7.

Some of the earliest known uses of cost-benefit analysis (CBA) were associated with health planning. In the middle of the 17th century, for instance, a prominent English physician, Richard Petty, favored society's investing more in medicine because the value of saved human life far exceeded its cost (194). In this country, a similar argument was made by Lemuel Shattuck, who in his famous 1850 report used CBA to justify his proposal for sanitary reforms in Boston (559). It is interesting to note that most, if not all, of the early applications of cost-effectiveness analysis/cost-benefit analysis (CEA/ CBA) to health care were used by the health profession itself to justify further investment in the public's health. Unlike the main proponents of CEA/CBA today-economists and others who argue that analytical techniques are needed to help society spend its health care dollars more efficiently-earlier proponents and users of CEA/CBA were health professionals who argued that society should spend more money on its health care. These professionals rested their argument on a concept that still dominates the discipline of health planning today-the concept of "medical need."

"Medical need" is not well-defined. In the discussion that follows, the term "medical need" is used to refer to that health benefit which an individual or a population could and "should" receive from a given health intervention or a prevention program. Thus understood, medical need is subject to change, depending on the state of medical and health knowledge and the availability of resources, and it also carries with it an element of equity. Thus, whereas a heart transplant was not "needed" 20 years ago because the procedure was not possible at that time, the determination as to whether there is a "need" today will depend on the safety and efficacy of the procedure (i.e., the state of knowledge), the personnel, equipment, and money available for

delivering it, and a notion of whether it "should" be available. This last considerationshould-is difficult to define because society's underlying values are so intertwined with it. A 95-year-old man, for example, might not qualify for a publicly funded heart transplant under any circumstances. In general, then, the concept of "medical need" is defined as some sort of absolute medical requirement, within. some bounds of reasonableness. This concept is inconsistent with generally accepted economic principles which are based on relative values such as price, utility, and alternative uses of re

sources.

Over the years, whether the issue has been manpower (353), public health departments (175), hospital construction, or comprehensive health planning, the principal consideration in planning has been "need:" If the planner could show a medical need for the resource or the service, the objective was set, the question of financial feasibility often being a secondary consideration.

When funds had to be specifically appropriated to meet an identified "need," however, an implicit cost-benefit tradeoff must have been made. For instance, the 1933 Lee-Jones Report (353) calling for more physicians would have required additional training funding; the 1945 Emerson Report (175) calling for complete public health coverage required additional Federal funding; and the 1946 Hill-Burton Act calling for increased hospital construction also required Federal funding. Although there is no evidence that formal CEA/CBAS were done in any of these cases, funding decisions were made in a political arena which implicitly weighed benefits against costs: When it appeared that benefits outweighed costs, funds were more likely to be appropriated; when the reverse seemed true, funding was curtailed. In the case of traditional public health measures, the Federal Government

increased funding from the mid-1930's until the early 1950's, at which point it perceived that additional costs (investment) would exceed additional benefits and therefore it curtailed funding even though the original goals had never been met (532). Recently, Federal funding for hospital construction has been similarly curtailed, as has funding for physician training. Although the essential ingredients for a CEA/CBA were present, formal economic analyses of these programs were not ordinarily performed.

Most health care resource decisions today are made in an economic semivacuum. Owing in large part to the third-party reimbursement system and to the relative ease with which the

health care system can obtain private capital, the recovery of investment has been all but guaranteed. In other words, the cost-benefit tradeoff has been distorted. Many believe that this distortion has led to the situation in which health care costs have escalated disproportionately to benefits, a situation that began with the advent of private health insurance in the 1930's and 1940's and became even more acute with the 1965 medicare and medicaid amendments to the Social Security Act. Adding to the problem has been the largely unrestrained diffusion of technological achievements of our time. Basically, the unwritten rule has been that if a technological advancement has medical merit it should be adopted.

