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able for the major group purchasers to use their power to do away with such plans.

In this connection, an interesting collaborative idea is being explored by a number of life insurance companies and the Harvard Medical School. Through an exchange of technical assistance and guidance, the insurance carriers and the School are looking toward ways whereby, in the Boston area, the groups of insureds will have the choice of obtaining service benefits from a division of the Medical School. Similiar explorations are now current with other carriers and will certainy be watched closely by other health insurers as well as by hospital administrators and the medical fraternity.

Factor prices (sphere Y).-The curious structure so often found whereby strong group purchasers turn over their buying power to third parties, who in turn are less than effective in controlling either vendor prices or the quality of care, has been remarked upon previously. When the third party expends the group purchasers' funds for health care, what are his responsibilities? What should they be? These are questions which need to be asked and seriously considered, but which are not within the scope of this paper.

Our question is, can group purchasers influence third parties to exercise more vigor in their vendor relationships? It seems to me the answer to this has to be Yes, of course, large purchasers can wield great influence with sellers. However, there are three elements to this: one, the purchasers must act with unified purposes; two, the third parties must reorient their thinking to accept the control activity as one of their primary roles; and, three, the third parties must develop and implement appropriate policies. In the final section, on sug. gestions, this theme will be expanded.


Up to now, this paper has consisted of reflections on how major group purchasers might exercise their considerable influence in stimulating third parties to control costs and prices. Now we turn to consideration of how this influence might be brought to bear directly upon health-care prices—how group purchasers can affect the charges made by the providers of health care. Direct operation of health-care organizations

There are two strategies that major group purchasers could, and have pursned: one, the direct approach, in which they would support their own facilities, paying salaries to the nonmedical staff and reimbursing the medical staff on some negotiated basis rather than the usual, unilaterally established fee for service. Examples of successful ventures of this sort are the Southern Pacific Employees Hospital Association, the Kaiser Plan, the United Mine Workers' program, and the International Ladies' Garment Workers Union health centers. These programs are each quite different in scope and approach, but are similar in giving their sponsor more administrative control over the costs and quality of health care. This, in turn, is reflected in lower costs and prices.

This is not an easy way to proceed, as evidenced by the rough sailing in one way or another that each plan has had. The hostility of organized medicine, the lack of awarness or appreciation of the individuals in the plans, the conflicting objectives of union politics, comprehensive care, individuals' wants, and adequate funding have all been problems. Yet the fact remains that, through these pro. grams, expenses were constrained, quality care could be sought, and the defenders of the status quo could be shaken and induced to reexamine their position. They were, to some extent, influenced to be competitive either throngh price-increase restrictions or through the development of new, countering institutions. An interesting one that developed to counter expansion of the Kaiser Plan is the San Joaquin Foundation for Medical Care, which was established by the San Joaquin County Medical Society in Ca ornia to provide care at predetermined fees, using third-party mechanisms.

Prepayment medical centers.-Given the high interest in health care among many giant unions and many giant business firms, it is conceivable that, if other methods failed to control costs, then these groups could combine to create a national chain of prepayment group-practice centers with hospital, convalescenthome, and nursing home affiliates. If these centers were open to the community. they would certainly provide a potent competitive force in the marketplace-one that existing providers could not ignore in setting their fees.

Self-insurance indemnity programs. It may seem a natural corollars to this do it yourself” approach for major group purchasers to expand their selfinsurance indemnity programs. Self-insurance, combined with purchased stop-loss

coverage for extraordinarily high claim experience, would seem a likely way to reduce the prices of health care. Potential savings on a private carrier's marketing costs, the mandatory commissions, contingent reserves, possibly, and the State premium taxes have been estimated by the the Food Employers Council of Southern California at about ten percent. Quite a few employers and union groups have moved in this direction.

It is not clear to me, however, that these savings are permanent or that they compensate in the long run for lost opportunities to achieve economies of scale through specialization of function. There is also a problem, in self-insured group plans, concerning the people leaving the group. With a private carrier, they can ordinarily convert their group certificates into an individual policy, but the selfinsured plans usually cannot do this. Accordingly, I wonder under what conditions a self-insured indemnity plan is really more effective; I could not find any defintive analysis of this question. This seems a worthy subject for further study, with results that would be useful to both major group purchasers and to private carriers.

