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dom of choice of both physician and patient; to guard and preserve the physicianpatient relationship and its innumerable benefits; to protect the public health; to work and study in cooperation with the insurance industry and service plans that provide for periodic and realistic budgeting for medical care and to work with all segments of the community to develop best possible ways of financing and providing medical care.

The San Joaquin Foundation was established in 1954 and is now responsible directly or through insurance companies for insurance for half the population of the 5 counties it serves. The Foundation concept has spread to include 31 counties in California and is established in some counties of 7 other states.

The majority of the physicians of the San Joaquin Foundation for Medical Care take pride in the fact that their Medical Society is sponsoring through its economic arm, programs that give to their patients comprehensive medical care with predictable costs at premiums that are under controlled devices. They are particularly pleased by the fact that, due to the administrative relationships be tween the Foundation for Medical Care and the insurance companies, governmental agencies and others that purchase Foundation programs, it has been possible to improve the coverage for medical services, and allow for comprehensive coverage of all needed medical care services. By this we mean the inclusion of such important items as care of infants from birth to assure protection against the catastrophe of birth anomalies; the coverage of patients who are critically ill and need physician attendance over many hours; consultive services for all types of problems; the ease in which new modalities, such as the intensive care unit and cardiac unit, can be covered under our programs.

A few of the physicians are unhappy about our program in that they chafe under the strict quality control and fee control mechanisms. These physicians, for the most part, are in the minority and probably will be with us for a long period of time.

This technique has spread to other areas and in the areas to which it has spread, the physicians have welcomed it because it gave them a device with which they could compete with other administrative modalities whose aim was the destruction of the traditional physician-patient relationship. In areas of less sophistication where the insurance mechanism has not been developed to any great amount, this technique would be completely impalpable. It is necessary for conflict for this technique to develop because it takes conflict to bring awareness as to the problems and possible solutions to the problems by the medical profession.

Preventive measures are encouraged under the Foundation programs, and early diagnosis is more easily arrived at because of the increased freedom of using X-ray and laboratory devices on an out-patient basis. The financial barrier of seeking care is removed in that the patient is aware of the cost factors in. volved prior to seeking his medical care and most, if not all, is covered by his prepaid program. Other ingredients in the improvement of preventive measures is seen in the fact that as physicians become involved in delivery systems of medical care they also become involved with areas of need and take steps to correct this need.


Does it result in savings of public funds? The answer to this question is an unqualified “yes". This can be proven through the work done in the San Joaquin Foundation as well as by the Foundation for Medical Care in Kern and Fresno counties in California. In the brief time that these three counties have been involved in experiments relating to Title XVIII and Title XIX of Public Law 89-97, considerable savings have been documented without a decrease in the quality of care and, as a matter of fact, with the increase in the quality.

The utilization control and medical audit features of the program are acceptable to most of the physicians who participate in the program for the simple reason that they know, in general, medical audit is being carried out which does not affect them personally. The 10% of physicians whose claims are chronically in medical audit, obviously, are unhappy about the program and their mhappiness perhaps attests to the thoroughness of the audit.

We have been asked if we have encountered any federal or state statutes, regulations, or administrative policies which unnecessarily impede or incon. venience our organization in rendering medical services. To some degree the answer would have to be yes. State statutes are restrictive in developing methods of payment that vary from participating and nonparticipating physicians. They also are restrictive in that any program that is carried out under our strict medi. cal audit in San Joaquin County must also be payable in areas where the audit is not so strict. This has increased costs in certain instances and caused problems in reviewing out of area claims. Our local programs could be more inclusive if protective devices could be developed to increase co-insurance deductible features for out of area coverage.

Second, at the present time, there is no way where the Foundation can involve itself in reimbursing hospitals in that State statutes require that this be done on an insured basis and for this reason funds must be available to cover all contingencies. If change in the Law were made we could develop similar service contracts with hospitals and allow, perhaps, for more comprehensive coverage in hospitals.


November 22, 1968.

