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pitals reduce the net gains of the elderly. Medicare has in part become an institution for making hospitals financially viable.

The availability of several billions additional per year also tends to increase costs of operating hospitals and thus cuts gains of the elderly. With hospital costs rising by about 15 per cent a year, the recovery of additional costs is facilitated by payments under Medicare. But the new resources made available also tends to make possible large rises in pay of hospital workers.

The Somers in their recent book on "Medicare and the Hospitals" have raised a vital question. Hospitals are guaranteed recovery of costs. With such guarantees and with no other restraints, are not costs likely to rise at an unacceptable rate? Indeed, the major reason for the current rise in hospital costs may well be the low pay of the past which is not easily tolerated in a full employment economy. But surely the inflow of medicare cash facilitates the rise in pay of hospital help. The new resources, however, do not merely facilitate increases in pay scale; they also assure a greater supply of labor for the hospital and hence to that extent facilitates improved service. Without the increase of funds and the accompanying rise of pay scales, the hospitals would be confronted with serious shortages of labor in a full employment economy.

Doctors and other health personnel necessarily profit from the increased cash thus being injected into the system. The large rise of income for physicians postmedicare is explained to a considerable extent by the billions being poured into medicare. The physicians' incomes rise as with slow response of supply of doctors to rising demand, incomes automatically rise. On top of that many physicians seek higher rate of pay by pushing for direct reimbursement by patients rather than obtaining compensation thru the intermediary of the hospital. Hence with the inflow of medicare dollars, the struggle between hospitals and physicians for a greater share of the medical dollar is intensified.

DOCTORS' COMPENSATION In the discussion of recent advances in medical costs, there is some disposition to adhere to the position that medicare has not improved the economic status of the doctors.

I do not subscribe to this interpretation. The rise of costs for service of physicians has recently been much greater than in the premedicare period.

Senator Robert Kennedy commented thus on the costs of doctors' services preand post-medicare:

*There have been some studies made in the State. I don't want to take too much time, we have a lot of witnesses, but here is an article from Watertown which shows that an office call before the passage of this legislation was $3: afterwards it was $6.50; a home call, $4; afterwards $8; special service, initial visit. $7.30; after the passage of the bill, it was $20.”

This excess is not by any means explained merely by the general inflation:ury trends. Nor am I convinced by the argument that costs of physicians' services recently have not risen more than the costs of services generally relevant especially for the younger population. The crucial point is that billions of additional funds are being channelled into the medical stream. Doctors' income accounts for about one quarter of the total medical income. In view of this fact and the large rise of costs per doctors' services, and of physicians' income and the inelastic supply of doctors, the only conclusion I can draw is that medicare has indeed raised costs of physicians' services, and the income of physicians.

That Medicare operates through fee for services is also unfortunate. This method of payment induces excessive services. The costs are compounded because of the absence of adequate quality control.

Another inflationary factor derives from the opposition of doctors to assignments. By refusing assignment (fees based on current practice) the doctor can impose much higher fees and with the patient recovering only part from the government.

DENTISTRY Improved economic status has accrued not only to physicians and hospital personnel. Medicare has especially been effective in stimulating services previously greatly under-supplied. One significant area has been dentistry. The pro



1 Senate Hearings, Costs and Delivery of Health Services to Americans, 1968, pp. 370–71.

2 Costs and Delivery of Health Services to Older Americans, Hearings, Subcommittee on Aging of U.S. Senate, p. 371.

vision of medicare dollars has helped correct the deficiencies of dental services. One result has been very large rises of dental incomes, with incomes of a dentist in some instances rising to about $100,000. (The difficulties of covering dental services under insurance accounted to some extent for the under-provisioning of this type of service.)


