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example, urges private insurance carriers to put special stress on promoting comprehensive coverage that will induce more treatment in doctors' offices and outpatient clinics and less in hospitals. Doctors also are being urged to deemphasize solo practice and instead to group themselves together in partnership arrangements so as to achieve economies of scale. Such group practice, already growing in popularity, affords much the same kinds of opportunity for division of labor and the use of special personnel and special equipment as are associated with hospital treatment. Another recommendation frequently advanced is that the health industry develop new types of personnel-physicians' assistants, for example, who in training would stand somewhere between nurses and doctors and who would take over much of the routine and follow-up treatment physicians now give. In view of the physician shortage that exists and that seems virtually certain to continue, this suggestion warrants serious study, even though some problems of patient acceptance are certain to be encountered. Opportunities and pitfalls

Numerous additional suggestions for improving the efficiency of the health industry are beginning to emerge in the growing body of literature concerned with the economics of medical care. This itself is encouraging, as is the general sharp ening of public focus on existing cost and supply problems in the medical field. And conferences such as the one which is to be held in the nation's capital next month could—if properly structured-serve as important forums for the exploration of ideas and the furthering of public understanding of problems and issues. There is an especially important need for general comprehension of the fact that the advance in medical fees and charges is a complex phenomenon that stems basically from an enormous swelling of demand (in part the product of public policy) occurring in an area where there are many stubborn obstacles to the rapid expansion of supply. This demand-supply relationship points to the virtual certainty of further increases in the prices of medical services. Unless the underlying causes of such a development are understood, however, there predictably will be impatient urgings that the government "do something" about it.

But this is an area in which to move cautiously. Neither admonition nor coercion will change the basic fact of upward pressure on prices. Either, if attempted, would tend rather to discourage the efforts—sorely needed—which providers of health services are making to close the gap between what they are now capable of producing and what a properly health-conscious society demands.

JULY 14, 1967. DEAR SENATOR SMATHERS : The testimony of Mr. Alvin M. David, Assistant Commissioner of Social Security, on June 22, before your subcommittee, shows we have good reason to be pleased with Medicare's performance during the past year. According to Dr. Carroll L. Whitten, President of the American Academy of General Practice, "it has worked better than most physicians bad expected.” But Mr. David made no mention of still unsolved problems in the area of the stated subject of your Hearings, “Costs and Delivery of Health Services to Older Americans." Among the witnesses appearing at the same time was Dr. Jeffrey H. Weiss, Operations Research Analyst in the Office of the Assistant Secretary for Program Coordination, also on the panel representing Sec. Gardner and the Dep't of H.E.W., who was actively engaged in preparing the report to the President on Medical Care Prices.

This report to the President shows that the Social Security Administration has been too slow in coming to grips with the economic problems of Medicare. It deplores the absence of moves toward “cost reducing methods” in the Medicare reimbursement guidelines. "The present Medicare reimbursement scheme, based on ‘reasonable cost' does not provide hospitals and other health facilities with adequate incentive to be efficient. The Medicare and Title XIX reimbursement formulas, as well as the reimbursement formulas of some private insurance plans, tend to maintain institutions that are inefficient in size, plant, layout and equip ment." According to the H.E.W. Report to the President on Medical Care Prices, whose ideas are only slowly beginning to penetrate the Social Security Administration; “At present, hospitals have inadequate incentive to be efficient. They are not under strong pressure from patients because a substantial part of patients' bills are paid by third parties. Third parties have usually reimbursed hospitals for costs incurred without pressing for greater efficiency, Hospital administrators often lack the training required for effective management. The medical staff of the hospital often presses the hospital administrator and board of trustees for acquisition of the latest medical equipment without regard to cost implications involved. Trustees are often subject to pressures imposed on them by the community and the medical staff. Even where the incentive does exist, initiation and application of cost reducing innovation is often beyond the resources of an individual institution.”

