Extended Benefits

Many Plans reported provision of extended benefits of all kinds as alternatives to general hospital use. Some of these benefits have been made available to all subscribers, and some to particular classes of subscribers. Sometimes the programs are of a frankly experimental nature, and are intended to test feasibility. Many times the Blue Cross Plan itself has been involved from the beginning in planning the program to provide care-particularly in home care programs. Specific mention was made by various Plans of nursing home care, home care, self care units, visiting nurse home services, hospital outpatient care and diagnostic services, chronic disease hospital care, emergency care, long-term care units (in general hospitals), pre-admission testing, postdischarge radiation therapy, diagnostic X-ray and laboratory examinations, physical therapy, basal metabolism testing, minor outpatient surgery and convalescent units (in general hospitals). It is realized that many categories of care in this list partly or entirely overlap others, but these are the things Plans were interested in reporting.

In addition to the activities described in this report, Plans also conduct a large number of research activities related to utilization review. Details of these activities, however, were not collected in this survey.

The mass of material included in the survey responses is difficult to handle. It is hoped that a broad, general picture has been painted here and that enough important details have been reported to pique the interest of Plans in each other's ways of behaving. Systematic study of ongoing utilization control efforts can pay off in an increased amount and level of activity for all Plans.

The general results of the survey can be summed up by quoting from the Chapel Hill, North Carolina Plan's response. After listing its cost and utilization control activities, the report goes on to say:

"Indeed, we try not to leave a stone unturned!"

Comment

UTILIZATION review by hospitals is not new. It and other controls have been practiced for several years; however, medicare, through specific references to utilization review, has given the subject new emphasis. With the wider practice that is bound to result, new procedures will certainly be devised and old ones improved.

Wisely, PL 89-97 leaves room for local interpretations of review. In fact it encourages experimentation in seeking ways to ensure the most effective use of the hospital in economie as well as clinical terms.

It is important to realize that utilization review is only one part of the total structure of control; it is neither comprehensive enough nor incisive enough to be the only or even the major device through which to control utilization. As PL 89-97 recognizes, other important and supportive steps must be taken; for example, claims administration, recertification, areawide planning, educational programs, and the provision of extended benefits. All of these involve, in addition to hospitals, prepayment, the gov ernment, and the professions.

In consort, these efforts give reasonable assurance of effective use without resting too heavily on our limited knowledge of any given control. If they are administered with proper attention to balance, abrasive encounters between provider and consumers and the dangers of underuse or compromises with quality can be minimized.

We must improve our measures and broaden our understanding of controls before acceler. ating our pace. Fortunately Blue Cross has, through the many activities discussed here, and with the providers of care, given us a sound base and made the course ahead easier to see.

WALTER J. MCNERNEY President

Michigan Blue Cross reporta functioning home care programs in eight regions in Michigan, with 31 hospitals, of which 15 are in Detroit, participating. The Plan estimates savings of more than $100,000 a year. The New York Plan (Associated Hospital Service of New York) is also extensively involved in home care, although the Plan did not report details in this survey. Many other Plans are involved to a greater or lesser degree in home care.

BLUE CROSS REPORTS is issued quarterly by the Blue Cross Association, 840 North Lake Shore Drive: Chicago, Illinois 60611. It is one of the regular publ cations of the Association's Division of Research and Planning of which Donald C. Riedel, Ph.D., is Director. This issue was prepared by Thomas B. Fitzpatrick. Vice President, Research and Hospital Consulting, Blue Cross of Western Pennsylvania. BLUE CROSS REPORTS may be quoted without permission.

Overall Cost Changes

HOSPITAL COSTS are rising considerably faster than all health care costs. Between 1950 and 1964 medical care costs in the United States rose from $12.9 billion to $36.8 billion, an increase of 186 percent, while during this period, population increased 26 percent. The resulting increase in health expenses for each person in the United States was approximately 128 percent-from $85 to $194. In the same time, however, total hospital costs rose 230 percent. When measured in terms of the population growth, hospital costs per person in the United States rose from $25 to $67, a change of 168 percent.

