Arthur J. Altmeyer

Financing Hospital Care Through Social Insurance

A. J. Altmeyer,
Chairman, Social Security Board
An address before the Second War Conference of the American
Hospital Association, Buffalo, New York, September 15, 1943.

The American Hospital Association and its officers are to be complimented upon having called this War Conference.

These are not easy times for hospital people to leave their posts. You are beset with all the customary problems of operating the hospitals of your communities and, in addition, with the multitude of difficult and perplexing problems generated by the war. Fortunately, many of you are relieved, for the moment, of some of your age-old strains to meet operating cost and to balance budgets. This is not to say that even in this period of war-time prosperity all your financial headaches are gone; it is meant only to recognize that with large--and, indeed, excessive--purchasing power in the hands of the public, increased demand for hospital service has been accompanied by increased ability to pay.

The public is, I believe, aware of the new problems you face. It appreciates the effort of hospital leaders, administrators and staff to maintain high standards, to make adjustments to the trying times, and to meet the obligations of public service.

These problems of wartime are difficult and urgent. Still, they are only a part of the job. We would fail in our obligations if we permitted ourselves to see only the problems of today and gave no thought against those of tomorrow. In this sense, this War Conference is also a Peace Conference.

Financing the Hospital of the Future

If we are to work out sound plans for the hospital services of this country, we must see our present and future problems in proper perspective and we must see them whole.

We can be confident that in the future, even more than in the past, the hospital will be the center of coordinated services for the well and for the sick, a community center for prevention as well as for diagnosis and cure. Coordinated with clinics and health centers for those who do not need bed care, working in effective relations with the community-wide facilities of the public health agencies, and interlocked with the educational institutions of the universities and medical schools, the hospital of today is the health center of the future. There are new and larger opportunities ahead for the hospital administrator.

Those who would make of the hospital a building in which to furnish bed, board, nursing and only technical services and who propose to separate professional services from hospital care, are flying in the face of experience and progress. They would not merely stop the clock; they would turn it back. Their view cannot and should not prevail.

The assurance of hospital facilities and access to hospital services are essential for progress in improving the health and well being of our population. This means that the facilities must be not only available in the community, but also must be so financed that all members of the community can receive service according to their need and not merely according to their ability to pay. The goal is health security for all.

In most communities, financing the continued operation of general hospitals has been a less dramatic but a more difficult and more persistent problem than raising the construction funds. In many communities which lack hospitals or are inadequately equipped, the capital funds are more or less readily found as soon as means are in sight to support the institution and the professional personnel. Nobody wants to sink capital into the construction of hospitals destined to remain empty for lack of operating funds because the community lacks fiscal resources and the potential patients are too poor to pay the costs. The expansion and improvement of general hospital care depends upon effective means of financing the operating costs. This is especially true for the voluntary hospitals.

I do not need to analyze at any length for this audience the real difficulty which people meet in paying for hospital care. The basic trouble is not that hospital charges are higher than they should be; on the contrary, there are too many communities in which those charges are lower than they should be if the hospitals are to give all necessary services and are to pay their staff the salaries and wages they deserve. It is not that the public undervalues the money value of hospital care; on the contrary, the public has great confidence in the modern hospital, witness the progressive increase in use of the hospital. The basic difficulties are of other kinds. Hospitalization usually comes unexpectedly; the costs of a hospitalized illness are relatively large by comparison with current or accumulated financial resources; people have not budgeted ahead such serious or catastrophic costs; and the whole cost of hospital care as a potential community service falls upon the one family in four or five which in the course of a year uses hospital service.

It is now widely accepted, in and outside off hospital circles, that the costs of hospital care must be distributed among groups of people and over periods of time. Distribution of costs means insurance and it is already widely practiced in the case of hospital costs. Despite strong opposition, your Association courageously sponsored this movement, gave professional guidance to assure the soundness of nonprofit plans, and gave confidence and reassurance to the public by your seal of approval on plans which meet the standards of the Blue Cross symbol. There are others who meet hospital charges through commercial indemnity insurance. The size of this group is difficult to estimate, but it is substantial.

Your Association has also declared its policy, through formal resolutions, for expansion of the Blue Cross membership. National enrollment is your goal. But, as your own officers have so often emphasized, the real test is accomplishment and not good intentions. Unfortunately, thus far the enrollment of the past decade has covered only the first 12 million-- by and large the easiest 12 million. Ten times as many are outside these voluntary prepayment plans. Indifference and lack of foresight are barriers which cannot be hurdled by voluntary selling. Moreover, the distribution of income and of ability to pay set limits upon the success of voluntary insurance. These limits have always circumvented the larger objectives, leaving those who are most in need of protection without the benefit of insurance.

Both the public and the hospitals need an insurance coverage which extends to all. The only practical method is financing through social insurance. Fortunately, we have already made a substantial beginning in the development of our social security program, we have accumulated considerable experience, and we have the basic administrative machinery in actual operation.

