i I 71-18,194 DOHERTY, Neville John Ganbier, 1935THE ECONOMIC STRUCTURE AND PERFORMANCE OF THE MEDICAL INDUSTRY IN MICHIGAN'S GRAND TRAVERSE REGION. Michigan State University, Ph.D., 1970 Economics, agricultural U niversity M icrofilm s, A XERQKCompany, A n n A rbor, M ichigan © 1971 NEVILLE JOHN GAMBIER DOHERTY ALL RIGHTS RESERVED THE ECONOMIC STRUCTURE AND PERFORMANCE OF THE MEDICAL INDUSTRY IN MICHIGAN*S GRAND TRAVERSE REGION .( < > l Navi11a J. G. Doharty A THESIS Submittad to Michigan Stata University la partial fulflllaaat of tha requirements for tha degree of DOCTOR OF PHILOSOPHY Dap artment of Agricultural Economics 1970 ABSTRACT THE ECONOMIC STRUCTURE AND PERFORMANCE OF THE MEDICAL INDUSTRY IN MICHIGAN'S GRAND TRAVERSE REGION by Neville J. G. Doherty The objective of thie study is to contribute to the search for so­ lutions to inadequate medical care in rural areas. Inadequacy is seen as a lover output of services than needed to meet a population's health care needs; changes in the need for medical care aside, solutions involve in­ creasing the supply of services( or increasing the demand, or both. The study examines the financial and institutional structure of a rural economy's medical service sector. asked: Four specific questions are What is the cost of providing medical care in a region? How is this expenditure distributed from purchases of medical goods and services to producers and ultimately to input suppliers? Are there excessive earnings of doctors and drug and medical equipment manufacturers as veil as inefficiencies in hospital services? What additional expenditures would be needed to Increase the supply of services to fulfill the region's needs? The Grand Traverse Region, the area studied, comprises eight rural counties in northwestern lower Michigan. Supported by fruit and vegetable agriculture and the tourist trade, the region displays outward signs of rural prosperity. Actually this prosperity is only relative; for while the region compares favorably with other rural areas, per capita incomes are quite low and unemployment quite high. In and around Traverse City a medical service industry of unusual slxa and scope for a rural area has developed. A major feature is a state ■intal hospital that sarvaa a larga araa and providas employment for many of tha region's 100,000 paople. In 1967 medical expenditures In the region wars $33.5 million; con­ sumer a spent 60.1 percent and government, 38.4 percent; philanthropy and other sources contributed the remaining 1.5 percent. 50.1 percent came from sources outside the region. Of the expenditures, Major recipients vers hospitals, 46.3 percent, and professional services, 28.1 percent. Drug atores accounted for 12.9 percent; nursing homes, eyeglass and appliance stores, the public health service, net Insurance costs, and miscellaneous, items accounted for the remaining 12.7 percent. When health care expenditures were respent by producers, labor recelvs d 62.7 percent and other inputs, 37.3 percent. The medical industry employed 3,214 people, 8.4 percent of the region* labor force; labor expenditures were $21 million, or 13.1 percent of total labor expenditures. regional trade. The Industry also affected the economy through inter­ Payments from nonregional sources for medical services producsd in the region exceeded the value of nonreglonally produced Inputs by $9.5 million— 28.0 percent of the region's total medical Income. These findings cast the medical industry In a role previously paid scant attention— as a distinct regional economic force, and in this region, a leading economic force. Also, the findings rsfute the notion that large medical complexes cannot be economically viable in rural areas. The average net Income of the raglon'a medical doctors was $35,363— 36 percent more then that of its dentists. About 17 percent of the dif­ ference was attributed to extra costs Incurred by doctors, and the rest, to controls of entry Into medicine. Excess Incomes resulting from these controls were estimated at between $134,000 and $620,000. Drug manufacturer* earned an estimated excess profit rate of 3.88 percent of sales. This rate was calculated by comparing average returns on equity earned by drug manufacturers end all manufacturers and converting to a percentage return on manufacturers* sales revenue. Applied to earnings from drug sales in the Grand Traverse Region, the formula shoved excess earnings of approximately $92,000. A sample of firms producing medical equipment was selected; profit rates were analysed using techniques similar to those used for drug manufacturers. No significant evidence of excess profits was found. The region** general hospitals operated as a reasonably efficient group. There was approximately the correct number of beds to handle current and expected needs. Average costa were constant, indicating no economies of scala; lower average coats than in comparable hospitals elsewhere indicated relatively efficient, productive techniques. Greater rates of use of the larger hospitals confirmed that the number of services and the quality of care usually incraaae with hospital size; but advan­ tages were also found in small hospitals, for they can treat simple matters and offer greater convenience for many rural people. Overall, the region's medical complex performs well and offers amre services than often found in a rural area. Nevertheless, the concentration of professionals in Traverse City could mean that some isolated population groups were rather reawved from convenient professional help. It was estimated that an additional 5 general practitioners, 3 dentists, and 45 nurses should be located in the six isolated rural counties to provide an adequate number of professional services. of providing these services was estimated at $666,000. The cost Potential financial sources consldersd include private consumers, philanthropy, and govern­ ment. Consumers were an unlikely source because additional services were M t d c d M l n l y for the poor; the role of philanthropy In finencing health care haa been declining; and taxes night have to be ralaed for governwent financing. The latter approach, particularly if It ware adopted at the federal level, would benefit the region economically because taxes col­ lected would probably be less than expenditures needed for the additional services. Another potential source, government taxation on the excess earnings of doctors and drug Manufacturers, would have yielded just about the revenue needed. The important variables in this study are a region's medical income and its nadlcal needs; in rural areas these are generally low and high, respectively. The Grand Traverse Region is exceptional. In terms of both real and economic contributions, its medical sector could provide policy makers with an additional dimension in their struggle for a reason­ able share of health planning funds for rural areas. Acknowledgmenta To Glenn Johnson, Clerk Edwards, Allen Schmid, Rite Zemach, A1 House, Bob Coltrene, end many others froe the ecedeelc coenimltles at Michigan State University and the U.S. Department of Agriculture; to William Hanson, Kathleen Putnam and others from the Grand Traverse medical community; to all anonymous contacts: American Indians, Con­ gressmen, Migrant Workers, Court House Clerks, People in taverns. People in hospitals. People, whose contributions, big or little, always helped; to "Sen" Sarkar, Barbara Cooper and Angela Wray, who can never know the value of their help; to Otella Ann Quarles, my typist; to my wife, Barbers, whose endearment, courage and confidence, though sorely tested, prevailed — my sincere thanks. TABLE OF CONTENTS LIST OF TABLES................................................... LIST OF F I G U R E S ................................................. vii xll Chaptar I INTRODUCTION ............................................... 1 Objectives ............................................... Hypotheses ............................................... Method of Analysis ....................................... Geographic Area of S t u d y ................................. Selection of Tine P e r i o d ................................. Plan of W o r k ............................................. 3 3 4 7 9 10 RURAL HEALTH AND THE MEDICAL INDUSTRY....................... 12 The Demand for Medical Care............................... Utilisation of Health Services in Rural Areas............ The Location of Medical Services ......................... The Economic Structure of the Medical Industry .......... Productivity ........................................... Market Imperfections ................................... 12 15 20 24 25 26 THE GRAND TRAVERSE REGION................................... 33 Physical Setting ......................................... Incostt................................................... Demography............................................... Employment............................................... Summary................................................... 33 36 38 41 44 THE GRAND TRAVERSE REGION'S MEDICAL SECTOR . .............. 46 All Medical Facilities................................... General Hospitals......................................... Professional Services..................................... Medical Doctors......................................... D e n t i s t s ............................................... Osteopathic Physicians ................................. Professional Nurses..................................... Summary................................................... 47 51 33 36 38 38 60 61 II III IV 111 V VI INCOME AND EXPENDITURE ACCOUNTS— HOSPITALS . 63 Fra— 1rork for Analysis..................................... H o s p i t a l s ................................................. Hospital Expenditures ................................... Inco— Distribution by Source of Funds................... Regional Distribution of Hospitals' Inco— ............ Regional Distribution of Patients ..................... Consu— r Expenditures ................................. General Hospitals ................................... Psychiatric Hospital................................. Philanthropic Expenditures............................. Federal Govern— nt Expenditures ....................... General Hospitals . . . . ........................... Psychiatric Hospital................................. State and Local Govern— nt Expenditures ............... Psychiatric Hospital................................. General H o s p i t a l s ................................... Interregional Trade in Hospital Services................. 63 66 66 69 73 75 75 78 78 80 80 80 84 84 84 89 90 INCOME AND EXPENDITURE ACCOUNTS— NONHOSPITAL COMPONENTS . . . Physicians.................................................. Dentists.................................................... Osteopaths.................................................. "Other" Professionals ..................................... Retail Drug Stores......................................... Eyegl— s and Appliance S t o r e s ............................. Nursing Ho— ............................................. Expenses for Prepay— nt and Administration................. Prepay— n t ............................................... Administration........................................... Total Expenditures....................................... Govern— nt Public Health Activities....................... "Other" Health Services . .............................. Voluntary Health A g e n c i e s .......... Central Michigan Children's Clinic....................... Sources of Funds and Interregional Trade in the Honhospltal Medical Components ........................... Sources of Funds......................................... Distribution Procedure................................. Exceptions........................................... Medical Insurance ............................... . Public Health ..................................... Other Health Servi c e s ............................. Nursing Ho— ..................................... Structural Exceptions ............................. Interregional Trade . . . . . . . . . . . . ............ Medical Services ..................................... Retail Drugs ......................................... Medical Insurance..................................... Public Health......................................... iv 94 95 96 98 99 102 105 106 110 110 Ill Ill 112 114 114 115 116 116 116 116 118 118 118 122 122 122 125 125 127 127 Pegs Consolidation of Results for tha Producing and Consuming Sectors....................................... Importance of External Financing. . . . .............. VII VIII IX X 129 135 INCOME AND EXPENDITURE ACCOUNTS— THE INPUT SUPPLIES SECTOR. 138 Distribution of Medical Incomes by Input and Regional Classlf l c a t i o n .................... General Hospitals ........................ Labor Inputs.................... Other Inputs........................................... S u m m a r y ............................................... Psychiatric Hospital................................ Labor Input a ........................................... Other Inputs........................................... Nursing Homes ........................................... Labor Inputa........................................... Other Inputs........................................... Professional Servicea ................................... Labor Inputa........................................... Other Inputa.................. S u m m a r y ............................................... Drug S t o r e s ............................................. Labor Inputs........................................... Other Inputs........................................... Summery ............................................. Eyeglass and Appliance Stores ........................... Classification of Expenditures......................... Public Health Services................................... Classification of Expenditures......................... Other Health Services . . . . . . . . .................. Classification of Expenditures......................... Summary of Results for the Input Supplies Sector........ 138 140 140 141 142 142 145 146 146 148 148 149 149 151 152 152 152 155 155 157 157 157 160 160 162 162 INCOME AND EXPENDITURE ACCOUNTS— SUMMARY AND IMPLICATIONS FOR DEVELOPMENT AND TRADE.................... 168 Development Aspects of the Medical Industry............ Interregional Trade in Medical Services ................ 171 175 ANALYSIS OF PHYSICIANS' P R O F I T S .......................... 179 The Physician Shortage................................... Physlclana* Market Power.................. Considerations in the Application of the FriedmanKusnets Analysis ..................... . . . . . . . . . Measurement of Excess I n c o m e s ........................... Conclusion. ...................... 186 189 191 ANALYSIS OF THE DRUG INDUSTRY'S PROFIT..................... 192 Characteristics of the Industry ......................... Measureswnt of Excess Profits ........................... 192 197 as 179 182 Page XI XII Method of Analysis....................................... Calculation of Excess Profit Rates..................... Analysis.................................................. Institutional Drug Purchases........................... Manufacturers' Sales Revenue........................... Calculation of Excess P r o f i t s ............ Significance of Estimated Excess Profits. . ............ 202 203 204 204 205 206 206 PROFITS IN THE HOSPITAL SUPPLY INDUSTRY ................... 207 Characteristics of the Industry ......................... Method of Analysis....................................... Analysis.................................................. 207 209 211 EFFICIENCY IN THE DISTRIBUTION AND UTILIZATION OF HOSPITAL SERVICES......................................... Introduction................ The Distribution of Beds.......................... 215 Optimisation with Separate Hospitals............ 217 Optimisation with a Regional CooperativeSystem. . . . Optladxatlon with a Subregional CooperativeSystem. . . Economies of Scale. ................................. Short-run Costs ......................................... The Quantity and Quality of Hospital Services .......... Sussfcary.................................................. XIII REVIEW AND IMPLICATIONS................................... Review...................... Unmet N e e d s ............................................. Physicians............................................. Dentists............................................... Nurses.................................................. Meeting the Needs ................................... Flnenclal Requirements................................... Conclusion................................................ 214 214 218 222 224 228 231 233 234 234 240 244 247 249 252 252 257 LIST OF TABLES T«blt 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Percentage distribution of regular health care and insurance coverage, by family income, 1963-65........................ 17 Percentage of persons with activity limitation attributable to chronic conditions, by femlly lncosw, July 1962-June 1963 17 Mean expenditure for all personal health services per family, by residence, 1963 ................................ 19 Percentage of persons with chrooic-activity limitations, by place of residence, 1963-1965 .......................... 19 Medical doctors and hospital facilities per 100,000 popu­ lation, United States and county groups, 1966.............. 21 Medical doctors and hospital facilities per $100 million personal Income after tax, United States and county groups, 1966 ............................................... 21 Distribution of beds per hospital and specialists and hos­ pital-based physicians per 100 beds. United States and county groups, 1966......................................... 22 Effective buying Income and percentage distribution by households, 1967 ........................................... 37 Population trends, Michigan, the U.S., and the Grand Traverse Region, 1950-67............ 39 Rates of migration for the Grand Traverse Region, 1950-60, 1960-66..................................................... 40 Average annual rates of unemployment in the Grand Traverse Region, 1950-1967........................................... 42 Seasonal patterns of eaq>loyment and unemp loyment in the Grand Traverse Region, 1967.............................. 43 National health expenditures, by type of expenditure and source of funds, 1967........................ 48 The Grand Traverse Region's hospitals and nursing homes, 1967 ....................................................... 52 Table 15 Page Population per general hospital bed for the United States, county groups, and the Grand Traverse Region, 1966........ 54 Number of medical professionals In the Grand Traverse Region, 1967............................................... 55 Number of persons per nonfederal nsdlcal doctor, by region and type of practice, 1967............................ .. . 57 18 Persons per active dentist. Grand Traverse Region, 1967 . . 59 19 Service and economic data, Grand Traverse Region hospitals, 1967....................................................... 67 Method of estlautlng characteristics of the osteopathic and Kalkaska hospitals.................................... 68 Hospital Income by hospital control, service, and source of funds, Grand TraverseRegion, 1967......................... 71 Income and source of funds. Grand Traverse Region hospitals, 1967....................................................... 74 Patient discharges by residential origin, general hospitals, Grand Traverse Region, 1967 ........................ 76 Estimated patient origin by residence, psychiatric hospital, Grand Traverse City, 1967 ................................ 77 Reglonallxation of consumer expenditures on hospital services, Grand Traverse Region, 1967 .................... 79 Federal hospital care expenditures by program. United States, 1967............................................... 82 Coat analysis for psychiatric patients in the Traverse City State Mantel Hospital, 1967 .............................. 87 Distribution of lncosm by source of funds. Traverse City State Mental Hospital, 1967 .............................. 88 Interregional nonfederal public financing of general hospital services, Grand Traversa Region, 1967............ 91 Interregional financing of hospital services. Grand Traverse Region, 1967 .................................... 92 Physicians' net lncosm by field of practice. United States, 1967....................................................... 96 32 Grand Traverse Region's physicians' incomes, 1967 ........ 97 33 Grand Traverse Region's dentists* incomes, 1967 .......... 98 16 17 20 21 22 23 24 25 26 27 28 29 30 31 Table 34 Paae l n c o w of the Grand Travaraa Raglon'a "other" professional nsdlcal services, 1967..................................... 101 35 Retail drug store sales In the Grand Traverse Region, 1967. 103 36 Average nursing hone cost per patient day, by region, control, and slse of nursing hone, 1967 ................... 107 37 Estimated Incone of the Grand Traverse Region's nursing hones, 108 1967........................................................ 38 Estimated income of the Grand Traverse Region's nonhospital medical services, 1967..................................... 117 Percentage distribution of national nonhospital medical expenditures, by source of funds, 1967. . . . . . ........ 119 Percentage distribution of the Grand Traverse Region's nonhospital medical expenditures, by source of funds, 1967 . . 120 Distribution of the Grand Traverse Region's nonhospital health expenditures, by source of funds, 1967 ............ 121 39 40 41 42 Distribution of nursing homes' Incomes by source of funds, the Grand Traverse Region, 1967 ............................... 123 43 Regionalixatlon of expenditures for the medical services ................ group, 1967 126 44 Regionalixatlon of drug expenditures, 1967................ 128 45 Regionalixatlon of public health service expenditures, 1967........................................................ 130 Percentage distribution of national and Grand Traverse Region expenditures, by service, 1967 ..................... 131 The Grand Traverse Region's xmdical Industry lncosm, by ser­ vice, region, and source of funds, 1967 ................... 133 Percentage distribution of the Grand Traverse Region's medical Industry income, by service, region, and source of funds, 1967 ............ 134 Exports and imports of medical aervlces, by service and source of funds. Grand Traverse Region, 1967.............. 136 Distribution of the Grand Traverse Region's general hospital expenditures by Input and region, 1967..................... 143 Distribution of the Traverse City State Hospital's expen­ diture by Input end region, 1967......................... 144 46 47 48 49 50 51 Tabl« 52 53 54 55 56 57 58 Page Distribution of the Grand Traverse Region's nursing hone expenditures by Input and region, 1967................... 147 Distribution of expenditures for the Grand Traverse Region's professional nedical services, 1967 ....................... 150 Distribution of the Grand Traverse Region's professional service expenditures, by input snd region, 1967 .......... 153 Distribution of the Grand Traverse Region's drug store incone, by input and region, 1967 ......................... 154 Distribution of the Grand Traverse Region's drug store expenditures, by input and region, 1967 ................... 156 Distribution of the Grand Traverse Region's eyeglass and ap­ pliance store lncorsss, by type of expenditure, 1967 . * . . 158 Distribution of the Grand Traverse Region's eyeglass and ap­ pliance store expenditures, by input and region, 1967 . . . 159 59 Distribution of the Grand Traverse Region's public health services expenditures, by input and region, 1967....... 161 60 Distribution of the Grand Traverse Region's "other health services" expenditures, by input and region, 1967 ........ 163 Distribution of the Grand Traverse Region's nedical ex­ penditures, by service, region, and type of input, 1967 . . 164 61 62 63 64 65 Percentage distribution of the Grand Traverse Region's sndlcal expenditures, by service, region, and type of input, 1967............................................. 165 Intersectoral distribution of the Grand Traverse Region's nsdlcal Industry Incone, 1967 ............................. 169 Percentage distribution of the Grand Traversa Region's nedical industry incosM, 1967 ............................. 170 Distribution of the Grand Traverse Region's swdical per­ sonnel, by place of work and occupation characteristics, 1967 .............. 174 66 Balance of nedical paynents of the Grand Traverse Region, 177 1967.................................................... 67 Indexes of incosut of physicians and selected occupational classes, 1951-65. . ....................................... 183 Rates of return of drug nanufacturers and all sMnufacturlng industries, 1956-67 ........ . . . . . . . . 199 68 Table PiM 69 Profits in tht hospital supply Industry, 1967............... 212 70 Number of bsds in the Grand Traverse Region's hospitals, 1967, and number needed if each hospital were completely independent................................................... 220 71 Number of hospital beds in the Grand Traverse Region's hospital service areas, 1967, and projections for 1967-73..................................................... 223 72 Average costs, personnel, and length of stay in short-term genersl hospitals in the Grand Traverse Region, Michigan, and the U.S., 1967 ........................................ 230 73 Distribution of general practitioners (M.D.'s) andpopulation In the Grand Traverse Region, 1967 ........................ 245 74 Actual and needed general practltoners (M.D.'s and D.O.'s) In the Isolated counties of the Grand TraverseRegion, 1967. 248 75 Actual and needed dentists in the Grand Traverse Region, 1967 ....................................................... 250 76 Excess expenditures in the Grand Traverse Region's medical industry, 1967 ............................................ 256 LIST OF FIGURES Figure 1 Page Percent of pereone with one or aore activity Halting chronic conditions, by faally incone, July 1962 - June 1967 18 2 Michigan and the Grand Traverse Region............ . . . . . 34 3 The Grand Traverse Region ................................. 35 4 Traverse City Hospital Region, hospital service areas, and location of facilities in the Grand Traverse Region . . . . 50 5 Structure of the Market for Medical Services............... 64 6 The Relationship Between Total Operating Expense and Patient Days in the Grand Traverse Region's General Hospitals . . . 227 Chapter I INTRODUCTION So m twenty years ago two medical doctors wrote: Against a background of unset nedical needs and burdensosm nedical costs, people are thinking things through and seeking solutions. The majority have lost falth^ln palliatives, they want concrete results through bold action. The doctors were writing about a problee which still exists: the Ina­ bility of sany people in rural areas to transform their nedical needs into effective denand. The reason the problen exists is essentially the sane now as it was 20 years ago and the sane as it was 30 years ago, when an American Medical Association board nenber noted, "The most important factor determining the character and extent of nedical servlcee in a community is the 2 economic one." Just as a family's income is a major determinant of the medical services it purchases, a region's income level sets bounds on the quan­ tity, quality, and variety of medical services available to its popu­ lation. Shortages of medical services, in turn, influence the ass>unt of health care received and in rural areas this situation is often aggra­ vated by inaccessibility of services. High incomes can obviate much of ^Frederick D. Mott, M.D., and Milton I. Roener, M.D., D.P.H., Rural Health a*»** medical Care (New York: McGraw Hill Book Co., Inc., 1948), 557. p7 2R. G. Leiand, "Medical Care for Rural America," Rural Medicine, Proceedings of the Conference held at Cooperstown, New York, October 7 and 8, 1938 (Springfield, Illinois: Charles G. Thomas, 1939), p. 228. the inconvenience Associated with inaccessibility, but there ere many rural areas characterised by low fasily fsadlles nay spend a high percentage incases. In such areas, poor of their incone total area nedical spending will be low.