The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
86l S
Sessioif8 }
J O IN T C O M M IT T E E P R IN T
STUDY
PAPERS
NOS. 4 A N D
5
ANALYSIS OF THE RISING COSTS OF
PUBLIC EDUCATION
BY
W e r n e r Z . H ir s c h
TRENDS IN THE SUPPLY AND DEMAND
OF MEDICAL CARE
BY
M a r k le y R o b e r ts
MATERIALS PREPARED IN CONNECTION WITH THE
STU D Y OF EM PLOYM ENT, GROW TH, AN D
P R IC E L E V E L S
FOR CONSIDERATION BY THE
J O IN T E C O N O M IC
CONGRESS
OF TH E
C O M M IT T E E
U N IT E D
STATES
N O V E M B E R 1 0 , 195 9
P rin ted f o r th e use o f th e J o in t E conom ic C om m ittee
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1959
47761
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington 25, D.O. - Price 90 cents
J O IN T E C O N O M IC C O M M IT T E E
(C reated pursuant to sec. 5 (a ) o f Public L aw 3 04 , 7 9th C ong.)
PAUL H. DOUGLAS, Illinois, Chairman
WRIGHT PATMAN, Texas, Vice Chairman
SENATE
HOUSE OF REPRESENTATIVES
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
HENRY S. REUSS, Wisconsin
FRANK M. COFFIN, Maine
THOMAS B. CURTIS, Missouri
CLARENCE E. KILBURN, New York
WILLIAM B. WIDNALL, New Jersey
JOHN SPARKMAN, Alabama
J. WILLIAM FULBRIGHT, Arkansas
JOSEPH O. O’MAHONEY, Wyoming
JOHN F. KENNEDY, Massachusetts
PRESCOTT BUSH, Connecticut
JOHN MARSHALL BUTLER, Maryland
JACOB K. JAVITS, New York
St u d y
of
E m ploym ent, G
rowth,
and
P r ic e L e v e l s
(Pursuant to S . C on. R es. 13, 8 6 th C on g., 1st sess.)
Technical Director
Administrative Officer
Special Economic Counsel
O t to E c k s t e in ,
Jo h n
Ja m e s
II
W.
W.
K
L ehm an,
n o w les,
These are part of a series of papers being prepared for con
sideration by the Joint Economic Committee in connection
with their “ Study of Employment, Growth, and Price Levels.”
The committee and the committee staff neither approve nor
disapprove of the findings of the individual authors. The
findings are being presented in this form to obtain the widest
possible comment before the committee prepares its report.
m
LETTERS OF TRANSMITTAL
N
ovem ber
6,
1959.
To Members of the Joint Economic Committee:
Su bm itted herewith for the consideration o f the m em bers o f the
Joint E co n om ic C o m m itte e and others are stu d y papers 4 and 5,
“ A n alysis o f the R isin g C osts o f P u blic E d u ca tio n ” and “ T ren ds in
the Su p p ly and D e m a n d o f M ed ica l C a r e .”
T h ese are a m on g the nu m ber o f su bjects which the Joint E co n o m ic
C om m itte e has requested individual scholars to exam ine and report
on to provide factu al and analytic m aterials for consideration in the
preparation o f the staff and com m ittee reports for the “ S tu d y of
E m p lo y m e n t, G row th , and Price L e v e ls.”
T h e papers are being printed and distributed n ot o n ly for the use
o f the com m ittee m em bers b u t also to obtain the review and com m en t
o f other experts during the co m m ittee’s consideration o f the m aterials.
T h e findings are entirely those o f the authors, and the co m m ittee and
the com m ittee staff indicate neither approval nor disapproval b y this
publication.
au l H .
o ug las
P
D
,
Chairman, Joint Economic Committee.
H on.
P au l
H.
N ovember 3, 1959.
D ouglas ,
Chairman, Joint Economic Committee,
U.S. Senate} Washington, D C.
D
S
D
:
ea r enator
o u g la s T ra n sm itted herewith are the fou rth
and fifth in a series o f papers being prepared for the “ S tu d y o f
E m p lo y m en t, G row th , and Price L e v e ls” b y outside consultants and
m em bers o f the staff. T h e authors o f these papers are W ern er Z .
H irsch , W a sh in g to n U n iv ersity , S t. L ou is, M o ., and M a r k le y R oberts,
A m erican U n iv ersity , W a sh in g to n ,
A ll papers are presented as prepared b y the authors, for considera
tion and co m m en t b y the com m ittee and staff.
D .C .
O tto E c k st e in ,
Technical Director,
Study of Employment, Growth, and Price Levels.
CONTENTS
S T U D Y P A P E R N O . 4, “ A N A L Y S I S O F T H E R I S I N G C O S T S
O F P U B L I C E D U C A T I O N ,” B Y
W E R N E R Z. H IR S C H
Page
Introduction— S tatem en t of findings_____________________________________________
Chapter 1. General su m m a ry _____________________________________________________
In trod u ction ____________________________________________________________________
State and local governm ent sector__________________________________________
C osts of public education-------------------------------------------------------------------------------Teachers’ salaries— the overw helm ing cost fa cto r________________________
A b ility to afford education— incom e elasticity-----------------------------------------T h e near term p rospect______________________________________________________
Som e im plication s_____________________________________________________________
Chapter 2. T h e State and local governm ent sector____________________________
In trod u ction ____________________________________________________________________
N atu re of d a ta _______________________________________ __________________________
A n overview ____________________________________________________________________
F unctional breakdow n________________________________________________________
Current versus capital expenditures________________________________________
C ost comparisons in constant dollars_______________________________________
Chapter 3. T he public prim ary and secondary education sector____________
In trod u ction------------- ---------- -----------------------------------------------------------------------------N ature of d ata_________________________________________________________________
Factors affecting expenditure level--------------------------------------------------------------N um ber of pupils in average daily attendance______________________
Sociological characteristics of popu lation _____________________________
A ge structure________________________________________________________
Geographical distribution_________________________________________
E conom ic characteristics________________________________________________
Price level of goods and services bought b y schools___________
Incom e lev el_________________________________________________________
Physical characteristics_________________________________________________
P rodu ctivity of school system ____________________________________
G overnm ental characteristics__________________________________________
V ariety, scope, and quality o f education_____________________________
A ddition or deletion of services___________________________________
Scope o f services____________________________________________________
Q u ality of services__________________________________________________
T est of hypothesis_____________________________________________________________
E du cation cost in constant term s___________________________________________
Incom e elasticity of public education______________________________________
T h e 1960 and 1965 ou tlook __________________________________________________
A ppendix— Econom ies of scale____________________________ ______ ________________
1
2
2
2
3
4
5
5
6
6
6
6
8
9
13
13
15
15
15
16
17
18
18
18
19
19
20
21
21
24
25
25
26
26
30
32
35
39
41
CHARTS
Chart 1. T o ta l current expenditures (plus debt service) for public prim ary
and secondary education, selected years, 1 9 0 0 -1 9 5 8 ________________________
Chart 2. Current expenditures (plus debt service) for public prim ary and
secondary education m inus expenditures, for auxiliary services, selected
years, 1 9 0 0 -1 9 5 8 _________________________________________________________________
16
35
TABLES
T ab le 1. State and local governm ent expenditures, selected years, 1 9 0 2 -5 8 T ab le 2. General expenditures of State and local governm ent b y function,
selected years, 1 9 0 2 -5 8 __________________________________________________________
T ab le 3. Percent of general expenditures b y service function________________
T ab le 4. Current general expenditures of State and local governm ent b y
function____________________________________________________________________________
vn
8
10
11
12
VIII
CONTENTS
T ab le 5. C apital ou tlay general expenditure of State and local governm ent b y fu n ction _________________________________________________________________
T a b le 6. S tate and local governm ent purchases of goods and services in
current and constant ( 1 9 5 4 = 1 0 0 ) dollars, 1 9 2 9 -5 7 ________________________
T ab le 7. Pupils in average daily attendance ( A D A ) , selected years, 1 9 0 0 1 9 5 8 ________________________________________________________________________________
T a b le 8. Public high school relative to to ta l public enrollm ent, selected
years, 1 9 0 0 -1 9 5 8 _________________________________________________________________
T ab le 9. U rbanization of school population, selected years, 1 9 0 0 -1 9 5 8 ____
T a b le 10. A verage annual salaries of public school teachers, selected years,
1 9 0 0 -1 9 5 8 _________________________________________________________________________
T ab le 11. Per capita personal income, selected years, 1 9 0 0 -1 9 5 8 __________
T a b le 12. Auxiliary school service expenditures, selected years, 1 9 0 0 -1 9 5 8 .
T ab le 13. Length o f school term , selected years, 1 9 0 0 -1 9 5 8 _________________
T a b le 14. T o ta l num ber of principals, superintendents, and consultants
per 1 ,00 0 pupils in average daily attendance in public prim ary and sec
ondary schools, selected years, 1 9 0 0 -1 9 5 8 ____________________________________
T ab le 15. T o ta l current expenditures (plus debt service) for public pri
m ary and secondary education, selected years, 1 9 0 0 -1 9 5 8 _________________
T a b le 16. T o ta l current expenditure (plus debt service) for public pri
m ary and secondary education m inus auxiliary services, selected years
1 9 0 0 -1 9 5 8 _____________________________ ______ ___________________________________ I
T a b le 17. Incom e elasticities o f select local public services, St. Louis
city-cou n ty area, 1 9 5 1 -5 2 and 1 9 5 4 -5 5 _______________________________________
ST U D Y
PAPER
NO .
5,
“TR EN D S
IN
TH E
SUPPLY
Page
12
14
17
18
19
20
21
25
25
29
33
34
38
A N D
DEM AND OF M EDICAL CARE,” B Y M A R K LE Y ROBERTS
Introduction and su m m a ry________________________________________________________
Chapter 1. D em an d for medical care____________________________________________
T otal dem and__________________________________________________________________
H ealth consciousness____________________________________________________
T otal spending____________________________________________________________
Private d em an d________________________________________________________________
T otal personal consum ption spending________________________________
F am ily medical care spending__________________________________________
G row th of p rep aym en t__________________________________________________
H ealth needs of older p eo ple___________________________________________
Public spending________________________________________________________________
Public support for health and m edical care__________________________
Federal support for research___________________________________________
D em a n d for hospital services________________________________________________
Trend to hospitals for health care_____________________________________
H ospitalization insurance_______________________________________________
U tilization by older people_____________________________________________
M en tal illness and chronic diseases____________________________________
Chapter 2. Supply of m edical care_______________________________________________
Organization of medical services____________________________________________
Q uality changes in m edical care_____________________________________________
S upply of medical personnel_________________________________________________
Physicians (medical doctors)_________________________________ _________
D en tists____________________________________________________________________
N u rses_____________________________________________________________________
Other health workers____________________________________________________
Supply of hospital facilities__________________________________________________
Increases and shortages_________________________________________________
T yp es of hospitals________________________________________________________
Distribution of hospitals________________________________________________
H ospital services and costs_____________________________________________
H ospital construction____________________________________________________
Chapter 3. The price index o f medical care____________________________________
T ren d s___________________________________________________________________________
L im itation s_____________________________________________________________________
Chapter 4. A look ahead __________________________________________________________
E xpanding dem and for m edical care_______________________________________
Inadequacies of su p p ly ________________________________________________________
C ontinuing price inflation____________________________________________________
P roviding an adequate supply of m edical care____________________________
Page
47
49
49
49
50
52
52
55
56
59
60
60
61
62
62
62
64
64
65
65
66
67
67
68
68
71
72
72
73
75
76
77
78
78
80
83
83
83
84
84
CONTENTS
IX
CHARTS
Page
Chart 1. Spending for health and medical care____________________________
Chart 2. Personal consum ption spending (for medical care)_______________
Chart 3. Growth of health insurance coverage____________________________
Chart 4. Supply of physicians, dentists, and nurses, in relation to popula
tion, with projections on the basis of currently predicted output of medi
cal, dental, and nursing needs___________________________________________
Chart 5. Ownership of hospital beds______________________________________
Chart 6. Medical care price index and selected com ponents_______________
51
53
57
09
74
79
TA B LE S
Table 1. Private and public spending for health and medical care, selected
fiscal years, 1929-58_____________________________________________________
Table 2. Personal consum ption spending for medical care, 1946-58_______
Table 3. Charges incurred by families for health services, by incom e and
health insurance status__________________________________________________
Table 4. Fam ily outlays for medical care as a percentage of fam ily income,
by income and health insurance status__________________________________
Table 5. Growth of health insurance coverage, number of people protected
against hospital expenses, surgical expenses and regular medical expenses_
Table 6. Health problems of people aged 65 and over, 1957-58___________
Table 7. Public spending for health and medical care, selected fiscal years,
1929-58_________________________________________________________________
Table 8. Physicians, dentists, and nurses: Trends and projections of
supply___________________________________________________________________
Table 9. Ownership of hospital beds______________________________________
Table 10. Hospital personnel and payroll costs____________________________
T able 11. Hospital construction, value put in place and value by source
of funds__________________________________________________________________
Table 12. Relative im portance of medical care price index com ponents as
percent of Consumer Price Index, all-items total________________________
Table 13. M edical care price index, selected items and groups, 1947June 1959________________________________________________________________
52
54
56
56
58
60
61
70
74
77
78
80
82
STUDY
A N A L Y S IS
PAPER
OF TH E
P U B L IC
NO. 4
R IS IN G
COSTS O F
E D U C A T IO N
( B Y 'J W E R N E R
Z . H IR S C H )
STUDY PAPER NO. 4
ANALYSIS OF THE RISING COSTS OF PUBLIC
EDUCATION
(B y W erner Z. Hirsch)
I ntroduction — S tatem ent
of
F in d in g s 1
A stu d y o f the relation of the public school sector to the problem s
of em ploym en t, grow th, and price levels leads to the follow ing conclu
sions :
1. T h e huge increases in current expenditure (plus d ebt service)
for public p rim ary and secondary education since the turn o f the
century are m a in ly due to exogenous forces, such as factors raising
salary levels and per capita personal incom e.
2. W it h the property tax as the m ain revenue source, general price
level increases, and particularly rises in teacher salary level, are likely
to lead to continued fiscal school crises.
3. Since the turn o f the century, the percentage increases in educa
tional expenditures— m ore specifically, daily per pupil current expendi
ture, plus debt servicc— were on the average abou t the sam e as the
percentage increases in per capita personal incom e.
T h e form er
exceeded the latter b y a very sm all a m o u n t.
Such low incom e elas
ticity of public education m u st be o f deep concern to all those who
are convinced th a t im provem en ts in education are essential if the
U n ited States is to rem ain a leading world power.
Since m ore funds
need to be found, serious consideration m u st be given to policies
aim ed at changing p eople’s attitu de tow ard public education, and to
shifting partial responsibility for financing education fro m the local
school district to the S ta te and possibly to the Federal G overn m en t.
T h is will require the com bined leadership o f all branches o f govern
m en t and the institution o f m atch ing Federal funds com bined w ith
such eligibility criteria as m in im u m tax effort and statew ide equaliza
tion of educational opportu n ity.
4. I t appears th at there h ave been no significant p ro d u ctiv ity
changes in the education sector.
5. D u rin g the last 10 years general expenditures o f S ta te and local
governm ents increased an average o f abou t 15 percent per annum
m easured in current dollars and 8 percent if m easured in 1954 con
stan t dollars.
D u rin g the sam e period the average annual increase
o f tota l current expenditures, plus debt service, for public prim ary
and secondary education w as a bou t 17 percent in current dollars and
5 percent in 1954 constant dollars.
1 to author would like to and Burton Weisbrod for their numerous useful comments. Much assistant,
his appreciation to Elbert
andTheProfs. Harold officialsexpressDepartments of Commerce;Segelhorst, who served as research assistance
was also rendered by Barnettin the
Health, Education and Welfare; and Labor.
They arc too numerous to be enumerated.
x
2
ANALYSIS OP RISING COSTS OF PUBLIC EDUCATION
6.
A “ medium” projection suggests that if annual teachers’ salary
increases of 3 percent are granted— and funds to finance them can
be found— total current expenditure, plus debt service, for public
primary and secondary education will have advanced in terms of
1958 dollars to about $17.4 billion by 1965; i.e., a 58-percent increase
in 7 years. However, if people’s attitude toward public education
and the way of financing it remain unchanged, a 3-percent annual
increase in per capita personal income may produce merely $15.3
billion in revenue in 1965. While this would be an increase of about
39 percent over the 1958 figure, it would be about $2.1 billion below
the earlier projected expenditure figure.
Chapter 1. General Summary
INTRODUCTION
This study is designed to shed light on the cost and expenditure
level changes of the public primary and secondary education sector of
our economy— a sector employing more than 2 million men and
women, who serve almost 35 million pupils. This sector in 1958
spent more than 30 percent of all the money spent by State and local
governments, an amount representing about 3.3 percent of national
income and 3 percent of gross national product. In order to trace
and understand changes in the cost of education and relate them to
the rest of the State and local government sector, the latter sector is
examined first in some detail. This sector, for example, accounts for
about 12.3 percent of gross national product, and perhaps 3 to 3%
percent of the Consumer Price Index of the U.S. Department of
Labor. There are indications that since 1952 the cost of State and
local government services increased up to three times more rapidly
than did the other items included in the index.
T o shed light on the cost behavior of this sector, a functional
service breakdown is attempted, and the question is raised: “ Which
State and local government services provided the major monetary
push?”
STATE AND LOCAL GOVERNMENT SECTOR
In terms of general expenditures, education, highways, public wel
fare, and health and hospitals have been the four most important
State and local government services since the turn of the century.
Education expenditures have accounted for an increasingly large share
of all expenditures. They increased from about 25 percent in 1902
to about 35 percent in 1958. General expenditures for public primary
and secondary education advanced at a somewhat slower pace than
did those for higher education.
The relative importance of highway expenditures showed great
fluctuations. During the first quarter of this century a steady advance
from 17 to 25 percent was registered. From then on until the end of
World War II a steady decline set in, which has been reversed only
in recent years. Public welfare expenditures, at least in relative
terms, grew more rapidly than any of the other main services. Most
of their advance took place during the first half of the 1930’s. Finally,
the relative share of health and hospital expenditures has shown a
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
3
very steady, though not rapid, increase. Many other services have
lost in importance.
Next, expenditures are examined from a somewhat different view
point. The issue at hand is, “ Did current or capital expenditures
provide the major push” ? The answer can be given in unequivocal
terms. So far in the 20th century, capital outlays of State and local
government advanced at a rate more than twice as fast as did current
expenditures. The 1902-58 increase of capital outlays is 76-fold,
while that of current expenditures is 37-fold. This not only holds
if all services are taken together, but it is also true for single services
except public welfare, sanitation, and local parks.
What is the picture of State and local government expenditures if
they are adjusted for price level changes; i.e., in constant dollars?
The U.S. Department of Commerce has prepared a series of implicit
deflatorsjapplicable toJState and local government purchases of goods
and services which goes back to 1929. This series does not make
allowance for quality changes. While State and local government
expenditures—measured in current dollars—increased from 1929 to
1957 by almost 370 percent, expressed in 1954 constant dollars these
expenditures have not even quite doubled. Between 1929 and 1945
the constant dollar expenditures moved relatively little and without
definite direction. Since them a pronounced and steady rise has
started. The average annual increase of the last 10 years—measured
in constant dollars—was about 8 percent.
COSTS OF PUBLIC EDUCATION
What about cost changes in the single most important State and
local government sector, i.e., public primary and secondary education?
More specifically, what forces have decisively contributed to cost
increases in this sector?
A large number of factors can be identified as possibly affecting
current expenditures, plus debt service, for public primary and
secondary education. Some of them have assumed greatly different
values since thefturnfoffthe century. Thus, for example, the number
of pupils in average daily attendance—A D A —increased almost
three times*since 1900,fhigh schooWenrollment relative to total public
school enrollment increased about six times, and the percent of pupils
living in urban as against rural America has increased about 40
percent.
Turning to some economic factors, it is noteworthy that the average
salary of a teacher advanced about 14 times, while per capita personal
income increased about 9 times.
Finally, an examination of some characteristics of public education
itself reveals that while in 1900 virtually no appreciable auxiliary
services were rendered, in 1958 pupils were fed in school cafeterias,
attended by school health services, and brought to school in schoolbuses, etc. In 1958, almost 14 percent of current school expenditures,
plus debt service, were applied to auxiliary services. In addition, the
school term was lengthened an average of 60 percent and the number
of principals, superintendents, and consultants per pupil almost
doubled.
4
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
TEACH ERS’
S A L A R IE S — T H E O V E R W H E L M IN G
CO ST F A C T O R
Which of these factors have decisively contributed to cost increases?
How important a factor is the salary of the average teacher and how
important is people’s ability to afford good education, i.e., their
income? Has the efficiency— or productivity— of the public school
system changed much?
These are some of the questions for which answers are sought by
relying on multiple correlation and regression techniques.
First an education unit was developed, one that appears to have been
fairly uniform over the years. It is so standardized that its variety
and scope are held reasonably constant and it is expressed in per pupil
in average daily attendance terms. Ever since the turn of the century
the costs of this education unit— daily per pupil current expenditures
plus debt service minus the cost of auxiliary services— appear to have
been overwhelmingly determined by the prevailing salary level of the
instruction staff, and perhaps the prices of all goods and services
bought by schools. However, they, in turn, are determined by the
general demand and supply situation and price level of the rest of the
economy, as well as the particular demand for and supply of teachers.
There is some evidence that the salary of the average teacher has
advanced somewhat more rapidly than the earning of other workers.
This suggests that the specific demand for and supply of teachers play
an important role in addition to general price level changes. An over
whelming percentage of the 1900-1958 variation of the cost of the
standardized education unit can be explained, on the average, in
terms of teacher salary level increases, holding constant the effect of
changes in the public high school-all public school enrollment ratio,
urbanization, and number of specialists per pupil.
If now current expenditures plus debt service are deflated by
teachers’ salaries, the 1930-57 advance is about 54 percent. It is less
than the 1930-57 advance in all State and local government costs in
constant dollars, which was about 88 percent. The average annual
increase in constant dollars was 2.0 percent for education and 3.3 per
cent for all State and local government costs.
The overwhelming importance of teacher salary level in determining
the cost of a public education unit raises some intriguing questions of
finance, since much of the revenue of schools takes the form of property
taxes. The general price level together with specific demand and
supply factors for teachers can advance at a more rapid pace than the
assessed valuation of real property. Not only may real property
increase at a slower pace than the general price level but, more impor
tantly, reassessments are usually at best a slow and belated process.
As long as the property tax is the main revenue source of schools,
general price level increases, and particularly teacher salary level
increases, are likely to create major fiscal problems.
The importance of salary level changes can also be illustrated by
comparing 1900-1958 total public school expenditure (minus auxiliary
expenditures) in current dollars witli those in constant 1954 dollars.
In current dollars the 1900-1958 increase was 48-fold, while in con
stant dollars the increase was merely 2}<-fold. If further adjustments
are made for the number of pupils in average daily attendance and
length of school term, expenditures in real terms are approximated.
Expenditures in real terms exhibit amazing stability during 1900-1958.
For the years for which data are available, 1922 was the low year with
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
5
$1.37 daily expenditure per pupil, and 1913 was the high year with
$1.60. Over these 58 years, an overall decline of about 3 percent was
registered.
To the extent that the standardization of the education unit has
been successful and appropriate data in general were used, the analysis
can reflect on the productivity variable as a residual. Apparently,
productivity in the public schools has changed very little, if at all.
A B IL IT Y TO A F FO R D
E D U C A T IO N ---- IN C O M E
E L A S T IC IT Y
Next the effect of per capita personal income on the cost of daily
per pupil current expenditure plus debt service is considered.
Once more multiple correlation and regression techniques are em
ployed. They point to the importance of income as another deter
minant. Most likely, income’s main impact is twofold— it affects
the amount of revenue that is raised for public education as well as
its variety and quality. About 76 percent of the 1900-1958 varia
tion in the cost of daily per pupil current expenditure plus debt
service can be explained on the average in terms of per capita per
sonal income changes, holding the effect of changes in the public
high school-all public school enrollment ratio and urbanization
constant. It must be remembered that these 76 percent, and the
change associated with salary level, are not additive.
Income elasticity of public education was estimated to have aver
aged plus 1.09 during 1900-1958. Thus, during 1900-1958 a 1 per
cent increase in per capita personal income was on the average asso
ciated with a 1.09 percent increase in daily total current expenditures
for public primary and secondary education per pupil in average daily
attendance. It is only slightly aboVe unit elastic and apparently
lower than that of some other public services, not to speak of such
consumer amenities as air conditioning, automobiles, golf, speed
boats, etc. Such low elasticity must be of concern to all those who
are convinced that improvements in public education are essential if
the United States is to remain a leading world power, and that there
fore an increasing portion of the American people’s income must be
channeled into public education. Certainly, people’s attitude toward
education and our general tax system are mainly responsible for the
prevailing income elasticity of education. If public education is to
be improved in the United States and more funds to finance education
arc to be found, serious consideration must be given to changing both,
including further shifts in the responsibility for financing education
from the local school district to the State and possibly to the Federal
Government.
THE
NEAR
TERM
PROSPECTS
Making projections is at best a hazardous undertaking, particu
larly in a case where the phenomenon awaiting projection so greatly
depends upon exogenous forces, such as personal income and teacher
salary levels. How hazardous predictions in the field of education
are is well demonstrated by recalling James B. Conant's 1938 pre
diction :
By 1960 or thereabouts we shall have a stationary population.
pressure on our schools will soon be gone.2
The expansive
2 James B. Conant, “ The Future of Our Higher Education,” Harper’s magazine, M ay 1938.
47761— 59------- 2
6
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
Three basic sets of projections for 1960 and 1965 have been pre
pared in 1958 dollars—low, medium, and high. The medium projec
tions assume a cumulative annual increase of 3 percent in per capita
personal income, teachers’ salary and length of school term. The
number of pupils in average daily attendance is assumed to increase
to 32 million in 1960 and 37.2 million in 1965. The other factors are
assumed to increase very little.
On the basis of these assumptions, equation 1.1, which emphasizes
teachers’ salary level, can be used to project expenditures. Equation
1.2, which emphasizes people’s income and thus ability to afford good
education, helps project revenue. Medium projections suggest that
if annual teachers’ salary increases of 3 percent are granted— and
funds to finance them can be found— total current expenditure plus
debt service for public primary and secondary education will have
advanced in terms of 1958 dollars to about $12.7 billion by 1960 and
$17.4 billion by 1965, compared to $11.0 billion expenditures in 1958.
This amounts to about an 8 percent annual increase.
However, if people’s attitude toward public education and the
way of financing it remains unchanged, a 3 percent annual increase
in per capita personal income is projected to produce merely $11.1
billion in revenue (in terms of 1958 dollars) in 1960 and $15.3 billion
in 1965. While this would be a 39 percent increase from 1958 to
1965, it would fall short by $2.1 billion in 1965 of what teachers’
salary pressure would lead to in terms of expenditure.