Older citizens have gained less from medica re than may be assumed from the amounts received for medicare because the increased availability of insurance in itself tends to waste resources. The insured tend to consume service not needed just because they are insured. I hold this position though Mr. James Brindle, head of the Health Insurance Plan of N.Y.C., found no increase in services in response to additional insurance. The tendency is to consume more whether needed or not, just because insurance becomes available. The purveyors of medical services, moreover, also contribute to wastage as they increase charges to patients who are insured. They are more disposed to raise fees when insurance increasingly carries the burdens.


In the period during which medicare was under disenssion, the fear was frequently expressed that the introduction of Medicare would result in serious pressures on medical services and especially shortages of hospital space.

So far it seems that the concern was excessive. Despite Medicare, despite medicaid which also inserted large additional funds into medicine and despite the unusual prosperity, the pressure on limited facilities brought no serious bottlenecks.

The explanation of this outcome so far, lies in the increased use of nursing homes-though far from a satisfactory expansion in this area--the large excess capacity available before Medicare, and the improved planning of hospital use made possible by Hill-Burton and Medicare: “During the first year of operation, the older people of the nation received from 12–20 per cent more inpatient hospital services than in previous years; and they received these services without the over-crowding of facilities which some people had predicted." 3

But it is well to note that further extension of medical servicese.g. more services and extensions of medicare to younger age groups and further growth of insurance all of these together may well raise demand vis a vis supply to an uncomfortable level. Any special measures to improve medical services to minority groups would further increase pressures.

The net balance between supply and demand will depend on a number of other factors. In the last few years medical outlays have been rising by about $1 billion a year, or around 8 per cent. A major part of this increase is explicable by the rise of prices. But this rise of prices is not exactly independent of the rising demand for medical services,


The adequacy of medical services will also depend on the developments in the economy and other (related) segments. Thus educational outlays (also roughly $50 billion a year) are also increasing at about $4 billion a year. Competition for construction, for tax dollars and services are significant in these two areas. Should the unusual prosperity of the last 8 years continue, then excess capacity of plant and personnel will be at a minimum and additional demands for services will be reflected more in rising prices than in rising supplies.

THE RELEVANCE OF VIETNAM Much will depend also on Vietnam. Should the war end, it is estimated by the top authorities in Washington that from $10 to $30 billion additional would be available for welfare outlays—the exact amount depends on what would be done with the (say) $15 billion saved in military and $15 billion out of additional taxes as incomes rise. It is conceivable that with $15 billion available $5 billion would go for improving our cities, $5 billion for anti-poverty programs and $5 billion for welfare inclusive of medicine and education. It is clear that pressures on medical markets would intensify, the larger the peace dividend, and the less spent on other welfare programs.

8 18t Annual Report of Medicare, 1968, p. 7.


On the assumption that substantial expenditures will be made on behalf of the minority groups, we should examine the effects on the medical segment of our economy. There is increasing support for an anti-poverty program, which would be based on a negative income tax-i.e. guaranteeing all families a $3,000 income. It has been estimated that the cost would be $900 per capita, or about $200 billion. This is clearly out. But a subsidy to the roughly 10 million families with income below the poverty line would cost from $7-$49 billion."

For our problem, the significant point would be that recourse to a negative income tax, that is payments to the poor to get their income up to a minimum level, might well have the result of reducing outlays for medicine. The negative income tax generally suggests that the poor would get cash and they would determine how to spend it. Would not the result then be less spending by government on medicine, housing, etc. and more by the poor on television, sports, clothing, furniture, etc.?


In the New York hearings on Costs and Delivery of Health Services to Older Americans, the official witnesses leaned towards an explanation of required therapy that stressed especially improved organization, e.g. neighborhood health centers, rather than an increase in the supply of doctors. These experts doubted that it would be possible to entice doctors to move into the low income areas. They are concerned at the large proportion of the population in slum areas not serviced by doctors. Doctors prefer to practice in the high income areas. In their view, greater production of doctors would not yield a flow of doctors to the poor neighborhoods. The New York experts seemed to argue that the inducement of group practice and salary payments would attract and has attached able young doctors.