^ on nsdlcalcare yet The result is that the levels of available services are low quantitatively and usually qualitatively as well.* The preceding consents view regional and personal nsdlcal problens fron the sane angle: fros the reletlonshlp between affluence and avail­ ability of health care. Yet it is frequently argued that access to ade­ quate health care is a social right, akin to access to education, and that, consequently, the distribution of health services and theability of people to receive care should not be dependent on the rigorsof an enterprise narket syaten. Much has been done In recent years to protect certain sectors of the population fron the sarket for health care. Medi­ care, Medicaid, and preschool health progress are exasplea of such efforts conducted by public authorities; privately, there has been a large in­ crease in the use of ssdical Insurance plans. Even so, to be aware of current consentary is to be aware that there la widespread public dis­ satisfaction with both the cost and the uneven distribution of nedical care. The present study is the second in a series which exaslnes the aforesentloned problens fron a regional perspective.^ The studies are 3 Ronald Andersen and Odin U. Anderson, A Decade of Health Services (Chicago: The University of Chicago Press, 1967), p. 56. ^President's national Advisory Conniesion on Rural Poverty, Rural Poverty in the United States (Washington: U.S. Gove m ean t Printing Office, 1968), p. 315. ^The first study, The Conner Country Medical Industry of Michlaan as It Serves Rural People, was the subject of Dr. Shyasslendu Sarkar's 3 primarily concerned with investigating the economic structure of a region's health care delivery system in order to determine the extent to which the region's health needs are fulfilled, the efficiency with which this la achieved, and the possibilities that exist for Improvements that could either reduce costs, Increase the availability of medical services, or both. Objectives Specific objectives of the present study are: 1. To develop and apply a frsmswork for describing the Income and expenditure accounts of a region's medical industry. 2. To investigate the possibility of and quantify the extent of excessive medical spending attributable to inexplicably high Incomes of medical doctors, excessive profits in the drug and medical equipment in­ dustries, and inefficiencies in hospital organisation. 3. To relate Income and expenditure patterns and excessive spend­ ing to the region's smdical needs in terms of fulfilling these needs either with the preeent, or the addition of extra health resources. Hypotheses A basic proposition is that in any given region there exists imper­ fections in the health care delivery system which are evident in terms of unnecessarily high expenditures for given amounts of care, or in an inadequate supply of medical services to S M t the region's needs, or in both. Ph.D. dissertation at Michigan State University. Reference: Michigan State University, East Lansing, Michigan, 1969. No. 1969-5, The validity of the proposition will be investigated with respect to four sectors of the nedical industry: nsdlcal doctors, general hos­ pitals, the drug industry, and the nedical equipment industry. Hypotheses are that: (1) nedical doctors' incones are greater than other professionals' by nore than can be explained by incone equalising differentials, the greater difference resulting fron restrictions on the supply of nedical doctors; (2) nonconpetltlve practices pervade the markets for products of the drug and nedical equipnent Industries, and consequently these industries earn abnornally high profits; and, (3) the spatial organization, rates of use, and cost structure of the general hos pltals are distorted, consequently hospital services are produced in­ efficiently. Method of Analysis Descriptive and analytical methods will be used to develop the incone accounting franework of a regional nedical econony and to inves­ tigate the sources of lnperfectlons affecting that econony. The Incane accounting franework will be based on estlnated gross incones of the various sndical sectors and will be developed to show the sources fron which Incones are derived and the subsequent expenditure patterns. Incone sources Include the najor purchasers of health services consuners, governments, and philanthropists. Subsequent expenditures Involve the allocation of these incones by their recipients to factors of production: labor, land, and capital. An addition to the franework will be the division of the Incone and expenditures according to their regional orientation. That is, funds fron sources outside the region will be regarded as payments for exports of nedical services and funds subsequently spent outside the region will 5 be regarded *■ payments for Imports. The utility of this approach lies In Its pointing the way to evaluating the relevance of the medical In­ dustry to regional economic performance. The income data developed In the accounting framework are necessary for the analysis of market Imperfections in that they provide the raw material for quantifying the findings. The initial examination of the imperfections hypotheses, however, will bear little relation to the re­ gional Income and expenditures analysis. That is, it is desired to de­ velop general methods of testing that do not depend upon the region. Once this is accomplished the results can be quantified with regional data and evaluated from the regional perspective. An analysis of doctors' incomes will be based on the work of Fried­ man and Kuznetz.^ They shoved that medical doctors' Incomes are approx­ imately 32 percent higher than dentists', yet only 17 percent is explain­ able by greater training costs. They attribute the balance to the power of the profession to control the supply of physicians. The author's findings, modified by current conditions, will be used to evaluate the incomes of the region's physicians to determine the amount, if any, that can be attributed to market controls. An analysis of the drug Industry will be based primarily on evi­ dence presented at congressional inquiries into the monopolistic status of the industry. Data will be presented which show that the Industry has succassfully exploited its market power to enable it to earn exceaslve profits. Profit differentials attributable to the Industry's market control will be analyzed with the use of smthods developed by Stilton Friedman and Simon Kuznetz, Income From Independent Pro­ fane ional Practice (New York: National Bureau of Economic Research, 1949). 6 Bain for comparing profit ratas among different industries.^ These dif­ ferentials will then be applied to the Industry's regional earnings to determine excessive spending on drug products. Paralleling the examination of the drug Industry's profits will be an examination of the medical equipment Industry's profits. But since there Is no previous research Into the competitive structure of this In­ dustry, the hypothesis Is based cm the observation that it serves some­ what similar market needs as the drug Industry, and that a large share of the market Is concentrated among a few firms. Given the rapid in­ creases In medical spending that have occurred in recent years, It Is a matter of Interest to determine whether the medical equlpawnt industry has been able to derive benefits by way of high profits. Accordingly, a representative sample of the fIras in the Industry will be selected. Their average profit rate will be calculated and used as an estimate of the Industry profit rate. This rate will be compared with profit rates in other Industries to determine whether or not evidence of excess earn­ ings Is present. Should such excesses be found, an approach similar to that used for the drug Industry will be used to determine the regional Implications. An analysis of sufficiency and efficiency In organisation and uti­ lization of a region's hospital facilities will be based on tests to de­ termine how closely the actual number of hospitals and the distribution of hospital beds conform with optimum regional needs. Three regional hospital planning criteria will be used. Each considers optimum bed needs under a distinct organisational system: the first with autonomous hospitals ^Joe S. Bain, "Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936-1940," Quarterly Journal of Economics. LXV (August, 1951), 293-324. 7 the M c o n d with fully cooperative hospitals, and tha third vlth semlcooperatlve hospitals. Tha long-run cost structura of tha hospitals will ba examined for avldanca of Incraaslng raturns. A positive finding In this raapact would Indlcata tha possibility of lowar costs, wars hospital facllltlas consolldatad In largar plants. Also, avaraga costs of tha hospitals will ba compared with costs for similar hospitals alsawhara to determine what ha r thara Is a raasonabla likelihood of affactlng savings through modification of production techniques. Finally, attention will ba paid to tha quantity and quality of services provided by tha hospitals to determine whether they Indlcata tha necessity for BK>dlf 1cat Ions In tha previous findings. A synthesis will ba made of tha lncoms status of tha region's medi­ cal Industry and tha areas In which potential savings exist. Tha re­ lationship of this synthesis to tha region's unmet health needs will ba explored. These neecs will ba expressed in terms of services needed to bring the region up to national adequacy standards. Costs of providing additional services will be calculated and alternative financial sources will be considered. Due consideration will be given to the medical in­ dustry's Income to determine what. If any, relationship exists between excessive Incomes and the need for more services. Geographic Area of Study The criterion governing the selection of the study region was that It be composed of a relatively homogeneous group of rural counties In Michigan. The definition of rurallty was to be based on some widely 8 accepted classification. It was decided to use a grouping, based on population and proximity to densely populated areas, developed by the U.S. Public Health Service.** Five types of counties have been delineated, the first two being deternlned by the standard Metropolitan statistical areas established by the Bureau of the Budget. The counties that constitute the SMSA's with populations of 1 million or more Inhabitants are called greater metro­ politan; the counties that constitute the SMSA's with populations between 50,000 and 1,000,000 are lesser metropolitan. Counties contiguous to the SM5A counties are called adjacent; although they may be sparsely popu­ lated, they are nevertheless relatively close to smtropolltan areas and to the health facilities ordinarily available in such centers. All other counties are called isolated— isolated semlrural if they contain at least one Incorporated place of 2,500 or more persons; otherwise, isolated rural. The 3,081 counties In the United States are thus classified as 109 greater Mtropolltan (group 1), 301 lesser metropolitan (group 2), 889 adjacent to metropolitan (group 3), 1,024 isolated semlrural (group 4), and 758 Isolated rural (group 5). About two-thirds of the U.S. popu­ lation live in metropolitan counties. An additional 16 percent live in counties contiguous to metropolitan counties. Counties to be studied were chosen from the fourth and fifth, or predominantly rural groups. It was decided to select a number of counties located in the north­ western part of Michigan's lower peninsula which could be visualised as g M. T. Pennel and M. E. Alrenderfer, Health Manpower Source Book 4 . County Data for 1950 Census and Area Analysis, Public Health Service Publication No. 263, Sec. 4 (Washington: U.S. Government Printing Office 1954). 9 an identifiable multicounty region. That ls» a region composed of counties relatively similar in physical, social, and economic charac­ teristics, and containing at least one city or town that could be re­ garded as a development center. Grand Traverse Region. The region selected is known as the It is composed of Antrim, Benzie, Crawford, Grand Traverse, Kalkaska, Leelanau, Missaukee, and Wexford Counties; the development center is Traverse City. Selection of Time Period The period chosen for study Is the calendar year 1967. In some re­ spects more accurate and complete data are available for 1965 and earlier years. But these years were prior to the advent of Medicare and Medicaid. These programs have had a substantial Impact on medical expenditures, thus the loss In relevance would be greater than the gain In accuracy were 1965 or an earlier year chosen. The year of transition was 1966, when many public and private sectors of the medical industry were adjust­ ing to the impact of government programs. Spending represented only a half a year of operation and Medicaid was in Its Infancy. Thus, It was felt that 1966 data would be quite unrepresentative and lead to Inaccu­ rate interpretations. However, 1967 saw the completion of the first full year of Medicare and greatly Increased participation In Medicaid. It was, furthermore, the latest year for which reliable data were available and the first year for which reliable data were available regarding new public expenditures. Thus, the period relevant to this study Is the calendar year 1967. Where data are only available for earlier years or on a fiscal year baais, the necessary lsq»utatlons will be made explicit. 10 Plan of Work Chapter two Is a review of probleas and research pertaining to the adequacy of health care In rural areas. Some of the crucial problems are explained and the aedical industry is discussed froa the perspective of the cost of aedical care and the Industry's econoaic structure. Chapter three describes the Grand Traverse Region's aajor econoaic and geographic characteristics with eaphasls on the rurality of the area. Chapter four, which describes the region's aedical industry, includes an account of the available aedical services and facilities and looks at thea in teras of their quantitative and qualitative reflections of the area's needs. The chapter intends to show what is available to the pop­ ulation, how the region cospares with other rural areas, and what potential probleas exist relative to the availability of services and the actual and potential needs of the population. The basic accounting fraaework is presented in chapters five through eight. Chapters five and six exaalne the flow of funds between consumers and producers of health services. Chapter seven considers the redistri­ bution of these funds froa producers to input suppliers. The findings of these three chapters are consolidated in chapter eight and sons special attention is paid to the econosdc consequences of the inter­ regional trade induced by the aedical lnduatry. The following three chapters— nine, ten, and eleven— involve chapterby-chapter development and analysis of the hypotheses regarding excess incomes earned in the area by medical doctors, the drug Industry, and the aedical equipment industry. In each case the excess income concept is developed in general and accepted or rejected on the basis of the avail­ able evidence. High and low estimates arc than made of regional medical expenditures dissipated in excessive income. Chapter 12 investigates the 11 Impacts of the relationship between potential organ1national deficien­ cies and hospital costs. The concluding chapter reviews findings of the preceding chapters and relates the findings to unmet needs and to transformation of felt needs Into effective demands. The capacity of the region's medical In­ dustry to fulfill these demands Is evaluated both In terms of Its exist­ ing organization and financial structure and In t e r m of an optimum or­ ganization and financial structure. Chapter II RURAL HEALTH AND THE MEDICAL INDUSTRY The purpose of this chapter is to expand Introductory statements about unfulfilled health needs and the market structure of the health care delivery system. Economic characteristics of the demand for health care are first examined. This is followed by a discussion of how these characteristics create special difficulties in rural areas and how these difficulties are complemented by the distribution of medical services. Then some pertinent, economic characteristics of the medical Industry are reviewed. The Demand for Medical Care In 1967, the American public spent $33 billion on medical care— $18 billion more than in 1957. During the 10-year period, the amount of money spent for medical bills more than doubled; there was a 40 percent increase In real expenditures as medical expenditures Increased from 5 to 10 percent of disposable personal Income; and amdlcal costs Increased faster than any other major category of personal expense shown in the Consumer Price Index.* From a 1957-59 base period to 1967, expenditures for hospital care rose 174 percent to a total of $10 billion; expenditures for physicians* services rose 129 percent to $9 billion; and expenditures for appliances *1968 Source Book of Health Insurance Data (New York: Insurance Institute, 1969), p. 53. Health 13 and medicines rose 86 percent to $7 billion. Individual aervicea with the greatest increase in coata were hoapltal room ratea and phyalclana* fees. The simple economic explanation of these increasing expenditures may be found in the forces of demand and supply. The demand for medical care is relatively inelastic with respect to price. 2 Thus, an Increase in the price of medical care relative to the prices of other goods and services means that the decrease in the quantity demanded will be rela­ tively less than the increase in price. The exact value of the elas­ ticity coefficient is unknown; it has been suggested that It may be as 3 low as 0.2 percent. This implies that If prices rise by 10 percent, the quantity demanded decreases by only 2 percent, ceteris paribus. Other researchers investigating the demand for individual medical services found elasticities of 0.0 for hospital care and 0.2 for physicians' services.* A second component of the price of smdical care is the consumers' opportunity cost. Depending on factors such as a person's type of em­ ployment and his age, sex, and distance from smdlcal facilities, the real price may vary substantially from the actual aedical fee. Thus, the price for the unemployed and the retired, for example, is actually lower than for those who must forego income to receive care. The real cost to 2 Paul J. Feldsteln and Ruth M. Severson, "The Demand for Medical Care," in Report of the Commission on the Cost of Medical Care. I (Chicago: Am rlean Medical Association, 1964), 57-76. 3 Victor R. Fuchs, "The Basic Forces Influencing Costs of Medical Care," in U.S. DepartMnt of Health, Education, and Welfare, Report of the National Conference on Medical Coats (Washington: U.S. Government Printing Office, 1 9 6 7 pp. 16-31. 4 Feldsteln and Severson, Report of the Commission on the Coat of Medical Care. I, 76. 14 f«nwrt M y be hlghar than for any othar largt group of workers. Not only la tha f a n a r oftan relatively laolatad froa tha aourcaa of cara so that ha, and M y b a his fsadly, Incur high travallng expenses, but ha la fraquantly an lndapandant oparator for whoa Incapacity at crucial tlaa, such aa harvest, could Involve tha loss of a large share of his annual incoae. I n c oM la a M j o r factor Influencing the deaand for aedical cara. While tha deaand can usually be reckoned to Increase with lncoas, what is unclear la the degree of elasticity. That Is, does a percentage Increase In IncoM lead to a greater, SMller, or equal percentage Increase In the deaand for care? Stigler, using pre-1965 data, calculated urban families’ I n c o M elaaticltles for sons aedical services. He found that IncoM elasticity was less than one for physician services and aore than one for dental services. He also calculated Incoae elasticities for physician services by Incoae class for 1935-36. The elasticity In each class was less than one, but rose with incoae froa 0.52 at $1,000 to 0.81 at $6,000.^ In a aore recent study using 1917-60 data, Feldsteln and Carr found the estiMted average Incoae elasticity of deaand for aedical care to be 0.7.6 They also approxiMted Incom elasticity, froa city averages and subset cross sections, as greater than one In 1950 and less than one In 1960. The latter estlMte M y be biased downwards, however, by the exclusion of third party payMnts.^ Furthermore, all of these ^George J. Stigler, The Theory of Price (rev. ed.; New York: alllsn Co., 1952), pp. 50-52. Hac- **Paul J. Feldsteln and W. J. Carr, "The Effect of Incose on Medical Care Spending," paper presented at the MetInga of the Aatrlcan Statis­ tical Association, December 1964. Reprinted in: Am rlean Statistical Association Journal. LX (June, 1965), 658. years. ^Note: Insurance coverage has grown substantially in the past 20 Studies have shown that the demand for health care Increases with 15 estimates may be too low because the measure of Income is current income rather than permanent income. Inclusion of health Insurance and perma­ nent Income would Increase the elasticity, so a realistic estimate is that, in general, the demand for medical care increases approximately proportionately to Income. This means that Increases in the share of total expenditures accounted for by medical care cannot be attributed to growing incomes alone. Other factors related to the demand for health care are sex, age, and locality. The first is Irrelevant to this study, though it should be noted that, except as young children, women conaietently demand more health care than men do. g Age and locality are relevant, however, and the next section will show how they, along with income, Interact to the detriment of rural health needs. Utilisation of Health Services In Rural Areas Other factors notwithstanding, income is usually singled out as the major determinant of both the demand for medical care and the supply of medical services. This factor is effective at the individual level in terms of the Individual's ability to obtain the health care he wants or needs, and it is effective at the regional level in terms of an area's ability ur inability to finance an adequate health delivery system. People living in rural areas tend to be disadvantaged in both respects because per capita Incomes and population densities are, relative to urban areas, generally low. Insurance; also that the sore insured a person is, the more unresponsive he is to Increases in medical prices. Feldsteln and Seversou, Report of the Commission on the Cost of Medical Care. I, 57-76. 8Ibld.. p. 28. 16 Results of surveys conducted a. few years ago show that most people In the United States relied on aedical doctors for their regular source of care, and that 87 percent of the population had a regular source. Twelve percent of the people surveyed had no regular source of care and 10 percent relied on clinics. These latter characteristics and low rates of Insurance coverage were aost proalnent aaong low-income fsallies (Table 1). Furthermore, variations by type of service have been main­ tained through tlae despite increases in the absolute use of health ser9 vices by the poor. Income differentials are particularly pronounced in the incidence of chronic activity-limiting conditions. The percentage of people with chronic conditions increases markedly as family incomes decrease (Table 2). Part of this result is explained by high incidences of Illness among older people and the fact that a disproportionate number of oldsters live in low-income families. However, when the figures in Table 2 are corrected for age differentials, the results show that regardless of age, relatively low family incomes are associated with relatively high incidences of chronic activity-limiting conditions (Figure 1). There can be little doubt that restrictions on the amount or kind of work that can be per­ formed by poor people are major factors in this relationship. Income and age are not alone in their relationship to expenditures and the incidence of illness. Urban families spend more for health care than do rural families; yet the latter have more chronic illnesses (Tables 3 and 4). Higher urban prices and Incomes and greater rates of use of medical services by urban families account for some of the differences. But for the most part, this serves to emphasise the fact that incomes are 9 Andersen and Anderson, p. 151. 17 TABLE 1.— -Percentage distribution of regular health ears and insurance coverage, by faally IncMi, 1963-65 Family Income Special­ ist General practi­ tioner Clinic Osteo­ path Mona Insured Percent Under $3,999. . . 20 43 17 4 16 51 $4,000-$6,999 . . 29 46 10 4 11 78 $7,000-and over . 38 37 7 6 12 89 Sourca: Ronald Andarsan and Odin W. Anderson, A Pacada of Haalth Sarvicaa (Chicago: Tha Univarsity of Chicago Presa, 1967), p. 16. TABLE 2.— Parcantaga of parsons with activity limitation attributable to chronic conditions, by family income, July 1962-June 1963 Income Percentage Percent All Incomes............................. 12.4 Under $2,000 ........................... 28.6 $2,000—$3,999........................... 16.0 $4,000-$6,999........................... 8.9 Over $7,000............................. 7.9 Sourca: politan Areas, Education, amd Series 10, Mo. p. 5. Health Characteristics by Geographic Region. Large Metro­ amd Other Places of Residence, U.S. Department of Haalth, Welfare, Public Haalth Service Publication Mo. 1000, 36 (Washington: U.S. Government Printing Office, 1967), Faailv Incoae | j Under $2,000 $2,000-3,999 g m $7,000+ $ *4 * u a Ii 1 li I x V Under 15 years 15-44 years 45-64 years 65+ years Source: Medical Cate. Health Status* and Faailv Incoat. United States. U.S. Departaent of Health, Education, and Welfare, Public Health Service Publication Ho. 1000 Series 10, Ho. 9 (Washington: U.S. Governnent Printing Office. 1964). p. 54.________________ FIGURE 1.— Percentage of persons with one or aore activity-Uniting chronic conditions, by fsally Incoae, July 1962-Juoe 1963 19 TABLE 3.— Mtan expenditure for ell personal health services per family by residence, 1963 Residence Mean expenditure Dollars Large urban.......... 404 Other urban.......... 373 Rural nonfarm........ 353 Rural f a r m .......... 302 Source: Ronald Andersen and Odin W. Anderson, A Decade of Health Services (Chicago: The University of Chicago Press, 1967), p. 55. TABLE 4.— Percentage of persons with chronlc-activlty 1initatIons, by place of residence, 1963-1965 Residence Unadjusted Age adjusted Percent Large urban................. 9.8 9.8 Other urban................. 11.4 11.9 Rural nonfarm.............. 14.6 14.1 Rural f a r m .............. .. 16.5 15.4 *Age adjusted means that the effects of uneven age distribution among residences have been removed. Source: Health Characteristics by Geosraphlc Reelon. Larne MetronnHt-^w Areas, and Other Places of Residence. U.S. Department of Health, Education, and Welfare, Public Haalth Service Publication No. 1000, Series 10, No. 36 (Washington: U.S. Government Printing Office, 1967), p. 5. 