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suggest that the environmental and life-style changes of the past two decades have had either a neutral or negative impact on health for most of the population. One piece of evidence in support of this hypothesis is the stability of age-adjusted death rates in the United States in the face of large increases in medical care and improvements in medical science.

All these questions, however, are in need of more study. The National Center for Health Statistics is now developing vast new bodies of relevant data. I believe that a combined assault on these data by health experts and social scientists will yield information comparable in importance to that emerging from the laboratory in our continuing efforts to understand and improve the nation's health. Accounting illusion

In concluding this discussion of demand, it should be noted that part of the observed increase in medical care costs is an accounting illusion. It does not involve any increase in real costs-only money costs. It is the result of an increase in the proportion of medical care produced and sold in the market, and a decline in the proportion provided outside the market by family, friends, and neighbors. Only the former is included in the GNP. A generation ago, a considerable amount of bed care, and associated services for the sick, were provided for at home. Surely there is relatively less of this today.

Some of the reasons for this shift other than increases in income and insurance coverage are: (1) urbanization, (2) the fragmentation of the family, and (3) the increased labor force participation of women. We do not know how much of the increase in observed medical care costs can be attributed to this shift ; I believe that the amount involved is substantial. One corollary is that "home care" programs and other current plans to transfer costs back out of the hospital will reduce the money costs of medical care by more than they will reduce real costs.


I turn now to the supply of medical care. In studying the supply side of an industry there are three main elements to be looked at. The first is the suppl of the factors of production—labor and capital-flowing into the industry. The second is changes in productivity, and the third is the degree of monopoly control, or other market imperfections that may influence the supply actually available to consumers. Supply of productive faotors

With respect to the supply of labor to the health industry, the crucial question is whether the industry has to pay inordinately high wages in order to attract an increasing fraction of the total labor force. In my judgment, the answer to this is “no." In technical terms, the supply of labor to the medical care industry is very elastic. This is true, incidentally, of most other industries as well. Except in the extreme short-run, the U.S. labor force is highly mobile and adaptable; studies of interindustry differences in earnings consistently refute the hypothesis that expanding industries must pay unusually high wages to bid away labor from other industries.

Between 1950 and 1960 medical care employment rose by 54 percent-compared with only 14 percent for total employment. Throughout the postwar period the annual rate of increase has been about 5 percent for medical care employment compared with a little over 1 percent for the economy as a whole. Despite this rapid expansion, wages for medical care personnel seem to have been rising at about the same rate as in many other industries. This last point has not been thoroughly documented, but is the most reasonable inference from the data available.

An analysis of the supply of capital to the medical care industry is much more difficult to undertake because most capital is used in hospitals, and most hospitals are nonprofit. Thus, the flow of capital is not determined by the rate of profit (as it is in most industries), but my government decisions and philanthropy. It is possible, however, to devise methods of financing and reimbursing hospitals that would make the flow of new investment more responsive to markettype mechanisms. The Soviet Union and other socialist nations have been attempting to do precisely this with substantial portions of their "nonprofit" economies.


Changes in the supply of any good or service, in the sense of changes in the price-quantity relationships, depend primarily on changes in productivity. It is à commonplace to argue that productivity in medical care has advanced less rapidly than in the economy as a whole; but in the absence of reliable measures of the output of medical care this must remain a matter of speculation.

The development of such measures is an extremely difficult task because of our ignorance concerning the precise contribution of medical care to health. In addition, output is not limited to improvements in health but takes other forms including validation services and the hotel aspects of hospital care."

There is some reason to believe that the available measures understate the true output of the medical care industry. A visit to a physician today is surely more productive than one twenty years ago, and this is even more true of a patient-day in a hospital. On the other hand, it is possible that many of the expensive procedures that are now part of “best practice” techniques are really not worth the money in the sense that their marginal contribution is small and the same amount of resources used in other ways would yield more utility to the consumer.

The common practice of reimbursing hospitals on the basis of their costs, as under Medicare and many other public and private programs, appears to be an open invitation to inefficiency. At best, the ability of hospital management to improve productivity is imperfect because of the independence of the attending staff. Under present arrangements, almost no one has any incentive to be concerned with the efficiency of the hospital as a whole.

