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through each door. No matter how many consultants he uses—no matter how many ancillary and paramedical services he orders, the ultimate responsibility, continuity, and final decision rest with him. His services can be greatly augmented by collaboration with a multidiscipline coordinating and expediting team, freeing him for that part of his work which requires his more highly specialized skills.


Contrary to popular notion, those "bad" doctors are responsible for only about one-quarter of the total costs. This, in spite of the fact that their services are the most frequently used by far. I do not intend this as a defense of physicians. Certainly, all costs, including doctors' fees need to be evaluated. However, it is far better that costs for so highly personalized services be improved by means of better use of professional time as well as by reduction of overhead resulting from sub-optimal use and duplication of personnel and equipment in each physician's office.

It is also obvious that, if reduction in costs is to be significant, it must be concentrated around the larger segment of that cost, the remaining 75%. Here, too, duplication and sub-optimal use are very significant factors—but here, they lend themselves much more readily to pooling and the concurrent savings resulting therefrom.

Hospital costs are the most astronomical of all (over 30%) and are becoming increasingly worse. The unexplained wide cost variations in hospitals of the same category certainly bear scrutiny. According to a report of the President's National Advisory Commission on Health Manpower—these differences are as high as 100%. There is also a need to more clearly define the role of all insti. tutions—the community hospital, the medical center, and the extended care facility. Not every hospital should be doing everything. The more frequently required, more common services should be community based and should be rendered through the smaller community hospitals, referred to under the Swedish system as the cottage hospital. The less frequently used services requiring high order skills, and highly specialized personnel and equipment should be available through the medical centers which should serve the megalopolis rather than just the smaller community. Chronic care should be delegated to extended care facilities and special out-of-institution programs. Too often all three are combined in one institution contributing to duplication and under utilization.

Most important of all, the best way to reduce institutional costs is to keep people out of them. Ambulatory care, diagnostic and special treatment centers would help immeasurably towards this end as would also health insurance plans permitting reimbursement for such services. It is common knowledge that high on the list of causes of hospital abuse are the doctors' use of the institution as his workshop and the senseless insurance allowances for in-hospital diagnostic services disallowed on an out-of-hospital basis.

The basic idea is that of pooling and centralization of the expensive and less frequently used services for economy and arailability, and decentralization of the less expensive and more frequently used services for accessibility and personalization. This can be effected by relating the physician to a single access ambulatory care diagnostic and special treatment center which makes available to his patient all the services contained in the hospital, exclusive of the sick bed or in-hospital observation, through the writing of a simple order just as he does in the hospital. Such a center can also supply other services including managerial, administrative, secretarial, and referral. Direct patient care serve ices will be coordinated and mediated through the Health Care Team which will also be responsible for utilization review and quality surveillance. A dy. namic health education program aimed at improved health practices as well as optimum and proper utilization of services will undoubtedly affect quality of care as well as reduce costs.

This type of system avoids the pitfalls of large group practice which too often becomes depersonalized as the patient identifies with a clinic rather than a doctor. It combines the best features of solo and group practice. The mainstream concept must also be maintained. The recently conceived “neighborhood clinics" for the poor tend to perpetuate the concept of "separate but equal". This too should be avoided.

FAMILY HEALTII AGENTS A very important part of the team will be the family health agents-a new health career, a medical ombudsman. These agents are properly trained and educated, peer related groups who will act as informed advocates of the family unit. They constitute an activist group who also serve as expediters of services. It is conceded by most medical care experts that about 85% of people presenting at a physician's office are not biologically ill but are troubled. This is a very significant group, constituting a great drain on all services and economy. Of this 85%, it is estimated that about 15% need true psychiatric care. The remaining 70% often just need someone to talk to. The family health agent can provide the type of informed advocacy required to help them.

In reality, they take over many of the functions previously performed by the old family doctor whose great bid to fame was that he took time to listen and knew the whole family. The plain fact is that he knew that family because he lived in the neighborhood and he had time to listen because health care was far less complex. I do not agree with those who advocate his return. The cost would be too great. It would involve the tremendous loss involved in depriving patients of the great value of specialization. Listening and understanding family problems can very effectively be undertaken by peer related non-professionals who are often more trusted by patients. These agents will keep the professional informed of family problems he might otherwise never be aware of.