20 lower in rural areas than in urban areas; consequently, rural people lack the means with which to fulfill their health needs and hence reduce the incidence of illness. So far this discussion has dealt mainly with Individuals and how their income or residence may be related to the use of health services. It was shown that, In general, low incomes and rural residency are likely to be associated with Inadequate health standards. To see why this should be a particularly pressing problem in rural areas relative to urban areas where low-Income families also exist, it is necessary to consider the relative availability of health services. The Location of Medical Services Prominent among factors influencing the location of medical facil­ ities and personnel are population densities and regional Incomes. Tables 5 and 6 show the relationship between these factors and the distri­ bution of medical doctors and hospital facilities in the United States and in county groupings. The county groups range from the most urban and densely populated (group 1), to the most Isolated and sparsely populated (group 5). levels decline as rurallty Increases from group 1 to group 5. Income The ratios of physicians to population and to Income decline as rurallty Increases. Much of this decline is accounted for by the concentration of specialists and hospital-based physicians In urban and hlgh-lncome areas. General practitioners are evenly distributed by population density and distri­ buted "favorably*1 towards low-income counties. Sparsely populated and low-income counties have relatively more hospitals, but that they tend to be smaller and less adequately staffed than hospitals In urban, highincome counties Is shown in Table 7. 21 TABLE 5.— Medical doctors and hospital facilities per 100,000 population, United States and county groups, 1966* CountT arouo Personnel and facilities U.S. 1 3 2 4 5 14.7 3.2 Pa r e n t Distribution of population by county groups.............. 100 35.8 15.7 30.5 Number Physicians in patient care . . . General practitioners........ Specialists, plus hospitalbased physicians............ 125 33 171 3A 123 28 73 35 81 36 43 35 92 137 95 38 45 8 Hospitals...................... 2.9 1.8 1.9 4.0 5.3 6.3 Hospital beds........ .. 381 401 381 323 412 209 *The county group classification is explained on page 8. Source: TABLE 6. See Table 6. Medical doctore and hospital facilities per 8100 million personal income after tax. United States and county groups, 1966 Personnel and facilities U.S. 1 Countfy areiw 4 2 3 5 Dollars Income per household............ 7,990 9,346 8,032 6,637 6,302 5,032 Number Physicians in patient cars. . . . General practitioners ........ Specialists, plus hospitalbased physicians ............ Hospitals...................... Hospital beds .................. 52.7 13.9 59.5 11.8 52.0 11.9 38.1 18.3 44.9 19.7 30.0 24.4 38.8 47.8 40.2 19.9 25.3 5.6 1.2 0.6 0.8 2.1 2.9 4.4 160.9 139.8 160.7 167.9 227.7 144.9 Source: American Medical Association, The Distribution of Physicians. Hospitals, and Hospital Bede, in the United States. 1966 (Chicago: Ameri­ can Medical Aseoclatlon, 1967). 22 TABLE 7.— Distribution of beds per hospital and specialists and hospital* based physicians per 100 beds, United States and county groups, 1966 Countv sroun U.S. Item 1 2 3 4 5 Nunber Average nunber of beds per hospital. . . . , 133 Specialists, plus hospitalbased physicians, per 100 beds................ 24.1 227 197 81 78 33 34.2 25.0 11.8 11.1 3.8 Source: Anerlcan Medical Association, The Distribution of Phy­ sicians. Hospitals, and Hospital Beds. In the United States, 1966 (Chicago: American Medical Association, 1967). Tables 4-7 present more evidence for believing that with respect to medical services, the rural environment has special problems. The low Income and sparsity problems that limit use of health services in rural areas also make rural locations unattractive to doctors and nurses. Not only is the supply of medical personnel in relation to population lowest in rural areas, but to make matters worse, physicians have been redistri­ buting themselves towards urban areas.^ Additional insights can be gained by considering the relative quali­ fications of rural physicians. There are few specialists, urbanisation being a much stronger factor in the location of specialists than in the location of general practitioners. This M a n s that immediate health needs of rural people are in the hands of general practitioners or, some­ times, paramedical substitutes. While the general practitioner may have certain humanistic advantages, he is often required to refer patients to 10Gaston V. Rim linger and Henry B. Steele, "An Economic Interpre­ tation of the Spatial Distribution of Physicians in the U.S.," Southern Economic Journal (July, 1963), pp. 1-12. 23 specialists to provide sound medical service for serious illnesses. This ■ay be particularly true of the rural practitioner who, because of the leolation of his location and his tendency to be older than his urban counterpart , nay be deprived of opportunities to keep up with advances in medical care. In terms of facilities. It is noticeable that while bigger hospitals are located in urban areas, the actual bed supply in rural areas is not dissimilar from the urban supply. the adequacy of hospital care. But bed quantities Indicate little about Small hospitals cannot offer the quality or quantity of services large ones can, and it is to small hospitals that rural people must usually go. Sswll hospitals are more often Inadequately staffed and poorly equipped, and frequently lack out-patient and ex­ tended care facilities. They seldom have rigorous policies for medical staff organisations so they are less likely to sect quality standards needed for accreditation. The preceding paragraphs suggest that the supply of medical services is concentrated In urban, high.Income places and that simple urban-rural comparisons hide variations in quality. While quantitative differences are Important, very serious problems are related to qualitative differ­ ences. Attempts that have been made to measure qualitative differences in medical care Indicate that it declines with regional per capita In­ comes and population densities. The picture has now been presented from two sides: unmet health needs of rural people and the concentration of supply of health services in urban areas. Were incidence of sickness alone to determine the ^Davld S. Ball and Jack W. Wilson, "Community Health Facilities and Services: The Manpower Dimension," American Journal of Aerlcultural Economics. L (December, 1968), 1217. 24 deaand for aedical care, aore aedical eervlces would locate In rural areas. Sickness, however, only expresses itself in a need for care. Incoae and accessibility do anich to deteralne how these needs are transformed into a person's effective deaand. Theae conclusions follow froa a staple inter­ pretation of econoaic laws of supply and desuund. is too staple. But the interpretation If supply and deawnd were operating unencumbered, In a relatively open market, it would be hard to understand why so much of the adjustment to Increasing deaand has occurred through price Increases and so little in supply increases. A look at the structure of the aedical industry may clarify the paradox. The Econoaic Structure of the Medical Industry The are labor major factors of production in the output of aiedlcal services and capital. The supply of labor In many sectors of the medical Industry is elastic; the Industry does not have to pay unusually high wages In order to attract a larger fraction of the labor force. Since World War II, medical care employment has Increased by about 5 percent annually, compared with a total employment Increase of annually. Yet medical wages have been Increasing at about the same rate as wages In other Industries. 12 about 1 percent Nevertheless, manpower Inputs have not Increased as fast as the demand for services. While consumer spending more than doubled between 1957 and 1967, the number of physicians In­ creased only 20 percent, the number of nurses, by about 65 percent, and the number of medical aides and technicians, by about 63 percent. The gap between the supply of manpower and the desiand for services has been closed somewhat by Increased medical technology and by substitution of lesser trained for higher trained medical personnel* 12Fuchs, p. 23. But at the same 25 time ttian have been longer dnlnya in receiving services and the prices of most nodical services have been rising rapidly. 13 Nonhuman capital flows mainly into hospitals. But because most hospitals are nonprofit-oriented and do not compete with other Institu­ tions for custossrs, capital expenditures are usually financed from tax­ ation or donations rather then loans. As a resultt until recently, hos­ pital administrators have often distinguished operating expenditures from capital expenditures; the latter being treated aa free goods. In conse­ quence, hospital charges have not necessarily reflected the costs of capital and hospitals have not been operated at rates of output that would economise on the use of capital resources. 14 Productivity Increases in productivity mean Increases in output that exceed those of the input factors. Changes in the supply of msdical services In terms of changes In prlce-quantlty relationships depend largely on Increases In productivity. It has been argued that productivity in medical care has advanced slowly relative to other sectors In the economy. Wasteful practices are usually cited as the cause, with hospitals invariably used as examples of big wasters. The development of productivity measures for medical services, how­ ever, is beset with unsolved problems. Por one thing, the real 13 Report of the National Advisory Commission on Health Manpower. I (Washington: U.S. Government Printing Office, 1967), 10. ^Millard F. Long, "Efficient Use of Hospitals," In The Economics of Health and Medical Care (Ann Arbor, Michigan: University of Michigan, 1964), p. 213. Seymour E. Harris, The Economics of Amsrlcan Medicine (New York: Macmillan Co., 1964, p. 34; Fuchs, p. 24; and E. Richard Welnerman, "Trends in the Economics and Organization of Msdical Care," The Yale Journal of Bioloxv and Medicine (August, 1963), pp. 53-74. 26 contribution of medical attention to health la unknown; for another, hos­ pital productivity measures derived by dividing expenditures by the hos­ pital components of the consumer price index are likely to be low because the output of hospitals Includes items such as hotel services that do not necessarily contribute directly to Improved health. A visit to a physician or a day spent in the hospital is undoubt­ edly more productive now than it was several years ago. But there may be some modern techniques with a low marginal contribution in terms of cura­ tive value, but whose cost is so high that a greater contribution could be obtained were the resources to be used in alternative ways; heart trans­ plants and artificial kidney devices are two techniques against which such criticisms have been levied.1^ Market Imperfections Lack of competition among producers of services and products is commonly asserted as a major cause of the dramatic increases in the price of medical care. Physicians, drug manufacturers, and hospitals have borne the brunt of the assertions. Reuben Kessel, drawing on a wide array of sources, has prepared a persuasive Indictment of physicians' ability to use price discrimination 18 and other monopolistic practices to further their monetary gain. The drug industry, probably the most thoroughly and frequently attacked of ^Howard Lee Boat, "An Analysis of Charges Incurred for Inpatient Care in General Hospitals" (unpublished Ph.D. dissertation. University of Michigan, 1955), p. 48. 1^Henry K. Beecher, "Scarce Resources and Medical Advancement," Daedalus, Journal of the American Academy of Arts and Sciences (Spring, 1969), pp. 275-313. ^Reuben A. Kessel, "Price Discrimination in Medicine," The Journal of Law and Economics. I (October, 1958), 20-53. 27 all American induaCries with respect to noncoapetitive behavior* has been the subject of major congressional Inquiries. Price fixing* multiple pricing, and other restrictive market practices have been shown as common behavior in the Industry. 19 Hospitals have come under attack most fre­ quently for operating inefficiently and maintaining a price structure which reflects numerous significant departures from norms of competitive pricing. These sectors will be analyzed individually later In this study. It may be helpful* however* to introduce at this stage some of the theo­ retical reasons behind the implication that noncompetitive behavior can lead to higher medical prices. As Hicks has indicated* firms which have some influence over the prices at which they sell are* to s o m extent* monopolistic. Situations giving rise to influence on prices and* hence, monopoly include lack of substitutes, collusion among producers* institutional actions and devices such as barriers to entry* and economies of scale. The last situation is more properly a result of bigness rather than some inherent badness of monopoly. It often leads to the creation of a natural monopoly and probably regulation to ensure that the public benefits from 19U.S.( Congress* Senate, Subcommittee on Anti-trust and Monopoly of the Committee on the Judiciary* Hearings. Administered Prices in the Drug Industry. 86th and 87th Cong.* 1960-61. 20 The literature on this subject is substantial. Examples are: Halter E. Landgraf* "Heeded: Hew Perspective on Haalth Services," Harvard Business Review (September-October* 1967), pp. 75-83; H. E. Klarman* "The Increased Cost of Msdical Care," in The Economics of Health and Medical Care, pp. 244-245; Herman M. Somers and Anne R. Sewers* Medicare and Hospitals. Issues and Prospects. Studies in Social Economics (Washington! The Brookings Institution* 1967), p. 233 at seq.; Kong Kyun Ro* "Incremental Pricing Would Increase Efficiency in Hospitals," Inquiry * VI (March* 1969), 28-36. 21J. R. Hicks. Value and Capital (2nd ed.; Oxford: 1946), p. 83. Clarendon Press* 28 the f I n ' * ability to supply the market at a lower average cost than could several competitors. Partial monopoly of an industry whereby some, but not all, of the conditions or consequences of monopoly exist Is, with natural monopolies excepted, said to be Inferior to cosq>etltion because It leads to higher prices and lower outputs. In competition, consumers have access to market information, pro­ ducts are relatively homogeneous, and prices are controlled by the forces of supply and demand. Consumers are less well Informed in purchasing medical services and producers are able to set prices and discriminate among consumers. Particularly in the medical professions, where price competition and advertising are stigmatized as unethical means of attracting additional customers, producers are selected according to necessity or subjective criteria. Once the selection is made the con­ sumer is rarely able to bargain on price, additional services to be pur­ chased, or to whom referral will be made for additional services. Fur­ thermore, medical services lack the homogeneity of competitively produced services. Each demand for medical care Is individually treated with the result that differences in the quality and quantity of services provided are coimnonplace. In competition there is relative ease of entry into an industry. The medical Industry has erected barriers to entry into some of the pro­ fessions and the hospital business. It has been charged that these barriers operate nationally through the educational process, at the state level through licensing procedures, and at the local level through medical societies and hospital staffs.^ 22 D. R. Hyde et al.. "The American Medical Association: Power, Purpose and Politics in Organized Medicine," Tale Law Journal. LXII1 (Kay, 1954), 938-1022. 29 Economic theory suggests that the consumer bases his purchasing decisions on rational criteria that enable him to maximize utility. By implication, medical services are just another item In the consumer's market basket. Under most circumstances a consumer may or may not pur­ chase medical services. Were he to enter the market In a setting where resources were allocated efficiently, there would be reason for encoura­ ging producers to act in their own best Interests, safe In the knowledge that consumer satisfaction Is being achieved. If it Is true, however, that there is a lack of competition In medical production, it is hard to conclude that consumers benefit when producers act in their own self Interest. Services may not be purchased if consumers lack knowledge or income, or feel that the price Is too high. Furthermore, some services may not even be offered If producers do not envisage a profitable market for them. It Is evident, therefore, that medical producers are in a strong bargaining position relative to consumers. Because of this relationship producers have not been fully subjected to competitive pressures to in­ crease the efficiency of their operation. Furthermore, as demand for msdical care has increased over the years, and though there have been substantial productivity increases in some areas, it has been rela­ tively easy for producers to adjust by increasing prices. It does not seem unreasonable to conclude with Bally, that, under a more cosq>etltlve structure the incentive to increase productivity would have been greater than it has, and that had this happened prices would have risen less than they have and a greater voluaw of medical services would have been avallable to consumers. 23 ^Richard M. Bally, "An Economist's View of the Health Services Industry," Inquiry. VI (March, 1969), 3-18. 30 Proposals are frequently being made whose purpose, whether stated explicitly or implicitly, Is to lower the price of aedical services. Suggested methods can usually be reduced to three broad criteria: In­ creasing the supply of services. Increasing the productivity of present services, and regulating prices. to apply all these sstthods. 24 To some extent efforts are being suide There are movements towards Increasing the supply of health personnel both at the professional and sub-professional levels. Productivity gains have resulted from new siethods of treatment and reorganization of health facilities. Recent statesmnts from the U.S. Department of Health, Education, and Welfare indicate that some controls are being applied with respect to fees charged for publicly Insured medical services. But these are only beginnings. Noticeable differences In the medical market will not become evident until some major policy decisions are made which will have far-rt to changing the health care delivery system. ng Implications with respect A full analysis of the de­ cisions that have to be made, if indeed the medical systems does need changing, is beyond the scope of this paper. 25 What Is intended here is to examine four sectors of the Industry as they relate to the Grand Traverse Region’s medical economy: to ascertain whether or not they act non­ competitive ly, to determine whether or not they are able to translate their actions into excessive earnings, and to obtain estimates of such earnings if they occur. In doing this the real objective Is to determine the extent to which the Industry Itself contributes to Imperfections in 24 See such studies as: Report of the National Advisory Commission on Health Manpower. I and II; and U.S. Departswnt of Health, Education, and Welfare, Report of the National Conference on Medical Costs. 25 Note: The interested reader may read a scathing lndictswnt of some sectors of the msdical industry In U.S., Congress, Senate, Committee on Finance, Report of the Staff, Medicare and Medicaid. Problems. Isaues. and Alternatives. 91st Cong., 1st Sess., February 9, 1970. 31 the health delivery system. Excessive profits, where they ere found, would suggest that output Is probably less end prices ere probably higher then they would be In the absence of the factors giving rise to excessive pro­ fits . As a result, some consumers* needs are not met, but their real needs, assuming no subsidies and a fixed demand curve, could be trans­ formed into effective demand through Increases In the supply of medical services* The analysis of excess earnings la concerned with four sectors: physicians, the drug Industry, the medical equlpawnt Industry, and hos­ pitals. The first three are hypothesized to act monopollatlcally and thereby earn excessive profits. The hospitals of concern in this study are the region's general hospitals. As nonprofit Institutions they can­ not be charged with earning excessive profits. They may, however, be subject to organizational deficiencies or operational inefficiencies so that average costs and, therefore, charges are higher than they would be were the deficiencies eliminated. Excess profits that are of concern here fall into two categories, those earned from professional practice by physicians and those earned from manufacturing and retailing by the drug and medical equipment Industries. Consequently, while the basic definition of excess profits Is similar In each case, the approach used to Identify profits will differ. In theory, given the demand curve and the cost structure of the industry, prices are higher and profit margins wider under axmopoly than under coaq>etitlon. If total costs are defined to include normal profit, revenue-cost ratios would have a minimum value of one for competitive Industries and reach an upper bound in monopoly. Excess profits, there­ fore, are returns greater than all costs, and firms or industries with a high degree of monopoly power will tend to earn higher profit rates than 32 others. This excess rste should be persistently higher asong industries with s relatively greater degree of nonopoly power than others, so long as the average relationship of industry deaand to cost and conditions of entry are stable. 26 The purely competitive condition, whereby the ratio of total revenue to total cost approaches unity, is a rare phenomenon In American Industry. It would therefore, be unrealistic to use the com­ petitive ideal as the yardstick against which to measure excess profits. A more reasonable approach is to use rates of returns in other industries as the yardstick. Uere resources relatively free to move among indus­ tries, resources would move from the relatively low profit industries to those with higher profits. In the long run these movements would be re­ flected In adjustments towards greater equality among industries. 26 Bain, Quarterly Journal of Economics. LXV, 295. CHAPTER III THE GRAND TRAVERSE REGION Phvilctl Setting The Grand Traverse Raglon upon which this analysis Is basad la composed of eight countlas In tha northwastarn part of Michigan's lowar panlnsula. Tha countlas ara: Antrim, Benzla, Crawford, Grand Traverse, Kalkaska, Laalanau, Mlssaukaa, and Uaxford (aaa Figures 2 and 3). Tha raglon foras tha larger part of tha Northwaat Michigan Econoaic Developaent District. In addition to tha alght countlas, tha Davalopaant District includes Eaaet, Charlevoix, and Manistee Countlas* Tha eleven counties ara linked not only by geographic proximity but also by common history, economic problems, and an economic future. Water and related resources ara important natural assets of tha region. Along with a large expanse of Lake Michigan shoreline, the region possesses many inland lakes and streams. Other natural resources include thousands of acres of pine and hardwood forests that abound with wildlife; large stretches of clean fine sand; and deposits of gravel, limestone, and salt. These natural resources are enhanced by favorable physical fea­ tures. The region is composed of glaciated land with high rolling hills, and broad valleys and plateaus that provide attractive views. The climate la tempered by the lakes and is marked chiefly by warm, comfort­ able suaers and cold, snowy winters. 34 MICHIGAN i:uni WTSa» Itt M A C Shadad Straight Linaa: Croaa-hatchlng: Study raglon laolatad rural ____ count laa Iwnsssrsavia bibbk laolatad aanlH6k*£JTCl* rural M u S*T. countlaa mm* o TTa w a WWJrtQT Tqn Ta TXtoh HJUAMA. calUooh > - 400*30 r i G U U 2.— Michigan and tha Grand Trararaa lagIon I7P7WF* 35 Manitou Islands Charlevoix Antrim Otssgo Trsvsrss City Crswford Grand Traverse Rose Cad11lac0 Uaxford Missaukee KEY * O County Seats Cities vith 3,000 or nore population FIGURE 3.— The Grand Traverse Region 36 A* a result of these geographical characteristics the region has evolved as a vacationers' paradise, and one of the largest Industries is the production of leisure services. Activities include touring, boating, fishing, swimming, camping, hiking, hunting, skiing, and snowswblllng. There are two large towns in the region: Cadillac. Traverse City and Cadillac has a population in excess of 6,000 people and Traverse City has approximately 20,000 people. region have populations of less than 3,000. All other towns In the These smaller places serve primarily as shopping centers for local Inhabitants and tourists. Income Family Incomes are indicative of a population's ability to support Itself within an existing economic structure. Comparisons of family Incomes in the region with family incomes in all of Michigan and the United States (Table 8) show that in 1967 the region had a higher pro­ portion of its population with Incomes under $3,000 per annum. The rates were 27.9 percent, 15.2 percent, and 21.5 percent, respectively, for the region, the state, and the nation. The same relative pattern held for families with incomes between $3,000 and $5,000 per annum. In the higher incosm ranges the proportion of regional families drops below the state and national levels. Individually, none of the counties is as well off in terms of fa^ly Income as the state, and only Grand Traverse County has an average family incosm greater than the nation's. region are unavailable. Cost of living data for the Local people believe, however, that especially during the tourist season, the cost of living is higher than in other parts of Michigan.*^Conversation with Mr. Hal Van Sumeren, Assistant Manager, Traverse City Area, Chamber of Cossserce, August, 1968. TABLE 8.— Effective buying Income and percentage distribution by households, 1967 Area Effective buvlna income Per Per household caolta Distribution of household Income arouos $5,000 $8,000 $0 $10,000 $3,000 $7,999 $4,999 $2,999 $9,999 and over Percent Dollars Michigan. . . . . . 2,839 9,885 15.2 11.1 27.8 16.9 29.0 United States . . . 2,543 8,532 21.5 15.4 28.1 13.5 21.5 Region........... 2,009 6,858 27.9 19.0 29.5 10.6 12.7 County: Antrim......... Bensle......... Crawford........ Grand Traverse. . Kalkaska........ Leelanau........ Missaukee . . . . Wexford ........ 1,871 2,034 1,948 2,449 1,836 2,015 1,770 2,150 6,237 6,426 7,014 8,971 6,032 6,672 6,196 7,318 30.8 25.7 27.3 23.1 30.6 29.2 32.6 24.6 21.1 17.9 19.0 13.9 21.7 20.5 22.4 15.9 29.2 33.0 32.2 30.0 27.0 28.9 25.3 31.0 8.7 11.1 10.7 14.1 10.7 8.8 8.4 12.8 10.2 12.3 10.8 18.9 10.0 12.6 11.3 15.7 Source: "Northwest Michigan Economic Development District— Overall Economic Development Program," prepared by the Mortbvest Michigan Economic Development District for the Economic Development Administration, U.S. Department of Conmerce, Washington, D.C., July 1, 1968, unpub llshed draft copy. 38 Demography Demographic information often provides useful insights Into the economic standing of a region. During 1960-67, the Grand Traverse Region had a population growth rate below that of Michigan and the nation (Table 9). Grand Traverse and Crawford Counties grew faster than the state, but the other six counties grew sufficiently slowly or negatively, so that the overall average went down. Migration Is a useful Indicator of population stability. An eco­ nomically stable area provides sufficient employment to cover employment needs generated by the natural Increase In population. If employment expands at the same rate as population, then one of the Incentives for migrating is removed. The region had a net out-migration of 9.4 percent In the decade 1950-60 (Table 10). This is typical of rural areas where per capita Incomes are relatively low. fell to 1.7 percent. In the 1960's, however, the rate Only Grand Traverse and Kalkaska showed a net in- migration in this decade, but all of the counties except Missaukee showed an Improvement over the earlier period. Nevertheless, people are still leaving the region to find employment elsewhere. Since momt of the migrants are young people, the pattern of net out-migration represents a cost to the region in terms of its Investment in education that is un2 likely to be recouped unless other young people move in. The population's age distribution is indicative of the fact that people of the most productive ages have been leaving the region. The proportion of the population aged 25-44 is about 4.4 percent lower than state and about 3.4 percent lower than national averages; the region's 2 "Northwest Michigan Economic Developsmnt District— Overall Eco­ nomic Development Program," prepared by the Northwest Michigan Economic Development District for the Economic Development Administration, U.S. Department of Commerce, Washington, D.C., July 1, 1968, unpublished draft cop7. p. 13. TABU 9.