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by the way my fellow economists have tended to concentrate on health care costs as though they were the only contributor to inflation.

Senator NELSON. Are you saying you would expand the intervention, so to speak?

Dr. GALBRAITH. I certainly would. Two things which have deeply aroused my colleagues in the Council of Economic Advisors in the last year, if one may be guided by the newspaper reports, is the high cost of preventive action against brown lung, and the allegedly inflationary cost of a comprehensive health insurance bill.

This suggests that the inflation problem is unduly associated with health costs. There is much less concern about steel prices, automobile prices, or the higher awards in union contracts. The reason is, of course, that it is a lot easier to speak of hospital costs and politically a lot safer than it is to come to grips with GM or the Teamsters.

I would be much more persuaded as to the importance of the problem of health costs in the discussion today if it had not followed by about a week the suppression of Mr. Bosworth over his concern about costs in other areas.

Third, I should like on one matter to agree with my colleagues and friends in this hearing. Indeed, if I have been critical of them, I know they would be the first who would want me to speak the truth. I would agree with them as I would with you, Mr. Chairman, that a cost-containment effort such as that now pending in Congress is extremely important and should be enacted.

There can be no question that we have a market in the health care industry which even the most orthodox of my neo-classical friends will not defend with their usual religious fervor. It is a market in which the seller not only sets his own price, in a very substantial measure, but where he can also decide what it is that he should sell. Given that kind of market a persistent inflation in prices is not at all . surprising

I am uneasy, however, as to whether the cost-containment program now before the Congress, in conjunction with the announcement of the last few days about the modification and postponement of the commitment to pational health insurance, reflects sufficient action.

I do not believe, Mr. Chairman, that national health insurance, either in the logic of the situation, or by the evidence of other countries, contributes uniquely to inflation.

I would be very sorry if legislation, along the lines of Kennedy Harmon, were postponed for that reason. I would again refer to one of the studies which have become available and which advert to the various possibilities for cost control in this field.

This is a study in the volume which I earlier mentioned and which was prepared for the summit conference on inflation. It is a special study by Theodore Harmon, Donald Wittman, and Thomas Heagy and I read from the summary:

"To summarize, the greater the likely effectiveness of an antiinflation policy, the less likely its enactment.

"The market improvement strategy has some promise of effectiveness.

"Public regulation at the State level (if I may interpolate again, this is the regulation to which Dr. Schultze adverted] has political appeal, but much lower probability of effectiveness * * * and the greatest chance of controlling relative medical inflation would appear to be through the back door of a national health insurance plan that

is not necessarily passed for the purpose of controlling medical inflation, and does not have a strong inflationary control mechanism built into it, but which increases the effective pressures for controlling medical inflation in the future by increasing the portion of medical expenditures that flows through the Federal budget.”

The case they go on to make, which I believe to be a persuasive one, is that national medical health insurance, by creating a powerful buyer of medical and hospital services, is the opposite of the very influential sellers of those services that we now have and it represents the best chance for bargaining on hospital prices, bargaining on doctors' fees, establishing a mechanism to conduct their bargaining, and making medical costs subject therefore to the kind of two-sided bargaining which is singularly now so lacking.

To return now to an earlier point, I was very sorry to see the Administration postpone the enactment of plans for a national comprehensive health insurance program.

I do not feel at all happy about the fact, as often has been said, that the United States and South Africa are the only two countries that have not come to that particular civilizing instrument. But I was especially sorry to see that this was done on the grounds that it would be inflationary, that the postponement of action for another year or 2 would be necessary because of the need to avoid any exacerbation of the present inflation.

I think the much stronger evidence is that the present system is inflationary. Steps to make the Federal Government, in conjunction with the States, a strong buyer of health services and a strong bargainer on costs are our best hope for getting this problem back under control. I would, to that end, by all means exclude the private carriers as a cost-enhancing influence.

Thank you very much, Mr. Chairman.

Senator Nelson. What did you mean, you would exclude the private insuror?

Dr. GALBRAITH. I think I would not like to see the private carriers made a part of this system.

Senator Nelson. Of the comprehensive national insurance?

Dr. GALBRAITH. That is something we will be stuck with forever if we do, and this is a concession that I would not make.

I am frankly sorry that the advocates of national health insurance have compromised on this issue. I suppose I would accept this compromise rather than have nothing at all, but it is not a compromise that I feel at all happy about.

Senator NELSON. I have seen the original Kennedy one, it did not include the private insurors.

Dr. GALBRAITH. That's right or only a minor role for them at most. Senator Nelson. Thank you very much, Dr. Galbraith.

We appreciate your taking the time from your schedule to come and present your testimony.

The committee will be in recess until 10 a.m. Monday morning in this room.

(Whereupon, the committee was recessed at 3 p.m.)

IMPACT OF INFLATION ON THE ECONOMY AND

SMALL BUSINESS HEALTH CARE

MONDAY, AUGUST 21, 1978

U.S. SENATE,
SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D.C. The committee met, pursuant to recess, at 10 a.m., in room 424, Russell Senate Office Building, Hon. Gaylord Nelson, chairman of the committee, presiding.

Present: Senator Nelson.

Also present: Alan L. Chvotkin, counsel; and Judith Robinson, staff of Senator Nelson.

Senator NELSON. The committee will please come to order.

Our first witness today is Dr. Stuart Altman, Dean of the Florence Heller Graduate School, Brandeis University, Waltham, Mass.

Dr. Altman, we are very pleased to have you with us this morning. Go ahead.

STATEMENT OF STUART H. ALTMAN, PH. D., DEAN, THE FLORENCE

HELLER GRADUATE SCHOOL FOR ADVANCED STUDIES IN SOCIAL
WELFARE, BRANDEIS UNIVERSITY, WALTHAM, MASS.
Dr. ALTMAN. Thank you.