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DEAR SENATOR WILLIAMS: First, I am enclosing a copy of a speech by Einar Mohn, Chairman of the California Council for Health Plan Alternatives, which was delivered before a recent convention of the California Hospital Association. Since I helped develop the address, I think it may be useful in responding to your questions.

As the speech indicates, the real crisis in health care is that while we are spending some 6% of GNP for health services, millions of Americans are still effectively removed from the essential services required to maintain good health. The government programs, including Medicare and Miedicaid, have failed to relieve the crisis because they are primarily concerned with removing the financial barrier between the individual and so-called "mainstream health services" without adequately attacking the problem of organizing health care services to make them more effective. In this sense, these programs are like the negotiated programs which tend to increase demand beyond the present capacity of our health resources as they are presently organized and used. If the federal government is to make good on the promise of Medicare and Medicaid to bring more individuals into the mainstream of health care, then it must find ways of encouraging the reorganization of health services so that delivery systems are developed to overcome the kind of problems both underprivileged and many blue collar workers face in obtaining quality medical care.

QUASI PUBLIC HEALTH CENTERS In the administration of Medicare, I would urge the federal government not only to encourage better organization of health services, but to actually sponsor new delivery systems in major metropolitan areas through the creation of quasipublic health centers so that realistic bench marks may be established for reimbursing the providers of health care services. In electric power generation, we have tried to keep alive the public power bench mark. In health care in California, we are moving in the opposite direction. MediCal has encouraged the conversion of county hospitals into community hospitals without the development of any new public delivery systems that can be used for bench mark purposes. We seem to be bent upon placing ourselves completely at the mercy of the providers, and what they determine to be "customary and usual charges."

In other words, I do not see any way of coming to grips with cost and quality problems in a framework that ignores the basic health care organizational issues. Mr. Mohn's address to the CHA places emphasis on the need for hospitals themselves to do something about keeping people well by taking a direct hand in fosterin new ways of organizing outpatient services. I agree with him that hospitals must assume some of the responsibility for the over-use of hospital facilities when such over-use results from the failure of the community and health plans to make outpatient care accessable on a timely basis.

In this regard, the federal government should consider the extent to which hospitals and other health facilities are cooperating in implementing the federal comprehensive health planning law. In reimbursing health facilities for services rendered through Medicare and Medicaid, no allowances should be made for depreciation of facilities and equipment unless individual health facilities are in fact planning to provide services needed by the community and coordinating their plans through the comprehensive health planning mechanism of their community. Mr. Mohn supports this view point in his CHA address.

PREVENTIVE HEALTH SERVICE FOR ELDERLY Finally, I would like to comment on the idea of providing preventive health services for the elderly. Of course, many of their health problems stem from the fact that they failed to receive preventive services when they were younger. The provision of such services may in fact be too late for many of them to suffer from chronic diseases that could have been prevented. Nevertheless, for those who's health can still be protected, I would suggest that the federal government establish a differential reimbursement rate for health facilities and physicians who participate in the establishment and operation of a community health screening facility for those covered by Medicare and Medicaid. This may be difficult to do, but I think it is worth the effort. Such a health screening facility should not only provide regular multiphasic health examinations for the aged, but should include a wide range of health education services designed to reach into the community and to help integrate medical care services that are now covered so that they may be used to preserve health. There is a great difference in my mind between adding health care screening on the one hand as another item on the medical “smorgasbord," and on the other, as a service that is organized to integrate for individuals the health services that are available to them in the community. I have serious reservations about multiphasic testing unless it is based on the integrated approach.

I offer these thoughts for what they may be worth, and regret that I hare not had the time to prepare a statement for submission into the record. Thank you for giving me this opportunity to submit these comments. Sincerely,

Dox VIAL, Chairman.




Today, in this age of crises, we find it difficult to talk about health care without referring to a crisis in connection with skyrocketing medical costs. The statistics, indeed, are of crisis proportions. During the two year period, June 1966 to June 1968, when the general Consumer Price Index was rising by an inflationary 766, the medical care index of the BLS rose 14%, twice as fast, and the index of hospital daily service charges rose 37%, over 5 times faster than the general Consumer Price Index. The projections for the future which we have heard many times are even gloomier .

