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20 years.

lems they may have later in life if they do not have access. That is my concern.

I am concerned that the system we have now does not encourage it or does not give equitable access for that purpose.

Dr. ENGLAND. If I may comment from the point of view of personal experience on the idea of early child care, and immunizations. This is something that in my particular community we have gone out of our way to indicate “Don't stay away from these immunizations,” because it has cost; if you cannot pay there is no charge. This we have done for

Getting a mother to complete the immunizations of her child is one of the most difficult things I have to do. They will come in and get one shot and you will not see them for a year. You tell them when to come back, and all the rest, and you have to keep the records of what the kid is immunized against because you cannot depend upon parents to do it. I do not see why I should love the child more than its parents do, but in this area apparently I do. These changes in human behavior that you alluded to, and finding a legislative response to them, it disturbs me to have you legislate in respect to it.

Fortunately we have not found a way to legislate behavior completely, because when you legislate on these matters you legislate constitutional liberty out the window.

Mrs. Keys. Dr. England, perhaps health education should apply to all ages, patient as well as children.

The other thing, I am thrilled to hear about the altruism of your town. I wish all Americans could live there.

Dr. ENGLAND. I do not think we are unique.

Mr. SOMERS. I would like to say, I think the point you make, Mrs. Keys, fits very well with the questions Congressman Duncan was asking earlier about phasing in. If you people do decide that phasing in is the approach, it seems to me children are a very good place to start.

I think a “kiddie-care” program would well supplement the medicare program because that is where the health of the Nation will be determined, at the young age.

Mrs. Keys. Thank you very much. Mr. ROSTENKOWSKI. The time of the gentlewoman has expired. All time has expired.

I want to thank the panelists for participating in this discussion, It has been most enlightening. We know that you have a busy schedule, and we appreciate the time you have taken out to be with us this morning.

Thank you very much. Good day.

The committee will adjourn to July 24 in this committee room when the subject will be the problems involved in health care organization, and financing

[Whereupon, at 2:01 p.m., the subcommittee adjourned, to reconvene at 8 a.m., Thursday, July 24, 1975.]

NATIONAL HEALTH INSURANCE (Problems and Issues in Health Care Organization, Delivery,

and Financing)

THURSDAY, JULY 24, 1975
U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON HEALTH,
COMMITTEE ON WAYS AND MEANS,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in the committee hearing room, Longworth House Office Building, Hon. Dan Rostenkowski (chairman of the subcommittee) presiding.

Mr. ROSTENKOWSKI. Good morning, gentlemen.
If our witnesses would kindly take their chairs we will get underway.

We welcome you to the Subcommittee on Health of the Ways and Means Committee. I would like to explain what we expect to do this morning.

It is our intention to hold this panel discussion at least until 12:30 when the full committee will have to meet on another matter. If we have not concluded the discussion and the questions on the part of the members of the subcommittee, we will return at 2 o'clock.

I would like to explain that you have the privilege of submitting your whole statement for the record if you so desire, and now you can summarize it. Immediately after all the panelists have concluded their statement we expect an interchange in various areas where there might be some disagreement.

We are looking forward, gentlemen, to a lively discussion. We hope that you will gain as much as we have gained from the other panelists who have participated in these discussions.

I would ask you each, when you make your statement beginning with Professor Feldstein, to introduce yourselves.

A PANEL CONSISTING OF MARTIN S. FELDSTEIN, PROFESSOR OF

ECONOMICS, HARVARD UNIVERSITY; HERBERT E. KLARMAN, PROFESSOR OF ECONOMICS, NEW YORK UNIVERSITY; WILBUR J. COHEN, DEAN, SCHOOL OF EDUCATION, UNIVERSITY OF MICHI. GAN; CHARLES A. SIEGFRIED, MADISON, N.J.; AND AVEDIS DONABEDIAN, M.D., PROFESSOR OF MEDICAL CARE ORGANIZATION, UNIVERSITY OF MICHIGAN

Mr. FELDSTEIN. I am Martin Feldstein, professor of economics at Harvard University. I am very pleased to have this opportunity to talk with all of you this morning. I understand that the subcommittee wants to concentrate today's discussion on the basic problems of our health care system and not get into details about alternative national

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health insurance proposals. I would like to focus, therefore, on the single problem that I believe is responsible for the widespread interest in national health insurance: The rapid explosion of health care costs.

This inflation of health costs is important because it reflects a serious misallocation of resources and a failure of the health-care system to reflect individual preferences. Moreover, high medical care costs are the primary source of inequity in our health system, creating financial hardship and imposing a barrier to adequate medical care.