Whether the public education sector will in 1965 account for about
$17.4 or $15.3 billion will much depend upon whether the income
elasticity of public education will change.
SOME IMPLICATIONS
Leadership will play a decisive role. The American people need
to be persuaded to spend a larger part of their income for public
education. Congress can make an important contribution by voting
into existence a system of matching Federal /unds combined with
carefully designed eligibility criteria. High on the list of these
criteria should be the following two: States must make a minimum
tax effort to finance education— i.e., a minimum ratio between per
capita State and local school tax and per capita income will have to
be set; and there should be a statewide equalization program which
effectively assures sufficient funds to underwrite a floor below which
the scope and quality of education cannot fall anywhere in the State.
Chapter 2. The State
and Local Government Sector
INTRODUCTION
While it might not be generally recognized, the number of State
and local governments in the United States is not only fairly large—
102,352 units in 1957—but they also perform a great variety of
functions. State and local government direct expenditure in 1958
was $53.9 billion, compared to $81.2 billion spent by the Federal
Government. These expenditures amount to 12.3 percent of gross
national product and 15 percent of national income. Or, to use
another yardstick, State and local governments employed in 1957
a full-time equivalent of 4,793,000 men and women.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
7
NATURE OF DATA
Because of the volatile nature of capital expenditures by State
and local governments, for analytical purposes it would be desirable
to let debt service reflect the capital expenditure of these govern
ments. Since these capital expenditures are usually amortized over
a 20- to 50-year period through bond issues and sinking funds, debt
service would more nearly reflect the current benefits accruing from
these capital outlays. However, the U.S. Bureau of the Census, in
its census of governments, excludes payments for debt retirement,
extension of loans, and purchases of securities from expenditure.
Since the U.S. Bureau of the Census is the basic source for many
State and local government expenditure data, the concept of debt
service as a reflection of capital expenditure cannot be used in con
nection with census data.
There are three general functional classifications of State and local
government expenditure: general expenditure, utility and liquor
stores expenditure, and insurance trust expenditure. Included in
general expenditure are the services which are commonly associated
with State and local government— education, highways, welfare,
health and hospitals, police, fire, sanitation, etc. In 1958, these
general expenditures accounted for $45.1 billion or 83.7 percent of
total expenditures. Utility and liquor store expenditures in 1958
were $4.6 billion or 8.6 percent of total expenditures and include
expenditure on such government-owned utilities as water supply,
electric power, gas supply, and transit systems. Included in this
category are expenditures for running State-owned liquor stores in
16 States and those owned by local governments in a few States.
Other commercial-type operations of State and local government are
included in general government. State and local government insur
ance trust expenditure consists chiefly of retirement payments for
State and local government employees and unemployment compensa
tion payments to the qualified unemployed, who together with their
employers, have contributed to the fund from which payments are
made. In 1958, insurance trust expenditures were $4.2 billion and
accounted for 7.7 percent of total State and local government expendi
tures.
It might be helpful to ignore liquor store and insurance trust
expenditures. Unemployment compensation, which in 1958 amounted
to $2.8 billion or 66.2 percent of insurance trust expenditure, is not
generally considered to be a State and local government expenditure
since both revenue is received and payments are made by this separate
insurance trust fund. The administrative cost of this insurance trust
fund is, however, included in general expenditure.
One must keep in mind, then, that the U.S. Bureau of the Census
uses the following basic concepts and terminology in its statistics on
expenditure of State and local government:
1.
State and local government expenditure comprises all amounts
of money paid out as between State and local governments and
external individuals or agencies (net of correcting transactions such
as recoveries or refunds), with the exception of amounts for debt
issuance and retirement and for loan and investment, agency, and
private trust transactions.
8
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
2. Although State and local governments act as agents of the
Federal Government in withholding Federal income and social
security taxes from their employees1 pay, such amounts are excluded
from State and local government revenue and expenditure, and are
reported as Federal revenue and expenditure.
3. Although the Federal Treasury handles unemployment compen
sation accounts for the States, these funds are omitted from the
Federal figures and are included with the State and local data.
4. The data utilized for each individual government represent a
consolidation of amounts for its various funds, and payments between
funds have been eliminated for census reporting.
5. Intergovernmental expenditure has been netted out of aggregates
comprising the groups of governments concerned. Most of the
amounts so classified comprise fiscal aid in the form of Federal and
State grants. The value of intergovernmental aid “ in kind,” such as
commodities distributed by the Federal Government for school-lunch
purposes, is not treated as intergovernmental revenue or expenditure.
Contributions by local governments to State-administered retirement
systems that cover their employees are included as part of the “ current
operation” expenditure of the local governments involved, and are
included with State insurance trust revenue.
T a b l e 1.— State and local government expenditures, selected years, 1902-58
[In millions of dollars]
General
expendi
ture
General
expendi
ture plus
employee
retirement
Total
expendi
ture
(1)
Year
(2)
(3)
1902...............
1913...............
1922...............
1927...............
1932..............
1934...............
1936...............
1938...............
1940...............
1942...............
1944...............
1,013
2,064
5,218
7,210
7,765
7,181
7,644
8,757
9,229
9,190
8,863
1,013
2,071
5,248
7,760
7,840
7,277
7,757
8,886
9,369
9,359
9,058
1,095
2,257
5,652
7,810
8,403
7,842
8,501
9,988
11,240
10,914
10,499
1946...............
1948...............
1950...............
1952...............
1953...............
1954...............
1955...............
1956________
1957...............
1958...............
General
expendi
ture
General
expendi
ture plus
employee
retirement
Total
expendi
ture
(1)
Year
(2)
(3)
11,028
17,684
22,787
26,098
27,910
30,701
33,724
36,711
40,375
45,059
11,265
17,981
23,148
26,628
28,495
31,380
34,446
37,536
41,318
46,132
14,067
21,260
27,905
30,863
32,937
36,607
40,375
43,152
47,553
53,857
Source: U.S. Bureau of the Census, “ Historical Summary of Governmental Finances in the United
States/’ 1959,23 pp. and “ Summary of Governmental Finances in 1958/’ 1959, p. 14.
AN OVERVIEW
As can be seen from table 1, during the last 56 years or so the annual
general expenditure of State and local governments increased from
$1 to $45.1 billion, about a 44-fold increase.3 Furthermore, total
overnment expenditure, i.e., general expenditure plus utility and
quors expenditure plus insurance trust expenditure, advanced from
$1.1 to $53.9 billion during this period, that is, about 48-fold.
But, as would be expected, the increase was far from steady. In
rough terms, the rate of increase was very high from the turn of the
century until the depression of the 1930’s— about an average of 25
g
5 Actually, although the census definition does not do so, it’is appropriate to include in the general expendi
ture figure government contributions to employees’ retirement fund. If this is done, the increase is some*
what higher.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
9
percent per year. Depression and World War II greatly changed
the picture. In 1944, general State and local government expenditure
was only $1.1 billion or about 15 percent higher than it had been 12
years earlier. But with the end of World War II, a very high average
annual rate of advance was resumed, i.e., about 24 percent a year.
The rate was slightly higher in the forties than in the fifties of this
12-vear period. No doubt the heavy backlog of demand from the
war years was responsible for the exceptionally fast increase in the
late forties.
F U N C T IO N A L B R E A K D O W N
W hat services are mainly responsible for this rapid advance in
State and local government general expenditure? To supply answers
to this queation, the general expenditure figures have been broken
down by 16 main categories; 1902-58 data are given in table 2.
o
,
T able 2.— General expenditures of State arid local government by function, selected years 1902—
58
[In millions of dollars]
17
55
164
218
269
215
283
330
357
373
462
484
1,032
1,298
1,415
1,533
1,567
1,721
1,970
2,263
255
577
1,705
2,235
2,311
1,831
2,177
2,491
2,638
2,586
2,793
3,356
5,379
7,177
8,318
9,390
10,557
11,907
13,220
14,134
15,782
175
419
1,294
1,809
1,741
1,509
1,425
1,650
1,573
1,490
1,200
1,672
3,036
3,803
4,650
4,987
5,527
6,452
6,953
7,816
8,694
(8)
(9)
37
43
52
79
119
200
151
279
444
349
889
309
827
351
1,069
400
1,156
450
1,225
432
1,133
468
1,409
567
2,099
937
2,940
1,384
2,788
1,745
2,914
1,863
1,962
3,060
3,168
2,053
3,139 22,164
3,404 2 2,648
3,751 23,066
(7)
17
29
58
76
107
109
116
151
159
159
188
251
292
364
440
427
447
471
2608
2 552
2 559
50
89
190
270
318
291
314
359
365
394
414
479
644
776
939
1,038
1,130
1,229
1,330
1,468
1,633
40
76
158
203
210
189
205
231
235
236
251
294
406
488
586
598
653
694
737
810
939
(10)
51
97
189
312
223
177
204
226
207
229
245
370
670
834
992
908
1,058
1,142
1,326
1,443
1,507
(11)
9
14
61
94
165
159
193
222
218
214
232
302
496
670
776
705
762
793
906
1,031
1,121
Local
Housing
and com General Interest
parks
and rec munity control on gen
reation redevel
eral debt
opment
(12)
29
57
85
153
147
126
104
130
162
128
123
179
243
304
324
374
424
509
541
608
685
(13)
3
230
236
46
114
176
452
769
631
611
499
437
505
601
Other
Total
general
expendi
tures
(14)
(15)
(16)
(17)
141
211
313
412
470
432
500
542
561
578
599
703
880
1,041
1,193
1,263
1,375
1,452
1,560
1,725
1,861
68
147
382
584
741
739
738
673
653
565
499
421
399
458
552
614
718
838
986
1,106
1,235
98
217
464
632
539
421
490
610
622
718
672
911
2,027
2,096
2,024
2,198
2,417
2,517
2,804
3,124
3,625
1,013
2,064
5,218
7,210
7,765
7,181
7,644
8,757
9,229
9,190
8,863
11,028
17,684
22,787
26,098
27,910
30,701
33,724
36,711
40,375
45,059
i The U.S. Bureau of the Census classifies education expenditure by State institutions
Source: U.S. Bureau of the Census, “ Historical Summary of Governmental Finances
of higher education, local schools, and other education. The classification of primary and
in the United States,” 1959,23 pages, and “ Summary of Governmental Finances in 1958, ”
secondary education of this study is the same as that of the census classification, “ Jocal
1959, 19 pages,
schools.” It includes a very minor portion for college level education.
* Payments to private hospitals are under “ Hospitals” for 1956, 1957, and 1958, and
under “ Health” for earlier years.
EDUCATION
238
522
1,541
2,017
2,042
1,616
1,894
2,161
2,281
2,213
2,331
2,872
4,347
5,879
6,903
7,857
8,990
10,186
11,250
11,871
(6)
(5)
Sanita Natural
tion resources
PUBLIC
(4)
Local
fire pro
tection
O
F
(3)
Police
COSTS
(2)
Public Hospi
Health
tals
welfare
RISING
High
ways
O
F
Total
educa
tion
ANALYSIS
1902.........................
1913.........................
1922.........................
1927.........................
1932.........................
1934.........................
1936.........................
1938.........................
1940.........................
1942.........................
1944.........................
1946.........................
1948.........................
1950.........................
1952.........................
1953.........................
1954.........................
1955.........................
1956.........................
195 7
195 8
Other
educa
tion
(1)
Year
Primary
and sec
ondary
educa
tion i
11
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
Moneywise, the most important functions are education, highways,
public welfare, and health and hospitals, in this order. As can be
seen from table 3, education expenditures are responsible for an
increasingly large part of all expenditures. Their share increased
from about 25 percent in 1902 to 33 percent in 1922; then a gradual
decline took place to about 26 percent in 1934. From that time on,
education has accounted for an increasingly large share of all expendi
tures, reaching a peak of 36 percent in 1956.
T a b l e 3 . — Percent of general expenditures by service function
Year
Primary
Education and second Highways
ary edu
cation
Public
welfare
Health
and
hospitals
Other
services
(2)
(4)
(5)
(6)
(1)
1902...........................................
1913...........................................
1922 , , ______
1927 „ .............. .......................
1932 ____ __ ___
1934...........................................
1936...........................................
1938...........................................
1940...........................................
1942...........................................
1944 ........................................
1946...........................................
1948...........................................
I960...........................................
1952...........................................
1953...........................................
1954..........................................
1955 ..........................................
1956 ....... .............. ............ .
1957...........................................
1958...........................................
25.2
28.0
32.7
31.0
29.8
25.5
28.5
28.4
28.6
28.1
31.5
30.4
30.4
31.5
31.9
33.6
34.4
35.3
36.0
35.0
35.0
23.5
25.3
29.5
28.0
26.3
22.5
24.8
24.7
24.7
24.1
26.3
26.0
24.6
25.8
26.5
28.2
29.3
30.2
30.6
29.3
129.3
(3)
17.3
20.3
24.8
25.1
22.4
21.0
18.6
18.8
17.0
16.2
13.5
15.2
17.2
16.7
17.8
17.9
18.0
19.1
18.9
19.3
19.3
3.7
2.5
2.3
2.1
5.7
12.4
10.8
12.2
12.5
13.3
12.8
12.8
11.9
12.9
10.7
10.4
10.0
9.4
8.6
8.4
8.3
5.9
5.2
4.9
4.9
5.9
5.8
6.1
6.3
6.6
6.4
7.4
7.4
6.9
7.7
8.4
8.2
7.8
7.5
7.6
7.9
8.0
47.9
44.0
35.3
36.9
36.2
35.3
36.0
34.3
35.3
36.0
34.8
34.2
33.6
31.2
31.2
29.9
29.8
28.7
28.9
29.4
29.4
i Estimate.
Source: U.S. Bureau of the Census.
General expenditure for primary and secondary education behaved
about the same way as did that for all education. Yet, its share has
grown less rapidly during 1902-58 than has that of all education. For
instance, between 1902 and 1956 the share of all education increased
by about 40 percent while that of primary and secondary education
rose by only 30 percent. Thus, higher education expenditures have
increased more rapidly than the rest.
The relative share of highway expenditures showed great fluctua
tions but no clear trend over the years. Until 1927 their share had
steadily increased to reach an all time high of 25 percent. From then
on, it rapidly declined and by 1944 it had lost almost half its earlier
importance. The postwar period has shown a slow but steady advance
to 19 percent in 1958.
During 1902-58, public welfare expenditures grew relatively more
rapidly than those of any other major State and local government
service. But most of the advance took place during the early days of
the Franklin D . Roosevelt administration, when their share jumped
from about 2 percent in 1927 to 6 percent in 1932 and 12 percent in
1934. From then on, speaking in rough terms, a decline set in, leading
to a low of 8.3 percent in 1958.
12
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
Except for the 1920's the relative share of health and hospital
expenditures has been increasing, although the pace was not fast.
If all remaining services are lumped together, their relative impor
tance shows a steady decline from 48 percent in 1902 to 29.4 percent
in 1958. Nevertheless, such services as housing and community
redevelopment, natural resources development, etc., showed a dis
tinctly different trend.
T
able
4 .—
Current general expenditures of State and local government by function
214
1902 ......................................
488
1913......................................
1922
.................................. 1,374
1932 ..................................... 2,064
1942........................................ 2,411
1957........................................ 10,882
12,293
1902-58 change, percent........
5,600
116
58
91
220
226
508
719
370
807
540
2,605 12,300
3,208
2,798
27
51
105
135
191
2 799
2 840
9
14
61
137
182
760
814
12
22
52
110
110
429
480
2,300
3,000
8,900
3,900
5,400
Total current
expenditure
(8)
<
8
A
o
w
<
3
Housing an comd
munity redevel
opment
3
Local parks and
recreation
3
Natural resources
3
Sanitation
3
bO
J
Health and
hospitals
(2)
a
q
All education
Year
0
3
[In millions of dollars]
850
1,609
3,834
6,056
7,868
29,089
32,514
2,800
25
222
235
414
723
1,508
2,521
3,602
11,092
11,846
3,700
1Hospitals only.
2 Sewers and sewage disposal only.
Source: Special computations in cooperation with the Data Classification and Research Branch of the
U.S. Bureau of the Census.
T a b le
5 .—
Capital outlay general expenditure of State and local government by
function
20,700
2,700
1,100
Total current
expenditure
9,900
211
283
366
w
8,400
17
35
33
37
18
156
205
3
0)
0)
(»)
28
32
271
307
A other
H
Housing an comd
munity redevel
opment
3
24
46
84
88
38
3 644
3 667
3
Local parks and
recreation
^
w
2
17
32
86
51
2 348
2 417
Sanitation
59
199
786
1,022
683
5,211
5,896
Health and
hospitals
41
89
331
247
175
3,252
3,489
Highways
Natural resources
1902-58 change, percent........
3
1957........................................
3
.........................
...........................
.........................
_________
^
1902
1913
1922
1932
3
Year
All education
3
[In millions of dollars]
20
69
118
201
114
1,121
1,198
163
455
1,384
1,709
1,322
11,286
12,545
5,900
7,600
1 Not available.
2 Hospitals only.
* Sewers and sewage disposal only.
Source: Special computations in cooperation with the Data Classification and Research Branch of the
U.S. Bureau of the Census.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
13
C U R R E N T V E R S U S C A P IT A L E X P E N D IT U R E S
It is mainly current expenditure, or mainly capital outlay that is
driving up the general expenditure of State and local governments?
And if one type of expenditure had advanced more rapidly than the
other, what services are responsible for it?
Here is some of the evidence. While total general expenditure of
State and local governments increased about 44-fold during 1902-58,
the current elements advanced about 37-fold and the capital elements
76-fold. (See tables 4 and 5.)
Capital outlays of the three important services— education, high
ways, and health and hospitals— which throughout this period ac
counted for between one-half and two-thirds of general expenditure,
advanced at a much more rapid pace than did current expenditures.
The 1902-58 increases for education were 84-fold versus 56-fold, for
highways 99-fold versus 23-fold, and for health and hospitals 207-fold
versus 54-fold.
Sanitation and local parks and recreation behaved in an opposite
manner. For natural resources only data since 1932 are available.
Housing and community redevelopment is a relatively new function
and not enough evidence is on hand to reach a conclusion. But
capital outlays of all other services increased about two and a half
times as fast as did their current expenditure.
In summary, much of the rapid increase in the general expenditure
of State and local government since the turn of the century can, no
doubt, be traced to the capital outlay elements of education, highways,
and health and hospitals.
COST C O M P A R IS O N S IN
CONSTANT DOLLARS
An analysis of State and local government general expenditure has
revealed major increases. But the entire analysis was in terms of
current dollars, in many respects an imperfect yardstick, since the
value of the dollar changed substantially during this period. In
recognition of this fact the question will now be asked, “ How great,
if any, were the cost changes of a given bundle of State and local
government services during this period?,, To answer this question, a
deflation procedure must be used so that a cost comparison in real
terms becomes possible.
Basically, there are two approaches to the problem of deflating
State andlocal government purchases. As George Cobren has so
aptly put it—
In the case of Government purchases, a basic dichotomy exists among national
income theorists as to the proper approach to the deflation problem. On the one
side it is argued that the deflation procedure should focus on the products which
the Government buys; on the other, that the procedure should measure the volume
of services which the Government provides.4
He goes on to point out that the U.S. Department of Commerce’s
implicit deflators for the Government sector of gross national product
follows the first of these alternatives. With the help of the implicit
deflator applicable to the State and local government sector, the value
of the goods and services purchased by these governments can be
deflated. Apparently this alternative was selected by the Department
* George M . Cobren, “ The Deflation of the Gross National Product by the Department of Commerce,”
American Statistical Association proceedings, business and statistics section, 1958, pp. 312-319.
14
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
of Commerce, since while it presents formidable difficulties, the other
is even more hazardous.
One of the main shortcomings of the deflating procedure followed
by the U.S. Department of Commerce stems from the fact that by
far the largest expenditure item— employee compensation— is derived
“ * * * by extrapolating the base-year estimate by man-hours wher
ever possible, and by employment when man-hours were not avail
able. * * *” « This, admittedly, is equivalent to deflating the current
value figures by indexes of average compensation. The result is a
measure which makes no allowance for quality changes— in this case,
for changes in the productivity of Government employees.
On this point, Richard Ruggles and Nancy D . Ruggles made some
revealing observations in their testimony before the Joint Economic
Committee.6 They are greatly concerned about the fact that the
implicit price deflators do not properly allow for quality and efficiency
improvements. Consequently, they argue that almost every category
of expenditure has an upward bias.
In table 6 purchases by State and local governments, both in actual
and constant dollars (1 9 5 4 = 100), are presented for the period 1929-58.
Money expenditures increased from $7.2 billion to $40.5 billion, i.e.,
slightly more than five times. In constant dollars the increase was
much less, i.e., the 1958 figure is only a little more than double that
of 1929. Expenditures in constant dollars zigzagged from 1929 to
1945. But with the end of World War II they began a pronounced
rise which as yet shows no sign of reversal. The average annual cost
increase in constant 1954 dollars during the last 10 years was about
8 percent.
T a b l e 6.—
State and local government purchases of goods and services in current and
constant dollars (1954= 100), 1929-57
[In billions of dollars]
1929.
1930.
1931.
1932.
1933
1934.
1935.
1936
1937.
1938.
1939.
1940
1941
1942.
1943
Constant
dollars
(1954=100)
(2)
7.1
7.8
7.7
6.6
6.0
6.8
7.1
7.0
7.2
7.5
8.2
7.9
7.8
7.7
7.4
15.6
17.1
17.9
16.6
14.6
15.8
16.3
16.6
16.4
17.4
19.1
18.0
16.9
15.4
14.0
Year
1944.
1945.
1946.
1947.
1948.
1949.
1950.
1951.
1952.
1953.
1954.
1955.
1956.
1957.
1958.
Current
dollars
Constant
dollars
(1954=100)
(1)
Current
dollars
(1)
Year
(2)
7.5
8.1
9.9
12.7
15.2
17.9
19.7
21.7
23.2
24.9
27.7
30.3
33.2
36.8
40.5
13.8
14.0
15.8
17.8
19.2
21.9
23.5
24.1
24.5
25.5
27.7
29.7
30.6
32.3
34.4
Source: U.S. Department of Commerce, “ U.S. Income and Output,” 1958, pp. 118-119.
« Ibid., p. 316.
• Richard Ruggles and Nancy D. Ruggles, “ Prices, Costs, Demand, and Output in the United States,
1947-57,” the relationship of prices to economic stability and growth, compendium of papers submitted by
panelists appearing before the Joint Economic Committee (Mar. 31,1958), p. 299.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
15
Chapter 3. T he P ublic P rimary and Secondary Education
Sector
IN T R O D U C T IO N
As was shown in the preceding section, public expenditures for
primary and secondary education are by far greater than those for
any other single service performed by State and local governments.
Of the 1957 general expenditure of $40.4 billion, almost 30 percent
were spent for public primary and secondary education; about 3.3
percent of national income. Education expenditures had increased
much faster since the turn of the century than the other State and
local expenditures. The pivotal position and importance of public
education for the future of this Nation is all too clear and needs no
elaboration.
NATURE
OF D A T A
A major portion of this study is concerned with pricing educational
services in constant terms. In this connection it is helpful to clarify
the concept of expenditure pertinent to the analysis and then embark
upon an inquiry of the factors that in the past appear to have had an
impact on them.
The question of how the cost of a given bundle of educational
services behaved over time is best answered by talking in terms of
current expenditures, plus a reflection of the cost of providing physical
facilities. The latter can be approximated by a debt service figure,
which can reflect the long-run benefits of capital expenditures. Such
data are compiled for education by the U.S. Department of Health,
Education, and Welfare (see chart 1).
16
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
FACTORS AFFECTING EXPENDITURE LEVEL
While, no doubt, a large variety of factors can be expected to deter
mine expenditure levels, the following are likely to be of particular
significance:
1. Number of pupils in average daily attendance (A D A ).
2. Sociological characteristics of population:
(а) Age structure, e.g., primary versus secondary school popu
lation.
(б) Geographical distribution, e.g., urbanization of school
population.
3. Economic characteristics:
(a) Price level of goods and services bought by schools.
(b) Income level, i.e., ability to afford services.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
17
4. Physical characteristics: (a) Productivity of school system.
5. Government characteristics.
6. Variety, scope, and quality of education services:
(a) Addition or deletion of services— variety.
(b) More or less of a given service— scope.
(c) Superior or inferior services— quality.
In the following pages each of these factors will be briefly discussed
and an effort made to quantify each.
Table 7.— Pupils in average daily attendance (ADA), selected years, 1900-1958
[In thousands]
Pupils in average
daily attendance
Pupils in average
Pupils in average
Year:
Year— Con. daily attendance Year- -Con. daily attendance
1950________ _22,284
i900________ 10,633
1930.............21,265
1902............ 11,064
1952________ _23,257
1932............ 22,245
1954......... ...... 25,644
1940........... 22,042
1910.......... __ 12,827
1913............ .. 13,614
1942________ 21,031
1956________ _27,740
1920___.......... 16, 150
1958................29,859
1946..........._ . 19,849
1922............ . 18,432
1948________ 20,910
Sources: U.S. Department of Health, Education, and Welfare, “ Biennial Survey of Education in the
United States 1954-56,” ch. 2, table 20, p. 66; select years not appearing in table 20 of the 1954-56 Biennial
Survey were taken from earlier issues of the survey beginning in 1920, on file at the U.S. Department of
Health, Education, and Welfare. All figures for years 1900-1956 are actual attendance data and are not
estimates. The 1958 figure is an estimate made by the U.S. Department of Health, Education, and Welfare
and is based on their annual fall survey.
1. Number of pupils in average daily attendance
Since most public programs are related to the number of pupils in
average daily attendance and not to enrollment, the first will be used,
whenever possible, to reflect the public school population in this stud}^.
In table 7 the number of pupils in average daily attendance for selected
years, 1900-1958, are given. During this period pupils in average
daily attendance increased from slightly more than 10 to almost
30 million— that is, about 200 percent.
The nature of the functional relationship between population size
and expenditures deserves some consideration. It is possible that
population increases lead to economies (or diseconomies) of scale.
However, in a scale analysis, both school size and the size of the school
district need to be considered.
During 1900-1958, the U.S. population grew rapidly; it became in
creasingly urban in character. M any school districts consolidated.
Thus, during the 15 years from 1942 to 1957, more than half of the local
districts disappeared.7 Likewise, the number of one-teacher schools
rapidly declined from 190,655 in 1920 to about 26,000 in 1959— that is,
by about 86 percent.8 Still, it must be remembered that during this
period, one-teacher schools educated but a very small percentage of
all pupils in average daily attendance in the United States.
There exist no data about the size of the average school district.