Hospital cost per admission has also gone up. Between 1950 and 1964 the cost of an admission rose from about $127 to over $320, an increase of approximately 153 percent. At the same time, the cost of a patient-day in short-term general hospitals rose 166 percent, from $16 to $42. By 1965 the cost of a patient-day had increased to about $45.1

Total health care expenditures in the United States represented 4.5 percent of the gross national product in both 1950 and 1955. By 1960

1 These figures represent the total hospital expense divided by total patient-days. While this is a standard AHA index of hospital costs, it includes certain costs not attributable to inpatient care, notably the cost of outpatient services. The index is much more valuable for comparing one time period to another than for absolute measures of Cost

they had risen to 5.3 percent and by 1964 to 5.8 percent. Hospital costs, however, rose from 1.35 percent of the gross national product in 1950 to 2.02 percent in 1964. Thus, while all medical expenditures relative to the GNP rose 29 percent, hospital costs rose 50 percent.

The increase in hospital costs is the result of a number of different factors. The concern of this paper is to identify some of the factors which have contributed to the rise in hospital cost and to speculate on the influence which these forces will have in the future.

Forces Contributing to Rising Costs

In 1950 the total amount spent by all shortterm hospitals was $2.1 billion. By 1965 that total had risen to $9.1 billion. These two cost figures are shown in Chart I. As the chart shows, several components of the 1965 hospital cost can be identified.

A portion of the increased hospital cost can be attributed to population growth. If the population had remained stable between 1950 and 1965, $1.9 billion less would have been spent on hospital care in 1965. Increased utilization also had an effect on the change in the cost of hospital care. If population and utilization had both remained stable from 1950 to 1965, $3.1 billion less would have been spent on hospital care.

Population growth and increased utilization are changes which are not directly related to per unit cost. The remainder of the cost-$6 billion-is attributable to the patient-day. The 1965 bar shows that $.4 billion can be directly attributed to the inflation in the cost of commodities experienced by the economy between 1950 and 1965. Another $1.3 billion can be attributed to inflation in the cost of personnel between 1950 and 1965. The remaining $4.3 billion are further divided into those costs which represent expenditures for goods and those costs which represent expenditures for services. In 1950, $.9 billion were spent by hospitals for commodities. By 1965 this adjusted figure had risen to $1.9 billion. In 1950, $1.2 billion were spent on personnel by hospitals. By 1965 this adjusted cost had risen to $2.4 billion. Population growth and inflation are essentially uncontrollable. Increase in the cost of labor and facilities are independent of the former two and require further discussion.

Increased Use of Hospitals

Between 1950 and 1965 admissions to general short-term hospitals rose from 110 per thousand persons to 138 per thousand, an increase of 25 percent. During the same time, length of stay took a general downward trend from 8.1 days in 1950 to 7.8 days in 1965. These two factors combined have produced a change in total patientdays, 897 per thousand in 1950 to 1,071 in 1965. At the same time, outpatient visits increased from about 252 per thousand persons to nearly 484 per thousand. There are several forces which have influenced these increases.

Changing Age Distribution-In 1950 about 8.2 percent of the people in the United States were 65 or older; today over 9.4 percent are that old.3 The use of hospitals by persons over 65 is three times that of those under 65. They enter the hospital 82 percent more often and stay 66 percent longer than do those under 65. (Number of shortstay hospital days per 1,000 persons per year for the year ending June, 1964, was estimated to be 1,119.4 for all persons; 2,840.8 for persons over 65, and 945.8 for persons under age 65.)*

2 U. S. Census of Population: 1950, Vol. II, Characteristics of the Population, Part 1 (U. S. Department of Commerce, Bureau of the Census [Washington, D.C.: U. S. Government Printing Office, 1953]).

3 "Projections of the Population of the United States, by Age, Sex, and Color to 1990, with Extensions of Total Population to 2015," Current Population Reports Series P-25, No. 359 (U. S. Department of Commerce, Bureau of the Census [Washington, D.C.: U. S. Government Printing Office, February 20, 1967]), p. 14.

