labor force that for years subsidized this Nation's health care system by accepting an inadequate wage structure. But much of the increase is the direct result of a consortium consisting of an abominable cost reimbursement system, which encouraged and rewarded inefficiency, and a hospital management group that did not need incentives to achieve ineptitude.

The basic failure of this country's hospitals to achieve any significant degree of internal efficiency has to rest with its No. 1 problem-the nonprofit status of the vast majority of our hospitals, and their self-perpetuating, nonresponsible leadership, and the lack of adequate, fiscally trained, full-time management, which has led to a very low level of competency in the area of controlled cost and productivity.

The general problem areas are (a) part-time trustees, who may be some of the finest, most humane and civic-minded men in this country, but who by the very lack of involvement and primary commitment cannot make a significant contribution to as complex and costly an organization as a major general hospital, as no man could in 5 or 10 hours per month, and (b) behind the trustee, in the area of primary responsibility, we have had poor fiscal training at all levels of administration.

Hospital administrators are trained to coordinate the services within the hospital, so that a facility can offer the required medical care. However, they are usually not trained in discovering or achieving the most efficient mechanics for the delivery of their required commodity. In short, the traditionally nonprofit hospital system does not now have adequate managerial capacity to achieve any significant degree of efficiency.

This, in turn, creates a very substantial doubt as to whether prospective reimbursement, capitation payment, or any of the budgeting programs contemplated in the various legislative proposals before Congress today can be meaningful. How can there be realistic budgeting or the ability to live with prospective reimbursement when there is, in fact, no sound fiscal management? No program of national health insurance, nor any more restricted drive to control the rise in costs, will succeed unless there is built into the legislation adequate incentives to increase productivity and attract strong management that is aware of the economics of its own industry.

By way of ad lib, following Mr. Cruikshank's presentation this morning, I heard Mrs. Griffiths address a remark to him: During the medicare-medicaid testimony. Blue Cross and the American Medical Association made some statements that did not come to pass.

I do not really believe there was duplicity. I simply believe they did not know, because these organizations have never really been truly involved in the economics of the health care industry.

If there is to be any advancement in the internal efficiency aspect of cost containment, it must come (1) from increased productivity of hospital labor, (2) elimination of unnecessary labor, and (3) in adequate capitalization that will enable the industry to mechanize to whatever extent is possible.

It is in the area of increased productivity that private enterprise, as represented by companies such as mine, and the members of the National Council, is playing an increasingly significant role.

Proprietary enterprise, by its very nature, is structured to provide the incentives which are completely absent in the nonprofit field. And, if I may, I would like to point out that virtually every aspect of the health care delivery system (with the exception of the Blues) is proprietary in nature, except for the general hospital, which in turn has suffered the most phenomenal inflationary spiral.

The entire philosophy of encouraging the development of marginally managed institutions and systems of a "nonprofit" nature while at the same time discriminating against, or even eliminating the participation by responsible, proprietary, tax paying enterprises, as some of the proposed legislation seems to do, is built on a series of false premises, most of them centered around the concept that profit motivation has no place in health care.

Yet there is no more reason for excluding private enterprise in the field of health care delivery than there is for excluding it from any other realm of vital life functions, such as the production and distribution of food or other essentials required for daily life and which are, frankly, on a day-by-day basis, more essential to more people than remedial health care.

Not only is proprietary activity, as such, in health care an existing and vital fact of life, it is a driving force in many so-called nonprofit organizations, such as in the proprietary aspects of the permanente medical group division of the Kaiser Foundation health plan.

In some regions of the country, proprietary hospitals are a significant force. In California, where I come from, there are 179 propietary hospitals in the California Hospital Association, as compared to approximately 255 nonprofit, nongovernmental institutions. Four of the 16 members of the new board of trustees of the California Hospital Association, including an officer of our company, are from proprietary institutions.