I find it a little difficult to accept this though surely there is some point at which the supply of doctors in the affluent areas becomes so large that the doctors will begin to desert the affluent areas. But it seems to me, we are far from this state now. Indeed, the income of doctors is already less in such cities as New York and Boston than in middle-sized towns. But this is explained in part by the penchant to practice where standards are high, research facilities good and cultural activities are attractive.

The Senators who seemed skeptical of the approach of Dr. H. Brown and others seemed to lean towards emphasizing the need of increased output of doctors rather than improved organization supported by some New York officials. I lean towards the views of the Senators.

MINORITY GROUPS, FINANCING MEDICAL EDUCATION An indication of the rising needs of minority groups is given by the Health Service Administration of New York City.

“Our projections are based on 4,000,000 New Yorkers being Medicaid eligible. While projections indicate no increase in New York City's population over the next 15 or 20 years, these same projections indicate a continuance of trends prominent between 1950 and 1960, to wit: an increase in the population of individuals over 65 by 35%, an increase in the population under 1.5 by 13%, a decrease in the white population by 12%, an increase in the Puerto Rican population by 149% and an increase in the non-white population by 48%. While continued increases in these statistics might not be as great as in the previous decade, it seems fair to assume that New York City will have enough of a shift in these population groups to offset any changes in Medicaid eligibility which may be passed by the Congress."

It is generally agreed that a shortage of physicians prevails and even if increased use were made of sub-professionals.

One expert would increase the output of physicians from 9.000 to 20,000. He would have the Federal Government finance the entire costs of $7,000 per physician to the School, $4,000 for upkeep of the student, and the additional con

4 Tobin, Pechman and Mieszkowski, Is a Negatire Income Tax Practical! 1967. These are rough figures, with the estimated cost related to size of basic allowance, and the tax iniposed on recipient on income beyond basic amount, and also savings on welfare programs.

50p. Cit., p. 375.


struction costs. The total costs over a 10 year period would be about $5 billion. He would finance the upkeep of the student because now students predominately come from high income groups.

Though I am sympathetic with the general position, I find it difficult to accept this additional burden on the Federal budget at the present time. The case would be stronger in the post-Vietnam era.

But even then one may raise the following issues. Why subsidize the medicai student to this extent and not introduce similar programs for scientists and teachers who are equally scarce?

The case is especially weak for the future physician because the income of the practising physician is now $30,000 to $40,000 a year. Would it not be more equitable to finance the future doctors by a loan program? The physician would then finance it by paying a percentage of his life time income depending upon the amounts borrowed during his training period. So long as incomes are high the doctor will pay proportionately more. This program could easily be integrated with a loan program for all college students and financed over the life time of the students. In this manner, society will finance part of the cost of training in that as incomes rise as a result of inflation or rising productivity, the financial burden on the doctor will be reduced and society's contribution will be increased. Should doctors' income rise as much as incomes of all members of the labor market-doctor's income have been going up more rapidly—then in 50 years we might expect doctors' income to rise to about $300,000 a year.

Such a loan program would enable all students of quality to get a medical education, to choose any school where he is acceptable, and he would finance his education over his active life instead of being burdened exclusively during his years of training.

ADEQUACY OF MEDICARE Medicare of course marks a great advance: in funds going into medicare; in providing additional help to the group that needed it most—the aged; in accepting the principle that compulsory health insurance for a large segment of the por

But there are still many reservations. Under Medicare, benefits are still restricted in the payment of doctors' bills. Expert estimate coverage-once allowance is made for corridors, co-insurance, exclusion of dental and other benefits—at only about 50 per cent of doctors' services. Moreover, the doctors seek to avoid assignments, which means higher charges to the patient, and are frequently criticized for charging in excess of usual charges. To get an increase, a requirement of Blue Shield of New York is that the rise apply to all patients, not merely those covered under Medicare. Much unhappiness also prevails because the doctor is compensated on the basis of fees for services thus increasing the difficulties of those (notably hospitals and group plans) where payment is on a capitation basis.

Yet something can be said for the limited coverage and benefits.