But there is reason to expect that once the effect of changes in urbani
zation and the accompanying tendency toward somewhat larger school
districts is partialed out— for example, by means of multiple regression
techniques— a by and large simple linear relation between per pupil
expenditures and number of pupils will result. This contention is
considered in some detail in the appendix, which examines the general
* U.S. Bureau of the Census, “ Governments in the United States,” No. 1, vol. 1,1957, p. 1.
8 National Education Association, “ Status and Trends: Vital Statistics, Education, and Public Finance,”
Kept. 13, August 1959, p. 14.
18
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
problem of economies of scale in public education in a deductive
manner and on the basis of a case study, and finds that growth or
consolidation of school districts are unlikely to produce significant
economies of scale.9
2. Sociological characteristics oj population
(a)
Age structure.— Not only does the age structure of the population
affect the size of the school-age population, it also affects the percent
of pupils in high school as against that in primary schools. Smce on
the average there are fewer high school pupils per teacher, more
expensive equipment is needed, and salaries tend to be higher in sec
ondary education; changes in this ratio can affect overall education
costs.
During 1900-1958, the percent of the high school age population
has changed and with it also high school enrollment as a percent of
total enrollment in public schools.1 By how much the latter has
0
increased can be seen by referring to table 8, which presents for
1900-1958 high school enrollment relative to total enrollment. The
1900-1958 increase was about 580 percent.
T a b le
8 . — Public
Year:
1900.
1902,
1910.
1913.
1920.
1922.
high school relative to total 'public enrollment, selected years,
1900-1958
Public high school
as a percent of
total public
enrollment
______
______
______
_______
____
______
3.3
3.5
5. 1
6. 1
10. 2
12. 4
Public high school
as a percent of
total public
Y ear— Con.
enrollment
1930_________
1932_________
1940_________
1942_________
1946_________
1948_________
17.
19.
26.
26.
24.
23.
1
6
0
0
1
6
Public high school
as a percent of
total public
Y ear— Con.
enrollment
1950.
1952.
1954.
1956.
1958.
.
22.8
22 1
21. 8
22. 1
22. 4
Sources: Worksheets of historical education series collected by Vance Grant, educational statistician,
Division of Statistics and Research Services, Reference, Estimates, and Projections Section, U.S. Depart
ment of Health, Education, and Welfare, Office of Education.
(b)
Geographical distribution.— Rapid urbanization has affected our
public schools and possibly their expenditures. For example, in
urban communities children live shorter distances from school than
they do in rural communities; many urban communities need no school
buses, while most rural communities do. Furthermore, in many
rural communities school enrollment is alarmingly small; some of
them still have one-teacher schools. As a result, per pupil expendi
tures tend to be high, considering the low quality of education that is
offered.
Thus, it stands to reason that increasing urbanization has tended
to lead to lower per pupil expenditures, particularly if the scope and
quality of education is held constant.
•Werner Z. Hirsch, “ Expenditure Implications of Metropolitan Growth and Consolidation,” Review of
Economics and Statistics (41), August 1959.
1 This information could only be obtained on the basis of enrollment and not pupils in average daily
0
attendance. However, both series are likely to be highly correlated.
19
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
Table 9.— Urbanization of school population, selected years, 1900-1958
Percent ofpupils
in average daily
attendance {age
6-19) from
urban areas
Year:
Year— Con.
1900_________ 39. 6
1930.. .
1932___
1902_________ 39. 8
1910.... ............ 40.4
1940___
1913_________ 42.0
1942___
1920_________ 45.9
1946___
1922.............47.4
1948___
Percent of pupils
in average daily
attendance (age
5-19) from
urban areas
_____ __53. 3
_____ __53. 6
________54. 6
________55. 1
________55.5
________54.3
Year— Con.
1950__
1952__
1954__
1956...
1958...
Percent of pupils
in average daily
attendance {age
5-19) from
urban areas
_____
_____
_____
_____
_____
_52. 1
_51.5
_51. 8
_51. 7
_51.5
N o t e .— The 1940 definition of an urban area was utilized so as to make the series comparable. Since an
urban-rural breakdown by age groups was available only for census years 1910-50, the ofi-census years were
estimated by assuming a constant rate of growth between consecutive censuses. Compound interest
formulas were utilized in making these estimates. In extending the 1940 definition of “ urban area” forward
from 1950-58, the rate of increase of the 1950 definition of “ urban area” was applied to the 1940 definition.
Since much of the area in metropolitan areas as defined by the census in 1950 as “ rural” will be redefined as
“ urban” in 1960, the method used to extend the 1940 definition probably understates the real urban popula
tion rate of increase. This fact was pointed out by Conrad Taeuber, Assistant Director, U.S. Bureau of
the Census.
Sources: U.S. Department of Commerce, “ Statistical Abstract of the United States, 1958,” ch. 1: Area
and Population. U.S. Department of Commerce, “ Population: Characteristics of the Population,’ *
U.S. Summary, 16th Census, 1940, tables 7 and 9. U.S. Department of Commerce, “ Population: U.S.
Summary,” 1950 Census, Kept. P -B l, vol. 11, pt. 1, ch. B, table 38.
The extent to which the percent of pupils (5 to 19 years old) in
average daily attendance living in urban America has undergone
changes since the turn of the century can be learned from table 9.
The percentage increased steadily from about 40 percent in 1900 to
about 56 percent in 1946. Since then it has slowly declined to about
52 percent in 1958.1
1
In addition to urbanization, other geographic shifts have taken
place. The extremely rapid growth of California and industrialization
of parts of the Southern States are two of many possible examples.
However, because of its complexity, this type of change in the geophic distribution of the United States will not be included in the
analysis.
8. Economic characteristics
(a) Price level of goods and services bought by schools.—To the extent
that the prices paid by schools for teachers, equipment, etc., increase,
also the overall cost of operating schools will tend to rise, unless ihese
increases are compensated for by such factors as productivity increases
or quality deterioration.
In order to fully gage changes in the prices paid by State and local
governments for public education inputs, it is best to separate the
various inputs into major categories, establish their importance during
the period under consideration, and develop cost data for each major
category. Main categories that come to mind are salaries of instruc
tion staff, salaries of maintenance personnel, equipment, etc. Great
difficulties are encountered in trying to estimate salaries of school
maintenance personnel and equipment. Since by far the overwhelmn Although in all other instances the 5^to 17 years age group was considered of school age, early census data
were only available on a 5- to 19-year basis. For this reason, the latter group was used here.
20
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
ing part of all current expenditures take the form of salaries to the
instruction staff, and since reasonably good data on annual salaries
of instruction personnel are available, these data are used as the main
source of information on price level changes.
It is possible to find data on average annual earnings of full-time
equivalent State and local government employees in public education.
However, this information goes back only to 1930 and these data
not only include salaries to the instruction staff but they cover all
salaries. At the same time, these data cover salaries paid not only
to the personnel of public primary and secondary schools, but also
to the personnel of State and city colleges and universities.
Iu table 10, information on average annual salaries per member of
total instruction staff in primary and secondary schools for selected
years, 1900-1958, is given. These data are supplemented for selected
years from 1930 on by data on the average annual earnings of full
time equivalent State and local employees in public education. To
facilitate comparisons, for both series index numbers have been
developed with 1954 = 100. Judging by the index numbers, the two
series resemble one another rather closely, especially since 1950.
Prior to that period, increases in the first series were more rapid than
those in the second.
T a b le
10.— Average annual salaries of public school teachers, selected years,
1900-1958
1900
............ - .................................................
1902 ......................................................................
1910......................................................................
1913
.........................................................
1922
..................................... - .....................
Index
1954=100
(1)
Year
Average
annual
salary per
member of
instruction
staff in pri
mary and
secondary
shools
(2)
$325
349
485
512
871
1,166
1,420
1,417
1,441
1,507
1,995
2,639
3,010
3,450
3,825
4,139
4,700
8.5
9.1
12.7
13.4
22.8
30.5
37.1
37.0
37.7
39.4
52.2
69.0
78.7
90.2
100.0
108.2
122.8
Average
annual
earnings
full-time
equivalent
State and
local govern
ment public
education
Index
1954=100
(3)
(4)
$1,455
1,399
1,435
1,512
2,025
2,538
2,794
3,169
3,510
3,799
4,343
41.5
39.9
40.9
43.1
57.7
72.3
79.6
90.3
100.0
108.2
123.7
Sources: Average annual salary data per member of total instruction staff were computed by Eugene
P. McLoone, Division of State and Local School Systems, School Finance Section, U.S. Office of Education.
Average annual earning data of full-time equivalent State-local government public education was taken
from: U.S. Department of Commerce, National Income, 1954, a supplement to the Survey of Current
Business, table 15.
U.S. Department of Commerce, U.S. Income and Output, a supplement to the Survey of Current Busi
ness, 1958, table VI-15.
In 1900, the average teachers’ salary in public primary and second
ary schools was $325. By 1958, it was about 13 times larger, i.e.,
about $4,700.
(b)
Income level.— There can be no doubt that throughout the
United States the richer communities and States spend on the aver
21
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
age more for education than do the poorer ones. It is true that this
is not a perfect linear relationship. Some States and communities
make greater tax efforts for education than do others. Nevertheless,
by and large, this relationship holds. The relation between income
and expenditures is not a simple one. Thus, for example, rich com
munities will tend to insist on good, education, which in turn will add
to the cost of education.
In such a case, statistical methods are unlikely to determine whether
changes in income level or quality level are originally responsible for
expenditure level changes. A good understanding of the impact of
income level changes on education is of paramount importance. In
spending his income, a person faces a virtually unlimited number of
different goods and services. As his income increases, his spending
habits are likely to change, too. Under those circumstances, the ques
tion is whether the average person, whose annual income increased by
a given percent, will increase his education budget by the same per
cent, by less, or by more. If for simplicity’s sake education expendi
tures are equated, in a rough way, wMi the amount of education pur
chased, the concept of income elasticity of public education becomes
applicable. Education demand can be unit elastic, inelastic, or elastic.
The question, therefore, is, “ How elastic or inelastic is the demand for
education?”
T
r:
1900
1902
1913
1920
1922
a b l e
1 1 .—
Per capita personal income, selected years, 1900-1958
Per capita
personal
income
$199. 2
218. 5
1910 300.6
325. 1
712.3
552.4
Year— Con.
1930______
1932______
1940______
1942______
1946______
1948______
Per capita
personal
income
$624. 1
401.4
595.5
915. 7
1, 268. 1
1, 435. 1
Year— Con.
1950
1952
1954
1956
1958
Per capita
personal
income
$1, 506.
1, 739.
. 1, 784.
1, 965.
2, 030.
2
0
5
3
3
Sources: Years 1900-1928. National Industrial Conference Board. Economic Almanac 1958. New York:
Thomas Y . Crowell Co., 1958, p. 401.
1929-57. U.S. Department of Commerce, Office of Business Economics. Survey of Current Business 38:
pp. 3-17; July 1958. Tables 3 and 4, pp. 6 and 7.
Year 1958. From Economic Indicators, M ay 1959, pp. 2,3, and 5.
Personal income data and their index numbers are presented in
table 11 for a select number of years from 1900 to 1958. Except for
the depression years of the early thirties, per capita personal income
steadily increased from about $199 in 1900 to about $2,030 in 1958,
i.e., about nine times.
4- Physical characteristics
(a) Productivity of school system.— Productivity in general relates
output to any or all of the inputs employed in producing goods or
service. Since the aim is to learn about the efficiency with which re
sources are utilized, input as well as output must be measured in
physical terms. Perhaps the most common productivity measure is
the partial productivity “ output per man-hour.” Output is related
to but one input, i.e., labor, which in the case of education over
shadows by far all other inputs. To estimate the net saving of all
cost elements, or inputs, and thus the change in overall productive
efficiency, output should be related to all inputs, i.e., labor, equipment,
physical plant, etc.
47761'— 59-------3
22
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
Productivity of schools is most difficult to measure. The main
measurement problems center around output. An automobile
assembly plant turns out on a given day a given number of cars of
virtually uniform characteristics. They are the plant’s output.
The output of education is much less tangible and much less stand
ardized. Everyone will agree that education has changed since the
turn of the century, and yet few will be able to say, in quantitative
terms, how great the change has been. Whether it is because or in
spite of the great difficulties of measuring educational outpu*, rela
tively little work has been done in this area.
One of the most serious studies of productivity in government was
undertaken by Solomon Fabricant in 1952. He concluded that a—
Review of some factors affecting the trend of government productivity— the
use of improved technology and equipment, the spread of the merit system, the
introduction of centralized purchasing, and various other advances in public
administration— leaves the impression that labor savings have been made.
Indeed, it is hard to think of any factor tending in the opposite direction except
possibly the very increase in the scale of government operations. Nor does it
appear that these savings of labor reflect merely increase in the volume of other
resources— capital goods and other purchases— used per worker. Total produc
tivity, output per combined unit of all resources, appears to have risen in
government.12
An empirical effort to measure the productivity trend of Federal
agencies was undertaken by Henry D. Lytton.1 Lytton estimated
3
changes of the last 10 years for the Commodity Stabilization Service,
Social Security Administration, Post Office Department, Veterans’
Administration, and Internal Revenue Service. Most of the outputs
of these agencies are readily quantified. Thus, for instance, a post
office handles a given number of pieces of mail having a given volume
and given other characteristics. The productivity advances of these
agencies during the last 12 years averaged about i){ percent a year.
The range extended from 1% to 8 percent, compounded annually.
The Commodity Stabilization Service showed the greatest productivity
increase; i.e., of about 8 percent a year. Much of this change appar
ently was due to the introduction of electronic processing equipment.
The same general view was expressed by Richard Ruggles and
Nancy D. Ruggles, in their paper to the Joint Economic Committee
when they maintained that—
There is good reason to believe, however, that the productivity of Government
workers has increased substantially in this period. For one thing, the introduc
tion of data handling machines and computers speeds up the operation of many
stages of Government work. Statistics in the Government now, in large part,
are handled mechanically rather than by clerks. The mechanization which is so
characteristic of current development in business is also occurring in Govern
ment.14
In 1955 Fortune magazine carried an article, “ Productivity: The
Great Age of 3 Percent.” In this article it was stated that—
Government efficiency, because electronic tabulating and computing can take
over the bulk of its clerical work, can and should rise enormously. * * * The
productivity of schools and teachers, by contrast, cannot and properly should not
increase very much.15
12 Solomon Fabricant, “ The Trend of Government Activity in'thc'United States Since 1900” (New York:
National Bureau of Economic Research, Inc., 1952), pp. 98-99.
is Henry D. Lytton, “ Estimating Recent Federal Agency Productivity Trends” (Washington, D.C.,
1959), 46 pages.
h Richard Ruggles and Nancy D. Ruggles, op. cit., p. 299.
w Gilbert Burck and Sam Ford Parker, “ Productivity: The Great Age of 3 Percent,” Fortune, November
1955, pp. 249-250.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
23
Instead of measuring the productivity of our public primary and
secondary schools in any direct manner, an indirect method might
be tried. It would move along the following lines: time series data
of current education expenditures plus debt service would be so
adjusted and standardized that price level and variety, scope, and
quality of education— to the extent that they affect expenditures—
are held constant and are expressed in per pupil in average daily
attendance terms. This series could be called education costs in
constant terms. It could trace over time cost changes of a given
bundle of public primary and secondary education. But it can also
testify to productivity changes. For example, should education costs
in constant terms have consistently fallen, it stands to reason that
productivity increases would have occurred and vice versa.
While it is not too clear whether and, if so, how much productivity
in Government in general increased, it is even more difficult to assess
the productivity increases in public education. Many of the forces
that apparently work in general State and local governments do not
work in education. Thus, for instance, electronic computers have
not been introduced nor do they warrant introduction; likewise, ad
ministrative improvements appear to have been minor.
While we cannot identify many steps taken in the past with a view
to improving productivity, a few new methods have recently been
discussed and tried. Perhaps the most important one is television.
The Ford Foundation and the Fund for the Advancement of Education
have been instrumental in experimenting with what has been described
as the most important new educational tool since the invention of
movable type. In their May 1959 report, “ Teaching by Television,”
Ford Foundation and the Fund conclude that—
Today the question is no longer whether television can play an important role
in education. That question has been answered in the affirmative not only by
the experiments supported by the Fund and the Foundation but also by the many
other programs in which the medium is being used successfully for direct classroom
instruction. The question that now needs fuller exploration is what kind of a
role television can play most effectively. * * *
Television can be used— and in some places is being used— to do the traditional
job of education, and to do it well. However, those who have had experience
with the medium know that, if wisely and imaginatively used, it also can bring
to students educational experiences far beyond what is possible in the conventional
classroom. * * *
Also, television makes possible exciting new developments in the team approach
to teaching, in which the particular skills and competencies of many teachers are
used cooperatively in planning and presenting courses. The status and rewards
of teaching can be vastly enhanced by this new medium.16
Another method that can possibly increase productivity in schools
is the use of teachers7 aids, who are employed to relieve teachers of
such burdensome and nonteaching chores as compiling attendance
records, collecting various kinds of contributions and fees, cleaning
blackboards, watering plants, etc.
To make fuller use of the physical plant, the length of the school
term has been expanded. Some schools are beginning to have summer
sessions. Some are considering a four-quarter system. The entire
school year would be divided into four school quarters; schools would
be open all year and students would attend any three quarters they
choose. If this is successful, the present physical plant could thus
accommodate as much as one-third more students.
ifl Ford Foundation and Fund for the Advancement of Education, “ Teaching by Television” (New York
1959), pp. 60-61.
24
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
5. Government characteristics
Governmental structure and relationships can greatly affect the
amount of money available for public education. At the moment not
too much is known about the specific governmental characteristics
which affect services and expenditures. But there can be no doubt
that State-local fiscal interrelationships can play an important role.
Clearly, the more the expenditures are financed by the State, and
the more the State subsidies are based on the equalization principle,
the more uniform the availability of funds throughout the State will be.
Julius Margolis advanced the thesis in a paper before the 1959
National Bureau of Economic Research’s “ Conference on Public
Finances: Needs, Sources, and Utilization,” 1 * that governments with
6
many functions may find it easier to raise funds by taxation, whereas
such single-purpose special districts as school districts may not have
sufficient fiscal strength to fulfill their goals. As is well known, public
education is offered by both independent governments, i. e., school dis
tricts, and as special functions of other governments, i.e., counties,
municipalities, and townships. Only about 4 percent of the public
school systems in the United States are nonindependent school de
partments. But they are significant in size— they have 22 percent of
the school enrollment.
According to Margolis, the comparison between fiscally independent
school districts and fiscally dependent school departments is of inter
est since it indicates whether the public will spend more for a public
service when it is presented as a single unit or as part of a package for
which the specific benefit of the marginal tax dollar is uncertain.
Agreeing that the evidence is far from conclusive, he reproduced some
data that were used first by Henry B. Woodward.1 They indicate
7
that fiscally dependent departments spend more per pupil than fiscally
independent school districts. Woodward had made an analysis of
expenditures in 85 cities between 100,000 and 1 million population
over the period 1929-30 to 1943-44. During this period the mean per
pupil expenditure was highest in the fiscally dependent cities. They
spent about 4 percent more than the independent districts in 1929-30
and nearly 12 percent more in 1943-44.
In addition, Margolis refers to the following census data. The
April 1957 payroll of fiscally dependent school departments was $22.90
per pupil while for fiscally independent school districts it was $20.90.
Ten of the forty-one largest cities have municipal school departments,
but they spent in 1952-53 $346.11 per pupil in average daily attend
ance against $293.40 spent in the other 31 largest cities with independ
ent school districts.1
8
Another example given by Margolis relates to New Jersey where
there are dependent and independent systems of all size classes. The
cities of over 100,000 had municipal school departments. They spent
$383 per pupil in average daily attendance. In the remaining cities,
the municipal school departments spent $343 per pupil in average daily
attendance, while the independent school districts spent $293 per
pupil in average daily attendance.
w* Public Finances: Needs, Sources, and Utilization—A Conference of the Universities-National
Bureau Committee for Economic Research; A Report of the National Bureau of Economic Research to
be published by Princeton University Press (1960).
i? Henry B. Woodward, “ The Effects of Fiscal Control on Current School Expenditures,” Ph. D . thesis,
New York Teachers College, 1948. Cited in Powell R. Mort and Walter C. Reusser, “ Public School
Finance,” second edition (New York: McGraw-Hill, 1941), p. 60.
is U.S. Bureau of the Census, 1957 Census of Government, vol. 2. No. 1, table 4, and vol. 1. No. 1, tablelO.
And U.S. Office of Education, Annual Survey of Education, 1953-54. “ Statistics of City School Systems,”
pp. 36-45.
25
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
The great shortcoming of these data is that they are not subjected
to a multiple correlation and regression analysis. Much more work
remains to be done on this score before M a r g o t thesis can be ac
cepted or rejected.
6. Variety, scope, and quality oj education services
(a) Addition or deletion oj services.—There are a number of different
ways in which an attempt can be made to measure the scope and qual
ity of public education. But before they are explored, it appears
desirable to distinguish between two types of services offered by
schools, i.e., services directly designed to improve education versus
those that do not directly affect educational quality. Amoi)g the
latter are the transportation of children in schoolbuses, the feeding of
children in school cafeterias, health services, etc. No one will claim
that these services are not important. However, it is helpful to
recognize that they do not directly contribute to the quality of educa
tion. From now on, they will be called auxiliary school services. At
the turn of the century they were hardly known. Today they amount
to almost $1.5 billion, the most rapid advance having taken place
during the postwar period. Expenditures for auxiliary school services
are given in table 12.
In many respects it is desirable to deduct expenditures for auxiliary
school services from total current expenditures (plus debt services).
If this is done, current expenditures (plus debt service) data are re
duced to a more common denominator.
12.— Auxiliary school service expenditures, selected years, 1900-1958
T a b le
[In thousands]
Year:
1900__
1902__
1910__
1913__
1920__
1922__
Auxiliary school
service
expenditures
10
10
1 $5, 000
1 10, 000
45, 673
69, 266
Year— Con.
1930___
1932___
1940___
1942___
1946___
1948___
Auxiliary school
service
expenditures
$152,
144,
179,
219,
349,
526,
263
273
257
670
097
999
Auxiliary school
service
expenditures
Year— Con.
$713, 132
1950___
1952___
917, 440
1954___
1, 020, 037
1, 304, 244
1956___
1958___ 1 1, 490, 000
i Estimate.
Source: U.S. Department of Health, Education, and Welfare, “ Biennial Survey of Education in the
U.S.—1954r-56,” chapter 2, pp. 19-21, 80-82, and worksheets made available by the U.S. Department of
Health, Education, and Welfare.
T a b le
Year
1900.
1902.
1910.
1913.
1920.
1922.
1930.
1932.
1940.
13.— Length of school term, selected years, 1900-1958
Average
length of
school term
(days)
Average
number of
days attended
by pupils
enrolled
144.3
144.7
157.5
158.1
161.9
164.0
172.7
171.2
175.0
99.0
100.6
113.0
115.6
121.2
130.6
143.0
144.9
151.7
Year
1942.
1946.
1948.
1950.
1952.
1954.
1956.
1958.
Average
Average
length of
number of
school term days attended
by pupils
(days)
enrolled
174.7
176.8
177.6
177.9
178.2
178.6
178.0
178.7
149.6
150.6
155.1
157.9
156.0
158.9
158.5
Source: U.S. Department of Health, Education, and Welfare, “ Biennial Survey of Education in the
United States, 1954-56,” ch. 2, table 1; for select prior years; these data were taken from earlier biennial
survey reports.
26
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
(ib) Scope of services.— As a first approximation it might, be claimed
that the longer the school term, the more can be learned. Table 13
indicates that, since the turn of the century, major changes have taken
place in the length of the school term. In 1900, the school term lasted
an average of 144 days; by 1958, it had been lengthened to 179 days,
i.e., by about 24 percent. At the moment further lengthening is con
templated by many school boards.
The change in the average number of days attended by pupils en
rolled in public schools during the school term has been even more
striking during this period. The average increased from 99 days in
1900 to 158 days in 1956, i.e., about 60 percent.
(c)
Quality of services.— Perhaps the most feasible approach would
involve identifying and then measuring ingredients that make for good
education. On that basis an index of quality of education could then
be developed. Here are some of the factors that might be included
in such an index of the quality of public education:
(1) Class size: While the average pupil-teaclier ratio in average
daily attendance is a reasonably good indication of class size, like any
other average it conceals much detail. For instance, since high school
classes are smaller than primary school classes, the age distribution is
important. Another telling item would be whether the school offers
a course in advanced mathematics or a foreign language if only 10 or
15 students are enrolled. Also the number of teachers’ aids is to be
considered.
(2) Grouping: M any educators maintain that good education re
quires that, within limits, students of common ability and interest
are grouped together.1 Even after this philosophy is generally
9
adopted, schools will differ as to whether they are able to deal with
very small groups of very able students.
(3) Quality of the teaching staff: A good teaching staff has a
number of important characteristics, some more tangible than others.
The percent of experienced teachers is revealing. D o they tend to
stay on for a career in the school system or do they move often? Also,
the background of the teaching staff plays a dominating role. W hat
is the percent of teachers who are graduates of strong liberal arts
colleges with majors in the field or fields in which they are teaching?
The methods used for selecting new teachers and of appraising the
quality of the existing staff are also of interest. A good school inter
views many persons for a position; it looks outside the borders of its
district and even outside its State for personnel. Thus, an important
indicator would be the average number of outside-the-area candidates
interviewed for each teacher hired, or the percent of outsiders on the
staff. In addition, the better school systems have an organized pro
gram of teacher appraisal on which merit increases are based.
Teaching load is another indicator. In many schools 20 hours of
teaching a week and dealing with about 175 students is considered
normal. It might be helpful to relate the average teaching load of a
given school to the national average.
Finally, the quality of the teaching staff depends to no small extent
on the number and the variety of specialists among it. Is there a
full-time librarian, or more than one, and what is the number of
1 See James B. Conant, “ The American High School Today” (New York: McGraw-Hill, 1959), 140
9
pages.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
27
students per librarian? Likewise, how many counselors are there,
and how many students per counselor? Similar figures should be
collected for other specialists.
(4) Quality of school administration: The leadership offered and
ability of the school superintendent and his principals cannot be
neglected; yet it is most difficult to appraise their contributions.
Usually, principals who are not relieved from all teaching cannot do a
superior job.
(5) Teaching program: Schools with a good college preparatory
program insist that college-bound students carry four courses a year
in English, mathematics, science, history, or foreign languages. W hat
percent of the students have such a program? How far does the
mathematics program go? W hat percent of the students take mathe
matics courses beyond a second year of algebra and 1 year of plane
geometry? Are they taught calculus? In the foreign language field,
what percent of the students take 3 or 4 years of foreign languages?
How much writing is done in the English classes?
While it is possible to develop an ideal hypotheis about the quality
of education, the task of implementation is enormous. It was at
tempted in a study of the public schools in the St. Louis city-county
area.2 This quality index was composed of six subindexes:
0
^ 4 = number of teachers per 100 pupils in average daily attend
ance.2
1
B =num ber of college hours of average teacher.