— Population tnoda, Michigan, the U.S.. and the Grand Traverse Region. 1950-67 Average annual absolute chanee Population Average annual percentage change Area 1950 1960 1967 1950-60 1960-67 1950-60 1960-67 Mll^ Mil. Mil. Mil. Mil. Pet. Pet. Michigan........... 6.372 7,823 8,199 0.15 0.54 2.3 4.8 United States . . . . 151.326 179,323 193,818 2.8 2.9 1.85 0.81 No. No. No. No. No. Pet. Pet. Region............. 90,506 95,621 97,500 512.0 268.0 0.57 0.20 County: Antrim........... Benzie........... Crawford......... Grand Traverse. . . Kalkaska......... Leelanau......... Missaukee ........ Wexford ......... 10,721 8,306 4,151 i.8,598 4,597 8,047 7.458 18,628 10,373 7,834 4,971 33,490 4,382 9,321 6,784 18,466 9,000 7,900 5,400 37,000 4,600 9,600 6,300 17,700 -34.8 -47.2 82.0 498.2 -21.5 127.4 -67.4 -16.2 -19.6 9.4 53.6 501.4 31.1 39.9 -69.1 109.4 -0.32 -0.57 1.98 1.71 -0.47 1.58 -0.90 -0.09 -1.30 0.10 0.90 1.05 0.50 0.30 -0.71 -0.41 Source: "Northwest Michigan Economic Development District-Overall Economic Development Program." prepared by the Northwest Michigan Economic Development District for the Economic Development Administration. U.S. Department of Commerce. Washington. D.C., July 1. 1968. unpub­ lished draft copy. p. 26. 40 TABLE 10,— b t c i of migration for the Grand Travaraa Region, 1950-60, 1960-66 Rate of nitration 1950-60 1960-66 Antrim........................ Percent -12.0 Pe£&nt -1.8 Beneis........................ -15.0 -4.0 Crawford...................... 5.3 -1.4 Grand Traverse................ 0.6 1.0 Kalkaska...................... -12.6 7.6 Leelanau...................... -6.4 -5.2 Missaukee ............. -7.1 1 . CM County Wexford ...................... -14.1 -2.8 Region...................... -9.4 -1.7 Sourca: "Northwest Michigan Economic Development District— Overall Economic Development Program," prepared by the Northwest Michigan Economic Development District for the Economic Development Administration, U.S. Department of Coamerca, Washington, D.C., July 1, 1968, unpublished draft copy, pp. 26 and 27. 41 population 65 and over la higher than atata and national proportIona by alaoat tha same percentages. All alght countlaa have an aga dlatrlbutlon that la high In ratlrad paopla and low In production workers whan conparad with aga dlatrlbutlona In Michigan and tha nation; yat chlldran In tha 0-16 aga group coaprlao about tha aana proportion of tha population 3 In tha rnglon aa tha atata and nation. In affact than, tha ragloa haa a typical rural problan of an lnaufflclant work forca to aupport Ita oldar and youngar population groupa. Employment Tha dacllna In tha population In tha production aga bracket, tha aaaaonal natura of tha labor market, and tha anploynant of aany people at or below nlnlnun wage levels are synptona of a labor problan which has plagued the region ever since the tlnber Industry declined at the end of the last century. The problem is emphasized by the region's persistently high and growing rate of unemployment (Table 11). In 1950, 5.5 percent of the labor force were unemployed; by 1967 unemployment had risen to 7.8 percent. This high rata may seem surprising for a region that la acknow­ ledged for ita bountiful agricultural industry and rapidly growing tourist trade. Tha explanation lias In tha seasonal variation, tha size of tha work forca, tha mosber of unesployed, and tha rata of unemploy­ ment. Table 12 shows, rather startllngly, how dependence on seasonal industries can lead to a large number of unemployed for much of tha year, with tha result that tha annual rata of unemployment is also high. Of tha top four sources of employment In tha region— manufacturing, whole­ sale and retail trade, services, and agricultural— all but tha first are 3Ibld.. p. 14. 42 TABLE 11.— Average annual rataa of unemployment In tha Grand Traverae Region, 1950-1967 Rate of unemployment 1950 1960 1967 Percent Percent Percent County: Antrim...................... 4.9 10.3 6.1 Bensle...................... 5.4 8.9 11.2 Crawford.................... 8.5 7.5 6.7 Grand Traverse, Kalkaska, and Leelanau .............. 5.9 8.8 6.9 Missaukee .................. 2.7 4.0 (a) Wexford .................... 5.7 6.5 8.1b Region.................... 5.5 7.7 00 . r* Area ^Included in Wexford. ^Includes Miaaaukee and Osceola, a nonreglonal county. Source: "Northwest Michigan Economic Development District— Overall Economic Development Program," prepared by the Northwest Michigan Economic Development District for the Economic Development Administration, U.S. Department of Commerce, Washington, D.C., July 1, 1968, unpublished draft copy* P* 31. 43 TABLE 12.— Seasonal patterns of employment and unamployment In tha Grand Traverse Region* 1967 Slse of work force Number of unemployed Number Number February........ 39,050 3,550 9.1 April .......... 39,525 3,750 9.5 June............ 42,075 3,650 8.7 August.......... 43,525 2,700 6.2 October ........ 40,450 1,975 4.9 December........ 39,775 2,850 7.2 Month Percentage of work force unemployed Percent *These figures exclude Crawford County and Include Osceola County. Source: "Northwest Michigan Economic Development District— Overall Economic Development Program," prepared by the Northwest Michigan Economic Development District for the Economic Development Administration, U.S. Department of Commerce, Washington, D.C., July 1, 1968, unpublished draft copy, p. 40. 44 rtipoailv* to the Mtaontl activity of tourists and harvests. Basidas suffering a reduction in income due to seasonal employment, workers in the region tend to work on a pay scale that is lower than for workers in corresponding trades in Michigan Consequently, even though there are good bases for steady employment, many workers earn smaller returns than are received elsewhere for a comparable investment. Further­ more, it is Inevitable that some of the people are without work for at least part of the year. The severe effect of these conditions was implied in Table 8, which showed that 27.9 percent of the Grand Traverse Region households had incomes of less than $3,000 in 1967, compared with 15.2 and 21.5 percent for the state and nation, respectively. Unemployment information suggests that there are too few Jobs to employ the entire work force of the region at any time. Tet, paradox­ ically, employers report that there are plenty of available Jobs, and that they often want employees and cannot get them. tions for this situation are: Sosw of the explana­ (1) required skills are beyond the capacity of the unemployed, (2) salaries are too low to entice the unemployed, (3) communication between employers and potential employees is Inadequate, or (4) the unemployed prefer not to work.^ SnmmsrT The Grand Traverse Region's economic viability rests primarily on its ability to make full uae of its natural resources and to attract more Industry. tourism. The physical setting creates advantages for agriculture and These seasonal industries have the capacity for greater 45 development, but there Is also a need to attract other, year-round Indus­ tries. Although Traverse City and Cadillac are potentially attractive for industrial development, neither community is large enough or financially strong enough to create new industries unaided. Thua, it seems likely that any major expansion would be heavily dependant on the investment of outside capital. Services are major sources of employment. Often, in small area studies, services are either conglomerated or at best separated into governmental and nongovernmental sectors. Part of the purpose of this study is to isolate one service sector, the medical sector, and in ao doing, to develop a method for analysing it as an individual component of a region's overall economic structure. Beyond some work on the rela­ tionship between health and human productivity, little attention has been paid to the medical field in a developmental context. This may be because the sector is usually an insubstantial element in a region's economy and also because of the scarcity and inadequacy of medical data. An attempt will be made in the next few chapters to show how the medical sector can be isolated and the data problem managed by integrating local and national sources. CHAPTER IV THE GRAND TRAVERSE REGION'S MEDICAL SECTOR It will b« helpful to think in t e n s of a Madlcal sector. That la, a sector of the local economy composed of a complex of public and pri­ vate firms. Institutions, and Individuals whose primary function Is fur­ nishing medical, surgical, and other health services to people, either directly or Indirectly. Every multicounty region has a medical sector. Its complexity and slxe are likely to vary with the physical and economic characteristics of the region In question. A few regions contain all, but most contain some of the following components: hospitals; nursing homes; medical and dental laboratories; offices and other establishments providing the ser­ vices of physicians, dentists, optometrists, and others; publicly operated offices, clinics, and laboratories; retailers of drugs and health sun­ dries, prosthetic appliances, eyeglasses, and medical equipment ; finan­ cial Intermediaries such as insurance offices; and manufacturers and distributors of medical supplies. The full coop lament of these cosponents Is rarely found outside large. Industrial urban centers. Nevertheless, Inasmuch as the residents of a particular region purchase the products and services of any com­ ponent, that cosponent exerts some economic Influence on the region. The emphasis of this study is on the economic structure of the medical sector in the Grand Traverse Region. At the same time It la de­ sired to develop an analytical framework for use In other regions. Thus, 47 thcrt Is need for s structural class if lest ion that vlll ba i m u b l t to both goals. A useful start can ba nade by adopting a classification, da­ ys lopad by tha U.S. Department of Health, Education, and Welfare, which forms the framework for national health expenditure estimates. HEW's format and estimates for the nation for 1967 are shown In Table 13. The first major objective of this study Is to relate parts of the table to the Grand Traverse Region. This will give a framework within which to express the structure and Income of the region's awdlcal sector and a base from which to branch off to prepare the analysis of excess ex­ penditures. All Medical Facilities Working In cooperation with the U.S. Public Health Service, the Michigan Department of Public Health has delineated the state according to hospital service areas. The areas are based on trade patterns, and take Into account population distribution, transportation and trade pattens, travel distance, and Information about the residence of patients using an area's hospitals. Boundaries of each area are drawn so that no person In Michigan Is more than 30 minutes traveling time from an acute care hospital. There le at least one general hospital In each area. It serves as the primary health care facility for the area's population. With patient referral pattens as the base, service areas are grouped to form regional areas. These areas have a medical center hospital which serves as the referral hospital for the other general hospitals In the region. To be a regional medical center, a hospital must have more than 100 beds, a teaching program for Interns and nurses, steff members with training In major specialities, and a pa t t e n of referral for patients from adjacent areas. TAILS 13.— National haalth azpandlturaat by type of expenditure and aource of funds, 1967 Source of funds Type of expenditure Private Total Total Total..................... Health eerrlcee 6 supplies . . . Hospital care............... Federal services ......... State 6 local facilities . . Snegova r— ental facilities . Physicians' services ........ Dentists' services ......... Other professional services. . Drugs and drug sundries. . . . Eyeglasses 6 appliances. . . . Murslng-bone care........... Expenses for prepayment and administration......... Government public health activities................. Other health services........ Research and medical facilities construction . . . . Research ................... Construction............... Publicly owned facilities. . Privately owned facilities . Con­ sumers Public Philan­ thropy Other Total Federal State and local 50,655 32,833 30,417 1,467 949 17,822 11,825 5,999 46,885 17,946 1,877 5,054 11,016 10,163 3,186 1,447 5,569 1,584 1,858 31,497 9,092 177 1,728 7,187 8,201 3,063 1,348 5,337 1,545 666 30,417 8,752 177 1,728 6,847 8,191 3,063 1,323 5,337 1,545 646 710 340 — 370 — — — — 340 10 — 25 — — 20 — — — — — — — 15,388 8,854 1,700 3,325 3,829 1,962 124 98 232 39 1,192 9,863 5,549 1,677 634 3,238 1,375 68 60 120 19 775 5,527 3,306 23 2,691 591 587 55 39 112 20 418 1,777 1,560 1,560 217 217 914 1,756 268 1,412 646 344 2,434 1,597 837 628 209 1,962 1,530 432 235 197 472 67 405 393 12 914 2,441 685 3,770 1,775 1,995 628 1,367 1,336 178 1,158 — 1,158 ** _ — 315 370 — 757 178 579 579 — — 579 579 — — — — 579 Source: U.S. Department of Health, Education, and Welfare, Social Security Adalniatratlon, Social Security lulletln (January, 1969), p. 4. 49 Travers* City has on* of the 14 regional nodical centers In Mich­ igan— the Janes Decker Munson Msnorial Hospital. The Traverse City Hospital legion includes the service area of Traverse City and four other service areas, all of which have snail acute general hospitals. The Tra­ vers* City Hospital Ragion, with Munson Hospital as tha regional swdlcal center, serves all of eight counties and parts of several others. Of the eight counties totally served, seven— Bensie, Crawford, Grand Tra­ verse, Kalkaska, Leelanau, Missaukee, and Wexford— are in the Grand Traverse Region, the focal point of this study. Farts of Antrin County are served; other counties served by the Traverse City Hospital Region, but outside the region of this study, are Manistee, Meson, Lake, Osceola, Clare, Roaconnon, and Otsego. The boundaries of the hospital region are shown in Figure 4. Travers* City, the regional center for specialised services, has practically all the wajor wedleal specialities represented on the staffs of its hospitals. Location of a State Mental Hospital in Traverse City nakes it the focal point for nental health services in the northwest portion of the lower peninsula* In addition to Munson Hospital and the State Hospital, there are an osteopathic hospital and two long-tern facilities. One of these, the Grand Traverse County Medical Care Facility, is constructed adjacent to Munson Hospital, which provides dietary, laboratory, pharnacy, laundry, and boiler plant services to the County Facility. Other general hospitals in tha study region are located in Leelanau, Kalkaska, Wexford, Bensie, and Crawford Counties. With the ex­ ception of the 128-bed Mercy Hospital in Cadillac, in Wexford County, these hospitals are relatively snail and ars, essentially, connunlty oriented. Long-tern facilities are located in Antrln, Bensie, Kalkaska, and Wexford Counties in addition to Grand Traverse County. Tuberculosis 0Ms Be 11*1re (OTSKGO) ANTRIM Ksz. Kalkaska Greyling m m • Traverse City Hospital Region xxx - hospital service areas, denoted as: tvo Traverse City Frankfort II BENZIE GRAND TRAVERSE CRAWFORD KA I Traverse City II Frankfort III Cadillac IV Grayling Nanes of counties outside the study region are In parentheses. ROSCOMMON) 0 Lake City j Cadillac (MANISTEE) r WEXFORD g j ! : MISSAUKEE t (LAKE) (CLARE) (OSCEOLA) FIGURE 4.--Traverse City Hospital Region, hospital service areas, and location of facilities In the Grand Traverse Region A ■ • Y Q Nursing Boos General Hospital Public Health Center Psychiatric Hospital Osteopathic Hospital I* o 51 in-pat lent needs i n provided u i n l y by TB hospitals in Saginaw and Grand Rapids, both of which ara outalda tha region. Public health ser- vlcea are located throughout the region on a diatrict baala. Leelanau, Grand Traveree, and Bensie Countlea are eerved by a health department with central offlcea in the Grand Traverse Medical Care Facility In Traverse City. Crawford, Kalkaska, Missaukee, and Wexford Counties for* another public health district; its central office is in Lake City, Mis­ saukee. Antri* is Included in a four-county district with its central office in Charlevoix, Charlevoix County. This section can be su**arlsed by noting that the Grand Traverse Region is served by a conplex and cowplete set of major wed leal facili­ ties. Location of these facilities is shown in Figure 4 and data on the region's hospitals and nursing hones is presented in Table 14. General Hospitals A widely used indicator of the adequacy of a region's nodical fa­ cilities la the populatlon-to-general hospital bed ratio. A limitation on this approach is its exclusion of admissions from outside a region, and the use by a region's population of facilities elsewhere. A study of the hospital needs in the Grand Traverse Region indicated that the region’s population relies almost 100 percent on local facilities, but that there are also many admissions from outside the region. Most of these nonregional patients are attracted by Traverse City's reputation as a center for high quality medical care, but many are alao drawn from the tourist and migrant worker populations. While similar patterns may well be observable In other rural regions, it seems reasonable to expect that the Grand Traverse legion would, because of its special medical and en­ vironmental characteristics, have a relatively low regional population- 52 TABLE 14.— The Grand Traverse Ragion's hospitals and nursing hones, 1967 County Facility Nunbar of facili­ ties Nunber of beds Patient days Dave Nunber Nursing hone 1 58 25,162 Bansla.......... General hospital Nursing horns 1 1 43 42 12,342 9,373 Crawford........ General hospital 1 68 20,561 Grand Travarsa General hospital State hospital Osteopathic hosp. Nursing hone 1 1 1 2 250 2,825 73 154 73,730 934,856 22,643 53,643 Kalkaska........ General hospital Nursing hone 1 1 20 12 4,259 3,650 Lsalanau........ General hospital 1 29 6,995 — — 1 2 128 87 37,946 24,111 15 3,789 1,229,271 Aatrln. . . . . . Missaukee . . . . Waxford ........ Total . . . . None General hospital Nursing hone — Sourcas: Ml chief* Flan for Hospital and Msdlcal Facllitlas Construction 1968-69 (Lansing, Michigan: Michigan Dspartnant of Public Health, 1969); Hospitals. Journal of tha As m rlean Hospital Asso­ ciation, XLII (August, 1968). 53 to~bed ratio. As Table 15 shows, thla la tha caaa. Tha region hae a lover population-bad ratio than any other county group in tha nation. While there are UnitatIona to tha approach, it ia indicative of a rela­ tively adequate atandard of hoapital facilitiea. Reference haa been aade to Traverae City*a reputation aa a canter Cor high quality care. Some of the factora assisting thla are: (1) the oateopathlc and the general hoapital are accredited by their reapectlve accrediting bodies;*1 (2) the relatively recent conatructlon or remodeling of the hospitals, which aeana, for the most part, that they are able to offer up-to-date treatment facilitiea; and (3) there ia a high proportion of apedallata on the hoapital ataffa. Considerable apace haa been devoted to the region's hoapital system. The reason is that a region's hospitals fona the core of its health care delivery system, and as M y have been gathered from Table 13, they are the major economic force of Its medical sector. Professional Services Profesaional medical services have been becoming increasingly specialized and concentrated in urban and high income areas. Thla nation­ wide pattern la evidently true of the eight-county Grand Traverse Region. Professionals are concentrated in the two relatively urban counties, Grand Traverae and Wexford (Table 16). Also, the region's M j o r M d i c a l facilities are located in Traverse City, and to a lesser extent, in Cadil­ lac in Wexford County. *Thie also applies to other hospitals in the region, except the Kalkaska Memorial Hoapital. Hospitals. Journal of the American Hoapital Association, XLIII (August, 1969), 112. 54 TALBE 15.— Population per gtiuiral hospital bsd for ths United States, county groups, and ths Grand Traverse Region, 1966 Area Population per hospital bed United States.......... 263 County groups: 1......................... 249 2.................... 249 3.................... 309 4.................... 243 5.................... 479 Grand Traverse Region................ 192 *The county grouping is discussed on page 8* Source: Anerlcan Medical Association, The Distribution of Physi­ cians. Hospitals, and Hospital Beds in the United States. 1966 (Chicago: Anerlcan Medical Association, 1967). TABLE 16.— Number of Medical professionals In tha Grand Traverse Region* 1967 Area Total Isolated rural counties: Antrim......... Bensie......... Crawford........ 4 4 2 ......... 3 4 2 Leelanau........ Missaukee . . . . Isolated senl-rural counties: Grand Traverse. . Wexford ........ Region total. . . . Active physicians (M.D.'s) In patient care*____ General HospitalSpecial­ practi­ based ists tioners Active . dentists Active osteopaths 3 7 2 2 4 1 5 1 1 Active registered nurses' 9 13 12 13 25 7 90 16 13 5 10 40 1 27 5 17 3 191 46 128 37 30 41 31 27 316 37 U* u* "Excludes Federal and retired physicians. American Medical Association* The Distribution of Physicians. Hospitals* and Hospital Beds, in tha_ United States. 1967 (Chicago: American Medical Association* 1968). "Dentistry" (Lansing* Michigan: Michigan State Board of Education* May* 1967)* unpublished mineograph; Anerlcan Dental Association* The Distribution of Dentists in the Pnlted States by State, Region. District and County* 1968 (Chicago: American Dental Association* 1969). ^ t a are for 1966. American Osteopathic Association* Yearbook and Directory of OsteopetMr PhytrtM. 1 , 1966 (Chicago: American Osteopathic Association* 1967). ^"Professional Burses" (Lansing* Michigan: Michigan State Board of Education* February* 1967)* unpublished mimeograph. Data baaed on 1964-65 Annual Report of the Michigan Board of Hurslna (Lansing* Michigan: <*61 56 Nidicil Doctors Ths pull sxsrtsd by urban srsss and thalr concomitant medical facllltlaa la most pronounced In tha location of specialists and hospitalbased physicians. Tha Intensity of tha pull in the Grand Traversa Region can ba roughly gauged from data In Table 17 regarding populatlon-to-medlcal doctor ratios. As tha data show, in 1967 tha Grand Traversa Region had lower populatlon-to-msdlcal doctor ratios than did other rural areas, tha United States as a whole, and, in soma categories, urban areas. This Is one Indication that tha region la wall provided with specialists and hospltal-based phys1clans. The low ratios are almost exclusively attributable to Traverse City's Influence. It should be noted that the city's medical hinterland does extend beyond the eight-county region. But so far as the eight counties are concerned, these are the relevant ratios. Furthermore they are the ratios commonly employed to effect rudimentary Indices of health service sufficiency. Nevertheless, as the American Medical Association cautions, "The use of ratios alone does not constitute an adequate measure of the quantity or quality of health cars received by the American 2 public." The Association points out that there Is no nationally appli­ cable or coaammly accepted standard for evaluation of health care re­ quirements. Most attempts that have been made to refine populatlon-to- physldan ratios do so by considering variables such as proportion of specialists, age of doctors, supporting services, and accessibility. Were such variables applied, the Grand Traverae Region could be expected to score at least as well and probably better than with the simple ratios used above. 2 American Medical Association, The Distribution of Physicians. Hospitals, and Hospital Beds In the United States. 1966 (Chicago: o . 18, 57 TABLE 17.— Nuabtr of persons psr nonfederal nedlcal doctor, by raglon and type of practice, 1967 County *ro!W Type of practice U.S. 1 2 3 4 5 General practice. , 3,047 2,959 3,562 2,844 2,810 Specialtide . . . . 6,743 1,148 1,451 3,238 2,774 14,535 Hospital-based practice ........ 3,471 2,006 3,812 13,478 10,325 87,211 802 586 812 1,361 1,230 2,314 All practices . . 2,842 Grand Traverse and Wexford Other six counties General practice. 3,050 2,316 2,673 Specialties. . . 1,168 14,667 1,978 Hospital-baaed practice . . . . 1,339 All practices . 518 Region 2,412 2,000 773 Source: Anerlcan Medical Association, The Distribution of Physi­ cians. Hospitals, and Hospital Beds in the United States. 1967 (Chicago: Anerlcan Medical Association, 1968). 58 Dsntiita In 1967, there were 1,714 people per daatltc In the United States; tht Michigan ratio was 1,899 paopla par dantlst. Tha Grand Traverse Region ratio, 1,912 paopla par dantlst, and thosa for tha Individual countlas ara shown In Table 18* Tha distribution of dentists Is Important In relation to tha avail­ ability of dental care. Dentists, like nedlcal doctors, tend to locate where economic and cultural advantages ara greatest, and there Is generally a aubstantial divergence between urban and rural areas. The range of population-to-dentlst ratios is wide. But individual county ratios aust be considered in a regional context and particularly in relation to the position of Grand Traverse County as a trade and nedlcal center. Thus, although Missaukee County had only one dentist. It is reasonable to suppose that aany patients used dentists In Grand Traverse and Benzie counties where there were, respectively, 1,370 and 1,141 people per dentist. Osteopathic Physicians The distribution of osteopathic physicians' services in the United States depends partially on legislation governing the practice of osteo­ pathy In individual states, and partially on attitudes of patients to­ wards osteopaths as qualified nedlcal practitioners. Michigan osteopaths enjoy a favorable legal and social climate, thus they nake an important addition to the supply of nedlcal personnel. the Grand Traverae Region. This Is especially true In Interviews with consusnrs and with nedlcal personnel Indicated that for many services, there Is a high degree of sub­ stitutability between the use of osteopathic physicians and nedlcal doctori ^These views were gained by the author during visits to the region. 59 TABLE 18.— Persons per active dentist. Grand Traverse Region, 1967 County Population per dentist Isolated rural counties: Antrim................................. 3,000 Benxle................................. 1,141 Crawford............................... 2,700 Kalkaska............................... 2,300 Leelanau............................... 2,400 Missaukee ............................ 6,300 Isolated semi-rural counties: Grand Traverse........................ 1,370 Wexford . . . 3,540 ......................... Average for region.................. Source: Tables 9 and 16. 