Moreover, large portions of the public have already indicated, in various ways, not only their interest in extending the coverage of the social insurance system but in extending the scope of its protection to hospitalization and medical services. In the most recent of various polls on this subject, the American Institute of Public Opinion asked the following question:

"At present the Social Security program provides benefits for old age, death and unemployment. Would you favor changing the program to include payment of benefits for sickness, disability, doctor and hospital bills?"

Mr. Gallup reports that: 59 percent answer yes; 29 percent answer no; and 12 percent are undecided. He also asked: "Would you be willing to pay 6% of your salary or wages in order to make this program possible?" It will be noted that this second question does not make it clear that the 6% would cover the entire program and not merely the additional benefits. Nevertheless, of those who approved the program and expressed an opinion, 80% answered yes they would be willing to pay 6%.

Hospitalization Benefits Through Social Insurance

The present social security program, as you know, is already broad in its scope. Now that its operations are well along, the President and the Social Security Board have recommended a number of changes which would greatly strengthen it. The principal proposals which would especially interest you are: first that the coverage of the federal old-age and survivors insurance system be extended to the groups hitherto excluded, and that the insurance protection should apply not only to old age and the death of the breadwinner, but also to ill-health, and second that the limited public assistance programs be extended to provide aid to the States for needy people who are not within the limited categories now aided, and that medical and hospital services for needy people be aided by Federal funds when expenditures for these purposes are made direct to those who furnish the services.

Many of us believe that the sound plan is to develop a single, national, contributory social insurance for all the people giving simultaneously protection against unemployment, sickness, disability, death and old age.

The Wagner-Murray-Dingell bills, recently introduced in Congress, propose developments to the same general effect. In addition to hospitalization benefits, they include the services of general practitioners and specialists, and laboratory and related services for non-hospitalized patients. These bills are sponsored and strongly endorsed by the principal labor organizations which have declared that the wage earners of the country are ready to pay their share of the costs involved in comprehensive social insurance.

In our own studies of hospitalization benefits to be provided through social insurance, we have had the advice of leading hospital authorities and we have had some conferences with committees of your Association. From those discussions it is generally recognized that a service benefit would be best for the public and for the general hospitals. The basic arrangement would be that the insured workers and their dependents would receive care from any qualified hospital in the same way as now, on the advice of the attending physician. For the essential services rendered, the hospital would bill the insurance system instead of the patient. The insurance fund would pay the hospital at an agreed per-diem rate. Such rates for hospitals might be guaranteed at not less than a minimum nor more than a maximum amount, depending upon the cost of providing service.

There would have to be, at least at the outset, a maximum limit on the hospital stay which is reimbursable; but with actual experience it might be possible to greatly extend or even abolish such a limit. Appropriate modifications in a standard range of rates could apply to special hospitals, institutions for the chronic sick, etc. All qualified hospitals, whether governmental, voluntary or proprietary would be eligible to participate. Reasonable standards to be met by the hospitals could be developed with the advice of an advisory council which should include competent representatives of the hospitals and professions. Whether rates of payment to hospitals should be according to individual hospital costs or should be uniform for all hospitals in a community, present a question which needs further examination with hospital people.

It is estimated that an adequate system of hospitalization benefits, designed along these general lines, could be financed for contributions of about 1 percent of the earnings (up to $3,000 in a year) of the workers who would be covered by the social insurance system. At the present time, when wages and employment are high, a 1 percent contribution rate--for the coverage which is proposed--amounts to about $900 million a year. By comparison, it is estimated that the total annual income of all non-Federal general and special hospitals is now about $600 million. It is therefore safe to estimate that even in much less prosperous periods than the present, the social insurance system could have available each year for disbursement to the hospitals an amount at least as large as, and probably considerably larger than, the usual income of general and special hospitals. With the continuance of even a moderate level of prosperity, the hospitals could be assured fair and reasonable income for services rendered to all or nearly all of the population. They could look forward to financial support which assures them a new opportunity for making further improvements in quality of care and in payments for staff, supplies and equipment. A relatively modest contingency reserve would be sufficient to assure that rates of payments to hospitals from the insurance fund would not need to be adjusted frequently. The rates should, however, be subject to review and, if necessary, subject to adjustment every few years so that equitable relations are maintained. Utilizing the existing collection and record machinery, additional government administrative costs should not be more than 5 percent of the disbursements to hospitals, or one-third to one-half the operating costs of the Blue Cross plans.

As an alternative to providing a service benefit of the kind I have outlined, the social insurance system could furnish a cash benefit. Under such an arrangement, the insurance fund would pay an insured worker or his dependent a specified amount of money for each day of hospitalization. If this had to be a uniform amount, it would presumably have to be a minimal amount in relation to hospital charges. With a cash benefit there would be no direct relation between the insurance system and the hospitals; the arrangement would be between the insurance system and the insured persons who would be able to obtain their cash benefits upon presentation of evidence that they had been hospitalized.

It seems to me that the service benefit would be best for the public and best for the hospitals, provided satisfactory arrangements can be worked out on the methods of paying hospitals from the insurance fund. I do not see any reason why this problem cannot be solved, to the mutual satisfaction of the hospitals and the social insurance administrators, through a simple reporting system. There are, of course, various ways in which parts of the service benefit pattern can be combined with some aspects of the cash payment. It may be possible to work out a plan which will have many advantages of each while avoiding some of their disadvantages.

