claim experience and their own frustration at their inability to contain the health-cost inflation, third parties remain the immediate point of contact of most group purchasers with the health-care system. This seems particularly curious. On the one hand, the Blue Cross and Blue Shield plans are closely affiliated historically and in terms of current board memberships with the principal vendors physicians and hospitals; and the private insurance companies are mainly in the business of risk control. Neither group has, in the past, considered the sustained, hard-nosed pursuit of lower costs as one of its prime functions. This is not to say that they have been indifferent, but rather that they have not seen their role as one of vigorous bargaining with vendors on the consumers' behalf. On the other hand, their group-purchaser clients, which include some of the most rational, sophisticated, and economically powerful organizations in the country, have diffused their bargaining power in the health area by turning this matter over to the third parties.

As the principal payors of hospital and physician bills, the private insurance companies and the Blues have frequently been criticized for not exercising more of an influence in controlling health costs. Some insurance companies and some Blue Cross and Blue Shield plans, in some ways, have tried to keep costs down. Careful review of claims for surgical fees, follow-up discussions with physicians whose charges were considerably out of line and with local medical societies, direct and indirect involvement with hospital boards of directors have all been tried by some companies. The effects are not measurable, but obviously have not been adequate. Several Blue Cross plans have tried to stimulate efficiencies in hospital operations through incentive provisions in proposed reimbursement formulas and through suasive processes. Hospitals have, by and large, successfully resisted these attempts. Blue Shield plans have been somewhat more effective in helping to establish pre-set medical fees for lower-income subscribers. However, once this is said, it is clear that still more needs to be done. More active programs of restraint on the part of individual third-party organizations would be very costly, and their success would be uncertain even in the short run. In the longer run, if a few such organizations were to initiate a program of restraint, their extra costs and possibly worsened relations with the medical profession and with hospitals would soon put them in a competitively untenable position. This is in the sense that if a few companies were to charge a price adequate to cover their costs, their customers would shift to other companies. It does not follow that if all the third parties acted together the same result would occur. But stimulation by an outside consumer force might lead to a greater willingness on their part to incur these economic and political costs. An expansion on this thought appears later.

What, then, can major group purchasers do to control the costs and quality of medical care through third parties? From the viewpoint of the public, most of whom pay for their health care through these third parties, the price of care consists of two sets of costs: the internal costs (including any profits) of the financial intermediaries and the prices charged by the providers of health care. It seems to me that the major group purchasers can, in the three-segment model, influence costs in both these areas through impacts on products specifications, by consumer education, through influence on third-party administrative costs, and directly on medical and hospital prices.

Product specifications

It has been pointed out by many observers that socially noneconomic health services are often provided or prescribed because it is advantageous for an individual patient. One commonly mentioned example is the utilization of hospital facilities for simple procedures that can be done in an office or a convalescent home, solely because the former are covered by a hospitalization policy while the latter are not. It has also been pointed out that the huge variety of health plans that are available makes it impossible for most purchasers to evaluate plans comparatively because of differences in coverages, levels of benefits, and claim-payment policies. It seems to me that major group purchasers can do something about each of these.

Comprehensiveness of products.-Group purchasers can push for plans that are more comprehensive (I differ from those who say that completely comprehensive prepaid plans are needed now. Such plans-at this time-would lead to abrupt increases in the demand for additional services and, with the well-known shortages in the supply of health resources, further price increases). More comprehensiveness is needed to avoid the common misallocations of scarce resources occasioned by today's usual restrictions. There are, admittedly, risks 24-798-69-pt. 3-10

of abuse in any steps of this type, but how can progress be made without risk, and how can management policies be formulated to reduce these risks until actual experience is obtained?

Standardization of products.-Group purchasers can take more initiative in developing specifications of what they want, in detail, in a prepaid health plan, be it of an indemnity or service type. Some large groups have been conspicuously successful in doing this, usually because of union pressures, exercised through the collective-bargaining process. The Steelworkers, Auto Workers, and Mine Workers have used this approach on a national basis for almost two decades; the Clothing Workers for even longer. Some local collective-bargaining units also have initiated similar programs. But, in general, the group purchaser still relies upon the third parties for development of package plans and for proposals. Group purchasers, in so doing, invite confusion and nonrationality because they cannot usually make knowledgeable cost-benefit analyses of the different proposals. It would be much simpler to specify what is wanted and then to obtain bids from several third parties. This would tend to force the third parties to compete on economic grounds, with all the concomitant pressures, for cost control and more efficiency.