The health-insurance industry, perhaps more now than ever in the past, is competing in a market where the ground rules and even, to some extent, the name of the game are rapidly changing. Union pressures for service-type benefits, new health-care alternatives and combinations of alternatives, Medicare and Medicaid, shifting medical attitudes, Federal concern about costs, and the as yet unknown effects of the Comprehensive Helath Planning and Public Health Amendments of 1966 (Public Law 89–749) make the role of the private carrier a particularly difficult one and call for new adaptions and philosophies. Management-labor coalition

An alternative strategy open to management-labor groups, besides actually operating health-care organizations, is the indirect one whereby the potential power of major group purchasers to establish their own health-care organizations is assembled and focused in some suitable organization and maintained as a deterrent to capricious increases in prices and careless administrative practices.

A point that cannnot be orerlooked in any consideration of how major group purchasers can affect providers directly is the fact that, to some extent, major group purchasers run the private hospitals. The boards of directors of these hospitals are largely composed of businessmen, with an increasing number of union leaders joining them. What often seems to be needed, however, is more recognition by these men of the intermingling nature of their two roles.

SUMMARY AND SUGGESTIONS I'p to this point, this paper has briefly discussed various ideas that major group purchasers might employ to restrain increases in health-care costs and encourage quality care. Actually, of course, these are more than ideas; most, if not all of them, are being practiced by one or more major group purchasers. Yet prices continue to soar.

Does this mean that the strategies are nonvalid? No, I don't believe so. Probably, without them, prices would have gone even higher. It does seem to indicate that a more massive, rigorous application of the strategies is needed to counteract the basic cause of the extraordinary inflation we are experiencing in the health field. The fragmented, partial applications that we have are not enough.

Some stronger force is necessary to negotiate effectively with the providers in the health field. It seems likely that unless some such force develops, the Government will initiate some control devices. It has become a generally accepted function of Government to concern itself with policies to control general inflation: it is simple to expand this perspective to include such a special problem as that of health care.

Reading and reflecting on these issues as summarized in the preceding pages have brought me tentatively to the following beliefs:

First, the rising prices of health care stem. to a large extent, from the noncompetitive markets in which physicians and hospitals operate. This is reflected in the physician's almost unilateral control of his fees and in the hospitals' ability to operate with little regard to economic rationality.

Second, unlike other markets, the bargaining power of the ultimate healthcare consumer and his opportunity to shift from higher-priced sellers to more economical ones are very limited.

Third, if the healthful effects of a competitive market are to be introduced in the medical marketplace, a continuing countervailing force that does not now exist will be needed.

Fourth, hospitals are unlikely, of their own volition, to relinquish some of their socially disfunctional high levels of autonomy and independence.

Fifth, the labor and/or management groups have one of the biggest stakes in the game, but have been sitting relatively quietly for a long time. As prices continue to go up and as the Government focuses increasingly on the problem, this group will be increasingly heard from in one or more of the ways described above.

Sixth, there is no shortage of ideas about what should be done. There is, however, a shortage of well-tested ideas and, most important, there is a shortage of ideas of how to get change started, how to get the ideas implemented.

These beliefs, in turn, lead me to the following conclusions: Fundamentalls, there is a need for reinstitutionalizing the health-care industry to place the physicians and the hospitals in a posture vis-a-vis the consumer that is more typical of buyers and sellers in other markets.

As prices continue to rise, stronger pressures will build toward change. While this paper has concentrated on possible actions by labor and/or management, it is obvious that the sparkplug role may be taken anywhere in the system-bs the

adors, by the third parties, by the Government. But, based on current trends and present orientations, the major group purchasers may well emerge as the major stimulant toward change. Possible approaches to a competitive environment

What form will this change take? It is hard to say, of course. The situation is complex, and there are many social and political considerations. In this paper we have already mentioned several possibilities. The following discussion concerns these and additional possibilities :

Broad-scale development of prepayment medical centers.—Imagine the effect on the organization of health care and on costs if, in each urban area, there were prepayment community health centers, similar to the Kaiser Plan, available as an alternative to the public. Other hospitals, independent physicians, and drug suppliers would be faced with adequate, but not overwhelming, competition.