<7= average teacher salary.
percent of teachers with more than 10 years of experience.
E = number of high school credit units.
percent of high school seniors entering college.
In this index, A is supposed to reflect class size, B , (7, and D quality
of teaching staff, and E quality of teaching program. It is true that
.Fis not an ingredient of good education. Instead it is a way of crudely
approximating an achievement-native ability comparison. It may,
however, be a better measure than appears at first glance. It is
widely assumed that whether a high school senior enters college de
pends mainly upon the financial situation of his parents. Y et the
rank correlation coefficient measuring the relation between percent of
high school seniors entering college in 1955 and average assessed valu
ation of the 27 school districts, which were considered in this case
study, is + 0 .3 4 , and is statistically barely significant at an a of 0.05.
This low correlation may have a number of causes. College education
has become more and more universal and is no longer available pri
marily to the sons of the well to do. Also, school districts are not
entirely homogeneous in regard to property values. And finally,
assessed valuation is not only the product of residential property values,
it is also affected by the relative importance of commercial and indus
trial property located within the district.
Another subindex tried was one reflecting average capital expendi
ture per pupil in average daily attendance for the past 4 years. As
2 For detailed discussion, see Werner Z. Hirsch “ Measuring Factors Affecting Expenditure Levels of
0
Local Government Services” (St. Louis: Metropolitan St. Louis survey, 1957), 94 pages.
2 Teachers per 100 pupils in average daily attendance and average teacher salary are usually expected to
1
be highly correlated with the general level of expenditures. An analysis revealed that the correlation, while
high,ys*farJfrom perfect. It is>f0.71 in the first case'and +0.68 in the second case. Both are not very high.
Thus, the inclusion of factors A and C in the seope‘and quality index appears warranted.
28
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
was to be expected, a simple scatter diagram revealed a very high cor
relation between this factor and school population increases. This
factor appears to measure primarily growth and not quality; and it was
therefore discarded.
The weighting problem is truly difficult. Who can confidently
assess the relative importance of the number of teachers per 100
pupils, as compared to the number of high school credits offered by
the school? Since no useful basis could be found to give each of the
six factors specific differential weights, equal weights were used.
Fortunately, with six components to the index, the weighting system
is no longer so very crucial. Doubling the weights of any one or
two of the components will not greatly affect the magnitude of the
index numbers.
This simplified index was subjected to a test which sheds some light
on its reliability. A number of educators who are well acquainted
with public schools of the St. Louis city-county area were interviewed
separately and asked to rate the various school distficts in terms of
excellent, good, medium, poor, and very poor. These ratings, when
compared with the scope and quality index data, showed very close
consistency. In no case was the school district with an index number
above 1, i.e., average, given a subjective rating of poor or very poor,
and vice versa. In the few cases with difference in the rating, the
index number was equivalent to excellent and the subjective rating was
good. Although this is a very simple validation procedure, it might
well be that if there are inaccuracies in the index numbers, they are
not in excess of from 5 to 10 percent either way. To the extent that
discrepancies exist, they are likely to be randomly distributed and
no bias appears to have crept into the index.
On the national level, the paucity of appropriate and consistent
data, useful for such an analysis, is very great. Virtually all the data
that are available, and that at first giancc appear pertinent, are ex
pressed in dollars. They pose serious problems of circularity. It is a
simple tautology to state that high salaries, designed to reflect variety,
scope, and quality of education, affect expenditures.
However, one measure, expressed in physical units and most likely
an ingredient of good education, is the number of principals, super
intendents, and consultants per 1,000 pupils in average daily attend
ance. These are the educational experts who evaluate the curriculum
and introduce changes, provide guidance, supervise teachers, etc.,
and their number is considered to be as reliable an indication of the
quality of education as can be obtained at present; superior to any
other simple measure, as, for instance, teacher-pupil ratio. About
the latter, Ralph Cordincr, of the General Electric Co., is reported
to have made the controversial statement—
There are some educators who are actually proud of the declining ratio of students
to faculty. * * * To my knowledge, there is no other field in human endeavor
which actually prides itself on declining productivity.2
2
Returning to the number of principals, superintendents, and
consultants per 1,000 pupils in average daily attendance as a sole
measure of the quality of education, in the narrow sense, the following
assumptions should be kept in mind. Quality of output is highly
2 Quoted by J. A. Livingston in “ Get With It, Professor, Your Show’s Slipping,” the Washington Post
2
and Times Herald. Nov. 27, 1957.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
29
correlated with the quality of certain crucial inputs, one of which is
the number of principals, superintendents, and consultants per 1,000
pupils in average daily attendance. Also, superior school districts
not only hire more specialists than do inferior ones, but they also hire
better ones and, in general, they are rational and approximate a
marginal calculus by using higli-quality ingredients all around, i.e.,
the quality of none of the ingredients milking for good education is
far out of line.2
3
As can be seen from table 14, the number of principals, superin
tendents, and consultants per 1,000 pupils in average daily attendance
has about doubled since the turn of the century.
T a b l e 1 4 .— Total number of principals, superintendents, and consultants per 1,000
pupils in average daily attendance in public primary and secondary schools, selected
years, 1900-1958
Number of principals,
superintenderUs, and
consultants per 1,000
pupils in average
daily attendance
Year:
1 9 0 0 ____________ 1 1. 3 1
1 9 0 2 ____________ i 1. 3 1
1 9 1 0 ____________ 1 1. 3 3
1 9 1 3 ____________ 1 1. 3 2
1 9 2 0 ............. ............ 1. 2 5
1 9 2 2 ____________ 1 1. 4 4
Number of principals,
superintendents, and
consultants per 1,000
pupils in average
daily attendance
Year— Con.
Year— Con.
1930________
1932________
1940________
1942________
1946________
1948________
Number of principals,
superintendents, and
consultants per 1,000
pupils in average
daily attendance
1. 78
11. 33
1. 65
11. 86
1 1. 82
1 2. 22
1950________
2. 18
1952________ i 2. 13
1954________
2. 18
1956________
2. 32
1958________
2. 70
i Estimate.
o t e .— The estimates were made by extending the biennial survey data backward based on Stigler’s
study. Estimates lor certain years was based on simple linear extrapolation. The number of consultants,
superintendents, and principals was derived as a “ residual” where data on total instruction staff and the
number of teachers, librarians, and other nonsupervisory instruction staff were available.
N
Sources: U.S. Department of Health, Education, and Welfare, “ Biennial Survey of Education in the
U.S., 1954-56,” ch. 2, table 1; George J. Stigler, “ Employment and Compensation in Education,”
Occasional Paper 33, NBER, Inc. (1950).
At least in theory, there is a much superior approach to measuring
scope and quality changes of public education. It involves comparing
the students’ achievement with their native ability. Specifically, a
pupil’s achievement test results obtained in high school could be
compared with results of his IQ test taken early in his primary grade
school days. One complicating element in this approach is that
school districts do not have identical educational objectives. Further
more, some schools consider it their task to prepare youngsters for
college, while other schools, particularly those in rural America and
to some extent in the core cities, have as their main objective the
provision of vocational training. There can be no doubt that students
will score differently on an achievement test depending upon the
school’s objective.
Implementation of this approach would require that all schools in
the United States use the very same achievement and IQ tests and
that they have done so for a long period of time. Since these require
ments are not met, this method does not lend itself to practical
application at the moment.
2 The author is obliged to Prof. William Fellner, who pointed out these explicit assumptions.
3
30
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
TEST OF HYPOTHESIS
The workingfhypothesis which was enunciated in the preceding
pages will now be tested in the light of available national data. In
many respects, availability more than appropriateness of data deter
mines their application. Time series data for selected years during
1900-1958 will be used and subjected to multiple correlation and
regression analyses.
B y insisting on intervals of at least 2, and in many instances 7 or 8
years, it is hoped that much otherwise existing serial intercorrelation
4
is eliminated.2 But with only data for 17 years at hand, one is
somewhat handicapped in including all the independent variables
that appear appropriate. Care must be exercised that no unduly
large number of degrees of freedom is lost. Because of this con
sideration, it was decided to use as dependent variable, daily total
current expenditures plus debt service per pupil in average daily
attendance. In a sense, the dependent variable is already adjusted
for possibly two independent variables—number of pupils in average
daily attendance and length of school year. While there are some
risks in taking such a step, they were considered outweighed by the
advantages of retaining more degrees of freedom.
In order to shed light on such questions as, “ Why has the public
education sector had such large expenditure increases?” and “ What
are the underlying relationships for the near term?” two working
hypotheses have been enunciated and empirically tested. The first
hypothesis is as follows:
Xia—daily total current expenditure plus debt service for
public primary and secondary education per pupil in average daily
attendance is a function of—
X2
—percent of public high school enrollment relative to total
public school enrollment;
X z—percent of pupils (5 to 19 years old) in average daily at
tendance living in urban areas;
X A average annual salary for member of instruction staff; and
—
X6
—number of principals, superintendents, and consultants
per 1,000 pupils in average daily attendance.
In brief,
Xia—j {X 2 X z, X 4, X 6
J
).
The following multiple regression equation was obtained for 17
selected years during 1900-1958:
yz
A
n,
>0.002067 X 2 0.005288 X 3
0.164999+ (o 0257)
(0.1069)
. 0.000441 X t 0.022391
(0.9895) + (0.0271) '
+
(
'
The coefficient of multiple determination, adjusted for degrees of
freedom lost— R**m m —is 0.998 and is statistically highly significant.
Thus, about 99.8 percent of the variation of daily total current ex
2 Although no detailed checks were made, it appears that also the other two important assumptions
4
underlying the method are met. Thus, the values of the dependent variable of the population appear to be
normally distributed around the least square line, and also the standard deviations of these normal popula
tion distributions appear about equal.
~
,
25 The figures in brackets are partial correlation coefficients. Since there are 17-5 or 12 degrees of freedom,
coefficients are statistically significant at an cc of 0.05, when they are larger than 0.532.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
31
penditure plus debt service per pupil in average daily attendance is
explainable in terms of these four variables of which salary level, X i}
is statistically significant. All relationships but one are positive The
significant net regression coefficient 0.000441 can be interpreted in
the following manner— during 1900-1958, a $1,000 increase in average
annual teacher salaries was on the average associated with a 44.1-cent
increase in daily total current expenditures per pupil in average daily
attendance, holding the effect of changes in the other three factors
constant. Also, about 98 percent of the variation of the cost oi the
standardized education unit can be explained in terms of teacher salary
level increases, holding the effect of changes in the other three factors
constant.
It is somewhat surprising that neither the percentage of high school
enrollment, nor urbanization, nor the number of specialists per 1,000
pupils in average daily attendance, which was designed to measure
quality of education, had a statistically significant effect on expendi
tures.
The beta coefficients, i.e., net regression coefficients divided by their
respective standard deviations, are, in order of magnitude:
$14.236= 0.9944,
$i3.246== 0.0504,
$12 346==0.0273, and
$16,234 = 0.0161.
The simple correlation coefficient matrix, which follows, is of some
interest:
x »
X la
x 2
X z
X i
........................ .........................................................................- .......................................................................................
........................- .............................................................................................................................................................
...........................- ..............................................................................................................- ..........................................
.................. ..........................................................................................- ...........................................................-
0
0
0
0
.6
.5
.9
.9
8
7
9
4
9
0
9
8
2
7
2
4
X 3
0 .9 6 5 9
0 .7 0 2 7
0 .7 3 0 7
0 .6 1 5 0
X *
0 .5 8 8 1
0 .9 4 8 7
This matrix reveals exceptionally high intercorrrelations; for ex
ample, r23= 0.9659 and r4 = 0.9487. All simple correlation coefficients
6
are high and statistically significant at an oc of 0.05.
The second hypothesis, a slight modification of the first one, takes
explicit recognition of the fact that expenditures for auxiliary services
and the number of principals, superintendents, and consultants per
1,000 pupils in average daily attendance are unlikely to be related.
Thus, instead of relating X 2, X z, X 4, and Xe to daily total current ex
penditures, it relies upon a new dependent variable, i.e., X lb— daily
total current expenditures plus debt service minus expenditures for
auxiliary services for public primary and secondary education per
pupil in average daily attendance.
On this basis, the following new multiple regression equation was
obtained for 1900-1958:
ri
nnnmpo
,
0-000603X2 0.000336X3 0.000372X4
(0.0030)
(0.00058) + (0.9889)
0013847^6
+ (0.01110) #
(L2)
32
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
The statistically significant net regression coefficient is & 3
l4.;» 6.
The beta coefficients are, in order of magnitude:
0 1 4 * 2 3 6 = 0.9970,
016*234= O.O118,
012-346=0.0094, and
013.246 = 0.0036.
The coefficient of multiple determination adjusted for degrees of
freedom lost is highly significant at an a of 0.05. It is 0.998. The
following is the simple correlation coefficient matrix:
Xib
X i.................................................................................................................
Xs ..........................................................................
X i.................................................................................................................
X t ..........................................................................
Xt
0.6963
0.5808
0.9994
0.9484
0.9659
0.7027
0.7307
X3
Xi
0.5881
0.6150 ” 0~9487
The foregoing multiple correlation and regression analysis clearly
points to the overwhelming importance of the salary level variable
and perhaps the prices of all goods and services bought by schools.
However, they, in turn, are determined by the general demand and
supply situation and price level of the rest of the economy, as well
as the particular demand for and supply of teachers.2
6
E D U C A T IO N
COST IN
CON STAN T TERM S
A truly serious shortcoming of the deflating efforts of the U.S.
Department of Commerce is its admitted inability to adjust for
anything but price level changes. It expresses State and local gov
ernment purchases in constant dollar terms, but neglects changes in
the variety, scope, and quality of services.
Thus, an effort will be made to develop first a series which in
concept resembles that of the U.S. Department of Commerce, i.e.,
cost of public primary and secondary education in constant dollars.
Thereafter, more terms than merely price level will be held constant,
leading to an education cost index in real terms.
B y deflating the actual expenditure series by an average annual
salary index— with, for instance, 1954 = 100— a new series results
which testifies to the expenditures that would have been incurred if
1954 salary conditions had prevailed throughout the period.
2 According to some calculations made by Roger A. Freeman, for instance, during 1929-57 teachers’
8
salaries advanced more rapidly than the earnings of all workers—94 versus 82 percent. This indicates that
the demand for and supply of teachers cannot be neglected. See Roger A. Freeman, “ School Needs in the
Decade Ahead” (Washington, D.C.: Institute for Social Science Research, 1958), p. 131.
33
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
T a b le
15.— Total current expenditures plus debt service for public, primary, and
secondary education, selected years, 1900-1058
|In thousands of dollars]
Year
Adjusted
Unadjusted for pupils
in ADA
(1951=100)
(1)
1900...............
1902...............
1910............—
1913...............
1920...............
1922...............
1930........ ......
1932........ ......
1940________
193.9
214.2
384.8
473.0
938.5
1.332.0
2.095.0
2,147.9
2.192.0
(2)
467.2
497.0
769.6
890.8
1.489.7
1,852.6
2,527.1
2,477.4
2.548.8
Adjusted
for salary
level
(1954=100)
Year
(3)
2,281.2
2.353.8
3.029.9
3.529.9
4.116.2
4.367.2
5.646.9
5,805.1
5.814.3
Adjusted
Unadjusted for pupils
in ADA
(1954=100)
(1)
1942...............
1946___ ____
1948...............
1950...............
1952________
1954.......... .
1956___ ____
1958...............
2.378.6
2,995.1
4,092.4
5.090.7
6.219.8
7,458.3
9,054.6
1 11,020.0
(2)
2,900.7
3.869.6
5.021.3
5,858.1
6.857.6
7.458.3
8.368.4
» 9,467.4
Adjusted
for salary
level
(1954 = 100)
(3)
6,037.1
5,737.7
5,931.0
6.468.5
6.895.6
7.458.3
8.368.4
18,973.9
i Estimate.
Sources: Worksheets made available by the U.S. Department of Health, Education, and Welfare, and
tables 7 and 10.
Such a deflated series is presented in column 3 of table 15 and can
be compared with the actual expenditure series in column 1. While
between 1900 and 1958 actual expenditures had increased 56-fold, the
increase of the salary adjusted series extends merely from about $2.3
billion to $9 billion—less than threefold— and only 5 percent of that
actually incurred.
The U.S. Department of Commerce's constant dollar series of State
and local government purchases extends back to 1929. During
1930-57 it advanced by 88 percent, while during the same period the
education cost series in constant dollars advanced distinctly less, i.e..
56 percent.
By the way, in the same manner adjustments have been made for
the number of pupils in [average daily attendance. (See col. 2 of
table 15.) In terms of 1954 average daily attendance, expenditure
increases from 1900 to 1958 would have been twentyfold, i.e., slightly
more than one-third of the actual increase.
What can be said about expenditures for public, primary, and second
ary education in constant terms? To answer this question an attempt
will be made to measure the cost of an education unit, so standardized
that its variety and scope are held reasonably constant, and expressed
in per pupil in average daily attendance terms.
At an earlier stage it was pointed out that since the turn of the
century an increasingly large number of auxiliary services—schoolbus
transportation, cafeteria, health services, etc.—have been introduced.
Their cost has progressed from near zero in 1900 to almost $1.5 billion
in 1958 (see table 12). But these auxiliary services have not neces
sarily improved the quality of education itself.
34
ANALYSIS OP RISING COSTS OF PUBLIC EDUCATION
If expenditures for auxiliary services are subtracted from the other
current expenditures plus debt service, the 1900-1958 increase is only
48-fold (col. 1 of table 16). B y adjusting this series for changes in
salary level, the increase is further reduced to less than 2}£-fold
(col. 2 of table 16).
Total current expenditure plus debt service for public, primary, and
secondary education minus auxiliary services, selected years, 1900-1958
T a b l e 16.—
Year
Unadjusted
annual,
thousands
of dollars
(1)
1900...............................................
1902...............................................
1910...............................................
1913...............................................
1920...............................................
1922...............................................
1930...............................................
1932...............................................
1940...............................................
1942...............................................
1946...............................................
1948...............................................
1950...............................................
1952...............................................
1954...............................................
1956...............................................
1958...............................................
193.9
214.2
379.8
463.0
892.8
1,262.7
1,942.8
2,003.6
2,012.7
2,158.9
2,646.0
3,565.4
4,377.5
5,302.4
6,438.2
7,750.3
i 9,530.0
Adjusted for
salary level
Per pupil
(1954=100), expenditures,
thousands
dollars
of dollars
(2)
(3)
2,281.2
2,353.8
2,990.6
3,455.2
3,915.8
4,140.0
5,236.6
5,415.1
5,338.7
5,479.4
5,069.0
5,167.2
5,562.3
5,878.5
6,438.2
7,162.9
7,760.6
18.233
19.357
29.607
34.007
55.281
68.506
91.359
90.069
91.311
102.655
133.308
170.511
196.443
227.991
251.062
279.392
319.167
Daily per
pupil ex
penditures,
dollars
Daily per
pupil ex
penditures in
1954 dollars
(4)
(5)
0.126
.134
.188
.215
.341
.418
.529
.526
.522
.588
.754
.960
1.104
1.279
1.406
1.570
1.786
1.482
1.473
1.480
1.604
1.496
1.370
1.426
1.422
1.385
1.492
1.444
1.391
1.403
1.418
1.406
1.451
1.454
i Estimate.
Sources: Tables 7,10,12,13, and 15.
In addition to excluding auxiliary services, it appears proper to use
an education unit which is neither affected by the number of pupils in
average daily attendance nor the length of the school term. Thus, the
education unit which will be used is daily public primary and secondary
education per pupil in average daily attendance, leaving aside auxiliary
services. In column 3 of table 16, per-pupil annual expenditures are
given, and in column 4 they are reduced to a daity basis. Finally,
in column 5, daily per-pupil expenditures (minus auxiliaiy services) in
1954 dollars are given. This series might be quite appropriate to
indicate the cost of a given bundle of public primary and secondary
education in constant terms. This series together with the current
and constant dollar series is presented in chart 2.
Costs in real terms exhibit amazing stability during 1900-1958.
For the years for which data are available, 1922 was the low year
with $1.37 daily expenditure per pupil, and 1913 was the high year
with $1.60. Over the 58 years, an overall decline of about 3 percent
was registered. To the extent that the standardization of the educa
tional unit has been successful and appropriate data in general were
used, the analysis can reflect on the productivity variable as a residual.
Apparently, productivity in the public schools has changed very little,
if at all. This finding appears to bear out the claim made by Burck
and Parker some 4 years ago.2
7
”
Gilbert Burck and Sam Ford Parker, op. cit., pp. 249, 250.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
35
INCOME ELASTICITY OF PUBLIC EDUCATION
For policy as well as projective purposes, there is much interest in
measuring the income elasticity of public primary and secondary
education, a concept which was briefly discussed above. Measuring
income elasticity requires that a net regression coefficient relating
expenditures to personal income be computed and then multiplied
by the mean personal income of the period divided by the corre
sponding mean expenditures figure. It assumes that expenditures are
representatives o f the “ amount” of education. To the extent that
—number of principals, superintendents, and consultants per 1,000
X§
pupils in average daily attendance—is a measure of the quality of
education, it should not be included in an equation designed to esti
36
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
mate income elasticity. Income changes must be permitted to find
their expression in quality changes, which, in turn, can then lead to
expenditure changes.
W ith these considerations in mind, the following hypothesis was
enunciated and tested:
X x daily total currently expenditures plus debt service for public,
—
primary, and secondary education per pupil in average daily
attendance is a function of,
X 2 percent of public high school enrollment relative to total
—
public school enrollment,
X z— percent of pupils (5 to 19 years old) in average daily attend
ance living in urban areas, and
X 5 per capita personal income.
—
In brief,
X la= f ( X 2,*Xz, X 5
).
The multiple regression equation was found to have the following
values for selected years during 1900-1958:
X ' la= . 112568-
0.000924
X*.
' (.8715)
0.004274
0.005200
X 2' (.0024)
~ (.0022)
(1.3)
The statistically significant coefficient is 015.23.2
7
The coefficient of multiple determination adjusted for degrees of
freedom lost— i?*21.235— is 0.969. It is statistically highly significant at
an oc of 0.05. About 76 percent of the 1900-1958 variation in the
cost of daily per pupil current expenditure plus debt service can
be explained on the average in terms of per capita personal income
change, holding the effect of changes in the public high school— all
public school enrollment ratio and urbanization constant.
The following beta coefficients were found:
&5.2 = . 9625 ,
3
013.25=— .0565, and
012.35=— .0474.
The following is the simple correlation coefficient matrix:
X ia
X t................................................................................................ .
X*................................................................
X t..................................................................................................
0.6892
.5707
.9746
X}
0.9659
.7049
0.5854
Income elasticity of education is defined as,
axx 1 > ,
and for 1900-1958 it is + 1 .0 9 , just a little above unit elastic. Thus,
it can be concluded that during 1900-1958, a 1 percent increase in
per capita personal income was on the average associated with a
2 With 17-4 or 13 degrees of freedom lost, coefficients are statistically significant at an cc of 0.05 if they are
*
larger than 0.514.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
37
1.09 percent increase in daily total current expenditures for public
primary and secondary education per pupil in average daily attend
ance. It assumes that the effect of the other variables of the equation
is held constant.
This figure can be compared with income elasticities obtained from
cross section data. For example, Solomon Fabricant, using 1942
data of the 48 States, found the income elasticity coefficient of
education to be + 0 .7 8 .2 Fabricant’s analysis included two addi
9
tional independent variables— urbanization and density. Income
elasticity of all State and local government services was + 0 .9 0 ; but
if education was excluded, it was somewhat higher, i.e., + 0 .9 6 . Such
services as come under the heading of general control, health and
hospital, highways and police, were income elastic, while in addition
to education, fire, public welfare, and sanitation were income inelastic.
Harvey E. Brazer estimated the income elasticity of education for
40 large cities using 1949 median family income and 1953 per capita
operating expenditure data. He computed the income elasticity to
be + 0 .7 3 .3 Other variables included in the analysis were:
0
Ratio of city population to metropolitan areas’ population in
1950,
Students in average daily attendance per 1,000 of 1950 popula
tion, and intergovernmental revenue per capita, for education,
1953.
The present author used 1951-52 and 1954-55 cross-section data
to estimate income elasticity of education for the St. Louis CityCounty area. It was found to be + 0 .5 8 . In the analysis the follow
ing additional variables had been included—
Pupils in average daily attendance,
High school pupils in average daily attendance as percent of all
pupils in average daily attendance,
Pupils in average daily attendance per square mile, and
Percent increase in pupils in average daily attendance, 1951-56.
The coefficient of + 0 .5 8 is distinctly below the + 1 0 .1 for fire
protection and + 0 .9 8 for police protection found in the St. Louis
study. (See table 17.) This study also estimated the elasticity with
respect to per capita income of major education expenditure categories,
which are also reproduced in table 17. It is interesting to note that,
with but one exception, the income elasticity for instruction is lowest.
Fixed charges are the exception, where a low income elasticity is not
surprising. B y definition these charges vary little with income.
The fact that the income elasticity of instruction is so low gives cause
for concern, as long as the quality of instruction requires great
improvement.
2 Solomon Fabricant, op. cit., p. 125.
9
so Harvey E. Brazer, “ City Expenditures in the United States,” Occasional Paper 66, (New York:
National Bureau of Economic Research, Inc., 1959), p. 58.
47761 59
—
)
-----------
1
38
T a b le
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
17.— Income
1 elasticities of
select local public services, St. Louis City-County
area, 1951-52 and 1954-55
Services
Income
Education:
elasticity
Total current plus debt service___________________________________ _+ 0 . 56
Total current without debt service_______________________________
+ . 52
General control__________________________________________________
-j-. 50
Instruction----------------------------------------------------------------------------------j-. 42
Auxiliary services________________________________________________ _+ 1 .1 5
Plant operation and maintenance_________________________________
+ . 55
+ .2 9
Fixed charges____________________ __________________ ______ _____
Fire protection_______________________________________________________ _+ 10. 1
Police protection_____________________________________________________
+ .9 8
H l Since"’assessed valuation of real property is highly correlated with income and information about it is
much more readily available, the former is used for measurement. The rank correlation coefficient, relating
1949 median income with 1954-55 per pupil assessed valuation of 10 of the districts about coterminous witn
municipal or census tract boundaries, is +0.905, which is highly significant at ana: of 0.05.
As was to be expected, income elasticities computed with the aid
of cross section data are lower than those based on time series data.3
1
Actually, depending on the type of data used, the coefficient answered
slightly different questions. Income elasticities of education based on
cross section data reflect the average percentage change in per pupil
education expenditures that is brought about as average per capita
personal income changes from one school district to the next by 1
percent within a given year or sets of years. If based on time series
data, the coefficient testifies to the average percentage change in per
pupil education expenditures that results as average per capita per
sonal income changes over time by 1 percent. The first provides a
static picture, while the second reflects dynamic changes in our society.
