--federal and state governments,

--business coalitions, and

--diversified health care companies.

At the federal level, further steps designed to constrain federal health expenditures can be anticipated. These actions are likely to affect primarily those parts of the health care delivery system which currently contribute most to health care expenditures, namely, hospitals, physicians, and nursing homes.

At the state level, much action is currently underway and further action can be anticipated to deal with such issues as care for the indigent, hospital cost containment, and long-term

care.

In the private sector, business coalitions have been established to fight increasing health care expenditures by operating utilization review programs to determine appropriateness of medical services rendered, negotiating with hospitals or provider groups for fixed-price agreements, analyzing claims data, and operating programs to encourage healthier lifestyles. Such efforts will likely continue and expand in the future as businesses grapple with the problem of rising health care expenditures eroding their profit margins.

WHAT MAJOR ISSUES SHOULD BE
ADDRESSED IN CONSTRAINING
HEALTH CARE EXPENDITURES?

We used an iterative process to formulate the most important cost-containment issues facing the nation. We developed a broad array of approximately 80 issues on the basis

of

--our long-standing work in the health care area,

--an extensive review of the health care cost containment literature,

--advice and consultation in developing our approach and methodology from the Johns Hopkins University School of Hygiene and Public Health, and

--discussions with more than 200 individuals knowledgeable in various aspects of health care in the United States, Canada, and Europe. (See app. I for a listing of these health care experts.)

We also invited 24 health care experts to a workshop designed to identify the most important issues. We instructed them to use specific criteria in assessing the general significance of the issues. These criteria were:

--the national significance of the issue,

--the magnitude of potential cost-savings,

--the extent of potential adverse impacts on quality and

access,

--feasibility, and

--the time lag between implementation and impact on
expenditures.

On the basis of general consensus reached by the experts participating in the workshop, we further refined and pinpointed the key health care cost-containment issues.

Making decisions on how to contain health care expenditures will be very difficult. But we believe these decisions can be more informed ones if the decisionmakers have available the range of issues, what we know about them, and possible alternatives for solving the problem. In some cases, the alternative solutions are known, in others they are not.

We intend to use the results of this effort to more effectively direct resources to reviewing and evaluating health issues for the Congress. We also intend to continue discussing these issues, along with newly emerging ones, with key decisionmakers so that agreement can be reached on the types of evaluations that need to be done, who is best suited to do them, and what the appropriate courses of action to take in addressing the health care cost problem should be.

Our work culminated in the identification of 31 key issues in the areas of health resources, delivery systems, utilization, and financing methods. The discussions that follow encapsulate the current debate over these issues and pose questions that we believe need to be addressed.

Resource issues

In the health resources area, five key issues were identified. These issues relate to the supply of medical technology and hospital beds, the continued need for health planning efforts, and subsidies for hospital construction. These issues are:

1.

2.

3.

4.

5.

Is it desirable to reduce the number of acute care
hospital beds in the public and private sectors or
convert some beds to other uses?

Are federal subsidies for hospital construction through the tax system still needed?

Is a federally supported health planning program still needed?

Are the costs and benefits of new and existing medical technology adequately assessed?

How can the sharing of medical technology and other
resources be maximized in the public and private
sectors?

Is it desirable to reduce the number of acute
care hospital beds in the public and private
sectors or convert some beds to other uses?

Several studies have concluded that there are more hospital beds than needed and that excess beds may increase health care expenditures. Estimates of the number of excess beds range from about 69,000 to 264,000, depending on the study used. 125 Excess hospital beds may also exist in the federal direct care delivery systems operated by the Department of Defense (DOD) and the VA.

A number of overall questions arise involving excess hospital beds, including:

--How should determinations of excess beds be made?

--Are there still areas of the country with bed shortages?
--Given the changing nature of the health care system, are
additional actions needed to reduce excess bed capacity?
--Should excess beds be maintained in federal facilities
as a wartime contingency?

--What effect do excess beds in VA and DOD facilities
have on private sector facilities?

What impact will recent changes in the health care system have on bed supply? The Medicare prospective payment system and other changes on the part of states provide hospitals an incentive to discharge patients earlier. In addition to changes in the reimbursement system, other factors could have an impact on the supply of hospital beds. Several outcomes are possible as a result of these changes.

--What effect will the increasing trend toward providing

more ambulatory care and less inpatient care have on bed supply?

--Will federal and state reimbursement changes result in an increase in the number of excess beds?

--Will these changes give hospital managers an incentive to reduce the number of excess beds in order to reduce operating costs and maximize profits?

--Will hospital managers retain the beds but reduce staff in order to cut costs?

--To what extent will excess beds be converted to other
uses, such as long-term care?

How should excess beds be reduced? Apparently the most effective (measured by cost reduction) means for reducing excess hospital capacity is closing entire hospitals, rather than simply reducing beds. It is generally contended that reducing a portion of a hospital's excess beds will not have a major impact on reducing health care expenditures because a hospital incurs certain fixed and other costs regardless of whether a bed is open or closed. Thus, the only way to remove major overhead costs associated with excess beds is to close the entire hospital.

However, closing hospitals may be an unpopular and politically difficult option. In many communities, hospitals are a major source of employment and community pride, and closing a hospital may not be politically feasible. The following questions emerge:

--Will recent changes in reimbursement and delivery

systems result in the closure of inefficient hospitals without government action?

--Will state and local governments act to keep inefficient hospitals open to maintain service to the community?

Will closing excess beds constrain health care expenditures? Reducing the number of operating beds in a hospital will result in some savings through decreased operating expenses. However, the savings will be limited because the fixed costs (buildings and equipment) will remain the same. Questions that need to be addressed include:

--What are the cost-effective ways of reducing the number of operating beds?

--Should whole floors or wings be closed?

--Should certain high-cost services be eliminated?

--What effect will such closures have on access to and
quality of health care?

To the extent that whole wards or wings can be converted to other uses rather than closed, additional savings may be realized. In this connection, the continuing need for additional long-term care facilities may make it desirable to convert surplus acute hospital beds to nursing home beds both in the private and public sectors. Factors to consider in dealing with this issue include:

--What other potential uses are there for excess beds, such as self-care or minimal care units?

--What factors affect the ability to convert excess beds to other uses, such as age and condition of the facilities, location, prior use, and certificate-of-need (CON) requirements?

Is regulatory action needed to reduce excess beds? A variety of strategies for reducing excess capacity have been proposed. In addition to the direct regulatory approach used in certain programs, such as the Michigan Bed Reduction Program, other strategies that have been discussed include (1) offering hospitals financial incentives for reducing beds, (2) providing incentives for hospitals to convert excess beds to other uses, (3) imposing moratoria on further capacity expansion through CON programs, and (4) encouraging alternative delivery systems.

Many believe that there is little need to directly intervene and regulate a reduction in hospital bed supply in today's environment. Aside from the obvious political and other difficulties involved in closing hospital beds, many believe that the forces of competition now at work will, by themselves, produce a reduction in hospital bed supply without the necessity for regulation. The empirical evidence on the impact of health planning legislation to regulate bed supply shows that efforts to control the number of hospital beds have had little impact on costs. The question then is should a reduction of beds be mandated or should an increasingly competitive environment be relied upon to make any excess beds "unprofitable."