Another weakness in the hospital supply picture is that, with few exceptions, each hospital is independently "owned" and managed. Unlike other industries where an exceptionally able manager gradually comes to exercise supervision over an increasingly large pool of resources through the growth of his firm, through mergers, and through establishment of branch plants, this pattern is absent in the hospital field. Also, it is much easier for inefficient management to remain in charge for long periods of time. Physicians

The physician plays a key role in the supply of all medical care; his decisions and behavior affect almost everything else. Physician supply is now more specialized than formerly. This growth of specialization is often attributed to cxogenously determined advances in medical science, but such an explanation ignores the role played by changes in demand. Two hundred years ago, Adam Smith observed that the division of labor is limited by the extent of the market. The relevant market for any one physician's services has grown tremendously because of the growth of income and population, the increased concentration in urban centers, and improvements in transportation. All these trends would lead to increased specialization, even if medical technology remained static. Moreover, given an increase in re income people want to buy more medical service for any given health condition. One way of buying more service would be to visit several different general practitioners, or to visit the same one several times. Alternatively, one can buy more medical service in each visit through the use of specialists. The specialist in medicine usually has more, not merely different, training than a general practitioner. The more valuable the patient's time, the greater will be the demand for “high powered" doctors. This demandinduced growth of specialization is thus a cause as well as a result of advances in medical science. Without a specialized practice, without the demand for specialized equipment and procedures, these advances would probably come more slowly.

Physicians have frequently been criticized because of their high earnings and their alleged desire to restrict their numbers. Such criticism, it seems to me, does not go to the heart of the matter. Most of the difference between the earnings of physicians and those of other occupations should not be attributed to their control over entry and competition, but to the long hours that they work, the lengthy period of education required, and the absence of pensions, paid vacations, and other fringe benefits. Moreover, physicians' earnings account for less than 20 percent of total health expenditures, and to the extent that they enjoy some monopoly return it could only be a small part of this fraction.

Victor R. Fuchs, "The Contribution of Health Services to the American Economy,” Milbank Memorial Fund Quarterly, Volume 44, No. 4, Part 2, October, 1966, pp. 65-102

A more valid criticism, it seems to me, can be directed against physicians for their opposition to changes in the methods of producing and financing medical care. The medical profession, or at least a significant and articulate portion of it, seems to believe that there can be rapid and far reaching technological change without disturbing the traditional organization of medical practice. This belief is irrational. One clear lesson from economic history is that technological innovation means organizational change.

Possibly the most harmful aspect of physicians' market control is the extremely narrow range of options available for someone seeking personal medical care. One bit of evidence is the size distribution of earnings in the entire medical care industry which can only be described as unnatural. Yearly all American industries have a distribution which reflects a fairly smooth vertical hierarchy of personnel. There are usually large numbers performing routine functions, and relatively fewer persons at each successive stage of increased power and responsibility. For instance, the 1960 Census of Population shows that in nearly every industry the number of persons with earnings from $7,000 to $10,000 in 1959 far exceeded the number with earnings above $10,000. Only in the medical care industry, do we find almost a void in the $7,000 to $10.000 category; those above $10,000 are three times as numerous. Today the void is in the $10,000 to $15,000 range.

Whether consumers would use less expensive medical care personnel, if they were available, would depend upon a number of factors—the institutional setting and supervision, whether there is a financial incentive to do so, and so on. That it is technically possible for professionals with fewer than ten to twelve years of training beyond high school to render useful medical care has been repeatedly demonstrated in a variety of settings.