A Hospitals Discharges and Length of Stay Short-Stay Hospitals, National Center for Health Statistics (U. S. Department of Health, Education, and Welfare, Public Health Service Publication No. 1000, Series 10, No. 30 (Washington, D.C.: U. S. Government Printing Office. June, 1966]), pp. 16, 48. (The 1,119.4 days per 1,000 quoted for 1964 differs from the 1,071 for 1966 quoted above by including federal short-term hospitals.)

Increased Bed Supply-Beds per thousand persons is one of the best predictors of gross hospital utilization. Total hospital beds in the United States increased from 505,000 (or 2.95 beds per thousand population) in 1950 to 741,000 (or 3.82 beds per thousand population) in 1965.

Increased Medical Sophistication-The public's greater knowledge of medical care has created a growing demand for more and better medical care than existed in 1950. "The revolution of rising expectations with respect to consumer demand for medical care appears to be still in full flood." Elementary economics shows us that as demand increases supply or price must also increase.

Third Party Payments-People who have some form of third-party health care payment are likely to use the hospital more than people who do not. For example, in 1965 the admissions rate for Blue Cross was 148 per thousand compared to 138 per thousand for the entire United States. Total hospital days for Blue Cross members were 1,199 per thousand while for the entire United States it was 1,071. In addition to the possibility that the insured population may in general have a different age-sex distribution than the uninsured, there is a complex of several factors which produces a higher hospitalization rate among insured people. They are likely to be more concerned about health care than people without coverage, to be better educated and thus more aware of the benefits of modern medicine, and to get needed care which the uninsured may put off because of cost. The interrelationship of all these is not fully understood, but there is little question that better coverage is related to higher utilization. In 1950, 76.6 million people (or 50.7 percent of the population) were covered for some form of hospital insurance or hospital prepayment. By 1965 that number had risen to 156 million (or 80.9 percent of the population).

Outpatient Facilities-A final influence in increasing use of hospitals is the greater amount of treatment given on an outpatient basis and the wider use of outpatient facilities. Between 1950 and 1964 outpatient visits rose 92 percent. This was partly due to the growing number of services for which people used the outpatient facilities of the hospital. While at one time people would have had a great number of services performed in a doctor's office or at home, they are now receiving these services at an outpatient facility. Moreover, they are receiving some services which were not available at all in 1950. Thus,

5 H. M. Somers and A. R. Somers, Doctors, Patients, and Health /surance (Garden City: Doubleday & Company, Inc., 1961), p. 187

while in 1952 hospitals received 19¢ of each health dollar, today they receive 26¢."

Increased Labor Costs

Hospital Growth-During the five-year period, 1957-1961, the total labor force employed in nonagricultural establishments increased from 52,904,000 to 54,077,000, an increase of 1,173,000. During the same time, the number of hospital employees increased by 295,000 people. This means that hospitals took one out of every four net positions provided during the five-year period.

Ronald Anderson, "Trends in Personal Health Spending." Progress in Health Services, Vol. 14, No. 5 (Chicago: Health Information Foundation, The University of Chicago, November-December, 1965).

The hospital work force increased 21 percent during the five years while the total employed labor force increased only 2.2 percent. Hospitals had to recruit at ten times the average rate of increase of the total labor force."

Closing the Gap with Industry-Hospital wages have only recently begun to approximate wages in industry. Consequently, the greatest single factor in the rapid increase of hospital per diem costs has been wage costs. According to Ray Brown, "A breakdown of average cost per patient-day (or $9.39) in 1946 shows that $4.98 was spent on wages and $4.41 was spent on non

7 Ray E. Brown, "The Impact of Wages on Hospital Cost," Hospi tals, Vol. 37, No. 13 (July 1, 1963), p. 28.

wage costs." By 1965 the wage costs had increased to $27.44 per patient-day, an increase of 451 percent, while nonwage costs had increased from $4.41 to $17.04 or a total of 286 percent.

Brown has also pointed out that in 1946 the average hospital wage ($1,226) lagged 49 percent behind that of industry ($2,420); by 1961 hospital wages rose 173 percent (to $3,349) while industry wages rose only 81 percent (to $4,385), narrowing the hospital-industry wage gap to 24 percent.