A big obstacle to this approach occurs, however, in the many cases in which the collective-bargaining procedures that lead to the group purchase result in an agreement on health-coverage expenditures rather than on types and levels of benefits, or in an agreement to give the coverage to a specified third party. (The Steelworkers' one-time preference for having Blue Cross and Blue Shield provided their health insurance is an example of the latter.) In either of these situations, the advantages of competitive bidding are lost. Accordingly, it would be well for labor and management to bargain for health benefits rather than for the amount of money to go into this fringe benefit. I realize this is a muchdebated subject and that many arguments can be made for labor-management agreements on health-premium dollars rather than benefit levels, but I suggest that in the interest of injecting the advantages of free competition into at least part of the health industry, emphasis should first be on benefits. Obviously, it would be completely unrealistic to bargain on benefits without some consideration of the price levels involved, but this is a solvable problem, since the number of consulting actuarial firms can be expected to increase to provide this service as it is needed.

Consumer education

It would be of little avail for sophisticated group purchasers and third parties to develop economic approaches to health care if the consumer remained naive about them. If the consumer does not recognize the value of patronizing accredited hospitals or, most important, does not realize that he is affected by the rising costs of health care even if he does not get ill, and even if his employer pays the entire health-care premium, then, in the long run, group purchasers will continue to face an uphill battle in trying to reduce costs and maintain quality.

The economics and sociology of health care are quite complicated. In our democratic society, public awareness and the resultant support or protest ultimately come to be reflected in private and public policies. For these to be sound, the public' awareness must hopefully be based on fact. In our case, the development and acceptance of policies to control costs will benefit from broader consumer understanding. The group purchasers-union and management-can help accomplish this by programs to teach the consumer such things as how much health care costs, who is paying for it, why there are certain restrictions in coverages that are necessary, alternatives that may have been possible and why they were not taken, the consequences to costs of claim abuses, the pros and cons of group practice and solo practice among physicians, the proper role of paramedical personnel, and the proper role of extended-care facilities other than hospitals.

Factors that are generally considered in attempts to increase the efficiency of an institutional system include the possibilities of effecting more economies of scale, of effecting economies through division of labor, of building in automatic restraints of cost escalations or inefficiences, and of shifting some fuctions to lower-cost alternatives. Persuasive cases can be made for how these suggestions will help realize these possibilities, not only as they apply to the insurance carriers but also as they apply to the providers of health care themselves.

Third-party management policies

As large-scale customers deciding on the expenditure of hundreds of millions of dollars for health insurance each year, the major group purchasers can have a great deal of influence on the management policies of third-party intermediaries. They have had, in many instances, but an area of potential influence in which little has been done is that of the relationship between the third parties and the providers of medical care-sphere Y as diagramed below:

Major group purchasers

Third parties

Providers of care

Applications of influence have been primarily in sphere X. In the section that follows, the X sphere will be commented upon, but it is also suggested that sphere Y offers significant opportunities for group purchasers.

Third-party costs (sphere X).-Conceivably, the group purchasers could radically affect third parties' operations. Over the years, they have been instrumental in, among other things, stimulating dramatic reductions in retention rates. According to Louis S. Reed, in 1948, private health insurance organizations (including Blue Cross-Blue Shield plans, insurance companies, and independent plans such as community-consumer programs and employer-employee-union programs) retained 29.7 percent of subscription or premium income. In 1964, the comparable figure was 12.8 percent. Included in these figures are the retention rates for individual as well as group coverages, and the differences are interesting. In insurance companies, the retention rates on individual policies decreased from 62 percent to 45 percent between 1948 and 1964, or more than a fourth. During the same period, the group insurance rates dropped from 30 percent to 8 percent, or almost three-quarters.*

