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A recent staff report of the President's Council on Wage and Price Stability, "The Rapid Rise of Hospital Costs," by Feldstein and Taylor, provides a method for determining the component of increasing hospital expenses per day which can be attributed to increasing prices paid by hospitals, as distinguished from the increase which is due to other factors. The study estimated that the average annual increase in hospital expense per patient day of 9.9 percent from 1955 to 1975 could be broken down into its component price and imput factors as follows:

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The price factors were estimated to account for about one-half (52.6 percent) of the increasing hospital expense per day from 1955-1975. The remaining half of the increase can be attributed to increasing numbers of employees and increasing amounts of non-labor inputs.

Corresponding estimates of the component parts of the average annual increase in expense per day for selected periods from 1955-1975 are presented below.


1955- 1955- 1966- 1955- 1960- 1966- 1969- 1970- 1971-
1975 1966 1975 1960 1965 1969 1970 1971 1972

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Components of overall percentage increase in average cost per patient day


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4.9 3.0


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29.0 32.8 24.6

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13.3 15.7 13.9 14.0




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Percentage distribution of components of overall increases
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
47.5 49.3 44.5 44.9 53.6
20.3 11.7 20.3 21.7

42.1 47.8 43.2 59.3 35.5
15.3 13.7 11.4

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56.8 40.7


50.7 55.5 55.1
36.4 40.6 35.8 43.5 37.7 45.1 36.3 43.9 30.7 33.3
24.8 33.2
16.2 10.1 19.7 11.6 8.7 12.8 15.9 12.9 10.0 31.1 43.6 23.9


64.4 68.4


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1/ May not add to total due to rounding.

Data derived from Feldstein, Martin, and Taylor, Amy. "The Rapid Rise of Hospital Costs." Council on
Wage and Price Stability, Staff Report, January, 1977.

B. Increased Health Resources

Another factor contributing to high health care costs has been the increase in health resources including (1) research, (2) manpower, (3) hospitals, and (4) services and equipment. This increase is due to a number of factors, including: government programs which support resource development, public demand, physician demand, and technological advances. It is thought by some that we now have, or will have in the near future, too much capacity to produce the level of services actually needed. There is also a growing conviction that the creation of service capacity contributes to greater utilization of health services, and that serious consideration must be given to influencing the supply of health resources if we are to effectively limit unnecessary utilization. A major dilemma in establishing policies and programs relative to controlling utilization is the considerable controversy which surrounds the issue of what is a desirable level and mix of health services and what constitutes unnecessary utilization. It is pointed out that it is virtually impossible to limit the use of health services by applying medical criteria alone; costs as well as medical benefits must be taken into account.

1. Research. World War II demonstrated the significance of science, research, and technology in solving problems which had previously been considered beyond solution or understanding. This realization, together with a number of significant breakthroughs accomplished by military medicine, suggested that science and technology could be fruitfully applied to certain chronic diseases and illnesses whose causes and cures were unknown. If sufficient resources could be devoted to expanding the biomedical knowledge base through intensive research, these diseases could perhaps be eliminated or at least significantly reduced in incidence.

There did not exist at that time a large-scale, coordinated research effort to expand in a systematic way the nation's medical knowledge base. The large level of support anticipated to be necessary for an intensive and comprehensive research effort suggested that the Federal Government assume direct responsibility for this effort. This led to a dramatic expansion of the National Institute of Health. In the years following the war, the National Institute became the National Institutes of Health, with a number of additional institutes established, each designed to coordinate and centralize research efforts on one or a group of related diseases. Federal appropriations for these activities have increased substantially--from $3 million in 1946 to over $2 billion in 1976.

2. Manpower. Funds for the National Institutes of Health (NIH) were allocated not only for research activities but for training as well. NIH funds provided significant support to medical schools for the development of clinical scientists and medical specialists with broad diagnostic and therapeutic skills. This assistance continued to be the major source of Federal support for health professions training until the early 1960's when perceived shortages of health professionals seemed to demand

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an expanded and explicit Federal authority to provide institutional and student assistance for health manpower training.