1,912 60 T h a n war* 27 oataopathlc physicians practicing in tha Grand Travaraa Region in 1967 (Table 16, page 55). Tha large proportion of oataopatha in tha Grand Travaraa Region can be attributed to Travaraa City'a rola aa the economic and medical center of the region, and aaaociativaly, with tha praaanca of an oataopathlc hoepltal in tha city. Profeaaional Nuraea Table 16 above that there vara 316 ragiatarad profeaaional nuraaa practicing in tha region in 1967. Michigan ara employed in hoapltala. Seventy percent of tha nuraaa in Hence, tha relative concentration of nuraaa in Grand Travaraa County and, to a laaaer extent, in Wexford County, la to be expected. Estimates of daalrable nuraa-to-population ration vary from a 1963 U.S. Surgeon General*a figure of 350 nuraea per 100,000 people to a 1964 Michigan aurvey figure of 327 nuraaa par 100,000 people.^ According to the Michigan Board of Nuralng there were, in 1964, only 238 nuraea par 100,000 people in the atata, and 319 par 100,000 in the Grand Travaraa Region. The regional ratio ia clone to the deaired atate ratio, la eig- nifleantly greater than the actual atate ratio, and elightly greater than the actual national ratio of 306 par 100,000.** *Slnce thla aatlmat* ia baaad on data in the 1964-65 Annual Report of tha Mlchlnan Board of Muraina. it may be low. 5U.S. Department of Health, Education, and Welfare, Health Raaourca Stat letlea. 1968. Public Health Service Publication Ho. 1509 (Waehlngton: U.S. Government Printing Office, 1968), p. 138; and "Hurslng Meede in Michigan1' (Lanalng, Michigan: Michigan Board of Huralng, 1967), unpublished mimeograph. 6U.S. Department of Health, Education, and Welfare, Toward Quality in Muraina: Heads and Goals. Report of the Surgeon General's Consultant Group on Huralng, Public Health Service Publication Ho. 992 (Washington: U.S. Government Printing Office, 1968); and "Huralng Heads in Michigan," 1967. 61 Assuming that these ratio* havt remained substantially unchangad, they provlda a baals for concluding that tha raglon la relatively wall situated regarding Its nursing needs even though the number of nurses say be lass than optimum. Summary This concludes the survey of major nodical facilities and profes­ sional health manpower located In the Grand Traverse Region. There are other facilities* such as laboratories* drug stores* and other medicallyoriented retail stores and manufacturers* and other professionals such as chiropractors and sanitarians that are found In most areas* as Indeed In this on*. These facilities and professionals are mostly supportive of the major medical complex. Their variety and quantity can be related to the else and comprehensiveness of the complex* and the characteristics of the population It serves. Their Importance to this study will be re­ vealed In the following chapters In which their income will be estimated. A detailed description of the quantities of these auxiliary services would add little to the picture of the region's medical structure. The region has been shown to be unusually well provided for in terms of the major medical services available to the population. The quantity and quality of medical services often greatly exceed the norm for rural areas in the United States* and in most cases* are closely comparable with standards found in well served urban areas. This Is due, almost exclusively* to the exceptional medical complex that has been developed in Traverse City* and which has given the city a reputation as a focal point for the provision of high quality medical care. Any comparative Inferences that might be drawn from Indications of the adequacy of medical facilities In the area are incidental to the 62 objectives of this study. The letter ere concerned with whether the popu­ lation Is edequetely served In t e n s of ectuel fulfl linent of heelth ser­ vice needs, end the cooper Ison of the cost of providing unfulfilled needs with the excess Incom, If any, of the region*e nedlcel sector. Never­ theless, It should be noted thet the region Is sn exenple of on Isolated rural ares that Is excellently served In terns of available nedlcel ser­ vices. Were the region used as a standard by which to judge the adequacy of eedlcal services In other Isolated rural areas. It scans probable that nost would be woefully lacking.7 7Dr. Shyaawlendu Sarkar's study, footnoted on p. 2 as the first study In a series of which the present study Is a part, provides an ex­ cellent contrasting exanple of an Inadequately serviced region. CHAPTER T INCOME AMD EXPENDITURE ACCOUNTS— HOSPITALS The primary objective of thla and tha following two chaptera is to estimate medical spending and Incoma In the Grand Traversa Region for the year 1967. This la to be accomplished in a way which will ahow the total dollar value of medical services produced in the region in the year; the distribution of this aawuat as incoma among the components of the medical sector; the sources from which it originates; the primary disposition of the income by the sector components; and, finally, the balance between external expenditures and externally originating incos*. A guiding criterion in these chapters is that the method used shall be so developed that a similar method could be used in analysing other multicounty regions. This will be accomplished by constructing a framework and set of accounts that are based mainly on nationally avail* able secondary data, but which can be modified so as to accomawdate primary data or special regional lnfonsatlon when they are available. • Framework for Analysis The market for a region's medical industry can, for the purposes of these chapters, be regarded as composed of three sectors: consumers, and input suppliers. producers, Producers are firms, institutions, and persons whose primary function la producing medical services for the con­ suming sector. The consuming sector is composed of institutions and people who pay the cost of maintaining the producing sector. The input supply sector is composed of firms and individuals that sell inputs to 64 tht producing sector and not directly to consusars; this sector can also be thought of as the prleery recipient of the Jacaaa the producing sector spends. The relationship aaoag the three sectors Is shown In Figure 5. Suppliers of inputs needed in producing sector Consualng sector Producing sector Input supply sector Inputs -* -4- Outputs Production of asdic al services Inputs Consumption of nedlcel services ♦ Payments for services 71CUKE 5.— Structure of the swrket for nedlcel se nrIces To show how the peynents nschenlsn operates aaong the three sectors, it Is necessary to deconpose each Into its coaponents* The Depertaent of Health, Education, and Welfare's nethod for distributing national health expenditures provides a starting point.* Several advantages are to be gained froa using HEW'e breakdown. In the first place, It Is an instantaneous source of eetisates of per capita spending, so it can be ueed for approxinatione of regional spend­ ing when no better data are available. Secondly, It covers all health services; consequently, the only aodlficatlons that night be needed on the producing side ere those which provide aore detail about specific coaponents. The seas Is true of the consusrimg sector; the various sources of funds are conveniently presented, and are aaenable to aodlficatlons to suit regional analyses. *The distribution of total national health expenditures for 1967 is shown In Table 13, p. 48. r 65 The type of Modifications to b« usad will b« onao that make tha HEW breakdown ralavant to tha analysis in general. In tha producing sactor, physicians' sarvlcas will ba dlvldad Into sarvlcas of nodical doctors and oataopathlc physicians. Padaral hospital sarvlcas, research, and nsdlcal facilities construction will not ba usad. There are no federal hospitals In tha Grand Traversa Region, and rasaarch and con­ struction expenditures are only Incidentally relevant to a study of tha cost of providing tha received level of care In a given year. In tha consuming sactor, state and local axpandlturas will ba shown separately and private consumer axpandlturas will ba divided Into those originating within and without tha region. These modifications will assist in tha development of estimates of tha value of nsdlcal services produced In tha eight-county region and. Inasmuch as soma ser­ vices are paid for by nonresidents, tha value of medical sarvlcas exports. For tha input supply sactor, tha analysis is more complicated be­ cause there exists no ready-made listing of how the productive compo­ nents spend their Income. Nevertheless, the main concern Is to Isolate three aspects of this expenditure: (1) the amount leaving the region, in effect, money spent on Imports of medical supplies; (2) tbe amount spent on wages and salaries, and (3) so as to lay the groundwork for future chapters, the net Incomes of medical doctors and drug and hospital equipment manufacturers. The approach adopted Is to take each producer Individually and estimate its Income and Income distribution according to the type of consumer and region of origin. Only Incidental attention Is paid to the Input supply sector during the Income analysis; the distribution of incomes to the input sector Is taken up separately In chapter seven. Finally, In chapter eight, the complete lncone-expendlture framework la presented for the three sectors. Since the analysis Is rather lengthy the remainder of this chapter will be devoted to the largest component of the health Industry, the hospital. Chapter six will contain the analysis of the other producing components, and then the Input sector and the summarising framework will be presented In chapters seven and eight. Hospitals Hospitals of concern In this section are: the general hospitals In Benzie, Crawford, Grand Traverse, Kalkaska, Leelanau, and Wexford Coun­ ties, and the osteopathic and psychiatric hospitals In Grand Traverse City. By combining Information from different sources It Is possible to obtain detailed smdical and economic data about most hospitals in the United States. Two major sources are Hospitals (the Journal of the American Hospital Association) and state plans for hospital and medical facilities construction. Hospital Expenditures Income and other data pertaining to the Grand Traverse Region's hospitals have been obtained from the above sources and are presented in Table 19. 2 Except for data on the osteopathic and Kalkaska hospitals on total expenditures, payroll expenditures, and number of personnel, the numbers in the table are as reported In the two sources. Unreported osteopathic and Kalkaska data were estimated according to the method outlined In Table 20. 2 Hospital incomes and expenditures are, unless otherwise noted, assumed equal. The assumption Is based on the nonprofit orientation of the region's hospitals and the existence of only minor imbalances in available Income-expenditure accounts. TABLE 19.— Service and economic date, Grand Traverae Region hospitals, 1967 Control* County and hospital Service** Stayc Beds Occuppancy Percent Benzie: Paul Oliver Memorial........ Crawford: Mercy ..................... Grand Traverse: Munson Memorial........* Traverse City Osteopathic . . Traverse City State ........ Kalkaska: . Kalkaska Memorial ......... Leelanau: Leelanau Memorial ......... Wexford: Mercy ..................... Total expense Total payroll Personnel, full-time ,equivalent 1.000 dollars 23 General S 43 78.6 499 271 67 21 General S 68 83.0 855 495 101 23 23 12 General General Psychiatric S 250 73 S L 2,610 80.8 85.0 94.8 3,794 1,070 7,555 2,675 617 6,089 609 152 905 13 General S 20 58.3 176 97 28 23 General S 29 66.1 279 153 40 21 General S 128 81.2 2,029 1,063 260 31,221 16,257 11,460 2,162 611 8,702 5,371 1,257 Total All hospitals............. General hospitals and osteopathic hospitals . . . *Control: Institutional arrangements governing hospital. Code: 12 - State hospital; 13 * County hospital; 21 ■ Church-related, voluntary nonprofit; 23 ■ other nonprofit. ^Service: Main medical orientation CStay: S • Short-term, over 50 percent of all patients admitted have a stay of less than 30 days; L ■ Long-term, 50 percent of all patients admitted have a stay of more than 30 days. ^Estimated totals: the method Is explained In Table 20. TABLE 20.— Method of estimating characteristics of the osteopathic and Kalkaska hospitals* Osteopathic Item estimated Total expense......... Payroll expense......... Number of personnel........ Method Number of patient days mul­ tiplied by the average total expense per patient day in similar U.S. hos­ pitals Number of patient days mul­ tiplied by the average pay­ roll expenses per patient day in similar U.S. hos­ pitals Average number of patients per day multiplied by the average number of personnel per patient days In similar U.S. hospitals Calculation 22,643 x $47.24 22,643 x $27.23 22.643 x 2.45 365 Kalkaska Estimate Calculation Estimate $1,069,650 4,259 x $41.42 $176,410 $616,570 4,259 x $22.73 $96,890 152 4,259 x 2.37 365 28 ‘Estimates of personnel and expense per patient day were based on U.S. averages for hospitals with similar size, control, service, and stay characteristics as these hospitals. Number of patient days based on data in Michigan State Plan for Hospital and Medical Facilities Construction. 1968*69 (Lansing, Michigan: Department of Public Health); Hospitals. Journal of the American Hospital Association, XLII (August, 1968). 69 The information In Table 19 is the first dsfinitlvs insight into ths region's aedicsl tcooosjr. In 1967 the hospitals spent sobs $16.3 aillion, $11.5 Billion (70.5 percent) of which represented the payroll expense of 2,162 hospital personnel. The average wage for hospital personnel was $5,319. The 1967 national wage in coanunlty hospitals was 3 $4,476. The everage wage in Michigan hospitals was approximately 4 $4,000. The differential can probably be most readily explained by the existence in the region of relatively high quality and comprehensive hospital services, which enable the region to attract a b o re productive labor force than do other regions.^ Income Distribution by Source of Funds To obtain an initial approximation of the distribution of hospital incomes by source of funds, it will be assumed that the regional distri­ bution is the same as the national one. This will provide an estimating franework that could be used in any region of the United States. However, as the chapter develops these estimates will be modified by particulars of the Grand Traverse Region. The national structure will also be modified to permit the development of a method to evaluate interregional trade in hospital services. Trade value la defined as tha difference between the hospital sector's income and the population's expenditure on hospital services. ^Hospitals. Journal of the American Hospital Association, XLII (August, 1968),445. 4 U.S. Bureau of the Census, County Business Patterns. 1967, Michigan CBk 67-24 (1968), p. 14. *These average wage figures lose some comparability as a result of the different sources in each case; the pattern, however, is expected to be valid. 70 A positive difference would be the value of exported hospital services, that is, hospital services supplied but not paid for locally* A negative difference would be the value of Imports, that is, hospital expenditures over and above the income of the region's hospitals. The latter would doubtless be particularly relevant in analyses of regions devoid of hospitals. Judging by the evidence already presented regarding the size and scope of the hospital complex in the Grand Traverse Region, a sub­ stantial positive difference is expected. Table 21 Is a detailed account of how national hospital expenditures are distributed, both according to their source and destination. are consumers, philanthropy, and governwent. Sources Destinations are type of hospital (major service offered) and control (type of ownership). In 1967 consumers and government contributed $8.8 billion and $8.9 billion, respectively, of the nearly $18 billion national expenditures on hospital services. Federal funds provided 63 percent of the public share, and local governments provided 37 percent. This marks a significant Increase from 1966, when the federal government spent $6.2 billion, or 40 percent of the total. Consumer spending, on the other hand, decreased from 58 percent of the total in 1966 to 49 percent In 1967. This change is largely the result of Msdlcere having taken over a substantial portion of hospital bills for people 65 years old and over. The change shows up particularly strongly la nongovernmsnt hospitals where government expen­ ditures jumped from $1.6 billion or 17 percent of totsl expenditures in 1966, to $3.8 billion or 35 percent in 1967. Over the same period, con­ sumer spending In these hospitals declined from $7.3 billion, or 79 Percent, to $6.8 billion, or 62 percent. This information can now be applied to the region's hospitals. Iuconss from Table 19 are multiplied by the appropriate percentages shown TABLE 21.— Boepital iaceae by hospital control* eervlce, and oonrco of f m d i , Grand Travaraa legion* 1967 Source of fanda Unit All hoe pi tala Type of hoepltal PeychiGen­ atric eral T,tesr All hoepltala Coaaunara........ Mil. dol. Percent 8*752.0 48*8 8*439.8 54.2 10.5 13.2 301.1 13.1 Public ........... Mil. dol. Percent 8*854.2 49.3 6*790.2 43.6 69.0 86.8 1*995.0 86.9 Federal........ Mil. del. Percent 5,548.7 30.9 5*257.8 33.8 1.5 1.9 289.4 12.6 State and local. Nil. dol. Percent 3*305.5 18.4 1.532.4 9.8 67.5 84.9 1*705.6 74.3 Philanthropy . . . Mil. dol. Percent 340.0 1.9 340.0 2.2 Total. . . . . Mil. dol. Percent 17*946.2 100.0 15,570.0 100.0 —— 79.5 100.0 — 2,296.7 100.0 Federal hoepltala Coaaunara........ Mil. dol. Percent 176.7 9.4 176.7 11.3 Public .......... Mil. dol. Percent 1,700.2 90.6 Federal........ Mil. dol. Percent 1*676.9 89.3 Stete and local. Mil. del. Percent 23.3 1.3 Mil. del. Percent 1,876.9 100.0 Total........ — — 1*386.0 88.7 1.5 100.0 312.7 100.0 1*386.0 88.7 1.5 100.0 289.4 92.5 __ — 1*562.7 100.0 1.5 100.0 23.3 7.5 312.7 100.0 Cantlnaad— 72 TABLE 21.— Hospital incone by hotplttl control, M n r i c t , and nonrcn of foods. Grand Travaraa Beglaa, 1967 — cootinned Soorca of foods Oalt All hoepltala Type of hoepltal 2 m ^ i r pH » i “ State and local government hoepltala 6 Consunara........ Mil. dol. Forceat 1,728.6 34.2 1,368. 49. 9 7.5 10.0 152.3 8.3 Pablic ........... Mil. dol. Farcaat 3,323.3 63.8 1,575. 5 50. 1 67.5 90.0 1,682.3 91.7 Mil. dol. Farcaat 634.3 12.6 634. 3 20. 2 “ Mil. dol. Farcaat 2,691.0 33.2 941. 2 29. 9 67.5 90.0 1,682.3 91.7 Mil. dol. Farcaat 3,053.7 100.0 3,144. 1 100. 0 75.0 100.0 1,834.6 100.0 Fadaral........ State and local. Total........ — Bangovarnnantal hoepltala Coaaonara........ Mil. dol. Farcaat 6,846.9 62.1 6,694. 5 61. 3.0 100.0 Pabllc .......... Mil. dol. Farcaat 3,828.7 34.8 3,828. 7 35. 2 — -- Mil. dol. Farcaat 3,237.5 29.4 3,237. 5 29. 8 — -- Mil. dol. Farcaat 591.2 5.4 391. 2 5. 4 Mil. dol. Farcaat 340.0 3.1 340.10 3. 2 Mil. dal. Farcaat 11,015.6 100.0 10,863. 2 100J0 Fadaral........ State and local. Philanthropy . . . Total. . . . . Bearcat 6 149.4 100.0 — ■a 3.0 100.0 149.4 100.0 Social Secarltv BallotIn, XXXIX (Janeary, 1969), 7. 73 in Table 21 for atate and local government and nongovernmental hoapltala. Tha raaulta ara ehown in Table 22. Theae are eatinatea of the diatrlbu- tlon of the region*a hoapltala* Incomaa by aource of funda, under the aaauaptlon that the regional and national dlatrlbutlon are alnllar. Theae are Initial eatlmatea. Some nodlflcatlona will become apparent aa the atudy proceeda and particular Information about Individual hoapltala la brought out. Neverthaleaa, for the moat part, the eatinatea of the dlatrlbutlon by aource will be aaaumed eaaentially correct. One of the major Innovatlona in eucceedlng aectlona will be to eubdlvlde theae aourcea further by conalderlng their location. Kaalonal Dlatrlbutlon of Hoapltala* Inconea Mow that the initial hoapltal Incomea have been dlatrlbuted by type of payer, the next atep la to uncover the geographic location of theae payera and aubaequently, to find out the proportlona of the Income originating from within and outalde the region. Patient origin data are available for moat of the reglone' hoapl­ tala. Thia will aimplify eatlmatlng the geographic aource of conBurner paynanta. Philanthropic payamnta are aaaumed to originate with the region or with the atate for the paychlatric hoapltal. theae donatlone la relatively amall. The amount of Turthenaore, It eeeme reaaonable to expect that moat or all donatlone to local hoapltala come from local aourcea. Public paymente preaent greater analytical probleaw than conaumar ac<£. philanthropic payamnta. For federal funda, the bulk of which ara Medicare relmburaemanta, It la neceeaary to eatlmate a net figure that repreeente the difference between total relmburaeamnta received by the hoapltala and Medicare premluma paid by the region*a population. A TABLE 22.— Incone and source of funds. Grand Travers* Region hospitals, 1967 Source of funda County end hospital Total Incone Thou. Private Consuser Thou. Public Philanthropy Percent Thou. Percent Federal Thou. Percent State and local Thou. Percent Benzie: General............. 499.0 307.4 61.6 16.0 3.2 148.7 29.8 26.9 5.4 Crawford: General............. 855.0 526.7 61.6 27.4 3.2 254.8 29.8 46.1 5.4 Grand Traverse: General............. Osteopathic......... Psychiatric......... 3.794.0 1.070.0 7.555.0 2,337.1 659.1 627.1 61.6 61.6 8.3 121.4 34.2 3.2 3.2 1,130.6 318.9 29.8 29.8 204.9 57.8 6,927.9 5.4 5.4 91.7 Kalkaska: General............. 176.0 87.8 49.9 — — 35.6 20.2 52.6 29.9 Leelanau: General............. 279.0 171.9 61.6 8.9 3.2 83.1 29.8 15.1 5.4 Wexford: General............. 2,029.0 1,249.9 61.6 64.9 3.2 604.6 29.8 109.6 5.4 Total............. 16,257.0 5,967.0 36.7 272.8 1.7 2,576.3 15.8 7,440.9 45.8 General hospitals and osteopathic hospitals ........ 8,702.0 5,339.9 61.4 272.8 3.1 2,576.3 29.6 513.0 5.9 Detail nay not add to totals due to rounding. pofitiv* difference will represent e net transfer of funds into the region, and vice versa. State and local funda are aggregated In Table 22. These will be separated and, as with federal funds, a net novsnsnt will be attributed to state funda. The analysis will follow three steps: (1) the value of services paid for froe nonregional sources will be estluated; (2) the value of services purchased outside the region and paid for with regional funds will be estlaated; and (3) theae two estluates will be used to obtain an estlasts of the net value of interregional trade in hospital services. Besional Distribution of Patients Residential origins of patients receiving hospital services in the region in 1967 are shown in Tablee 23 and 26. The inf onset Ion for general hospitals (Table 23) is drawn from a 1967 hospital patient census.^ census. Paychiatrlc data (Table 24) are estinates based on a 1965 Both show the regional origin of the patients and clearly indi­ cate that the region's hospitals are providing a substantial amount of hospital services to people fron outside the eight counties. The next few sections of this chapter will be concerned with placing a value on this and related trade. Consunar Expenditures Three assuaptlons are necessary if the infonsatlon presented eo far is to be used to estimate trade figures. The first is that the nuaber of patient days of hospital care provided to any one county's population is ^Such conplete and current information is available for a few areas in tha United States. Attempts to gauge the distribution of hospital patients in many other aultlcounty regions would probably depend on esti­ mating procedures. TABLE 23.— Patient discharges by residential origin, general hoepltala, Grand Travarse Region, 1967 County All discharges Regional residents Nuaber Percent Munber Nuaber Bensle............. 1,109 881 79.5 228 20.5 Crawford........... 2,617 969 37.0 1,648 63.0 11,043 9,558 86.4 1,485 13.4 Kalkaska........... 625 591 94.5 34 5.5 Leelanau........... 797 712 89.3 85 10.7 Wexford ........... 5,206 4,084 78.4 1,122 21.6 21,397 16,795 78.5 4,602 21.5 Total ........ Percent Nonregional reeldents ^Includes Infcreation for general and osteopathic hospitals. Source: Health Planning Council of Michigan, 1967 Patient Orlain Study. North Central Region (Lansing, Michigan: Health Planning Council of Michigan, 1968). 77 TABLE 24. " E s timated patient origin hy residence, psychiatric hoapltal. Grand Traverse City, 1967 Patient origin Regional............................ Patients 270 Honregional ....................... 2,204 Total patients................. 2,474 Source: Table 22 end Mlchlean Denartnent of Mental Health. Mental Health Statistics. Julv 1. 1964 - June 30. 1963 (Lansing, Michigan: Michigan Department of Mental Health , 1965). Patient origin data are unavailable for 1967. It Is assumed that the regional dlatrlbutlon In 1967 was the seme as In 1965. 78 distributed in tbs s u e proportion to total pstisnt days as the nuaber of discharges for one county is to total discharges. The second Is that the nuaber of patient days does not vary significantly aaong patients froa different counties. The third is that there is no discrimination In hospital charges according to a person*s residence. There is no available evidence to dispute the final assumption; the other two assumptions rest upon reasonable expectations and the Improbability that hospitals take different lengths of time to provide the same services to people from different regions. General Hospitals With these assumptions aade, it is a straightforward matter to obtain the trade patterns for consumer expenditures by applying the per­ centages in Table 23 to the consumer expenditure totals in Table 22. results appear ia Table 25. The They show that the region's general hospitals sold, or exported, hospltel services valued at $1,059,000 to nonregional consumers in 1967. This amounted to 19.8 percent of the value of general hospital services sold directly to consumers, both regional and nonreglonal. Psychiatric Hospital To estimate consumer payments to the psychiatric hospital, it is necessary to know the number of private paying patients and the cost per day. The former is estimated to have been 257 patients. It was obtained by taking the proportion of private paying patients plus half the partially publicly supported patients in 1965, and assuming that the sans proportions held in 1967.^ The asseseed cost per patient day was ^Patient costs are court-apportioned. A patient may be fully publicly supported, fully privately supported, or partially publicly TABUS 25.— ltc|loatlliation of consuaar t x p a n d l t u m on hospital nrrlccc, Grand Travaraa Ration, 1967 Hoapltala and county _ _ Conaunar axoand:Lturas Total Haglonal Nonratlonal 1,000 dollars 1,000 dollara Bansla........... 307. A 244.4 79.5 63.0 20.5 Crawford......... 526.7 194.9 37.0 331.8 63.0 Grand Travaraa* . 2,997.2 2,624.7 87.6 371.5 12.4 87.8 83.0 94.5 4.8 5.5 171.9 153.5 89.3 18.4 10.7 1,249.9 980.0 78.4 269.9 21.6 5,339.9 4,280.5 80.2 1,059.4 19.8 844.2 85.4 10.1 758.8 89.9 6,184.1 4,365.9 71.6 1,818.2 28.4 Parcant 1,000 dollars Parcant Ganaral hoapltala: County— Kalkaaka........ Laalanau......... Waxford ........ Subtotal. . . . Psychiatric hoapltal........... Total ........ Ganaral and oataopathlc hoapltala conblnad. Expandlturaa hava baan proratad on tha baala of total nunbar of admlaalona, patlant daya, and coat par patlant day. 80 approximately 89.00 in 1967. g Consuaar axpandlturas can ba eatlaated by expreeslng tha cost par day or an annual basis and Multiplying by tha nuaber of patlanta. Tha eetlnete, $844,200, is somewhat graatar than tha preliminary aatlnata of $627,100 givan in Table 22. Twenty-six of tha 257 privately paying patients ware residents of tha Grand Traverse Region. Their expendlturee, eatlmatad by tha aathod usad above, ware $85,410. Nonregional consumer payaents, aaaumed to represent tha difference between total consuaar payaents and regional consuaar paymanta, were $758,835. Theae reaults ara shown in Table 25. Philanthropic Expendlturee Philanthropic payaents to the general hospitals were estlaated In Table 22 to be $272,800. Since no additional information is available this estiawte will be used. For the psychiatric hospital, the preliminary estimates show n o philanthropic income. This, however, auet be refined. State financial records show that philanthropic income averaged $89,900 o for the fiscal years 1967 and 1968. Philanthropic Income is actually the amount spent from s special maintained state account. Since it la necessarily spent in the year received, it le considered nonreglonal in origin. Federal Government Expenditures General Hospitals It was estlamted that the fedsral government epent $2,576,300 for general hospital services in the Grand Traverse Region in 1967 (Table 22). supported and privately eupported. The latter proportion is assusmd to be 50 percent public and 50 percent private. **Actual coate were $8.55 in flecal 1967 and $9.45 in fiecal 1968. The average le ueed for the 1967 calendar year. ^State of Michigan, Detail Financial Stateaante. 