As some of my earlier remarks suggested, patients with high incomes, and patients with acute conditions would undoubtedly continue to seek the highest possible level of training and experience. But the demand for something less might be large in cases of chronic illness, or in isolated communities, or among those with low incomes. To say that everyone should get "highest quality care" is a counsel of perfection that presently deprives many people of the opportunity of getting even moderately good care. The natural conservatism of doctors, allied with the strong egalitarian drives of some social reformers, has served to limit the supply of medical care below that which would be available in a freer market setting. New medical techniques

One special feature of the supply of medical care is the appearance of radically new medical techniques and procedures. Normally, when economists speak of the supply of a commodity they assume that the quality of the commodity remains unchanged. This is almost never strictly true, even for such staples as coal or wheat, but frequently the change in quality comes gradually, can be objectively measured, and an increase in quality can be thought of as a decrease in price.

In the case of medical care, some of the new procedures such as renal dialysis and open heart surgery are so radically different from anything previously available that they cannot conveniently be analyzed in this manner. Part of the increased expenditure for medical care is undoubtedly attributable to the appear. ance of these new techniques for treating conditions that simply could not be treated before.


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Summary of the demand-supply analysis

What conclusions emerge from this analysis of demand and supply? By now it should be clear that cost is the result of many forces, that rising costs are not necessarily bad (or necessarily good), and that economists have some interesting questions to sk, but are far from being able to supply all the answers. Many of the estimates have a large range of uncertainty, but sustained scientific investigation can reduce that range and increase understanding.

If we take as our analytical task the explanation of why medical care now accounts for 6 per cent of gross product instead of 4 per cent, as it formerly did, the following developments all seem to have played a role:

1. An increase in medical care prices relative to other prices facing a relatively inelastic demand. These price increases are probably related to the institutional rigidities that surround the organization and production of medical care.

2. The growth of insurance, prepayment, and other forms of third party payment.

3. An increase in the proportion of elderly people in the population.

4. A shift from nonmarket to market production. If we measured all costs, the increase for medical care would not be as great as the GNP accounts indicate.

5. The introduction of radically new medical techniques and procedures to treat conditions that formerly could not be treated at all.

6. More tentatively, I have suggested that there may be greater need for medical care now to offset changes in the environment and in ways of living

that are detrimental to health. Two possible explanations that I believe the available evidence rejects are the rise in real per capita income, and the alleged rapid rise in wages for medical care personnel. Suggestions for discussion

Before concluding, I would like to offer a few suggestions suggestions that you may wish to consider in your panel discussions today and tomorrow. They deal with matters that affect the costs of medical care, but involve judgments about objectives and methods in fields where I can only claim to be an interested bystander. Perhaps they can be justified on the grounds that health, like war, is too important to be left to the "generals."

1. I begin with medical education. This priority is deliberate. Given the key role that physicians play in personal health care, in determining expenditures for hospitals and drugs, and in directing the work of other medical care personnel, it seems unlikely that significant changes can occur in medical care without changes in medical education. At the risk of some exaggeration, I would argue that the biggest shortcoming of medical schools is indicated by their name. If they were to transform themselves into schools of healthwith all that such a transformation implies for attitudes, objectives, personnel, and curriculum, many of the other goals that will be discussed at this Conference would be much closer to attainment.

A "school of health” would have the twin objectives of training personnel and advancing knowledge to meet the health needs of the community. It would define these needs broadly, would be concerned with the future as well as the present. and would want to meet health needs at various levels. There would be several different "educational tracks” with some possibility of moving from one to another, and there would be a strong interest in continuing education. The aim would be to provide a continuum of trained personnel to deal with a continuum of health problems. Some students would be ready for professional careers with less preparation than is currently required. Others might receive even more training than physicians now do. Members of the last group would truly be "captains" of health teams—not only in name, but in spirit and in practice.

A physician emerging from such a school would take a broad view of his duties and responsibilities. It is not likely that a man so trained and so motivated would want to be a solo practitioner. Similarly it is unlikely that he would want to be paid on a "piecework” basis. He would expect, and would deserve, a good salary, but he would also want time to read and study, time to think and plan, and time to maintain his own physical and mental health. Far from regarding auxiliary medical personnel and new technologies as threats to his status or financial position, he would welcome developments that would permit the delivery of more medical care at lower cost per unit. Finally, his yardstick of success would not be the number of cases in which he personally was able to alter the course of events, but improvement in the health levels of the population that he and his colleagues serve.

