3. SUPPORT FOR GUARANTEED LOANS AND LOW-INTEREST LOANS BOTH CONSTRUCTION AND MODERNIZATION

Both H.R. 6797 and H.R. 7059 provides for Federal loan guarantee programs. Since each State varies in its needs for construction and modernization, the Governors support the guaranteed loan program to cover both construction anl modernization. The Governors strongly endorse the provision in the legislation introduced that would continue the prominent role in the State Hill-Burton agency by having those agencies approve applications for the proposed guaranteed loans and low-interest loans the same as in the present grant program.

4. CONSOLIDATION OF CATEGORICAL HEALTH FACILITIES GRANTS

The proposal presented by the officials of the Department of Health, Education, and Welfare that various Hill-Burton categories be consolidated is in agreement with the often stated request of the Governors that such consolidation take place in a number of the human service programs. An important aspect of the Hill-Burton program has been the willingness of Congress to have the States exercise considerable latitude in the planning of fund allocation within the States. With the advent of State comprehensive health planning, States now have both the planning resources and improved knowledge of comparative needs to enable them to assume greater responsibility for allocation of health care facilities funds.

As States develop comprehensive health plans, there has been difficulty in fitting their own more detailed echelons of health services into the prescribed categories of health facilities. The need for categories remains, but they should be determined at the level where comprehensive health services are being planned.

5. DELETION OF RURAL AREA PRIORITY REQUIREMENT

The issue of rural area priority as required in the present HillBurton program, and for which a deletion of the requirement is included in the bill introduced by Representative Rogers, is related to the issue of whether a higher priority is to be given the poor in rural areas or the big city ghettos. It would appear that there is finally some meeting of the minds in realizing that categorizing the needs of people as to whether or not they live in a city or a rural area is limited in its usefulness. There is more need to deal with each local situation, seeing each rural area and each urban area as being unique in the nature of the problem that it faces and unique in the combination of services needed and how they can best be organized to meet the needs of the people. The Governors, therefore, support the legislation in H.R. 7059 which would eliminate the rural priority requirement and leave it up to the States to give special consideration to rural areas if they wish and to set priorities in the best interests of the people of the State. The people in rural areas are often the primary beneficiaries of multicounty area planning efforts in health and other human service programs. This can occur by multicounty area health service plans which relate a regional health facility in a medium sized urban area to satellite facilities and services in the surrounding rural area.

It would also be of interest to the members of this committee to know that in April the Southern Conference of the Council of State Gov

ernments in cooperation with the U.S. Public Health Service is sponsoring an orientation seminar on public health for southern State legislators. This is a trial attempt to provide additional information to State legislators who are also confronted with problems of financing health services.

With the concern that this committee has expressed about rising hospital costs the committee may be interested in an informational monograph prepared for the Governors when they met last summer in Cincinnati, Ohio. This monograph, entitled "Moderating the Cost of Hospital Care," explores various alternatives which may be available in dealing with this problem which faces all levels of government, the individual consumer of health services and the taxpayers. Copies of this monograph are available. I believe they are in the package available to the members of the committee.

During the next few months the Human Resources Committee of the National Governors Conference under the leadership of the chairman, Governor Nelson Rockefeller of New York and Vice Chairman Governor Robert McNair of South Carolina will be developing a policy statement which will attempt to evaluate the various avenues available for the financing, organizing, and effective delivery of health care services. A policy statement noting the rising cost of illness and the desirability of grant consolidation in the human resources area was adopted last month by the Governors at their midyear meeting on February 27.

Again, Mr. Chairman, we were pleased to have had this opportunity to appear before this committee.

I would also like to add that Dr. Eugene Guthrie, who will be representing Governor Mandel of Maryland, will be appearing before this committee. I believe he will be talking about some of the same issues that we are referring to today, as far as the role of the State in health facilities planning.

(The monograph referred to follows:)

MODERATING THE COST OF HOSPITAL CARE

AN INFORMATIONAL MONOGRAPH, NATIONAL GOVERNOR'S CONFERENCE, COMMITTEE ON HEALTH AND WELFARE, JULY 21–24, 1968, CINCINNATI, OHIO

Americans today are spending about $50 billion a year for health care, making this the third largest item of expenditure in the nation today.

In recent years, there has been mounting public concern that health care will be literally priced out of people's reach and the trends of recent years lend substance to this fear.

While the general cost of living index rose 70 percent between 1946 and 1967, medical care costs increased 123 percent, the sharpest rising item in the entire index.

Among all of the components that comprise health care, hospitals today represent both the single largest item of expenditure and the fastest-rising item of cost.

As an item of consumer expenditure, hospitals in 1965 accounted for 30 cents of the health care dollar, with physicians' care ranking second at 27.7 cents, drugs third at 16.4 cents, followed by dentists, 9.6 cents; health insurance, 7 cents; appliances, 4.4 cents; and other items, 4.9 cents.

In the years 1960-1965, consumer prices increased at an annual average rate of 1.3 percent while hospital prices increased at 5.8 percent. Hospital charges rose even more steeply in 1966, recording an actual increase of 16.5 percent.