1966-67 and 1967-68 81 This h o w Y t r , should not bs regarded ss an unllstsrsl trsnsfsr. Fifty- six psrcsnt was lnsursncs for ths sgsd undsr ths Mad1cars program (Tabla 26). taxes. This program la partially flnancad with social security By deducting an estimated value of tha raglon's contribution to hospital Insurance from the estimate of Medicare reimbursements to the region, It will be possible to reduce the value of federal expenditures to a figure which M y be regarded as a net transfer. It Is realised that some proportion of the net will still be financed from the region's taxes. Ths adjust w e n t , however, would be minor; consequently, It will be over­ looked . Virtually all United States residents 65 years of age and over are eligible for benefits under the compulsory program of hospital Insurance, Medicare. The program Is financed by a schedule of contribution rates applied to a maximum earnings base. The base was $6,700 In 1967. This Income Is channeled Into a hospital insurance trust fund from which all benefits and administrative costs are paid. The contribution rate, 0.5 percent In 1967, applies equally to employees and the self-employed. The cost of benefits for people who are not entitled to social security or railroad retirement benefits Is paid from general funds of the Treasury. 10 Total earnings In the region, subject to social security taxes, are e s t l M t e d at $98,242,000. The largest part of this sum, $97,192,000, Is e s t i u t e d earnings of the covered work f o r c e . ^ The difference of *®U.S. Department of Health, Education, and Welfare, Social Security *TTT|TWff If1 rh> United States (Washington: Social Security Administration, March, 1968), pp.43-44. Note: The earnings base and contribution rate cited In this publication are for 1968; they are $7,800 and 0.6 percent, respectively. Bureau of the Census, County Business Patterns. 1 9 6 7 . pp. 18— 19. 82 TABLE 26.— Federal hoapltal care expendlturee by program, United States, 1967 Total expenditure Prograa Million dpll^rp Percentage of total Percent Health Insurance for the a g e d ........... 3,102.0 56.0 Vorknea's compensation (nedlcel benefits)............................... 9.8 0.2 Public assistance (vendor medical payments)................................ 609.0 10.9 General hoapltal and medical care. 146.9 2.6 543.0 9.9 27.7 0.5 1,079.1 19.4 . . . 26.2 0.5 T o t a l .................................. 5,548.7 100.0 . . . Defease Department hospital and medical care (Including military dependents) . Maternal and child health services . . . Veterans* hospital and medical care. Medical vocational rehabilitation. Source: . • Social Security Bulletin. XXXIX (January, 1969), 9. 83 $1,050,000 Is an • s t l H t * of ths earnings of self-enployed people, baaed on an estimated self-enployed work force of 2,250 people and the average wage In the eight-county region. 12 The aaount of Medicare reimbursements received by regional hoapltal patients is estimated to have been $1,849,000 in 1967. This was arrived at by multiplying the nunber of enrollees, people aged 65 and over, by $148.20, the annual average reinburaeeent per Michigan enrollee. 13 Average Michigan reimbursements were actually $154.80 in Metropolitan counties with a central city, $157.08 In Metropolitan counties without a central city, and $131.40 In nonustropol 1 taw counties. It Is felt, how­ ever, that the special characteristics of the Grand Traverse Region*a hoapltal facilities would be wore accurately reflected were the atate average relnburseaent used rather than the nonamtropolitan county average. Medicare relnbursenents to regional patients asK>unted to $1,849,000 of the $2,576,300 of federal funds. The balance of $727,300 can be accounted for nalnly by Medicare relnburaemwnts to nanreglonal patients. A snail aaount, If any, nay be attributed to the general hospital and mndlcal care progress. If regional Medicare prenluna, eatlasted at $977,000, are subtracted from the $2,576,300 total federal payamnts, there is a balance of $1,599,300 which aay be regarded as a net transfer of federal funds Into the region. all general hospitals. 14 This la 18.4 percent of the IncoiM of This transfer represents a slsable net return 12 Overall Econo^f - n*«*elopmant Proaran. *^U.S. Department of Health, Education, and Welfare, Health Insur­ ance Statlatics. Mo. HI-9 (Washington: Social Security Administration, Deceaber 19, 1968), table 1. ^ E s t i v a t i o n of regional Medicare Premiums: 10.0 percent of the earnings of the covered work force ($97.2 md.lllon x 0.10), plus 5.0 percent of the earnings of the covered self-employed work force ($1.0 Million x 0.05) - $977,000. from the federal government to the region* s medical econoey. Psychiatric Hospital The psychiatric hospital at Traverse City received $36,796.98 frosi the federal government In fiscal 1966-67 and $28,168.60 in fiscal 1967-68. All State of Michigan accounts are maintained on a fiscal year basis. Where, as In this case, specific details are required. It has bsen decided to take a simple average of the two years' expenditures to represent the calendar year 1967 expenditure. Thus, federal expenditures on the psy- chistric hospital are estimated at $33,000, a figure which represents a further refinement In Table 2 2 . ^ State and Local Government Expenditures State and local governments were preliminarily estlsuited to have spent $7,440,900 on the region's hospitals In 1967. quantity of funds from one source. This Is the largest The estimated amount for the state and local cost of maintaining the psychiatric hospital was $6,927,900 or 93.1 percent of the total. The financial significance of this Institution requires that It receive special attention; accordingly Its source of funds will be analysed before a movement Is aide to the relatively smaller state and local financing of the general hospitals. Psychiatric Hospital The 1967 Income of the psychiatric hospital was estimated as $7,555,000 (Table 22). Actual expended appropriations In the two fiscal ^ S t a t e of Michigan, Detail r-twgwgjal Statement. ***Some privately paying patients may be on Medicare. Medicare support of mental patients Is slight however. There are no data to Indi­ cate the age distribution of the patients In the psychiatric hospital. Since the proportion of privately paying patients is relatively low anyway no allowance will be made for Medicare payments. 85 year* 1966-67 and 1967-68 ware $7,750,415.81 and $8,141,834.52.17 An analysis of the accounts reveals that these relatively high reported ex­ penditures Include s u m for forwarded unexpended balances. However, If these balances are deleted for 1966-67 and prorated for 1967-68, the average expenditure over the two year period is a p p r o x l M t e l y equal to the e s t l H t e d $7,555,000. Actual state and local paystnts are e s t l u t e d to be $6,587,900. This was obtained by taking the difference between total ptystats and the sum of the payments attributed to other sources. region's contribution to state and local p a y m n t s , To separate the the total can be divided according to the proportions of regional and nonregional publicly supported patients. Out of 2,217 public patients, 1,973 (89.0 percent) were nonreg i o n a l , and 244 (11.0 percent) were regional. When these pro­ portions are applied to the total, the nonreglonal share of expenditures Is $5,863,200, and the regional share Is $724,700. This approach is a useful first step towards regional separation of nonfederal public funds. Nevertheless, from the point of view of the eight-county region, it is Insufficient because the regional total over­ states the actual regional contribution. of financing. The reason lies In the M t h o d A publicly supported patient Is paid for by the county for the first year and by the state thereafter. In looking at regional ex­ penditures, therefore, allowances must be M d e for two things that reduce the region's share and Increase the state's share. These are the state's payment for long-term patients and the state's relnburaesant to counties for health expenditures. Assuming that half the regional patients had been In the hospital for more than a year, half the bill for publicly *7State of Michigan, Detail Ti«**w<»ial S t a t O M n t a . and 1967—6 8 . p. 60. 1966-67. p. 63, 86 supported patients automatically falls on tha stats. Tha othar half is paid by tha county, but tha stata pays an everage of 50 parcsnt of tha region's health expenditures. cost falls on tha stata. Therefore an additional quarter of tha In all, given tha assumptions, 75 percent of tha cost of publicly supported regional patients Is borne by the state and not by the region at all. 18 Using this analysis, It can be assumed that the state automatically pays the full bill for half of the 246 publicly supported patients, and an additional half the bill for the remaining 122. Thus, the state pays for the equivalent of 183 patients, the counties for 61, and 26 are private paying. The economic effect of shifting payments from regional counties to the state la that It Increases exports of medical services. Table 27 shows that the estimated cost of maintaining the 270 regional psychiatric patients was $810,000. It also shows that dividing maintenance costs according to the criteria outlined above shifts $524,305 to the state, thereby reducing the effective regional expenditure to the sum of private and residual county expenditures: $285,795. The complete distribution of the psychiatric hospital's Income Is presented on a regional basis (Table 28). 96.2 percent of the hospitals* It attributes $7,269,205 or total income to nonreglonal sources. This is a substantial Interregional transfer of funds which must have a sig­ nificant economic Impact on the region. 18 Indirect regional paysmnts through state taxes are not being taken Into account. The focus Is upon Initial transfers to and from primary recipients and payers. 19 These estlmatee were also based on 1964-65 admissions data, the most up-to-date source available. Partially supported patients were equally divided between full public and full private. 87 TABLK 27.— Cost analyala for psychiatric patlanta In tha Travaraa City Stata Mantal Hospital, 1967 Typa of aupport Avaraga dally canaiia Annual patlant daya Coat par patlant day u n I Mupbar Dollar* Annual coat Dollar* 26 9,490 9.00 85,410 County ......... 61 22,265 9.00 200,385 Stata........... 183 66,795 7.85 524,305 Total. . . . 270 98,550 (a) 810,000 Prlvata......... *Tha avaraga coat par patlant day waa $8.22. 88 TABLE 28. — Distribution of incoat by oourco of f u n d s , T r m r M Msntal Hospital* 1967 Expandl turs s Sourca of funds ■sglonal: County govs Cons .to ro Regional total HonrsgIona1: Fadaral govs City Ststo int 200*385 2.7 85*410 1.1 285*795 3.8 33*000 0.4 10.0 Cons Phi lsnth ropy Stats and local govs Nonregional total Total In ts 89*850 1.2 6.387*520 84.6 7*269*205 96.2 7,555*000 100.0 89 General Hospitals Thar* hat* always baan tha medically Indigent— people who needed hospitalisation or nodical care but who were unable to pay for It. o o m In regions such people either went without attention or had their e x ­ penses paid by philanthropic or local governnsntal sources or assuned by the hospital, in which case they were usually paid Indirectly by other patients. In the Grand Traverse Region noat of these expenses were paid prior to 1966 by the county governments and the hospitals. Since 1966, however, federal and state programs have taken much of the financial responsibility for the Indigent away from local authorities. County governments, which traditionally maintained the indlgents, now find that their health assistance costs have been reduced. This does not mean these costs have been eliminated. There are still bad debts and sundry Indlgents who, for one reason or another, are Ineligible for, or unaware of, the n e w programs. Indian and migrant worker populations. There are also the Federal programs have been de­ signed to assist with these groups* medical needs, but this Is a rela­ tively recent Innovation. The Grand Traverse Region** county governments, possibly Influ­ enced by the need to attract a regular annual supply of fruit pickers, still assume s»st Indlgents* expenses that are not met by the federal or state governments. Neither total expenditures for health care nor the distribution among health services can be ascertained clearly from county financial reports. 20 20 Therefore, previous estimates of state and local hospital Stats of Michigan, Countv Governme n t . Financial Report (Lansing, Michigan: D s p a r t s n t of Treasury, 1968). Health expenditures are not recorded so that they can be disaggregated satisfactorily for this study. 90 expenditures will be used. These can be apportioned aacmg regional coun­ ties , nonreglonal counties, and the state as follows. ditures were $513,000. Estimated expen­ Approximately one fifth (21.5 percent) of the patients were nonreglonal (Table 23, page 76). Host of these were from surrounding counties, however, so it nay be assumed they were as likely to be supported by their county govern wants as regional patients ware. Thus, $110,300 (21.5 percent of $513,000) way be regarded as externally originating funds. Since the state contributes an average of 50 percent of the counties' revenues, the remaining $402,700 nay be divided equally between state and local sources. 21 These results are In Table 29. It shows that of the $513,000 spent by state and local governments on general hospital services, $201,000 came from regional sources and $311,600 from nonreglonal sources. Interregional Trade In Hospital Services The analysis of the Interregional financing of exported hospital services Is now complete. The results, summarised In Table 30, show that 69.0 cents of each dollar spent on hospital services In the region cones from a nonreglonal source. Total nonreglonal expenditures are estimated In excess of 11 million dollars. From the trade point of view, a useful way to consider the expenditures Is as paynsnts for exports and, clearly, the region Is hsavlly engaged In exporting medical services. But before drawing any conclusions In this respect, the other components of the health Industry must be analysed. Before moving to the other sectors, however, recognition must be given to 968 of the region's population who received hospital care 21Ibld.. p. 22-23. 91 TABLK 29.— Int«rngloii«l nonftdtral public financing of ganaral hoapltal ••nrlcts, Grand Travaraa Baglou, 1967 Itan ExpandItura Parcantaga 1,000 dollarf Parcant Total axpandlturaa........................ 513.0 100.0 Monraglonal axpandlturaa: Baglonal patlanta .................... Monraglonal patlanta................. 201.3 110.3 39.2 21.5 Baglonal axpandlturaa: Baglonal patlanta .................... 201.4 39.3 TABLE 30.— Interregional financing of hospital services, Grand Travarsa Region, 1967 Itan Iacona Total Consuners Source of Fundla ConPhilan­ Local Total suaers thropy govt. Regional - - 1.000 dollars - 1,000 dollars Philan­ Federal Stata and thropy govt, local govt. Nonreglonal 1.000 dollars . . . . . Hospitals: General* . . 8,702.0 4,754.7 4,280.5 272.8 201.4 Psychiatric. 7,555.0 285.8 85.4 200.4 Total . . 16,257.0 5,040.5 4,365.9 3,947.3 1,059.4 7,269.2 100.0 311.6 758.8 89.9 33.0 6,387.5 272.8 401.8 11,216.5 1,818.2 89.9 2,609.3 6,699.1 16.1 41.2 Psrcant Parcaat. . 2,576.3 Percent 31.0 *Iaclndes tha oataopathlc hospitals. 26.8 1.7 2.5 69.0 11.2 0.5 93 outside Che region. 22 A nuaber of those, 152 to be precise, were petients in the Veterans' Adninlstratlon hospital at Saginaw. were net by the federal govern— nt. Their — jor expenses Expenses for another 100 patients were paid for under other public progra— , prl— rily Medicare.23 It will be sssu— d that any large expenditures Incuabed by the re— inlng 700 or so patients were covered by private Insurance progra— . Hence the outflow of funds from the region attributable to inported hospital services is included in — dical insurance. This coaponent will be taken up in the — xt chapter. 22 Health Planning Council of Michigan, 1967 Patient Origin Study. North Central Region (Lansing, Michigan: Health Planning Council of Michigan, 1968). 23 This assu— a that the proportion of the region's population aged 65 and over (12.74 percent) la applicable for the region's population travelling outside the region. Chapter VI INCOME AND EXPENDITURE ACCOUNTS— NONHOSPITAL COMPONENTS Tha preceding chapter deacribed what could be the heart of alaost any region*a aedlcal coaplex, the hospitals. the other coaponents. This chapter will focua on Though leaa laportant than hoapitale froa the financial point of view, nonhoapltal coaponenta have an eaaentlal rola In delivering aedlcal aervlces that auppleaent and coapleaent hoapltal services. Incoass estlaated In this chapter are those of the region's physicians, dentists, and other aedlcal profeselonala, those of Its retail pharaaceutlcal stores and aedlcal appliance and optical atores; and those of Its nursing hoaes, public health services, and alscellaneoua or "other" health services.^ Detailed data of the type used In analysing the hospitals Is rarely available for any of the other coaponents. As a reault, tha foraat will differ froa that followed previously. With a few exceptlona, coaponents will be analysed for the whole region rather than for Individual counties. Each coaponent's Incoae will be estlaated. Then an analysis of the source and Interregional aovsaant of funda will be perforasd on all coaponenta aa a group. The results will be added to those froa the preceding chapter, ao that the conclusions of this chapter will show the aaount, recipients, and sourcea of the region's Stodlcal and osteopathic doctors* Incoaes will be estlaated sepa­ rately. For the sake of brevity the foraer will be referred to aa physicians and the latter as osteopaths. 94 95 total 1967 M d l c a l income. Ths r t M t r c h vlll still be b t M d on the criterion of developing and using aatlnatos which aro ralavant to tha Grand Traverse Ragion, but which ara baaad on tha type of information and methodology that would facllltata tha development of similar astlmatas for othar multicounty rsglons. Physicians Thara wars 128 practicing physicians in tha ragion in 1967 (Tabla 16, p. 55). Thirty-six of those were hospital baaad; thalr salaries ara a component of hospital care, and ara already accounted for. Of tha re­ mainder there wars 36 general practitioners, 16 aedlcal specialists, 27 surgical specialists, and 13 othar specialists. Thera ara significant differences in tha earnings of physicians according to their major field of practice and tha area in which they practice (Table 31). this study. Midwestern physicians* incomes are relevant to They will be used as estimates of physlclsns* incomes in the Grand Traverse Region. There are insufficient data to conduct a separate analysis of incomes of specialists who are in neither the msdical nor surgical fields. Nevertheless, there is sufficient evidence to suggest that their incomes are quite close to those of medical specialists. Accordingly, the category containing 16 medical specialists will be expanded to 29, thus including the 13 other nonsurglcal and non­ us d leal specialists. Estimates of net incomes for physicians in the region can be ob­ tained by multiplying the number of physicians in each field of practice by the appropriate Income from Table 31 for physicians in the Midwest. Gross incomes can be obtained by dividing net incomes by 0.60, the per­ centage of gross income reported to the Internal Revenue Service as the 96 TABLE 31.— Physicians* nac incona by flald of practice, United States, 1967* Area Net income of: Solo medical specialists Solo general nractitloners Solo surgical sneciallsts Dollars Dollars Dollars East............. 25,560 31,600 37,670 South ........... 31,250 33,330 38,820 Midwest ......... 31,330 34,170 41,000 Uest............. 32,920 33,180 32,940 *Net Incona Is froa practice after paynent of tax deductible pro­ fessional expenses, but before paynent of Incone tax. Source: Medical Econonlce (February 3, 1969), p. 95. Copyright (c) 19 by Medical Econonlcs, Inc., a subsidiary of Litton Publications, Inc., Oradell, N.J. 07649. Reprinted by permission. None of this aaterlal nay be reproduced, stored In a retrieval system, or transalt ted In any fora or by any means (electronic, nechanlcal, photocopying, recording, or otherwise) without the prior written pernlsslon of the publisher. average net incoam of physicians. Incomes are shown in Table 32. 2 These calculations and the resulting The total gross Income of $5,376,350 will be used as the 1967 estimated gross Income of the region's nonhos3 pital-based physicians. Dentists There were 51 practicing dentists in the region in 1967 (Table 16, p. 55). The mean net Income for nonsalaried Michigan dentists was 2 U.S. Department of the Treasury, "Preliminary Statistics of Income, 1967," Business Income Tax Returns (unpublished). 3 Estimates of physicians' earnings are difficult to verify. Never­ theless, several medical personnel in the region indicated in conversa­ tions that these were probably sound. Sarkar estimated the net Income of Copper Country physicians at over $41,000. These higher earnings say re­ flect the relatively lower supply of physicians in the Copper Country medical Industry. 97 TABLE 32*— Grand Travaraa Region's physicians' incomes, 1967 Field of practice Physicians Met income Gross Income Nufsber Dollars Dollars General practice........... 36 1,127,880 1,879,800 Medical specialties . . . . 29 990,930 1,651,550 Surgical specialties. 27 1,107,000 1,845,000 92 3,225,810 5,376,350 35,063 58,438 31,330 52,216 . . • Average . . . . . . . . General practitioners. ... $25,753, or 52.2 parcant of tha gross lncosm of $49,257. A Assunlng that thasa incomes ara raasonabla estiontes for tha region, total regional dental incomes can be calculated by multiplying the average incomes for dentists in all of Michigan by the number of dentists in the region. Tha results are shown in Table 33. The As m rlean Dental Association's 1968 survey of dental practice shows sosm variation in dental incoses according to the size of the city in which dentists practice. Were the present study concerned with a less medically-oriented rural area, consideration would be given to changing the estimated Incomes to reflect lower than average Incomes earned in rural areas. But for the Grand Traverse Region, where dentists are part of a sophisticated medical community and the quality of professional care Is high, it is felt that dentists, like other medical professionals, should have no difficulty in attaining state average incosms at least. 4 American Dental Association, "Income of Dentists by Location, Age and Other Factors," in 1968 Survey of Dental Practice. II, Report of Councils and Bureaus (Chicago: American Dental Association, 1968), 345. 98 TABLK 33.— Grand T r m r a * legion's dentists* ineoaaa, 1967 Dentists Total............. Net Income Gross lncone Number Dollaff DollaTf 51 1,313,403 2,512,107 25,753 49,257 Average* ......... *Theee aatlnatca ara cloaa to thoae Sarkar found for the Copper Country Medical Industry. Oateopaths The United Statea average groaa Incone of oateopathe was $35,590 in 1967.5 State estimates for 1965 show that Michigan oateopathe1 inconea were 93 percent higher than national averages.6 Aaaumlng the aane relationehip held In 1967, the Michigan average groaa income would have been $68,688* Net earn Inga for 1967 were 52 percent of groaa; therefore, the average net lncone of Michigan oateopathe would have been $35,717. Aaaumlng theae estimates are valid for the Grand Traverse Region and Multiplying by 27 (the number of osteopaths In private prac­ tice), total groaa and net Inconea of $1,854,576 and $964,359 are ob­ tained. The estimated average net earnings of osteopaths are very close to the average for all physicians; their average groaa earnings, however, are higher, though approximately the same aa the average groaa income of aurgaoma. 1967." 5U.S. Department of the Treasury, "Preliminary Statistics of Incomi 6 U.S. Department of the Treasury, Statistics of Income* 1965 (Washington: U.S. Government Printing Office, 1966), pp. 38 end 80. 99 Tht>« results M y techniques. be coincidental and depend on tha aatiaating An alternative and sore positive argument la that tha equality la to be expected. Froai the conauMra' point of view the two professions provide many essentially substitutive services. Consuaers are, therefore, unlikely to favor one over the other unless the prices are different. Furthermore, most of the region* cians are located In Traverse City. osteopaths and physi­ Hence, both groups practice In a similar medical environment. "Other** Professionals In the HEW classifications, "other" professional M d l c a l services are those of: M d l c a l and dental laboratories, chiropractors, private registered and practical nurses, proprietary hospitals, sanatorlusa, convalescent and rest homes, and a M d l c a l sector for such itess as in­ dustrial and inplant health services. Laboratories, nurses, and chiro­ practors will be focused upon in this section. The others are either nonexistent In the region or will be taken up under nursing horns. There was one dental laboratory and one chiropractor In the region In 1967; and In 1965, the last year for which Information Is available, 15 of the region's 316 practicing nurses were in private practice.7 There Is no specific business denoted as a M d l c a l laboratory. Labora­ tory services are provided by doctors' offices, drug stores, snd hospi­ tals; it will be essumed that their lncorns Include the region's expendi­ tures on M d l c a l laboratory services. 71964-63 Annual Import of the Mlchlaan losrd of (Lansing, Michigan: Michigan Board of Nursing, 1966), pp. 11-12 snd 17-18. 100 Annual lncone data for laboratories, chiropractors, and nurses are available froe the Treasury Departnent. a national basis. g Data for 1967 are available on The most recent year for which state data have been published is 1965. Assuming that the proportionality between state and national incomes in 1967 was the aaim asin 1965. 1967 state estimates can be obtained by weighting the data by the 1965 differential. method la used for the laboratory and chiropractor. This The differential is 10.7 percent, the amount by which the average income of Michigan's "other medical services" (the relevant component of the state tax data) la 9 greater than the United States average. Nurses* incomes were not published separately in the 1967 Statistics of Income. able for 1966 on a national basis. They are avail­ To convert to 1967 Michigan estimates, the incomes will be increased by 8.0 percent, the average increase In medical professional fees between 1966 end 1967. then by 10.7 percent, the state adjustment. The calculations and resulting estimated incomes are shown in Table 34. The estimated total gross Income of $94,570 for all "other" pro­ fessional medical services in the region averages out to approximately $1 per capita for the region's population. This Is markedly less than an HEW national estimate of $6.76 per capita for the asms p e r i o d . T h e differences Is mainly attributable to an urban bias In HEW numbers. Several professional services, In addition to medical laboratories, ars 8 U.S. Department of the Treasury, "Preliminary Statistics of Income, 1967." 