In order to alleviate some of the problems surrounding the shortages of health manpower, Congress enacted the Health Professions Educational Assistance Act of 1963, which was extended and broadened in 1965, 1968, and 1971. The programs authorized under this legislation were specifically designed to: (1) increase aggregate supplies of health manpower, mainly by increasing enrollments and graduates at health professions schools; (2) provide a stable base of revenue to the educational institutions in order to insure their financial viability; and (3) encourage specific developments at the individual institutions including curriculum improvements, more intensive efforts to recruit minorities, and experiments to train new kinds of personnel such as physician extenders.

Most agree that the Health Professions Educational Assistance Act has been relatively successful in addressing these perceived needs. For example, enrollments in medical schools increased from about 9,000 in 1963-64 to over 14,000 in 1973-74. They are expected to increase to nearly 16,000 by academic year 1979-80. During the decade from 1963-64 to 1973-74, graduations from medical schools increased from 7,300 to 11,600. Corresponding to these substantial increases in manpower were increasing Federal funds devoted to health manpower training programs. Health manpower programs in the Department of Health, Education, and Welfare have grown to appropriations of $429 million for fiscal year 1976.

Contrary to the usual expectations of the impact of increased supply on cost, studies indicate that the increasing supply of physicians, rather than reducing the cost of medical care, has caused increases in costs because of greater utilization of health services. This is due in part to the fact that, to a considerable extent, physicians can determine the demand for their own services since they not only treat their patients but also determine what services are to be provided.



Increased technology and science in medicine demanded a more sophisticated setting for its application. The HillBurton program of hospital construction and modernization grants was initiated in 1946 to provide funds for an updated and sophisticated hospital plant which had grown obsolete and inadequate during the depression and war years. From 1942 to 1973 Hill-Burton authority provided $4.3 billion for 11,255 construction projects, including 5,986 general hospitals with 358,000 beds; 1,795 long-term care facilities with 100,000 beds; and 4,000 mental hospitals, tuberculosis hospitals, outpatient facilities, rehabilitation centers, public health facilities, and State health laboratories.

Approximately 80 percent of the hospitals in the United States are community hospitals, which include non-Federal short-term

general and special hospitals. The number of community hospitals increased little from 1965 to 1975--from 5,736 to 5,875. However, the number of beds in these hospitals increased from 741,000 to 942,000, an increase of 27 percent. The percentage of these beds that are occupied on an average day is 75 percent. This indicates that at any point in time there will be unused hospital beds which cost annually an estimated $18,000 to $19,000 per bed, or about half the cost of an occupied bed. It has been estimated that existing hospital capacity could be reduced from 10 to 20 percent without jeopardizing the health of the American people. These unoccupied, and often surplus, beds have contributed to rising hospital costs. Total expenses have increased for all U.S. hospitals from $36 billion in 1973 to $49 billion in 1975 (+34 percent) and for community hospitals, from $28 billion to $39 billion (+37 percent).

4. Equipment and Services. The considerable advances in medical technology in recent years has led to great investments in new and costly medical services and equipment. Unlike advances in other industries, new technology in medicine has not, in general, been costsaving. Not only is the new equipment and its installation expensive, but the operating costs, including the cost of trained personnel, are also very high. Some examples of recent sophisticated and expensive treatment techniques include cancer radiation, renal dialysis, organ transplants, open heart surgery, and body scanners, including the controversial CAT (brain) scanner. In addition to the high costs of medical equipment is the problem of the frequent duplication of sophisticated technology. Each hospital in a community believes it must have all of the most recent techniques and equipment, no matter now expensive nor how small the demand for such services. There is little incentive for hospitals in a community to cooperate in acquiring and offering these services.

The necessity for services provided by a hospital or a physician are also an issue in rising health costs. Superfluous or duplicated laboratory tests, unnecessary surgery, and excessive hospital stays all contribute to higher costs. In many cases, excessive tests are performed to protect the physician against the threat of malpractice charges. In addition to the costs of this so-called "defensive medicine," the direct costs of malpractice insurance for both physicians and hospitals has dramatically increased in recent years. Testimony at public hearing held by the Council on Wage and Price Stability in 1976 indicated that the average malpractice insurance cost per New York hospital bed in 1975 increased from $348 to $1,447. In Texas, the malpractice costs for hospitals in 1970 were approximately $13 per bed per year; by 1976, they had risen to $2,300 per bed for some hospitals.


Third-Party Coverage

In health-financing terminology, the phrase "third party" refers to an organization that pays for health services. (The patient

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