HEALTH CARE TEAM Referrals to community hospitals, chronic care units, special programs, medical centers, and public and private agencies can be coordinated through the Health Care Team. Mobile Health Core Facility Units for sparsely populated areas are also very feasible. Education, training and research can also be conducted but care must be taken to exclude these costs from patient care costs. Teaching in the community hospital should be confined to personnel in final stages of training who will act as paid apprentices, thus increasing available manpower as well as providing improved emergency care.

The Health Care Team and Family Agent Concepts are innovative and their effectiveness in circumventing manpower shortages, abuse of facilities and equipment, and improving quality of care should be demonstrated at first through government grant awards.

There must be free transfer between all components of the system which in reality becomes a BIOMEDICAL COMPLEX. This is a functionally unified complex and not necessarily geographically unified.

It is very realistic to expect that such a system will permit the physician to supervise the care of more than twice as many patients as he does under the present systems, thus not only circumventing shortages but also lowering costs.

Pooling of services, optimum utilization of all components, coordination, and team quality surveillance should improve quality and lower costs. Thus it might be possible to continue the fee for service concept and still maintain reasonable costs. Certainly, this plan is the more popular with providers of serivces and even to the recipients who often object to prepayment for services they may nerer use. The fee for service plan has undoubted value in the form of incentives to the provider and circumvention of abuse by the recipient. An all inclusive prepaid plan can produce a situation whereby the well finance the frequently and chronically ill which is certainly undesirable. Another possibility is physician fee for service with prepayment for all other services. Whatever plan is adopted, effective safeguards over quantity and quality of care are exerted through the Health Care Team. Also, if associations of physicians have a rested interest in the Health Core Facility, it is obvious they will protect its optimum utilization and operation.

PATIENT PREFERENCES There is a great need to study patient preferences. This has never been done to my knowledge. We never seek their perspectives—which is a bad mistake. We always assume that what we think is good for them is what they want. I wonder if prepayment is such a good idea in a country such as ours, where a pay-as-you-go policy-free enterprise-is so cherished, I wonder too, if stressing the need for prepayment-in case illness strikes—does not in reality orient our people towards illness rather than health. Too often, I have seen patients view their health insurance as a precious passport to the hospital. Is it then health insurance or sick insurance?

Perhaps a combination, providing prepayment for catastrophic and frequent or prolonged illness with reasonable exemption for family per year is more desirable. The type of payment is far from decided. There are so many individual preferences that flexibility is certainly necessary.

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The real challenge is to insure availability of quality oriented care to all, no matter which reimbursement system is applied. Decreased cost, effected through pooling, coordination and optimum use of facilities, equipment and manpower. could just as readily be applied to the fee for service plan as it could to prepaid plans. This would have the added incentive of circumventing abuse by both consumers and providers, as well as insuring that consumers will for the most part, pay only for services rendered to them. Prepayment could then be applied only to long-term and catastrophic illness. This would adequately protect families from such events, and could be secured at a more reasonable rate. Such a system would very likely be more acceptable to all involved than is the present multifaceted and complicated health insurance and other prepaid plan systems, which too often succeed only in subsidizing the medical industry, the insurance companies and the prepaid groups, causing further inflation of health care costs.



OCTOBER 4, 1968. To: California Council for Health Plan Alternatives : members of the Council

and Advisory Committee Members; California Labor Federation : Thomas Pitts, Mike Peevey ; Central Labor Councils, Metropolitan Areas: Other union

officials and health care specialists concerned about the Medical Program. From : Bruce Poyer, member, Health Review and Program Council. Re: September 25th meeting of the Council.

(Note: Copies of this report are being sent to California Health Welfare Department officials, other HRPC members, CMA officials, and administrators of major negotiated health programs in California. Comments or suggestions (or criticisms) on any matter raised herein will be appreciated.)

The key agenda item for September 25, which was on the advance agenda, was: "Presentation of California Blue Shield method of determining reasonable charges for physicians' services on the basis of profiles.”

Spokesmen for CBS, the fiscal intermediary, gave a thorough and detailed explanation of the entire, complex, profile business, and described their procedures in processing Medical claims, in keeping track of physicians' fees, and in reviewing questionable costs and practices.