The H.E.W. Report to the President makes the following recommendation, among others: “The Dep't of H.E.W. should review the reimbursement formulas used in Medicare and Medicaid in an effort to find practical ways of increasing the incentives for hospitals and other health facilities to operate efficiently." H.E.W. Secretary Gardner, at the final session of the National Conference on Medical Costs on June 28 called for “a radical shift in emphasis." Hitherto, he said, we were preoccupied with the "financing mechanism,” but now "we are forced to examine the efficiency, the productivity and the logic of the system by which (health) care will be delivered.” I called for this "radical shift in emphasis" while employed in the Social Security Administration but got, and am still getting, the cold shoulder there. However, my letter to the Chairman of the Senate Finance Committee (Hearings on H.R. 6675, Social Security, 89th Congress, First Session, 1965, pages 1123–5), contrasting the dominant "actuarial” approach and the newly-required "economic" approach, gave some inspiration to Senator Russell B. Long, now Finance Committee Chairman, to say on the Senate Floor just before they passed the Social Security Amendments of 1965; "The worth of the Social Security bill of 1965 cannot be measured solely in terms of dollars. It can better be judged by an economist than an actuary, better by a social worker than an accountant, and even better by ... the needs that are met, the fears that are dissolved, the wants that are satisfied by what we have wrought.” He was calling for cost-benefit analysis, just as Sec. Gardner is doing now.

The House Ways and Means Committee Hearings on H.R. 5710 ("President's Proposals for Revision in the Social Security System") has in its record (Page 2445-9) my letter to the Chairman, Honorable Wilbur D. Mills, which provides evidence that the Social Security Administration has been dragging its feet when it comes to moving in the direction to which H.E.W. Secretary John Gardner is pointing. An elaborate statistical program is provided for but no economic study in the sense called for by the Gorham grcip which prepared the H.E.W. report to the President on Medical Care Prices. (See Social Security Bulletin, January 1967, “Health Insurance for the Aged: The Statistical Program" by Howard West. "Analytical Studies," including "Studies of Utilization and costs of Health Services," "Studies of Effectiveness of Administration,” and “Studies Relating to Specific Provisions," are here envisaged as awaiting future findings of the “statistical system." Defense Secretary Robert S. McNamara's warning that we must do our basic thinking “before we start to bend metal" has not yet reached the Social Security Administration. Here they are in the habit of awaiting the results of “actuarial experience,” (another name for muddling through.) According to an article in the March 23, 1967 Washington Post ("Budgeting System Spreading Slowly" by William Chapman) the Programming Planning Budgeting System, or PPBS, announced with fanfare almost two years ago by President Johnson as a "very revolutionary system' still meets with bureaucratic resistance. "Even in H.E.W., where the most significant progress has been recorded, Gorham encountered considerable inertia when he pushed custom-ridden officials into the cost-benefit field." I can supply evidence of such "inertia" in the Social Security Administration. Some of this may be found in my letter to the Honorable Wilbur D. Mills, mentioned above. In this, I refer (page 2448) to testimony before the Subcommittee on the Health of the Elderly on April 27, 1964, which I tried to bring to the attention of my supervisors in the Social Security Administration in connection with an official assignment.

Your subcommittee already has in its record one letter from me addressed to the Honorable Maurine Neuberger (See Hearings, “Detection and Prevention of Chronic Disease Utilizing Multiphasic Health Screening Techniques," 89th Congress, Second Session, pages 577-8). This spells out a criticism of sloppy thinking on "costs" and "expenditures” in the health field, touched upon in a letter from me in the Washington Star of July 10.

I would appreciate your inclusion in the record of your Hearings on "Costs and Delivery of Health Services to Older Americans" this letter, my short letter in the Star and a letter I wrote while employed in the Social Security Administration which is relevant to showing there has been "inertia” in the Social Security Administration. This is in the interest of stimulating as much discussion as possible in how to do a better job in providing better health services to Older and Other Americans. Yours sincerely,


[From the Washington Star, July 10, 1967)

MEDICAL Costs Sir: In your editorial, “The Doctor Shortage," you should also have mentioned the American Medical Association's report of the Commission on the Cost of Medical Care, 1964, especially Volume I. Too many fail to heed the warning in this study that "cost, price, and expenditure may be, but generally are not, equal." Official government reports on medical economics fail to distinguish between "costs" and "expenditures." They talk as if the rich have higher costs than the poor because they spend more. When the President boasted that health expenditures of the government had more than doubled since he became President, was he boasting of higher costs?