9 U.S. Departsmnt of the Treasury, Statistics of Incoam. 1 9 6 5 . pp. 69 and 80. *^Sne|pl Security Bulletin (January, 1969), p. 15. TABLE 34.— Incoae of Che Grand Traverse legion's "other" professional aedlcal services, 1967 Estlaated Michigan average arose Incoae Iunbar of services In region Total regional gross Income Total regional net lncone Dollars Dental laboratories* . . 24,390 Dollars 26,000.0 lumber 1 Dollars 26,000.0 Dollars 8,580.0 11,435 12,660.0 1 12,660.0 6,836.0 3,727.3 15 55,910.0 47,356.0 17 94,570.00 62,772.0 Services Chiropractors. . . . . Private nurses . . . . U.S. average gross Incoae 3,367* Total. . . . . . . . *The 1966 average lncone was $3,117. Searce: U.S. Department of the Treasury, Statistics of Incoae. 1965, 1966, snd 1967 (Washington: U.S. Government Printing Office). 102 Independently operated In urban regions and are accounted for In HEW* a "other" professional services estiaatee for the nation. In rural areas, such services are either unavailable, unwanted, or provided as one of nany services In hospitals or other service centers. It is reasonable, therefore, to expect a rural area to exhibit relatively low expenditures for this component. Retail Drux Stores Standard Rate and Data Service reports retail drug store sales by county on an annual b a s i s . D r u g stores are classified by their usual trade designation rather than the merchandise lines carried. The term "retail sales" Is based on the Department of Cowserce definition. It represents all sales and receipts of county drug stores. The Cosnwrce classification of drug sales Is used widely, and par­ ticularly by the Department of Health, Education, and Welfare in estimat­ ing per capita drug salea. Items. Total drug store sales Include non n sdical The Department of Commerce has a formula, explained In Table 35, which Is used to separete drug store sales according to prescription sales, proprietary and medical sundries sales, and other sales. By applying this formula to the Stendard Rate and Data Service estimates, nonmedical Items can be elladmated from drug store sales. This adjustment isolates those receipts solely derived from the sale of medical products. In making these estimates It will be assumed that the population of the eight counties makes Insignificant drug purchases outside the region. This conforms with observed purchasing behavior. People tend ^ S t a n d a r d Rate and Data Service, Inc., Hewspaper Rates and D a t a . L (August 12, 1968), 319 et s e a . TABU 35.— Retail drug store aalea in the Grand Traverse Region, 1967 Comty Total Prescription drugs Medical aundriea and nroorletarv druts Nounedlcal itens Antrim. . . . . . . . . . . . . . Dollars 507,000 Dollars 305,975 Dollars 76,050 Dollars 124,975 Bentla. . . . . . . . . . . . . . 652,000 393,482 97,800 160,718 Crawford. . . . . . . . . . 400,000 241,400 60,000 98,600 Grand Traverse. . . . . . . . . 2,158,000 1,302,353 323,700 531,947 Kalkaska. . . . . . . . . . . . 307,000 185,274 46,050 75,676 Leelanau. . . . . . . . . . . . 353,000 213,035 52,950 87,015 Missaukee . . . . . . . . . . . 202,000 121,907 30,300 49,793 Wexford . . . . . . . . . . . . 1,427,000 861,194 214,050 351,756 Total . . . . . . . . . . . 6,006,000 3,624,620 900,900 1,480,480 Percentage. . . . . . . . . 100.0 60.35 15.00 24.65 d rived froa the Department of CoMtrce formula. It allova 15 percent for aundriea and proprietary draga, 71 percent of the remainder for prescription drugs, and the rest for other itens. U.S. Departnant of Bealth, Education, and Welfare, Office of the Secretary, Task Force on Prescription Drugs, The Prut Peers (Washington: U.S. Govemeant Printing Office, December, 1968), p. 14. Source: Standard late and Data Service, Inc., Mevseaeer lates and Data. L (August 12, 1968), 319, 322, and 323. 104 to purchase drug* o«ar their hone or in the vicinity of w h o m the pro­ scription was writ ton. F«v psopls lssvs cb* region for sadical services. Thsrs Is, on ths othsr hand, a significant Inflow of paople snaking sadical att ention, as well as a large seasonal Inflow of tourists and workers. These persons undoubtedly make a significant addition to the region's drug store sales. A nethod of sharing the export trade generated by these people will be developed In the section dealing with Interregional transfers. The region's total retail drug store sales and their division Into prescription drugs, aedlcal sundries and proprietary drugs, and non sndleal itens Is shown in Table 35. According to these figures, the total value of sales of prescription drugs, aedlcal sundries, and proprietary drugs was $4,525,520 in 1967. This will be taken as the estlaated incoae of the retail drug sector. It Is of aore than passing Interest to note that drug store sales of $4.5 aillion in a region with a population of 97,000 would Indicate per capita sales of $46.15. diture was $27.55 In 1967. 12 The average United States per capita expenSonetlass aany factors are needed to e x ­ plain why a particular regional average differs froa a national one. foraetlon for 1967 is unavailable. In- But data for 1964 and 1965 reveal no significant differences in per capita drug expenditures regardless of a person's residence, region, or Incoea. 13 Assualng this was true In 1967, there aust be another explanation for the observed difference In the 12Social Security Bulletin (January, 1969), p. 13. **U.S. Departaent of Health, Educa t i o n , and Welfare, Office of the Secretary, Task Force on Prescription Drugs, The Drua Users (Washington: U.S. Governasnt Printing Office, Deeenber, 1968), p. 21. 105 Grand Traverse lagloa. In thin case, It la believed that tha Impact of aedlcal and aaaaonal visitors Is sufficiently substantial to bs tha sig­ nificant factor bahlnd tha dlffaranca. Evasions and Appllanca Storas Tha basic source of axpandlturaa for eyeglasses and appliances Is tha report of personal consumption expenditures In tha Department of Coanerce publication. Survey of Currant B u s iness. Total expenditures estimated by the Department of Health, Education, snd Welfare are obtained by adjusting Conamrce figures and adding expenditures under public pro­ grams. (These are the only estimates available for this study.) Per capita national expenditures In 1967 were $7.84.** To obtain the incoaw for the Grand Traverse Region, estimated national per capita expenditures must be multiplied by the relevant population. For the most part people purchase these Items In their own neighborhoods or, as Is often the case for appliances, through treated. the hospital where they are T h u s , while It Is unlikely that tourists make a significant difference in the demand for glasses and appliances. It is likely that persons who regularly use the region's medical services purchase these Itens In the region. Approximately 90 percent of the people using the region's general hospitals come from the region Itself or nearby counties. These people regard the region's facilities as their regular source of health care. Since moat of this care Is provided In Traverse City or Cadillac, and since these towns are the only Important sources of eye­ glasses and appliances, both with respect to the eight counties and the surrounding area, It Is felt that the number of regular users would 14Soclal Security Bulletin (January, 1969), p. 13. 106 provide i fair •atiaitt of the population likely to purchase eyeglasses snd appliances. The relevant population is 1 1 0 , 4 0 0 . Multiplying by par capita expenditures of $7.84 gives s total of $865,536 as an estlawte of regional expenditures on eyeglasses and appliances and hence, the Incons of this component. Hurslnx Ilonas Throughout this section the tern "nursing hone" naans a facility which is designated, staffed, and equipped for the acconnodatlon of In­ dividuals not requiring hospital care, but needing nursing care and related nedical services prescribed or perforned under the direction of persons licensed to provide such care or services In accordance with Michigan laws.^** This definition sunnarily excludes very snail rest hones and hones for the aged. Such facilities are usually unlicensed. Mo information is available about the occupancy or financing of these places. Accord­ ingly no atteupt will be nade to include then In this analysis beyond the present recognition that sons probably exist in the region. Their economic significance Is slight, and their Impact on this study would be. If anything, minimal. Information about the economic status of nursing hones is sparse. In the past, nursing hones have occupied s snail role in the total nedical e c o n o m y ; consequently, there has been little demand for specific information. Furthermore, most nursing homes are operated for profit. Thus, adadnlstrators are reluctant or unable to reveal economic details. 15Health Planning Council of Michigan, 1967 Patient Orlain S tudy. 16U.S. Department of Health, Education, and Welfare, Murains Horns Standards G u i d e . Public Health Service Publication Mo. 827 (Washington: U.S. Government Printing Office, June, 1961; reprinted, April, 1963). 107 TABLE 36.— Average nursing host cost per patient day, by region, control, and else of nursing hone, 1967 Type and else of nursing home North Atlantic North Central S. Atlantic and S. Central Uest U.S. average - Dollars - Proprietary: Under 50 beds. . . . 50-99 beds ......... 100 beds and over. . 9.82 13.32 15.11 8.86 9.77 10.36 8.13 9.21 10.47 10.45 8.25 13.19 9.42 9.70 12.16 Nonprofit: Under 50 beds. . . . 50-99 beds ......... 100 beds and over. . 17.78 17.01 13.39 8.42 9.07 9.09 9.03 9.26 10.33 12.06 11.58 11.71 10.50 10.17 10.60 Source: Professional Nursinn B o n e s . IX (December, 1967). Nevertheless, sons surveys are conducted and, sonatinas specific Infor­ mation can be obtained from nursing hoans. Eatlaates of the incons of the region's nursing homas will be derived froa both secondary snd primary sources. Up-to-date economic and other data taken from sample eurveys of different classifications of nursing homas are available In annual guide Issue of Professional Murslns H o m e s .17 Table 36 shows the magazine's data 00 average coeta per patient day for homas classified according to loca­ tion, slse, and control (proprietary or nonprofit). Estimated Incomes of the region's nursing homes can be obtained by multiplying known patient days by the average costs of appropriate North Central homee. The complete framework Is laid out In Table 37. ^ P r o f e s s i o n a l Murslns H omes (Minneapolis, Minnesota: Publishing Co.). The Miller TABLE 37.— Estlaated incoae of the Grand Traverse Region's nursing hones, 1967 County Control Nuaber of beds Patient days Cost per patient day Estlaated lncone Nuaber 24,966 Dollars 9.07 Dollars 226,442.62 Antrin. . . . . . . . . . Nonprofit Nuaber 58 Bensle. . . . . . . . . . Nonprofit 62 15,292 8.42 128,759.64 Grand Traverse. . . . . . Nonprofit 90 32,781 19.07 675,210.63* Grand Traverse. . . . . . Proprietary 65 22,995 9.77 224,661.15 talkasks. . . . . . . . . Proprietary 12 2,880 8.86 25,517.80 Wexford . . . . . . . . Proprietary 25 8,395 8.86 74,380.70 Wexford . . . . . . . . . Proprietary 64 22,227 9.77 217,158.79 356 129,536 Total . . . . . . . . 1,572,125.33 *Actual Incoae. Source: Michigan State Plea 1968-69; end Professional Burning Hom e . IX (Decenber, 1967). 109 The total flgura la tha region's estlswted nursing hone income. Ona remarkable point about tha Income figuraa in Tabla 37 la tha substant­ i a l dlffaranca between tha cost par patlant day In tha Grand Traversa Medical Cara Facility, tha ona hone where actual figures are used, and tha other hoses for which eetlnates are used. Fortunately, tha apparent conflict can be resolved without discarding the setism tad figures. Tha Grand Traversa Medical Cara Facility (MCF) aaple of a nursing hone. Is an unusual ax- In fact. It is batter described as an axtandad care facility than as a nursing hone. That Is, In addition to providing tha usual, and rather nlnlnal, services of a nursing h o n e , it is designed and operated to care for patients requiring an extended period of hospital care. In most connunlties such patients are treated and kept In a hos­ pital, thereby Incurring relatively high hospital costs. Nursing hones can provide hotel-type services without Incurring nany of the overhead costs of hospitals; consequently, their total costs per patient day are nuch lower than hospitals*. The MCF provides, partially because of its access to the adjoining Munson Hospital, a large array of nodical services. services are borne by the facility's patients. The costs of these But because the demand for these services Is relatively low anong extended care cases, the costs, when averaged out, are spread over a relatively large number of patients. The average cost per patient day Is, therefore, low relative to a hos­ pital, but high relative to other nursing hones which cannot provide these services. This Is the reason for the high per patient day costs In the MCF, relative to the costs in other nursing honss. The availability of additional services does not swan that "regular" patients, who do not require special attention, pay a higher bill than 110 they would elsewhere. But If they do need hospital-type t rootw o n t , thoy can receive It without tho necessity for transportation to a dlffarant and nayba distant facility. This la a working example of what many raaaarchars ara calling for as a naans for reducing hospital costs. Expanses for Prepayment and Administration Prepayment Prepayment expanses ara tha difference between the earned premiums or subscription charges of health Insurance organisations and their bene­ fit expenditures. That Is, they are the amounts retained by insurance organisations for operating expenses* additions to reserves* and profits. These are consumer expenditures and from the regional point of view can be assumed to represent the difference between what the population paid in premiums and received in benefits. Since no insurance companies are located in the Grand Traverse Region* the sum will represent a net out­ flow of money, or import of medical services. Over 90 percent of Michigan residents under 65 years old carry hospital insurance, and over 80 percent also carry surgical Insurance. One of the reasons for this relatively high incidence of coverage is the ability of rural people to participate In group insurance through their meabershlp in farm organisations, particularly the Farm Bureau. Because of the relatively low Income status and rurallty of the region* and despite previous remarks discounting the latter as a negative influence on health care in this region* the 90 percent average enrollment estimate may be high. A balancing factor* howeve r* is the purchase of supplementary private Insurance by people aged 65 and over. While no estismte of the number Involved Is available* It is probably sufficient to temper any excess In the 90 percent estimate. Ill The number of m r o l l t M , under 65 years of nt*» M t l a i t t d as 90 percent of the population 76,860. 18 Tha average premium in estimated at $7.54 par enrollee; Multiplying anrollaaa by tha premium ylaIds $579,500 aa tha estimated total prepayment expenditure. Administration In this study tha administration component rapraaanta groaa expanaaa of fadarally flnancad haalth programs. Maarly all of thaaa ex- panaaa ara lncurrad in tha oparation of tha hospital and supplanantary haalth inauranca programs, Madlcara and Madicald. Expandituraa can ba rapraaantad by tha pramluma tha region's population pays into tha two programs. Madlcara premiums wars previously estimated at $977,000 (p. 83). To obtain an estimate of Madicald premiums In tha region, it was assumsd that tha proportion of Madicald to Madlcara anrollaaa in tha region was the same as it was in tha state. Multiplying this proportion (94.08/100) by tha number of Madlcara anrollaaa (12,000) yields 11,383 Madicald anrollaaa.^ Tha Madicald premium in 1967 was $36.00; multiplying by tha number of anrollaaa ($36.0 x 11,383) gives $40,978 as tha estimated total Madicald premium paid by regional anrollaaa. Total Expenditures Estimated total insurance expenditures ara tha sum of private in­ auranca prepayment expanses and public insurance p r e m i u m s : ($579,500 + $977,000 + $40,978) - $1,597,478. 18 Thera ware 85,400 people under 65 years old, Northwest Michigan Econosdc Development District, "Overall Economic Development Program,*' p. 29. ^ H e a l t h Insurance Statistics. H-9 (Washington: U.S. Department of Haalth, Education, and Welfare, December 19, 1968). 112 This approach is unorthodox in that it considers nat p r e m i u m for private Insurance, but gross premiums for public Insurance. there are two reasons for adopting It. However, The first Is that It avoids cluttering the analysis by adding the private Insurance sector as a source of funds, when In reality It Is only an in teres diary between con•users and producers. The second reason is that the approach lends Itself to the analysis dealing with the interregional sovesent of funds. The approach Is different fron the one used by HEW, which only classifies adslnlstratlve expenditures under administration (hence the title). To avoid confusion this health service component will henceforth be called Medical Insurance. Government Public Health Activities This component consists of the expenditures of state and local health departments and Intergovernmental payments to the states and localities for public health activities. In Michigan, public health services are organised on a district health department basis (this organisation of public health services is distinct from the organisation of hospital service areas described In chapter 4). Most rural districts Include more than one county. The Michigan D e p a r t m n t of Public Health suslntains a headquarters In one of the counties and may have branch offices in some or all of the other counties. Financial transactions for the whole district are reported in the headquarters county. not readily available. As a result. Individual county expenditures are Possible sources are state public health depart­ ments, or HEW estimates of per capita expenditures. In this ease, actual 1967 expenditures are available for the Grand Traverse District. The District Is cos^osed of Leelanau, Bensie, and 113 Grand Travcra* Counties. not available. Expaodlturaa for tha other flva counties ara Nevertheless, since public health services are fairly evenly distributed throughout the region, there la unlikely to be sub­ stantial variation. In per capita expenditures, among districts. Hence, to estimate total public health expenditures, the Grand Traverse District's 1967 expenditures, less special expenditures for migrant workers, will be pieced on a per capita basis and used as estimated per capita expenditures for the other five countlea. Public health expenditures were $115,477.80 In the Grand Traverse District in 1967. $25,231.93. 20 The asount allocated to migrant expenses was The difference, $90,245.87, divided by the three county population of 54,500, gives a per capita expenditure of approxlsmtely $1.66, Multiplying this by 43,000, the population of the other five counties, yields $71,380 as their estimated expenditure. Total regional public health expenditures are obtained by adding the estimated five county figure to the Grand Traverse District's gross figure (Including migrant expenaea). The resulting estlsmte Is $186,857.80. The advantage of this approach over using HEW national estlsates is that the latter Include many Items of expense that are, generally, irre­ levant In this type of analysis. Had HEW figures been used in this study, the estimated per capita expendlturea would have been $3.20, nearly twice the $1.66 estimated with more regionally relevant data. 20 21 **1967 Financial Report for the Grand Traverse District" (unpublished) ^*To estimate rural single county or multlcounty public health ex­ penditures using HEW data, national per capita expenditures ($4.52 In 1967) are multiplied by the nonfederal, that Is the state and local com­ ponents of the source of funds (71 percent In 1967). Data are available annually In January editions of the 8ocial Security published ^>7 the U.S. Department of Health, Education, and Welfare. 114 "Otlwr" Health Stnrlcai Items of expenditure that could not bo clooolflod elsewhere «ro con sidorod in the "other" hoolth expenditures cosponont. In deriving •stinstod oxpondituros for this sector, tho Department of Health, Educa­ tion, and Welfare includes such items as industrial in-plant services, school health services, medical activities in federal units other than hospitals, and private voluntary health agencies. With the exception of the last, these services are more likely to be associated with urban than vith rural communities. Such is the case in the Grand Traverse Region, where the only relevant item is the activity of voluntary health agencies. Voluntary Health Agencies Since n o better estimates of the Income or expenditure of such agencies are available, the HEW estimate will be used. Fortunately, estimated expenditures on "other" haalth services are cosq»lled in such a way that the com ponents can be separated. shown in Table 13, page 48. Total expenditures were The amount attributable to philanthropic sources is the estimated expenditure by voluntary agencies. On a per capita basis the amount is $1.66; multiplying by 97,500 (the region's population), $161,850 is the estimated expenditure of voluntary agencies. This is probably a high estimate for a rural area. Therefore, with the exception of expenditures of the Central Michigan Children's Clinic,the $161,850 will be regarded as the expenditure of voluntary agencies plus any other small health sectors which have not been accounted for. 115 Central Michigan Children*a Clinic There la ona rajor facility which waa not Included In the previous sections. City. This Is the Central Michigan Children's Clinic In Traverse The clinic Is a separately financed extension of the Janes Decker Munson Manorial Hospital. The clinic provides specialised pediatric services to children fron a wide area beyond the eight-county region. Financial Information about the clinic Is available, as is the case for all sections of the Munson Hospital, fron audited annual financial state­ ments . The clinic's operating Income for fiscal 1967 was $71,704. Actual Income was $157,382.50. 22 Of this $85,678.56 went for construction which was completed before the calendar year. The operating income was made up of a philanthropic grant of $64,000, a salary grant from Munson Hospital of $6,000, a rent payment of $1,650 and nlscellaneous income of $54.00. In distributing this lncoem by source of funds, the first Item is allocated to philanthropy and the last three Itesm to "other private sources." This Is the only conponent for which it has been necessary to utilise the "other sources" category. The HEW classification of national expenditures also utilises "other sources" only In respect to this coseponeat; thus, the approach used here Is at laast consistent with HEW's. Total Income for the "other" health services component Is the sum of the clinic's Income ($71,704) and tha estlsuited Income of voluntary agencies ($161,850): 22 $233,554. "Import on Kxaadnatlon, Central Michigan Children's Clinic of James Decker Munson Hospital, Traverse City, Michigan, June 30, 1967" (unpublished)• 116 This c < M p l « € M Cht Ia c o m analysis of tha raglon*s nodical complex. Incons results for tha components analysed in this chapter are suanarlsed in Table 38. Sources of Fund| ***** Tnterreaional Trade In the Monhospltal Medical Conponants The objective of this section Is to take the estlnated Incones of the nonhospltal conponants and to disaggregate then according to pur­ chasing and regional sources. In nuch the sane manner as was done for hospital services. with which to work. Only here there are nore sectors and less Information This ahould not detract fron the development of use­ ful estimates; It any, however, result In a nore generally applicable approach than was used for hospitals. Sources of Funds The first step Is to take the Incomes fron the previous sections of the chapter and, starting with the framework of Table 13, page 48, dis­ tribute then according to source of funds. The reglonallcation of these funds will then follow in a second, trade-oriented step. Distribution Procedure With a few exceptions, the distribution of the nonhospltal com­ ponents* incomes must be based on national distributions. The reason Is that the type of detailed Information that would be neceaaary for actual distribution Is rarely available to a researcher In medical economics unless he la able to conduct extensive surveys. Exceptions in this case are the medical Insurance, public health, "other** health, and the nursing horns components. 117 TABLE 38.— E s d M t a d loro— of tho Grand Traverse ftagien'a nonhospltal nadlcal services, 1967 Madlcal conponant Incone 1.000 dollars Percantage Percent Physicians' aarrlcaa............... 5,376.3 28.6 Osteopaths* services............... 1,854.6 9.9 Dentists* aarrlcaa........... .. 2,512.1 13.3 Othar professional services.......................... 94.6 0.5 Retail drugs........................ 4,525.5 24.0 865.6 4.6 Nursing hones ...................... 1,572.1 8.4 Insurance prepaynent expenses ............. 1,597.5 8.5 G o v m e a n t public health activities . . . . . . . . 186.9 1.0 Other health services.......................... 233.6 1.2 Total .......................... 18,818.8 100.0 Eyeglasses and appliances................... .. 118 These except loos sport, this section really consists of e slople sppllcstlon of e netlooel distribution to regional lncones. It will probsbly be illustrative, therefore, to present ell the results now end to consider the exceptions subsequently. For nonhospltel services, Teble 39 shows the percentage distribution of nations! health expenditures by purchasing sources. Table 40 shows the percentage distribution, and Table 41 the actual distribution, of regional expenditures by purchasing sources, resulting fron estimates based on both the national figures snd analyses of the exceptions. Exceptions ModlflestIons In the sppllcstlon of national percentages were used In the distribution for medical Insurance, public health, “other'* health, and nursing homes. Msdlcal insurance.— All medical Insurance expenditures sre assumed to be mede by consumers. The 12.2 percent federal share shown In the nstlonal distribution relates to sdmlnlstretlve expenditures of various federal programs, consequently It Is Irrelevant to this analysis. Public health.— The federal share of the region's public health expendlture was available from county data. 23 State and local expenditures were, therefore, the residual between total expenditures and the federal •hare. In this case the distribution turned out to be the same as It would have been had no Information been available, and the national dis­ tribution been applied directly. "Other" health services.— The distribution for "other" health ser­ vices was modified In order to Incorporate lnformetIon about the Children's 231967 M l c h i » n County Covers— f j i f " d a l Resort. TAILS 39*— Percentage distribution of national nonhospltal nodical expenditures, by source of funds, 1967 Medical service Total Private Philan­ Consuners thropy Source of funds Other Total Public Federal State and local Physicians. . . . . . . . . . 81.0 81.0 — — 19.0 13.0 6.0 Osteopaths. . . . . . . . . . 81.0 81.0 — — 19.0 13.0 6.0 Dentists. . . . . . . . . . . 96.0 96.0 — — 4.0 2.0 2.0 Other professionals . . . . . 93.0 91.0 2.0 — 7.0 4.0 3.0 Drug and drug sundries. . . . 96.0 96.0 — — 4.0 2.0 2.0 Eyeglasses and appliances . . 98.0 98.0 — — 2.0 1.0 1.0 lurslng hones. . . . . . . . 36.0 35.0 1.0 — 64.0 42.0 22.0 Medical insurance. . . . . . 87.8 87.8 — 12.2 12.2 — Public health . . . . . . . . — — — — — 100.0 29.0 71.0 "Other1* health. . . . . . . . 28.0 — 13.0 15.0 72.0 58.0 14.0 Total . . . . . . . . . . 67.2 64.9 1.5 0.8 32.8 21.0 11.8 TABU 40.