I think the basic facts of health cost inflation are well known to the committee. I summarized them on the sheet I handed out this morning. They indicate in the period from 1950 to 1974 prices as a whole in the overall Consumer Price Index went up about 114 percent. During the same period medical care costs rose more rapidly, 193 percent. But the cost of hospital care was much more dramatic in its upsurge. Average cost per patient-day was only $16 in 1950. It was about $125 in 1971, an increase of more than 650 percent.

While prices in general have doubled, health care costs have gone up triple and hospital costs seven and a half times. These increases in hospital costs have really dominated the rise in health care costs. By comparison the prescription and drug charges hardly changed over that period and physician fees have only gone up at the same rate as all other services in our economy. I will, therefore, limit my attention to the problem of hospital costs.

I think everyone is aware that hospital costs have risen rapidly, but there is little understanding of why this happened or why hospital cost inflation is very different from the other types of inflation that currently trouble our economy. Let me begin by giving you my own view of the nature and cause of this problem.

The two key ideas in my explanation are: First, the changing nature of the hospital product; and, second, the impact of insurance.

Consider first the importance of product change. The most obvious thing about hospital care today is that it is very different from the care given in hospitals 25 years ago. Today's care is more complex, more sophisticated and, hopefully, more effective.

The rapid rise in hospital costs really reflects a rapidly changing product, a rapid change in quality or style of care. It is, therefore, unwise to compare the rate of hospital cost inflation to the rate of inflation of most other goods in the Consumer Price Index. The cost of inflation of hospital care is not that consumers are paying so much more for the same old product that they bought before, but that they are buying a different and much more expensive product today.

Therefore, hospital cost inflation is quite different from other types of inflation in our economy. It is nevertheless a serious problem. To understand the nature of this problem, we have to ask why hospital cost inflation has occurred, why the style of care has become much more sophisticated and, therefore, much more expensive.

Higher incomes and greater education have, no doubt, played some role in increasing the demand for sophisticated hospital care and scientific discoveries have obviously changed the technological possibilities in hospitals. But the major reason I believe, for the hospital cost inflation has been the very rapid growth in insurance.

Let me explain why. In addition to providing protection against unpredictable medical expenses, health insurance substantially lowers

ance.

the net price of care that the patient pays out of pocket at the time he consumer services.

There is now substantial evidence that consumers are responsive to price differences, that is, that patients, guided by their doctors, demand more services and more expensive services when a large part of their costs are offset by insurance.

Some simple but striking numbers, which I have noted on the sheet I have passed out, will illustrate my point. In 1950 when average cost per patient-day was $16, private insurance paid 37 percent of hospital bills. That means on the average the net cost to a private patient was $10. By 1974 average cost per patient-day had jumped to about $125, but private insurance was paying 77 percent of the private hospital bill, leaving a net cost to the patient of $28.50. Thus, cost per day was up from $10 to $28.50, but $28.50 in 1974 really only brought $13 worth of goods and services in 1950 prices.

So in real terms the net cost to the patient at the time he consumes care had hardly changed at all during the 25-year period, having risen only $3. Consumer demand has, therefore, encouraged and supported the growth of more sophisticated and expensive care and consumer demand has done this primarily because of the growth of insur

Looked at somewhat differently, with 77 percent of private hospital bills now paid by insurance, an extra $10 of expensive care only costs the patient $2 out-of-pocket. It is not surprising, therefore, that patients and their doctors continue to encourage the growing sophistication and expense of hospital care.

The same process has been occurring during the 8 years since medicare was introduced. In 1966 hospital cost per patient-day was only $18. The 1974 figure of $125 thus represents a 160-percent increase in only 8 years. But because private insurance also grew rapidly, the net cost to the patient in 1966 prices remained essentially unchanged.

I think this is the essence of the hospital cost inflation problem: Increased insurance has induced hospitals to change their product and provide much more expensive and sophisticated care.

Before I talk about the implications of this explanation, let me contrast this with the usual reasons offered for the rise in hospital costs. These traditionally boil down to four ideas: (1) Hospitals are inefficient; (2) labor costs have risen particularly rapidly; (3) hospitals had a low rate of technical progress; and (4) supply has not kept up with increasing demand.

I think each of these ideas is basically incorrect as a diagnosis of hospital cost inflation and misleading as a basis for policy in this area. Let me explain why.

Perhaps the most frequently heard explanation of rising hospital costs is that hospitals are technologically and mangerially inefficient, that they get less output for input than ordinary business firms. Even if there are reasons for criticizing the inefficiency of hospitals, there is no reason to believe that this inefficiency has been rapidly increasing. Inefficiency could not account for a 650-percent increase in hospital costs. If hospitals are less efficient, their costs are higher than they should be, but not necessarily rising, let alone at such rapid rates.

Rising labor costs are also cited as the primary cause of hospital inflation. It is true that wages and salaries constitute a large share of

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