Secretary's Advisory Committee ole Hospital Effectiveness U.S. DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE '' ''Secretary's Advisory Committee On Hospital Effectiveness U.S. DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE '' For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price 25 cents '' CONTENTS Ast Members of the Secretary’s Advisory Committee on Hospital PON Special Consultants and Industry Representatives___________ PHS Staff Assisting the Secretary’s Advisory Committee on Hospital Effectiveness_-_-_.._....._.._-.-_-=_--_____-- Presenters of Position Papers to Secretary’s Advisory Com- mittee on Hospital Effectiveness_______.._._____________ I. II. III. IV. ¥. VI. VII. VIII. Exe What the Committee Was Assigned To Do___________ How the Committee Worked________________________ How the Committee Viewed the Existing Health Service. Some Basic Assumptions About What Should and Shouldn’t be Done_____-___..-.-_--__-------_2_-__- Planning and Franchising the Health Services_________ Internal Management of Health Care Institutions_____ Financing Health Facilities and Services.__.__________ The Hospital as the Organizing Focus for Health Care_ RIN 5 ee GoehatGs vi Vil 11 20 27 33 35 35 ''MEMBERS Secretary's Advisory Committee on Hospital Effectiveness Mr. Joun A. Barr (CHamrman) Dean, Graduate School of Business Northwestern University Chicago, Ill. Mr. Karu G. BartscuHt Community Systems Foundation Ann Arbor, Mich. Mr. Ray Brown Executive Vice President Affiliated Hospital Center Boston, Mass. C. Westey E:sets, M.D. Professor of Medicine and Asso- ciate Dean for Postgraduate Medical Education, University of Colorado Medical Center Denver, Colo. Mr. Ray Eprertr, Chairman Board of Trustees Harper Hospital and President, Detroit Medical Center Development Corp. Detroit, Mich. Mr. Scorr FLemine Kaiser Foundation Health Plan Oakland, Calif. Jack C. Hatpeman, M.D. President, Hospital Review and Planning Council of Southern New York New York, N.Y. Mr. Raymonp Francois Ki1i0n Vice President, Metropolitan Life Insurance Co. New York, N.Y. Mrs. ELEANOR LAMBERTSEN, R.N. Director, Division of Nursing Education Columbia University Teachers College New York, N.Y. Mr. Lawrence E. Martin Associate Director and Comptroller Massachusetts General Hospital Boston, Mass. Joun Mayne, M.D. Mayo Clinic Division of Medicine Rochester, Minn. Mr. Water J. McNerney President, Blue Cross Association Chicago, Ill. Mr. Watrrer J. Romp Executive Director Children’s Hospital Pittsburgh, Pa. Mr. Harvey STEPHENS Executive Vice President Automatic Retailers Association Philadelphia, Pa. Mr. James W. STEPHAN James A. Hamilton Associates Minneapolis, Minn. Mr. Joun TomayKo Director, Insurance, Pension, and Supplemental Unemploy- ment Benefits Department United Steelworkers of America Pittsburgh, Pa. ''SPECIAL CONSULTANTS AND INDUSTRY REPRESENTATIVES Secretary’s Advisory Committee on Hospital Effectiveness Anceto P. Anceripes, M.D. Director of Medical Education Lankenau Hospital Philadelphia, Pa. Geratp Besson, M.D. President, Santa Clara Medical Society Sunnyvale, Calif. Epwarp J. Cuertan, Ph. D. President, Institute for Resource Management, Inc. Bethesda, Md. Mr. WENDELL CRAIN Health Industries Association Chicago, Il. Mr. Ropert EpcecuMBrE Executive Vice President Commission for Administrative Services in Hospitals Los Angeles, Calif. Jack H. Hatz, M.D. Director of Medical Education Methodist. Hospital Indianapolis, Ind. Mr. Suetpon Houck Health Industries Association Chicago, Ill. Mr. J. J. JenRine Director, Center for the Study of Productivity Motivation Graduate School of Business University of Wisconsin Madison, Wis. Joun R. McGzrony, M.D. Chevy Chase, Md. (Retired USPHS Officer) Donato C. Rieper, Ph. D. Associate Professor of Public Health Yale University New Haven, Conn. Mr. Rosert M. Siemonp Executive Director, Hospital Planning Association of Al- legheny County Pittsburgh, Pa. Mr. Arruur STANKOVICH Director, Management Informa- tion Systems Department, Lan- kenau Hospital Philadelphia, Pa. Herrman M. Somers, Ph. D. Professor of Politics and Public Affairs, Woodrow Wilson School of Public and Inter- national Affairs Princeton University Princeton, N.J. ''PUBLIC HEALTH SERVICE STAFF Assisting the Secretary’s Advisory Committee on Hospital Effectiveness Bureau of Health Services, PHS Carrutu J. Wacner, M.D., Director, Bureau of Health Services Ricuarpv M. Macraw, M.D., Assistant Director for Extramural Relations Mr. Max Finz, Deputy Director, Office of Information Office of Program Planning and Evaluation, BHS Mr. Francois GoLDSMITH Mrs. StePHANIE SMITH Chief, Special Staff Services Staff Assistant Branch Mr. Grorce SPATAFORE Trene C. Revi Deputy Director Secretary to Deputy Director Mr. Joun Runyan Lots Ann WILLIAMS Special Assistant to the Deputy Secretary to the Chief, Director Special Staff Services Branch vi * ''PRESENTERS OF POSITION PAPERS to Secretary’s Advisory Committee on Hospital Effectiveness AxsraMowiTz, Dr. JossrH Chief, Dental Services Branch Division of Indian Health Bureau of Health Services, PHS Paper : “Personnel-Staffing Needs and Practices.” Barnuart, Dr. Gipert R. Assistant Director for Research and Development Bureau of Health Services, PHS Paper: “Research and Development in Hospital Effectiveness.” Brrnzweic, Mr. Enz P. Legislative Planning Officer Bureau of Health Services, PHS Paper: “Tax Structure and Tax Policies Affecting the Health Care Industry.” Bierman, Miss Prarn Chief, Standards and Methods Branch Division of Medical Care Administration Bureau of Health Services, PHS Paper: “Standards and Methods: Development and Effects.” Brewster, Mrs. Agnes Chief, Health Economics Branch Division of Medical Care Administration Bureau of Health Services, PHS Paper: “Hospital-Based Group Practice: A Growing Pattern of Medi- cal Care.” Burteien, Mr. Wii11aM Director, American Hospital Association Regional Office Charlottesville, Virginia (Formerly Assistant Director for Plans and Policies, Division of Hospital and Medical Facilities, Bureau of Health Services, PHS) Papers: (1) “Areawide Planning”; (2) “Shared Services”; (3) “In- centives and Support for Research and Development Construction.” CavanauGH, Dr. James Director, Comprehensive Health Planning and Development Office of the Surgeon General, PHS Paper: “The Partnership for Health Program and Impact on Hos- pital Effectiveness.” vii ''Curran, Dr. Epwarp J. President, Institute for Resource Management, Inc. Bethesda, Maryland Papers: (1) “A Systems Approach to the Design of Incentives for Improved Hospital Effectiveness”; (2) “Automation and Health Care: An Overview of Systems Integration.” Community Systems FounpatTIon Ann Arbor, Michigan (Karl G. Bartscht, John M. Armstrong, Richard M. Grimes, Ray- mond Smith, and Ronald D. Gregg) Papers: (1) “Share Hospital Services”; (2) “Automation and New Technology—Contributions to Hospital Effectiveness” ; (3) “Sources of Capital in Hospitals.” Crain, Mr. WENDELL Health Industries Association Chicago, Tlinois Paper: “Health Industries Association Presentation.” EpcrecuMsBE, Mr. Ropert Executive Vice President Commission for Administrative Services in Hospitals Los Angeles, California Paper: “Labor Operating Controls for Hospitals.” Fisner, Mrs. Gat Program Evaluator Office of Program Planning and Evaluation Bureau of Health Services, PHS Paper: “Role of the Hospital in the Community.” Fiemine, Mr. Scorr Kaiser Foundation Health Plan, Inc. Oakland, California Paper: “Governmentally-Sanctioned Health Facility Planning—A Viewpoint from the Opposition.” Frazer, Miss Axicr Special Assistant for Educational Services Office of Program Planning and Evaluation ‘Bureau of Health Services, PHS Paper: “Improving Consumer Use of Hospitals.” GatiacHER, Dr. JosrpH A. Deputy Director, Bureau of Health Manpower, PHS Paper: “Incentives to Encourage the Improvement. in Acquisition, Retention and Effectiveness of Health Manpower.” viii ''Jeurine, Mr. J. J. Director, Center for the Study of Productivity Motivation Graduate School of Business, University of Wisconsin Madison, Wisconsin Paper: “Hospital Productivity.” Lane, Mr. Gera S. Chief, Automation Section Division of Hospital and Medical Facilities Bureau of Health Services, PHS Papers: (1) “Measures of Hospital Effectiveness”; (2) “Use of Hos- pital Information Systems.” Lizpman, Dr. Mayer Assistant Chief, State Plans Section National Institute of Mental Health, PHS Paper: “Prototypes of Hospitals of Different Sizes and Different Geographic Locations.” Lewis, Mr. Irvine Deputy Assitant Director, Human Resources Program Division Bureau of the Budget Paper: “The Bureau of the Budget and Hospital Effectiveness.” Maxi, Dr. Nancy C. Acting Chief, Medical Care Program Methods Section Division of Medical Care Administration Bureau of Health Services, PHS Paper: “Effective Use of Hospitals by Physicians and Other Health Professionals—Utilization Review.” Martin, Mr. Lawrence E. Associate Director and Comptroller Massachusetts General Hospital Boston, Massachusetts Paper: “Capital Needs for the Facilities of the Voluntary Hospital System.” Moscato, Mr. Joun Public Health Advisor Division of Hospital and Medical Facilities Bureau of Health Services, PHS Paper: “The Hill-Burton Program.” Nasu, Mr: Rosert M. Director, Office of Equal Health Opportunity Office of the Surgeon General, PHS Paper: “Discrimination and Its Effect on Hospital Effectiveness.” 295-545 O - 68 - 2 ''Parmer, Mr. PIErRe Special Assistant to the Associate Deputy Chief Medical Director Department of Medicine and Surgery Veterans Administration (Formerly Assistant Division Chief for Hospital Affairs, Division of Health and Welfare, Bureau of the Budget) Paper: “Supplementary Material Relating to the Presentation on Bureau of the Budget View of Incentives.” RispeL, Dr. Donan C. Associate Professor of Public Health Yale University New Haven, Connecticut Paper: “Prepayment, Insurance, and Hospital Effectiveness.” Trerney, Mr. Toomas M. Director, Bureau of Health Insurance Social Security Administration Paper: “Incentives and Hospital Cost Reimbursement—Titles XVIII and XIX.” Watsu, Dr. Joun J. Director, Division of Direct Health Services Bureau of Health Services, PHS Paper: “Improved Management Techniques.” WiiiaMms, Mr. Epwarp R. Assistant Director for Planning Office of Program Planning and Evaluation Bureau of Health Services, PHS Paper: “Need for National Planning Council.” Woxxste1n, Mr. Irwin Director, Division of Health Insurance Social Security Administration Paper: “The Legislative History of Medicare Hospital Cost Reimbursement.” ''1. WHAT THE COMMITTEE WAS ASSIGNED TO DO DISCUSSING ITS ASSIGNMENT with the committee on the occasion of its first meeting in Washington, June 29, 1967, Secretary of Health, Education, and Welfare John W. Gardner asked the Committee on Hospital Effectiveness to examine the evidence and advise him of actions that might be taken to improve performance in four principal areas of health service involving hospitals. These were: 1. Ways to improve the internal efficiency of the hospital as a func- tioning mechanism. 2. The extent to which the hospital should serve as the organizing focus of a new and more effective system for the delivery of health care. 3. Considerations of the community mix of health care facilities. 