The agenda item which was not described in advance, and which related only indirectly to the CBS appearance, was the California Medical Association's request, appearance, and argument for higher fees to be paid to doctors for services performed under MediCal. In contrast to the detailed procedural description presented by CBS, the CMA spokesmen gave no data and developed no economic rationale to support their argument for higher fees. They relied primarily on the simple threat that continuation of present limits on fees would soon cause California physicians to be unwilling to participate in the Medical program.

The present formula sets maximum physician fees at the 60th percentile of the level of physicians' charges in effect January 1, 1967. Physicians' charges are determined by procedures, as defined in the CMA Relative Value Studies, and br different areas of the state. Price control "at the 60th percentile" means that at a particular price for a particular procedure in a particular area, over 60 of all claims for that procedure in that area are at or below that price. The present maximum fees under Medical are presumably set at the 60th percentile of prices charged January 1, 1967."

* See Statement, p. 697.

1 There is some question about where the maximum fees are actually set. The following is from the legislative analysts report on Governor Reagan's budget request of last Voreni ber, with particular reference to the appropriation requested for physicians' fees under the Medical program:

"It is difficult to understand the meaning of all of these assumed program limitations. We have never been able to obtain a clear explanation of the reported rollback of physicians fees to January 1, 1967, and the related application of the sixtieth percentile maximum fee. This is because the actual administration of the fee system has been by contract with California Physicians' Service. We do not believe that in fact physicians fees are being approved at the level of those fees which were charged by individual physicians at January 1, 1967, and if this is the case, then all assumptions as to increases in physicians charges should be reexamined to see how far physicians have in fact been able to increase fees since January 1, 1967, and what this means as to increases for the next few years."

The CMA proposal was to move this “percentile control” to the 90th percentile of current charges, rather than charges in effect January 1, 1967, and to redefine the interpretation of the percentile control point. Under the redefinition, for a procedure like an office visit or a tonsillectomy, the maximum fee Medical would pay for a particular area would be (a) that fee which is at the 90th percentile of all claims under California Blue Shield plans in that area for that procedure (this is the "area profile,” as used previously) ; or (b) that fee which is at the 9th percentile of all fees charged by all the doctors in that area for that procedure (this is the "individual physicians' fee profile,” now to be introduced). Whichever fee is higher, (a) or (b), would prevail as the maximum fee that could be charged to a Medical patient. In no case would the maximum fee ever be below the 90th percentile on both profiles. In some cases, if the (a) profile established a price higher than the (b) profile, or vice versa, the actual control point could fall as high as the 98th percentile on both profiles.”

In discussion of the CMA proposal, the following points were raised:

(1) The State Department of Health and Welfare estimates the cost of the revision requested by CMA to be in the neighborhood” of 5 to 7 million a year. This would be over and above the 5% increase in physicians' fees which was already budgeted in appropriations for this fiscal year. Questions raised at the September 25 meeting established that the 5–7 million estimate is obviously


In a paper describing the mechanics of its full service program, California Blue Shield has itself given the most concise explanation of the development of its "profiles :"

“From an 'area profile of charges, with the top of the range established by means of a conversion factor applicable to broad bands of service reflected in the Relative Value Studies, the evolution has been to 'procedure profiles by area. The latter establishes a range of charges for each procedure (service). Thus, a charge is screened against a procedure profile to establish that it is customary for that specific service in the geographic area.

"Now in its final state of development is the 'Individual Physician Charge History.' This is a refinement from an 'area profile by type of service to an individual physician's usual charge history for a specific procedure (service). Thus, a charge is screened, first, against the physician's charge history to determine that it is his usual charge, then it is screened against the area range of charges to verify that it is within the customary range of charges for a similar service, and, therefore, considered 'reasonable.'

In the same paper, cbs also gave a better illustration than it gave to the firPC of how the two profiles would be put together in the determination of "Top of the Range :"

Example 1: Procedure 1234

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*Top of the Range. In Example 1, at $45-90.2 percent of the claims were included. However, only 85.3 per cent of the physicians were included. Therefore, to establish the range to include at least 90 per cent of physicians, the next charge of $50 was selected as the top of the range. This represented the charges of 93.4 per cent of the physicians and 94.3 per cent of the claims.

