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an expanded and explicit Federal authority to provide institutional and student assistance for health manpower training.

In order to alleviate some of the problems surrounding the shortages of health manpower, Congress enacted the Health Professions Educational Assistance Act of 1963, which was extended and broadened in 1965, 1968, and 1971. The programs authorized under this legislation were specifically designed to: (1) increase aggregate supplies of health manpower, mainly by increasing enrollments and graduates at health professions schools; (2) provide a stable base of revenue to the educational institutions in order to insure their financial viability; and (3) encourage specific developments at the individual institutions including curriculum improvements, more intensive efforts to recruit minorities, and experiments to train new kinds of personnel such as physician extenders.

Most agree that the Health Professions Educational Assistance Act has been relatively successful in addressing these perceived needs. For example, enrollments in medical schools increased from about 9,000 in 1963-64 to over 14,000 in 1973-74. They are expected to increase to nearly 16,000 by academic year 1979-80. During the decade from 1963-64 to 1973-74, graduations from medical schools increased from 7,300 to 11,600. Corresponding to these substantial increases in manpower were increasing Federal funds devoted to health manpower training programs. Health manpower programs in the Department of Health, Education, and Welfare have grown to appropriations of $429 million for fiscal year 1976.

Contrary to the usual expectations of the impact of increased supply on cost, studies indicate that the increasing supply of physicians, rather than reducing the cost of medical care, has caused increases in costs because of greater utilization of health services. This is due in part to the fact that, to a considerable extent, physicians can determine the demand for their own services since they not only treat their patients but also determine what services are to be provided.

3.

Hospitals.

Increased technology and science in medicine demanded a more sophisticated setting for its application. The HillBurton program of hospital construction and modernization grants was initiated in 1946 to provide funds for an updated and sophisticated hospital plant which had grown obsolete and inadequate during the depression and war years. From 1942 to 1973 Hill-Burton authority provided $4.3 billion for 11,255 construction projects, including 5,986 general hospitals with 358,000 beds; 1,795 long-term care facilities with 100,000 beds; and 4,000 mental hospitals, tuberculosis hospitals, outpatient facilities, rehabilitation centers, public health facilities, and State health laboratories.

Approximately 80 percent of the hospitals in the United States are community hospitals, which include non-Federal short-term

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general and special hospitals. The number of community hospitals increased little from 1965 to 1975--from 5,736 to 5,875. However, the number of beds in these hospitals increased from 741,000 to 942,000, an increase of 27 percent. The percentage of these beds that are occupied on an average day is 75 percent. This indicates that at any point in time there will be unused hospital beds which cost annually an estimated $18,000 to $19,000 per bed, or about half the cost of an occupied bed. It has been estimated that existing hospital capacity could be reduced from 10 to 20 percent without jeopardizing the health of the American people. These unoccupied, and often surplus, beds have contributed to rising hospital costs. Total expenses have increased for all U.S. hospitals from $36 billion in 1973 to $49 billion in 1975 (+34 percent) and for community hospitals, from $28 billion to $39 billion (+37 percent).

4. Equipment and Services. The considerable advances in medical technology in recent years has led to great investments in new and costly medical services and equipment. Unlike advances in other industries, new technology in medicine has not, in general, been costsaving. Not only is the new equipment and its installation expensive, but the operating costs, including the cost of trained personnel, are also very high. Some examples of recent sophisticated and expensive treatment techniques include cancer radiation, renal dialysis, organ transplants, open heart surgery, and body scanners, including the controversial CAT (brain) scanner. In addition to the high costs of medical equipment is the problem of the frequent duplication of sophisticated technology. Each hospital in a community believes it must have all of the most recent techniques and equipment, no matter now expensive nor how small the demand for such services. There is little incentive for hospitals in a community to cooperate in acquiring and offering these services.

The necessity for services provided by a hospital or a physician are also an issue in rising health costs. Superfluous or duplicated laboratory tests, unnecessary surgery, and excessive hospital stays all contribute to higher costs. In many cases, excessive tests are performed to protect the physician against the threat of malpractice charges. In addition to the costs of this so-called "defensive medicine," the direct costs of malpractice insurance for both physicians and hospitals has dramatically increased in recent years. Testimony at public hearing held by the Council on Wage and Price Stability in 1976 indicated that the average malpractice insurance cost per New York hospital bed in 1975 increased from $348 to $1,447. In Texas, the malpractice costs for hospitals in 1970 were approximately $13 per bed per year; by 1976, they had risen to $2,300 per bed for some hospitals.

C. Third-Party Coverage

In health-financing terminology, the phrase "third party" refers to an organization that pays for health services. (The patient

and the provider of the services are the other two parties.) The thirdparty payor may be a public organization such as Medicare or Medicaid, a nonprofit organization such as Blue Cross or Blue Shield, or a private or commercial insurance company.

Before the advent of the Medicare and Medicaid programs in the mid-sixties, direct payments by individuals (including "out-of-pocket" payments such as deductibles and coinsurance amounts and other costs not covered by insurance) represented the largest source of funds for personal health care, with private third-party funds making up a larger portion than public third-party payments. By 1970, after Medicare and Medicaid were in operation, direct payments paid only 40 percent of expenditures, with public third-party coverage (34 percent) exceeding private coverage (26 percent).

By FY 1976, third-party payments constituted 68 percent of personal health care expenditures, more than twice the percentage in FY 1950 when third-party payments were only 32 percent of personal health care expenditures. The following table presents the data:

AMOUNT AND PERCENTAGE DISTRIBUTION OF PERSONAL HEALTH CARE EXPENDITURES, BY SOURCE OF FUNDS, SELECTED FISCAL YEARS, 1929-1975

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1/ Includes insurance benefits.

2/ Includes Federal, State, and local expenditures. 3/ Direct payments include any insurance benefits. 4/ Preliminary estimate.

"National

Source: Gibson, Robert M., and Mueller, Marjorie Smith.
Health Expenditures, Fiscal Year 1976." Social Security Bul-
letin, Vol. 40, No. 4, April, 1977.

Of the various types of personal health care, hospital care has the largest portion of expenditures paid for by third-party coverage. This amount has risen from 66 percent in FY 1950 to 91 percent in FY 1976. The consumer of hospital care in 1976 is, on the average, directly responsible for only 9 percent of the costs of hospital care. The following table presents the data.

AMOUNT AND PERCENTAGE DISTRIBUTION OF HOSPITAL CARE EXPENDITURES, SOURCE OF FUNDS, SELECTED FISCAL YEARS, 1950-1976

BY

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Source:

"National

Gibson, Robert M., and Mueller, Marjorie Smith.
Health Expenditures, Fiscal Year 1976." Social Security Bul-
letin, Vol. 40, No. 4, April, 1977.

The increasingly large contribution of third-party payments to expenditures for health services has had a considerable impact on the demand for and the cost of health services. The demand for expensive health care is likely to be higher when both the patient and the doctor know that the third-party payor, not the patient, will be paying most of the bill. This is especially true with hospital costs, where the patient pays less than 10 percent of the costs directly. This process of third-party coverage increasing the demand for additional and more costly services, and thus driving up the costs of health care, may even have a spiraling effect because as the costs of health care increase, the pressure for more comprehensive third-party coverage increases, enabling even more costly care to be provided. An additional cost resulting from the growth of third-party coverage is the expense incurred in administering these payment plans and the expense to providers of filing the numerous claims forms necessary to receive payment.

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