4. The formula for reimbursement to hospitals and other health care institutions by third-party payers. Elaborating on the charge to the committee, Secretary Gardner and other representatives of the Department explained the reasons for concern with hospital effectiveness: First, the hospital is a central institution in community life whose services in one way or another affect the well-being of every family and are thus related to all the programs and services conducted and offered by the Department of Health, Education, and Welfare. More directly, in the Medicare pro- gram conducted by the Social Security Administration, in its admin- istration of Federal funds to support State programs of medical assistance for welfare recipients, and in hospital construction grants, the Regional Medical Program, Partnership for Health and many other activities the Department is supporting the provision of services whose effectiveness depends heavily if not wholly on the effectiveness of hospital service. “There isn’t any agreement yet as to what more effective systems of health care ought to look like,” Secretary Gardner said to the com- mittee in conclusion. “Certainly there isn’t any agreement as to what the organizing focus of such a better system should be. But it is clear that there is going to be some kind of organizing focus; the system is going to be more interdependent than it is now, more interrelated; the various institutions are going to relate to one another in more orderly ways, and this suggests that there is going to be some order. This is the kind of thing I would like you to think about very hard in con- nection with the hospital—what its role can be as a focus for organiz- ing health activities. You have one of the most interesting committee assignments I have seen in this Department.” ''As seen by the Secretary and accepted by the committee, then, the concept of hospital effectiveness includes but is not limited to the quality and economy of hospital services per se. The concept reaches out to consider the effectiveness with which the hospital serves as an organizing principle for the delivery of health services in the com- munity, a process the committee judged as comprehending the activi- ties of the hospital’s medical staff, trustees, and administration directed toward the determination of needs for health services of all kinds and the ordering of facilities and programs aimed at fulfilling perceived and projected needs. Hospital effectiveness in this view is thus con- cerned with the accessibility of health services, the suitability of services to needs, the quality of the services, and the economy with which the services are delivered to the population. These are the con- cerns to which the committee addressed its deliberations. ''ll. HOW THE COMMITTEE WORKED THE METHOD THE COMMITTEE FOLLOWED in arriving at the conclu- sions and recommendations reported here was not the time-honored one of accumulating and analyzing masses of data on the performance and cost of the health services, though the data developed in previous studies were available and were referred to frequently during the com- mittee’s discussions. Instead, the committee assumed the truth of cer- tain basic propositions (see p. 9) and invited appropriate members of the Health, Education, and Welfare staff and respected professional authorities in the health services and related fields to prepare back- ground or position papers on their specialties, including recom- mendations for action to correct known deficiencies and improve performance. In nine 2-day meetings over a period of 7 months, a large share of the committee’s time was spent examining the facts, conclusions and proposals presented by these authorities, questioning them about their findings and their arguments, and then evaluating thése contributions in relation to those of other authorities and the views of committee members, who were themselves broadly representative of the health professions and related enterprise. Karly in its deliberations the committee considered whether it might handle its assignment more expeditiously by dividing itself into sub- committees for consideration of problems and formulation of recom- mendations having to do with specific areas of hospital activity such as, say, planning, medical staff organization, management, and financ- ing. While some special assignments relating to their particular exper- tise were given to individual members and groups during the course of the discussions, it was the feeling of the committee that the prob- lems of the several areas of study were so interrelated that separate consideration would be unwise, and that examination of all the prob- lems of hospital effectiveness by the committee as a whole would be more advantageous. The discussion and recommendations that are re- ported here thus represent the thinking of the entire committee, with only the exceptions that are noted.’ (Footnotes at end of text.) In formulating this report the committee has made comparatively few specific recommendations for action, not because it has seen any lack of opportunities for effective action by all the groups and interests concerned in all segments of the health service, but chiefly because re- ports of this kind—and there have been many of them in recent years— have commonly made so many recommendations for action by so many groups that there has been no clear priority of importance and no com- pelling impact on decisionmakers in the communities, in the health 3 ''professions, and in government. Seeking to avoid any such diffusion of impact, the Committee on Hospital Effectiveness determined to make only those recommendations that were seen as being capable of apply- ing pressure at certain key leverage points in the health services— recommendations for action that could be expected in each case to force or evoke further decisions and actions and might thus have a multi- plier effect ultimately reaching into all branches of the health service. The committee thus agreed that its specific recommendations would be few in number, high in priority, and pregnant with potential conse- quence. Recognizing a surfeit of recommendations that are really noth- ing more than statements of desirable goals, the committee also decided that its calls for action must be stated in specific terms, and that they should be capable of implementation in the near and foreseeable fu- ture. Finally, it was decreed that the recommendations must be “do- able” or actionable rather than conceptual in nature and that they must be directed, as far as possible identifying the persons and groups required to act. The resulting constraints on the number and nature of the recom- mendations set forth here may cause some disappointment among those who will read this report, as it has among some who have taken part in writing it, as they may see their own interests and judgments subordinated to what the majority of committee members have con- sidered to be the most significant of the actions that must be taken now. Understanding that such disappointment may exist, the com- mittee remains convinced that concentration of attention on results as opposed to far-off goals will have the most beneficial impact for the improvement of hospital effectiveness. ''lll. HOW THE COMMITTEE VIEWED THE EXISTING HEALTH SERVICE Tue AMERICAN HEALTH SERVICE has its its roots in the traditions of the private practice of medicine and the voluntary hospital organized and managed as a philanthropic service by church and citizen boards of trustees serving without remuneration. As it exists today, the health service represents a broad diversity of interests and practices; a third or more of physicians practice in groups or on salary rather than as individual, fee-for-service practitioners; more than half the hospital beds are in institutions that are part of Federal or State hospital systems; more significantly, through Medicare, Medicaid and other public assistance programs one-third or more of the charges for patient service at voluntary hospitals is now paid out of public funds. While the voluntary hospitals and the general hospitals run by city, county and district governments have less than half of all the hospital beds, these short-term hospitals account for 85 percent of all hospital admissions. This is where American physicians practice medicine, and where American families receive their hospital care, and—with public assistance or through Blue Cross or insurance or some other prepay- ment mechanism in most cases—pay for it. What happens in these hospitals is thus a matter of public concern. Since the discovery of anesthesia and antisepsis in the mid-19th century initiated the transformation of hospitals from religious and charitable asylums for the sick poor to workshops for physicians in private practice, what happens in hospitals has been determined largely by advances in medical science and the resulting proliferation of medical technology. The impact of technology on hospital care and the hospital economy in our time may be recognized instantly by any visitor to a hospital operating room, intensive care unit or nurs- ing floor, yet the impact remains difficult if not impossible for even the most knowledgeable experts to measure in precise terms. One simple measurement may suggest the transformation of hospital care from a person-to-person service to a sequence of technical procedures: Twenty years ago the new general hospitals that were being designed averaged 300 to 350 square feet per bed for all services, and an archi- tect who planned a hospital at 400 square feet per bed was likely to be criticized for extravagance of scale. Hospitals today commonly average 700 or 800 square feet per bed, and in the more sophisticated centers, 1,100 and 1,200 square feet per bed are often required to accom- modate all the processes'of modern medical care. In industry, advances in technology have usually resulted in sub- stitutions of capital for labor; as the automated machine tool, rolling 5 ''mill and assembly line were introduced, the work force in each case was diminished. In contrast, the hospital work force often as not has been increased rather than diminished by the new technology, because the technology keeps creating new things to do instead of just new ways to do things. In short-term general hospitals, for example, the average number of employees per occupied bed, exclusive of doctors, has increased from 1.7 20 years ago to 2.6 in 1966. Economists have assumed from these figures that the productivity of hospital workers has been diminishing over that period. The as- sumption is valid only if one considers that the output, commonly measured in patient days of hospital care, has remained constant, which is obviously not the case. The output today includes diagnostic and therapeutic procedures that didn’t exist a few years ago. Open heart surgery, requiring an operating room team of 20 to 22 members, including biomedical engineers to manage the heart-lung machine and blood volume analyzer, is a dramatic example; hospital floors today are filled with patients who are benefiting from one or another of the new techniques. The new hospital care costs more than the old hospital care, how- ever, not just because of new technology and added staff but because the salaries and wages of hospital workers at all levels of skill have been rising steeply in recent years. In the religious asylum years, hos- pital workers were expected to have a sense of mission that was con- sidered in effect a substitute for cash; nurses and others commonly lived in housing provided by the institution and took their meals in hospital cafeterias, and wages were far below those paid for compara- ble services in the industrial economy. As the hospital has emerged over the years from religious asylum to doctor’s workshop to com- munity enterprise and now, in part at least, public health facility, these outmoded personnel practices have been largely discontinued, but wages still lagged behind those paid in the general economy and have had to rise rapidly in the last year or two. Wages should con- tinue to rise as hospitals compete with industry for manpower in a tight labor market. The wave of nurses’ strikes and threatened strikes that moved across the country in late 1966 and early 1967 and the inclusion of hospitals for the first time in the minimum wage pro- visions of the 1966 amendments to the Fair Labor Standards Act were visible signs that hospitals are out from under the protective comforter of charitable enterprise and must stand on their own in the economy. Impelled by these changes in the content of hospital care and the nature of hospital enterprise, hospital costs have mounted steadily and at an accelerating rate; the increase in 1966 alone was in excess of 16 percent, compared to yearly increments of 6 to 8 percent over several previous years, and the 1967 increase is expected to have been about the same. Authorities have estimated that average per diem 6 ''hospital costs now totaling $65 may rise to as much as $100 in 5 years. As the 1967 Report to the President on Medical Care Prices indicated, other elements of medical expense, such as physicians’ fees and drug prices, have been rising also, but there can be no question that hospital costs are leading the charge. Over the same period that has marked these sharp increases in hospital prices, other forces have been at work adding to the com- plexity of the health service economy. The proliferation of specializa- tion in medical practice, for example, has made the average physician as dependent on the capital and organizational resources of the hos- pital as the surgeon of the early 1900’s was dependent on its operating tables and anesthetic machines, and the growth of Blue Cross, hospi- talization insurance and other forms of prepayment has contributed to increased