In considering the figures actually presented for the intermediatecost estimate, it should be kept in mind that a considerable range of variation is possible. The spread from the intermediate-cost estimate to the high-cost estimate (or to the low-cost estimate) is approximately 10% due to the hospitalization element alone, and perhaps another 15% due to the range of variation inherent in the basic OASDI cost estimates.

The cost figures shown for the first few years incorporate the lowcost assumptions as to hospital utilization (to allow for the normal lag in making "use" of insurance benefits), but thereafter the intermediatecost factors are used.

Cost Estimates for Skilled-Nursing-Facility Benefits

It is very difficult to make estimates for skilled-nursing-facility benefits because currently such facilities are not uniformly available in adequate amount in all sections of the country, and even more so because there are a number of different concepts under which these benefits might be operative or be utilized by the medical profession. At the one extreme, such a benefit might be utilized almost entirely for very limited convalescent care and be applicable to only a relatively few cases. At the other extreme, the benefit might be utilized so broadly as to provide care that emphasizes the long-term domiciliary element far more than nursing care (naturally, both elements must be present, but much importance hinges on the relative predominance of one feature or the other). In fact, there is the question of whether hospitalization will occur that, under present circumstances, would not be considered necessary and proper, and whether nursingfacility benefits will be provided following these hospital stays.

The bill provides that skilled-nursing-facility benefits should be available only in a hospital-associated facility (i.e., affiliated or under common control with a hospital) upon transfer from a hospital and for further treatment of the condition that resulted in the hospitalization. It is not possible to know from this written definition exactly what the actual admitting and transferring practices may be. In the early years of operation, one limitation on the costs for this benefit will, of course, be the limited availability of qualifying facilities. In the long run, however, this cannot reasonably be regarded as a cost-control factor. Section 1706(i) provides that the Secretary of Health, Education, and Welfare may, after making studies, broaden the category of skilled-nursing facilities that qualify for benetit receipt to include those which are not hospital-associated if he finds that such action will not create (or increase) any actuarial imbalance in the HI Trust F!. Because of the latter limitation, and because the program is estimated to be exactly in balance when only hospital-associated nursing-facility benefits are provided, no account is taken of this provision (and the expanded protection possible thereunder) in this Study.

In the 1959 Hospitalization Report, cost estimates were made for a strictly administered "recuperative care only" skilled-nursing-home benefit (and also for much broader provisions)--see pages 83-84. The original cost

estimates for this very limited benefit were based on the experience of a few Blue Cross plans having such a benefit. The available data suggested that there might be annual utilization of 10 days of such care per 100 beneficiaries protected by this type of benefit. Since the average daily cost would be about $10, this would mean an aggregate average cost of $1 per year per person aged 65 and over entitled to monthly OASDI cash benefits.

Subsequent staff consideration of skilled-nursing-home benefits analyzed the various elements involved in the cost of this type of benefit, namely:

(1) Present number of skilled-nursing-home beds;

(2) Number of such beds that are acceptable according to
reasonable standards;

(3) Estimated needed beds;

(4) Proportion of beds occupied;

(5) Proportion of occupied beds used by aged persons;

(6)

Proportion of the aged occupants of beds that consists
of OASDI beneficiaries;

(7) Proportion of occupants with duration less than 6 months;

(8)

Proportion of occupants who entered the nursing home by
transfer from a hospital; and

(9) Average daily cost.

Use of the above data and analysis can produce a wide spread in the cost estimates--both short-range and long-range. This is particularly the case under the limited benefit protection provided by the bill, under which only hospital-associated facilities qualify. In the first full year of operation, the cost would be relatively low because of absence of facilities and because of lack of knowledge of the benefits available. In the next few years of operation, the cost would rise steadily as new facilities are built to meet the demand or existing facilities are improved to meet the qualifying conditions (and in recognition of the money available from the benefits).

The long-range cost of these nursing facility benefits would be higher than the early-year costs for a number of reasons--an increase in the number of available beds to meet the demands, OASDI beneficiaries being a larger proportion of the total population aged 65 and over, and a greater utilization of the benefits available.

The cost estimates of Actuarial Study No. 52 (and, likewise, those of this Study) recognize these r'actors that produce higher long-range costs.

Also, they take into account the fact that part of the cost arising for the
skilled-nursing-facility benefits, when more widely utilized, will be an
In the present estmates, it
offset to the cost for hospitalization benefits.

is assumed that this offset represents 33% of the cost of the skilled nursingfacility benefits and is taken against the hospitalization-benefit cost.

Cost Estimates for Home-Health-Service Benefits

The original estimates for home-health-service benefits were based on an assumed annual cost of $1 per eligible beneficiary. This assumption was based on such limited experience with this benefit as was available, taking into account also the limited general availability of such services at present. For the foregoing reason, it is likely that this is the cost that will develop in the early years of operation of the program. In later years, however, it seems reasonable to assume that this type of service will become generally available throughout the country, since there will be the money to pay for it.

A study made by the Kansas Blue Cross and Blue Shield indicates that for persons aged 65 and over, the annual per capita cost was almost $6. Over the long-range, for the country as a whole, it seemed that this was a much better figure to use than the previous figure of $1, and so this figure was used in Actuarial Study No. 52 and also is used in this Study.

