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M® Fir©© Aspiirm ?
The House Ways and Means Com­
mittee quietly began hearings last
week on a major unfinished piece
of New Deal legislation— national
health insurance. Actually, a na­
tional insurance plan was first pro­
posed a half-century ago by the
American Medical Association, but
the proposal became mired in con­
troversy for decades thereafter, and
failed to make any headway until
the advent of the Medicare program
in the mid-1960's. But now, in the
mid-1970's, the proposal to extend
insurance from the aged to all seg­
ments of the population has gained
wide support across the political
spectrum, so that a history-making
piece of legislation may soon
emerge from Congress.
Yet, to paraphrase a favored eco­
nomic cliche— there's no such
thing as free aspirin. Medical-care
costs have soared in recent decades,
especially after the introduction of
Medicare, a piece of legislation
which supported a strong upsurge
in demand but weakened the role
of the market mechanism in allo­
cating medical resources. Mean­
while, despite its sharply rising
costs, and despite its highly
advanced technology, the health­
care industry has failed to produce
a completely satisfactory product
for its consumers.
Poor health, high cost
Although Americans spend much
more per person for medical care
than the citizens of any other coun­
try, the blunt truth is that they don't
enjoy commensurately higher
health levels. Fourteen nations have
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lower rates of infant mortality than
the U.S., with its death rate of 19.8
per thousand live births. (In some
Boston slums, one out of nine babies
dies.) The U.S. ranking in male life
expectancy continually declines, so
that it now stands in 27th place,
just between Poland and Romania.
(The atmosphere apparently is more
conducive to female health, since
the U.S. ranks 12th in female life
expectancy.)
Health personnel are badly dis­
tributed and in short supply. About
a third of the 50 states have less
than one physician per 1,000 popu­
lation, with the number per thou­
sand ranging between 2.2 in New
York and 2.0 in Massachusetts to 0.7
in Mississippi and Alaska. Conse­
quently, the nation has been forced
to turn to foreign-trained doctors
to fill shortages; they now make up
roughly 14 percent of available
medical manpower, and fill almost
30 percent of hospital internships
and residencies.
At the same time, the cost of pro­
viding health services has gone up
steeply, from $3.6 billion in 1929
to $94.1 billion in 1973 (fiscal years),
while medical claim on GNP has
more than doubled over that
period, from 3.6 percent to 7.7
percent. The fastest growth of
spending occurred in the post­
World War II period, particularly in
the recent Medicare era. Medicalcare expenditures rose at an 8.2percent annual rate over the 1950­
66 period, but then surged at a
12.2-percent annual rate between
1966 and 1973. Most of the recent
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

increase was in publicly financed
programs, which jumped 19.4 per­
cent annually in the 1966-73 period.
Why so costly?
The growth of population and real
income helped account for rising
spending in each of those periods,
but the most important factor was
the rise in prices of health care.
Over the 1950-66 period, popula­
tion increased at a 1.6-percent
annual rate, as against 1.0 percent
annually during the 1966-73 period;
in contrast real per capita income
grew at a 2.2-percent rate in the
earlier period but at a 3.1-percent
rate between 1966 and 1973. More
importantly, medical-care prices
rose at a 3.5-percent rate between
1950 and 1966 but at a 5.7-percent
rate since 1966— considerably more
in each case than the overall rise in
consumer prices.

In searching for the reason for this
price upsurge, we should recognize
that a large part of consumer de­
mand is determined by physicians
themselves. It is they who suggest
hospitalization, who prescribe
drugs, and who order tests and
X-rays, so that they are not only the
suppliers of medical care but also
the patients' advisers on how
much to buy.
The problem is accentuated by the
fact that physicians' approach to
medical care is dominated by tech­
nological rather than cost considera­
tions. Medical tradition in essence
emphasizes giving the best care that
money can buy— and most patients
wouldn't have it otherwise.
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Still, this approach goes against the
basic economic proposition that
decisions involving the allocation
of scarce resources to competing
goals require the weighing of costs
against benefits.
Weakened market mechanism
The rapid acceleration of costs of
the past half-decade or so reflected
all of the above factors, plus the
advent of Medicare and Medicaid—
the extension of health services
among the aged and the poor.
These segments of the population
constituted an enormous pool of
previously unfinanced health-care
needs, and once their needs began
to be financed, the demand for
health care jumped further ahead of
available supply. By 1973, public
funds spent on these two programs
alone reached $13.4 billion.

