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1. Medicaid should switch to reimbursement on a cost basis because the current negotiated basis is leading to provision of inadequate levels of care.

2. Incentives to reduction in cost are difficult to devise because we have not found ways of measuring our product.

3. The intermittent services of a homemaker or home health aide for as little as 8–12 hours per week may keep an older person out of a hospital or a long-term care facility. Therefore, in establishing the criteria for eligibility for such "covered" services, the term “custodial” should be discarded. Eligibility should be based upon the existence of an active medical care program for the aged person. In all instances, such services should be provided if, in the opinion of a competent professional, they will enable the person to avoid institutionalization and remain with safety at home.

4. The great success enjoyed in upgrading the quality of care in acute hospitals through the Joint Commission on Accreditation of Hospitals should be extended to Long Term Care Facilities including Homes for the Aged. Licensure is not enough.

5. The barriers to the establishment of meaningful relationships between proprietary and non-profit institutions are almost insurmountable. After several years of trying, we have not been able to establish any relationship beyond a relatively unimportant transfer agreement. Great support should, therefore, be given hospitals for the development of their own geographically proximate Extended Care and Long Term Care Facilities.



OCTOBER 17, 1968. DEAR SENATOR WILLIAMS: In compliance with your request, we are submitting pertinent information which we believe has a direct bearing upon the purpose of the investigation of the United States Senate Special Committee On Aging of which you are a member. Unfortunately, we were not given any time on your program to present facts relating to costs for the care of the elderly when administered by doctors of chiropractic.

In depth statistics compiled by Dr. H. G. Higley, who is head of the Department of Research and Statistics for the American Chiropractic Association reveal some interesting facts. Dr. Higley is a qualified statistician and his conclusions can be buttressed by data which he has compiled. The most pertinent information. which we feel would have a direct bearing upon your search for lower costs in health care of the aged comes directly from the statistics compiled during a two year period (July, 1962-June, 1964) of treatment of patients under the Public Assistance Medical Care Program in California. Number of patients treated by chiropractic doctors during this period. 43, 279

The expected cost on the basis of "Medical Care Expenditures” for all three services (M.D., D.C. and D..).

$3, 449, 177 The startling fact was that the actual cost of the treatment of the above patients under chiropractic care was only---

1, 474, 02.5

The difference between the expected cost based on the Medical

Care Expenditures and the actual cost of chiropractic aid-- 1,975, 152

The average cost per case under chiropractic management

34. 06 The average cost per case under medical care, all professions (M.D., D.C. and D.O.) -

79. 70 From the above it can readily be seen that the inclusion of chiropractic care does not represent increased costs to any program, but rather represents a savings, which should be apparent from the above. Please keep in mind that the bulk of the conditions being treated were musculo-skeletal problems, which are treated by all the hearing professions. Consequently, the difference in cost as noted above, would be predicated primarily on a difference in approach to therapy.

The California Chiropractic Association has been dedicated for many years to providing the highest quality health care to the public, while at the same time curbing spiraling costs. Toward that end, we have instituted educational symposia and local review committees which have been most effective and beneficial to the public and profession alike.

We would welcome an opportunity to appear before your august body, or to submit further information if it should be desired. Very truly yours,

PHILIP E. BROWN, D. C., Chief Administrator, CCA-HSF.



November 11, 1968.




DEAR SENATOR WILLIAMS: A point which is major, in my opinion, but which does not emerge clearly is that the health care problems of the elderly are but a reflection of a bigger underlying problem. This is the fact that our health care system is so structured that its prices must continue to rise inordinately, while its amenities continue to decrease. Physicians are in a position to set their fees almost by whim; as a group, because of increasing demand for their services and a small increase in the supply of physicians, they enjoy a protected monopolistic position. This is enhanced each year by the relatively small number of annual graduates from medical schools. There are now fewer practising physicians per 1000 people than there were in 1950. The other major source of health care costs hospitals--are similarly insensitive to consumer economic needs. Operating largely on a cost reimbursable basis and as non-profit institutions, they have no real incentives to effect major, radical economies.