The payroll in hospitals constitutes roughly two-thirds of all operating expense. This means that increased wage demands hit hospitals twice as hard as they do industry, where the payroll accounts for only one-third of the operating expenses.

Professionalization-There has been a general trend toward specialization and professionalization in the provision of medical service. It is not unusual for an acute general hospital today to require the services of people in over 200 job classifications.

Accrediting agencies have placed increasing pressure on hospital schools of nursing to formalize and increase the inclass time of student nurses, thus depriving the sponsoring institution of one source of inexpensive labor. Even back in 1955 the net cost of operating a school of nursing (sum of tuition and fees plus value of student services minus direct cost, allocated cost, and cost of room and board) was over $1,500 per student in Cook County hospitals."

As training and education of nurses and others are intensified, lengthened, and formalized, the hospital assumes the cost. Hospitals can only look forward to the prospect of having to pay for the more highly skilled services that are provided by these more highly trained people.

Increasing Personnel per Patient-Arising from increasing professionalization is one of the most important forces toward higher hospital costs. This is the increasing number of hospital personnel needed to care for each patient. In 1950 the average number of hospital employees per 100 patients was 178. By 1965 this average had risen to 246.10 Moreover, while the number of patients served per hospital employee has decreased, the amount of money paid these employees has increased. This adds a multiplicative factor to increasing costs.

8 Ibid., p. 25.

9 Herbert E. Klarman, Hospital Care in New York City (New York: Columbia University Press, 1968), p. 245.

10 The Nation's Hospitals: A Statistical Profile," Hospitals, Vol. 39, No. 15, Part 2 (August 1, 1965), p. 441; "The Nation's Hospitals: A Statistical Profile," Hospitals, Vol. 40, No. 15, Part 2 (August 1, 1966), p. 427.

Fringe Benefits and Unionization-Fringe benefits for hospital workers have just recently begun to compare in quantity and quality with their industrial counterparts. According to Hospital Forum, pension plans were available in 58 percent of the reporting hospitals in New York State in 1965, as compared to only 53 percent in 1963," The Hospital Personnel Director's Newsletter of May, 1965, reports that employee benefits have risen explosively in the last ten years due to both federal and state legislation and to union emphasis on benefits that fall in the hidden cost

area.

There is always the problem of measuring the cost of fringe benefits, but cost as high as 40 per hour per employee may not be uncommon.12 The Illinois Hospital Association reported that the average Illinois hospital pays $82.32 in fringe benefits per month for a general duty registered nurse with three years of service. This figure constitutes an increase over 1963 figures of 8 percent. 13

The bulk of unionization efforts in hospitals has recently been aimed at the nonprofessional, semiskilled, and unskilled worker for whom both wages and fringe benefits were most dramatically out of line with industrial standards. Many hospital workers in these categories are working for less than federal minimum wage levels. The result of unionization efforts will be a steady pressure for increased wages and fringe benefits, particularly for these people.

Increased Costs Due to Medical Advances

According to Klarman, the criteria of what is considered good medical care are constantly being appraised and revised, usually upward, with resulting cost increases.14

There are numerous examples of the effect of medical advances upon hospital operating costs. In most cases, these advances herald an increase in cost. Open heart surgery, artificial kidneys, cobalt therapy, to name a few examples, call for a great amount of money for equipment and skilled personnel.

The cost to establish a cardiovascular research laboratory ranges from $176,000 to $600,000. The

11 "1965 Wage and Fringe Benefit Survey Confirms Upward Trend in Wage Rates," Hospital Forum, Vol. 33, No. 12 (December 1, 1965). p. 3.

12 "Fringe Benefit Analysis Pays Dividends to Employer and Employ ee." Hospital Personnel Director's Newsletter, Vol. 1, No. 5 (Mar. 1965), p. 2.

13 "Survey Shows Average Illinois Hospital Pays $82.32 Per Month Fringe Benefits for RN.'s," The Modern Hospital, Vol. 106, No. 6 (June, 1966), p. 190.

14 Herbert E. Klarman, "The Increased Cost of Hospital Care." in The Economics of Health and Medical Care (Ann Arbor: Buress of Public Health Economies, The University of Michigan, 1964), p. 282.