tions within the law. He opted in favor of following one and did violence simultaneously to the other.

So he made a judgmental decision that has resulted in that suit. This is the concern I have. You have lay people that are, in effect, getting into the position of making decisions not just about expenditures and how much you will pay for an appendectomy but you are getting them providing guidelines with respect to medical care that it seems to me should be reserved unto the medical professionals exclusively.

Mr. REINHARDT. There are actually two parameters to the fee schedule. One is the overall absolute dollar amount for an initial office physician visit-for example-or for an appendectomy. But the other is the relative fees; that is, how much more expensive is an appendectomy relative to the initial visit?

If one sets about setting relative fees, I think one is indeed getting into the practice of medicine, although economists surely are bold enough to attempt such an intervention; as for the overall absolute fee level, I don't think we actually are intruding in the practice of medicine by saying an initial office visit of, say, 15 minutes duration should earn the same revenue-or perhaps less-in Massachusetts than it does in Mississippi. That was the type of leverage I was talking about. Only the absolute fee level need be manipulated.

Mr. CRANE. Thank you.

Mr. ROSTENKOWSKI. The time of the gentleman has expired.
Mr. Corman will inquire.

Mr. CORMAN. Thank you, Mr. Chairman.

I would just like to present another view to this problem of the doctors' always telling us that somehow we are interfering in their professional decisions. Of course, that is not true at all. No one ever tells the doctor what he can do for a patient.

We do say how much he will be paid for it if the Federal Government is paying the bill. No one has ever told a doctor he cannot see his medicaid patient once a day or whatever. We just say under certain circumstances you will be paid a dollars for it.

It seems to me we can divide the problem of national health insurance into two parts. One is what effect we are going to have directly on the delivery system itself and one can at least make a fair case for the fact that the delivery system itself is not all that bad now.

The other half of the problem is how are we going to pay for it? A great number of people will concede that the way we pay for it now can be significantly improved on. How you pay for it and how it is delivered certainly has some relationship, but it seems to me you can make drastic changes in that second part without radical changes in the first part or without destroying all that is good in the first part. Would the panel pretty much concede that or do you have a different view about it?

Dr. FREYMANN. This was precisely the point that I tried to make earlier, Mr. Corman. The experience of other countries has been that national health insurance has frozen the delivery system rather than changed it. To me, this is one of the threats of national health insurance. I do feel that our delivery system is inadequate, but we could actually stop evolution toward improvement by the way these bills eventually become law.

Mr. CORMAN. What would be your guideposts for us as we move down this road? Are you saying we ought not to try to change the way we pay the bill or are you saying when we make the change, that we ought to try to give flexibility to how this evolution in the care itself is carried out?

Dr. FREYMANN. I think we should concentrate on the payment mechanism without attempting to transform the delivery system simultaneously. Since the two are not inseparable, provisions can be put into the payment system which would better fit the delivery system to the perceived priorities of the American public.

This is why I keep coming back again and again to primary care. This is clearly a deficiency, and I believe we can rectify it through the payment mechanism.

Mr. CORMAN. If we devise a payment system that does not give preferential financial treatment to nonprimary care, make it evenhanded, then that is a system which I assume you would be in favor of? In other words, to raise the primary care opportunity for payments to where the very intensive care is already?

Dr. FREYMANN. Yes; replace the overincentives toward using highcost care. But here, of course, you could go too far. You could end up with all the hospitals going broke even faster than they are now if it were not carefully modulated.

Mr. CORMAN. If everybody had the financial ability to get to the hospital when they needed to get there, I expect they would be full, don't you?

Dr. FREYMANN. They are, sir.

There is a lot of talk about people not getting to hospitals. Well, I think such people are few and far between. That is not our problem. I think everybody can get to a hospital and does, and somebody pays for it.

Mr. REINHARDT. If you ask specifically what in health care legislation should we do about reimbursement of providers, hospital and noninstitutional provider, or physicians, I think that that is so controversial an area and so difficult an area that merits almost an extra session. But if the options you have one might be for noninstitutional providers to opt for prepayment. The other option is to continue with the fee-for-service system.