Put another way, the health care industry is basically non-competitive and accordingly, lacks the normal business incentive to keep its costs and its prices as low as possible.

To introduce the benefits of competition into the industry, major institutional change is necessary. I have elaborated on this theme in a presentation to the 1967 National Conference on Private Health Insurance, a copy of which is attached. In this presentation a number of possible changes are described.

The economic impacts of what might be called--non-market oriented biasesin the health care system are particularly severe upon the many elderly who have to live on relatively fixed incomes. With a high incidence of expensive acute and chronic ailments, with other living costs rising regularly, with their other special costs, the rapidly rising prices that they must pay for health care becomes a most severe burden. Certainly Medicare and Medicaid help tremendously, enabling many of the elderly to obtain care heretofore impossible for them. For the individual, these plans make the personal cost in most cases. However, for society as a whole, the total cost must rise for two reasons. First, more people with more care simply means more dollars spent for health care; and, of course, these extra dollars come from society. Second, the resultant increased demand puts additional upward pressures upon medical fees and hospital prices. Since these upward pressures are not being relieved by concomitant supply increases, prices will tend to rise.

You also asked me to comment upon deficiencies in the organization of health services for the elderly, and about the relationship of federal programs to the broad scale development of prepaid medical centers.

I believe the organizational deficiencies have been well noted in the Hearings. I am not an expert in this field and I have nothing but personal prejudices to add. I would like to stress the danger however, of not considering such deficiencies in the context of larger wholes : namely; the organizational deficiencies of health care generally; and, for another, in the context of the elderly person's total social and psychological health. It is in this later regard that so many nursing homes and extended care facilities seem to fail completely.

As for government participation, my personal view is that it would be far better for the so-called third parties, or for labor-management groups to take the lead in developing the new institutional arrangements that are needed if incentives

for efficiency and low prices are to be effective. However, the federal government can play a signiticant role in bringing appropriate people together from these groups and working with them to start such activities. The government has done this successfully in the past and I hope it can again for this important social problem.

For the immediate future and some time to come, however, the government is in the best position to alleviate the health care problems of the elderly. Certainly something more needs to be done about substandard Medicaid plans, about high drug costs to the elderly, about better enforcement to avoid abuse by the vendors of medical care (note attached clipping from November 8, 1968 L.A. Times), about the problem of chronic illness care. Medicare represents a big step forward for acute health problems; the costs of chronic illness still represent a most formidable threat.

An area in which the federal government can improve its activities in order to help alleviate the health care problems of the elderly as well as other health care problems relates to its research grants procedures. Under the current system, millions of dollars are being spent on various studies of health care organization and delivery. However, because of procedures followed, most funded studies tend to be very specific and actually prevent the investigator from doing the sort of broad study and general casting about that is essential for the creation of new break-throughs. Thus, while many specific, narrow studies of health care and of the elderly exist, no really comprehensive scientific view nor tested set of recommendations exist. Largely because of the grants procedures, the information we have on the health policy question is fragmented, full of gaps and generally inadequate. This deficiency is not the fault of the researchers, or the research organizations, but rather stems directly from the philosophy and practice of the research grant system. Yours sincerely,




Among the thousands of studies prepared in recent years on the health-care industry in the United States, there are virtually none concerning the potential effects of major group purchasers upon the system. This is strange, in that all the other participants in the industry have been reported upon in exhaustive detail. The providers of care, the so-called third parties, and the governments have been studied both in general terms and in great detail. However, the major group purchasers—the single largest source of the funds that flow into the system-have received scant attention.

Accordingly, I was most pleased when the Department of Health, Education, and Welfare asked me to prepare a background paper for the National Conference on Private Health Insurance on the question of how management and labor might act to restrain the soaring prices of health services while their quality was, at least, maintained. The Medical Care Price Index, based on 1957 to 1959 as 100, was 122.3 in 1965, 127.7 in 1966, and up to 135.7 by May of this year. In the last twelve months alone, it has risen almost .712 percent.

