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PERSONAL HEALTH CARE EXPENDITURES AND PERSONAL INCOME,

SELECTED FISCAL YEARS, 1950-1976

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Source: Department of Commerce, Bureau of Economic Analysis; and Social

Security Administration.

In short, people are spending more on health care than ever

before:

They are spending more through taxes for public programs;

They are spending more on health insurance premiums;

They are spending more on direct health care expenditures;

They are foregoing some wage increases because the costs of health insurance fringe benefits are increasing; and

-- They are paying more for goods and services as health

expenditures affect the costs of production.

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III.

WHY HAVE EXPENDITURES FOR HEALTH CARE INCREASED?

A number of interrelated factors have contributed to the increasing costs of health care. It is thus difficult to assess their relative impact.

A.

Price Increases

1

One cause of increasing expenditures is an increase in unit price. This is difficult to quantify in the health care field because the character of the products, or services, does not remain constant. The content of a physician visit or day of hospital care changes significantly over time. For example, the increase in the charges for a day of hospital care from 1965 to 1975 would reflect not only a change in the price for essentially the same services as were provided in 1965 but also the charges added on to pay for increases in staff and in technology. other words, part of the increase is essentially a matter of paying a higher price for the same thing and part of the increase is for a new, higher level of services.

In

The Social Security Administration estimates that price alone accounted for approximately 55 percent of the growth in personal health care expenditures from FY 1950-FY 1976. The balance is accounted for by changes in population, changes in the kinds of services provided, and changes in use rates. The relative contribution of price increases has varied during this time period, increasing after 1965, declining during the Economic Stabilization Program, and jumping dramatically following the expiration of controls, as the following table indicates.

PERCENTAGE OF TOTAL INCREASE IN PERSONAL HEALTH CARE
EXPENDITURES ATTRIBUTABLE TO PRICE INCREASES,

SELECTED PERIODS, FY 1950-FY 1976

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It should be noted that these estimates, while the best available, may tend to overstate somewhat the portion of the personal health care spending increase which is due to price. The data are derived in part from the CPI medical care price indices, which can reflect to some degree increases due to improvements and/or increases in the services provided.

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.

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Average Cost Per Patient

Day--Average Annual
Increases

1/
13.6

1/
11.6

1/
18.3

9.9

6.9

6.9

6.9

13.3

15.7

13.9

14.0

9.0

4.7

3.4

6.1

3.1

3.7

5.6

7.5

6.0

8.3

3.2

3.7

7.9

Input Factors

FTE Employees Per

Patient Day
Volume of Non-Labor

Inputs

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ESTIMATED COMPONENTS OF INCREASED HOSPITAL COST PER PATIENT DAY, SELECTED PERIODS,

1955-1975

1955-
1975

1955-
1966

1966-
1975

1955-
1960

1960-
1965

1966-
1969

1969-
1970

1970-
1971

1971-
1972

1972-
1973

1973-
1974

1974-
1975

Components of overall percentage increase in average cost per patient day

Price Factors

Earnings Per Em-

ployee
Price, Non-Labor

(CPI)

Average Cost Per Patient

Day--Total Increases

Percentage distribution of components of overall increases
1/
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

100.0

47.5

49.3

44.5

44.9

53.6

42.1

47.8

43.2

59.3

35.5

31.6

42.9

Input Factors

FTE Employees Per

Patient Day
Volume of Non-Labor

Inputs

15.2

20.3

11.7

20.3

21.7

11.3

15.3

13.7

11.4

12.2

15.4

12.5

32.3

29.0

32.8

24.6

31.9

30.8

32.5

29.5

47.9

23.3

16.2

30.4

52.6

50.7

55.5

55.1

46.4

57.9

52.2

56.8

40.7

64.4

68.4

57.1

Price Factors

Earnings Per Em-

ployee
Price, Non-Labor

36.4
16.2

40.6
10.1

35.8
19.7

43.5
11.6

37.7
8.7

45.1
12.8

36.3
15.9

43.9
12.9

30.7
10.0

33.3
31.1

24.8
43.6

33.2
23.9

1 May not add to total due to rounding.

Source:

Data derived from Feldstein, Martin, and Taylor, Amy.
Wage and Price Stability, Staff Report, January, 1977.

"The Rapid Rise of Hospital Costs."

Council on

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 developinent, 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 girect 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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