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3. The Federal Government should require that grants to State

and local governments for health purposes be spent in accordance with these plans and should deny funds for construction or expansion to health institutions which refuse to comply with

the directions of the State or area planning agency. 7. The Federal Government should require that money paid to

the providers of medicare services as reimbursement for depreciation costs must be held in a separate account to be used only for capital expenditures consistent with the overall plan of the

State or area planning agency. 5. The National Center for Health Services Research and Devel

opment should evaluate the effectiveness of area planning as a

means of reducing medical costs. 6. The President should appoint a commission to review all Fed

eral programs for the construction, expansion, and modernization of health and medical facilities and to advise him on the future direction and scope of such programs and their potential role in moderating the rising trend in the cost of medical care.

The expiration of the Hill-Burton Act in 1969 makes imperative a thorough reexamination of Federal policy toward health facility construction, expansion, and modernization.

The commission should have all types of medical facilities within its purview, including: hospitals, extended care facilities, nursing homes, mental hospitals, community mental health centers, and neighborhood health centers. It should reexamine needs for these facilities and recommend a Federal strategy for assuring efficient distribution and utilization of facilities and coordination of Federal programs with State and local planning.


At present, hospitals have inadequate incentive to be efficient. They are not under strong pressure from patients, because a substantial part of patients' bills are paid by third parties. Third parties have usually reimbursed hospitals for costs incurred without pressing for greater efficiency. Hospital administrators often lack the training required for effective management. The medical staff of the hospital often presses the hospital administrator and board of trustees for acquisition of the latest medical equipment without regard to the cost implications involved. Trustees are often subject to the pressures imposed on them by the community and the medical staff. Even where the incentive does exist, initiation and application of cost-reducing innovation is often beyond the resources of an individual institution.


Cost-reducing methods of reorganizing the delivery of services in hospitals and other providers of health services should be developed, demonstrated, and implemented. 1. The National Center for Health Services Research and Devel

opment should support research directed at improving the internal operation of health services facilities and disseminate the results of its research projects. Special emphasis should be placed upon the development of new methods of organiza

tion and more efficient patterns of staffing in health facilities. 2. The center, in conjunction with area planning agencies, should

undertake an active program of technical assistance to health facilities and institutions to promote effective application and

implementation of cost-reducing innovations. 3. Government hospitals and other Government health facilities

should be used to demonstrate new methods of construction

and delivery of services. 4. Loans and grants should be made available to finance cost

reducing innovations in non-Federal health institutions and facilities.


The Department of Health, Education, and Welfare should review the reimbursement formulas used in medicare and medicaid in an effort to find practical ways of increasing the incentives for

hospitals and other health facilities to operate efficiently. The present medicare reimbursement scheme, based on “reasonable cost," does not provide hospitals and other health facilities with adequate incentive to be efficient. The medicare and title XIX reimbursement formulas, as well as the reimbursement formulas of some private insurance plans, tend to maintain institutions that are inefficient in size, plant layout, and equipment.

Two examples of reimbursement plans that might be considered are: cost-plus-incentive-fee approaches in which the institutions' demonstrated efficiency would determine the amount of an allowable growth factor; or a fixed-price approach in which the institution prices its services in advance and then gains or loses depending on its ability to control costs. In either case, detailed standards of service would have to be specified.



This study has not examined the demand for or supply of particular types of health manpower. Detailed recommendations will be made by the President's Commission on Health Manpower.

It is clear, however, that the demand for physicians will far outrun supply unless ways are found to use physicians more efficiently. The need is particularly acute in child health. About 15 million children in low-income areas are receiving little care. With current methods of delivery, providing comprehensive care for these children would require the services of about 15,000 doctors. However, many functions now performed by physicians could be performed just as effectively by less-highly trained personnel supervised by a physician. The use of physician assistants would reduce both the number of additional doctors needed and the costs of providing care.


Federally supported health care programs should be used to train physician assistants, evaluate their performance, and dis

semiante the results. Large-scale use of assistants in actual care programs will be necessary. Training programs alone will not suffice, because jobs will not be available to such medical personnel until their usefulness and acceptance by patients and doctors have been demonstrated on the job.

Legal obstacles to the employment of physician assistants should be examined and model State laws developed.


Federal funds available under the Health Professions Educational Assistance Amendments of 1965 should be used to support and encourage innovations in health professions' education and

training which promote the efficient practice of medicine. At present, medical educators are considering a variety of innovative changes in both undergraduate and graduate medical education programs. Although improvements in the quality of medical schools and teaching hospitals are of paramount interest, the rising prices of physicians' services can be moderated through innovations in medical education designed to: (1) shorten the length of training programs without a reduction in their quality; and (2) train physicians to utilize ancillary personnel effectively and to organize their own medical practices efficiently.


Although drugs are not contributing significantly to the rising price of medical care, there is evidence that they are higher than they would be if there were more vigorous price competition in the industry either at the manufacturing or at the retail level, and more knowledge on the part of doctors about the costs and effectiveness of drugs. Recommendation

The Department of Health, Education, and Welfare should undertake an intensive examination of frequently prescribed drugs to assess the therapeutic effectiveness of brand name prod

ucts and their supposed generic equivalents. Doctors often prescribe costly brand name products when equivalent drugs could be made available to the patient at lower cost under the generic name. Requiring generic prescribing under Government programs, however, will not be possible until doubts are resolved about whether certain drugs with the same generic name are actually equivalent in therapeutic value.


The Food and Drug Administration should provide doctors with authoritative information on the efficacy and side effects of

all new drugs. Doctors get much of their information about the efficacy of drugs from the manufacturer. There exists no official compendium which a doctor can consult for information about the efficacy of a drug. Preparation and distribution of such a compendium might reduce advertising outlays of drug manufacturers. It would make it easier for doctors to prescribe the least expensive appropriate drug for their patients.


The rise in medical prices is not a temporary phenomenon. Upward pressure on medical prices is likely to continue for many years. Measures to assure that all citizens receive good care will increase that pressure. Their success will depend in part on a serious and comprehensive national effort to use medical resources efficiently. The Federal Government can contribute leadership and offer incentives, but it cannot make a major impact on the efficiency of medical care delivery without the cooperation of the medical profession, the hospital industry, insurance carriers, State and local governments, and many other public and private groups.


The Department of Health, Education, and Welfare should call a national conference on medical costs. Leaders of the medical community and concerned public representatives should be called together to discuss implementation of the recommendations of this report and cooperative efforts to improve medical care services and control medical costs.

Recommendation .

The Department of Health, Education, and Welfare, in cooperation with the Department of Labor and others, should continue

to monitor and attempt. to explain medical price behavior. The studies undertaken for this report revealed many gaps in our knowledge of what has happened to medical prices and what determines their movement.

Statistics on medical prices should be improved; indexes of medical productivity should be developed ; and the search for an understanding of the determinants of medical price and cost behavior should be pursued.

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