utilization of hospital facilities and services. By 1966, an estimated 156 million persons were enrolled in private health insur- ance organizations and thus paying for some part of their medical and hospital care through some form of prepayment rather than by fee-for-service. Because an oversupply of hospital beds has existed in some areas, and because the new techniques have popularized the hospital as the best place to go for medical service, and because it has served the convenience of physicians and patients, and because prepayment and insurance benefits generally have emphasized hospital care as opposed to services rendered in nursing homes, physicians’ offices and patients’ homes, the use of hospital facilities has soared along with hospital prices. From one hospital admission for every 10 persons in the popu- lation in 1946, the utilization rate has risen to one admission for every 6.5 persons in 1966. While the removal of economic barriers to hospit- alization has obviously made an important contribution to good health care, the emphasis on hospitalization in prepayment has unquestion- ably been an incentive to extravagance; the number is in dispute, but there is evidence that people are admitted to hospitals because their Blue Cross or insurance plan will pay for the services they receive if they are hospitalized and won’t pay for the same services if they are rendered in outpatient departments or nursing homes, or physicians’ offices, or their own homes. A final complexity of the health service today results from the absence of coordination among its many diversified elements. Hospitals are licensed by their several States and local authorities, but licensure has been structured mainly on the safety of physical facilities, without regard for the way they are used. Hospitals built with Federal assist- ance under the Hill-Burton Act of 1946 have had to show evidence of community need for the services they proposed: to offer, and Hill- Burton has thus introduced an element of system, at least, into the provision of facilities. Boards of trustees and organized medical staffs 7 295-545 O - 68 - 3 ''within hospitals have generally tried to be conscientious in the applica- tion of known regulatory measures to the use of the facilities and services for which they are responsible, but more often than not they have acted independently of one another, with no guiding or control- ling intelligence governing the effectiveness of the entire hospital organism and no continuing effort to coordinate the services offered inside and outside hospitals in the same community, or among com- munities. In major population centers, areawide planning agencies have been organized, usually on hospital initiative, and are operating to seek some measure of coordination of facilities and services, but these agencies have lacked authority to compel compliance with their recom- mendations. Finally, at a time when the technology of medical care has advanced to a point where substantial accumulations of capital and personnel resources are required to make the benefits of medical science available to the population, nearly half of all short term gen- eral hospitals still have fewer than 100 beds and annual budgets of $1.5 million or less—resources that can be considered generally inade- quate to meet the Nation’s rising expectations for medical care. These are the complexities and problems the Secretary’s Advisory Committee on Hospital Effectiveness has been examining during the last 7 months. ''IV. SOME BASIC ASSUMPTIONS ABOUT WHAT SHOULD AND SHOULDN’T BE DONE THE HEALTH SERVICES are a unique phenomenon in the American economy. The peculiarities arise in part from the origin of the health service in the freely offered beneficences of religious and charitable enterprise; in part from the controlling position in the health services of persons trained in professions that are distinguished from industry by the fact that while men and women may enter them to earn a liveli- hood, the measure of their success is the service they render to man- kind; and in part from acceptance in our time of the proposition that the health and welfare as well as the subsistence of the less fortunate are the responsibility of the whole society and cannot be left to the vagaries of charitable impulse, professional dictation, or the intention and solvency of local authority. These distinguishing characteristics are at once a source of-strength in the health services and a cause for concern about their present problems and future development. They are a source of strength because they have permitted the full play of community initiative and professional freedom to achieve unequaled peaks of performance where the service operates at the highest levels of efficiency; they are a cause for concern because in some communities local initiative has been inadequate and professional freedom has been abused, and be- cause these same characteristics of the health service have permitted a measure of disorganization and resulting extravagance that now threaten the structure. The key fact about the health service as it exists today is this disorganization. Unlike industry, the health service lacks most of the controls that are imposed in the free enterprise economy by the forces of supply and demand, competition, and the drive for profits. These forces are present to some degree in some elements of the health service, but for the most part they are either absent or subordinate to the forces of need rather than expressed demand as the measure of input, professional decision rather than consumer satisfaction and volume as the measure of output, and accessibility and quality of service rather than profits as the measure of performance. In its deliberations the committee has considered a number of argu- ments and proposals looking toward introduction of the controls that are at work in the industrial economy, and some of the recommenda- tions included here are aimed at securing some of these advantages. But the committee remains firm in its conviction that there is more to be lost than gained by relinquishing the community and professional thrusts that have characterized the health services in America in favor 9 ''of the competitive and profitmaking thrusts that have characterized American industry. Given the extraordinary circumstances resulting from the nature of the health service, the committee is convinced that the service must remain complex and pluralistic, and that its problems are not suscept- ible of solution either by the introduction of competitive forces or by monolithic centralized planning and controls. No such simplistic solu- tion is sought or proposed in the recommendations here, and none is considered feasible. Instead, the committee has considered that the key to solution of the problems of the health service as it exists, with the hospital already established as ‘a central core of medical intelligence and activity, must lie in the introduction of motivation and controls that can be expected to bring shape and system to a service that has remained formless and disjunctive. The committee believes an element of planning may be injected into the service in such a way as to compel improvements in effectiveness without directing the application of specific management methods. The recommendations reported here are aimed at achieving this goal. 10 ''V. PLANNING AND FRANCHISING THE HEALTH SERVICES THE MOST COMMON POINT of entry into the health service is the physician’s office—in the majority of cases a physician chosen by the patient or family but increasingly instead the physician on duty or on call at a hospital outpatient department or emergency room or clinic, where the institution rather than the individual physician is the real point of entry. In either case, if further diagnostic study or continued care is required the patient is likely to be admitted to the hospital and is thus locked into this particular compartment of the health service system, even though his condition may be so mild that further study or continued care might be furnished successfully in outpatient visits, or in a nursing home, or in the patient’s own home. In contrast, there may also be occasions when the patient’s condition is so serious that he should be transferred at once to a medical center instead of being held for treatment at the community hospital. In the first instance, the result is an extravagance; either the patient, or his insurer, or the com- munity is paying for more facilities and services than are required, and an expensive hospital bed is being used by somebody who doesn’t need it. In the second instance, the result may be tragedy: the patient is getting less care than he requires, with the consequent possibility of delay in recovery, damage to health, or danger to life. Obviously, neither extravagance nor tragedy can ever be avoided entirely in medical care, but lack of planning and control in the health services has resulted in fragmentation and disjunction that promote extravagance and permit tragedy. For example, physicians and hos- pital administrators and trustees and Blue Cross executives have known for 20 years or more that one of the reasons people are admitted to hospitals for diagnostic workups which might readily be performed as outpatient services is that their insurance contracts will pay for the workups if they are hospitalized and won’t pay for them if they aren’t; yet the needed controls to prevent this from happening have not been developed, and beds are still filled with these patients who don’t need to be there, and hospitals build more beds to accommodate more of them, and costs keep on going up, in a senseless spiral that has been repeating itself for years. Lack of planning and control also results in other common anoma- lies: Two new hospitals, both half empty, within a few blocks of each other in one city neighborhood ; half a dozen hospitals in another city equipped and staffed for open heart surgery, where the number of cases would barely keep one of the centers busy; empty beds the rule rather than the exception in obstetric and pediatric services across the nation ; aged, chronically ill patients lying idle in $60-a-day hospital 11 ''beds because no nursing home beds are provided; overloaded emer- gency rooms, and under-used facilities and services that have been created for reasons of prestige rather than need. No authority, no decision, no law, no prescription can eliminate these abuses all at once, of course. They have been developing for years, and it may take years to eliminate them completely with the best of remedies. Unless the remedy is applied at once, however, the abuses seem certain to multiply ; costs could then mount beyond control, serv- ices could become even more fragmented than they are today, and the result eventually might be the kind of upheaval of the entire health service system that nobody really wants. The remedy starts with planning, to be applied in massive doses over the entire surface of the health service economy. Planning must be based on careful estimates and projections of needs for the whole spectrum of health service and must include appropriate representa- tion of consumer as well as professional interests in the community. Unless it is linked to such planning, licensure of health care institu- tions by State authority cannot make any positive contributions to the improvement of institutional effectiveness. Based on the proper plan- ning process, however, licensure may be considered as backstopping or undergirding effectiveness by making certain that minimum standards are adhered to by institutions—including considerations of program and quality as well as facilities—and by requiring that new and added programs and facilities represent useful increments to the health care system as seen by appropriate planning bodies. Though licensure does not by itself contribute to the design of a rational system, it helps to ensure that the growth and development of health care facilities are always congruous with the evolving system. Specifically, the Committee on Hospital Effectiveness makes these recommendations: 1. Recommendation Every health service institution shall be included in the jurisdiction of an areawide health service planning agency. 2. Recommendation Every health service institution or group of institutions under com- mon management shall prepare an institutional services plan to be furnished to the areawide health services planning agency and updated at least annually. 