security is evaluated in terms of the taxes necessary on a current basis. It is evaluated on a current basis as we go along. The national health legislation is looking ahead to a considerable number of years in the future, and projecting costs which admittedly seem to be quite low in the present, but which escalate very rapidly into the future, somewhere, I believe in the committee report, it said that something like $8,000 would be required in terms of investment on the part of a young wage earner today by the time he were in position to realize the health benefits at 65. Senator ANDERSON. Thank you very much. Mr. CULLEN. Thank you. (The following was later received for the record:) CHAMBER OF COMMERCE OF GREATER PHILADELPHIA, Hon. HARRY F. BYRD, Chairman, Senate Finance Committee, DEAR SENATOR BYRD: As a result of our privilege of appearing in public hearings on H.R. 6675, I have the honor to transmit to your committee the attached proposed amendment to the bill. If adopted, this proposed amendment, in the opinion of the Greater Philadelphia Chamber of Commerce, would reduce the cost of the execution of the bill to the taxpayer and to the Government and prevent a miscarriage of its objectives. For these reasons, we respectfully request that you offer this amendment when your committee is ready to act upon the bill. Respectfully yours, GEORGE L. CULLEN, Chairman, Hospital Task Force. PROPOSED AMENDMENT TO THE SOCIAL SECURITY BILL (H.R. 6675) The effective date of the basic and supplementary plans shall be the first of the month following 90 calendar days after the Secretary of Health, Education, and Welfare has caused to be published in the Federal Register the complete administrative regulations and has certified that the following measures have been completed: 1. Development of uniform cost accounting systems for hospitals and cost formulas which give proper recognition to major differences among hospitals as to character of services rendered, teaching facilities, and general costs of the area. Provisions for reimbursement of hospitals to apply only to those hospitals in compliance with this section. 2. Construction of uniform terminology and numerical coding for all medical and surgical services and procedures which are reimbursable. 3. Financial incentive to hospitals to hold down general operating costs and financial incentive to hospitals to transfer patients to long-term care facilities. 4. Development of specific formulas for each region to determine reasonable charges for physicians' services, and maximum dollar limits established by region on each type of service in the supplementary plan. 5. Appropriate notice, review, and appeal procedures provided and completed in connection with the specific content of sections 1-4 above. Senator ANDERSON. Dr. Hanchett. STATEMENT OF DR. PAUL E. HANCHETT, EDUCATIONAL DIRECTOR, CHICAGO MEMORIAL ASSOCIATION Dr. HANCHETT. Senator Anderson, members of the committee, it is a pleasure to be here, and I especially wish to thank Senator Douglas for permitting me to come. I am an economist, educational director of Chicago Memorial Association. As you can easily see from the statement before you and from a supplementary statement which I submitted for the record, the position I represent is definitely in favor of the bill. I believe it should be unhesitatingly passed. A more rational system of medical economics for the disfavored segments of our population, such as the aged, at least, is long overdue. There are four reasons why a system of medical care, paid for, in part, collectively, is more rational than the private-fee-for-service system: 1. Prime necessities of life such as water, air, food, education, and health care must be universally distributed. Whether this distribution will actually prevail, depends upon their price. The cheapness of air and food enables them to be supplied without consumer subsidy-while education and health care, to be widely available, require to be paid for collectively. 2. Ours is an age of secularly rising prices. Over a man's lifetime, the costs of medical care can, and do, substantially rise. But private insurance companies provide no protection against this risk. 3. Increased life expectancy and changing employment practices are augmenting the proportion of a man's life that will be spent in retirement. These extra years, however, are the very ones when medical costs are likely to be especially high. Unfortunately the public has not yet fully realized and made provision for the implications of this longer life. This hazard applied to men and women both, but especially to women. 4. Medical care has become more than a prime necessity of life. It is a precondition to the efficient production and enjoyment of all other commodities. Thus the implications of the consumption of health care far transcend direct health benefits. Collective subsidy is justified by the larger production and consumption of other commodities, that adequate health care alone can make possible. With your permission, I would like to add just one short note. Senator ANDERSON. Surely. Mr. HANCHETT. When our youngest Government department was set up by our Congress about 15 years ago, it was called the Department of Health, Education, and Welfare. This was not a misnomer. It was no accident that this designation was chosen for health and education of the twin strategic social services of our economy. Education and educated people are more healthy, and healthy people can become better educated, and will better educate their families. These two services complement and reinforce each other, and both education and health lead to welfare. It is also no accident that health came first, for health today has become more than a necessity; it is a universal imperative, an ultra necessity of life. Therefore, I say pass the bill, pass it now. Don't let another year or session go by. Every year that we wait is another year of accumulating of the hidden costs that an inadequately structured system of health care has delivered for our older people. Thank you very much, Senator. Senator ANDERSON. Are there questions? Thank you very much. I appreciate your coming for the hearing. (The supplemental statement submitted by Dr. Hanchett follows:) WHY GOVERNMENT ACTION IS ESSENTIAL TO PROVIDE HEALTH INSURANCE FOR THE AGED (By Dr. Paul E. Hanchett, educational director, Chicago Memorial Association) The campaign to provide voluntary health insurance for the aged has failed. After nearly a decade of intensive underwriting and sales effort by 77 Blue Cross plans, 68 Blue Shield plans, and 879 private insurance companies, the enrollment gap for the aged stands at 40 percent and the benefit gap at 75 percent. That is, approximately 7 million or 40 percent of our senior citizens still have no health insurance protection whatever, and even the 10.3 million who have been covered hold policies which exclude protection against 75 percent of their total health hazards. The reasons for this unpremeditated tragedy are not to be charged up to lack of diligence by the private insurance industry. Rather, they are inherent in the structure of the medical care market itself. For medical care in our economy has become an unbudgetable commodity, especially for persons like the aged, many of whom are already chronically afflicted. Being unbudgetable, it is not strictly insurable. Moreover, the attempt to insure medical