2. My second suggestion concerns hospitals and has two parts. First, I would like to see widespread adoption of reimbursement plans that provide incentives for efficient operation. Such plans could establish target rates for each hospital, or establish fixed rates for groups of hospitals providing comparable service. These reimbursement rates would probably be related in some way to average costs. Inefficient hospitals, therefore, would be under strong pressure to bring their costs down, while efficient hospitals would find themselves with extra funds which they could spend for improving the range and quality of services offered. Such a system might well enlist the support of attending physicians. If the medical staff realized that by holding down costs the hospital would be able to buy new equipment, or make other improvements, the hospital administrator would be in a much better position to obtain their cooperation. Reimbursement along these lines would facilitate another useful change the development of hospital systems that include many separate and diverse types of establishments under common management. This would permit more able managers to exercise control over a larger range of resources and would also permit more efficient utilization of these resources within the system.

3. My third suggestion is to arrange for a minimum guarantee of medical care to every citizen through some sort of insurance or prepayment plan or plans. Most people can afford such plans; the minority that cannot should be subsidized by the government. Presumably this minimum guarantee exists now, because we are often told no person need go without necessary medical care. This may be true, but there is little merit in having this guarantee rest on the judgment and benevolence of physicians or hospital administrators. It should be a common charge against the total society. We have been moving in this direction, but on a hit or miss basis. We are now trying to care for the aged, for some of the poor, and compulsory insurance has been proposed for all wage and salary workers. This piecemeal approach is likely to be highly inefficient and inequitable. It is time this nation faced, in an adult way, its responsibility to assure some minimum level of medical care to all persons as a matter of right.

4. Having said this, I would also urge that we declared a moratorium on misleading talk about complete equality of medical care. This is technically not a realistic possibility, and in my view it is not a desirable objective as long as there is substantial inequality in the distribution of other goods and services. It would be most extraordinary if poor people, given an income subsidy, were to choose to bring themselves up to some common high level of medical care rather than to increase their consumption of a variety of goods and services. To arbitrarily impose this equality at the taxpayer's expense is to redistribute income in an extremely inefficient way. Moreover, insistence on equality may very well impede the development of the quantity and quality of medical care.

We can take a lesson from the field of higher education. In recent years there has been a tremendous increase in the demand for higher education, far greater than the increase in the demand for medical care. What has been the response of the higher education industry? On the whole, it has shown more adaptability and flexibility than has the medical care industry. There has been some crowding of existing institutions. There has been better use of facilities and personnel through trimester and quarter plans, and more intensive use of summer sessions. Some schools have expanded capacity. Perhaps most important of all, new insti. tutions of considerable variety and scope have been created. In particular, one should note the growth of junior colleges.

One reason why higher education was able to respond so quickly is that the industry is not fooling itself with slogans about "equality" and "high quality for all." No one in education pretends that Smalltown Junior College offers as good an education as does Harvard. There is an attempt to assure that everyone who wants higher education can get it in some form, and to some degree, and this guarantee is probably more reliable than the one currently offered for medical


5. My final suggestion-almost plea-is for us to remember that what we are really concerned with is health-not costs as such, and not medical care as such. My reading of the health literature leaves me with the impression that the greatest potential for improving the health of the American people is not to be found in increasing the number of physicians, or in forcing them into groups, or even in increasing hospital productivity, but is to be found in what people do and don't do, to and for themsleves. With so much attention given to medical care, and so little to health education and individual responsibility for personal health, we run the danger of pandering to the understandable urge to buy a quick solution to a difficult problem. “Eat, drink, and be merry" runs the refrain. "Smoke two packs a day.” “Engage in every physical and emotional excess known to man, for tomorrow you can come to Dr. Squash and have it all taken care of in two easy visits." (Some would add "at government expense.") Do we really believe that if only there are enough Dr. Squashes, or if only they practice in groups, everything will turn out all right? Let me express some doubts. I am impressed with Douglas Colman's recent observation, “Positive health is not something that one human can hand to or require of another. Positive health can be achieved only through intelligent effort on the part of each individual. Absent

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