3. Recommendation Each areawide planning agency shall develop and publish an area- wide plan and guidelines for determining needs for health services and for developing facilities and programs consonant with needs. 12 '' 4. Recommendation There shall be within the State health department in each State a single agency responsible for the licensing and regulation of all health care institutions and facilities, and (a) in its health facilities licensing statutes every State shall require prior review and approval of any change in physical facilities which significantly affects the nature or magnitude of the pro- gram of any health care institution. and (b) Effective at as early a date as the Congress shall find feasible, all Federal grants to States involving health facilities shall be contingent on adoption by the State of a plan approved by the Secretary of Health, Education, and Welfare for prior review and approval of new health facilities and of physical changes in existing health facilities, and (c) The State plan shall include establishment of a State health fa- cilities advisory council representing professional and community interests, and the council’s review shall be required for any change in physical facilities or any major alteration in the nature or magnitude of services rendered by any health care institution, and (d) The State advisory council and licensing agency shall be required to consider the advice and recommendations of the appropriate areawide planning agency before taking official action on any facility or program. 5. Recommendation Where such arrangements will assist the institutions in meeting the purposes of the planned project, State health facilities licensing agencies shall condition the approval of projects seeking Federal funds on the ewistence of formal contractual arrangements between institutions for shared administration, medical staff appointments and privileges, services offered, and facilities furnished. Obviously, the formulation of institutional and areawide plans for development and integration of facilities and services will not by itself overcome incoherencies in the health service and eliminate fragmenta- tion and waste, but without such planning there is no possibility that these goals can be achieved. Moreover, the discipline of the planning process, carried on continuously as prescribed here, will expose incon- sistencies and waste and thus develop pressures to avoid perpetuating them. Within institutions, planning compels thoughtful attention to the determination and projection of needs for institutional services and the development and deployment of resources to meet perceived needs. In industry, the pressures of competition and the drive for profits make continuous planning mandatory ; today the business that doesn’t 13 ''plan doesn’t survive. Lacking these market pressures, health care institutions must be required to engage in the planning process—the rational ordering of means to achieve stated ends—if they are to con- tinue to have the public confidence, and the public support, and the public funds most of them still enjoy, albeit with some shrinkage of public enthusiasm in recent years. The precise form and substance of the institutional plan will be specified by the appropriate areawide planning agency in order to ensure uniformity and comparability of plans among institutions in the area. Certainly such plans will include at least descriptions of the constituencies served by the institutions, statements of service objec- tives, and details of the programs designed to achieve these goals. Institutional needs for new or modernized buildings and equipment must also be described in detail, and plans for financing such capital additions included. Plans should present projections not just for the coming year but for 5 years, and be flexible enough to comprehend changing conditions resulting in changing needs for services, staff, facilities and capital. Ideally, planning will be a full-time function of a member of the institution’s administrative staff; in smaller com- munities and institutions the services of a full-time planner may be shared by several institutions—an arrangement that may present difficulties but has worked out in some cases. It is plain, at any rate, that when planning is left to be done by persons with other governing, administrative or professional responsibilities, plans are likely to be either absent or perfunctory. 13 However the planning function is staffed within the institution, it is mandatory that the process must include the governing board, the administrator, appropriate members of the medical staff and other personnel, such as nursing, representative of the services the institution offers. Especially, it is important for physicans to take part in formulating the institutional plan, not only because their patients ‘and their responsibilities and the their practices are central to the achievement of institutional goals but more particularly be- cause medical staff and individual physican decisions and actions have a signficant influence on every aspect of institutional effectiveness, from internal hospital management to developmental goals and inter- institutional plans for referrals and shared services. The physician who has taken part in the planning process may be expected to accept responsibility for the plan’s effectiveness, and the one who has not, may not. Evidence that physicians have played an appropriate role in planning will be considered in the acceptance and publication of institutional plans by areawide planning agencies and in the approval of funding for capital projects by State licensing authorities. As provided in Public Law 89-749, areawide planning agencies may be either arms of local government or not-for-profit corpora- 14 '' i REE OSES SRY BRL “OEE ARSE. SIRS SEI TSE Ne as eel cana tions. The committee is convinced, however, that areawide planning should be done by voluntary nonprofit agencies whose governing boards are composed of leaders of decisionmakers representing all elements of the community, including users as well as providers of health services. State authority should be called on only when the areawide planning agency isn’t functioning. It is understood that the nature of health planning, particularly in complex metropolitan areas, precludes the possibility of develop- ing a fixed scheme of facilities and services in which the future role of each institution and activity are clearly specified. Rather, it is intended that each areawide planning agency shall continually review the health needs of its area and establish guidlines and standards for the coordinated development of appropriate facilities and services. In any case, itt is considered essential that such agencies be organized for all areas of the country so that no health care institution may exist outside a planning authority. Necessarily, planning for the health services must go where the population is and not stop at political boundaries. Thus an areawide agency may plan for facilities and services across State lines and work with the appropriate State au- thorities in all the States involved. In determining the size of the area to be included within the agency’s jurisdiction, the resources of the community must be considered; the planning agency will be supported by some combination of govern- ment grants and contributions from industry, labor, prepayment plans and other segments of the community. The support must be sufficient to provide a staff consisting at least of a director, a professional planner, a statistician and necessary secretarial and clerical personnel, and commitments for financing the planning function must anticipate operations for three to five years to avoid hand-to-mouth, year-to-year solicitations. Planning agencies as envisioned here are as concerned with the orga- nization and integration of programs and services, and with the avail- ability of manpower to provide such services, as they are with the orderly provision of plant and equipment facilities, but agencies no less than individual institutions have an obligation to keep facilities costs down. Where unnecessarily restrictive building codes or State or national regulations exist, for example, the planning agencies and hospital trustees may initiate efforts to obtain revisions. Agencies have an obligation also to keep informed of new techniques developed else- where for improvements and economies in design and construction. The most promising opportunities for advances in hospital effective- ness may be expected to result from the combined efforts of health care institutions, areawide planning agencies and State licensing au- thorities to encourage and when necessary demand the development of cooperative programs among institutions. The precise prescription of 15 ''facility allocation and shared services in every case will depend on local needs and circumstances, obviously, but the committee is con- fident that when institutions and planning agencies are compelled to examine their facilities and services with a view to exploring every possible opportunity to achieve economies through integration, some such opportunities will be disclosed in every planning area, if not every health care institution. The success with which opportunities to improve effectiveness through arrangements for shared services among institutions may be discovered and developed depends heavily on the involvement of phy- sicians in planning such arrangements, and the extent to which physicians accept and are willing to work within the resulting pro- grams. Physicians are not especially concerned, to be sure, with plans for joint administration, data processing, purchasing, food service or other nonmedical operations, but the physician’s freedom to practice as he chooses, and his livelihood, may be directly involved when hospitals in the same area agree to share radiology or pathology service, for example, or when reasons of economy result in a decision to concen- trate obstetric service in one hospital at the expense of another, or when examination of emergency service experience suggests that one hospital in an area may handle the greater part of the emergency load without risk. Physicians whose travel time and patients’ conven- ience are adversely affected by such decisions can scarcely be expected to cheer about putative improvements in the effectiveness of com- munity service. Such decisions must therefore be made only after the most careful examination of the patterns of practice of the affected physicians by appropriate medical staff representatives, comprehending also the accessibility of medical care to the population, the division of spe- cialty skills, and the levels of utilization of all the facilities and ser- vices involved. Once these considerations have all been carefully studied, however, planning agencies and licensing authorities must make decisions for shared services on the basis of total effectiveness for the whole population rather than institutional autonomy or the convenience and disposition of individual physicians. For any area, the existence and location of hospital and nursing home facilities, physicians’ offices, group practices, capital resources and available personnel at all levels of skill will have an important bearing on the decisions that are made. In a rural area, a single hos- pital may be the only available focal point for the organization of medical services, and the sole opportunity for improved effective- ness through inter-institutional cooperation may be the development of arrangements for referrals and transfers to nursing homes or out- patient services. In many cities, shared medical staff appointments and interhospital agreement on expansion plans may be indicated, 16 ''as when by arrangement between their governing boards, administra- tions and medical staffs one hospital becomes the center for radiology services and another establishes a facility for long-term care. City hospitals with overloaded wards and emergency rooms have been relieved as voluntary institutions have taken the initiative in estab- lishing neighborhood clinics with Federal assistance. There lis no single plan that can work for all areas, but there is probably no area whose health service effectiveness cannot be improved through thoughtful cooperative planning. In many of its discussions, the committee has considered the benefits that may be realized through the systems approach to health service planning—the method that seeks to measure the cost-effectiveness of alternative solutions to community health problems. In the health services, application of