In Example 2, at $110–92.4 per cent of the physicians were included. However, only 86.5 per cent of the claims were included. Therefore, to establish the range of at least 90 per cent of the claims, the next charge of $120 was selected as the top of the range. This represented the charges of 98.2 per cent of the physicians and 98.0 per cent of the claims.

very loose. No data was submitted to support the estimate, nor did it appear that any reliable data was available.

The control point on physicians' fees was moved back from the 9th to the 60th percentile, in September, 1967. The Office of Health Care Services later (May, 1968, reestimates) determined that this reduced expenditures for physicians' services by 10 million in fiscal 1967–1968. and by a projected 12 million for fiscal 1968–1969. The financial impact of the proposed upward revision would be greater than the impact of the last downward revision, for two reasons: (a) there would no longer be a freeze on fees at their January 1, 1967 level, and fees are obviously much higher now; (b) the use of the individual profile system permits maximum fees beyond the old goth percentile maximum level.

(2) California Blue Shield the fiscal intermediary, indicates that complete “top of the range” fee data, by areas, using both the individual physicians' profiles and the area profiles, is available only from January 1, 1968.

This means, in effect, that CBS either does not have, or will not disclose, any "base data" that can be used to determine what usual and customary fee charges were in the various areas, except data as of January 1, 1968. Nearly two years of inflationary impact of the MediCal and Medicare programs is therefore now to be built into the January 1, 1968 determination of "top of the range" (or 90th percentile plus). Probably, that will be the only data available as a bench mark for future determinations of how fast fee levels are rising.

The intent of the Medical law was and is that physicians' fee levels prevailing in various community areas were to determine what Medical paid for similar services to recipients. However, the "bench marks" on what is happening to fees in the various areas are continually pushed forward in time—by the physicians who are the fiscal intermediaries. Thus, what is being measured is usual and customary community practice, plus all of the inflationary impact of the Medical and Medicare programs.

In other words, in my opinion, the program is being used to advance the fee levels that are considered to be “usual and customary,” which in turn results in advancing the program's fee levels. It is a very nice situation for any provider of service to be in, especially if the provider is also the fiscal intermediary, and is therefore in charge of all the data.

(3) The representatives of the medical profession quoted data to indicate an over-all increase in the “California Physican Fee Index" of about 4% a year for the past five years or so. They did not bother to produce any of the data they quoted. Their figures are probably from the Socio Economic Report of the Bureau of Research and Planning of the OMA. The March 1968 issue of this report shows the CMA physician fee index at 123.9, using June 1962 as base of 100.0. This would be a 4.34% increase per year over the 542 year period. However, the 512 year period used in this computation includes only 1 year and 9 months under Medical, and 3 years and 9 months when we did not have Medical or Medicare. Use of this period spreads most of the inflationary impact of the government programs over a longer period of time prior to the advent of the programs.

The same CMA data, using December 1964 as base, shows a 14% increase in physicians' fees to December 1967, or 4.7% a year. This 3 year period is short to establish a trend, but it sets a base period 1 year and 3 months before the government programs started, and it covers 1 year and 9 months of their operation. It thus provides more realistic barometer of what is happening now.

U.S. Department of Labor data on physicians fees in San Francisco and Los Angeles (from the BLS Cost of Living determinations) was also quoted at the September 25th meeting. This data is regularly discredited by the CMA, as being statistically unreliable. However, in the 3 year period December 1964 December 1967, BLS shows virtually the same change in physicians' fees in Los Angeles and San Francisco, as that which is recorded in the CMA data. BLS shows a 4.9% increase per year over the 3 years. CMA shows a 4.7% change each year over the 3 year period.

The basic similarity of BLS data describing the 3 year period is important not only because CMA discredits their data, but even more because BLS shows an index of physicians' fees (for Los Angeles and San Francisco) for June, 1968. CMA is silent on that subject, at least in its public disclosures.

BLS shows a remarkable jump of 11% in physicians' fees in Los Angeles and San Francisco in the six month period December 1967 to June 1968. That single jump is big enough to bring the annual rate of change in the BLS series up to 7.8% over the total 312 year period, December 1964 (base) to June, 1968. CMA data, or that which is released publically, does not yet cover this period Decem

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