My own sense is that you probably won't have the political option to go with prepayment everywhere. You can certainly encourage it and certainly allow it to exist, but I think ultimately the bulk of medical transactions in the ambulatory side will be reimbursed on a fee-for-service basis.

Here you have nevertheless opportunities to provide incentives that would move the sector toward a more desirable state than we are now in. The question is how quickly can you do that?

It is clear now that you could not cut medical fees payable in New York City in half. I wouldn't propose this. But I would propose a more gradual approach. That is to say, in a national fee schedule you would have to regionalize it because they are so different.

I would freeze the high-fee States and let the others drift up. This way no one can really scream, "I can't meet my mortgage payment," because you can say, "Sir, vou met it last year out of those fees. You ought to be able to do it this year."

But in the gradual area I would let the underpaid area fees drift up and you could do roughly the same with intraspecialty differences in fees.

Mr. CORMAN. Would you all concede that what is good in fee-forservice medicine can be preserved if that fee is negotiated between the doctor and the intermediary instead of as it is now between the doctor and the patient?

Mr. REINHARDT. Well, much of what is good can be preserved. An argument in favor of fee-for-service is that it encourages productivity on the part of the physician, or that-being paid on a fee-for-service basis a person by working harder can actually improve his economic status. Those who are against any other form, particularly salary, point out or hypothesize that salaried people have no incentive to go the extra mile.

These are hypotheses that can be tested.

Mr. CORMAN. I am concerned about the entities that negotiate that fee. The doctors are on one side. On the other side, are all the incentives there for negotiating with the intermediary or with the patient? Mr. REINHARDT. I personally do not believe there are such negotiations between the doctor and patient now.

Mr. CORMAN. Patients feel that way, too.

Dr. FREYMANN. I think much of total physician income is obtained through intermediaries, sir. Again I must admit I don't have the exact figures, and I am sure it varies from specialty to specialty, but most physicians made a lot of their income through hospitalized patients. Note this includes primary care physicians.

The vast majority of inhospital professional fees are negotiated between the doctor and the third-party payer. So I think your point is well taken. Not negotiating directly with a patient doesn't change the doctor-patient relationship one whit.

Mr. CORMAN. The part that discouraged me is the rapid erosion in medicare where lower and lower portions of the elderly's health bill is being paid because the doctors reject the obligation to negotiate with the intermediary and insist on negotiating with the patient.

That is why patient costs are climbing rapidly. I think whatever we do we are probably going to have to reach a decision that if we have fee-for-service medicine, that the fee has to be negotiated between the doctor and the intermediary.

Dr. FREYMANN. Yes. Could I make one more comment about fee for service? I hold no particular brief for it, but I think that it does provide an incentive factor. A study published in 1970 (Surgery, vol. 68, pp. 1-19) demonstrated significantly lower productivity among members of medical school faculties on straight salaries as compared with those who could make money from patient fees in addition to their salaries. The greater productivity of the latter group should be no great surprise to anyone.

Fee for service is today's whipping boy. Many people think that is the cause of all our problems. But I would like you to look at Sweden and Canada. In Sweden, 99 percent of all professional fees are prepaid. In Canada, 99 percent are paid through fee for service. Yet these are two of the most expensive countries in the world insofar as the rates of increase of percentage of GNP going into health are concerned.

Mr. CORMAN. I personally do not reject the fee for service at all. I just think the mechanism has to be a negotiation between the doctor and the intermediary if we are going to have a national health insurance system.

Do any of your see the necessity or advantage in retaining the private insurance company in that intermediary role if we go to a broadbased health insurance system?

Mr. FEIN. There are two roles that private insurance

Mr. CORMAN. Yes. Maybe I ought to specify. One is the fiscal intermediary, and the other is the underwriter, as I understand it. So we ought to address both of those.

Mr. FEIN. I see no necessity or advantage to preservation of the private insurance sector in the role of underwriter. It complicates things and for no good reason.