cost-effectiveness methods is enormously com- plicated by the fact that results must always include considerations of quality for which no precise measurements exist. It is possible never- theless to make certain assumptions about quality—such as that care of a critical illness may be better in a medical teaching center than in a small, rural hospital, that an accredited hospital is preferable to a nonaccredited one, and that quality is not espécially at issue and cost- effectiveness is not maximized when a patient with uncomplicated coryza is hospitalized for diagnosis. In planning for the deployment of facilities and services under today’s conditions, moreover, even ele- mentary considerations of cost-effectiveness are often in conflict with the'small] unit size of health facilities, the chauvinism of local hospital boards of trustees, and the independence of practicing physicians from any controls except State licensure, hospital staff supervision, and the ethical interdictions of medical societies. Certainly the recommenda- tion here that approval of capital funding by State facilities licensing agencies be conditioned on cooperative planning among institutions with participation by administration, boards of trustees and physicians can be expected to help overcome these difficulties, but all these groups will need demonstrations that cooperative arrangements will pay off in improved effectiveness. In the opinion of some authorities, prepaid group practice has al- ready demonstrated that health costs are reduced when physicians and patients are free of organizational or economic restraints on choice of needed institution and service. Blue Cross plans and insurance companies are now offering some nursing home or extended care and outpatient as well as hospital benefits, testing the assumption that a leveling off of hospital utilization will result. It has been suggested that a logical next step for Blue Cross and insurance might be ar- rangements with group practices to offer or sell their services to subscribers already covered for hospitalization and extended care. This committee has no desire to add to the already abundant inventory 17 ''of exhortation on the need for research, experimentation and innova- tion in health service organization, but it would appear that Blue Cross plans should provide a fertile soil to be seeded with innovation. By contract or lease arrangement with providers, or even by outright purchase of facilities, for example, it has been suggested that Blue Cross and Blue Shield plans might offer the full range of health serv- ices and thus speed, if not force, the kind of intraregional integration that is seen as essential to greater effectiveness. Some changes in enabling legislation in the States might be required to allow this kind of experimentation to be undertaken, but it is likely that legislators today will be receptive to any proposal that offers promise of injecting some system, and some economy, into the health service. Regional medical programs already operating under Public Law 89-239 are demonstrating that the incentives provided by fund- ing and specific new objectives can help establish new patterns of co- operation among physicians, medical schools, hospitals, public health departments, planning agencies and representative consumer groups. If this can be done to improve effectiveness in the understanding, diagnosis and treatment of heart disease, cancer and stroke, certainly it can be done also in*the interest of improved effectiveness in the entire health service. The recommendations for planning are aimed at accomplishing that purpose. Plainly in a rational health service system the licensing of health facilities should be based primarily on the health requirements of the community ; since these determinations can be made only by an agency with health responsibilities and competence, the licensing authority must logically reside within the health agency, as is recommended here. The recommendation that Federal grants to States shall be con- tingent on the strengthened licensing process envisioned here is in- tended to make certain that appropriate pathways are provided within the States for the movement of health facilities projects and programs from inception in the community to approval and licensure by the State, with intermediate stops for review by area and State planning groups. While it should be clear that the areawide planning agency and State advisory council are advisory bodies whose recommenda- tions must be considered, but that licensing or franchising authority is vested in the State agency, these intermediate stops are seen as essential buffers making it unlikely that projects or programs having any undesirable or uneconomic elements can reach final approval. The conditioning of Federal grants on conformity with the recommended planning and licensing procedure cannot properly be considered as an intimation of Federal control of State decisions; like similar pro- visions in the Hill-Burton program and, more recently, in the Partner- ship for Health program, it is intended to secure the planning- ''licensing process as orderly, professional and logical, thus assisting in the evolution of a sane health service system, While an unsuccessful applicant for licensure would always have recourse to the courts in an appeal for reconsideration, the committee believes there should be an established procedure for appeal by ad- ministrative hearing and that the appeal mechanism should be availa- ble to areawide planning agencies as well as program applicants. Except as affected by successful appeal or court action, however, the ruling of the State licensing authority is intended to be final, as ap- plied in a judgment of the effectiveness of a service or program offered or in the franchisement of an added or new facility. Any licensing loophole for unapproved projects, it is believed, could be damaging to community health care, as has happened on occasion when institutions with questionable antecedents and bad professional habits have been initiated to the detriment of neighboring hospitals with good goals and good doctors. The committee sees licensing or franchisement, like the certification of banks, as an obligation of gov- ernment to protect the public by reserving a function vested with public interest for qualified persons acting within specified conditions. ''VI. INTERNAL MANAGEMENT OF HEALTH CARE INSTITUTIONS Imacrne THAT A vistror from Mars, intelligent but unfamiliar with such earthly problems as illness, happened into one of our hospitals and engaged the administrator in conversation. “What is the purpose of this fine institution?” asked the visitor. The administrator explained that persons disabled by illness or injury come here for the most searching, skilled examinations and judgments to determine precisely what is wrong and apply measures, often re- quiring great delicacy and wisdom, to combat the disability. “Ah, and as the man in charge here, do you make all the judgments and ones these poner yourself?” the Martian inquired. “By no means,” replied the administrator. “That is the function of persons called physicians, who qualify for these tasks by long periods of intensive training and observation.” “The physician, then, must make many decisions that determine how your resources are used and what work your people do,” the visitor observed. The administrator acknowledged that this was an understatement, if anything, since the physician also decided which patients to admit, and when to dismiss them. “And where do these important persons stand in your organiza- tion?” asked the Martian. “Actually, they stand outside the organization,” the administrator explained. “They are engaged and paid by our customers, as you might say, and they. must observe certain organizational rules, but the fact is that the institution itself, by tradition, must not interfere or seek to influence their decisions.” “But you must be joking!” the visitor exclaimed. “As anyone can plainly see, such an arrangement would be impossible to manage.” The administrator acknowledeged that it wasn’t easy, and the visitor was heard to say to himself as he departed, “Impossible—or very, very expensive !” The circumstance of “dual control” as described in this fable and the complexities of the board of trustees-administration-medical staff relationship generally are well known and were thoroughly studied by the committee, which does not feel the need to dwell any further on the difficulties these phenomena present in the management of hospitals. The committee determined instead that steps must and can be taken that will have the effect of giving physicians some responsi- bility for management and thus diminish the divisiveness and cost- liness of dual control, and that many inefficiencies in the internal management of hospitals do in fact exist that are in no way attrib- utable to dual control. 20 ''Among the management measures already in use in many hospitals, for example, the committee concluded that there are promising oppor- tunities for improved efficiency in such programs as financial incentives designed to increase productivity of hospital employees; competitive compensation plans and employee benefits to facilitate recruitment and reduce turnover; restructuring of training and employment prac- tices to permit “career ladders” encouraging advancement to positions of greater responsibility and higher pay on the basis of merit; assign- ment of duties to employees qualified to do the job at the lowest cost, with intensified effort through hospital associations and professional organizations to eliminate professional and legal barriers inhibiting the flexibility and mobility of hospital manpower; joint operation with other health facilities or purchase from commercial sources of such nonmedical services as accounting, data processing, laundry, purchasing, housekeeping, maintenance and food service; introduc- tion of automated supply, transportation and information systems; service and operating plans aimed at reducing or eliminating waste caused by “lost weekends” and seasonal variations in occupancy; sys- tematic in-service education to improve job performance, especially at. supervisory levels, and many others. It is unlikely that all health care institutions can benefit from the application of all these modern management practices, but the com- mittee is convinced that most institutions can benefit from many of them, and that no institution can fail to benefit by considering how these and other management programs now operating in hospitals or regional groups of hospitals might improve efficiency. The following recommendations seek to ensure that these benefits, and putative benefits, will reach into all health care institutions. 