Yet, we would be making a tragic mistake were we to focus only on costs, for this extraordinary rate of cost inflation in health care is merely a symptom of the real crisis.

The real crisis in health care is that while we are spending some $.30 billion a year for health serv in America (about 6% of GNP), millions of Americans are still effectively removed from the essential services required to maintain good health.

In a more immediate sense, the real crisis is that the billions being poured into the mainstream of health care to reach these millions are actually feeding the inflationary fires and providing very little in the way of incentives to finding more effective ways of organizing and delivering health services.

This, then, is the real crises—the sluggishness and unresponsiveness of our health care system to unmet needs, regardless of how much money we manage to pump into it.

We know this crisis only too well in the labor movement. We are up to our ears in it.

For years we have been "sweating out” of our employers, in lieu of wage increases, ever-larger amounts of money to purchase health care benefits for our members and their families through third party, group-purchases, arrangements. For years we have been pouring this money (now about $700 million annually in California) into the so-called mainstream and in the process, we have contributed more to the rate of health care inflation than to the improvement of the benefit structures of our programs. More importantly, quality considerations have consistently eluded us, and we have spent our dollars over the years withont affecting a more efficient use of medical resources or better ways of organizing and delivering services to maintain the health of our members.

We have worked primarily through third-party intermediaries to come to grips with our mounting problems—and they have failed us. We are now prepared to abandon them, if necessary.

As we told the CHA committee that met with us recently to discuss our problems, the Council for Health Plan Alternatives seeks a fundamental reorganization of health care. Our object is to pool the collective bargaining power of a million and three-quarters organized workers in the state to insure the greatest return for our health dollar, to secure an effective voice for the consumer in providing and planning for health, and to establish the machinery for monitoring the cost and quality of health care services and preventing abuse.

In order to accomplish these far-reaching objectives, we have made the deci. sion to become active participants in solving the problems in planning and organizing health care services. We have taken the steps necessary, as in the case of the CHP and the CMA, to establish direct lines of communications with the providers of health care services, rather than continuing to rely primarily on insurance companies and other vendors to act as our intermediaries. At the same time, we are not closing the door to constructive help from the insurance companies or other vendors.

We are under no delusion that the job we have cut out for ourselves is going to be easy to accomplish. For example, economists are prone to tell us, in connection with the current run-away inflation in health care, that we are bucking a classical situation where the demand for health services is running way ahead of the supply of resources needed to meet the demand. Inflation, we are told. is inevitable under these circumstances, and will continue until the supply side catches up with demand.

We wish it were possible to be even this optimistic. The prospects of supply catching up with demand doesn't even appear on the horizon at this time. We are in a sellers market in the health industry, and it's going to continue that way for a long time for some obvious reasons, the main one being that the health industry appears to be well sheltered from the pressures of demand to use resources in short supply more efficiently and effectively, while more resources are being developed. We do not see these classical economic pressures at work. In connection with hospitals specifically, we are inclined to believe, until proven false, what the Somers' pointed out in their book Medicare and the Hospitals:

"In no other realm of economic life today are payments guaranteed for costs that are neither controlled by competition nor regulated by public authority, and in which no incentive for economy can be discerned.” (Somers and Somers, Medicare and the Hospitals, 1967, p. 192.)

Negotiated programs have also taken a great deal of the risk out of collections for hospitals, and for doctors and other providers as well. Doctors are undoubtedly even more immune from incentives to economy than hospitals.

PROBLEMS FACED BY PROVIDERS In a very real sense it can be said that the econoinic chips are on the side of the providers. But the Council knows things really aren't quite that bright on the provider's side either. The Government isn't adding its billions to the purchasing power stream for health care without attempting to exercise some responsibility to protect consumers from the forces working against them. And, as indicated, it is the intent of CCHPA, as an organization of group purchasers, to develop all the bargaining power it can pull together for the purpose of developing a direct buyer-seller relationship with providers of health services. Like the government, we have become very interested not only in removing financial barriers, but also in making sure that when negotiated dollars are spent, maximum pressure is exerted on providers to utilize resources as efficiently as possible, and to organize them so that our members obtain the right health service at the right time in the right place. We are going to try to use our dollars to get the quality we are paying for and to develop health care delivery systems that will maintain health as well as treat the sick. That is the thrust of government policy these days; it is our main thrust also.