As for fiscal intermediary, somebody is going to have to process pieces of papers. It is likely that the kind of national health insurance bill that will emerge will require that somebody process pieces of

paper.

If that is the case, the question arises who can do it better, cheaper, more efficiently, and if it is the case that the Federal Government can do it better, is the difference between the cost to Government and the cost through the private sector so large as to necessitate getting involved in a political battle?

I would like to think that if the private insurance sector is going to perform the role of fiscal intermediary, it would do so with more stringent standards set for it than was the case initially in medicare because as a representative of the Government, it just cannot process pieces of paper without being involved in the fee structure, the negotiation process perhaps, et cetera, et cetera.

If it is our representative, then it has got to protect the U.S. taxpayer.

I would prefer to see the Social Security Administration perform that function. Yet, it is not a matter of principle. The role of fiscal intermediary can go to the private sector if the private insurance sector can demonstrate that it can do it efficiently. I would say this is not necessarily a role for Government.

Mr. CORMAN. Do any of you find the role of underwriting as being a necessary part of the national insurance program? This is the difference between a compulsory private program and the public program.

Do any of the others of you have a view as to their relative value? Mr. REINHARDT. The question of necessity is quite clear. You certainly can do without it, as Canada has demonstrated. The Canadians administer their plans

Mr. CORMAN. Let's avoid administering. But the underwriting is important, whether we go to a compulsory private system or the public system which may be fiscally managed by contract.

Mr. REINHARDT. And the underwriting is eliminated also in Canada. So certainly the elimination of underwriting is feasible, and one can observe the effects of such an elimination in Canada.

The question could be put in another way: Could one live with the private system in which policies are privately underwritten? In such a case, what would be the price one pays for that as far as the Government is concerned?

Well, if one had insurance policies that were somewhat standardas for example, our homeowners insurance policies-and then allowed the companies to compete, if some companies can manage to compile a better payout record, that would reflect itself in lower premiums. Perhaps one could experiment with that.

But I remain rather doubtful that such experiments would indicate

success.

Mr. FEIN. This is not an unimportant issue so maybe I can take an extra minute to take issue with the implication of your remark as an experimental program.

It is in the nature of the Government program that you can scale the premiums which would not be premiums but taxes, to income and you do it every day not only in the income tax, but in the payroll tax. It is in the nature of the private insurance market that no private insurance company is going to underwrite with scaled premiums as a function of income.

This means that you are going to have a fixed dollar premium. If you then want to provide, different levels of cost to individuals as a function of income, you're involved in a Government assistance for some citizens to meet their premium payments to the private sector if they have low income.

So now you have involved an extra burden of assessing a person's income, transmitting a check from the public sector to the private sector. I think that is a complexity.

If, in addition, you permit the private insurance companies to cream and select the good risks you are going to have different insurance with different premiums as a function of the population that they have managed to address. It is not clear then that the difference in premuims comes out of efficiency. It may come out of selection of risks.

Then we are back at the old ball game that led to the difficulties that Blue Cross got into. The philosophy of a community premium and community rating was great, but then came the private sector and said to the Harvard faculty, "You're healthy, why do you want to be involved with Blue Cross?" I make up the Harvard faculty, that is only an example. We actually have Blue Cross. But they said to the Harvard faculty, "You are healthy, why do you want to pay for the aged? Why not sign up with us and we can give a lower premium?" The Harvard faculty, being socially responsible, said "No, that wouldn't be fair." [Laughter.]

So they went to Boston University. [Laughter.]

But then when BU did it, they came back to Harvard and said, "Now the difference between Blue Cross, which now has a higher proportion of aged than they once had, and what we can offer you is even greater," and the Harvard faculty which was socially responsible when the difference was low, now that the difference was magnified also signed up with a commercial carrier.

That is where we got to the medicare situation. The strong proponent of medicare in many States was Blue Cross because they couldn't compete with the private sector and keep the old people in the program.

I think that we would find that history repeated if we went the underwriting route with private insurance. I see no reason to repeat that history. We should be able to learn from it.