review, of CHAP and of PSROs.

3. An assessment of outcome would perhaps be the most critical test of medical care, and the most difficult to define and control. Insurers are accustomed to this procedure in measuring financial outcomes, but have made only limited attempts at assessing quality outcomes.

Historically, responsibility for control of the quality of health care has been exclusively in the hands of the health professional, usually the physician. Today, this is being seriously questioned, in part because the system is viewed as being structured more for the needs of providers than of patients, with undue emphasis on the treatment of illness rather than its prevention.

Assurances of quality must be provided for all aspects of health care. This must be done at a reasonable additional cost, otherwise too few people may be able to afford the higher quality. The health insurance business can and should assist in this activity.

Many aspects of the traditional health insurance function directly or indirectly affect the quality of health care.

Experience has shown, for example, that benefit design influences the patterns of medical practice. Benefit plans are increasingly expanding beyond the hospital and physician based services to cover treatment in more economical alternative settings and, if appropriate, performed by less highly trained auxiliary personnel. These changes improve the financial accessibility of insured persons to a broader range of services and will likely also increase the availability of these services.

Similarly, the trend is toward eliminating exclusions of coverage for treatment of specific diseases. Expanded coverage for alcoholism, drug addiction and nervous and mental conditions are examples.

Another promising development is found in recent dental insurance contracts where insurers, often as a result of union bargaining, have a contractual obligation to monitor the quality of care received by insured

An evaluation of the impact of plan design on the health system cannot be accomplished by an insurance company alone. The health care providers have an interest in and a responsibility to speak out on aspects of plan design and the insurance business can benefit from their cooperation.

Claim administration can also influence the quality of health care. It is more than a certification and payment function. Increasingly it is being expanded to include evaluation of appropriateness and quality of care. Insurer support of CHAP programs, Foundations for Medical Care, and PSROs are efforts aimed not only at containing costs but at eliminating poor quality care.

In addition, an ombudsman function for insurers might increase patient understanding and informed interaction with providers. While this would involve more cost initially, long term there could be significant savings through elimination of inappropriate or ineffective care and through less loss of time from work.

A quality assessment system requires the collection of data on the encounter between patient and system. The claim form necessary for insurance benefit payment can provide the basis for an encounter form from which patient utilization profiles can be built. The computer permits analysis of the patient's use of care as well as the physician's mode of treatment.

Finally, insurer investment and management involvement in alternative forms of delivery-Health Maintenance Organizations and other types of ambulatory care centers-can improve public accessibility to quality health care services. Active support of the health planning process, PSRO developments, medical research, and the like, similarly help advance the quality of care received by the American people.

V. COST OF ADMINISTERING NATIONAL HEALTH INSURANCE: PRIVATE VS. PUBLIC SECTOR

A key factor in considering how to implement national health insurance is whether it can be more efficiently operated by government or private institutions. A prime test of efficiency is the operating cost of administering the program. In this regard, studies have demonstrated the superiority of the private sector.

A recent Federal government study of Medicare administrative costs,1 conducted by the General Accounting Office (GAO), reveals that in 1973 it cost the government nearly twice as much as private health insurers to process Medicare claims.

The GAO report compared the performance of the Bureau of Health Insurance of the Social Security Administration (SSA) with that of four of Medicare's thirteen private fiscal intermediaries (i.e., two insurance companies and two Blue Cross plans). Of 20.2 million Medicare claims processed overall in 1973, some 500,000 were handled by the SSA.

The GAO study found that the average cost, excluding audit, of a Medicare bill processed by SSA was $12.39, whereas the cost for the four private insurers ranged from a low of $3.55 to a high of $7.31 per claim.

On the other side of this question, an SSA release indicates that the overall Medicare expense ratio is about 5.2 per cent.2 However, this cost may be artificially low, as government does not include in its Medicare costs the fair rental value of its own buildings or depreciation of its equipment or capital goods. Also not included are the costs of some Office of Management and Budget and GAO personnel involvement with Medicare administration. In addition, there is reason to assume that the Treasury Department undercharges the Medicare trust funds for the collection and management functions it performs on behalf of the Medicare program.

The results of the GAO study prompted an editorial in The Wall Street Journal (December 3, 1975) which said in part:

"You've heard it a thousand times: Government can do it cheaper than private industry because it doesn't make a profit. The implication of that remark is that private enterprise pockets profits that a generous government passes along in the form of lower prices.

"The theory is predictably nonsensical, since profit is merely a word we apply to particular parts of the economic cost of producing goods and services-the cost of capital and the cost of risk. If government takes over a service, it still must bear these costs by another name. It must also bear the additional costs of the inefficiencies it is likely to introduce, so having the government do a job typically costs more."

Interestingly, another recent study-the Vogel-Blair study published by the SSA-indicates that insurance companies are more efficient than Blue Shield in processing Medicare Part B claims.3 The analysis was not repeated for Medicare Part A claims (hospitals and extended care facilities) because of significant differences in types of claims between Blue Cross plans and insurance companies.

Another basis for comparing public and private sector operating costs lies in the Government-Wide Indemnity Benefit Plan (GWIBP)-operating under the Federal Employees Health Benefit Act-which had a claim volume of about $200 million in 1973 compared with the $10 7 billion claim volume of the Medicare program in fiscal year 1974.

As a general rule, the larger the size of the group and the larger the size of the average claim, the lower the administrative costs. Yet the GWIBP, underwritten and administered solely by private health insurers, and providing comprehensive benefits for 450,000 employees and their families, had an expense ratio of 3.3% in 1973. To this should be added the carriers' profit factor of 6/10% and the 4/10% which the government spent enrolling employees and collecting their contributions. The total, exclusive of taxes, was 4.3%, or approximately 18% below the Medicare expense ratio of 5.2%.

Overall, according to a survey conducted in 1971 by the Health Insurance Association of America, the administrative expense ratio for private health insurance large group cases covering 50,000 or more employees is only 2.9%. Even the average expense ratio for all size groups covered by insurance companies is only 8%. These ratios are exclusive of State premium taxes.

This is particularly significant in view of the diversity of these benefit plans, as compared with the uniformity of benefits provided under the Medicare program.

By definition, "cost" in part means: "a loss or penalty incurred in gaining something." This consideration was aptly underscored by Caspar W. Weinberger, the former Secretary of Health, Education, and Welfare, who shortly before leaving Federal service observed:

"If social programs continue growing for the next two decades at the same pace they have in the last two, we will spend more than half of our whole Gross National Product for domestic social programs alone by the year 2000.

"Should that day ever come, half of the American people will be working to support the other half. At that point, government would be like a gigantic sponge, sopping up all the nation's surplus capital needed for industrial growth and modernization. . . .In all likelihood, we could not maintain our free enterprise, incentive capitalistic economy, if 50 per cent of the whole GNP had to be used to pay for domestic social programs alone. And if we lose our free enterprise, incentive system, we will have destroyed, by inaction, the system that has brought more benefits to more people at home and throughout the world than any other system since recorded history began....Above all, we must recognize that personal