But no matter which of the two concepts is used, there can be
little doubt that the income elasticity of public education is quite low.
(Especially low appears to be the income elasticity of instruction.)
It is low in comparison to income elasticities of other public services
and in particular such consumer amenities as air conditioning, auto
mobiles, golf, speedboats, etc. It is also low compared to what it
must be if public education in the United States is to be improved.
No doubt, people’s attitudes toward education and the existing tax
system, which relies so heavily on proportional property and sales
taxes, are mainly responsible for the low income elasticity of education.
The United States can readily afford the expenditures needed to
raise the level of education as required by our status as a leading world
power; but the necessary funds will only become available if an increas
ing portion of people’s income is channeled into public education.
This will require the combined leadership of all branches of govern
ment and educators. Further shifts will be needed in the responsi
bility of financing education from local to State and possibly Federal
Government. Matching Federal funds combined with specific per
formance criteria for eligibility for aid appear to offer a useful approach.
Among the States’ performance criteria two will be mentioned—
tax effort and partial statewide equalization of educational oppor
tunity. Only States that raise a given percent of personal income for
education should be eligible. In addition, a certain minimum educa
tion budget needs to be underwritten by the State for each and every
child in the State.
8 Marguerite C. Burk, “ Some Analysis of Income-Food Relationships,” Journal of the American Sta
1
tistical Association, 53 (December 1958), pp. 905-927.
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
39
THE 1960 AND 1965 OUTLOOK
In spite of serious misgivings, 1960 and 1965 projections have been
made with the aid of two of the equations given above. The fact that
predictive equations have been derived offers flexibility and makes
possible later projections by others who might want to change the
assumptions.
By and large the following projections are based on the same general
assumptions that were made by Otto Eckstein in his “ Trends in Public
Expenditures in the Next Decade.”
1. The degree of international tension is not expected to change
much.
2. The political attitudes toward expenditures will not undergo
a revolution.
3. Prices are assumed constant at 1958 levels.
4. The economy is to grow at a 3 percent annual rate.
5. The division of functions between Federal and State, and
local governments is assumed to persist unchanged.3
2
Three basic sets of projections will be developed. The first or
“ low” projection assumes that by and large 1958 conditions will per
sist, except that the number of pupils in average daily attendance will
in all three cases increase as projected by the National Education
Association.3
3
The “ medium” projections assume a cumulative annual increase of
3 percent in the magnitude of per capita personal income, teachers’
salaries and length of school term. The other independent variables
are assumed to increase very little.3
4
Finally, the third projections are “ high,” in that they make rather
optimistic assumptions about the future, i.e., cumulative annual
increases of 6 percent in per capita personal income, teachers’ salaries
and length of school term.
On the basis of these assumptions daily per pupil expenditures can
be projected with the aid of equations 1.1 and 1.3. They will be con
verted into annual total current expenditures plus debt service esti
mates by assuming that the number of pupils in average daily attend
ance will advance from 29,859,000 in 1958 to 32 million in 1960, and
37,200,000 in 1965.
Under these assumptions the following sets of projections were
derived, which can be compared with 1958 expenditures:
[In billions]
(1958)
Low projection___________________________________________________________
Medium projection_______________________________________________________
High projection___________________________________________________________
$11
1960
$11.8
12.7
13.8
1965
$13.8
17.4
22.8
3 Otto Eckstein, “ Trends in Public Expenditures in the Next Decade” (New York: Committee for
2
Economic Development, 1959), p. 4.
3 Enrollment projections were taken from “ Status and Trends: Vital Statistics, Education, and Fi
3
nance,” (Washington, D.C., National Education Association, 1959), p. 9, and with the aid of an enrollment-pupils in average daily attendance regression, pupils in average daily attendance figures were
estimated.
3 X%— percent of public high school enrollment relative to total public enrollment— is assumed to be
<
23 in 1960 and 1965, compared to 22.4 in 1958, and
X\—percent of pupils in average daily attendance living in urban areas—is assumed to be 52 in 1960 and
1965, compared to 51.5 in 1958.
40
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
Equation 1.1 emphasizes teachers’ salary level and, in certain
respects, it mainly reflects expenditure conditions. Using equation
1.3, which emphasizes the income side, projections are produced which
more nearly reflect the revenue situation. As is to be expected, projec
tions by these two equations show differences. Thus, with the aid of
equation 1.3 the following three sets of projections are derived and can
bo compared with 1958 expenditures:
[In billions]
(1958)
Low projection______________ _______________________ ________________ __ _
Medium projection_______________________________________________________
High projection___________________________________________________________
$11
1960
$10.4
11.1
12.1
1965
$12.1
15.3
20.3
It is interesting to compare these sets of projections with 1958
expenditures, which amounted to $11 billion; 1960 and 1965 medium
projections (in terms of 1958 dollars) emphasizing the expenditure
side are 16 and 58 percent, respectively, above the 1958 figure. The
corresponding projections emphasizing the income revenue side are
1 and 39 percent, respective!}^ above 1958.
APPENDIX
E c o n o m ies
of
S c a le
To shed light on the question whether economies of scale are likely in the public
schools, a working hypothesis will be established in the light of detailed deductive
reasoning. It then will be subjected to empirical tests by using the St. Louis
City-County area as a case study.
An examination of the operational characteristics of school districts suggests
that, within limits, growth need not lead to economies of scale. Here are some
of the reasons. A school district can be looked upon as a horizontally integrated
government which controls a number of units all furnishing a single service, i.e.,
education; a unified policy is pursued with regard to all its units. For the sake
of efficiency, a school is usually built in a location which minimizes the average
distance of its pupils. Growth and even consolidation, except in the case of oneteacher schools, usually take the form of more horizontally integrated units.
With the advent of consolidation, some local schools will tend to be closed and
their functions performed by consolidated schools, particularly high schools.
However, with minor exceptions, the consolidated government will use the
existing plant. The consolidated school district, like any government that adds
facilities to already existing ones, will seldom operate under genuine longrun
conditions. Thus, growth and consolidation, in the strict sense at least, takes
place under quasi-longrun conditions which, depending upon the relative im
portance of fixed factors, and their degree of fixity, can approach longrun condi
tions.
A school district in a small community faces a shortrun expenditure function
until it reaches a size where an additional school is needed. While very little is
known about the shape of the shortrun per pupil expenditure function of a
of a school, deductive reasoning suggests that it should have a flat-bottomed
shape. The declining phase on the lefthand side is due to the spreading of over
head. The flat bottom can be traced back to a certain amount of flexibility in
most schools. The end of the flat bottom will curve up; from that point on there
are more students than can be readily accommodated in the existing facilities.
But schools will seldom operate in the rising expenditures phase. Location con
siderations, i.e., the distance a child has to travel to school, lead to diseconomies
of scale, and in turn will tend to result in the opening of a new school. Schools
have indivisible but highly adaptable fixed plants. The law of diminishing
returns applies and leads to a U-shaped shortrun expenditure function. Since
schools are basically flexible, the average expenditure function will tend to be
reasonably flat.
What about the per pupil expenditure function of horizontally integrated
schools? If we assume that services of equal quality are rendered regardless of
the scale of operations and that the various plants are all of about equal size,
have about equal service functions, and tend to be operated at about optimum
capacity, schools can be readily added and closed and that factor prices are
fixed, the longrun per pupil expenditure function will tend to be horizontal.1
To what extent are these longrun assumptions met? It has been argued
above that location considerations result in schools of about equal size; upon
inspection it appears that each school has quite similar service functions. There
should be a tendency to operate near optimum capacity. But whether the
schools are of exactly equal size and operate at optimum capacity is not too
important a factor affecting the shape of the longrun per capita expenditure
function, as long as the shortrun expenditure function is flatbottomed. Except
for financing problems faced by local school districts, adding schools poses few
problems. These new schools are additions to existing plants, making for quasi
longrun conditions. This is not of major importance, since overhead of hori
zontally integrated school districts is relatively small compared to operating
» Don Patinkin, “ Multiple-Plant Finns, Cartels, and Imperfect Competition,” Quarterly Journal of
Economics, 61 (February 1947), pp. 173-205
41
42
ANALYSIS OF RISING COSTS OF PUBLIC EDUCATION
expenditures. Closing of schools is not much of a problem in most areas, because
of rapid population growth.
Next, the relative importance of economies and diseconomies which can be
associated with different degrees of integration and scales of operation deserves
consideration. On the whole, it appears that conditions which help horizontally
integrated manufacturers and marketers benefit from net economies— lower factor
costs, larger and more efficient plants, and induced circular and vertical integra
tion— do not exist when local government grows and consolidates. Since schools
purchase a highly diversified array of factors, but virtually none in quantity,
few large-scale factor purchases and even fewer significant price concessions are
likely to result. While pecuniary economies are likely to be minor, the only
factor purchased in large quantities, i.e., manpower, tends to unionize and produce
pecuniary diseconomies.2 Also, the nature of public education, particularly the
importance of location, tends to keep schools relatively small. This aspect
together with legal restrictions on salary levels and permissible debt will tend to
allow only small technological economies. At the same time, serious technological
diseconomies can accompany large school districts, which tend to lose efficiency
because of political patronage and general administrative top heaviness.
On a priori grounds, growing or consolidating school districts can approximate
the conditions under which the longrun expenditure function will tend to be
horizontal. Since plant and caliber of the school superintendent are virtually
fixed, the quasi-longrun function will resemble a U with a flat bottom over a very
wide range. To the extent that relatively little overhead exists, the shortrun
and longrun functions tend to approximate one another. They coincide in their
flat-bottomed portion. Net economies are responsible for a negative slope to the
left of this area and net diseconomies for a positive slope to the right of it. The
more units are horizontally integrated, the flatter the shortrun function.
The conclusions of this deductive reasoning have been subjected to some em
pirical verification. With the aid of multiple regression and correlation tech
niques a working hypothesis was tested in relation to the school districts of the
St. Louis area.
First, a few words might be said about the St. Louis City-County area and its
27 school districts which offer both primary and secondary education. The area
has a total population of about 1% million. St. Louis City with a population of
about 850,000 has a single school district, while St. Louis County has 29 districts,
26 of which operate both primary and secondary schools, while the other 3
have merely primary schools. The 1954-55 enrollment of the St. Louis City
district was 84,000 while the smallest of the 26 county districts with both primary
and secondary schools had an enrollment of 600, and the largest had one of 7,000.
Total expenditures per pupil in average daily attendance in St. Louis City was
$261 and in the county districts it ranged from $121 to $728. Some school dis
tricts, including that of the St. Louis City, had hardly grown between 1951 and
1956, while in one school district a 225 percent growth had taken place. There
existed great differences in assessed valuation of real property per pupil in average
daily attendance; the low was $1,500 and the high $24,000. * Finally, much varia
tion in the tax rate levied upon property within these school districts existed.
The school district of the city of St. Louis had the lowest rate. In the county
school districts it ranged from $1.68 to $3.58 on $100 of assessed valuation.
The State of Missouri has a school aid program, under which relatively small
subsidies are paid to a district per pupil in average daily attendance. In addition,
the equalization phase of the program is designed to assure each district $110
er pupil in average daily attendance. During the period under discussion, the
tate of Missouri contributed virtually nothing under its equalization program,
i.e., less than $60,000 in 1954-55. The virtual absence of State equalization
payments made the St. Louis City-County area useful for the purpose of this
case study. It excluded many knotty problems connected with identifying
determinants of the progress of State subsidy.
The following working hypothesis was established in order to learn about the
presence or absence of economies of scale in the St. Louis schools:
Total current expenditures plus debt service for public primary and secondary
education per pupil in average daily attendance is a function of—
X 2 number of pupils in average daily attendance in public primary and
—
secondary schools,
Xs— high school pupils in average daily attendance as a percent of all
pupils in average daily attendance,
E
2 it is recognized that teachers throughout the country are or ganized, but in the larger school districts also
maintenance workers, etc. ,tend to unionize.
ANALYSIS OP RISING COSTS OF PUBLIC EDUCATION
43
Xi — number of public school pupils in average daily attendance per square
mile,
X 5 percent increase in public school pupils in average daily attendance,
—
1951-56,
Xi — average assessed valuation of real property per pupil in average
daily attendance, and
Xi — quality index of public education in primary and secondary schools.
As was mentioned above, the quality index is composed of six subindexes—
A is equal to number of teachers per 100 pupils in average daily attendance,
B is equal to number of college hours of average teacher,
C is equal to average teacher's salary,
D is equal to percent of teachers with more than 10 years of experience,
E is equal to number of high school credit units, and
F is equal to percent of high school seniors entering college.
Since testing this hypothesis involves the loss of 8 degrees of freedom, a large
loss when merely 27 observations are available, it was thought desirable to work
with as large a sample as possible. For this reason, data for two different
periods— that is, 1951-52 and 1954-55, with a 2-year interval between, were used.
Since expenditures and their determinants increased overtime at somewhat
different rates in the different school districts, the cross-section data pertaining
to the 2 staggered years are devoid of major serial intercorrelation.
In order that a test as to the presence of economies of scale can be made, the
following functional relationship was assumed:
X ! - / ( X 2, X I, X8, X4 X6, X8, X7
,
).
The following results were obtained for total current expenditures plus debt
service (Xi0) and total current expenditures without debt service (Xi&), respec
tively, per pupil in average daily attendance.
orr
i«—
0.00347 X 2 . 0.000000317 X%
(0.0916)
(0.0696)
4.090 X 3
(0.363)
0.0293 X A 0.335 X 5 0.0135X6 213.888 X 7
*
(0.0253)
(0.0253)
(0.679) +
(0.414) #
The coefficient of multiple determination— R2 is 0.85 and this coefficient ad
—
justed for degrees of freedom lost— R *2 is 0.82. It is highly significant at an
—
o of 0.05. Thus, about 82 percent of the variation in total current expenditures
c
plus debt service per pupil in average daily attendance is explainable in terms of
these six stated independent variables, of which financial ability, service level, and
percentage of high school pupils are statistically significant.
o. ^
0.00181 X 2 0.0000000154X1 2.999 X 3
(0.0584) +
(0.0412)
+ (0.329)
0.0198 Xi
(0.148)
0.143X5 . 0.0116 X« 156.40 X 7
*
(0.131)
(0.697) “h (0.375)
222=0.84 and R*2=0.82. They are highly significant at an o of 0.05.
c
Thus, the empirical correlation and regression analysis did not reveal significant
economies of scale in the school districts of the St. Louis city-county area.
* The figures in brackets are partial correlation coefficients. Since there are 54-8 or 46 degrees of freedom,
the coefficient is statistically significant at an oc of 0.05 in case it is larger than 0.28. Statistically significant
regression coefficients are associated with «Xj,
and X i.
4See footnote 3 above.
STUDY PAPER NO. 5
TRENDS IN THE SUPPLY AND DEMAND
OF MEDICAL CARE
(BY MARKLEY ROBERTS)
45
STUDY PAPER NO. 5
TRENDS IN THE SUPPLY AND DEMAND OF
MEDICAL CARE
(By Markley Roberts)
I n t ro d u ctio n a n d S u m m a r y
Medical care is becoming wonderfully effective and appallingly ex
pensive. Rising demand for medical care and shortages o f medical
personnel and medical facilities require sound public policy decisions
to bring about a balance which is fair to those who need care and
successful in providing a rising standard o f medical services.
This study, suggestive rather than comprehensive in scope, is an
effort to outline some of the problems which require attention and
action. These are public policy problems because the adequacy of
medical care vitally affects the general welfare. Improving health
has been an important factor in the advance of American productivity,
and continuing improvement of health standards will contribute to
further economic growth. Also, public policy must recognize the
primary public interest in an adequate supply of medical care and
must assure that those needs that private agencies and individuals
do not meet, and perhaps cannot be expected to meet, will be fulfilled.
The American people are increasingly conscious of health problems
and eager to share in the advances of medical science. Total spend
ing on health and medical care is approaching $25 billion a year,
or about 5 percent of gross national product. The price of this por
tion of the G N P has been rising rapidly, and thus has served to raise
consumer prices, and no study of inflation would be complete without
examination of this sector.
Private spending on medical care is rising, with the biggest in
creases in spending for hospitalization and for prepaid health insur
ance programs. The average family spends 5 percent of its income on
medical care, but medical costs are not spread evenly. Spending on
medical care rises with rising family income, but declines as a pro
portion of rising family income. Voluntary health insurance covers
more than 70 percent of the population, and pays about 25 percent
of the Nation’s private medical care bill.
Federal, State, and local community spending make up about a
quarter of total spending for health and medical care. A substantial
part of this public spending comes from Federal funds to care for
veterans and military personnel and their families. Federal support
for medical research is growing and pays an increasing proportion
of medical school operating expenses.
Hospitals are increasingly utilized in medical care because medical
progress and medical services are hospital oriented, because of the
prevalence o f hospitalization insurance and because o f long-term
hospital care needs of older people with chronic and degenerative
diseases. New drugs have made treatment possible for mental pa
tients in general hospitals and outside hospitals.
47
48
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
Organization of medical services is separated from the market price
system by a combination of public and voluntary nonprofit supply
factors. To achieve greater efficiency, certain aspects of the organiza
tion of supply may need revision, and a trend toward greater efficiency
in supplying medical services appears in the growth of group medical
practice. Although medical science is raising the quality of medical
care, there has been a decline in the ratio of active physicians and
dentists to the rising population. Expansion in the number of profes
sional, technical, and auxiliary health workers matches advances in
medical science, but lengthy training, low wages, and low salaries con
tribute to shortages of personnel and high turnover in these
occupations.
The number of hospitals and hospital beds increased between 1948
and 1959. However, the number of beds per 1,000 population
dropped from 9.7 in 1948 to 9.1 in 1958 and hospital utilization rose
from 115 to 137 hospital admissions per 1,000 population. Almost
half of existing hospital beds are occupied by mental and tubercu
losis patients in State and Federal hospitals, but most hospital
care for the general public is provided by short-term nonprofit hos
pitals. These general hospitals are community-owned or under re
ligious or other voluntary associations which depend on hospital fees
and on philanthropy for their operation. Expenses increased from
$10.04 per patient-day in 1946 to $29.24 in 1958 in the voluntary short
term hospitals, primarily because of rising payroll costs.
Demand for higher levels of quantity and quality of medical care
can be expected to continue. This demand will generate increasing
public support for medical research, medical education, and health
facilities. Rising costs of hospital care will continue to increase
demand for insurance protection against hospitalization. Demands
for protection against other medical care expenses will increase the
comprehensivenesss and cost of health insurance.
In spite of progress in medical science, the supply of available med
ical care, in terms of medical personnel and medical facilities, is
declining in relation to population growth and rising health conscious
ness. Shortages of supply exist already and will grow more serious
in the future, unless there is a broad national effort of public and
private support.
Such a national effort will require increased Federal assistance for
medical research, medical education, and construction of medical
facilities. It will require Federal aid to encourage recruitment, train
ing, and more effective use of auxiliary health workers such as physical
therapists, rehabilitation specialists, practical nurses and home aides.
Voluntary health insurance, already widespread, will become in
creasingly comprehensive in financing the Nation’s private medical
care needs. Nevertheless, the greater health care needs and lower
income of the aged population will preclude private insurance plans
from solving the financial side of the medical problems of this group.
There will continue to be a need for some form of public participation,
probably in the form of social insurance. Other health needs include
development of community services to provide home care for the
chronically ill and aged, and public assistance for the special problems
of disabled children.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
C h a p t e r 1. D e m a n d
for
49
M e d ic al C are
TOTAL DE M A N D
Health consciousness
Personal and social ethics combine to put reverence for life and
health high on the current American scale o f values. Higher stand
ards o f living, rising levels o f education, and widespread public infor
mation about progress in medical science contribute to increasing
general public awareness of health and medical care needs, thus
stimulating a large and growing desire for health and medical care
for individuals and for communities. There is a new awareness of
interaction between health o f the community at large and the health
of its individual members. There is growing realization of benefits
achieved for individuals and for society by maintaining a high,
rising level o f health through effective medical care and preventive
health measures.
Disease, pain, and disability are increasingly regarded as avoidable
and death as postponable. These attitudes are reflected in the concept
that a society can buy the level of health it wants for its members if it
is willing to pay the price. Such expectations raise the problem of
distinguishing between needs for health and medical care and the
demand for such care. Needs may be large, or even infinite, but
demand is a measure of financial ability and willingness to meet the
needs.
A revolution o f rising expectations is in progress in the field o f
health and medical care. New expectations and new attitudes are
raising demand for medical care, increasing utilization of medical
services, and generating support for public health activities and
medical research. Widespread concern about cancer, heart disease,
mental illness, alcoholism, accidents, and other health hazards reflect
public awareness o f social costs as well as personal and family costs.
Widespread concern about the chronic and degenerative health prob
lems o f the aging reflects an awareness o f the human and social costs
imposed by increases in the older age groups o f the American popu
lation. Rising expectations stimulate support for medical progress
through research. These expectations also support private and public
action to raise availability o f health and medical care toward higher
levels of adequacy.
Good health and adequate medical care are regarded as part o f a high
standard o f living. Naturally, individuals want to gain the advan
tages of progress in medical science for themselves and their families,
but the American people increasingly appear to believe that their
fellow citizens have a right to adequate medical care, although the
concept o f adequacy may be subject to wide variations. This belief
rests primarily on humanitarian welfare considerations,1 but there is
growing awareness o f the economic costs o f illness as well.23
1 Herman M . Somers and Anne R. Somers, “ Private Health Insurance, Part I, Changing Patterns of
Medical Care Demand and Supply in Relation'to Health Insurance.” Reprinted from California Law
Review, August 1958, vol. 46, No. 3, p. 382.
2 Selma Mushkin, “ Toward a Definition of Health Economics.” Public Health reports, vol 73 No 9
September 1958.
’
* ’
3 But see the views of Eli Ginzberg, “ What Every Economist Should Know About Health and Medi
cine.” American Economic Review, March 1954. pp. 104-119;‘also see his testimony in hearings before the
Joint Economic Committee, Oct. 1,*1959. “ But we are’coming to the nonproductive areas of medicine * * *
We are moving up against the old age, and what^e are really trading is a kind of easing of life in the terminal
years, and really trading one kind of illness for another.”
50
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
Total spending
Total public and private spending on health and medical care indi
cates aggregate effective demand for medical care. Such spending is
currently about 5 percent of the gross national product, or close to
$25 billion annually in recent years. (See table 1.)
Combined private and public health care spending rose from 3.6
percent of gross national product in fiscal 1929 to 4.7 percent in fiscal
1950 and to 5.2 percent in fiscal 1958. Total spending rose from $3.6
billion in 1929 to $9 billion in 1950 and to $22.7 billion in 1958.4 It is
clear that health and medical care is taking vastly increased amounts
of the Nation’s output in absolute and relative terms.
A rising proportion of total spending on health care comes from
public funds. In 1929, public spending, excluding funds for medical
facilities, amounted to $414 million. In 1958, public spending was
more than $4.9 billion, or about 13 times the 1929 level. On the other
hand, private spending on health care in 1958 was more than five
times the 1929 level, increasing from $3.1 billion to $17.2 billion.
In fiscal 1929, public expenditures by Federal, State, and local gov
ernment units were about 15 percent of the total. Since 1946, public
expenditures have been about 25 percent of the total, amounting to
$5.4 billion in fiscal 1958. (See chart 1.)
The rising amount of spending for health and medical care indicates
that the American people want to raise their health standards. Even
after allowance for cnanges in the purchasing power of the dollar,
a substantial increase in total demand is indicated by the amount and
proportion of medical care spending. Spending on medical care
increases as national income rises, but the increase in the proportion of
income devoted to medical care also reflects changes in distribution of
income as well as new sophistication about the need for health care
and about its social and economic value.
4Ida C. Merriam, “ Expenditures for Health and Medical Care, 1928-29— 1957-58.” Department of
Health, Education, and Welfare, Social Security Administration, Division of Program Research, Research
and Statistics Note No. 26, Sept. 17,1959.
TRENDS IN SUPPLY AND DEMAND OP MEDICAL CARE
C hart
1. Spending for health and medical care.
Billions of Dollars
Source: Social Security Administration,
Research and Statistics Note No. 26'-1959.
52
TRENDS IN
T a b l e 1.—
SUPPLY AND DEMAND OF MEDICAL CARE
Private and public spending for health and medical care, selected fiscal
years 1929-58
[Dollars in millions]
1929
1940
Total spending................. $3,625.0
1950
1955
1956
1957
$3,914.7 $12,407.1 $17,764.7 $19,220.6 $21,057.3
1958
$22,737.7
Private expenditures.................
Health and medical services.
3,112.0
3,010.0
3,023.0
2,992.0
9,042.0
8,827.0
13,455.0
13,130.0
14,711.0
14,399.0
16,082.0
15,693.0
17,294.0
16,785.0
Direct payments...........
Insurance benefits____
Expenses for prepay
ment_______________
Industrial in-plant
services.......................
Philanthropy................
2,900.0
2,900.0
7,125.0
878.0
9.388.0
2.357.0
10,176.0
2,776.0
10,937.0
3,245.0
11,555.0
3,675.0
274.0
595.0
611.0
639.0
645.0
30.0
80.0
40.0
52.0
150.0
400.0
210.0
580.0
221.0
615.0
232.0
640.0
245.0
665.0
Medical facilities construc
tion...................................
Public expenditures...................
102.0
513.0
31.0
891.7
215.0
3,365.1
325.0
4,309.7
312.0
4,509.6
389.0
4,975.3
509.0
5,443.7
Health and medical serv
ices. _................................
Medical facilities construc
tion...................................
414.0
836.6
2,780.1
3,923.4
4,148.3
4,497.3
4,918.5
99.0
55.1
585.0
386.3
361.3
478.0
525.2
Total expenditures as percent
of gross national product........
Public expenditures as percent
of the total......... ....................
Percent of personal health care
spending from—
Private spending.................
Insurance benefits_____
Public spending..................
3.6
4.1
4.7
4.7
4.7
4.9
5.2
14.2
22.8
27.1
24.3
23.5
23.6
23.9
90.5
82.0
9.5
18.0
78.2
8.1
21.8
78.0
14.8
22.0
78.9
16.1
21.1
79.4
17.3
20.6
78.8
18.1
21.2
Source: Social Security Administration, Research and Statistics Note No. 26-1959.
P R IVA TE D E M A N D
Total 'personal consumption spending
Total personal consumption spending for medical care gives a gen
eral view of effective private demand for health and medical care,
although certainly not an accurate picture of needs or costs. Per
sonal consumption spending for medical care rose 140 percent between
1947 and 1958, from $6.8 billion to $16.4 billion.5 During this same
period, gross national product rose 88 percent, from $234 billion to
$441 billion.