Recent legislative measures reflect public concern over the rising costs of health care. Partly in anticipation of the economic effects of the medicare and medicaid amendments and also to help rationalize the health care system, in 1966 Congress passed both the comprehensive health planning (CHP) amendments and the regional medical program (RMP). By that time, scholars including Roemer had already noted a positive correlation between unneeded beds and unnecessary hospitalization (521), and other researchers were beginning to suggest that some health care procedures, especially surgery, were being performed unnecessarily. An underlying premise of the CHP/RMP laws was a belief that the pluralistic and fragmented health care system simply needed a catalyst to help its elements cooperate with one another. Cooperation among these elements, it was believed, would reduce duplication of services and facilities, and future decisions would therefore be "cost effective." Planning and compliance under the CHP/RMP laws were strictly voluntary. These laws envisioned a health planning system based on "need:" If a particular service or facility was "needed," then it must be worth the cost.

As it became apparent that voluntary planning efforts were not effectively constraining the health care system, Congress and individual

States began searching for stronger measures to contain costs. First, in 1964, New York State enacted a certificate-of-need (CON) law that empowered its planning agencies to deny reimbursement to hospitals for large capital expenditures unless the agency found that there was a "need" for the service to be provided. Subsequently, several other States enacted similar laws. These State laws were strengthened by Congress in 1972 when it passed section 1122 of the Social Security Act, allowing Federal funds for capital expenditures to be withheld if large capital projects were not approved by State planning agencies.

In 1974, Congress enacted the National Health Planning and Resource Development Act (Public Law 93-641), which required all States to legislate CON laws. The main intent of this Act was to ensure that health resource decisions were based on cost as well as need. Section 1513 of the Act demonstrates concern for health status, cost, and accessibility, and sections 1502 (national health priorities) and 1532 (CON) show similar concerns.

By 1979, Congress had passed amendments to the Act specifying "cost effectiveness" as one of the criteria that local health planning agencieshealth systems agencies (HSAs)-must use in their review of the appropriateness of a health

service. Specifically, section 1513(g) was amended to read:

... In making the appropriateness review of a health service, each health systems agency shall at least consider the need for the service, its accessibility and availability, financial viability, cost effectiveness (italics added), and the quality of service provided.

Consideration of "cost effectiveness" was also required of the State planning agencies-State health planning and development agencies (SHPDAs)—in their review of appropriateness.

The use of the term "cost effectiveness" in the 1979 amendments suggests a growing emphasis on a cost-benefit type of tradeoff. There is no evidence that Congress intended that HSAs and SHPDAs do anything as elaborate as formal CEA/CBAS, but there is evidence that Congress wanted these planning agencies to consider during the planning process both the effectiveness of the health care system and its cost. The 1979 amendment to section 1502 (national health priorities), for example, specified the following as national priorities:

The adoption of policies which will (A) contain the rapidly rising costs of health care delivery, (B) insure more appropriate use of health care systems, and (C) promote greater efficiency in the health care delivery systems . . . and the development and use of cost saving technol

ogy ...

and

The strengthening of competitive forces in the health care services industry wherever competition and consumer choice can constructively serve. . . to advance the purposes of quality assurance, cost-effectiveness, and access.

In addition, other parts of the 1979 amendments severely restrict HSAs' authority over health maintenance organizations (HMOs), in the apparent belief that HMOs have inherent cost-effective incentives, an issue more fully considered in chapter 10 of this volume.

There is evidence, then, that Congress intends that the Department of Health and Human Services (DHHS) consider both effects and costs in its health care resource considerations and that this intent has become more explicit over the

years. The National Health Planning and Resource Development Act and amendments have provided five vehicles through which health resource allocation decisions can, theoretically, be affected:

1. CON for large capital expenditures or additions of new services,

2. Federal funds review for certain health programs,

3. appropriateness review for existing facilities,

4. area health services development fund for planning grants for "needed" services, and 5. closure and conversion funding (title XVI) for assisting facilities to close "unneeded" facilities.