In addition, Medicare and Medicaid
accentuated an already evident shift
in the character of the nation's
health-delivery system, measured
by source of expenditure. Between
1929 and 1966, the public share of
the health bill rose from 13 to 26
percent, but by 1973, public funds
provided 40 percent of a rapidly
rising total. Another 26 percent of
the total represented insurance pay­
ments rather than direct consumer
payments.
These changes worked to reduce
further the market character of the
health-delivery system. To empha­
size again, the medical system has
always been characterized by the
fact that, within certain limits, the
seller-physician tells the buyerpatient the amount and prices of

the services he has to buy. But even
these restraints are now being
eliminated by the third-party pay­
ment of medical bills. Increasingly,
one party obtains the services,
another party provides them, and
yet another pays for them. Under
these circumstances, very little is
left of the market mechanism, to
limit the number and price of physi­
cian and hospital charges. Thus the
highest rate of inflation has oc­
curred in hospital services, where
direct payments by patients
account for only 8 percent of the
total bill.
Congressional task
Congress is now working on an ex­
ceedingly difficult problem: how to
bring adequate health care to all
segments of the population, but at
a bearable cost to the Federal bud­
get and to the national economy.
Some 15 bills have been introduced
in an attempt to reconcile these
conflicting objectives, but most
interest is centered in the Adminis­
tration proposal and the MillsKennedy bill.
The two bills are rather similar in
concept, with the Mills-Kennedy
plan involving about $8.5 billion a
year of new Federal funds, as op­
posed to the Administration's $6.4
billion pricetag. But there are also
several important differences. The
legislative plan would make partici­
pation compulsory under the socialsecurity system, while the Ad­
ministration plan would make
membership voluntary. The MillsKennedy bill envisions a straight
4-percent payroll tax to finance the
DigiSz § d ? ? F R K s g R t h th e e m P lo Y e r P aY 'n S


3 percent and the employee 1 per­
cent; the Administration bill would
have the employer pay (at least
initially) 65 percent of the $415
annual insurance premium.
The Mills-Kennedy bill would re­
quire the individual to pay $150 a
year in medical-care costs ($300
maximum per family) before he
could receive any benefits. The
Administration bill has the same
$150 deductible feature, but calls
for a $450 family maximum. Both
plans then would require benefi­
ciaries to pay 25 percent of addi­
tional medical-care costs, up to
$1,000 a year under Mills-Kennedy
and up to a $1,500 maximum under
the Administration plan.
Whatever happens, the American
consumer is almost certain to be
paying considerably more for good
health in future years. (John Dunlop,
as head of the Cost of Living Coun­
cil, recently supported his plea for
continued controls in this area by
predicting that hospital costs other­
wise would soar 16 to18 percent a
year.) Of course, much of the infla­
tion in demand has already oc­
curred, with the development of the
Medicare and Medicaid programs,
not to mention the continued
spread of private-insurance plans,
which now reach 80 percent of
the population in one form or an­
other. But these demand pressures
will increase further, in an atmos­
phere of weakened cost controls, as
the nation accepts the concept that
an affluent society should provide
all of its members with a minimum
standard of health care.
William Burke

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BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)

Selected Assets and Liabilities
Large Commercial Banks
Loan gross adjusted and investments*
Loans gross adjusted—
Securities loans
Commercial and industrial
Real estate
*
Consumer instalment
U.S. Treasury securities
Other Securities
Deposits (less cash items)— total*
Demand deposits adjusted
U.S. Government deposits
Time deposits— total*
Savings
Other time I.P.C.
State and political subdivisions
(Large negotiable CD's)

Weekly Averages
of Daily Figures

Amount
Outstanding
4 /1 7 /7 4

Change
from
4 /1 0 /7 4

82,555
63,489
1,074
23,097
18,878
9,171
5,966
13,100
78,591
22,855
682
53,610
17,954
25,702
7,274
12,899

+ 977
+ 1,046
+ 112
+ 453
+ 101
+
3
+
30
— 99
+ 227
—
673
+ 320
+ 657
153
+
41
+ 705
+ 108

Week ended
4 /1 7 /7 4

Change from
year ago
Dollar
Percent
+ 9,977
+ 8,491
228
+ 2,967
+ 3,046
+ 969
- 160
+ 1,646
+ 7,327
+ 1,408
- 205
+ 5,816
- 140
+ 6,224
- 438
+ 4,363
Week ended
4 /1 0 /7 4

+ 13.75
+ 15.44
—
17.51
+ 14.74
+ 19.24
+ 11.81
2.61
+ 14.37
+ 10.28
+
6.57
— 23.11
+ 12.17
0.77
+ 31.95
—
5.68
+ 51.11
Comparable
year-ago period

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free (+ ) / Net borrowed ( —)

75
22
53

16
117
-1 0 1

+ 2,243

+ 1,625

+ 359

+

+

+ 71

+

74
49
25

+

Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases (+ ) / Net sales ( —)
Transactions: U.S. securities dealers
Net loans ( + ) / Net borrowings ( —)

117

76

■"Includes items not shown separately.

Information on this and other publications can be obtained by calling or writing the
nir.iti-7 Qri fnr fc Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
Digitized Tor
rancisco> California 94120. Phone (415) 397-1137.
http://fraser.stlouisfed.org/

Federal Reserve Bank of St. Louis