It is always stimulating to be connected with a pioneering effort, and that is what this paper is. It is not designed to be comprehensive, or convincing, or in any way conclusive. It is rather designed to expand understanding, to present some possibly new views, and to be a basis for discussion, argument, and dialogue. From these and from the refinement and extension of this work, it is hoped that some advances in our nation's capacity to cope with the problems of the health-care market may ultimately result.

While, as usual, the author of this paper must take full blame for all errors and inanities, I have been uniquely fortunate in the advice I have had. Not wanting the paper to be limited by my own ideas and prejudices, I invited distinguished Los Angeles representatives of management and labor to discussion meetings in which many of the thoughts herein presented were developed. As a measure of the tremendous interest and concern with which such people view the health-price problem, it is noteworthy that of thirteen people invited, eleven attended or sent alternates. The twelfth, a union executive, had to cancel at the last minute because of a strike problem ; the thirteenth, an insurance-company official, could not attend because of a death in his family.

We were most privileged to be able to draw upon the experience and thoughts of the following men, although none of them should be considered as necessarily endorsing this report: Cass D. Alvin, Education Coordinator, United Steelworkers of America; Wallace J. Andrews, Consultant, Merchants and Manufacturers Association; Charles Boren, Executive Vice President, Association of Motion Picture and Television Producers, Inc.; John Despol, Representative, United Steelworkers of America ; Anthony M. Frank, President, State Mutual Savings and Loan Association; Caniel Johnston, Daniel Johnston and Associates; Harold Klein, Administrator, Food, Health and Welfare Fund, Retail Clerks Union; Irvin P. Mazzei, President, Los Angeles County Federation of Labor; Lawrence A. Peifer, Labor Relations Associate, Ford Employers Council, Inc.; and Harry Winston, Manager, Industrial Relations Branch, Lockheed-California Company. Particular appreciation is due Dean Robert Dockson and Professor Donald E. Yett for their constructive suggestions; to Max Fine of the Department of Health, Education and Welfare for his sage advice and help; and to Robert Sigmond for his incisive comments.

The literature abounds with history, data, and proposals about the problems of health-care costs and their quality-what the problems are, their causes, and their remedies. Excellent materials are available, particularly the books Bargaining for Health by Munts, Health Plans and Collective Bargaining, by Garbarino,? How to Get the Most out of Medical and Hospital Benefit Plans, by

Brecher. Tilove's article "Pensions, Health and Welfare Plans”," and the many splendid papers prepared for June's National Conference on Medical Costs. It cannot really be useful to restate these or even to add more of the same. However, there is a dearth of material regarding the roles that management and/or labor—the major group-health-care purchasers_play or can plan in these problem areas. There are some materials describing and analyzing what they are doing in health, but, except for some material in the book by Brecher and Brecher, one looks in vain for any analysis of group purchasers' interests and attitudes toward health care, their role perception, their options for action and policies, or their view of where their responsibilities begin and end.

Accordingly, it is the purpose of th paper to try to conceptualize and categorize how the major group purchasers do and can influence the costs and quality of health care. This paper will then attempt to suggest deficiencies in the ability of the current institutional organization to solve the big problems and to indicate possible revision which might make it more effective.

Many of the ideas that have been expressed over the years for expanding the supply of health-care providers, for reducing demand, or for introducing controls over the noncompetitive aspects of the industry have been ineffective, in my opinion, for two interrelated reasons. First, the ideas were just that-ideas. They might be considered as interesting hypotheses, based largely upon faith or judgment or prejudice. Many have plausible rationales, but, fraught as they are with implications for disruption of the accustomed ways and for acrimony with established institutions, they do not have an adequately hard, factual basis for activation. Plausibility is not enough. There is always difficulty, and rightfully so, in changing major social policies or programs without strong evidence that the changes will, in fact, have the desired results.