It is impossible to attribute any specific share of this dramatic reduction to the direct influence of the group purchasers, because other factors also were at play, but it seems clear that they have been responsible for a significant portion. Major group purchasers can go further in stimulating additional reductions in the operating and marketing costs of third parties. They can do this in a generalized fashion through an emphasis on more comprehensive plans and more standardized packages, as mentioned earlier. Similarly, a better-informed employee body will tend to enable third parties to operate with lower costs through fewer abuses and more individual-consumer bargaining with vendors. More specifically, and in addition, sample screening of claims by major group purchasers to nip abusers and abuses in the bud, periodic claim reports and analyses, efforts directed toward reducing the hundreds of different claim-reporting forms so that providers could routinize their completion, and other similar steps would have some, although probably relatively minor, effects on costs. A more important step would be to rationalize the commissions paid for group business. Under State laws based upon antidiscriminatory concepts, a commission has to be paid by insurance companies for group business. Accordingly, despite the fact that salaried employees frequently do all the necessary work, a commission expense must be incurred. Some individuals frequently reap handsome rewards for doing virtually nothing. Group purchasers would seem to have an opportunity to help eliminate this economically unnecessary requirement by aggressive action at the State legislative level.

Furthermore, the whole question of an indemnity system of insurance is something for group purchasers to consider. There is a large body of informed opinion that believes that, in Raymond Munts' words, "indemnity insurance is part of the problem rather than part of the solution". For this reason, many purchasers have sought service-benefit coverages, and indemnity-type carriers have shifted some coverages-hospital room charges and major medical provisions, for instance-into a service basis. Consequently, if further investigation proves that an indemnity system of coverage does, in fact, tend to promote higher factor prices and does not deter inferior care, then it would seem reason

Louis S. Reed, "Private Health Insurance: Coverage and Financial Experience, 1965," Social Security Bulletin XXIX (November 1966), 12. 7 Munts, op. cit., p. 129.

able for the major group purchasers to use their power to do away with such plans.

In this connection, an interesting collaborative idea is being explored by a number of life insurance companies and the Harvard Medical School. Through an exchange of technical assistance and guidance, the insurance carriers and the School are looking toward ways whereby, in the Boston area, the groups of insureds will have the choice of obtaining service benefits from a division of the Medical School. Similiar explorations are now current with other carriers and will certainy be watched closely by other health insurers as well as by hospital administrators and the medical fraternity.

Factor prices (sphere Y).-The curious structure so often found whereby strong group purchasers turn over their buying power to third parties, who in turn are less than effective in controlling either vendor prices or the quality of care, has been remarked upon previously. When the third party expends the group purchasers' funds for health care, what are his responsibilities? What should they be? These are questions which need to be asked and seriously considered, but which are not within the scope of this paper.

Our question is, can group purchasers influence third parties to exercise more vigor in their vendor relationships? It seems to me the answer to this has to be Yes, of course, large purchasers can wield great influence with sellers. However, there are three elements to this: one, the purchasers must act with unified purposes; two, the third parties must reorient their thinking to accept the control activity as one of their primary roles; and, three, the third parties must develop and implement appropriate policies. In the final section, on suggestions, this theme will be expanded.

IMPACTS DIRECTLY ON PROVIDERS-MODEL B

Up to now, this paper has consisted of reflections on how major group purchasers might exercise their considerable influence in stimulating third parties to control costs and prices. Now we turn to consideration of how this influence might be brought to bear directly upon health-care prices-how group purchasers can affect the charges made by the providers of health care.

Direct operation of health-care organizations

There are two strategies that major group purchasers could, and have pursued: one, the direct approach, in which they would support their own facilities, paying salaries to the nonmedical staff and reimbursing the medical staff on some negotiated basis rather than the usual, unilaterally established fee for service. Examples of successful ventures of this sort are the Southern Pacific Employees Hospital Association, the Kaiser Plan, the United Mine Workers' program, and the International Ladies' Garment Workers Union health centers. These programs are each quite different in scope and approach, but are similar in giving their sponsor more administrative control over the costs and quality of health care. This, in turn, is reflected in lower costs and prices.

