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Last August, you asked me to study the reasons behind the rapid rise in the price of medical care and to offer recommendations for moderating the rise. In response to your request, I am transmitting herewith a Report on Medical Care Prices. The Report was prepared by Assistant Secretary William Gorham of this Department with the assistance and advice of the Department of Labor and the Council of Economic Advisers.

Medical prices have been rising for many years at a rate substantially in excess of the rise in the general price level. Like other prices, medical care prices accelerated in 1966. The Bureau of Labor Statistics Index of Medical Care Prices rose 6.6 per cent in 1966. Hospital room rates rose even more precipitously.

The Report attributes these price rises to the pressure of the rising demand for medical services, the relatively slow growth in the supply of physicians, rising wage costs in hospitals without commensurate increases in productivity, and the increasing complexity of medical care provided to the patient.

The Report holds out little hope for an early end to medical price
increases. Growing population and rising incomes, as well as the
public commitment to assure adequate medical care for all citizens,
will continue to put upward pressure on medical prices.

Nevertheless, steps can be taken to moderate the rise in medical prices by using medical resources more efficiently. To this end, the Report recommends:

1. The establishment of a National Center for Health
Services Research and Development to discover and
disseminate new ways of delivering health care

2. The encouragement of the group practice of medicine.

3. Strong Federal support for State and area-wide planning
for the efficient use of health resources.






Re-examination of the reimbursement formulas under Medicare and Medicaid in an effort to design formulas which increase the incentives to health institutions to operate efficiently.

The appointment of a Presidential commission to review Federal programs of support for health institutions with an eye to the efficient distribution of such institutions.

Training and use of physician assistants and other innovations in medical education and the efficient use of medical manpower.

A study of frequently prescribed drugs to determine the
relative therapeutic value of brand name products and
other drugs with the same generic name.

Implementing these recommendations will demand the concerted efforts of the medical community, the insurance industry, State, local, and Federal officials, and concerned public groups.

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This Study represents the collective efforts of many people.
It was prepared in my Office, under the supervision of
Alice M. Rivlin, by Jeffrey Weiss and Douglas Wilson, with
the assistance of Robert Turtle.

Substantial contributions to the data and analysis were received from the Bureau of Labor Statistics, especially Arnold E. Chase and his staff; the Public Health Service, especially Agnes Brewster and her staff; and the Social Security Administration, especially Ida Merriam and her staff. Ideas and advice from the Council of Economic Advisers, the Department of Labor, the Department of Justice, and many parts of the Department of Health, Education, and Welfare are reflected in the Report.

Rashi Fein of the Brookings Institution and several other experts outside the Government were extremely helpful.

William Jaham

William Gorham

Assistant Secretary

for Program Coordination

Part I. Summary and Recommendations

Cause for Concern

The price of medical care rose rapidly in 1966:

The Bureau of Labor Statistics index of medical care prices rose 6.6 percent.

The index of hospital daily room rates went up 16.5 percent. Increases of this magnitude cause severe hardship to individuals in need of medical care, whether they pay the prices directly or indirectly through higher insurance premiums. Medical price increases make Government-financed medical care programs more expensive for the taxpayer.

There is nothing new about rising medical prices.

Since World War II, medical prices have been rising considerably faster than consumer prices generally. But the 1966 increases were the largest in many years.

The purposes of this report are to

• identify the causes of the longrun upward trend and the recent acceleration in medical prices;

⚫ estimate what is likely to happen to medical prices in the future; and

• recommend Government actions to moderate the price rise and to encourage greater efficiency in the delivery of medical care.

Why Doctors' Fees Are Rising

More people are seeking doctors' services more often.

Increases in population, rising personal income, wider private and public insurance coverage, and other factors contribute to rapid increases in demand for physicians' services.

The number of active physicians is rising relatively slowly.

Between 1950 and 1965, the number of family physicians (pediatricians, internists, and general practitioners) actually declined.

In the face of rising demand for their services, physicians have been

• seeing more patients per week; and

• raising their fees.

Physicians' fees-like many other prices-accelerated in 1966.

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