One of the tasks of the recent National Conference on Medical Costs was to proceed with hitherto neglected public education in health economics. A beginning was made in the American Medical Association study, but the Social Security Administration administering Medicare has not yet caught on. What good does it do to have mention of “reasonable costs” in Title 18 of the Social Security law when there are no reasonably clear cost concepts?


MARCH 18, 1965. Mr. BERNARD POPICK, Deputy Director, Division of Disability Operations, Social Security Administration, Baltimore, Md.

DEAR MR. POPICK: In the Report of the Advisory Council on Social Security, 1965, the subject of costs other than costs to a fund-entity gets less than a page's treatment. This is Section 6 of Part II (pages 42–3): “Payments on the Basis of Reasonable Cost.” This ends on the following note: "Payment on a reasonable cost basis would be in line with the recommendations of many expert groups, including the American Hospital Association. The established practices of most Blue Cross plans are generally in line with this recommendation.” But some, including Dr. Robert S. Morison, Director for Medical and Natural Sciences of the Rockefeller Foundation, are critical of prevailing cost studies which are nothing but extrapolations of existing trends. If they are right, we cannot assume current practice represents “reasonable cost."

The printed record of the House Ways & Means Committee Hearings on H.R. 3920 ("Medical Care for the Aged," part 5, page 2497), contains my letter to the Continental Casualty Company, asking for “light on the economic principles whereby hospitals price the services they provide.” This committee did not consider this question, but a representative of this company testified to a Senate subcommittee that they were not qualified to discuss "the cost of health care itself" (including hospital services),; they only considered "the cost of the insurance process; administrative and marketing costs, costs of paying benefits, and a risk charge or profit.” In no other economic field would anyone get away with concern only for the marketing of goods to the neglect of their improved production.

The same printed record (pages 2501-2) has an exchange of letters between me and Governor George Romney, relating to my inquiry about the McNerneyUniversity-of-Michigan Study of Hospital Economics. An official assignment had introduced me to this Study. I was to prepare “a summary analysis . . . which might pertain to a Medicare statistical program,” which was to “devote itself" to certain problems, including "ways in which an evaluation of reasonability of costs were arrived at."

The Advisory Council on Social Security might well have considered points and questions I raised in my report. Some of these appear in the Ways & Means Committee printed record (pages 2496–2502).

I would like guidance as to what use I am permitted to make of a carbon copy of my report, not being sure whether it is mine or belongs to the Social Security Administration. Yours sincerely,



June 21, 1967. DEAR SENATOR SMATHERS: I am responding to a letter forwarded to me by Mr. Cary Williams in regard to your hearings with the Special Senate Committee both currently and in the future on the subject of "Costs and Delivery of House Services to Older Americans".

I am writing from the point of view of the nursing home field on how it affects or is being affected by the current federal legislation.

Your first question regarding rising medical costs, the rising costs are, of course, causing difficulties for the elderly and everyone else, I might add, not merely the elderly.

Comment: I think especially the rising hospital costs are a burden to every. body, the elderly included. It appears to me that one of the major causes for this rise in hospital costs is the complete lack of any concern on the part of the federal government for eficiency of operation. This is in sharp contrast to other federal programs of competitive bidding, negotiated contract, incentive plans under the Defense Department and other similar ideas. In the health field, it is currently written on a cost-plus basis. It is actually encouraging inefficiency and rising costs. This, of course, reflects very strongly on the pocketbooks of all of your citizens.

2. Do many of the elderly face insurperable obstacles in obtaining needed health services?

Comment: It has been my experience here in dealing with numerous welfare clients over the years that while there are numerous obstacles in the way of obtaining service in time delays in getting service through socialized practices, that these are not insuperable and are part of the system of socialized services.

I might add that private people experience similar delays when they go to their doctors. I can't remember getting into a doctor's office on time with an appointment any time in the recent past.

Here in St. Petersburg various services both at the Welfare Clinic level and in other Welfare programs have been speeded up and the Welfare Department, I feel, today is doing a substantially better job in serving the elderly and the indigent than they were doing a couple of years ago.