6. Recommendation Effective at as early a date as the Congress shall find feasible, every health care institution as a condition for approval to receive capital grants or operating payments involving Federal funds shall prepare each year a detailed budget of income and expense and a plan for services and operations for the coming year; and (a) Appropriate members of the medical staff shall be directly in-~— volved with the administration in developing the budget and operating plan, and in the achievement of financial and service objectives as budgeted and planned; and (b) Zhe institution’s financial budget and operating plan shall be re- viewed and approved by the board of trustees or appropriate governing body which shall delegate to the administrator the authority required to enable him to manage the operations of the institution in accordance with the approved financial budget and operating plan. 21 ''7. Recommendation (a) Inevery State there shall be a State agency with specific respon- sibility for setting up a system for accumulating, processing and publishing detailed information on the operations of health care institutions; taking into consideration the kinds of data that will be most useful to third-party-payers and most useful to institutional managements in judging comparative performance, the agency shall determine requirements for information to be furnished by health care institutions and make all such informa- tion available on request. (b) Appropriate machinery shall be sotalol and supported by the Department of Health, Education, and Welfare to advise and work with the States in developing their information and reporting systems and to develop a national standardized admin- istrative reporting system for health care institutions, designed to meet the information requirements of licensing and planning agencies, third-party payers and institutional managements in such a way as to eliminate as far as possible overlapping and duplicated information demands on these institutions and agen- cies and provide maximum information value for management, planning, and research purposes. These recommendations for management reflect the committee’s considered judgment that whereas the hospital administrator is not a chief executive officer in the full sense to the extent that some man- agement authority and control reside in the medical staff, the resulting inefficiencies can be substantially modified, and the administrator’s authority substantially buttressed, by requiring that appropriate mem- bers of the medical staff (such as the chief of staff, chiefs of the clinical services and heads of departments of the hospital-based medi- cal specialties) become directly involved in the processes of budgeting for income and expense and planning for service and operating objec- tives. The involvement of responsible department heads in budgeting and use of the budget as an instrument of management control are well- known business principles that have been in use in many hospitals for many years, although some hospitals and, especially, many small hos- pitals and nursing homes have only impromptu budgets, hastily pre- pared and improperly employed, or no budgets at all. The requirement that detailed budgets and operating plans be prepared annually as a condition of approval for participation in Federal programs can be expected to disclose management inefficiencies in such health care institutions as a necessary first step towards bringing about needed improvements. Especially, the committee believes this requirement will compel the attention of many hospital trustees to lapses in manage- ment that would not be permitted in their own businesses. 22 ''The committee has studied and discussed the composition and com- ~~ petence of hospital boards of trustees at considerable length; the vol- untary trusteeship services of thousands of thoughtful, responsible men and women on hospital boards must certainly be applauded, not faulted, yet the fact must be faced that deficiencies in hospital man- agement owe something, at least, to inattention, indifference, or lack of information on the part of some hospital boards, and some trustees with the best intentions and energy haven’t been adequately informed by administration on what the function of a hospital trustee, or a hos- pital, should be. The provision of a financial incentive for detailed budgeting and planning can be expected to improve the performance of trustees, if only by getting their attention, and trustees can be expected in turn to make more exacting performance demands on administrators and medical staffs. The requirement for physician involvement in the budgeting and planning processes can also be expected to have the effect of improving performance by improving attention. While few hospitals will wish to make attending staff appointments or privileges specifically condi- tional on performance according to budget and service objectives, the committee is convinced that physician participation in the budget and planning disciplines cannot fail to have a benefical effect on physican performance and, especally, on the elements of cost that are neces- sarily under physician control. The physician who has sat through a line-by-line examination of the pharmacy budget may consider that the inventory of tetracyclines could be reduced from five brands to two or three without lasting damage to the cause of medical freedom, for example, and the surgeon who has had to study the nursing depart- ment payroll might readily modify some of his demands on nursing department time and temper without lasting damage to either his pride or his patients. Nobody wants to interfere with the physician’s freedom to exercise his medical judgment in the care of his own patients, and nobody expects that participation in budgeting will bring about a dramatic reversal of physician behavior with respect to the ordering and use of hospital resources, but such participation can and will heighten the physician’s awareness of cost factors and bring about a change in attitude that in time may be expected to modify behavior. The recommendation for State and national systems for reporting operating data from health care institutions is based on the convic- tion that pressures for improved management performance can be produced by making comparative data on management performance visible throughout the community. The committee understands fully that the measure of performance in health care institutions must always comprehend considerations of quality which can never be standardized and counted, like bottles on a shelf. But the committee is 23 ''convinced also that “quality care,” like dual control, has been used by some as a screen to conceal poor management performance in many health care institutions. The reporting system is designed to take the screen away. The administrator of a hospital whose eight nursing manhours per patient day and $1.25 direct dietary cost per meal are suddenly being compared in Macy’s window with State or national medians of 6 nurs- ing hours and 93-cent meals may indeed be able to demonstrate, as he will now be required to do, that the variations reflect an added measure of tender loving care, or an excess of critical cases on the nursing units, or a truly gourmet meal service. But in the process of justification he may also find out that the figures reflect a measure of illogical work assignment on the floors, or inadequate supervision, or incompetent purchasing, or thievery in the kitchen. Whatever the justi- fication or the cause, the process of comparing performance and the visibility of the comparative data seem certain to have a beneficient effect on management practice. This effect has already been demon- strated in hospitals participating in the American Hospital Associa- tion’s Hospital Administrative Services; the committee suggests that the proposed reporting services should be coordinated as far as pos- sible with existing systems such as HAS and Medicare, perhaps actu- ally using existing facilities on a contract basis, and that the data systems should also be coordinated with existing reporting require- ments of the Hill-Burton Act. It is assumed that in establishing their systems the States will initiate whatever measures they may consider necessary, including audit, to ensure the reliability and comparability of data. It is assumed also that in most cases the States will wish the reporting function to be performed within the State licensing agency. The key role of physicians in determining hospital effectiveness has been widely acknowledged, here and elsewhere. Systematic and con- scientious review of the utilization of facilities and services is imperative, and this is best accomplished within the framework of a continuing study of the quality of medical care, commonly called the medical audit. For the medical staff to fulfill this mission, the hospital must provide from patients’ records adequate analyses and display of data, using modern data handling techniques. In establishing uniform reporting systems, consideration should be given to programs such as the Professional Activity Study and the Medical Audit Program of the Commission on Professional and Hospital Activities which provide regional and national comparisons of specific lengths of stay and many other aspects of practice and are considered vastly superior to data systems in individual hospitals or in limited local areas, where results are sometimes viewed through the tinted glass of provincial complacency. 24 ''Neither the Committee on Hospital Effectiveness nor any other group except its own board of trustees, administrator and medical staff can prescribe the precise techniques that should be introduced to improve management efficiency in the individual health care institu- tion. The computer-based “total hospital information systems” that are now being introduced, for example, certainly offer some promise that information handling, which is said to cost 25 percent of total hospital budgets on the average and up to 40 percent in nursing departments, can be improved in time, especially through shared systems in regional groups of institutions. Meanwhile, however, many institutions may be well advised to analyze and improve existing information handling methods instead of turning to computers; the state of the art of computer applications in hospitals was described by one observer, possibly with more acid than accuracy, as “an extra- ordinary combination of brilliant technology and used-car salesman- ship.” Such decisions are best left to the informed judgment of the governing board and management of individual institutions. In management as in planning, however, the committee believes individual institutions have an obligation to examine the opportunities to achieve improvement and economy through shared services. The recommendation that shared services must be used wherever possible as a condition of eligibility to participate in Federal programs was included in the section on planning in this report, but the effect will be seen in management results, where joint operation or contract purchase of accounting, administrative, food, laundry, housekeeping, maintenance, purchasing and other services already being used by hospitals can assist in overcoming inefficiencies occasioned by small unit size, which, like quality care and dual control, is another explana- tion that is often a screen for failure. As in the case of systems planning, it is suggested that Blue Cross and State hospital associations might readily be the agencies initiating and offering contract services to participating hospitals and nursing homes where these are not already available. Obviously, there can be no more important route to the improvement of hospital effectiveness than through improved utilization of health manpower. The committee sees as promising the introduction of work standards and financial incentives for increasing worker productivity. Several such plans are already in operation in individual institutions, and others are under study. It is hoped that despite the complexities inherent in the nature of the service, incentive plans may be adopted increasingly by hospitals and nursing homes, with resulting improve- ments in work output. Another promising development is the increasing insistence of many authorities in nursing and the other paramedical professions that present rigidities in training, certification, licensure, and work assignment must be eliminated or relaxed so that the 25 ''dangerous practice of assigning people to tasks for which they are undertrained and the wasteful practice of assigning people to tasks for which they are overtrained can be obviated, and so that capable per- formers ‘at lower levels of knowledge and skill can be motivated to take additional training and mount career ladders to greater responsibilities and rewards. Finally, the committee believes there is no element of health man- power whose impact on hospital effectiveness is more important than the hospital administrator’s. The committee recognizes the contribu- tion to improvements in hospital administration made by existing university programs and their graduates, but the fact that less than half the hospitals in the United States are administered by graduates with specific training for these responsibilities suggests that the educa- tional programs need to be expanded. To achieve that purpose, the committee strongly urges that the education and training of hospital administrators in the principles of effective management should be encouraged and facilitated by fellowships, scholarships, and training grants financed by Federal funds. Continuing education for ad- ministrators with and without formal training should be similarly supported. 