So much for the insurance proposals. I would like to say a few words concerning hospitalization provisions for needy persons. At present, the Social Security Act limits the Federal grants-in-aid which are available toward State public assistance programs to 50 percent reimbursements of money payments up to specified maximums to the needy aged, blind and dependent children. The Federal funds are not available to reimburse expenditures to physicians and hospitals made by the State or local authorities, except for necessary administrative expenses. This has not worked satisfactorily with respect to medical or hospital expenditures; the nature of these expenditures is such that if the State funds are to be used most effectively they should be available for use not only as money payments to the needy persons but also as direct payments to those who furnish medical or hospital services. The Social Security Board has already recommended amendment of the law to authorize Federal matching of payments for these types of services and we hope Congress will enact such an amendment.

Hospital Security Through a Cooperative Program

From the outset, I have given large emphasis to the central role of the hospital in the health and medical services of the future. By the same token, I have given emphasis to the potential role of the voluntary hospitals. These institutions have been the mainstay of general hospital service, more so in this country than elsewhere. They have been and are a notable expression of community action and community service, a symbol of fellowship and compassion among our people. They have deep roots in the life of our society and we can all unite in helping to nourish and support them. The voluntary hospitals have a major function to perform, side by side with governmental and proprietary hospitals.

The social insurance proposals for hospitalization benefits offer no threat to the voluntary hospitals. On the contrary, by offering a new assurance of income, these proposals would give renewed strength to all the hospitals and enlarged opportunity for community service. There is nothing in the proposals which proposes or intends that the social insurance system shall interfere with hospital operations or invade the field of hospital administration properly reserved to the individual institution. The best assurance we can give that fears about the future of voluntary hospitals will remain groundless is again to invite the active participation of hospital people in the development of the social insurance plans.

I have spoken with confidence and without hesitation about the assurances which I believe can be given the hospitals that the proposed social insurance developments will strengthen and not injure them. As regards the effects of the proposals on the Blue Cross Plans, I hope it will be possible to work out arrangements which will assure that minimum essential services will be the benefits of the social insurance, and that services above and beyond that level will be an active field for supplementary voluntary insurance. This, it seems to me, is the sound and logical plan. Social insurance and voluntary insurance should complement each other, both working in the public interest. We have extended invitations to Blue Cross officials to participate in joint studies in this area so as to enable us to reach more definite conclusions.

You and we have been told that any social insurance proposals are bad because they endanger the Blue Cross Plans; that nothing should be done through social insurance until the Blue Cross Plans have had a full opportunity to demonstrate what they can do through voluntary means toward insuring all or most of the national population. Nearly a year has elapsed since the House of Delegates of your Association adopted the Bishop Resolution, requesting the Trustees to take various steps toward expanding the operations and coverage of the Blue Cross Plans. Many of you have recognized that the rapid early growth of the Blue Cross membership, when new plans were being established in many communities, might not be sustained. As of the beginning of 1943, the membership in Blue Cross plans was about 11 million, or 8 percent of the population. The growth in Blue Cross plans at the present time represents a net increase of about 200,000 members a month or 2.4 million a year. This is a considerable growth expressed in absolute figures but is equal to an annual growth of less than 2 percent of the population. At this annual rate of increase, how many years should elapse before a decision is made that something should be done for 8 or 9 persons out of each 10 in the country who are not insured against the costs of hospital care and who can be given protection through a national social insurance system?

May I emphasize again the distinction which should be drawn between the problems to be solved with the hospitals and the problems to be solved with the prepayment plans. They are not unrelated; but neither are they the same.

It has been suggested that the proposals to extend hospitalization insurance to most of the population be laid aside for the present, and that, instead, Federal aid should assist in providing hospital care for the aged poor. I have already referred to the recommendation we have made which would improve the financing of hospital and medical services for all needy persons. But surely it must be clear that this is no substitute for providing insurance to the population above the level of the needy. The insurance needs of 100 to 125 million self-supporting persons are not to be met by improving the provisions for a few million who are needy.

I would not leave you with the impression that we think the social insurance proposals would solve all problems in the hospital field or that we believe all the problems are easy to solve. I might mention the need to work out plans for assuring the availability of capital funds--whether through grants or loans--for the construction of needed hospitals in areas where the facilities are altogether lacking or are inadequate and where the money may not be available from local or State resources. I might refer to the need for a simplified and satisfactory method of using cost accounting as a basis for per diem rates of reimbursement. And I might also refer to the need to restudy the principles developed by the joint committee of your Association and the American Public Welfare Association.

I believe, however, that those and many other important problems can be met through fair, reasonable and practical solutions by our working together. Such a joint undertaking has every prospect of success because all of us have only the public interest to serve.

In closing, I express to the American Hospital Association the thanks of the Social Security Board for the cooperation you have already given us in studying social insurance plans for hospitalization benefits. Again I extend our cordial invitation for continued joint study and for collaboration in the development of sound and useful plans to be considered by Congress.