Private medical care spending rose from 2.9 percent o f GNP in
1947 to 3.7 percent in 1958. In terms o f total personal consumption
spending, private medical care spending rose from 4.1 percent in 1947
to 5.5 percent in 1958, but remained about 15 percent o f consumer
spending on all services.
The greatest increases in private medical care spending were for
hospital costs and health insurance payments. Spending for hospital
ization rose about 280 percent, from $1.1 billion m 1946 to $4.3 billion
in 1958. Insurance payments rose 205 percent, from $444 million to
$1,359 million. Payments for drugs and prescriptions rose more than
150 percent, from $1.2 billion to $3.2 billion. Payments to doctors rose
about 130 percent, from $1.7 billion in 1947 to $3.9 billion in 1958 and
payments to dentists rose about 115 percent, from $772 million to $1,674
million. ( See chart 2 and table 2.)
* U.S. Commerce Department, “ U.S. Income and Output, Supplement to Survey of Current Business,
1958.” Also “ Survey of Current Business, July 1959,” tables II-4.
TRENDS IN SUPPLY AND
DEMAND OF MEDICAL CARE
53
Rising national income and new health consciousness provide partial
explanations for increases in private demand for medical care. How
ever, increases in private spending for hospitalization and health in
surance indicate the nature of this demand. The increase in spend
ing for hospitalization reflects the central role of hospitals in supply
ing medical care. The growth of prepayment and health insurance
spending represents a new approach to the problem of financing medi
cal care, a new approach to adjust supply and demand. This new
approach has created a new component in total private demand for
medical care since the end of W orld W ar I I . Some aspects o f this
component will be discussed below.
C
h a r t
2. Personal consumption spending (for medical care).
Millions of Dollors
'Source: Commerce Deportment
47761— 59------ 5
TRENDS
I
N
Table 2.— Personal consumption spending for medical care
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
7,749
8,051
8,741
9,440
10,172
11,072
11,925
12,827
14,048
15,051
16,384
Physicians............. - ................ ........... ........
2,020
784
390
2,327
900
445
2,338
920
455
2,427
961
482
2,519
997
510
2,657
1,098
544
2,840
1,234
586
3,109
1,406
634
3,189
1,508
653
3,470
1,625
697
3,693
1,705
734
3,901
1,674
769
1,163
1,397
1,621
1,772
2,037
2,248
2,486
2,729
2,962
3,229
3,518
3,884
4,319
444
1,271
513
1,313
559
1,466
557
1,555
629
1,719
641
1,979
749
2,058
942
2,137
1,056
2,163
1,090
2,473
1,055
2,869
1,064
3,098
1,359
3,261
396
400
431
454
486
546
580
604
595
685
814
873
1,101
Other professional services.......... ...............
Privately controlled hospitals, nursing
homes, and sanitariums------------ -------—
Medical caro and hospitalization insurDrug preparations and sundries------------ *
Ophthalmic products and orthopedic ap
pliances...................... - ........... — ...........
Source: Commerce Department, U.S. Income and Output.
CARE
O MEDICAL
F
6,817
1,720
772
338
DEM
AND
6,104
AD
N
Total—
............................... ................
SUPPLY
[Millions of dollars]
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
55
Family medical care spending
The family is the typical consumer unit in private demand for
general health and medical care. The “ average” family spends about
5 percent of its income on such care. However, the real impact of
medical care needs on the family budget appears not in average family
spending but in the uneven incidence of sickness and disability, in
the uneven distribution of medical charges and in the uneven ability
of families to pay the costs incurred.
A nationwide survey, sponsored by the Health Information Founda
tion,6 indicated that 53 percent of all families spent less than 5 percent
of their income and 8 percent had no health or medical expenses.
On the other hand, 2 percent of all families incurred expenses exceed
ing 50 percent of their income. More than 40 percent o f the total
medical costs of all families were incurred by 11 percent of the
families, which had medical expenses greater than $495 a year.
The 1950 Bureau of Labor Statistics study of consumer spending7
found an average medical care expenditure by all families of $197
a year, of which $163 was paid directly for medical service and $34 was
paid for group health plans and insurance. Average medical care
spending ranged from $91 for families with income less than $1,000 to
$446 for families with income of $10,000 and over.
The more recent 1953 survey of the Health Information Founda
tion reported an average cost incurred for all personal health services
of $207 per family, although the median charge was $110. The aver
age charge incurred by families with some kind of health insurance
was $237 and the average charge incurred by uninsured families was
$154. The proportion of income paid out for personal health services
ranged from a median of 6.1 percent for families with income under
$2,000 to a median of 3.2 percent for families with income greater than
$7,500.8 However, average medical care outlays ranged from 11.8 per
cent for families with income under $2,000 to 3 percent for families
with incomes of $7,500 and over. For families with incomes under
$2,000 and without health insurance, medical care took an average of
13.4 percent of family income.9 (See tables 3 and 4.)
Medical care needs clearly impose a major financial burden on lowincome families. Large, unexpected, medical care expenses can have
a catastrophic impact on family budgets. Some indication of unmet
medical care needs can be found in the pattern of rising family spend
ing on medical care as family income rises. This increase in spending
would indicate the high order of importance placed on medical care
for the family. However, spending on medical care as a proportion of
family income declines as family income increases. This proportional
decline would appear to indicate that families achieve some degree of
satisfaction of their medical care needs as family income goes up.
« Odin .W. Anderson, “ Family Medical Costs and Voluntary Insurance: A Nationwide Survey.”
McGraw-Hill, 1956. p. xiii.
* U.S. Bureau of Labor Statistics, “ Study of Consumer Expenditures Incomes and Savings,” vol. XVIII.
University of Pennsylvania, 1957, p. 9.
8 Anderson, op. cit., p. xii.
•Ibid., p. 114.
56
T a b le
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
3 . — C h a rg e s in c u r r e d by f a m ilie s f o r health se rv ice s, by in co m e a n d health
in s u r a n c e status
Mean gross charges
Family income
Total, all income groups________________
Under $2,000 __________________________
$2,000 to $3,499_________________________
$3,500 to $4,999______ ____ _____________
$5,000 to $7,499_________________________
$7,500 and over............. ...............................
Median gross charges
All
families
Insured
Un
insured
All
families
Insured
$207
130
152
207
259
353
$237
164
168
220
262
362
$154
115
132
167
247
312
$110
54
82
119
176
238
$145
82
103
134
187
255
Un
insured
$63
43
54
83
105
185
Source: 1953 survey by Health Information Foundation and National Opinion Research Center, table
A-15 in Odin W. Anderson, “ Family Medical Costs and Voluntary Health Insurance,” p. 113. Footnote
omitted.
T a b l e 4 .— F a m ily
o u tla y s f o r m e d ic a l care a s a percentage o f f a m i ly in c o m e b y
in c o m e a n d he alth in s u r a n c e statu s
Aggregate family outlay as
percent of aggregate family
income
Family income
Total, all income groups______ __________
Under $2,000 __________________________
$2,000 to $3,499____________ ______ ______
$3,500 to $4,999_________________________
$5,000 to $7,499 ________________________
$7,500 and over............. ...............................
All
families
Insured
4.8
11.8
6.1
5.4
4.7
3.0
4.8
13.4
6.6
5.8
4.9
3.1
Unin
sured
4.8
11.0
5.3
4.2
4.2
2.8
Median of family total outlay
as percent of aggregate
family income
All
families
Insured
4.1
6.2
4.0
3.9
3.6
3.3
4.4
10.2
5.1
4.4
3.9
3.3
Unin
sured
3.0
4.8
2.6
2.2
2.2
3.0
Source: Table A-16 in Anderson, “ Family Medical Costs and Voluntary Health Insurance/’ p. 114.
Footnotes omitted.
Growth of prepayment
Prepaid health insurance programs cover an increasing* proportion
of the Nation’s private medical care bills. The heavy burden of hos
pital and medical charges on low- and middle-income families, the un
predictability of individual family medical expenses, and the relative
predictability of aggregate family medical care costs have contributed
to the tremendous expansion during the past 12 years of voluntary
health insurance coverage and prepayment programs which now cover
more than 70 percent of the American people. (See chart 3.)
The growth of these prepayment plans, enabling families to finance
the greater part of their medical care expenses on a regular budget
basis, is a major feature of the new pattern of private demand for med
ical care. These programs reflect rising demand for medical care, but
they also contribute to rising demand by financing medical care needs,
converting need and health consciousness into effective demand.
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
57
C hart 3. Growth of health insurance coverage.
Millions of People Covered
In 1948, only 60 million Americans were protected by insurance for
hospitalization, the most expensive part o f modern medical care. By
the end o f 1958, more than 123 million people were insured against
hospital expenses, 111 million were insured against surgical expenses,
and 75 million were insured against regular medical costs o f nonsurgical physician care.1 (See table 5.)
0
i° Health Insurance Council, “ Greater Security for the American People.,, Preliminary report on 13th
annual survey, voluntary health insurance in the United States as of Dec. 31,1958.
47761— 59----- 6
58
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
Table 5.— Growth of health insurance coverage, number of people protected against
hospital expenses, surgical expenses, and regular medical expenses
[In thousands]
End of year
1940 .......................
1941.......................
1942 .......................
1943 .......................
1944 .......................
1945 .......................
1946 ..... ..................
1947 ............... ........
1948
.................
1949.........................
Hospital
expense
Surgical
expense
12,312
16,349
19.695
24,160
29,232
32.068
42,112
52,584
60.995
66,044
5,350
6,775
8,140
10,069
11,713
12,890
18,609
26,247
34,060
41,143
Regular
expense
medical
3,000
3,100
3,200
3,411
3,840
4,713
6,421
8,898
12,895
16,892
End of year
1950........................
1951_.......................
1952..................... 1953........ .............. .
1954....................... .
1955.................. ......
1956........................
1957.................. ......
1958....................... .
Hospital
expense
Surgical
expense
76,639
85,348
90,965
97,303
101,493
107,662
115,949
121,432
123,038
54,156
64,892
72,459
80,982
85,890
91,927
101,325
108,931
111, 435
Regular
medical
expense
21,589
27,723
35,670
42,684
47,248
55.506
64,891
71.813
75,395
Source: Health Insurance Council.
Insurance benefits now pay almost a quarter of all private medical
care bills. Direct “ out of pocket” private spending for medical care
dropped from 88.7 percent in 1948 to 72.5 percent of total private
medical care spending in 1957. Insurance benefits for hospital serv
ices rose from 6 to 15.3 percent of private medical care spending, and
insurance benefits for physicians’ services rose from 2 to 7.8 percent.1
1
Private medical care spending rose from 4 percent in 1948 to 4.9
percent of per capita disposable income in 1957. During this period,
direct “ out of pocket” per capita payments for medical care remained
fairly stable, but insurance benefit payments for medical care rose
more than 250 percent, from 0.3 percent in 1948 to 1.1 percent o f per
capita disposable income in 1957.1
2
Direct “ out of pocket” payments for doctors’ services as a percent
age of per capita disposable income dropped 26 percent from 1948 to
1957, but insurance payments to doctors rose 375 percent. In 1948
insurance benefits were only 6.4 percent of private spending for doc
tors’ services; by 1957 insurance benefits were paying 30 percent.1
3
Voluntary health insurance, which accounted for about one-quarter
of private hospital service spending in 1948, covered more than half
of private spending for hospital care in 1957. Insurance benefits paid
for more than 40 percent of private spending for hospital and doctor
services in 1957 compared to 15 percent in 1948.
One dramatic indication of the growth of prepayment programs
appears in the 470-percent increase in benefit payments made by vol
untary health insurance, from $606 million in 1948 to $3,474 million
in 1957. Payments into voluntary health insurance programs rose 380
percent, from $862 million in 1948 to $4,144 million in 1957.14 The
declining rate of overhead expenses, which represents the cost of get
ting the insurance protection, reflects in part the savings achieved by
enrollment of large groups in health insurance programs but pressures
of rising utilization and opposition to increases in health insurance
premiums have also forced insurance carriers to reduce the gap between
earned income from prepayments and outgoing benefit payments.
w Agnes W. Brewster, “ Voluntary Health Insurance and Medical Care Expenditures: A 10-Year Re
view,” Social Security Bulletin, December 1958, p. 9.
12 Ibid., table 2, p. 10.
w Ibid., table 6, p. 13.
u Ibid., table 3, p. 11.
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
59
Collective bargaining is one of the major factors contributing to the
growth of health insurance coverage and medical care prepayments.
In 1945 an estimated 500,000 workers were covered by prepaid health
programs under collective-bargaining agreements. B y 1957 more than
12 million workers were covered.1 Non wage fringe benefits negoti
5
ated during W orld W a r I I and exemption of health benefits from
Korean W a r wage freezing encouraged growth of these industrial
health prepayment programs and expansion of their coverage. A s
the proportion of workers covered by these programs has increased,
more attention is centered on broadening the coverage of existing
plans to workers5 families and to retired workers. Also, more atten
tion is given to problems of adding new benefits and raising the level
of benefits.
The growth of industrial health prepayment programs and other
voluntary group enrollment for health insurance reflects the new
awareness of the value of medical care and awareness of the need to
budget unpredictable medical costs. The demand for health insur
ance is part of the total demand for medical care, and they rise to
gether as family income rises. These are underlying factors behind
the rising proportions o f total and individual medical care spending
channeled into prepayment insurance programs, which pay an increas
ing part of the Nation’s private medical care bill.
Health needs o f older people
Older people need more health and medical care at the stage in life
when they can least afford to pay for this care. Longer life spans,
brought about by progress in preventive and therapeutic medicine,
have changed the Nation’s demand for health services, with emphasis
shifting from control and treatment of communicable, infectious dis
eases to the chronic and degenerative diseases. The three leading
causes of death at present are heart diseases, cancer, and vascular
lesions of the brain— all characteristic health problems o f older age
groups.
Nearly 16 million Americans, or about 9 percent of the population,
are now over 65 years of age. B y 1970 there will be an estimated
20 million persons over 65, and, if research in disease and health prob
lems of the aged progresses at a rapid rate, the estimate for 1970 may
be raised closer to 30 million.16 People over 65 are particularly af
fected by the cost of medical care, since the chronic and degenerative
health problems cause more long-term disability, greater need for medi
cal services, and longer hospital stays at a time when income is sharply
reduced by retirement. (See table 6.) Three-fifths of the men and
women past 65 received less than $1,000 in cash income last year.
Five major points on health needs o f the elderly are listed in the
summary o f discussions this year before the Senate Subcommittee
on Problems of the Aged and A g in g : 1
7
1.
Most older people in this country do not have hospital and surgi
cal insurance enabling them to get health services readily and at rea
sonable cost, although in recent years voluntary health insurance has
increased among persons over 65.
h U.S. Bureau of Labor Statistics, “ Analysis of Health and Insurance Plans Under Collective Bargaining.
Late 1955.” Bulletin No. 1221, November 1957, p. iii.
is U.S. Senate, Committee on Labor and Public Welfare, “ The Aged and Aging in the United States,
Summary of Expert Views Before the Subcommittee on Problems of the Aged and Aging,” 86th Cong.
1st sess., 1959, p. 6.
it.Ibid.
60
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
2. Public and private efforts are needed to preserve health and
functional ability m old age.
3. Older people spend more on health care and are less able to afford
it than younger age groups.
4. Three basic principles in organization of medical care are (a)
high quality o f medical care, (5) a satisfactory payment system to
support professional, hospital, and supplementary services, and (e)
administration guaranteeing proper standards and economy o f service.
5. Most older people in the future could readily acquire paid-up
health insurance if it were provided through the social security mecha
nism.
These general considerations lead to the conclusion that the present
health care needs o f our older citizens are not being met adequately.
Furthermore, their health care needs are a growing national problem.
Although about 40 percent o f the population aged 65 and over has
some kina o f health insurance, there is less opportunity for the “ over
65” group to get private health insurance for a number o f reasons.
Elderly people are poor risks for private insurers because their health
needs are greater than the needs o f younger age groups. Higher pre
miums charged for greater risk are more difficult to pay when income
is reduced by retirement. However, even when elderly people are will
ing and able to pay the premiums, they frequently are unable to get
private health insurance coverage. Further consideration o f these
greater health care needs and reduced ability to get insurance protec
tion appear below in the discussion o f hospital utilization by older
people.
T
a b le
6.
— Health problems of people aged 65 and over, 1957-58
Rate per 100 persons per year
Experience
Persons
aged 65
and over
Restricted activity days____ _______________________. _____
Bed disability days including hospital days__ ______________
Days in short-stay hospitals..__ ____ ____ . . . ____ . . . . __ . . . .
Incidence of acute conditions______________________________
Persons with 1 or more chronic conditions__________________
Persons with activity limited by chronic conditions______ __
Persons injured. _______ - __ _____ . . . _ ______________ ____
_
Physician visits
. . . . . __ _____ ________ ______ ___ __ . . . _
Dental visits _ ____ _____ ____________ . . . . . __ ___
4,730
1,630
178
163
76
42
25
680
80
Persons
under
age 65
1,743
697
76
269
38
7
28
514
164
Persons of
all ages
2,000
780
85
260
41
10
28
530
160
Source: Tabulation from U.S. National Health Survey in “ Hospitalization Insurance for Old-Age.
Survivors, and Disability Insurance Beneficiaries,” report submitted to the Committee on Ways and
Means by the Secretary of Health, Education, and Welfare, Apr. 3,1959, p. 13.
PUBLIC SPENDING
Public support for health and medical care
A major component o f total demand for health and medical care is
public spending, which is about a quarter o f total spending for this
purpose. Public funds from Federal, State, and community sources,
almost $5.5 billion in fiscal 1958, are spent for veterans, military per
sonnel, hospital construction, medical research, maternal and child
health services, medical vocational rehabilitation, public assistance
medical payments, school health programs, and various other public
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
61
programs providing health care for such groups as Indians, merchant
seamen, civilian residents in the Panama Canal Zone, narcotics ad
dicts, and the residents in prisons and penitentiaries.1
8
The largest public outlays are for State and local public hospitals
and medical care, about $1.8 billion, and the next major outlay is Fed
eral spending for veterans and military personnel and their families,
about $1.5 billion in fiscal 1958. Veterans’ hospitals and medical care
accounted for about $800 million, hospital and medical care adminis
tered by the Department o f Defense accounted for about $580 million
and Medicare assistance for medical services in community hospitals
to eligible military dependents accounted for about $85 million. (See
table 7.)
Table 7.— Public spending for health and medical care, selected fiscal years, 1929-58
[In millions of dollars]
1929
1940
1950
513.0
891.7
3,365.1
4,309.7
4,509.6
4,975.3
5,443.7
Health and medical services________
414.0
836.6
2,780.1
3,923.4
4,148.3
4,497.3
4,918.5
General hospital and medical care.
Defense Department facilities—
Medicare______________________
Veterans* hospital and medical
care_________________________
Public assistance (vendor medi
cal payments)_______________
Workmen's compensation medi
cal benefits__________________
Temporary disability insurance
medical benefits______________
Medical vocational rehabilitation.
Maternal and child health ser
vices________________________
School health programs_________
Medical research_______________
Other public health activities___
215.0
30.0
415.0
45.0
1,174.0
332.0
1,449.5
602.6
1,577.8
548.0
1,707.0
529.3
24.7
1,881.5
584.7
86.6
30.0
72.0
582.2
Total .........................................
Medical facilities construction. .
1955
1956
1957
1958
25.0
722.0
723.5
732.9
794.1
211.9
252.6
287.6
320.2
90.0
193.0
315.0
335.0
355.0
370.0
.4
2.5
7.4
20.6
9.2
22.7
11.0
25.8
12.7
31.9
14.9
166.0
13.7
17.9
3.1
179.5
29.7
30.6
55.0
373.7
.93.4
66.3
105.9
327.0
104.8
74.2
115.9
382.8
113.8
81.0
183.0
444.5
122.7
87.8
237.5
386.6
99.0
55.1
585.0
386.3
361.3
478.0
525.2
5.0
9.0
Source: Social Security Administration, Research and Statistics Note No. 26—1959.
Federal support for research
Federal support for medical research is growing in amount and im
portance. Total medical research spending rose from $88 million in
1947 to $479 million in 1958. The Federal share rose from 32 percent
in 1947 to 56 percent in 1957, but dropped to 48 percent in 1958, al
though the Federal funds for medical research increased from $186
million in 1957 to $230 million in 1958.1 Medical research in uni
9
versities is particularly dependent on Federal funds. Two-thirds o f
university medical research funds came from the Federal Government
in 1957.2
0
The 1958 report to the Secretary o f Health, Education, and W el
fare by a panel o f consultants, headed by Dr. Stanhope Bayne-Jones,
indicated that Federal support for research and specialized training
provides a rising proportion o f total budgets o f medical schools.
1 Merriam, op. cit. Also, Federal Hospital and Medical Care Programs, Special Analysis J, reprint of
8
pp. 1004-1010 from the Budget of the U.S. Government for the fiscal year 1960.
1 U.S. Department of Health, Education, and Welfare, “ The Advancement of Medical Research and
9
Education.” Final Report of the Secretary’s Consultants on Medical Research and Education, June 27,
1958, p. 22. Hereafter cited as Bayne-Jones report.
*o Ibid., p. 22.
62
TRENDS
m
SUPPLY AND DEMAND OF MEDICAL CARE
A more recent study of 20 medical schools for the National Insti
tutes of Health indicates that Federal funds made up 9 percent of
medical school budgets in 1948, about 29 percent in 1958, and that by
1970 an estimated 44 percent of medical school budgets will come
from Federal grants.2 These figures do not include construction
1
grants, which would raise the proportion of Federal support for
medical education.
Assuming an annual growth in gross national product of only 3
percent, the Bayne-Jones report projects a desirable rise in national
spending for medical research from $330 million in 1957 to $900 mil
lion or $1 billion a year by 1970. Attainment of this level of spending
for medical research will require private industry and private philan
thropy to triple private spending for medical research, the report
states, and Federal spending for medical research should rise to about
$500 million a year in 1970. Although the report stresses the need
for increasing Federal support, it also states clearly that non-Federal
spending must continue to support about half of the total medical
research effort.2
2
Widespread awareness of the value of research has created strong
public support for medical research. Discovery of an effective polio
myelitis vaccine has raised hopes for other major medical break
throughs. It is significant that in 1959 Congress raised appropria
tions for National Institutes of Health research activities by $106 mil
lion above the Administration budget request to $400 million. This
action reflects public support for medical research. This demand for
progress in medical research can be expected to continue to grow.
D E M A N D FOR HOSPITAL, SERVICES
Trend to hospitals for health care
Hospitals are focal points for advances in medical science, and the
American people increasingly demand hospital services for diagnosis
and treatment of disease, as well as for preventive medicine and com
munity health education. Increased utilization of hospitals stems in
part from the social and technological role of hospitals in providing
medical services, but rising income and prepaid health insurance
programs provide additional incentives toward utilization.
Hospital utilization is also determined by age, sex, marital status,
education, and a variety of less measurable socio-economic factors, in
cluding existing alternatives to hospital care such as family or home
care or care by nonhospital institutions such as nursing homes and
halfway homes for mental patients. Among the most significant
factors, however, are the prevalence of hospitalization insurance, the
increase in older age groups, and the incidence of long-term diseases
and mental illness.
Hospitalization insurance
The most widespread benefit of health insurance is protection
against costs of hospitalization. Evidence of higher hospital utiliza
tion by insured persons raises the question of abuse of this protection.
It is difficult to establish abuse, which implies doctor-patient collusion,
2 U.S. Department of Health, Education, and Welfare, “ A Study of 20 Medical Schools,” a report to the
1
Director, National Institutes of Health, from the staff committee on support for research and training,
April 1959, p. 6.
2 Bayne-Jones report, pp. 29-30.
2
TRENDS IN
SUPPLY AND DEMAND OF MEDICAL CARE
63
but it is possible to indicate some factors involved in utilization of
hospital care by the insured and the uninsured.
The 1953 Health Information Foundation survey2 revealed that
3
hospital admission rates vary little between different income groups,
but that insured persons, regardless of income, had higher admission
rates— 14 admissions per 100 insured persons per year, compared
with 9 admissions per 100 uninsured persons per year. The survey
also indicated utilization of 100 hospital days per 100 insured persons
pear year and 70 hospital days per 100 uninsured persons per year
but with an average length of stay in hospitals of 7 days per insured
person and 8.3 days per uninsured person.
Among the uninsured, there was little variation in hospital utiliza
tion, regardless of family income. Among insured persons, however,
individuals from low-income families (less than $2,000 a year) had a
much higher hospital admission rate than any other income group— 21
hospital admissions per 100 persons. This rate is far above the gen
eral average admission rate of 14 per 100 insured persons per year
and 9 per 100 uninsured persons per year,2 but this high utilization by
4
low income individuals may reflect the large number of older retired
people in this income group.
In all income groups, hospital utilization by insured persons ex
ceeded utilization by the uninsured, even at very high income levels.
Apparently, families with health insurance go to hospitals more often
and stay a shorter time than do those without such insurance. This
higher utilization by the insured does not imply excessive use of
hospitalization insurance protection, although it does indicate that
insured persons (or their doctors) use hospitals for less serious con
ditions. I f at least some of these less serious conditions are presumed
to require hospital care, it would appear that there are unmet hospi
talization needs and lack of health consciousness among uninsured
people. The lack of health consciousness is indicated by the failure
of uninsured persons to demand more hospital care as family income
rises.
Whether insured persons get more hospital care because they have
hospitalization insurance or whether they get hospitalization insur
ance because they want hospital care, it is clear that insured persons
are more health conscious. The significance of health consciousness
in hospital utilization is confirmed by the observation that insured
persons, regardless of income or insurance benefits, spend more for
“ out of pocket” medical expenses than do the uninsured.
A s health insurance benefits become more comprehensive, covering
“ out of hospital” medical care, it is possible that the high rate of
hospital utilization by insured persons will be reduced. I f a patient
must be hospitalized to get the benefit of health insurance, both
patient and doctor may have some incentive to use hospital care to
ease financial burdens on the patient. On the other hand, compre
hensive health insurance, which covers outpatient hospital visits and
doctor visits to the patient’s home or patient’s visits to the doctor’s
office, may reduce hospital utilization, but will also raise questions
concerning overutilization of nonhospital medical services. There
exists already a growing trend toward greater comprehensiveness of
2 Anderson, op. cit., pp. xiv-xv, 55.
3
« Ibid., p. 58.
64
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
benefits in health insurance coverage^ including home calls, visits to
doctors’ offices, and diagnostic X-ray and laboratory fees. However,
the effect of comprehensive health benefits on hospital utilization has
not yet been clearly established.
Utilization by older people
Older people need more hospital care than younger age groups.