Medical economists see no immediate relief in sight. There are two schools of thought on the issue. The optimists say that in the next few years annual

rate increases of hospitals will amount to from 10 to 12 percent, followed by a gradual leveling off that will keep pace with the general upturn of the economy. Pessimists, however, see hospital costs continuing to outpace the average citizen's income until 1975.

I. Factors responsible for increasing hospital costs

While disagreements may persist on the future rate of increase in hospital costs, there is close agreement as to the reasons for the upward spiral. Aside from the general increase in prices that occurs in our economy and affects hospitals as much as any other purchaser, the upward spiral of hospital costs can be attributed to four factors:

1. Wage catch-up.-Hospital payrolls, which represent about two-thirds of the expenses of running a modern hospital, have been increasing at a rate that exceeds those in the manufacturing industries. In the past, the hospital employee was traditionally paid far less than counterparts in industry, meaning, in effect, that the hospital worker was helping to subsidize the cost of medical care.

In 1947, hospital workers were paid about half of what manufacturing workers earned. However, growing unionization within the hospital field and the increase in the collective bargaining by hospital workers, have enabled the hospital worker to begin catching up.

2. Costs associated with increases in the quality of care.-The quality of medical care has improved steadily, and with it, the cost. Two factors determining quality are (1) the number of employees in hospitals and their level of skill, and (2) equipment.

Both the number of people working in hospitals and their level of skill have been increasing. In 1946, there were 156 employees in voluntary short-term general hospitals in the United States for every 100 patients. By 1956 the number of employees had increased to 215. Today the rate probably exceeds 261 per 100 patients.

Also adding to hospital costs has been the steady addition of sophisticated, expensive equipment. A single cobalt therapy unit with protective housing costs $400,000. Kidney dialysis units, intensive coronary care equipment and other new forms of hospital hardware all save lives, but also add considerably to the hospital's investment and overhead.

3. Built-in inflation.-Contributing also to the increase in hospital costs is the steady rise in the cost of all goods and services in the nation's economy. This built-in inflation adds to the expense of building and operating a hospital, just as in any other industry.

Industry, however, has one weapon against inflation that hospitals do not have: automation. By developing machines that do the work of many men, an industrial plant can offset built-in inflation. A hospital, however, must provide a service that is personally tailored to meet the needs of individual patients, a factor which limits to some degree its ability to institute production-line economies. In fact, many of the machines developed for medicine like heart-lung machines do not subtract, but add, to the need for skilled personnel in a hospital. 4. Increasing demand for hospitals.-A final factor adding to the total national outlay for hospital care is the increasing demand for hospital service. Several generations of Americans have been educated to seek the life-saving advantages of hospital care. Not only that, hospital care has become accessible to millions more through the growth of prepaid health insurance plans and such publiclyfinanced programs as Medicare and Medicaid. And finally, the United States today contains large numbers of the very young and older persons, both of whom need more hospitalization.

Efforts to moderate the cost of hospital care should consider the following:

Hospital wages and fringe benefits ought to increase until they reach parity with those of workers in industry, not only from the standpoint of simple equity but also because a continuing wage deficit in the hospital field would drain manpower from hospitals, lowering the quality and availability of care.

The quality of medical care should continue to improve, as rapidly as new medical advances permit. With quality largely dependent upon additional skilled personnel and better equipment, the cost of hospital care is bound to rise as quality improves. Access to quality health care is one of the keys to individual fulfillment in America. A single, high standard of health care for all should become the unremitting national goals, for healthy citizens constitute the real strength of any nation.

II. Approaches to controlling hospital costs: Where to look

If nothing can or should be done about the four cost factors just cited, the question then becomes: What can be done to slow the spiral in hospital costs? For answers, it is necessary to look at the way the health care industry, and hospitals themselves, are organized.

Health care is a non-profit personal service industry that has been disrupted by a rapidly advancing technology. Nothing in the origins of hospitals, which were founded as charitable institutions, have equipped them to take advantage of the economies to be realized by these advances.

But each hospital is, for all practical purposes, an autonomous unit within the health care system. So decentralized is the health care industry that it can hardly be said to operate as a system at all. What it amounts to is a sprawl of single units, without interlocks that join the parts together into any kind of system for marshalling resources and rationalizing consumer demand.

The size, varietly and distribution of hospital services has been decided, not on the basis of need, but on an almost random basis.

Nor have the duplications and waste that have resulted from this been subjected to the discipline of competing prices. Lacking profit-loss incentives, hospitals have justified their bills on grounds that they simply reflect their costs. As a result, hospital reimbursement rates established through Blue Cross or by government, such as Federal requirements for payment of Medicare and Medicaid bills, have been on a cost-plus basis.

This pass-through pricing pattern in effect subsidizes inefficiency and waste. It denies the very function of pricing, which is to force efficiencies, reorganizations, mergers, diversification, improvements in technology, changes in method and all the other administrative devices which can be employed to hold costs down without adversely affecting quality.