This is not an easy way to proceed, as evidenced by the rough sailing in one way or another that each plan has had. The hostility of organized medicine, the lack of awarness or appreciation of the individuals in the plans, the conflicting objectives of union politics, comprehensive care, individuals' wants, and adequate funding have all been problems. Yet the fact remains that, through these programs, expenses were constrained, quality care could be sought, and the defenders of the status quo could be shaken and induced to reexamine their position. They were, to some extent, influenced to be competitive either through price-increase restrictions or through the development of new, countering institutions. An interesting one that developed to counter expansion of the Kaiser Plan is the San Joaquin Foundation for Medical Care, which was established by the San Joaquin County Medical Society in California to provide care at predetermined fees, using third-party mechanisms.

Prepayment medical centers. Given the high interest in health care among many giant unions and many giant business firms, it is conceivable that, if other methods failed to control costs, then these groups could combine to create a national chain of prepayment group-practice centers with hospital, convalescenthome, and nursing-home affiliates. If these centers were open to the community, they would certainly provide a potent competitive force in the marketplace-one that existing providers could not ignore in setting their fees.

Self-insurance indemnity programs.—It may seem a natural corollary to this "do it yourself" approach for major group purchasers to expand their selfinsurance indemnity programs. Self-insurance, combined with purchased stop-loss

coverage for extraordinarily high claim experience, would seem a likely way to reduce the prices of health care. Potential savings on a private carrier's marketing costs, the mandatory commissions, contingent reserves, possibly, and the State premium taxes have been estimated by the the Food Employers Council of Southern California at about ten percent. Quite a few employers and union groups have moved in this direction.

It is not clear to me, however, that these savings are permanent or that they compensate in the long run for lost opportunities to achieve economies of scale through specialization of function. There is also a problem, in self-insured group plans, concerning the people leaving the group. With a private carrier, they can ordinarily convert their group certificates into an individual policy, but the selfinsured plans usually cannot do this. Accordingly, I wonder under what conditions a self-insured indemnity plan is really more effective; I could not find any defintive analysis of this question. This seems a worthy subject for further study, with results that would be useful to both major group purchasers and to private carriers.

The health-insurance industry, perhaps more now than ever in the past, is competing in a market where the ground rules and even, to some extent, the name of the game are rapidly changing. Union pressures for service-type benefits, new health-care alternatives and combinations of alternatives, Medicare and Medicaid, shifting medical attitudes, Federal concern about costs, and the as yet unknown effects of the Comprehensive Helath Planning and Public Health Amendments of 1966 (Public Law 89-749) make the role of the private carrier a particularly difficult one and call for new adaptions and philosophies. Management-labor coalition

An alternative strategy open to management-labor groups, besides actually operating health-care organizations, is the indirect one whereby the potential power of major group purchasers to establish their own health-care organizations is assembled and focused in some suitable organization and maintained as a deterrent to capricious increases in prices and careless administrative practices.

A point that cannnot be overlooked in any consideration of how major group purchasers can affect providers directly is the fact that, to some extent, major group purchasers run the private hospitals. The boards of directors of these hospitals are largely composed of businessmen, with an increasing number of union leaders joining them. What often seems to be needed, however, is more recognition by these men of the intermingling nature of their two roles.

SUMMARY AND SUGGESTIONS

Up to this point, this paper has briefly discussed various ideas that major group purchasers might employ to restrain increases in health-care costs and encourage quality care. Actually, of course, these are more than ideas; most, if not all of them, are being practiced by one or more major group purchasers. Yet prices continue to soar.

Does this mean that the strategies are nonvalid? No, I don't believe so. Probably, without them, prices would have gone even higher. It does seem to indicate that a more massive, vigorous application of the strategies is needed to counteract the basic cause of the extraordinary inflation we are experiencing in the health field. The fragmented, partial applications that we have are not enough.

Some stronger force is necessary to negotiate effectively with the providers in the health field. It seems likely that unless some such force develops, the Government will initiate some control devices. It has become a generally accepted function of Government to concern itself with policies to control general inflation; it is simple to expand this perspective to include such a special problem as that of health care.

Reading and reflecting on these issues as summarized in the preceding pages have brought me tentatively to the following beliefs:

First, the rising prices of health care stem, to a large extent, from the noncompetitive markets in which physicians and hospitals operate. This is reflected in the physician's almost unilateral control of his fees and in the hospitals' ability to operate with little regard to economic rationality.

Second, unlike other markets, the bargaining power of the ultimate healthcare consumer and his opportunity to shift from higher-priced sellers to more economical ones are very limited.