Of the five, CON has been the main vehicle available to planning agencies for affecting resource allocation. Appropriateness review carries with it no sanctions,1 and neither the area health services development fund nor closure and conversion funding (title XVI) has been funded to date (189).

The 1974 National Health Planning and Resource Development Act contained several provisions intended to ensure that planning agencies would have technical and analytical capabilities as well as assistance presumably for analyses such as CEA/CBA. First, the 1974 law authorized funding the HSAs at a significantly higher level than the old CHP agencies and also specified that HSA staff are to have expertise in administration, in the gathering and analysis of data, in health planning, in financial and economic analysis, and in the development and use of health resources. Second, the law provided for the use of consultants. Third, it provided for Regional Centers for Health Planning to provide technical assistance to agencies. Fourth, it provided for a National Health Planning Information Center.

The law makes it clear, however, that HSAs are not supposed to gather data, a restriction which is significant because available data are not sufficient to perform most CEA/CBA-type studies. In addition, it should be noted that HSA funding has been appropriated at a significantly 'Federal Register, Dec. 11, 1979.

66-220 0 - 80 - 6

lower level than was authorized, which in itself could preclude HSAs' ability to perform valid studies. Finally, it should be noted that since

HSAs have only 90 days for the entire CON process, another factor that may limit HSAs performance of CEA/CBA studies is time.

Like Congress, DHHS is explicit in its desire that health care resource costs be balanced against benefits. In 1979, the Secretary issued State agencies planning guidelines to

(SHPDAs), State Health Coordinating Councils (SHCCs), and local planning agencies (HSAs) (287). Contained in these guidelines was a message to planning agencies that their assessments of the costs of implementing goals and objectives should be made in context with the expected effects of such implementation both on the health status of the area residents and on the health care system and its costs.

This message is a clear departure from previous ones, those messages, in effect, being that planning should be based strictly on "need" first and "efficiency" second. The departure from previous policy does not neglect the concept of need in the planning process; indeed, identifying and planning for the health needs of the local population is still an important theme in the new guidelines. What distinguishes the new guidelines is that cost containment is apparently as dominant a theme as need (287).

Cost containment is one of the fundmental purposes of the health planning program. Section 1513(b)(3) of Public Law 93-64 requires comparison of cost and benefits.

Previously, the concept of cost containment was generally expressed in terms of eliminating "unnecessary" costs, referring to those costs that produce little or no benefit. The nuances of the latest guidelines suggest that other costs are not justified because they produce insufficient benefits.

To make judgments concerning the adequacy of benefits in relation to costs, agencies must first be able to identify changes in health status indicators that result from health care investments. The Secretary states (287):

The HSA should describe in its HSP (Health Systems Plan) the expected effects of health systems goals upon the improvement in the population's health status . . . as measured by "Indicators" (which) are quantifiable measures chosen to reflect the health status of the population or to represent how well the health system is performing. Direct indicators (such as infant mortality or disability days, and cost per patient day, or time, or distance from primary care) measure the level and/or change in community health and in health systems performance. Indirect indicators (such as percent of the area population with income below the poverty level or the number of houses lacking adequate plumbing) indicate social or environmental conditions which have been attributed to affecting the health of the area's residents.

Then, goals are assessed in terms of expected payoffs (287):

The development of health systems goals is based on an assessment of the health service needs of the present and projected population, and on an assessment of health services in terms of availability, accessibility, cost, continuity, acceptability, and quality. The HSP summarizes. the HSA's assessment of health service alternatives. The summary(ies) should focus on possible tradeoffs between characteristics, such as accessibility and cost, which will affect the selection of goals, and priorities among selected goals.

The HSP summarizes the major alternative actions considered for accomplishing each objective. The choice between alternative actions should obviously be predicated on technical, political, and administrative feasibility, as well as cost effectiveness analysis.

In discussing the importance of cost, the Secretary states (287):

The HSA must consider costs when it sets goals and objectives in the HSP, as well as when it develops the recommended actions in both the HSP and AIP (annual implementation plan).