III. Three ways to fight costs

There are several basic approaches that would moderate the rising cost of hospital care:

1. Set arbitrary limits on expenditures: This is the most common form of fiscal control. Though its effect is direct and immediate, relief is symptomatic and there is always the danger that the wrong kinds of service will be eliminated.

2. Monitor hospital costs: This method is often necessary to avoid abuses. However, the negative atmosphere created by outsiders runs the risk of restricting desired growth in a hospital's range of services and discouraging attempts to improve quality.

3. Provide incentives to economize: This method envisions some form of state incentives that act as a substitute for profit-and-loss discipline. Hospitals that adopt sound management practices would be financially rewarded while those that cling to poor practices would be penalized. This approach provides incentives to economize without imposing intrusive government controls that might demoralize the internal administration of a hospital. IV. How an incentive system might work

If a system of incentives to better hospital management were combined with present third-party reimbursement sources health insurance and government medical programs an effective substitute for profit-and-loss management for hospitals would be operative. An incentive system could be integrated into the existing governmental practice of reviewing proposed hospital reimbursement rates under prepaid health insurance.

How would such a system work?

Let's say that one hospital in a community is operating an open heart surgery service that is meeting the full extent of local need. If a second hospital in the community wanted to start the same service, the state would in effect say to it: You can inaugurate this service if you wish, but you can't factor its cost into your reimbursement rate. Health departments would be given legislative authority to conduct individual reviews and base approvals on whether economies and improvements were possible.

Any service that was in excess of the community's need would be non-reimbursable, as would any service operated by a hospital that could be purchased from a centralized community service.

This could include such things as: 1. an excess of maternity beds; 2. use of individual "housekeeping" services like laundries, when central service was avail

able; 3. special services, like open heart surgery whenever the number exceeded community demand.

Services that provided no direct benefit to patients would not be factored into the reimbursement rate either, but would instead be subsidized by government on the basis of local need. This would include such things as a nursing school, a research program and the teaching of interns and residents. Subsidies would also go to certain hospitals for maintaining costly equipment and services not needed in every hospital within an area.

Hospitals that kept their daily patient charges below the prevailing average for their area would be allowed to keep part of the savings to spend either on improved quality or bonuses to employees. Hospitals whose rate exceeded the community average would have to make up their deficit from private sources. In no case could a hospital be reimbursed in excess of its own costs, or the average of comparable area hospitals. Nor could it exceed the prevailing rate of increase in payrolls, goods and services.

The net effect of this fiscal carrot-and-stick system would be to encourage economies and discourage waste. Hospitals would make fewer decisions on the basis of institutional pride and more on the basis of community need.

Were state governments to institute such legislation, they would be hamstrung unless improvements were made in the reimbursement formulas now prevailing under Medicare and Medicaid. While Medicare has effective procedures for identifying costs, the manipulation of costs under the formula is deficient. Payments to hospitals treating Medicare patients are based on estimated current costs. There are no ceilings, no incentives for efficiency, no requirement for funding depreciation.

The impact of Medicare and Medicaid on the prevailing hospital reimbursement system is pervasive. Millions of persons are receiving care under these programs every year. Unless incentive reimbursement methods are instituted in these two programs, there is little prospect that state-minded incentive systems would be successful.

V. Improving hospital management

Hospitals, because of their origins as charitable institutions, have inherited an organizational structure that is unique and not always suited to new conditions. The modern role of the hospital, and its altered financial base, are not always accounted for in the administration and management structure.

Schools for training hospital administrators have developed to meet the new need, but much more encouragement is needed to ensure the growth of a fully professional hospital administration service.

Government could assist this development in several ways:

1. By licensing hospital administrators and training programs;

2. By starting training programs for hospital administrators and establishing standards of qualification;

3. By setting up a state hospital trustee advisory council to provide policy direction and advice on new needs;

4. By establishing a hospital research and management center.

VI. Incentives for better utilization of hospitals

At today's construction costs, the space for a hospital bed costs $20,000. Hospital occupancy rates vary greatly with localities and among individual hospitals but the national average for occupancy has been estimated at 76 percent. This means that, at any given time, there is a considerable number of unoccupied hospital beds.

Study after study has shown that hospitals vary widely in their efficiency. A study of 22 voluntary teaching hospitals in New York City in 1965 turned up daily room charges that ranged from $50 to $87. A similar study of 42 voluntary community hospitals in the same city showed a range of $34 to $61 in the daily charge to patients. These differences show up even among comparisons of groups of hospitals that offer the same scope of services and quality of staff.

The National Advisory Commission on Health Manpower reports that huge savings could be realized if hospitals could become more efficient. The Commission estimates that, if the average cost in general hospitals could be brought down by only 10 percent, the savings would amount to almost $1 billion a year, and by 1975 they would total $3 billion annually.

The potential savings to be realized from improving the internal efficiency of hospitals justifies major efforts in this direction by government. However, any approaches must not impose intrusive government controls. Outside intervention