Massive self-insurance indemnity programs.-The expansion, by major group purchasers, of their self-insurance indemnity programs is not a likely occurrence: among the major unions, at least, there is a strong preference for nonindemnitytype coverages.

Management-labor coalitions.--Regional coalitions of management and/or labor could bargain and negotiate directly with the vendors of health care, stimulate effectiveness in community health planning groups, institute improved claimcontrol systems, and in general assume the role of the consumers' representative. There is reason to believe that this type of coalition may be more than a dream. Recently, the California Health Plans Alternatives Committee was established by the Teamsters, Steelworkers, Carpenters, and Longshoremen in the State for this very purpose. It plans to invite members of industry shortly. There are sev. eral interesting elements to be observed. First, despite the fact that each of these unions already has advanced health plans, they still feel the need for a more forceful combination. Second, despite differences in philosophy, values, and pas rates, and despite continuing jurisdictional disputes, the unions can cooperate with each other on common problems. Third, despite geographical differences in their organizations and differing relationships with their national unions, these unions can overcome problems of regional autonomy when necessary.

Much of industry is no less concerned about the problem than is labor. It would seem, therefore, that, if a catalytic agent could be found that would bring the major labor and management groups together, it might be possible to form regional combinations that would be large enough to be effective.

A variation of this would be a regional coalition of management, labor, and Government to accomplish these purposes. In some areas, Government may be needed as the sparkplug to get things going. This may be the eventual shape of the comprehensive regional planning activities created under the ('omprehensive Health Planning and Public Health Amendments of 1966.

Prirate-company operation of medical facilities.-A new private company. patterned after the American Telephone and Telegraph Company in State-br-State organization and after the Communications Satellite Corporation in ownership arrangements, could operate the nation's voluntary, nonreligious hospitals and extended-care facilities on a for-profit basis. Owned by public shareholders, with prices and quality regulated by State agencies, such a company would provide the overall planning, direction, and control that are now lacking among hospitals.

With the additional stimulation of the profit motive, and of a size to permit economies of scale and command top-grade management, such a company should be expected to:

1) Remove duplication and fill in gaps of service
2) Eliminate or convert noneconomic hospital plants
3) Purchase centrally
4) Create specialized centers for health care as needed

5) Engage in continuous research and development, leading to improved technologies and new economies of management

6) Find ways to reduce hospital construction costs

7) Find better ways to serve professional staffs--physicians, researchers, dentists

8) In general, operate on a rational, coherent, cost-effective basis.

This company would not be granted a monopoly. Anyone could establish a forprofit hospital. Thus, a competitive element and additional stimulus to efficient management would exist.

Establishment of such a company would be fraught with difficulties and unanswered questions. How would hospitals be induced to join? How would physicians be treated? How would proprietary hospitals fit into the system? Can urgent human health needs be handled in a way that is compatible with profit maximization? Can costs really be restrained if there is a guaranteed maximumprofit rate? These are a few of the serious questions that need discussion and exploration. The difficulties may be more apparent than real, and the potential advantages of this system may be sufficient to justify such further exploration.

Third parties as agents of major group purchasers.-Less drastic, and simpler in some ways to accomplish, would be a new relationship between major purchasers and third parties. It is doubtful that major purchasers are anxious to undertake radical new roles and responsibilities. Third parties, too, would certainly not be enthusiastic about their doing so. This suggests that there is substantial room for a revision of roles wherein the third parties--principally the Blues and the private carriers would explore new approaches together with management-labor groups. This, in itself, is not new; what is suggested is that it be done with a new "psychological set". The third parties would regard themselves as the agents of the major group purchasers rather than merely as financial conduits. They would, as agents, develop new bargaining relationships with the vendors of care; negotiate contracts with them; encourage competitive buying behaviour by consumers; if warranted, move into service benefits; insist on more effective regional hospital planning; and actually be the countervailing force. The need for evaluation

In reflecting upon the health-care-cost problem, I hare been struck by the lack of conclusive data that can be used for decision-making. In this regard, many people have pointed to the need to experiment with the many ideas that hare been promulgated. Actually, experiments of a noncontrolled sort are already in process all over our country. This paper has only briefly touched on a few of these : there are many more. We should think of these as experiments, and we should organize efforts to document what each is doing, to ascertain results, and to evaluate the experiences. It is too bad that such noble ideas as Health Insurance Plan of Greater New York, the San Joaquin Foundation for Medical Care. the program for hospital planning in Allegheny County, Kennicott Coppers' health program in Utah, the food industry's program in Los Angeles, and on and on. are not systematically studied hy economists and management specialists so that the needed lessons could be learned.

