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The Bureau of Labor Statistics index of physicians' fees, which had been increasing less than 3 percent per year in the period 1960-65, rose almost 8 percent in 1966.

Much of this increase was to be expected in view of the general inflationary pressures in the economy this year. In the past, doctors' fees have risen about twice as fast as the consumer price index. In 1966, the consumer price index rose 3.3 percent. There is no evidence that medicare was a major factor in the rise in doctors' fees.

Why Hospital Charges Are Rising

The cost of providing hospital care is rising rapidly.

Wages, which account for two-thirds of total hospital costs, are the most important factor.

The wages of hospital employees, still low relative to other sectors of the economy, are rising more rapidly than other wages. This increase in wages has not been offset by any measurable increase in the "productivity" of hospital employees. The number of employees per patient is rising, not falling.

Nonwages costs of hospitals are also rising, reflecting the growing complexity of hospital plant and rapid increases in the specialized care facilities available in hospitals.

The 1966 acceleration was primarily related to

⚫rising wages in a tight labor market; and

increases in the prices of things hospitals buy.

Although medicare raised hospital occupancy rates in many places, increased occupancy does not generally lead to higher costs per patient. However, participation in medicare required hospitals to reexamine their costs and charges. In the course of this reexamination, many hospitals probably decided to increase their charges.

Drug Prices

Drugs contribute to the high cost of medical care, although they have not contributed significantly to recent price increases.

The use of drugs is increasing, and many consumers are conscious of an increased burden of drug expenditures not generally covered by insurance.

Drug prices are higher than they would be if there were more vigorous price competition at either the manufacturing or drug store level. Advertising costs are high, and doctors often prescribe costly brand name drugs when cheaper equivalents are available.

Future Price Movements

Continued increases in the price of medical care are inevitable. The question is not whether medical prices will rise in the future, but how fast they will rise.

Forces which have been pushing up demand in the past-population increase, rising income, increasing insurance coverage-will continue to exert pressure.

Moreover, a new element has been introduced: rising public conviction that excellent medical care should be available to all Americans. The passage of medicare and medicaid are evidence of this new conviction.

Charity medicine is being abandoned in favor of new public programs which give needy people the resources to purchase medical care from private physicians and hospitals on the same basis as more affluent citizens.

These new demands add to the upward pressure on medical prices. There are two means of moderating increases in medical prices :

⚫ adding to the supply of medical resources by increasing medical facilities and training more medical manpower; or

increasing the efficiency with which medical resources are used. Federal resources are devoted to a wide variety of programs designed to increase the supply of medical resources. The President's Commission on Medical Manpower is reviewing the adequacy of all Federal programs affecting manpower supply.

This report concentrates on steps that can be taken to use medical resources more efficiently.

The recommendations which follow are designed to increase the effectiveness of medical care delivery in order to moderate future price increases and make it possible to meet the rising demand for medical



Hospital services are the most costly form of medical care. The average cost of a day in the hospital is about $45. To protect themselves against these high costs, most people presently have hospitalization insurance.

Far fewer people have insurance which covers less expensive medical care services, such as care in nursing homes and convalescent hospitals, outpatient care, or organized home health services. Hence, doctors often put patients in hospitals for diagnosis or treatment rather than utilizing less expensive alternative services because a third party will pay the hospital bill.

Many people are hospitalized unnecessarily: some for unnecessary surgery, some for conditions which better or more timely medical care would have prevented, some because they have no other place to go. Much of the care given in hospitals could be given less expensively outside, but lower cost alternatives are unavailable in many communities.


Comprehensive community health care systems should be developed, demonstrated, and evaluated.

The Federal Government should take the lead by creating a National Center for Health Services Research and Development in the Department of Health, Education, and Welfare.

1. The center would offer technical assistance and financial support for the development of model comprehensive systems. These model systems would make available intensive care, hospital care, extended or convalescent care, nursing home care, outpatient care, and organized home health services. Doctors would be encouraged to choose the least costly appropriate service for their patients.