Had coverage been complete, the pressure on resources would have been much greater, and prices risen even more than they have. Moreover, under these more generous conditions, the pressure for universal compulsory insurance would have increased greatly. Ultimately the country is likely to accept compulsory insurance. But there is something to be said for experimentation on a restricted basis at first and also for the avoidance of another inflationary pressure in the midst of general inflationary trends. Medical shortages and bottlenecks have contributed much to the inflation of the last few years. The contributions to inflation comes from Medicaid, and private insurance as well as Medicare. The price of medical services and especially of hospital services has especially soared. But we should observe that in some areas, the quality of service on the introduction of new and costly procedures raise prices. In part these increases may be described as non-inflationary. That is to say, the quality of services has improved-an offset to higher prices.


6 Dr. Cherkasky pointed out that 50 percent of physicians come from those in the top 12% of income levels.


NOVEMBER 18, 1968. DEAR SENATOR WILLIAMS: In 1965, before Medicare was available, the California State Department of Public Health studied all admissions for a 6-month period to 35 home health agencies in California. The Bureau of Chronic Diseases has furnished me with the following evaluation of the replies :

"One question on the discharge form asked the private physician, “After observing this patient in a program of home nursing care would you please answer the following question: If home nursing care had not been available would you have had to: Send the patient to the hospital? Send (or keep) the patient in a nursing home?" (For patients referred from a hospital the question was: “Would a longer hospital stay been required ?") A majority of the physicians did not see these two choices as alternatives but physicians did indicate that one out of every five patients would have had to be in a hospital if home nursing services had not been available. One out of every six patients would have been sent to a nursing home. So for over one third of the patients (35.9 percent) a much more expensive form of care would have been imperative if these services had not been available to the private physician.

“There was considerable variation in alternate care needed depending upon the diagnostic condition which brought the patient under care. For example, 35 percent of the cancer patients would have had to be hospitalized and another 14 percent would have had to go to a nursing home. Twenty-six percent of the stroke patients would have been sent to nursing homes while an additional fifteen percent would have been in hospitals. An entirely different picture appears for patients with arthritis where 20 percent would have been sent to nursing homes and for only 6 percent would a hospital have been the alternative.

“This study was conducted before home health services were made available under Medicare and many physicians were not aware of this type of service. It seems reasonable to assume that early referral of patients was not always made. For example, agencies with liaison nurses in hospitals or some other similar arrangements had a much higher percent of their admissions made directly from a hospital. Vine agencies had at least 30 percent of their admissions made directly from a hospital while ten agencies had less than 10 percent of their admissions referred directly. Obviously, with a good referral system cases can be evaluated early and sent home as soon as feasible. Home nursing services would then be substituted for more expensive hospital care."

In 1961 I was project director of a comparative study of 15 home care programs, using the coordinated (comprehensive) home care program of the Jewish Hospital of Saint Louis, where I was then executive director, as the base. The answers to several of the questions posed in your letter are found in the report of this study, which was published as Monograph #9, Hospital Monograph Series, by American Hospital Association, Chicago, publication no. G164. A copy of this monograph is enclosed. The evaluation of benefits to patients is as valid today as it was then. I refer you particularly to the Critique (pp. 65-70), which I hope your staff will extract as a part of my comments as needed.

In September, 1967, the Division of Medical Care Administration of the Health Services and Mental Health Administration of the U.S. Public Health Service held an invitational conference on Home Health Agencies after one year of Medicare. I had the privilege of participating in this conference and of collaborating in the preparation of the final report: "Home Health Agencies After One Year of Medicare", published in mid-1968. (Since I have only one copy of the report in my possession, I cannot send it, but I am sure copies are available on application to the appropriate office of the Public Health Service).

It was the consensus of the conference group that ways must be found to bring home health services into the main stream of community health for patients of all ages and economic levels : home health services should be made a part of voluntary individual and group health insurance plans as well as of government programs. Home health services should be included by State and community

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