My name is Stuart Altman, and I am the dean of the Florence Heller Graduate School at Brandeis University.

I very much appreciate the opportunity to address the committee on this most important topic of containing health care costs.

Unfortunately, the problem is not new to me. In my capacities with the Federal Government, first as Deputy Assistant Secretary for Health Planning and Evaluation at HEW and later as Deputy Administrator, Office of Health, for the Cost-of-Living Council during the stabilization program, I concentrated most of my attention on the problem of rising health care costs.

Much of my energies went into trying to determine what the Federal Government could or should do to slow their very rapid rates of growth.

Obviously, I was not very successful. In 1971, when I began my tenure at HEW, this country was spending $77 billion for health care which equaled 7.6 percent of the Nation's gross national product.

The latest estimates indicate that total spending for 1977 was $163 billion, or an increase of 112 percent in 6 short years. As you might have expected, since leaving the Federal Government I have continued to give a great deal of thought to this seemingly intractable problem.

Let me say at the outset that, while I do not come before you this morning with any magic solution, I do bring you my strong conviction that these rising costs are the most serious problem confronting our health system today.

Failure to adequately deal with this problem will, I believe, not only seriously affect Government's capacity to address other health problems, but has already reduced the country's willingness to alleviate other important human service problems.

The truth of this latter statement comes home to me daily as I interact with the faculty and students at the Heller School who are concerned with the problems surrounding many of our less well financed social ills.

I am sure I need not go into what has now become almost a litany of statistics which demonstrates the magnitude of health cost increases and shows that health care continues to consume an ever larger proportion of the country's gross national product. But I would like to spend a few minutes discussing what we know about the causes of these increases.

Rapid growth of third party payments from Government health financing programs and private insurance, while protecting most people against the financial burdens of costly health care, has also eliminated most of the financial incentives that usually motivate consumers to insist on some balance between the value of a service and its costs.

In a report to the President's Council on Wage and Price Stability in 1976, Profs. Martin Feldstein and Amy Taylor emphasized this point by showing that after adjusting for overall inflation, the average cost per patient day in a hospital tripled in the last 20 years, while the dollar cost to the patient had remained the same.

Thus, the last 2 decades have seen a very substantial reduction in the "real" price the patient has had to pay for hospital care at time

Senator NELSON. I do not quite follow that, that the average cost to the patient, after adjusting for inflation, tripled if the dollar cost remained the same.

Dr. ALTMAN. In other words, in terms of what the patient pays out-of-pocket in actual do lars, the amount has remained about the

Senator Nelson. But that is not some of those who are paying.

Dr. ALTMAN. Absolutely correct, sir, but on average, the dollar costs remain the same. There are fewer and fewer people today who pay the total cost of a hospital bill. Over 90 percent of hospital patients have their bills paid by some third party.

Senator NELSON. Well, then, when you say the dollar cost remains the same, it means that would only apply to those who were not paying anything, would it not?

Dr. ALTMAN. Or those that pay a small proportion; that is, have a coinsurance rate, or have a policy which only pays for some of the ancillary services.

For the individual who pays the bill, the full bill, there is no question; they pay triple the amount. Actually they could pay a lot more than triple the amount, depending on the hospital they go to.

Senator Nelson. But there are a lot of people who make a contribution, either pay for their own insurance, or pay for half their

of use.

same.

insurance, and in those cases, I take it the cost of that insurance has tripled or quadrupled during that same period?

Dr. ALTMAN. Yes. As a matter of fact, in 1975 when we were costing out a package for national health insurance, that package cost about $600. I think the latest estimates for the same package is about $1,000. In 1965, that same package probably cost less than $300.

I was just trying to get the point across, sir, that when people use a service, which is priced at much less than its value, pressures exist to use more of it.

With these reductions in price have come expanded uses of hospital services and rapidly rising costs.

Today, close to 95 percent of an average hospital budget is paid by these third parties.

In most instances the payers—including Government-pay whatever the hospital charges or has spent for the care.

This, I'm afraid, does not create an environment for making the tough decisions necessary to provide efficient health care.

Other analysts of our health system point to rising costs of supplies as the primary cause of increases in health costs. Factors such as rising malpractice insurance premiums, fuel bills, new federally mandated safety standards, and, most importantly, the increasing complexity of modern medicine are pointed to as the main culprits behind the current wave of health cost inflation.

While both pressures are real and important, the evidence is very strong that our payment system goes too far in removing the fiscal discipline needed for an efficient health system.

Hospital beds are being built or at least modernized in areas where occupancy levels are already low. Purchases of expensive and duplicative equipment continues to be a problem.

It has been documented that salaries paid to health workers are often higher than those paid to similarly trained people in other sectors of the local economy.

If the pressures of increased demand are the main culprits, as I believe they are, then cost increases for health care above other sectors of the economy are inevitable and will continue so long as funds flow freely from these seemingly bottomless wells. I'm afraid there is no practical limit to the amount of money which our country could spend for health care.

Today it's malpractice insurance premiums, tomorrow a new wave of expensive procedures, the following week the introduction of a new group of highly paid health professionals. Each new factor may seem “necessary” or even an unavoidable increment to our health system, but when added together they make for very large additions to the Nation's health bill.

Vor should we be lulled into thinking that the most recent favorable news about low hospital price increases suggests that these increases are only temporary, a short-term adjustment to the start of medicare, or a "catchup” for the control period.

As the Feldstein-Taylor study revealed, history strongly supports the expectation that future medical cost increases will be significantly greater than price increases for the general economy.

These health cost increases translate into expected spending for health care of about $265 billion by 1981, or about 10 percent of our

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