Those past 65 use more than twice as many days of hospital care as
those under 65. But the surge in demand for hospital care begins
before 65, affecting those in the final years of their active working
lives. People in the 55-to-64 age bracket use hospitals at a rate three
times as great as those in the 35-to-44 age group.2
5
About 60 percent of the over-65 population do not have any hos
pital insurance. Insurance coverage for the aged increases with in
come, but the low incomes characteristic of this age group indicate
that these people who need hospital insurance coverage the most have
the lowest proportion of protection. According to Prof. Wilbur
Cohen, an authority on welfare and problems of the aging:
These are the people who, as they need hospital care, even though they are
receiving social security, must ultimately apply for public assistance to supple
ment their social security to pay for their hospital care; or not receive hospital
care; or borrow money; or receive it from relatives or friends; or get free
care in some way from the communities.2
6
About half of the uninsured persons in the over-65 age group
reported that they could not afford or were refused health insurance,
and half indicated that they had not considered or did not want such
protection.2 It would appear, therefore, that even apart from lack
7
of financial ability, older people are less aware of their health care
needs and potential benefits from modern medical science. There
may also exist a reluctance to get medical care for what older people
may regard as inevitable illneses of old age.2
8
Since hospital and nursing home care imposes heavy medical ex
penses on older citizens, the lack of tax-supported health insurance
and the failure of private health insurance programs to meet their
needs for protection leaves this portion of the population in a particu
larly weak, vulnerable position in financing their hospitalization
needs.
M e n t a l illn e s s a n d c h r o n ic d ise a se s
Mental illness and chronic diseases are raising the demand for
long-term hospital care. To a large extent, this trend in demand for
hospital care reflects the conquest of communicable, infectious dis
eases, with consequently longer life expectancy and resulting increases
in health problems of the older age groups. Mental and tuberculosis
patients occupy almost half of all available hospital beds, but the
demand for long-term-care facilities appears even more strikingly in
the 94 percent average occupancy reported in 1958 by the long-term,
non-Federal psychiatric hospitals, many of which have waiting lists.
In contrast to this high occupancy, voluntary, short-term, general,
2 Ray E. Brown, “ Forces Affecting the Community’s Hospital Bill.” Reprinted from “ Hospitals,”
*
Journal of the American Hospital Association, Sept. 16, 1958, vol. 32, p. 3.
2 U.S. Senate, “ Hearings Before the Subcommittee on Problems of the Aged and Aging of the Com
«
mittee on Labor and Public Welfare.” 86th Cong., 1st sess., June 1959, p. 26.
2 “ Progress in Health Services,” Bulletin of the Health Information Foundation, January 1959.
7
28“ Progress in Health Services,” April 1959.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
65
and special hospitals reported an average occupancy of only 76 per
cent.2
9
Mental illness is a heavy financial burden on the Nation with mini
mum annual costs estimated at more than $2.4 billion a year.3 The
0
average length of stay for a patient in a mental hospital is about 1
year and 10 months. More than 80 percent of all mental patients
are in State mental hospitals and about 10 percent are in veterans’
hospitals.
Mental and tuberculosis hospitals have traditionally been operated
at taxpayer expense, in part because of the high cost of the necessary
long-term care and in part because of a public interest in protecting
the community from mental and tuberculosis patients. However,
medical progress is reducing the need for tuberculosis facilities and
tranquilizing drugs are changing the pattern of long-term care for
mental patients and are easing the need for facilities for confinement
of mental patients.
Nevertheless, long-term care will remain beyond the financial
capacity of most families. The cost per patient-day in non-Federal
psychiatric hospitals in 1958 was only $4.40 compared to $29.24 in
voluntary short-term general hospitals, but despite this lower cost
per day, a patient’s length of stay would impose staggering burdens
on most families.
General hospital care for patients with long-term diseases is costly
and clearly not an economic use of limited hospital resources. The
increasing burden of chronic and degenerative diseases accentuates the
need for alternative facilities, nursing homes, and long-term-care insti
tutions which can furnish skilled care for patients who need medical
attention but who do not require the intensive care and treatment
and expensive services included in the overhead costs of general short
term hospitals.
C h a p t e r 2. S u p p l y
of
M edic al C ar e
ORGANIZATION OF MEDICAL SERVICES
The visiting family doctor with his little black bag no longer holds
the center of the stage in supplying medical services. The drama of
medical care has shifted to the hospital operating room, where teams
of specialized physicians, assisted by an ever-increasing number of
highly trained assistants, technicians, and laboratory experts, co
operate in complex techniques of surgery, radiology, pathology, and
many other specialized medical skills. In order to utilize the new
techniques and new skills achieved by medical science, the supply of
medical services must be organized. Changes in organization of these
services is taking place not only in hospitals, but also in the private
practice of physicians, particularly through the growth of group
practice.
The complexities of organization reflect the pluralistic nature of
supply in the medical care field. Private physicians’ services for
fees are supplemented by free services to the indigent as charity, by
industrial inplant services, by hospital outpatient clinics, by public
Hospitals: Guide Issue,” J.A.H.A., Aug. 1,1959, p. 384.
30 Rashi Fein, “ Economics of Mental Illness.” Joint Commission on Mental Illness and Health, 1958,
p. xii.
66
TRENDS I ' SUPPLY AND DEMAND OF MEDICAL CARE
N
health services, and by a variety of combinations of private, public,
and semipublic voluntary, nonprofit medical services and health facili
ties. Direct payment for medical services is supplemented by thirdparty payments through health insurance, public assistance, Govern
ment programs such as Medicare and by philanthropy. Similarly,
the supply of hospitals, medical schools, and other health facilities are
determined by a wide range of private, public and semijmblic agencies.
These agencies make decisions and perform functions vitally affecting
the general welfare, at times without recognition of the public inter
est or without enlisting public support.
Group medical practice and specialization affect the general prob
lems of supply and efficiency of physicians. As a means of coordinat
ing specialized physicians’ services, economizing on laboratory facili
ties and administrative expenses, group practice of medicine may well
be a partial solution to the shortage of medical doctors. The trend
to group practice brings another intervening step in the financial
relations between doctors and patients, since partners in group prac
tice are likely to get a fixed income plus “ profit sharing” from the
group’s income, rather than direct fees from patient to doctor.
In the field of hospital organization, requirements for expensive
equipment and additional skilled personnel have diminished the role
of small, proprietary hospitals and have augmented the central role
of the large public and voluntary general hospitals. Hospitals are
developing progressive patient care with patients moving from inten
sive care units to less costly intermediate care units and home care
programs as rapidly as possible. Hospital organization requires
coordination in supplying services to patients, as well as coordination'
in supplying educational opportunities for medical students, interns,
and auxiliary medical personnel and coordination of research activi
ties. This coordination has become a specialized field with graduate
training for hospital administrators.
The new trends in organization of medical services undoubtedly
affect the supply of these services but there is great difficulty in meas
uring the effect. The pressure of rising costs in supplying medical
services encourages any trend to greater efficiency, and further devel
opments in organization of medical services can be expected as a result
of this pressure, in spite of resistance from traditionally conservative
professional organizations.
QUALITY CHANGES IN MEDICAL CARE
The quality of medical care improves as medical research provides
new, more effective techniques for prevention, diagnosis, and treatment
of disease. However, there is no simple, single index of quality
changes in medical care.3
1
The trained, competent physician has a primary role in providing
high quality medical care. Quality reflects the caliber of medical edu
cation and research, specialization in medical practice, and progress in
hospital administration. It also reflects health education of the pub
lic, consumer financing practices, community social and economic pat
terns, and many other factors. The quality of medical service a
physician is able to provide depends also on the drugs, equipment, and
supplementary personnel available to him and to the community he
serves.
3 U.S. Veterans* Administration, “ Report of the Committee on Measurement of the Quality of Medical
i
Care,” Department of Medicine and Surgery, April 1959, p. 27.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
67
Bising life expectancy, reduced mortality rates, and control of many
communicable diseases are indications of rising quality of medical care,
but they are difficult to disentangle from questions about the quantity
or the availability of health and medical service or from improved
diet and improved living conditions. Although judgments on quality
of medical care are generally subjective and elusive, nevertheless, they
are pertinent in considering the more measurable factors of supply,
the supply of trained medical personnel, and the supply of hospital
facilities.
SUPPLY OF MEDICAL PERSONNEL
P h y s ic ia n s (M .D .)
Present trends indicate that population growth is outstripping the
supply of medical doctors, the most important group supplying
medical care to the American people. Since 1949, the ratio of M.D.
physicians has declined from 135 to 132 per 100,000 population, al
though their total number has risen from 201,000 to more than 227,000.
In 1930, the ratio was 125. (See chart 4 and table 8.)
The national totals fail to reflect the number of physicians who are
retired or partially retired, and thus understate the physician-population ratio. Furthermore, the national average covers wide geographic
differences. In New England and the Middle Atlantic States, there
are about 160 physicians per 100,000 population, but there are less than
100 physicians per 100,000 population in the South Central States.
In 1959, about 6,900 medical students were graduated from the
Nation’s medical schools. The output of physicians will have to ex
pand to 9,100 a year from medical schools in the United States, plus
another 750 from foreign medical schools, if the 1957 ratio of 132
physicians per 100,000 population is to be maintained in 1970.3
2
There are currently eighty-one 4-year medical schools and four 2year medical schools. The graduating class of each 4-year school aver
ages about 90 students. Medical schools must increase in number and
capacity to provide adequate personnel for medical research, educa
tion, and maintenance of current physician-population ratios.
More physicians can be produced by existing medical schools. Since
the attrition rate in these schools results in under-utilization of exist
ing clinical facilities during the final 2 years of medical education,
2-year preclinical medical schools can provide students to fill the
existing clinical facilities. Also, experiments are underway to shorten
the time required to produce physicians by strengthening premedical
training and by speeding the process of medical training.
However, the Bayne-Jones report points out that even with such
trends underway, from 14 to 20 new medical schools will have to be
built to maintain a ratio of 132 physicians per 100,000 population and
to meet research and educational needs. Such a program, requiring
$500 million to $1 billion for construction of new medical schools, may
well require substantial Federal aid. The report states:
Unless there is a marked change in social philosophy leading to private gifts
or State appropriations on an unprecedented scale, large Federal appropriations
will be required.8
3
Without the large number of foreign-trained physicians serving
the American people, the physician-population ratio would have de
8 Bayne-Jones report, p. 34.
2
3 Ibid., p. 36.
3
68
TRENDS m SUPPLY AND DEMAND OF MEDICAL CARE
clined much more seriously in the postwar years. More than 10 per
cent of new physicians added to the total supply in this country since
1950 were educated outside the United States. About 400 of the 1,300
foreign medical school graduates added to the supply in this country
were American citizens studying abroad, but the rest were aliens.
Thus the output of medical schools in the United States was supple
mented by the equivalent of 10 to 15 medical school graduating classes
from abroad. Such dependence on foreign-trained medical doctors
clearly indicates inadequate output of physicians by American medi
cal schools.
D e n tis ts
The number of dentists in the United States increased from 81,000
in 1947 to about 100,000 in 1958, thus maintaining the ratio of 57 to 59
dentists per 100,000 population which has existed since 1949. How
ever, the national average fails to exclude an estimated 12,000 dentists
who are retired or active outside the dental profession.3 Also, the
4
national average includes dentists in Federal service, almost 7,000 in
1958. #
As in the case of physicians, there is a wide range in distribution
of dentists. New York had a 1958 ratio of 85 dentists per 100,000
population and South Carolina a ratio of 20 dentists per 100,000
population.3
5 Increased use of auxiliary dental personnel such as
technicians and dental hygienists has resulted in a better supply of
dental services, but needs for dental research and adequate dental
services in the future will require a greatly increased number of
dentists.
The Nation could use 13,500 more dentists now, and unless more dentists per
year are produced, the dentist-population ratio win continue to decline. While
four new dental schools have been established during the past 2 years, more
new schools are needed. Indeed, two new schools, each with a graduating class
of 50, would be required each year between 1957 and 1970 to reestablish the 1955
ratio of 1 dentist for each 1,900 persons.8
6
The American Dental Association has made a similar estimate. Pub
lic Health Service estimates, based on projected current levels of
dental schools output, indicate a decline in the supply of dentists to
52.8 per 100,000 population in 1970 and 50.2 per 100,000 population
in 1975.3 Dental schools in the United States have graduated about
7
3,000 students a year since 1952. Nearly all of the 45 dental schools
reported that they are operating at full capacity and would apply for
Federal matching construction grants to expand teaching facilities,
if such funds were available.3 (See table 8.)
8
N u rses
In contrast to continuing declines in the physician- and dentistpopulation ratios, the supply of active professional nurses has been
rising and is expected to continue rising to provide higher nursepopulation ratios in the future. (See table 8.)
Nurses are the largest single group of health workers and nursing
service is fundamental in supplying adequate hospital care. About 60
3 U.S. House of Representatives. “ Medical School Inquiry,” staff report to the Committee on Inter
4
state and Foreign Commerce, 85th Cong., 1st sess., 1957, p. 435.
w Ibid., p. 436.
3 Bayne-Jones report, p. 37.
9
3 U.S. Department of Health, Education, and Welfare, Health Manpower Source Book, sec. 9, Physi
7
cians, Dentists, Nurses. Public Health Service Publication No. 263,1959, p. 58
3 “ Medical School Inquiry,” p. 71.
8
TRENDS
I
N
STJPPLT
AD
N
DEMAND
O
F
1946
1950
1955
I960
1970
1975
r.Ann
Sources: Health, Education and Welfare Indicators.
Projections from Health M
anpower Source Book, Section 9.
1965
MEDICAL
Chabt 4. Supply of physicians, dentists and nurses, in relation to population, with projections
on the basis of currently predicted output of medical, dental, and nursing schools.
O
C
D
70
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
percent of active professional nurses are employed in hospitals. Hos
pitals also supplement the relatively expensive services of graduate
professional nurses, who have 3 or 4 years of professional training,
with the less expensive and less highly trained services of practical
nurses, nursing aids, and other auxiliary nursing personnel.
Estimates of the number of graduate professional nurses range
above 800,000, but many are retired permanently or temporarily from
active employment. Active professional nurses totaled 460,000 in
1958, a ratio of 268 per 100,000 population. On the basis of cur
rently predicted output of nursing schools, the supply of active pro
fessional nurses will rise to 525,810 for a projected ratio of 269 per
100,000 population in 1965, and to 608,050 for a projected 1970 ratio
of 284 per 100,000.3
9
In 1958, about 1,100 professional nursing schools graduated 30,000
students. Increasingly, nursing education includes a 4-year collegiate
degree program, although the present pattern is still predominantly
a 3-year diploma program. Hospitals bear the major burden of
financing nursing education, a burden estimated at two-thirds to
three-fourths of the total cost of nursing education. Therefore,
tuition fees must be supplemented by general university funds in
collegiate nursing schools and by the institutions which operate nurs
ing schools as part of a general hospital program.
The 2-year 30,000 increase in the number of active professional
graduate nurses from 1956 to 1958 tends to confirm the observation
that almost half of nursing school graduates drop out of professional
life within a few years after graduation. In spite of the preference
for matrimony to employment, large increases in the number of 17year-old girls, who comprise most of the students admitted to nursing
schools, will maintain a rising supply of active professional nurses,
according to Public Health Service projections.
T a b le
8 .— Physicians, dentists, and nurses: Trends and projections of supply
Number of persons
Physicians
1910.......................
1920 - .................
1930 ...................
1940.......................
1947
1948
___
1949
1950 ...................
1951
1952
1953 .................. 1954
1955 ...................
1956
1957
1958 ...................
I960 1 .............. —
19651
.....................
19701
.....................
1975 1
135,000
144,977
153,803
175,163
201,277
203,400
205,500
207.900
210.900
214,200
218,061
221,700
226,625
239,350
259,950
279,000
296,100
Dentists
Rate per 100,000 population
Active
professional
graduate
nurses
37,684
56,152
71,055
69,921
82,990
50,500
103,900
214,300
284,200
89,441
375,000
91,638
93.726
95,883
97,529
99,227
100,534
101,623
100,266
106,735
112,881
118,142
401,600
430,000
Physicians
146.0
137.0
125.0
133.0
135.0
134.0
133.0
132.0
132.0
132.0
132.0
132.0
132.0
460,000
475,190 ............ i32.'9"
132.8
525,810
130.5
608,050
125.9
Dentists
Active
professional
graduate
nurses
41.0
53.0
58.0
54.0
58.0
55
98
174
216
59.0
251
58.0
59.0
59.0
59.0
59.0
59.0
57.0
55.6
54.5
52.8
50.2
249
258
268
264
269
284
i Projections based on currently predicted output of U.S. medical, dental, and nursing schools plus grad
uates from foreign medical schools.
Source: Health, Education, and Welfare Indicators, August 1958; Health Manpower Source Book,
Section 9—Physicians, Dentists, Nurses, Public Health Service Publication No. 263.
a Health Manpower Source Book, sec. 9, p. 73.
*
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
O th e r h e a lth
71
w orkers
As the functions of medical care become increasingly specialized
and expensive, there has been great expansion of the professional and
technical occupations in the health field to supplement and often to
take over functions previously performed by physicians, dentists, and
nurses. To some extent, this trend reflects the substitution of less
expensive medical care for the more expensive services of physicians,
dentists, and nurses. However, the growing complexity of medical
care and equipment requires more workers with specialized profes
sional and technical training.
More than 1.8 million workers were employed in health-related
occupations in 1955. Of this total, about 750,000 were medical doc
tors, dentists, and professional nurses. The remaining auxiliary med
ical workers providing health services included: 4
0
Student nurses------------------------------------------------------------------------------------113, 000
Practical nurses---------------------------------------------------------------------------------- 175,000
Hospital attendants---------------------------------------------------------------------------- 146,000
Nursing aids--------------------------------------------------------------------------------------- 138,000
Pharmacists_________________________________________________________ 111,000
Medical laboratory technicians------------------------------------------------------------ 50,000
Dental technicians----------------------------------------------------------------------------- 21,000
X-ray technicians------------------------------------------------------------------------------- 50,000
Dietitians, nutritionists_______________________________________________ 22,000
Chiropractors------------------------------------------------------------------------------------- 25,000
Osteopathic physicians------------------------------------------------------------------------- 12,000
Veterinarians------------------------------------------------------------------------------------- 17,000
Medical record librarians-------------------------------------------------------------------7,000
Medical social workers----------------------------------------------------------------------5,000
Psychiatric social workers-----------------------------------------------------------------5,000
Physical therapists----------------------------------------------------------------------------7,000
Occupational therapists----------------------------------------------------------------------6,000
Speech, hearing therapists-----------------------------------------------------------------4,000
Rehabilitation counselors_____________________________________________
2,000
Hospital and medical program- directors----------------------------------------------9,000
In addition to the occupations listed above, office assistants to physi
cians and dentists totaled about 130,000. Nonprofessional attendants,
orderlies and ward maids in hospitals and other health institutions
numbered about 200,000.
New paramedical occupations, requiring additional training and
new skills, tend to appear with advances in medical science. The
major training field is necessarily the hospital, which is a focus for
all health training, but increasing emphasis by professional organiza
tions on maintenance of high standards withm their specialty has
resulted in longer training and greater reliance on university graduate
degree programs for training. Lengthening of the training period
tends to discourage people from entering these occupations and also
raises the income requirements of those completing the training.
Thus, at the same time that rising professional standards push up
the cost of paramedical services, relatively low salaries in paramedical
occupations continue to deter recruitment of enough trained workers
to overcome persistent shortages in these occupations.
Apart from doctors and dentists, about 9 out of 10 professional
health workers are women.4 Thus, a characteristic employment prob
1
U.S. Department of Health, Education, and Welfare. Health Manpower Chart Book, Public Health
Service Publication No. 511, 1957, p. 1.
< Walter L. Johnson, “ Personnel Shortages in the Health Field and Working Patterns of Women.”
1
Public Health Reports, January 1957, vol. 72, No. 1, p. 61.
72
TRENDS m SUPPLY AND DEMAND OF MEDICAL CARE
lem in the nursing profession, early retirement from professional ac
tivity, is a significant factor in the supply of other professional health
personnel. The high proportion of women in these professions helps
to explain the persistent personnel turnover imposed by marriage, child
raising, and female attitudes toward employment. The predominant
number of women may also help to account for the relatively low pay
scales in hospitals and health service employment. However, low
wages and salaries are also determined by the institutional arrange
ments and organization in the health industry, where public institu
tions depend on tax funds and nonprofit agencies depend on philan
th rop y and voluntary donation of services. The voluntary nonprofit
hospitals and the general public community hospitals are usually un
able to pay fully competitive salaries, even for the professionally
trained auxiliary medical personnel. Therefore, these occupations are
filled with women whose salary expectations are less optimistic than
the expectations of men with similar professional training.
Although the supply of personal health services could be increased
by greater use of family services for patients in hospitals and by
greater utilization of volunteer workers, there is no clear trend toward
increased charitable or volunteer service to ease the foreseeable demand
for professional and auxiliary health workers. The supply of such
workers is inadequate in almost all fields, and shortages of profes
sional auxiliary health workers appear likely to continue for the fore
seeable future.
SUPPLY OF HOSPITAL FACILITIES
In c r ea s es a n d sh o rta g es
The supply of hospital facilities has grown by more than 10 per
cent in the last decade, but rising population and rising hospital uti
lization continue to put severe pressures on the available supply of
hospital facilities.
The American Hospital Association reported 6,786 hospitals in the
continental United States with a total of 1,572,000 hospital beds in
1958. In 1948, there were 6,160 hospitals with 1,411,000 beds. In
spite of these increases, however, the number of hospital beds per
1.000 population dropped from 9.7 in 1948 to 9.1 in 1958, and hospital
utilization rose from 115 to 137 hospital admissions annually per
1.000 population.4
2
The decline in the average length of patient stay in general and
other special hospitals tends to counteract pressures on the supply
of hospital facilities. These pressures result in earlier discharge of
patients and occasionally in refusal to admit patients. However, the
average length of stay in general short-term hospitals fell from 15.4
days in 1932 to 11.1 days in 1948 and to 9.6 days in 1957. This would
indicate that hospital care is changing so as to enable existing facilities
to serve more people more quickly. Among the factors involved in
declining length of patient stay are the concentration of expensive and
effective diagnosis and treatment in the first few days of a hospital
stay, the trend to early ambulation of maternity and surgical patients,
and the development of “ progressive patient care” which moves pa
tients from intensive care units to intermediate, less intensive and less
expensive hospital care units and early transfer to home care status.
Increasing reliance on tranquilizing drugs for mental patients enables
4 Hospitals: Guide Issue,
2
Aug. 1,1959, p. 384.
TRENDS IN SUPPLY AND DEMAND OP MEDICAL CARE
73
hospitals to give “out patient” analysis and treatment to cases which
formerly had to be institutionalized.
However, apart from these trends which reflect progress in medical
science and reduce pressures on the supply of hospital facilities, con
siderations of supply also involve problems of distribution of facili
ties, as well as the nature and cost of hospital services.
T y p e s o f h o s p ita ls
The predominant type of hospital supplying medical care to the
general public is the non-Federal, short-term general hospital. In
1958, there were 5,290 hospitals in this category with 610,000 beds.
Voluntary, proprietary and State and local public hospitals are in
cluded in this category. Long-term hospitals include mental institu
tions, tuberculosis hospitals, and hospitals intended primarily for care
of aged or chronic disease patients.
However, in terms of all hospital beds, about two-thirds are owned
by Federal, State, or local governments. The rest are under volun
tary or proprietary ownership, although proprietary ownership is
declining. Three-fourths o f the governmentally owned beds are in
mental, tuberculosis, and veterans’ hospitals.4 Thus, Federal and
3
State hospitals tend to be large, long-term care institutions, whereas
general, short-term hospital care is provided by the private, nonprofit
or community hospitals. O f the 5,290 non-Federal short-term general
hospitals in 1958,3,203 were voluntary, 896 were proprietary, and 1,191
were owned by State and local governments. (See chart 5 and table 9.)
« Health Education and Welfare Indicators, August 1968, p. 19.
47761— 58- 7
- ,
74
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
Chart 5. Ownership of hospital beds.
Thousands of Hospitol Beds
Source: Health, Education and Welfare Indicators
Table 9.— Ownership o f hospital beds
[In thousands]
Governmental
Total
Nonprofit
Federal
2930.......................
1940.......................
1946.......................
1947.......................
1948.......................
1949.......................
1950.......................
1951.......................
1952.......................
1953.......................
1954.......................
1955.......................
1956.......................
1957.......................
956
1,226
1,436
1,400
1,411
1,435
1,456
1,522
1,562
1,581
1,578
1,604
1,608
1,559
64
109
236
200
186
187
189
215
213
203
189
183
184
183
Proprietary
Local
State
405
572
812
808
826
842
844
871
897
711
718
739
728
686
i Included with nonprofit hospital beds.
* Included with State governmental beds.
Source: Health, Education, and Welfare Indicators, August 1958.
151
193
(2
)
(2
)
(2
)
(2
)
(2
)
(2
)
(2
)
204
202
203
202
195
336
298
335
342
349
355
368
383
399
409
417
427
443
448
0)
54
53
51
50
51
55
54
54
54
52
52
50
47
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
75
When function rather than ownership is considered, the impact of
mental illness appears startling in relation to the total supply of
hospital beds.
Almost half of existing hospital beds are occupied by mental
patients. In 1957, there were 4.6 beds in general and other special
hospitals per 1,000 population and 4.2 mental hospital beds per 1,000
population. The 4.6 rate of general hospital beds per 1,000 has re
mained about the same since 1947, but the 4.2 rate of mental hospital
beds per 1,000 in 1957 represents a drop from 4.7 beds per 1,000 in 1947.
Non-Federal psychiatric hospitals contained 646,000 beds for mental
patients and Federal psychiatric hospitals another 67,000 beds for
mental patients. On the basis of the Public Health Service standard
of 5 beds for the mentally ill per 1,000 population, there is clearly
a shortage of mental beds, and the shortage would appear even greater
if “nonacceptable” mental beds were excluded from the existing total.
However, new emphasis on community and home treatment, out
patient mental health clinics and centers are easing the pressures on
existing mental hospitals, although shortages and overcrowding of
mental facilities continue. According to estimates reported to the
Public Health Service, only 55 percent of total needs are met by exist
ing acceptable mental beds.4
4
The need for long-term care facilities to supply medical services
for the rising aged population has brought new emphasis on the role of
nursing homes. The best of these nursing homes provide skilled nurs
ing care and related medical services to patients who do not require
the expensive, intensive care provided in general hospitals. The worst
are venal and dangerous, extracting profit from the small pensions of
elderly people crowded together in obsolete firetraps.
A 1954 survey of nursing homes and related facilities by the Public
Health Service indicated a total of about 25,000 nursing homes with
about 450,000 beds.4 Only 180,000 beds, however, were provided with
5
skilled nursing care. On the basis of needs reported to the Public
Health Service, existing acceptable skilled nursing home beds are
meeting only one-fourth of the needs.