care for the aged escalates medical prices and threatens the stability of the 454 million outstanding health insurance contracts for young and old alike. Thus, the present predicament is likely to worsen, and the whole future of health insurance in the United States stands in jeopardy. MEDICAL COSTS FOR THE ELDERLY ARE NEITHER BUDGETABLE NOR INSURABLE Budgeting and insurance are both prognostic attempts to substitute average costs for actual costs. Two formidable factors, however, prevent the elderly individual-even one whose income is adequate and secure-from budgeting for his own medical expense. Likewise, similar barriers prevent the insurance industry from providing a firm and effective policy in the health insurance field. In 1961 the average person beyond the age of 65 spent approximately $226 for personal medical care. Such expense would be budgetable if every member of the group experienced approximately the average expenditure or close to it. Unfortuantely, such is not the case. More than expenditures for any other necessity of life, medical outlays fluctuate capriciously and are subject to extremes of dispersion and askewness. Although in 1961, most senior citizens did not spend as much as $226 for personal health care, more than 10 percent of them experienced medical bills in excess of $1,000. Some, of course, were compelled to pay far higher amounts. Furthermore, the incidence of the smaller and larger claims can seldom be known in advance. Thus it becomes too speculative a venture for an individual, or anyone else acting on his behalf, to budget for his own expense by setting aside deposits based upon the average costs for the whole group. The risk of exposure to a large expenditure that might undermine his whole future, is far too perlious. A second factor also acts to make medical expenses unbudgetable for the individual. This is the fact that any ascertainable average of medical expenses is always yesterday's average. In recent years the medical field has become the most dynamic and explosive in the whole economy. Since 1957 medical costs have risen three times as rapidly as the Consumer Price Index and certain components such as hospital costs have risen about six times as fast. In principle the problem of budgeting could still be solved if the future pace and path of medical prices could be forecast. Unfortunately, however, the medical sector of our economy has been a law unto itself-with prices rising sometimes more slowly than other prices, sometimes much more rapidly, and sometimes rising not at all. Until the form of that law has been fathomed and at least some of its determinants have been empirically quantified, firm budgeting for medical care will remain an utter impossibility. These very same considerations generate strains within the insurance industry such that the insurance companies and Blue Cross also find it difficult, if not impossible, to average. Two requirements are mandatory: first, a reasonably firm average must be obtained in advance; second, it is necessary to find and to hold a nonselected group. The preceding discussion has dealt with the first point by showing that averages of medical costs, insofar as they are definitely known, will always be obsolete. It suffices, therefore, to indicate the virtual impossibility that the private insurance industry can enroll and maintain a nonselected group to which any true average, even if it could be obtained, would validly apply. In the early days of health insurance the insurance companies went out looking for the better risks. In other words, company selection prevailed. More recently as insurance became more popular and the industry became more competitive, the buyers of insurance, both group and individual, selected the companies so that self-selection prevailed. Either way there is a biased population. Furthermore, even if a random, nonselected group could be enrolled at the beginning, it tends to deteriorate over time because there is no guarantee that the members of the group will continue their policies. In fact what happens, the purchase of a health insurance contract educates the buyer to a closer attention to the economics of speculation and risk. No one is closer in touch with the facts that control his own health prospects than he. Buyers will discontinue policies for assorted reasons, logical and illogical, but no one lets his policy lapse because he has contracted chronic illness or thinks that he has become sickness prone. The insurance company is left holding on to an actuarially deteriorating group. The final result is that a randomly selected group fails to be attained because either the insurance company or the insured makes the selection originally, in the renewal of the policy, or both. In summary, the fundamental reason why health care costs are not a strictly insurable risk today is because they are adversely subject to the hazards of open end averages and open end groups. THE SELF-DEBASING INSURANCE POLICY In attempting to come to terms with the conditions of this dilemma, the insurance companies have had to devise a very special contract. They have to put fixed-dollar amounts in it like $15 a day for hospital room and board, and $3 for medical visits. This is not because the insurance companies are inhumane. It is because of the necessities of the situation. But these fixeddollar benefits-even in the absence of general inflation-depreciate in real benefit value so long as medical costs continue to rise. Consider a specific case. As early as 1939 North American Life & Casualty Co. was progressive enough to offer a combined hospital-surgical policy with a $150 maximum surgical schedule, that could be purchased during working years and continue on indefinitely into retirement. At time of issue the fixed-dollar benefits sufficed to cover about 50 percent of short-term inhospital charges. As time went on and hospital costs rose, this percentage of protection steadily declined (table 1). Finally in January 1963 when the insured who bought this policy really needed protection during retirement, he went to the hospital and ran up a medical bill of $822.20-of which the policy then covered only $62.20 or about 7.7 percent. What had been purchased as an up-to-date and effective policy steadily depreciated into trivial protection-at the very time when it was needed most. There is an even more fundamental reason why any attained level of coverage under private health insurance tends to deteriorate. Selling health insurance has become somthing like war or a football game. A company cannot stand still. It has to go ahead-it has to sell more and more. A parasitic kind of competition has developed. After any given level of selling the best risks and the people who most want insurance will be enrolled on the books of some insurance company. The poorer risks and those least interested in insurance will not. Any company desiring to expand volume as is essential even to stand still in today's market-will realize that its best sales opportunity is to go after a group that is already enrolled. To do so, something must be offered that looks very attractive. The insurance company has to offer what looks like a lower price, because the market is very cost conscious and because price is objective. But to make it seem even more attractive, what it actually does is to offer a lower price and a better package of benefits at the same time. |