Many proprietary hospitals, incidentally, are not small, limitedservice institutions. The size of some of my company's general hospitals, existing or under construction, is 319 beds, 263 beds, 245 beds, and 232 beds. These are large facilities in California. All are fullservice facilities, offering the same services as do nonprofit facilities of similiar size in their respective communities, and invariably at lower cost to the patients and to the Government.

While the scope and responsibility of proprietary activity may be somewhat unique in California, we feel it has growing nationwide implications.

We hope that legislation developed by this committee will take cognizance of the fact that the Nation needs the participation of the private enterprise sector in the health care industry.

In my written matter, I have an area where I discuss the shortage of trained personnel. In the expediency of time, I would like to pass over this with a question: Do we really have a shortage of personnel, or do we have incredibly poor utilization and distribution of what might be adequate personnel were they properly productive?

Take a look at the better than doubling of the number of employees it requires to take care of one patient in an American hospital in the last 15 years. I doubt that you will find a commensurate doubling of job function.

There is one final factor behind low productivity of hospitals. That is that hospitals have been capital poor institutions for years. This has required them to turn to labor which in turn has contributed directly to the inflationary spiral.

We believe that any effective national health insurance legislation is going to have to include some way for the system to capitalize itself, and I do not mean by Government grant.

General inefficiency should not be offset by governmental subsidy. Capital accumulation should flow from efficient operations.

The use of capital can be regulated by comprehensive planning agencies, which should confine themselves to major construction and the unnecessary duplication of facilities, a task which most comprehensive planning agencies are now doing very poorly.

As you can ascertain by my comments, tied inevitably into the problem of lack of management is the insulary, unitary organizational setup of this Nation's average general hospital.

There is a definite and progressive trend toward the development of the multifacility organization, both in the nonprofit and in the proprietary hospital field. I believe that the trend is affirmative.

The larger and more comprehensive the multifacility organization is, so long as it is more than just a simple paper merger of facilities, the stronger the chances are that this organization will engage in those activities that are commonplace in modern industrial management.

Through the use of statistical information available to them, centralized management can do all of the following: Reduce costly duplication of equipment, share services between facilities, sharpen and evaluate purchasing techniques and practices, do group buying, reduce inventories based on statistical analysis, develop standards for costs, staffing, and productivity, put budget planning and controls procedures into operation, and, because of size and scope, increase upward mobility of lower echelon employees, attract superior personnel, and reduce personnel turnover through incentives, advancement, and training.

In summary, to control hospital operational costs and achieve internal efficiency, we need full-time centralized management, operating a cohesive network of hospitals in a structure that has all the advantages, incentives, and advancement potential to attract top personnel.

And where does all this come from? All the plans that I see before Congress seem to ignore, at least they do not articulate the need for or invite participation by, the largest existing single source of potential solutions to these problems-America's private enterprise.

The second category which affects health care costs is utilization control, most of which is largely outside of the control of the health facility and its administrator.

Most of the major proposals before Congress for national health insurance attempt to deal with the hospital cost problem by striving to control utilization through measures such as peer review, health maintenance organizations, capitation reimbursement, the restructuring of prepayment plans and insurance plans to emphasize out-ofinstitution alternatives for care, a push toward group practice (which

statistically has lower hospital utilization than the fee-for-service practitioners).

Any form of national health insurance must include the following: 1. Insistence that the doctor be more efficient in seeing patients, get more coverage per hour out of his time.

2. Cover areas where there are insufficient primary physicians and facilities the ghettos, the barrios, the rural poverty areas, to care for the 30 million Americans who today receive little or no care.

I submit that no form of national health insurance per se will solve the problem of inadequate availability of primary health care services to certain segments of the population. There simply are not enough primary physicians to do the job, now or in the foreseeabl future, unless there is substantial incentive for many of the specialists to return to primary practice.

The basic deterrents for the physician to move into the high-need areas are rather simple-he thinks his income will suffer, he does not want his family to live there, his children to be educated in that particular environment, and he is, in some cases, personally freightened for his own physical security. These things will continue to be true, with or without national health insurance.