26 ''Vil. FINANCING HEALTH FACILITIES AND SERVICES Iv Is NEITHER SENSIBLE nor possible to consider health care financing as a discrete phenomenon. Planning, management, and financing are inseparable; they are considered separately and sequentially here only because the discussions and recommendations of the committee seemed in most cases to go more directly to one of these considerations than to the others. It is assumed that readers of this report will understand, as members of the committee do, that financing here stands not alone but with planning at its right hand and management at its left elbow. As it turns out, many of the severest problems of the health service, such as the lack of system, duplication and overlap of facilities and services, encouragement of the use of high-cost services where low-cost services would be sufficient, and inefficiency. in the management of institutions all have their roots in financing methods and practices that have become embedded in hospital tradition and thought and have remained unchanged long after they have been widely recognized as barriers to hospital effectiveness. Thus lack of system and duplication of services and facilities owe their protracted existence in part to con- tinued tax exemption and community support and unregulated free- dom of institutions whose use of capital resources may be well-inten- tioned but is often ill advised ; high-cost services prevail where low-cost services would suffice because of prepayment and insurance practices that are contrary to the interests of the health economy; manage- ment inefficiencies are not only permitted but positively invited by cost reimbursement formulas that may reward spending and blink at extravagance. The same practices, though less frequently, may lead to under- as opposed to over-utilization of services, with resulting waste of money, manpower and facilities and possible damage to the health of con- sumers. The patient who is hospitalized in an institution that is half empty may pay more than he should for the service he receives, and the patient whose prepayment or insurance plan leaves unforeseen gaps in coverage may get less than the service he needs. The following recommendations are designed to produce pressures on planning, financing and management agencies that will lead to solution of these problems: 8. Recommendation Effective at as early a date as the Congress shall find feasible, all Federal financing for health facilities and services shall be authorized for health care institutions only in States whose appropriate regula- 27 ''tory agencies governing health service prepayment and health insur- ance require: (a) Noncancelability of all health prepayment and insurance policies, group and individual, so that each prepaid or insured person or family has the option to maintain the prepayment benefit or insurance policy in force by continued payment either through a group or on an individual basis; however, group practice pre- payment plans shall have an option of obtaining for the insured the guaranteed purchase from another carrier of an available policy, reasonably comparable as to benefits and premiums, and (b) Reasonable and controlled limits on all carrier retentions, con- sonant in each case with the type of carrier and the content of the prepayment benefit or insurance policy.’ (Footnotes at end of text.) 9. Recommendation The Secretary of Health, Education, and Welfare shall establish a commission or committee to work out and recommend a procedure and time table for requiring by either State or Federal law a minimum range of benefits for health prepayment plans and insurance policies including hospital inpatient services, outpatient ambulatory services, extended care services, home care programs, and physicians’ services in and out of hospitals. The committee recommends a plan which moves in the direction of requiring that all health insurance shall provide the full range of benefits enumerated above.® 10. Recommendation The congress shall authorize a system of federally insured borrow-. ing for capital purposes by health care institutions, similar to the Fed- eral housing administration loan program, or another form of federal assistance such as low-interest loans or interest forgiveness loans, re- stricted to capital projects approved by the appropriate areawide and state planning authorities, such borrowing to be in addition to existing and proposed programs of federal grants and direct Federal loans, and with a fixed limit of 80 percent of the total project cost for the aggre- gate of grants and borrowed funds. 11. Recommendation Reimbursement to all hospitals and, where possible, other health care institutions having third-party service contracts shall be based on rates negotiated and agreed to annually between the third parties and the participating health care institutions. The recommendations for regulation of health insurance establish- ing minimum benefits, noncancelability, and control of retentions is clearly called for to curb the proliferation of small health insurance companies offering quick-sale policies, especially to individuals and especially in States having inadequate insurance regulations. The de- ''ceptive promotional practices of such companies, whose policies are often sold by direct mail or through newspaper advertising featuring coupon application forms, continue to bring many patients to hospitals and extended care facilities unaware that their insurance will cover only a small fraction of the charge for the services they require, with resulting disappointment and financial hardship on the insured fam- ilies and on institutions unable to collect the uninsured portion of the charge. Such practices are a fraud on the public and a blight on the health service; unless they can be regulated out of existence by ap- propriate State or Federal authorities, it seems inevitable that they must lead eventually to widespread public mistrust of hospitals and responsible prepayment and insurance carriers and to a demand for compulsory government health insurance for the entire population. The same result can be expected unless controls are extended to protect the public against the effects of abrupt cancellation of coverage and prohibitive retentions resulting in large premiums and small benefits. The mechanisms for control exist in the ‘States, and the committee is convinced that the States must be compelled ultimately by the methods suggested here to initiate the needed regulations. The provision looking toward regulation to establish a minimum range of benefits goes to the heart of the problem of over-use of hospital facilities and services. Patients who are insured for hospi- talization but not for outpatient service, extended care or home care tend to be admitted to hospitals unnecessarily and to overstay in hospi- tal beds when hospital care is no longer required. Such patients are a burden on the system, and while properly organized medical staff utilization review and utilization monitoring initiated by carriers are a curb on these abuses, it is evident that utilization review alone, however conducted, will not provide the protection needed to guarantee the effectiveness of the system, The removal of financial incentives to over-use and overstay is regarded as essential to achieve this result. The recommendation for federally insured, FHA-type mortgage loans for health care institutions as an addition to existing sources of capital financing reflects the committee’s conviction that new capital will be needed increasingly in an era of burgeoning technology ; that replacement of obsolete facilities, especially those serving the poor populations of innercity ghettos, is essential to hospital effectiveness; that the cost of capital financing should be separated conceptually from operating costs and shared by the whole community, and not carried largely or exclusively by those using health care facilities, and that voluntary community participation in support of capital financing for health care institutions is a valued element of the voluntary tra- dition of the American. health service that should be perpetuated and encouraged. 29 ''The proposed limit on the aggregate percentage of total project costs to be financed through grants and loans is aimed at safeguarding the tradition of voluntary community participation and retaining a significant measure of control in the community. With 20 percent of project costs to be raised locally, the population to be served has the opportunity to withhold approval or to vote its dollars in support of the added facility or service. The emphasis on voluntary contributions and borrowing as sources of capital financing must not be construed as implying, however, that the committee thinks government grants should be any less important in the future than they have been in the past. On the contrary, the committee believes health care institutions must continue to rely heavily on grants and should seek in every case to establish the most advantageous ratio of grants to borrowing. The provision limiting all federally funded capital financing for health care institutions to projects having the approval of area and State planning agencies is seen as necessary to avoid duplication and over- lap of facilities and services and support instead the development of a rational health service system. The recommendation that third-party payments for service con- tracts with health care institutions should be at rates negotiated an- nually, instead of rates fixed by reimbursement formulas based on costs, may readily be the most controversial of all the committee’s recommendations and the one least likely to evoke cheers from the health care community. While there are some members of the com- mittee who consider that the negotiation of separate rates for some 7,000 hospitals providing service for patients covered by Blue Cross, Medicare, welfare and other service contracts will present endless and perhaps impossible complications, and no member thinks it is going to be simple, the majority believe that the proposal is workable, that negotiated rates for services rendered are common in business and by no means new in hospitals, that seemingly irreconcilable differences between carriers and institutions can be resolved by accepted methods of arbitration, that certain principles or guidelines can be adduced to speed and simplify the processes of negotiation, and finally, that the negotiated rate is the most practical method yet devised for eliminating the disincentives to efficiency that are inherent in cost-based reim- bursement, and the most practical method of rewarding institutions for efficient management of resources. While recommending the immediate adoption of negotiated rates for service contracts with health care institutions, the committee joins with others, including the Department of Health, Education, and Welfare and the Congress, in urging continued experimentation with other reimbursement methods, such as capitation and “point systems” now in use in several States for welfare payments to nursing homes, in which payments are related to rewards for efficient performance and 30 ''penalties for inadequacies. In time, development of the reporting services comprehended in the management recommendations here may permit application of some such point system to hospital payments, but the committee believes this would be unworkable now and sees no practical alternative to the negotiated rate, whatever its disadvantages. Recognizing that a negotiated rate cannot properly be tied to any agreement between the parties on elements to be included or excluded, since these elements are themselves negotiable, the committee never- theless offers certain guidelines related to the concept of separate consideration of capital and operating costs. Acceptance of these guidelines by the negotiating parties will, it is believed, facilitate agreement on negotiated rates. The guidelines are: (a) The rate should include consideration of changes in institutional requirements for operating cash needs. Because of inflation, improve- ment of services, or other changes in existing procedures, operating expense may increase, and the cash required to meet these demands is thus subject to frequent change. (b) To the extent that the rate comprehends reimbursement for capital expense, this should be confined to officially approved projects. (c) The rate should not, however, include consideration of depreci- ation on buildings and class I (built-in and fixed equipment commonly included in the general contract) capital costs. (d) The rate should include consideration of reimbursement at re- placement cost for depreciation of class II (major movable equipment) capital costs. (e) The rate should include consideration of reimbursement for the cost of retiring existing debt and reimbursement for cost of new debt on projects approved by the planning process. (f) The rate should include consideration of the provision of monies to be used by hospitals for the purchase of new, innovative equipment. (g) The rate should include consideration of the inclusion of reno- vation and alteration projects for the existing