3. Are present health services remote geographically and sociologically from many of our older persons ?

Comment: I can't answer this for the general area, but in the St. Petersburg area, it is quite the opposite. The health services are located right in the heart of the greatest concentration of elderly people as well as close to the greatest concentration of indigent people, so I would say that they are quite close both geographically and sociologically.

4. Are present Medicare and Medicaid policies intensifying old problems in the organization of health services or causing entirely new problems?

Comment: On this subject, I can speak with considerable authority both as Vice President of Region III of the American Nursing Home Association and as past president of the Florida Nursing Home Association. I think that many old problems in these fields have been solved by Medicare in Florida in that many of the older people are getting care that they did not get before. However, on the other hand, Medicare has created untold additional problems and entirely new problems and problems which are yet only on the horizon. I have never in my life been associated with anything that took so much time and effort, procedure, change, rechange, and new issues and ideas than the Medicare program has presented. While I recognize that this is somewhat inherent on all governmental programs, it seems to be unduly complicated in the Medicare Administration. I suspect that it will be equally complicated in the Medicaid Administration unless the Congress somehow changes these programs to the right incentives for eficiency of operations.

5. Are shortages of trained personnel in the medical and medical-related professions especially severe in the fields that serve the elderly?

Comment: There is no question that there are great shortages in the field, especially in the areas of nursing and nurse-related types of services. We are in great need in this area of expanded LPN training programs and Aide training programs. I think Pinellas County has done very well in that it has had an LPN school for many years which is accredited and will have two more schools this coming year under the State Vocational Education Program.

It has also done well in the Aide training program. We, at my three nursing homes, have graduated over 300 Aides under the State Vocational Program, but there are many more needed. It is needless to say that the minimum wage laws which will increase the cost of nursing each year for the next four years are, of course, increasing the general cost of all nursing care for all patients, and this, of course, is something that should be taken into account in the planning of new medical programs which are going to be much more costly than originally anticipated and much more costly than the current situation unle88 the federal government sincerely and seriously considers some sort of reward for efficient operation instead of penalizing the efficient operator and rewarding the inefficient one. My experience, broadened in the last year or so, shows that there is no necessary relationship at all between a non-profit medical-care institution and a proprietary medical-care institution or a governmental medical. care institution. We have right in St. Petersburg some non-profit homes providing care at very reasonable rates; we have others providing care at rates substantially higher than the tax-paying institutions of first class quality. Likewise, we have proprietary institutions that are both efficient and inefficient and in each case, the patient in the inefficient institution really is suffering and the federal pocketbook is paying the bill directly or indirectly.

Final comment: May I commend to your consideration the fact that under the proposed Medicaid Programs in Florida and in some 20 other states, the proposal of HEW to cut off the supplementation in these states will grossly increase the cost of the Medicaid Program in the states and suggest that you look into this problem, especially in Florida which will be the worst hurt in the nation in terms of its own finances and suggest some sort of alternative legislative approach to phase out supplementation from January 1, 1969 over a 2, 3, or 4-year period rather than cutting it off. If it is cut off, the cost of medical care in Florida will rise astronomically and indirectly the cost of the private patient also as has been the case under Medicare. Sincerely yours,

David R. MOSHER,



June 15, 1967. Senator GEORGE A. SMATHERS, Chairman, Subcommittee on Health of the Elderly, U.S. Senate, Washington, D.C.

DEAR SENATOR : In connection with the hearings scheduled for June 19, I am enclosing a policy statement of our organization on Title XVIII of P.L. 89-97 It calls for extension of coverage to preventive services and out-of-hospital prescriptions. It also calls for elimination of deductibles, co-insurance, and limits on certain services. Change in methods of paying hospital-based specialists, and encouragement of group practice are also advocated.

The Public Health Association of New York City, an affiliate of the American Public Health Association, has a membership of individuals working in health professions and of agencies concerned with the public health. With all best wishes for your subcommittee's activity, Yours sincerely,


President. [Enclosure)


XVIII, PUBLIC LAW 89-97, AS AMENDED The New York City Public Health Association's legislative objective is to assure the availability and provision of adequate total health care at reasonable cost for all people.

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