Reimbursing the Hospital The Differences the Third Party Makes

The effects of health insurance are to help equalize the financial burdens of illness, facilitate payment to the providers of service, and increase the use of services. Prepayment per se need have no consequences for reimbursement. Health insurance in this country was superimposed on certain distinctive institutional arrangements for delivering hospital service. Owing to the complexity and diversity of the product, hospital service cannot be bought as a standard product at a uniform price. With admission to a hospital arranged by physicians with staff appointments in that hospital, relative price cannot play a significant part in influencing the patient's choice of a hospital. Medicare was added to the existing structure of financing. Its most prominent sequel is a large rise in hospital unit cost. The huge increase in the number of patient days reimbursed at cost-75 percent or more-may be an important factor in this development. Thought must be given to devising effective ways to combine fair reimbursement for a given quality of care, with rewards for efficient operation and penalities for inefficiency. What difference do third parties make? The answer depends on the point of view. From one standpoint, a hospital administrator might say that, in the absence of third parties, there would be less paper work for hospitals, less accounting, greater freedom in setting charges and collecting them, more surplus revenue for development and expansion, etc. Herbert E. Klarman, Ph.D., is Professor of Public Administration and of Political Economy at the Johns Hopkins University. He was formerly Associate Director of the Hospital Council of Greater New York and chairman of the planning committee for the Second Conference on the Economics of Health. He is presently a member of the National Advisory Committee on Health and Vital Statistics. Dr. Klarman is author of Hospital Care in New York City, 1963, and of The Economics of Health, 1965. This paper was submitted in August, 1968. It was prepared for the National Forum on Hospital and Health Affairs, Graduate Program in Hospital Administration, Duke University, Durham, N.C., May 17, 1968. Financial support from the U.S. Public Health Service is acknowledged under CH-00282, Research Program in the Economics of Health. Another point of view, that of the Blue Cross plan manager, perhaps, would hold that third party financing has enabled hospitals to reach their present position as multiple-million-dollar enterprises, that out-of-pocket financing of hospital care is not a realistic alternative when patient day cost is $60 and more, that even paper work and accounting can be a blessing if properly exploited, and that complete autonomy for the individual hospital is an outmoded concept today. How is one to choose between these two answers and perhaps other, intermediate ones that could be conceived? The best way to proceed is through an analysis of the effects of third party payments. First, two points, which may be obvious to the reader, seem to acquiire particular importance. One, third party financing was superimposed on certain distinctive institutional arrangements for delivering hospital services. Had the arrangements been differ-