The related reason that the ideas have had tough sledding is that, in addition to lacking a firm intellectual basis, they have lacked the support of any significant power group. The providers of medical care have generally opposed significant changes through their organized associations, the third parties have been relatively passive and divided, and the individual consumersthe actual payors of the rising health costs—are unorganized and not fully cognizant of what has been happening to them.

Management and labor, working together in some instances and separately in others, have been the largest organized payors of health costs, either through payment of premiums or through direct payments to health-care providers. The

1 Raymond Munts, Bargaining for Health (Madison University of Wisconsin Press, 1967).

2 Joseph W. Garbarino, Health Plans and Collective Bargaining (Berkeley: University of California Press, 1960).

3 Ruth Brecher and Edward Brecher, How to Get the Most Out of Medical and Hospital Benefit Plans (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1961).

4 Robert Tilove, “Pensions, Health, and Welfare Plans," in Lloyd Ulman (ed), Ohallenge to Collective Bargaining (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1967).

6 Washington, D.C., June 27-28, 1967 (Publication of the Conference proceedings, by the U.S. Department of Health, Education, and Welfare, forthcoming 1968).

Southern Pacific Railroad Company established its still-existent medical-care prepayment system in 1868; the first national union health program was set up in 1877 by the Granite Cutters' Union. Now, there are thousands of different plans. It is estimated that two-thirds of the civilian population of the country are covered by a health plan purchased by or through a management and/or labor group. Yet the effects of these on restraining general health-care costs are probably quite negligible.

When management and labor reach agreement in their negotiations about health care, then they may bargain with third parties for the best buy. But they then are bargaining with the wrong group. The bargaining, at some point, has to be with the providers of health care. The ability of our free-enterprise system to regulate economic forces through competition needs, among others, three conditions to enable it to work: there has to be a mechanism for dialogue between the buyers and the sellers for bargaining to occur, there has to be knowledge on the part of the buyers, and there must be alternatives so that each side has bargaining power. As I see it, these do not exist to any adequate extent. For this, as well as other reasons, management and labor, despite their thousands of individual plans, have failed, together or separately, to correct the conditions that have led to the soaring costs.

Since management and labor, as the major purchasers of group coverages, are the natural choice to act for the consumer as a power force in opposition to the vendors' force, and since they do have economic as well as humanitarian motives for obtaining the best medical care for their people at reasonable cost, it seems appropriate to consider how they might be a more effective force in the healthcare market. This is a particularly urgent task, because what choices are there? Who else will represent the consumer-the immediate victim of the cost spiraling? Ultimately, of course, the entire economic system is the victim. If management and labor fail this challenge, if third parties do not radically revise their orientations, the Federal Government may have to step in as the consumers' representative. There is no other group existent that can exert the types of pressures that are necessary if health prices are to be restrained.

Consequently, this paper will focus on the roles that major group purchasers might plan in regard to this national problem. It is based on several premises : first, that health-care prices will continue to rise inordinately unless something new happens; second, that when they rise, management and labor will become increasingly concerned and will examine the problem more deeply and become more knowledgeable and sophisticated; third, that when they do so they will move toward constraining measures such as those that follow. Analysis of their possible actions is built on two simple models of the market as it exists: Model A (a three-segment model, in which the major group purchasers buy coverage from a third party, who in turn pays the vendors) : Major group purchasers: Third parties :


Model B (a two-segment model in which the first parties deal directly with the
second parties) :
Major group purchasers :


Other. In the following section, this paper considers each of these models to explore the different strategies they afford the major group purchasers. In the final portion, there are some suggestions regarding the implementation of these strategies and ideas through institutional modifications in the health industry and through experimental research.


One pattern of involvement of group purchasers in the task of controlling health-care costs and maintaining quality is through the third parties, who so often serve as intermediaries between the purchasers and providers of health care. Despite the fact that the third parties are themselves victims of increasing prices, and despite their occasionally serious losses due to unexpectedly high

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