If there are significant expenditures for home-health-service benefits, this should mean somewhat lower hospitalization and skilled-nursing-facility benefit costs. In fact, in cases where a person would otherwise be in the hospital but is instead receiving the much less expensive home-health services, there would actually be a net savings in cost to the program, or in other words the program would cost less because of the inclusion of this type of benefit. It is believed, however, that any such savings will be more than offset by the home-health services being made available to people who would not otherwise be in hospitals or skilled-nursing facilities. Nonetheless, with the availability of these home-health services on an expanded national basis, there should be some offset taken against the hospitalization-benefit costs that would otherwise occur if there were no home-health-service benefits. This adjustment has been taken as 40% of the estimated cost for home-healthservice benefits and is taken against the hospitalization-benefit cost. Cost Estimates for Outpatient-Hospital-Diagnostic-Services Renefits

The cost estimate for the outpatient-hospital-diagnostic-services benefits was first made on the basis that there would be no deductible. Relatively little experience is available in regard to the cost of this benefit for a group consisting of persons aged 65 and over. Such Blue Cross and insurance company experience as there is seems to indicate that the annual cost per capita will be about $7.50 (spread over the total protected population and not merely among those who will use this benefit).

From a cost standpoint, the effect of a $20 deductible per month vill be significant. This deductible provision will reduce the aggregate cost by an estimated 80%, since most of the charges for these services will be relatively small amounts, such as $10 for an X-ray. The number of claims will also be reduced by about 80% by the deductible provision, and thus a considerable amount of the administrative costs otherwise involved in paying a large number of small claims will be eliminated. The relative magnitude of the reduction arising from such a deductible tends to be verified by a study of the actual charges of hospital outpatients covered under group insurance policies (see "A Reinvestigation of Group Hospital Expense Experience" by S. W. Gingery in Transactions, Society of Actuaries, Vol. XII, 1961, which gives data on such claims by size intervals).

Estimated Administrative Expenses

It is assumed that the administrative expenses that will be chargeable to the Hospital Insurance Trust Fund for processing the benefit claims and for a pro-rata share of the cost of maintaining the earnings records and collecting the contributions will represent 3% of the benefit disbursements. This 3% element is included in the cost figures for each of the various types of benefits, as described previously. This figure is consistent with the relative administrative costs of the most efficiently-run Blue Cross plans. The latter generally have higher administrative costs than 5% of premium collections, but this is because they have expenses that would not arise in connection with hospital benefits under OASDI--such as those for selling individual enrollments, collection of health insurance contributions alone, and maintenance of the rolls of insured persons solely for purposes of health insurance. In the early estimates for health benefits, a 5% allowance for administrative expenses had been made, but studies by administrative personnel of the Social Security Administration now indicate that this is too high a figure for the type of program under consideration.

The administrative expenses for the proposed health benefits that are chargeable to the Hospital Insurance Trust Fund do not, of course, include the administrative expenses of the hospitals and other health agencies supplying the benefits, which are included as part of the benefit disbursements. Also not included are the record-keeping and tax-payment expenses incurred by employers in connection with the OASDI program.

C. Results of Cost Estimates

Cost Estimates for 1961 Proposal

g/ Long-range actuarial cost estimates for the 1961 proposal (as presented in Actuarial Study No. 52) that were made at about the time the 1961 bill was introduced indicated that the benefits provided (and the accompanying administrative expenses) would be exactly financed, on a long-range basis, by the two sources of revenue to the Health Insurance Account. These two sources were an increase of 2% in the combined employeremployee contribution rate (and a corresponding increase of 3/8% for the self-employed), effective in 1963, and the net "gain" to the OASDI system resulting from increasing the maximum annual earnings base from $4800 to $5000, effective in 1962. The latter "gain" was estimated to be equivalent, over the long run, to the effect of a rise in the combined employeremployee contribution rate of .10% of taxable earnings. The bill provided that the equivalent of this level contribution rate was to be continuously appropriated to the Health Insurance Account.

As indicated in the previous section, these estimates were revised somewhat during the first half of 1961, as a result of the continuous process of study and investigation of all factors involved in the actuarial cost estimates. In particular, this reexamination was focused on the three "subsidiary" benefits (i.e., other than hospitalization benefits), which are less important cost-wise. The revised estimates for these benefits also included certain partially offsetting reductions in hospitalization-benefit costs, as discussed previously.

The following table shows the original and revised estimates of the level-costs of the various types of benefits (plus administrative expenses) under the 1961 proposal, expressed as percentages of taxable payroll:

*After offset for reduced cost because of availability and use of skillednursing-facility and home-health-service benefits.

g/ This Administration proposal was contained in H.R. 4222, introduced by Congressman King on February 13, 1961 (and in S. 909, introduced by Senator Anderson).

h/ The level-cost is the average long-range cost, based on discounting at interest, relative to effective taxable payroll (which is the total earnings of all covered workers reduced to take into account both the maximum taxable earnings base and the lower contribution rate for the self-employed as compared with the combined employer-employee rate so that, in effect, only 3/4 of the earnings of the self-employed within the maximum base are counted). For more details on this concept, see Section E of Actuarial Study No. 49.