With the Medicare program coming up for review by Congress within the next twelve months, it would seem in order to undertake an impartial, scholarly study. adequately staffed and funded, to evaluate its effects on health costs and develop recommendations for ameliorating the negative ones. It seems clear that the effects so far have been massive. To the extent that people who would otherwise not have received care did expand the demand, this is good. But any negative efforts also need to be identified and evaluated with a view toward their elimination or reduction. Conclusion

I believe that those who argue for allowing the consumer a substantial number of health-care choices are correct. Tastes and values differ and these differences should be respected.

There are no villains responsible for the soaring costs. What we hare are responses to the forces of supply and demand, operating in a unique economic

marketplace. What we therefore should seek to do is reduce the differences in this market through improvements in its organization and productivity.

The sounder social programs are those that evolve because they are right for the time and place rather than those that are superimposed extraneously.

Ordinarily, the best way to create a competitive-market environment where one does not exist is by eliminating the barriers to competition. In the case at hand, however, I have been unable to find or think of any practicable way to put hospitals in a competitive framework, or to set physicians to competing with their associates.

Through regional health planning, it is possible to effect some significant economies among hospitals. But it is doubtful to me that such an approach is a substitute for the sort of buyer-seller price-and quality negotiating that is the essence of a competitive system.

Accordingly, I suggest in this paper that new, countervailing power arrangements be considered and, if deemed worthy, stimulated and nurtured. Through these, the effective, competitive conditions can be developed that are necessary, in my opinion, if health-care prices are to become market-responsive.

Several ideas of what these countervailing power arrangements might be have been presented. The one that seems the best for all, in my opinion, is that in which third parties adopt a new role that of “agent” for the major group purchasers. In this role, the third parties would maintain their functions of risk control and health-care-money transfer, but in addition would act as negotiators and bargainers with the providers of health care. This would entail major changes in their product, their methods or procedure, and their perception of themselves.

As we look to the future, it seems inevitable that some, if not all, of the participants in the health-care model will have to change their viewpoints and behavior. Current positions are incompatible with our societal and economic valves, and now the winds of change are blowing. Some will be actors, and some. reactors. It is difficult to say which group will be which ; bnt certainly the third parties' group would seem from many viewpoints the best candidate for leadership if it can organize. If it doesn't, the task will devolve upon management and labor, or upon the Government.


OCTOBER 16, 1968. DEAR SENATOR KENNEDY: The concise summary that appeared in the Democrat and Chronicle of a local study has some relevance to the Congress, I believe. It points to the fact that we need many more facilities and services which will keep persons independent. Specifically we need, as a community, a system of patient evaluation to prevent unnecessary placements in general hospitals, state mental hospitals, and nursing homes. If we are to stop misplacing these elderly people, we, in Monroe County, would require roughly 2,000 apartment units with supportive services, and 2.500 congregate living facilities.

Hopefully. We will be able to move on these problems under the Comprehensive Health Planning Act of 1966 (89–749) and the 1967 Partnership for Health Amendments. I hope there will be opportunity for consultation among the localities, the State, and the Federal government on local-State priorities and action. William J. ('urran, Professor of Health Law, Harvard, comments in the American Journal of Public Health, June 1968, in an article entitled "Public Health and the Law: Comprehensive Health Planning: Audacious Law-Making.” that "The legislation actually gives the local (area wide) planning agencies no power or authority."

Beyond this, comprehensive planning seems to be inadequately funded, and the responsibility for comprehensive planning is placed well below the Secretary's office in the Department of Health, Education, and Welfare.

We would be glad to send you a copy of the Health Care of the Aged Study if you or your staff would wish one. Sincerely,

MARION B. FOLSOM. (Enclosure)

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