plant when such projects are not of sufficient magnitude to require approval by the areawide planning agency. These guidelines are not intended to be mandatory for consideration by negotiating parties, but the committee believes they reflect a sound concept of the way capital costs of health care institutions should be paid, and that they may be helpful in negotiations. In addition to providing incentives for efficiency, the committee believes that the negotiated rate for service contracts will contribute to planning and management efficiency for both institutions and car- riers by increasing the predictability of income and expense and by 31 ''forcing the negotiating parties to examine together all aspects of institutional financing and operations. During its discussions of health care financing problems, the com- mittee worried repeatedly about ways in which the existing tax struc- ture may affect hospital effectiveness. The committee agreed that studies should be undertaken at once looking toward revision of the structure so that tax laws would support rather than threaten or handicap health care effectiveness. For example, it is considered essen- tial that the Federal income tax exemption for nonprofit hospitals and extended care facilities should be grounded in the institution’s function as a health care enterprise rather than in the ill-defined concept of “charitable activities,” as at present. Clarification is also needed in the area of “related activities” which are not themselves directly concerned with the provision of health services but may contribute to hospital effectiveness and, the committee believes, should therefore be tax-exempt. In addition, the right of hospitals and other health care institutions to adopt employee incentive plans without jeopardizing their tax-exempt status should be clarified and made firm. 32 ''Vill. THE HOSPITAL AS THE ORGANIZING FOCUS FOR HEALTH CARE Ir 1s rmpuicir in this report, as it was throughout the committee’s deliberations, that the hospital is considered the principal organizing focus of a new and more effective system for the delivery of health care—not necessarily because hospitals as they exist today in most communities have all the capabilities that will be required for develop- ment of the more rational health care system foreseen in the commit- tee’s recommendations and discussions, but simply because in most communities the hospital has more of these capabilities than are likely to be found anyplace else. In any given community, of course, the initiative and the leadership and the resources that are needed may emerge in a county medical society, or a group practice, or a neigh- borhood clinic, or a planning agency, or Blue Cross, or ‘in one of the regional programs organized to implement Public Law 89-239. In most communities, however, the initiative and 'the leadership and the resources will more commonly be found in the hospital, and especially in those hospitals where the concept “hospital” signifies, as it does in this report, cognate groups of trustees, administrators and physicians sharing common responsibilities and common goals. Some observers and critics of the health service have argued that hospitals cannot logically be expected to serve ‘as the organizing focus for a more effective health care system, because hospital revenues de- pend on keeping acute beds occupied, and hospitals can’t reasonably be expected to cut down or cut off revenues by voluntarily keeping people out of these beds—whether this is done by serving them as outpa- tients, or referring them ‘to nursing homes, or caring for them at their own homes, or cutting short their hospital stays, or consolidating hos- pital departments, or any of the other things that are seen as neces- sary in an integrated, efficient health service economy. This limited view of the hospital as a self-serving enterprise having no mission out- side its own walls is unquestionably true of some hospitals in some com- munities, but the Secretary’s Advisory Committee on Hospital Effec- tiveness rejects it as demonstrably untrue of hospitals generally. The spontaneous, voluntary efforts of many hospitals in recent years to join in such movements as accreditation, areawide planning, medical audits, utilization review, uniform accounting and pricing policies, expansion of outpatient services and extended care facilities, and joint ventures ‘and shared services of all kinds are overwhelming evidence that the capabilities for serving as the organizing focus of ‘a more 33 ''effective health care system exist within our hospitals: It has been the purpose of this committee and this report to hasten the day when trustees and administrators and medical staffs shall have the resolve and the resources to mike certain that their hospitals are not just where the capabilities are, but where the action is. 34 ''IX. CONCLUSION In THE concert of this committee, hospital effectiveness is con- cerned with the accessibility of health services of all kinds, the suit- ability of services to needs, the qaulity of the services, and the econ- omy with which the services are delivered tothe population. The committee considers that the improvement of hospital. effec- tiveness thus lies in better planning for health facilities and services; in a licensing or franchisement system with authority 'to effect needed improvements in planning, management, and financing performance by controlling the flow of public funds to health facilities and services; in improvements in the internal management of health care institu- tions, including systematic participation in management by physi- cians; in broader benefits, guaranteed coverage, and stronger regula- tion of carriers; and in capital financing and reimbursement methods that will provide incentives for rational use and efficient management of the health care system instead of encouraging over-use and ineffi- cient management. The commilttee’s recommendations are aimed at accomplishing these results not by prescribing specific courses of action for institutions and agencies but by creating public and community pressures on the responsible individuals and groups. The interacting recommendations for planning, franchising, managing and financing are applied alt what the committee has seen as key leverage poinits in the health service, with the expectation that the recommended action ‘in each case will compel further decisions ‘and actions resulting in the improvement of effectiveness in ‘all elements of ithe health service. FOOTNOTES 1. Fremrne, Mr. Scorr, Kaiser Foundation Health Plan, Oakland, Calif. Despite respect for my colleagues and appreciation for excellent work by HEW staff, and despite inclusion of some ideas which I sup- port, my disagreements with the report are so pervasive that I cannot concur. I will attempt a brief and necessarily oversimplified summary of major differences. The Structure of the Health Care Industry. The Secretary asked us to think hard about what more effective systems of health care should look like. This called for us to scrutinize the basic structure of the health care industry (hospitals, physicians and others), including the nature of industry output and the degree to which it effectively meets public need. I suggest that the industry’s purpose is wrongly con- ceived; the industry should develop the capability of delivering com- 35 ''prehensive health care for people rather than merely providing episodic treatment for patients. In a pluralistic society there will be various organizational approaches: the “systems” to which the Secre- tary referred. Physicians exercise primary authority over how health care resources are used; comprehensive, integrated systems in which they will participate with economic responsibility hold most promise. But by whatever means, it is important that physicians and hospitals join in developing economically self-sufficient modes of functioning before public impatience with irrationalities in the health care industry forces a political “solution” as the “least worst” alternative. Governmental effort should be concentrated on eliminating legal and other restrictions which inhibit the development of diverse meth- ods of organizing health care and on fostering development of effective incentives for systems within the industry to assume responsibility for comprehensive health care for their constituencies—an approach which can introduce significant competition among health care systems. Planning and Franchising. By providing a public forum and process through which consumer representatives may confront health facility sponsors on the issue of how best to meet public needs, voluntary planning can play a useful role. However, the report would give “private voluntary” agencies a governmental stick with few if any conceptual guides as to where the system should be driven, and few criteria for evaluating alternatives. The result I see is planning of, by and for the status quo, and serious ‘potential for stifling innovation. Internal Management. Public disclosure of statistical and accounting information is useful. However, significant benefits from uniform reporting are foreclosed by the elusive issues of quality of care and service and the formidable difficulty of meaningfully comparing in- herently different methods of operation. Although uniform reporting will not contribute importantly to hospital effectiveness, it (along with several other recommendations) will increase clerical and ac- counting costs, and it will open up a new health care occupation, the “hospital rationalizer,” who will explain away unfavorable compari- sons. Finance. Here various divergent philosophies met, none prevailed, and the report embodies elements of all. Aside from evident inconsist- encies, I vigorously object to the economically unsound attempt to separate “capital costs” from “operating costs.” This ignores the economic reality that, because capital can often be substituted for labor, with important benefits to consumers, the two are inseparable aspects of the cost of providing service. Conclusion. Though not so intended by the committee, the combination of governmental control, franchising and “free” governmental financ- 36 ''ing is a fair blueprint for evolving a nationalized health care system. I dissent. 2. Kituion, Mr. Raymonp Francis, Vice President, Metropolitan Life Insurance Co., New York, N.Y. Recommendation No. 8 This recommendation, which can be considered an intimation of federal control of state decisions, is put forward without any under- lying study of the real nature and extent of the situations intended to be cured. Its inclusion in a report on hospital effectiveness, a relation- ship which to some may seem remote, exaggerates what problems do exist out of all proportion. Continued activity which has been carried on for years by State and Federal agencies may be expected to resolve these problems without coercion based upon disbursement of Federal funds for financing health facilities. 3. Kitiion, Mr. Raymonp Francis, Vice President, Metropolitan Life Insurance Co., New York, N.Y. Recommendation No. 9 This recommendation is aimed at controlling hospital utilization through the addition of alternative services under a mandated plan of minimum benefits. Whether such minimum benefits would have the desired effect has not been demonstrated and indeed there is some evi- dence to the contrary. Other factors, such as physician-patient con- venience, or paid in full benefits, may be of far greater significance. However, it should be possible, and the committee might well have so recommended, to study the results under coverages already in exist- ence. Comprehensive and major medical coverage offered by insurance companies and covering over 50 million people include some or all of the benefits outlined in the recommendation, and this experience should reveal the effects of these added coverages. Quite aside from the question of whether so-called minimum benefits would have the desired result as regards hospital effectiveness, the recommendation ignores the question of cost and the right of employers and employees and individuals to choose their own coverage according to their ability to pay and the services available in the community. Certainly no one can question the desirability of moving in the direction of the broadest possible coverage and this has been demonstrated by the rapid growth in insurance company comprehensive and major medical coverage. 37 U.S. GOVERNMENT PRINTING OFFICE: 1968 O—295-545 '' ''''''U. C. BERKELEY LIBRARIES ce SA A €O?74451132 ''