Thus, existing needs and future needs of the expanding aged popu
lation indicate an inadequate supply of long-term care facilities, but
a national effort to increase the supply of nursing home facilities
can alleviate the need for general short- and long-term hospital care.
D is tr ib u tio n o f h o s p ita ls
Wide regional differences are included in the national average of
4.6 general hospital beds per 1,000 population. New England and
Northwest States have about 6 beds per 1,000 in their central cities;
Southeast States, 5.7; Central States, 5.2; and Middle East, South
west and Far West central cities have about 4.5 beds per 1,000 popu
lation.4 In the 375 hospital service regions reported in Hill-Burton
6
State plans, general hospital bed availability varies from 1.6 beds
per 1,000 population for 31 regions to 6.2 acceptable beds per 1,000
population for 20 regions. In rural States, where population density
is low, more small hospitals with relatively low occupancy are needed,
a U.S. Department of Health, Education, and Welfare, “ The Nation’s Health Facilities: 10 Years of
the Hill-Burton Hospital and Medical Facilities Program, 1946-56.” Public Health Service Publication
76
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
and adequate hospital care would require 5.1 to 5.5 beds per 1,000
population.4 Acceptable beds in areas outside central cities vary
7
from 0.51 general beds per 1,000 in the Southwest to 1.86 in New
England, with a national average of 1.42 beds per 1,000 population
outside central cities.4
8
H o s p it a l s e r v ic e s a n d c o sts
A vast range of services are provided by hospitals. Primarily,
these are personal services, but they also require an array of expensive
equipment.
Payroll expenses are the major hospital operating expense, taking
about two-thirds of total costs and about two-thirds of the average
cost per patient day. In the psychiatric hospitals, payroll expenses
account for $3.08 of the $4.40 expenses per patient day. In the volun
tary, short-term hospitals, payroll expenses account for $17.71 of the
$29.24 expenses per patient day. The American Hospital Associa
tion survey for 1958 listed 1.5 million full-time hospital workers with
an overall average of 111 hospital workers per 100 patients and a
range from 234 workers per 100 patients in voluntary short-term
general hospitals to 34 workers per 100 patients in non-Federal
psychiatric hospitals. (See table 10.)
More than 90 percent of short-term non-Federal hospitals have
emergency rooms and operating rooms, clinical laboratories, basal
metabolism apparatus, diagnostic X-ray equipment and electrocardio
graphs, the hospital survey indicated. Other expensive equipment
such as electroencephalographs, radioactive isotope therapy, X -ray
therapy, intensive pare units, postoperative recovery rooms, and pre
mature nursery facilities are increasingly prevalent, as are such hospi
tal services as physical and occupational therapy as well as various
skilled services, including medical and psychiatric social service.
The addition of new, expensive equipment does not result in sav
ings on hospital payrolls. Instead, this equipment creates new pay
roll expenses.
As newly developed diagnostic and treatment equipment is added to hospitals,
more—not fewer—people are required to operate it. Hospital equipment is ex
pensive, its cost is impressive, but the enduring element of cost for these new
services is the new trained personnel who must accompany it.4
®
In addition to the rising expense of professional and other highly
trained workers, hospitals are faced with payroll pressures from the
general wage level on costs of lower paid, unskilled workers. A l
though there have been significant increases in hospital wage scales
and reduction of hours worked, there is still a considerable lag be
hind the general wage level of industry. Wages averaging $1,330 a
year in 1946 for a 48-hour week rose to $2,873 in 1957 for a 42-hour
week, an increase of 116 percent in pay and a decrease of about 14
percent in hours.5
0
But continuing requirements for hospitals to match general wage
and salary levels will put a long-run pressure on hospitals costs.
47 xj.s. Department of Health, Education, and Welfare. “ How Many General Hospital Beds Are
Needed?” Public Health Service Publication No. 309,1953, p. 62.
« “ The Nation’s Health Facilities,” p. 49.
4 Russell A. Nelson, Maryland-District of Columbia-Delaware Hospital Association. Statement before
9
Maryland Insurance Commissioner, May 26,1958, (mimeo) p. 16.
c Frank Groner, American Hospital Association. Statement prepared for U.S. House of Representa
o
tives, Ways and Means Committee, hearings on Federal Unemployment Tax Act, Apr. 10,1959, (mimeo)
p. 4.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
77
This pressure, reinforced by the difficulty of introducing machinery
and automation to replace personal services, will increase costs of hos
pital care by an estimated 5 percent annually for many years in the
future.5
1
T a b le
10.— Hospital personnel and payroll costs
Number *
All hospitals, total:
1946...............................................
1948.....................................................
1960.....................................................
1952.....................................................
1954.....................................................
195 6
195 7
195 8
1.057.000
1.118.000
1.245.000
1.374.000
1.401.000
1.465.000
1946.....................................................
1948.....................................................
1950.....................................................
1952.....................................................
1954.....................................................
195 6
195 7
......................................
195 8
361.000
427.000
473.000
485.000
567.000
638.000
680.000
720,000
Voluntary, short term general hospitals:
829,000
Number1
per 100
patients
73
76
84
84
93
101
111
107
156
173
191
184
207
213
218
224
Hospital
patient-day
Hospital
expense per
patient-day
$2.93
3.60
4.79
5.63
6.83
7.98
8.72
9.63
$5.21
6.35
7.98
9.14
10.67
12.16
12.96
14.74
$5.11
7.57
9.40
$10.04
14.06
16.89
19.55
22.78
24.99
26.81
29.24
11.22
13.67
15.23
16.14
17.71
1 Full-time personnel plus full-time equivalents of part-time personnel. Excludes resident physicians,
interns and students.
Source: “ Hospitals: Guide Issue,” JAHA, Aug. 1, 1959, vol. 33, pt. 2, hospital statistics table 1.
H o s p ita l c o n s tru c tio n
The Hill-Burton Federal aid program to stimulate construction
of hospitals and other medical facilities was approved by Congress
in 1946. Since that time, spending for hospital construction has
ranged from about $650 million to $950 million a year. Hill-Burton
funds helped to finance about 25 percent of all non-Federal construc
tion of health facilities, particularly in rural Southern States pre
viously having serious shortages of hospital facilities. (See table 11.)
Hospital construction, slowed by the depression of the 1930’s and
by World War II, has been tremendously expanded by the HillBurton program, which aided construction of 135,000 new hospital
and nursing home beds plus 750 units for outpatient care such as
public health centers, clinics, and diagnostic centers during the first
10 years of the program.5 It is worth noting that this program,
2
relying on State plans, provides Federal aid without regard to the
public or private nature of the ownership of the projects to be aided,
but requires that the operation of facilities be nonprofit.
This is believed to be the first major example of Federal assistance to non
public groups, for public ends. Such action was found essential to a compre
hensive program, because of the dual nature of the existing hospital system,
which has evolved to a large degree under private auspices.6
3
Such an approach is a frank recognition of the semipublic nature of
privately owned medical facilities.
S om e indication o f fu tu re hospital construction needs can be fo u n d
in the estim ates o f S ta te agencies concerning specific projects to be
« Ray E. Brown, “ The Nature of„Hospital Costs.”
^ 52 “ The Nation’s Health Facilities,” p. 19.
« Ibid., p. 15.
Reprinted from Hospitals, J.A.H.A., Apr. 1, 1956,
78
TRENDS m SUPPLY AND DEMAND OF MEDICAL CARE
undertaken if funds become available. These estimates forecast hos
pital construction amounting to $700 million a year and an additional
$300 million a year for long-term care, including chronic care hos
pitals, nursing homes, rehabilitation facilities and outpatient diag
nostic or treatment centers.5 These estimates indicate unmet needs,
4
and public support appears to be strong for further Federal assist
ance in this program. In 1959 Congress, in the same appropriation
bill which increased funds for medical research, also increased funds
for Federal grants for hospital construction to $186 million, $85 mil
lion more than requested by the administration.
T a b l e 11.— Hospital construction , value put in place and value by source o f fu n d s
[Millions of current dollars]
Value of new hospital construction Value of hospital construction by source of funds
put in place1
Non-Federal
Total
Public2
87
679
840
947
867
682
697
673
626
858
1940.....................
1949.....................
1950.....................
1951.....................
1952....................
1953.....................
1954.....................
1955.....................
1956.....................
1957______ _____
54
477
496
528
473
365
360
322
298
333
Private
Federal
33
202
344
419
394
317
337
351
328
525
Without
Federal
aid
5
169
146
132
113
66
35
22
37
45
Federally
aided
82
386
466
569
532
434
529
553
467
560
124
228
246
222
182
133
98
122
253
Federal
share as
percent of
federally
aided a
31.8
39.7
35.4
33.0
27.1
28.2
25.8
25.0
29.7
* Includes construction of health-related institutions, such as nursing homes.
2Includes construction of federally owned hospitals.
3 For projects approved and construction begun under the Hill-Burton hospital and medical facilities con
struction program.
Source: Health, Education, and Welfare Indicators, August 1958.
C h a p t e r 3. T
he
P r ic e I n d e x
of
M
e d ic a l
C are
trends
The medical care component of the Bureau of Labor StatisticsConsumer Price Index, currently weighted at 5.3 percent of the total
CPI (see table 12), gives an indication of price reactions to de
mand and supply relations. During the period 1947-58, only two
items in the medical care “market basket” increased more than the
“ all services” index: hospital room rates and group hospitalization
insurance premiums. All other services in the “ market basket” of
medical services increased less than the average for all services. (See
chart 6 and table 13.)
Medical care services generally rose about 58 percent from 1947
to 1958, but hospital room rates rose more than 125 percent and group
hospitalization premiums rose almost 80 percent from 1951 to 1959.
When hospital rates and hospitalization insurance prepayments are
removed from the medical care price index (see table 13), the rise in
“ Ibid., p. 32.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
79
the medical care price index from 1947 to 1958 is 35 percent, only
slightly above the all items CPI increase of 29 percent during the
same period.
C h a r t 6.— Medical care price index and selected components.
1947-49=100
200
H o s p it a l R a t e s
150
S
M e d ic a l
__________ -
d
0
*
*
100
f
,.• *
P h y s ic ia n s
50
1947
G ro u p
H o s p ita l N a tio n
Dec. 1950=1100
F ees
..
.1____ 1
1950
1
____ J
____
1955
1958
Source: Bureau of Labor Statistics
The index of fees for general physician fees rose by only 44 percent,
dentist fees by 38 percent, specialist fees by 35 percent and surgeon’s
fees by 27 percent.
Expressing the increases as average annual rates without com
pounding, the rise in the price of hospital rooms was 7 percent from
1947 to 1958; for group hospitalization insurance premiums it was
6.5 percent. No other component of the medical care price index
rose as fast. General physician and specialist fees rose by only 3
percent a year during this period.
Thus, hospital expenses and hospitalization prepayments are clearly
a major factor in the rapid increase in the price index of medical care.
Introduction of payments for group hospitalization among the items
priced for the medical care price index in December 1950 was a justi
fied recognition of the rapid growth of voluntary health insurance,
which in turn reflected a rechanneling of demand for increasingly
expensive hospital care. However, as noted below, the rise in costs
of prepayment is based not alone on hospital costs, but also on in
creased hospital utilization.
The trend in group hospitalization premiums since December 1950, when first
included in the CPI, has closely paralleled the trend in the room rate—the major
cost item covered in such plans. However the average annual increase in group
hospitalization premiums during these 6 years (1950-56) was 7.5 percent com
pared with 6.4 percent for hospital room rates, reflecting not only higher hospital
costs but also greater utilization.6
5
« Elizabeth Langford. “ Medical Care in the Consumer Price Index, 1936-56.”
Labor Review, September 1957, p. 2.
Reprint from Monthly
80
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
Drugs and prescriptions, the nonservice component of the price
index of medical care, account for about one-sixth of the total medical
care weight in the CPI “market basket.” The price experience for this
component has been quite different from that of medical services. The
drug price index went up about 26 percent, 2 percent a year, compared
to the all-items rise of 30 percent, or 2.3 percent a year, and the medi
cal services price rise of 58 percent, or 4.1 percent a year, from 1947
to 1958. Therefore, it would appear that increasing prices of drugs
and prescriptions, the commodity portion of the price index of medi
cal care, are relatively less significant in comparison to the increases
in the prices of medical services.
T able 12.— Relative importance o f medical care price index components as percent
o f consumer price index all-items total
1947-49
average
January
1950
December
1952
December
1957
All items__________ ________________ _
100.0
100.0
100.0
Medical care___ —_______________ ___
3.3
5.2
5.1
5.3
Medical care (excluding drugs)___________ __
2.9
4.4
4.2
4.4
General practitioner___ -_______________
1.1
1.3
1.6
1.6
Office visit________________________
Home visit________________________
Obstetrical care____________________
.6
.4
.1
.6
.5
.2
.7
.7
.2
.7
.7
.2
Surgeon:
Appendectomy______________ -_____
Tonsillectomy_____________________
.1
.1
.1
.1
.2
.1
.2
.1
Dentist______________________________
.7
1.2
.8
.8
Filling........................... ......................
Extraction________________________
.5
.2
.9
.3
.6
.2
.6
.2
Optometric examination and eyeglasses----Hospital services______________________
.1
.6
.2
.5
.3
.2
.2
.4
.2
.3
.1
.1
1.0
1.0
Group hospitalization
Accident and health insurance___________
Prescriptions and drugs____________________
Prescriptions, narcotic and nonnarcotic----Penicillin tablets_____________________
Multiple vitamin concentrates__________
Aspirin _____________________________
Milk of magnesia___ __________________
Tincture of iodine ____________________
}
.2
.4
coo©
Men’s pay ward____________-______
Semiprivate room__________________
Private room______________________
100.0
.1
{
:i
1.1
.8
.9
.9
.2
.4
.1
.1
.1
.2.
.1
.3
.1
.2
.2
.1
.3
.1
.2
.2
.1
Source: “ Relative importance of CPI components, 1957,” Monthly Labor Review, July 1958, reprint
No. 2287.
LIMITATIONS
The price index of medical care is useful for describing price trends
and comparing medical care price trends with changes in prices of
other goods and services. This index also can serve as a price deflator
or an approximate indicator of the changing purchasing power of the
medical care dollar. However, the index does not show changes in the
quality and quantity of medical care purchased. Consumer spending
surveys may give an indication of quantity, but the index-making
process precludes measurement of quality changes, even if these qual
ity changes were not extremely elusive.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
81
Higher hospital rates reflected in the price index, for example, may
indicate greater concentration of expensive hospital services during
the first few days of a patient’s hospital stay. Since 1946, the average
length of stay in general hospitals has dropped from 13.5 to 9.5 days,
a decline which might be considered a 30 percent increase in hospital
efficiency or in the quality of hospital services. The index of hospital
room rates must cover a variety of demand and supply factors, there
fore, which have a resultant upward pressure on the index.
Some of the limitations of the medical care price index stem from
the sampling techniques used. The CPI is determined by the prices
of goods purchased by urban wage earners and clerical salaried work
ers and thus fails to indicate rural medical care spending costs. There
is a presumption that urban medical care prices give an accurate pic
ture of total medical care cost trends, but such assumptions need
further confirmation.
A recent Health Information Foundation study lists four limita
tions of the medical care price index.5 First, the quality of priced
6
services are not uniform. However, since the index measures price
trends rather than specific prices, this limitation does not vitiate va
lidity of the index. A second limitation is that relative weights of
items in the medical care index may not reflect changing patterns of
medical care purchases. Thus; the items priced for the CPI may not
be representative of the medical goods and services actually pur
chased by consumers. Third, the index does not measure changes in
the product. Finally, the weight of the medical care component in
the CPI may not reflect the overall importance of medical care within
the CPI, since consumer purchasing patterns change over time. The
Bureau of Labor Statistics makes surveys of consumer spending to
revise and update the sources of the index, but the process is unend
ing since consumer purchasing patterns are continuously changing.
Subject to its limitations, however, the price index of medical care
does indicate price trends for the major components of medical care
and shows the relation of these price trends to other consumer price
trends. These trends may indicate changing demand and supply rela
tions and thus suggest the problem areas for public and private action.
8 Harry J. Greenfield and Odin W. Anderson, “ The Medical Care Price Index.” Health Information
6
Foundation Research Series No. 7,1959, pp. 7-8.
1 3 . — Medical care price index, selected items and groups, 1947-J u n e 1959
[1947-49=100 unless otherwise specified!
1952
1953
1954
1955
1956
1957
1958
95.5
94.5
94.9
96.3
102.8
100.4
100.9
100.7
101.8
105.1
104.1
103.2
102.8
108.5
106.0
104.9
111.0
114.1
111.1
108.6
113.5
119.3
117.2
111.7
114.4
124.2
121.3
114.1
114.8
127.5
125.2
116.2
114.5
129.8
128.0
118.5
116.2
132.6
132.6
121.9
120.2
137.7
138.0
125.8
123.5
142.4
144.6
129.7
124.5
145.4
150.6
96.8
96.9
96.8
97.6
95.2
96.2
97.3
95.1
95.2
95.2
95.1
96.2
87.4
85.8
87.4
89.0
100.7
100.6
100.8
100.1
101.7
101.0
101.0
100.9
100.3
100.3
100.4
100.2
102.1
102.3
101.9
102.1
102.5
102.5
102.4
102.3
103.1
102.9
101.8
103.9
104.4
104.4
104.6
103.5
110.4
111.9
110.7
108.9
104.1
104.0
103.8
104.3
104.2
104.5
104.2
104.8
106.9
106.8
107.3
104.5
114.6
117.2
114.6
112.1
96.1
94.0
99.5
99.7
101.2
101.7
100.3
100.0
102.7
104.2
100.3
100.2
103.9
106.9
99.9
100.5
108.0
108.0
107.5
107.7
110.9
107.3
107.4
107.1
110.9
110.3
112.5
109.2
126.9
131.2
126.6
122.5
85.6
106.9
112.2
99.4
100.7
112.8
113.0
111.9
111.0
122.7
111.5
112.0
111.1
113.3
113.2
113.8
110.5
139.5
145.3
138.3
134.0
97.0
107.9
113.6
99.5
101.4
115.8
116.1
115.8
113.5
125.4
113.9
114.0
114.1
117.0
116.9
118.1
109.4
148.2
155.1
145.9
142.1
104.8
108.9
113.6
99.8
108.2
100.1
119.2
119.9
120.4
115.9
131.2
115.2
114.9
116.4
120.9
120.4
124.0
108.0
156.8
164.4
153.5
150.9
112.5
110.1
115.8
98.6
112.3
100.8
123.3
124.3
123.7
120.7
139.8
116.4
115.2
119.2
122.0
121.2
126.1
109.5
164.4
173.9
160.0
157.7
115.5
111.2
117.3
100.0
114.1
101.1
127.0
128.4
127.1
125.3
144.5
118.2
117.6
120.0
124.4
123.6
128.4
111.2
173.3
183.8
170.0
164.4
122.7
113.7
121.0
100.7
123.0
101.4
132.5
134.5
131.4
133.1
149.8
120.9
119.6
124.1
127.4
126.6
131.6
115.5
187.3
202.3
183.0
174.2
129.9
116.7
125.0
102.3
132.8
101.6
137.0
139.3
136.3
138.2
153.8
122.7
120.1
128.4
131.4
130.8
135.0
116.7
198.0
215.6
193.5
182.4
143.3
120.7
130.7
108.0
136.3
101.2
142.3
145.0
141.2
144.7
158.5
126.2
122.8
133.5
134.6
134.2
137.0
118.2
209.6
229.9
203.0
193.6
156.6
122.7
134.2
109.1
141.9
100.4
June
1959
MEDICAL
1951
O
P
1950
DEMAND
CARE
1949
AD
N
Source: Bureau of Labor Statistics.
1948
SUPPLY
All items_ __ _____
_
____
_________
Services
________ ________ _______________
Medical care. ______________________________
Medical care less hospital rates and group
hospitalization.
Physicians’ fees.._____________________
General practitioners’ fees__________
Office visit. __________________
House visit____________________
Obstetrical care________________
Surgeons’ fees_____________________
Appendectomy________________
Tonsillectomy_ _ ____-__ ____
_
Dentists’ fees_________________________
Fillings_________________________
Extractions
__
___________
Optometric examination and eyeglasses
Hospital rates___________________ _____
Men’s pay ward__ ________________
Pemiprivate room______
__ __ r
Private room__________ ___________
Group hospitalization ____ ___ __________ December 1952
Prescriptions and drugs____________ _______
Prescriptions_________________________
Aspirin tablets ______________________
Milk of magnesia_____________________
December 1952
Multiple vitamin concentrate
1947
I
N
Other index
base
TBENDS
T a b le
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
C h a p t e r 4. A L oo k A
83
head
EX PAN D IN G DEMAND FOR MEDICAL CARE
1. The increase of the population of the United States to an esti
mated 196 million in 1965 and 214 millinn in 1970 will raise demand
for a greater quantity of medical care. Rising national income and
rising per capita income, bringing rising standards of living, will also
raise the demand for a greater quantity of medical care.
2. Increasing awareness of health and medical care needs will
stimulate demand for a greater quantity of medical care and a higher
quality of medical care. Rising expectations for improved medical
care generate support for medical research and public action to
increase the availability of medical care.
3. Rising demand for medical care generates private and public
action to finance medical care. Private action appears in the growth
of voluntary health insurance, which now pays about 25 percent of
the private medical care bill and will pay an increasing proportion in
the future. Public action appears in tax-supported programs to
provide medical care for special segments of the population and in
tax-supported medical research programs.
INADEQUACIES OF SUPPLY
1. The supply of medical doctors in relation to the population has
been falling. Since 1949, the ratio of M.D. physicians declined from
135 per 100,000 to an estimated 132.7 per 100,000 population in 1959.
The Public Health Service has estimated 5 that the ratio will fall to
7
130.5 per 100,000 population in 1970 and to 125.9 medical doctors per
100,000 population in 1975, if the number of graduates of U.S. medical
schools does not increase above the level currently predicted.
2. The supply of dentists in relation to population has been stable,
but the Public Health Service estimates the ratio will drop from 57
dentists per 100,000 population currently to 54.5 dentists per 100,000
population in 1965, to 52.8 m 1970, and to 50.2 in 1975, on the basis of
currently predicted output of dental school graduates.5
8
3. The supply of health facilities and the supply of hospital beds
judged acceptable by Public Health Service standards are inadequate
in terms of rising population and increased demand. To meet the
needs of the prospective population, 265,000 hospital beds will be
required within the next 10 years 6 in addition to the existing 1.5 mil
9
lion hospital beds. The supply of nonhospital health facilities offering
alternative services for health and medical care, such as public health
centers, nursing homes, mental health clinics, and physical therapy and
diagnostic centers, can alleviate the shortage of hospital beds; at the
present time, the backlog of demand for these alternative health
facilities far exceeds their supply.
CONTINUING PRICE INFLATION
1.
Expanding demand for medical care and continuing inadequacies
in supply of personnel and facilities providing medical care have con
tributed to rising prices of medical care services. This price inflation
5 * Health Manpower Source Book,” sec. 9, p. 31.
7
6 Ibid., p. 58.
8
“ The Nation’s Health Facilities/’ p . 31.
84
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
will continue even if supply expands simply to maintain current levels
of availability of medical services.
2.
Price inflation in the field of medical care is made more acute by
longer training and increased specialization for medical personnel and
by increasing utilization of expensive hospital equipment and proce
dures requiring additional personnel. Medical care is little suscep
tible to economies of mechanization and automation. Therefore,
the rising quantity and quality of medical care will tend to create
additional inflationary pressures on the price of medical care.
PROVIDING AN ADEQUATE SUPPLY OF MEDICAL CARE
Decisions of public policy on problems of medical care must recog
nize the primarily public service nature of medical services. These
decisions must encourage and insure an adequate supply of resources
available for medical care. The following observations stem from
the paramount public interest in maintaining an adequate, rising level
of medical care for the Nation in the future.
1. To maintain current physician-population ratios, the output of
U.S. medical schools must be increased.
This increase will require expansion of medical school facilities,
construction of new medical schools, and greater educational oppor
tunities.
A recent report to the Surgeon General6 includes the following
0
recommendations to increase the output of medical schools:
(a) Private support for low-cost loans and scholarships and
Federal grants-in-aid for needy medical students.
(b) Establishment of new medical schools and expansion of
existing medical schools.
(ic) Reconsideration of unreasonably restrictive medical school
admissions policies.
(d) Continuing appraisal of the length and content of medical
training, including evaluation of experiments to shorten the
training period.
(e) Increased public and private support for basic operations
of medical schools.
(J) Federal matching grants for construction and expansion
of medical schools and teaching hospitals.
(g) Public and private efforts to recruit candidates for careers
in medicine and related health services.
2. The supply of health facilities must be increased.
Shortages of health facilities and uneven geographic distribution of
hospitals hinder optimum organization and maximum efficiency in the
supply of medical services. The existing Hill-Burton program of
Federal aid for construction of these facilities has been very successful
in stimulating States and communities to increase the supply of
hospital beds, public health centers, nursing homes, and other health
facilities. In view of the rising needs for health care for older people,
there is particular need for greater availability of nursing homes with
skilled nursing care. Existing skilled nursing home beds are meeting
less than half of the need for such care. The Hill-Burton program
eo Department of Health, Education, and Welfare, “ Physicians for a Growing America,” Report of the
Surgeon General’s Consultant Group on Medical Education (Bane Committee), Public Health Service
Publication No. 709, October 1959.
TRENDS IN SUPPLY AND DEMAND OF MEDICAL CARE
85
should be expanded, with greater support for construction of nursing
homes and other health facilities to supplement hospital care.
3. Organization of supply in the field of medical care must be
improved.
This can be achieved by public and private assistance and encour
agement for innovations in hospital administration, in the use of
alternative health facilities such as nursing homes, and in more effi
cient use of available facilities and personnel through such programs
as “ progressive patient care,” group medical practice, and increased
utilization of voluntary workers in health care.
4. Public action is needed to protect particularly vulnerable groups
against the burden of heavy medical expenses.
A Federal program of social health insurance for elderly citizens is
justified by their larger health needs and smaller effective demand
than other segments of the population. These elderly citizens are
poor risks from the point of view of private insurers, but their health
needs are important from a social and humanitarian perspective.
Other possibilities are direct assistance or federally aided private
insurance.
Crippled and handicapped children create tremendous financial
burdens for low- and middle-income families. Private voluntary and
philanthropic assistance to ease the burden of such disabilities must
be supplemented with greater public support.
Low-income families have great difficulty in financing their medical
care needs adequately. Continued private and public efforts to meet
the needs of this group are necessary. The inability of low-income
families to finance their medical care needs adequately imposes a
heavy financial burden on private philanthropic sources of funds.
To enable these families to get the medical care they need, public
efforts by State and local governments must be supplemented with
greater Federal support.
To summarize—Federal support and leadership is essential for
cooperative action by States, communities, and private groups to
insure adequacy in the supply of medical care.
o
@FedFRASER