The costs and effectiveness of such model systems would be evaluated and the results widely publicized.

2. The center would undertake research dealing with the medical
care system and support such research in industry, universities,
health services, institutions, and areawide planning groups.
3. The center would serve as a clearinghouse for information and
would disseminate the results of research on medical care

4. The center would support the training of health planners, sys-
tems analysts, health economists, and other specialists in
methods of improving the efficiency of health care delivery.
5. The center would make the services of such specialists avail-
able for consultation with communities and health institutions
seeking to improve medical care delivery systems.


Group practive, especially prepaid group practice, should be encouraged.

Groups of doctors practicing together can make more efficient use of equipment, auxiliary personnel, and consultation than doctors practicing alone. Where the patient has paid in advance for comprehensive medical care under a group practice plan, less incentive exists to use high-cost hospital services where lower cost alternatives would meet the patient's needs just as well.

1. The Federal Government should encourage group practice prepayment plans by amending title XIX of the Social Security Act to require States to allow medical beneficiaries to use such plans.

2. The Department of Health, Education, and Welfare should encourage the States to use title XIX funds to foster and extend the group practice of medicine.

3. The National Center for Health Services Research should provide "seed money" to encourage incipient group practice prepayment plans and to evaluate their ability to provide quality care efficiently.

4. The Department of Housing and Urban Development and the Department of Health, Education, and Welfare should make maximum use of the Group Practice Facilities Mortgage Guarantee Program.


Private and public health insurance plans should be broadened to include more alternative types of medical care.

The Federal Government has already taken major steps in the direction of comprehensive health insurance coverage. Medicare beneficiaries are covered not only for hospital care, but for diagnostic services in outpatient clinics, stays in extended care facilities, and home health care services, as well as physicians' office visits. Title XIX beneficiaries are similarly intended to be the recipients of comprehensive health care.

Other groups in the population can be expected to seek more comprehensive health coverage. This development should be encouraged by the carriers, by the States, and by the Federal Government.

The Department of Health, Education, and Welfare shouldconfer with representatives of the health insurance industry, State officials, labor, management, and public representatives on ways of moving toward more comprehensive coverage;

• develop, with the assistance of insurance experts and others, model State laws to encourage or require comprehensive health insurance coverage.



Uncoordinated development of health services and facilities often leads to costly duplication and underutilization of facilities, as well as to serious gaps in the availability of health services. Most communities have no mechanism for health planning. There is nothing to prevent two nearby hospitals from installing the same rarely used

special facility, the construction of a hospital or nursing home in an area already well served, or the perpetuation of several inefficient facilities where replacement with a modern health center would be preferable.

The Comprehensive Health Planning and Public Services Amendments of 1966 (Public Law 89-749) authorized grants for state- and area-wide planning for comprehensive health services, health manpower, and health facilities. In addition to promoting and assuring the highest level of health attainable for every person, this planning activity is intended to coordinate existing and planned health services, to reduce overhead costs by increasing utilization rates, to prevent unnecessary expansion of hospital beds, and to encourage expansion of less costly services and facilities. It will also encourage the development of needed facilities which are not now available and improve the quality of medical care.


The States should move quickly to establish and support strong health planning agencies at the State and local levels.

1. Where they have not yet done so, State Governors should designate a comprehensive health planning agency to carry out the purposes of Public Law 89-749 and assure that agency adequate powers and staff to carry out its mission.

2. States should enact legislation providing for a State system of area planning bodies with the power to affect the rate of expansion of health facilities in the community and to set standards of service.

These bodies, operating under the aegis of the statewide planning agency, would have the power to prohibit construction or expansion of health facilities where such construction or expansion conflicted with the development of an efficient system of health care delivery for the community. They should have the power to close substandard facilities.


The Federal Government should actively assist and support health planning at the State and local levels.

1. The Federal Government should implement Public Law 89-749 by providing funds to help staff state- and area-wide planning agencies.

2. The Surgeon General should review the State plans submitted under Public Law 89-749 to make sure maximum attention has been given to efficiency in the development and provision of health services.

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