It would seem to me that the encouragement of group practice to settle on the outskirts of the ghetto, with ombudsmen, trained paramedical personnel combing the ghetto, trained in symptomology, encouraging utilization of these fringe clinics and practices, would solve at least the personal fear aspect. The physician could live generally where he desired, as long as he had reasonable access to his place of work.

It is up to Congress to create those economic incentives to induce the physician to engage in this type of practice.

May I recommend the changing of licensing laws to a federal system, so that the physician's assistants, public health nurses, psychologists, and others can do more health screening, problem finding, and treatment within the constraints of their training and under defined medical supervision.

We have too many cases where allied health professionals are prevented from achieving their full potential by various State boards that are acting like guides, seemingly trying to "keep the other off the reservation," the upshot being that professional groups become self-serving institutions, raising standards for certification and acting more like bargaining agents to justify pay raises.

3. Force physicians to educate themselves in the economics of health care in all aspects, not just in their individual practices or group practices. but in the economics of hospital operations and convalescent facilities, in the cost of pharmaceuticals, supplies, and equipment, and the efficient utilization of all of these.

In this area, one very important fact stands out. There are two very important people holding the keys to the success of utilization control. Foremost, and the one most readily available, is the physician, who must be given incentives to keep utilization of costly facilities and services to a minimum, and only to those persons definitely in need of them.

Peer review must be the answer to utilization control, in concert with other similar programs. It is obvious that peer review, in some

form or another, is becoming effective. In-patient utilization of hospital facilities is down on a national basis, and in some geographical areas down sharply.

While some of this is attributable to concentrated governmental restrictions on eligibility under the various programs, much of it is due to the educational processes that have evolved in the last year encouraging voluntary reduced in-patient utilization.

The consumer needs to be educated. He must learn what he can and should expect from his visit to the physician, when to go to the doctor, how to use paramedical professionals-basic symptomology. Until the consumer is educated to seek the appropriate kind of care, until he stops believing that the best care consists of daily visits in a private hospital room by a specialist, then we, in this age of consumerism, will not be able to use scarce resources effectively. Education of the provider and the consumer is the only potential relief from overutilization.

I personally believe in first-dollar insurance in any national health insurance program. I do not believe in copayment or in deductibles as a deterrent to overutilization.

Such copayments and deductibles will militate almost exclusively against the poor and the underprivileged, and deter them from seeking the care that they most severely need and require. Copayments and deductibles for the well-to-do are not a deterrent.

Therefore, any system which waived copayments and deductibles from the poor but enforced them against those able to pay is not a part of the deterrent philosophy, but becomes a funding mechanism. This will, in the long run, create, at least in the eyes of the poor, two classes of medical care: One, which the well-to-do receive, and for which he pays a portion, and two, that which the poor and underprivileged receive.

I think it is a basic matter of sensitivity in these times that there be no distinction, and that the poor be brought into the mainstream of health care. Then only consumer and provider education, and the understanding of what health care is, its scope and limitations, will solve the problems of potential massive overutilization.

The health maintenance organization concept appears to offer hope for the future in redefining and restructuring incentives to both physicians and providers within certain limited areas. However, the HMO has potential limiting problems, particularly if it has a monopoly in a given area.

Whatever the system of national health insurance, each individual covered under the program must have some choice between providers. Medical care is both an art and a science, and we know that good care requires patient-physician rapport. Hence, there must be alternatives available to the patient who is not satisfied.

The major thrust behind the HMO concept, as enunciated by Dr. Paul Ellwood, is to give consumers and big buyers of health care benefits more choice between providers as to services and rates. This is competition, and there should be more of it.

In the historically subsidized environment of the health care delivery system, with its cost reimbursement, its uneven distribution of resources, its lack of concern with cost and the requirements of the consumer, there has been altogether too little competition.