The exercise of "power" these days has become something of a scare word, even though it is the basis of economic action in our free society. We use it in the sense that the Council is seeking to exercise power that goes with “consumer sovereignty" in our economy-the sovereignty that too often falls prey to producers and providers of goods and services. Just how much consumer power it will be necessary for the Council to attempt to muster will depend on the response we receive to our pleas for help from the providers. We would much prefer to work with you on our mutual problems, rather than in opposition to policies and practices which we believe no longer have any validity.

Let me therefore explain how our Council members look at some of the reo sironsibilities of hospitals.


The staggering increase in hospital costs experiences over the long run, and the acceleration of the increases since Medicare and Medical, is an urgent matter that group purchasers who are responsive to their members cannot ignore. Out-of-pocket costs of covered members are going up as fast as the value of hospital benefits declines. Yet we know what costs cannot be discussed in a vacuum without relating them to quality considerations, advancements in the health and medical sciences, and related technological changes. CCHPA is not looking for "bargain basement" health services. That is why we have asked CHA to make all the facts available that will help to explain the sharp rise in hospital charges ince Medicare.

In this connection we know wages alone could not begin to explain increases of the magnitude experienced. In fact, we have no tolerance whatsoever for the view point that singles out rising labor costs in hospitals as the chief culprit. Apart from what appears to be the case that hospital charges are going up faster than uit labor costs, it should be recognized that labor costs are in fact going up in hospitals because they should be going up. It is intolerable to think that a nation spending $50 billion a year on health care should require, at the same time, a public subsidy from low-income hospital workers through the acceptance of substandard wages and conditions. From the viewpoint of thinking consumers, substandard wages and conditions are incompatible with the high quality of services demanded by consumers.

It's that simple to us. Hospitals can't score any public relations points by blaming low-income hospital workers and other underpaid persons, while ignoring a host of other considerations relating to the way services are planned and organized-considerations that vitally affect what the consumer is getting for his money.

What is important to the consumer in comection with hospital labor costs is how hospital administrators respond to the new set of economic considerations which come into play as labor costs go up. In a sellers market, like the one that exists for providers of health care services, the easiest and most irresponsible thing to do is simply pass the increases on to consumers. It would be considerably more responsible, although more troublesome, to explore ways of making offsetting adjustments, as for example:

-by introducing more efficient administrative practices. --by introducing labor saving measures and finding ways of organizing work

so that professionals and para-medical personnel are regularly employed

at their highest skill levels, consistent with quality considerations. -by abandoning under-utilized, high cost services which can be provided

just as effectively and more efficiently in the community through other

facilities. To the extent that hospitals take the easier path of charging what the traffic will bear, while simultaneously denying consumers full access to financial data and information on how costs are allocated for rate setting purposes, they are simply helping to build a case against themselves for regulation as public utilities. It would be wise policy for hospitals to recognize that the days are limited in the future when they will be able to increase rates without being fully accountable to the public. Whether or not it comes through public utility regulations, group purchasers will increasingly demand accountability.

These observations are not intended to imply that we cannot see the ineritability of some substantial cost increases in the future, apart from the questions of wage costs. The Council can appreciate the fact that hospitals have historically been institutions for those who are seriously ill, and the fact that the cost of medical care has gone up as medical knowledge has advanced and as treatment procedures in hospitals have become more elaborate. It does not follow, however, that hospitals are now powerless to do anything about rising labor costs associated with medical progress.

As I have already indicated, CCHPA is also concerned about hospital costs in the context in which hospital services are organized in the community to meet the health needs of the community. Our over-riding concerns are (1) that hospital facilities and services of highest quality be available to all persons;

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