— Percentage distribution of tho Grand Traverse Region's nonhospltal nodical oxpondituros, by sourco of funds, 1967 Nodical service Total P rivate PhllanCon­ sumers throor Source of funds Other Total Public Federal State and local Physicians. . . . . . . . . . 81.0 81.0 — — 19.0 13.0 6.0 Ostoopaths. . . . . . . . . . 81.0 81.0 — — 19.0 13.0 6.0 Dontists. . . . . . . . . . . 96.0 96.0 — — 4.0 2.0 2.0 Otbnr profossionals . . . . . 93.0 91.0 2.0 — 7.0 4.0 3.0 Drugs and drug sundries . . . 96.0 96.0 — — 4.0 2.0 2.0 Byoglassos and appliancos . . 98.0 98.0 — — 2.0 1.0 1.0 Burning bonss . . . . . . . . 27.4 25.1 2.3 — 72.6 57.3 15.3 Nodical insurance . . . . . . 100.0 100.0 — — — — — Public haalth. . . . . . * — — — — 100.0 29.1 70.9 "Other" haalth. . . . . . . . 50.1 — 36.4 13.7 49.9 40.3 9.6 Total . . . . . . . . . . 61.1 59.5 1.5 0.1 38.9 14.4 24.5 TAILS 41.— Distribution of the Grand Traverse Uglon'a nonhospltal haalth expenditures, by source of funds, 1967 Service Incow Private Conauwra Soorca of funds Philan­ thropy Other . . . . . . . . 1.000 dollars 4,354.8 - Physicians. . . . . . . . . . 5,376.3 Oataopatha. . . . . . . . . . 1,854.6 1,502.2 — Dantlata. . . . . . . . . . . 2,512.1 2,411.6 Othar profaaalonala . . . . 94.6 86.1 Drags and drag aundrlaa . . . 4,525.5 4,344.5 Eyaglaaaaa and appliances . . 865.6 Nursing h o w s . . . . . . . . Public and Federal Stats local 698.9 322.6 — 241.1 111.3 — — 50.3 50.2 1.9 — 3.8 2.8 — — 90.5 90.5 848.2 -- — 8.7 8.7 1,572.1 393.6 36.6 — 901.4 240.5 Medical Insuranca . . . . . . 1,597.5 1,597.5 — — — Public haalth . . . . . . . . 186.9 — — — 54.4 132.5 -Othar" . . . . . . . . . . . 233.6 — 85.0 32.0 94.0 22.6 Total . . . . . . . . . . 18,818.8 15,538.5 123.5 32.0 2,143.1 981.7 — 122 Clinic. The clinic's Incons of $71,704 was distributed between consusars and philanthropy In tha proportions given previously. The remaining $161,850 of "other" Income, attributed to voluntary agencies, was distri­ buted according to national figures. Murslna bomss.— Approximately 43 percent of the $1.5 million nursing hone Income Is accounted for by the Grand Traverse Msdlcal Care Facility. Financial reports Indicate the sources of the facility's Income. Unfor­ tunately, because the facility Is so unlike the region's other nursing hones. It would be Inappropriate to use its distribution of funds to estimate their distributions. divided Into two sections: The nursing home sector was, therefore, one which shows the actual distribution of the facility's funds and another which appllee national estimates to the other homes. The derivation of the estimates by this method Is shown In Table 42. Structural exceptions.— Apart from the difference noted In defining the Insurance component, the fraswwork of Tables 40-41 differs from the usual HEW framework In that physicians and osteopaths are separated, whereas HEW classifies them Jointly. The separation was made to assist future analyses relating to physicians* Incomes. Interregional Trade Some Interregional movement of funds Is to be expected for all com­ ponents of the health Industry. For the most part, a regional Industry's ability to serve more, or less, than the regional population determines whether it will be a net exporter, or Importer, of medical services. The Grand Traverse Region's hospitals have already been shown to be net exporters. To obtain estimates of the nonreglonsl population expected to use the region's other msdlcal services, consideration must be given to TAIL! 42.— Distribution of nursing homes' Incoat by source of funds, tbs Grand Traverse legion, 1967* Item Total Income. . . . . . . . . . . . All nursing homes 1,000 dollars 1,572.1 Percent 100.0 Grand Traverse Medical Care Facility 1,000 dollars 675.2 Percent 100.0 Others 1,000 dollars 896.9 Percent 100.0 Source: Philanthropic. . . . . . . . . 36.6 2.3 27.6 4.1 9.0 1.0 Federal . . . . . . . . . . . . 901.4 57.3 524.7 77.7 376.7 42.0 Consumers . . . . . . . . . . . 393.6 25.0 79.7 11.8 313.9 35.0 State and local . . . . . . . . 240.5 15.3 43.2 6.4 197.3 22.0 *The source of Grsnd Traverse Medical Care Facility Information ves the annual report for the calender year 1967. Two liberties were taken In transposing data froa the report. Reported patient Income of $73,709.81 was Increased by the amount of co-insurance receipts: $6,031.42, and reported "other income” of $27,589.22 was attributed to philanthropic sources. 124 tha Infloir of visitors and to tha accessibility of tha region's facilities relative to those In adjacent counties. In rural areas aost eadical services are located In the central town of a county or group of counties. Hence* except for occasional visits to village doctors and druggists* rural people Must travel to town for Medical attention. Towns with a wide array of Medical services* such as Traverse City* can attract a population fron a large area. The sane is true, but to a lesser extent* of other hospital towns; the pre­ sence of a hospital attracts other uedlcal services and hence a center grows to serve the surrounding area. For nany of the people In counties adjacent to the Grand Traverse Region* the nearest nodical centers are located In the region. Therefore* a reasonable estlnate of the total population using the region's nodical services Is the population that also uses the hospitals. This approach is likely to understate the population relevant to the drug trade because visitors undoubtedly Make significant purchases of nonprescription nodical sundries. Therefore, a separate estlnate will be developed for the drug component. The conponents nay be divided Into four groups* 1. Msdlcal services* which Include: the professional services* eyeglasses and appliances* nursing hosns* and other health services; 2. retail drugs; 3. Msdlcal insurance; and 4. public haalth. Interregional trade estlnatee will be developed for each group Indepen­ dently. 125 Mtdlcal S t r v i o t It Is assumed thst ths population which normally uaas tha region's ganaral hospitals conprlsas tha merket for tha msdlcal services group. Tha slsa of this population was 110,400 In 1967.^* Slnca 97,500 paopla lived In tha ragion, tha balanca, 12,900, makas up tha nonraglonal narkat. Tha proportion of rnglonal to nonraglonal sub-populations, 88.3 par cant to 11.7 parcant, will ba usad in astlmating tha approprlata division of funds batwaan regional and nonraglonal sourcas. Total expenditures for tha msdlcal services group Is tha sum of tha conponants* lnconss. This sum and tha apportionment by purchasing sourcas haws baan calculated from Table 41, and ara shown In Table 43. Tha regional apportionment In Table 43 Is based on tha population ratio and othar assumptions. Philanthropic and "other'* axpandlturas ara assumed to originate solely within tha ragion. externally. Federal expenditures originate State and local axpandlturas ara divided by tha population ratio; than in accordance with tha criterion established for hospitals, half of tha region's share Is allocated to tha counties and half to tha state. Nearly 30 parcant of tha group Income originates from nonraglonal sourcas. As with hospitals, ths largest nonraglonal contributor Is tha public sector, but In this case tha federal government rather than tha state government pays tha largest share. letall Pruss The retail drug group's lncoew was estimated to ba $4,525,500. Par capita sales were $46.15. 24See p. 106 It was suggested that tha Inflow of emdlcal TABLE 43.— lagiooaliiation of expenditures for the nodical services group, 1967 Source Percent 100.0 1,000 dollars 8,473.7 123.5 100.0 32.0 100.0 1,998.2 100.0 — State and local0. . . . . . . . . 758.7 100.0 335.0 Total . . . . . . . . . . . . 12,508.9 100.0 8,964.2 Consuarsb. . . . . . . . . . . . 1,000 dollars 9,596.5 Phllathropy. . . . . . . . . . . Other . . . . . . . . . . . . . . . Federal . . . . . . . . . . . . . Mooreglonal Eeglonal Expenditures0 Percat 88.3 1,000 dollars 1,122.8 Percat 11.7 123.5 100.0 — — 32.0 100.0 — — — 1,998.2 100.0 44.2 423.7 55.8 71.7 3,544.7 28.3 *The nsdlcal services group it couposed of: physicians, osteopaths, dentists, other professionals, nursing hoots, eyeglasses and appliances, and "other" health aeprices. Vonsnusr expenditures are divided between regional and nonraglonal services In the proportions 88.3 percent a d 11.7 percent. cThe division of state a d local expenditures was calculated as follows: Total expenditures ■ $758.7 Unadjusted regional share ■ ($758.7 - $88.7) ■ $670.0 Unadjusted nonregional share ■ ($758.7 x $11.7) ■ $88.7 100 Adjusted regional share « ($670.0) ■ $335.0 2 Adjusted nonraglonal share * ($88.7 + $335.0) ■ $423.7. 127 and •••tonal visitors accounted for ths $18.60 diffaranca between regional and national par capita salaa. 25 Assuari.ng this is true, and convarting to percentages, 59.7 parcant of salas wara to tha raglonal population and AO.3 parcant to tha nonraglonal population. dlvldad with thasa population ratios. thropic or "othar" sourcas. Consumer axpandlturas ara Thara ara no sstlnatss for philan­ As with tha pravlous group, fadaral axpandl­ turas ara dlvldad by tha population ratio and than tha raglonal shars Is raallocatad to account for stata payments. Tha calculations and result­ ing rsglonallsatlon of drug axpandlturas ara shown in Tabla 44. Coaparad with previously discussed conponants, tha rsglonallsatlon of drug axpandlturas depends far lass on tha influence of public sourcas. Private consumers ara by far tha noat inportant purchasers and, in tha Grand Traversa legion, 38.7 parcant of all drug purchases ara estimated to have bean made by nonraglonal consumers. Msdlcal Insurance Estimated smdlcal insurance expenditures ara $1,597,500. Tha only source of this expenditure is tha regional consumer; none is attributed to nonraglonal sourcas. Public Haalth County public haalth services ara financed by fadaral, stata, and local governments. Public haalth offices serve tha populations from tha county or district In which they ara located. Consequently, thara would usually ba no nonraglonal population to consider In reglonallsing expen­ ditures. The Grand Traversa situation is a little unusual In that there is a nonregional migrant population to consider. 25See o. 104. But because funds for TABLE 44.— Regionalization of drug expenditures, 1967 Consunars. . . . . . . . . . . . Regional Expenditures Source 1,000 dollars 4,344.5 Nonreglonal Percent 100.0 1,000 dollars 2,593.7 Percent 59.7 — 90.5 100.0 1,000 dollars 1,750.8 Percent 40.3 Fadaral. . . . . . . . . . . . . . 90.5 100.0 — Stata and local* . . . . . . . . 90.5 100.0 27.0 29.8 63.5 70.2 4,525.5 100.0 2,620.7 57.9 1,904.8 42.1 Total. . . . . . . . . . . . *The of stata and local expenditures vas calculated as follovs: Total axpandlturas • $90.5 Quadjustad raglonal share * ($90.5 x $59.7) • $54.0 division 100 Onadjustad nonraglonal share ■ ($90.5 - $54.0) • $36.5 Adjusted raglonal share ■ ($54.0) « $27.0 2 Adjusted nonraglonal share ■ ($36.5 4- $27.0) • $63.5. 129 migrant workers' public health services ere provided by the federal governnsnt, It Is a simple setter to allocate Bigrant expenses to a nonraglonal source. State and local expenditures, all of which are assumed to be spent on the resident population, can, in accordance with the criterion pre­ viously developed, be evenly divided between the state and counties; the foraer being a nonraglonal source and the latter a regional source. The reglonallsatlon of the estimated $186,900 public health expen­ ditures Is shown in Table 45. Consolidation of Results for the Produclna a n d r iw iM M iw g Results fron this and the previous chapters can now be assembled. This Is done: first, to demonstrate the Income structure of the medical components individually, as entltlas within the productive complex, and collectively, as the complex Itself; and secondly, with respect to the consuming sector, to show how expenditures are divided among the various consuming sources themselves and the regions in which they are located. The results are presented in tables that summarise previously re­ ported income and expenditure data. Table 46 shows the distribution of regional and national health expenditures for 1967. Except for soma re­ ordering of services, separation of hospitals by type (instead of control) and separation of physicians and osteopaths, the classification of medical services la similar to the standard HEW classification.^6 The distribution of regional expenditures follows the pattern of the national distribution. 26 Three components, hospitals, physicians and Standard HEW classification refers to the classification of ser­ vices and sources shown In Table 13, p. 48. TABLE 45.— lagloaallsatlon of public haalth sarrlca axpandlturas, 1967 Sourco Fadaral. Statu m d local. . . . . . . . . Total. Efepandlturas 1,000 dollar* 54.4 Honragloual lagional Parcant 100.0 1,000 dollars — 132.5 100.0 186.9 100.0 Parcant — 1,000 dollars 54.4 Parcant 100.0 66.2 50.0 66.3 50.0 66.2 35.4 120.7 64.6 131 TABLE 46.— Pcrccntagt distribution of notional and Grand Travarsa Ragion haalth axpandlturas, by aarvlca, 1967 National Itau Parcant Itaglonal Parcant 38.3 46.3 Nursing h o n a s ......................... 4.0 4.5 Physicians and oataopatha........... 21.7 20.6 Dsntisto ............................. 6.8 7.2 Othar profasolonala.................. 3.0 0.3 11.9 12.9 Kyaglaaoaa and appllancaa........... 3.4 2.5 Msdlcal lnauranca.................... 3.8 4.5 . ........... 1.9 0.5 5.2 0.7 100.0 100.0 Hospitals. . . . . . . . . . . . . . Drugs and drug aundrlaa.............. Public haalth sarulca. "Othar** haalth sarvlcas.............. Total............................. 132 osteopaths, and drugs accounted for sore than 70 parcant of both national and raglonal expenditures. Tha concentration of hoapltal facllltlsa In tha ragion la raflactad by tha 46.3 parcant of axpandlturaa going for hoapltal cart coaparad with 38.3 parcant nationally. penditure I t t M , Othar atjor ex­ doc tore and drugs, accounted for approxlaately tha sane percentages of axpandlturaa at tha raglonal and national levela. Tha rather large difference between national and raglonal percentages spent on "other" haalth services can bast ba explained by tha observation that the regional estlsmte was baaed on sx>ra factual Information than tha national e s t l M t e , which la for tha most part, of a residual nature. Table 46 Includes all axpandlturas for health services produced In the region, plus nadlcal Insurance expenditures. Essentially the latter are spent outside the region and then rechanneled, by third parties, to regional services. In this sense, Inclusion of the Item In the total figure Involves double counting. However, since the Insurance component Is not part of the region*s Industry, Its Income Is not regional Income; the component must, therefore, be delated In considering the Industry's income. Also, the standard HEW distribution by consuming source Is not designed to differentiate regionally. These reservations are accounted for In Tables 47 and 48, which show the actual and percentage distribution of the regional msdlcal Income. One of the main points brought out In these tables Is the relative else of the nonreglonal contribution to the lnduatry's Income, of the psychiatric hospital, the state and ie ciuae local governments contribute the largest share of outside Income. Baaoval of data for this facility, as In Tables 47 and 48, shifts the emphasis to the federal government as ths major source of external income. this analysis been conducted for any This would have been the case had prior year. The first full year 133 TABLE 47.— The Grand Traversa Baglon'a aadical Industry I n c o w f by service, region, and source of funds, 1967 a teams w a Total Con— auwrs Philan­ thropy General h o s p i t a l s ......... 4,754.7 4,280.5 272.8 Psychiatric hospital . . . 285.5 85.4 Msdlcal services 201.4 — — Msdlcal services group*. . 8,964.2 8,473.7 123.5 Drugs and drug sundries. . 2,260.7 2,593.7 m 32.0 Urn — 200.4 335.0 — 27.0 — 66.2 Public h e a l t h .............. 66.2 T o t a l .................. 16,691.6 15,433.3 396.3 32.0 829.0 16,405.8 15,347.9 396.3 32.0 628.6 All services except psychiatric hospital . . — Local Other governwnt Hon r e d o n e ! Total Consuwra source oi funds Fede­ Philan­ ral thropy govern­ ment State 6 local govern­ ment - - 1.000 dollars . . 3,947.3 1,059.4 Psychiatric hospital . 7,269.2 758.8 Msdlcal services group1 3,544.7 1,122.8 Drugs and drug sundrlei 1,904.8 1,750.8 General hospitals. Public he a l t h ......... Total. All services except psychiatric hospital 120.7 — 16,786.7 4,691.8 9,517.5 3,933.0 3[,576.3 316.6 33.0 6,387.5 1,998.2 423.7 — 90.5 63.5 — 54.4 66.3 4,752.4 7,252.6 4,719.4 865.1 — 89.9 89.9 ^Includes professional services, eyeglasses end appliances, nursing h o w s , and "other" health services. 134 TABLE 48.~P«roMta|* distribution of the Grand Traverse Region's nedlcal Industry Incons, by service, region, and source of funds, 1967 Beelonal sourca of funds Percent­ age of total Msdlcal services Ganaral hospitals . .. Con­ tra 54.6 49.2 . 3.8 1.1 Msdlcal sarvlcas group* 71.7 67.7 Drugs and drug sundries 57.9 57.3 Public health . 35.4 Psychiatric hospital. a a a a Total All services except psychiatric hospital. Philan­ thropy Othsr Local govern- — ot 3.1 2.3 0.7 1.0 0.3 2.7 0.6 35.4 49.9 46.1 1.2 0.1 2.5 63.3 59.2 1.6 0.1 2.4 tfonrenlonal sources of funds State Fede­ Percent­ Con­ Philan­ ral 6 local age of tra thropy govern- governtotal nsnt nent . . 45.4 12.2 Psychiatric hospital . 96.2 10.0 Msdlcal services group4 28.3 Drugs and drug suadrlei 42.1 Public health. 64.6 General hospitals. . . . . Total. All services except psychiatric hospital 29.6 3.6 0.4 84.6 9.0 16.0 3.3 38.7 2.0 1.4 29.1 35.5 1.2 50.1 14.0 0.2 14.2 21.7 36.7 15.2 — 18.2 3.3 *lncludes professional services, eyeglasses and appliances, nursing houns, and “other” health services. 135 that federal lnauranca prograaa were operating was 1967. Total Incone would have been leas In earlier years and state and local governments would have been paying ax>re. Importance of External Financing The shift In external financing towards the federal government has particular significance with respect to economic development of rural and low-Income areas which have or are planning a medical services Industry. For one t h i n g, these federal funds ars likely to be underecompenseted In terms of tax revenues collected from rural or poor areas. For another, to the extent that a medical Industry serves a population beyond the county or region where It Is located, it can attract public and private funds on behalf of the nonregional population. The Grand Traverse Region ap­ parently enjoys the best of both these situations. In Table 49 nedlcal Income derived from nonregional sources has been isolated and called exports. Expenditures by the regional population for services purchased outside the region, which can be called Imports, are assumed to be Included under Insurance. The region earned a net trade surplus of nearly $15 million In 1967. This was approximately 44.0 percent of the region's medical In­ come. The gross trade surplus, however, was nearly $17 million or, close to 50.0 percent of the medical Income. From the developmental point of view, the latter Is the relevant surplus because export payments constitute additions to a region's Income and can, through a multiplier effect, create even more Income. Imported emdlcal services on the other hand, promote leakages from the regional Income stream. Insurance payments, has already been discussed. One such leakage. There are, however, others which are likely to cause a greater outflow of expenditures. These are 136 TABLE 49.—-Exports and laportt of nedlcal stnrlcts, by service and aourca of funda, Grand Traverse Region, 1967 Con atnear inoorts Exports* Nadlcal service Conswears Total ------------ Philan­ thropy l .000 Govarunent Consunars dollars - - - - 11,216.5 1,818.2 Msdlcal sarvlcas group........... 3,544.7 1,122.8 — 2,421.9 — Drugs and drug sundrlas. . 1,904.8 1,750.8 — 154.0 — Hospitals ............ Net Insuranca. . Public health. . . . Total. . . . . . Total exports leas total inports. . . . — 120.7 16,786.7 89.9 — — — — 4,691.8 89.9 9,308.4 — 120.7 12,005.0 14,814.3 *Keglonal expenditures by nonreglonal aourcaa. ^Nonreglonal expenditures by raglonal consunera. 1,972.4 — 1.972.4 137 p u r c b u c s by the health care producers for nonrestonally produced goods and services. The greatest part of the development Impact of a region's nedlcal industry Is probably Its affact on local employment; the industry is highly labor intensive with payroll expenses accounting for approxi­ mately 70 percent of total expenditures. The total lsg>act, however* is likely to be lessened by substantial outlays for Imported goods and ser­ vices. Furthermore, if excessive profits are earned by the producers of some Imports, the cost to a region of maintaining its medical structure may also be excessive and the development ls^iact moderated. It is not an objective of this study to pursue the relationship between employment and development at great length, but it is an objective to ascertain the costs ascribable to excess profits. Progress can be made, towards iso­ lating expenditures giving rise to the latter, by completing the analysis of the intersectoral and interregional flows of medical Incomes and ex­ penditures. The last stage in the analysis, prior to assembling the parts of the regional medical structure, deals with the input supplies sector. CHAPTER VII INCOME AMD EXPENDITURE ACCOUNTS— THE INPUT SUPPLIES SECTOR So far, tha producing and coneumlng aactora Hava baan conaldarad. Tha lncona of aach producar of medical aarvlcaa haa baan eatlmated and diatributad according Co Ita aourcaa. Thla chaptar examinee tha rela- tIonahip between tha producing aactor and tha input auppliaa aactor. It daala with upon what and whara tha producing aactor apanda incoak re­ ceived froai tha conauadmg aactor. That la, thla chaptar analysea tha dlatribution of aach nadlcal producer*a income among tha varloua inputa it purchaaaa and raglonallxaa thla dlatribution according to whatbar tha inputa ara purchaaad within or without tha region. In thla procaaa, conalderatlon will only be given to one ataga of ependlng beyond tha producar. Dlatribution of Madlcal Incoma a bv Input and Regional Claaalfication Rather than the traditional land, labor, and capital claaalfIcation, inputa will be claaalflad in a way that will beat aerve tha apeclflc anda of thla chapter. Theae ara to eatlmate tha dlatribution of tha aedlcal income a among profeaolonal and nonprofeealoual labor and amdlcal and nonnadlcal auppliaa, and regional and non regional expendlturea. All labor la aaauaad to live in tha region; therefore, all labor axpandlturaa ara regarded aa regional. To aid in identifying tha dlvlelon of axpandlturaa among different eaploymant categorlea, labor la divided into three claaaaa: 138 139 Mlf-«Bploy«d professionals, professional employees, and nonprofeaslonal employees. Physicians, osteopaths, dentists and other professionals fall la the first class; examples of profasslonal employees are registered nurses, nedlcal technologists. X-ray technicians, and therapists; ex­ amples of nonprofeaslonal enployees are practical nurses, housekeepers, food service workers, clerical workers, and maintenance staffs. This labor classification is nainly necessary for the major health facilities: hospitals and nursing hones. Sons crossover and arbitrari­ ness nay be Involved in the classes; It is, however, based on U.S. De­ partment of Labor classification.^ The balance of producers* Incomes after deducting net Income and labor expenditures are assumed to be spent for nonlabor Inputs. These inputs will probably account for between 30 and 40 percent of expendi­ tures; no one Input Is likely to account for a substantial proportion of the expenditures. Nevertheless, where possible. Inputs will be classified according to whether they are purchased from regional or aonreglonal sources, and whether they are for medical or nonmedical Inputs. Each component of the Grand Traverse Region's medical lnduatry Is considered individually. Labor expenditures are estimated first and categorised according to the classification outlined above. Income re­ maining after labor expenses are deducted will be assumed to be spent on other inputs and will be allocated both regionally and by type of input. U.S. Department of Labor, Industry Wane Survey. Hospitals. July 1966, Bureau of Labor Statistics, Bulletin No. 1553 (Washington: U.ST Government Printing Office, June, 1967). 140 The availability of data for thla typa of analyela la aporadlc. Though none apaciflc raglonal lnforaatlon la avallabia, rallanca will ba placad mainly on tax raturna and othar nationally avallabla raporta* Ganaral Hoanitala Ganaral hoapltal axpandlturaa in tha raglon in 1967 warm $8,702,000. Of thla, $5,371,000 wara payroll axpandlturaa and $3,331,000 wara nonpayroll axpandlturaa. Labor Inputa A hoapltal*a labor force can ganarally ba dlvldad Into profaaalonala and nonprofaaalonala. Examplaa of tha former ara raglatarad nuraaa. In- tarna, nadlcal tachnlciana, and admlnlatratora; axaaq>laa of tha lattar ara practical nuraaa, houeekeepere, and naintananca and clarlcal workara. According to data In Tabla 19, paga 67, thara wara 1,257 hoapltal enployaaa In tha raglon In 1967. $5,371,000. Total payroll axpandlturaa wara Ualng tha profaaalonal/nonprofeaalonal claaalfIcation of aaployaaa and tha avaraga aalarlaa at one of tha region'a hoapltala aa proxlaa for all of tha hoapltala, It waa eatlnated that 685 of tha 1,257 aaployaaa wara profaaalonala and 572 wara nonprofaaalonala.^ Avaraga profaaalonala* aalarlaa wara eatlnated at $5,000 and nonprofeaalonal aalarlaa at $3,402.* Total profaaalonal aalarlaa wara $3,425,000 and nonprofeaalonal aalarlaa wara $1,946,000. 2Table 19, p. 67. ^ Klaman, Tha Econoad.ce of Health and Medical Cara, pp. 227-254. *Thaee eetlmatea compared d o a e l y with eatlnatee for tha North Central legion. U.S. Departawnt of Labor, indtintrv Wane Survey. 2 141 Oth*r Inputs Monpayroll expenditures wars astlastad at $3,331*000. or 38.3 psrcant of total axpandlturaa. Hospital racords lndlcata than an approx- laats braakdown of nonpayroll axpandlturaa In percentages of total axpandlturas Is: nadlcal suppllas and sanrlcas, 18.2 psrcant; and non- asdical suppllas and services, 20.1 psrcant. Thasa axpandlturaa can ba furthar dlvldad so that thay nay ba consldsrad fron tha parspactlva of Intarraglonal trade. Purchasas of nadlcal Inputs, 18.2 psrcant of total axpandlturaa, ara dlvldad batwaan regional and nonregional sources. Hospital racords indicate that special services, such as professional consultation, nay account for as nuch as half tha axpandlturaa on nadlcal suppllas and services. Tha location of highly specialised nadlcal personnel within the region can ba assuned virtually to eliminate the need for nonreglonal expenditures for special services. Medical supplies such as hospital equipment and pharmaceuticals are purchased largely from nonreglonal sources. Accordingly, It Is assumed that these expenditures are evenly divided between regional and nonreglonal destinations. The regional half consists of special services and a small amount of supplies, the nonreglonal half consists solely of medical supplies. Nonmedical expenditures (20.1 percent) are Incurred largely for housekeeping supplies (12.1 percent of total expenditures) and nonoper­ ating services (8.0 percent of total expenditures). For the most part the former are generally available goods such as food and fuel, which can be purchased locally; tha latter consists of items such as social security which must be purchased nonlocally and de p r e d a t i o n payments which may or may not ba made locally. Accordingly, It will be assumed 142 chat houaakaaplng auppliaa ara regionally purchaaad vhlla nonoparating axpandlturaa ara avanly dlvldad batwaan raglonal and nonraglonal purchaaaa. Suaaaary Tha braakdovn of nonpayroll axpandlturaa auggaatad In tha pracadlng paragrapha and of payroll axpandlturaa glvan aarllar ara Incorporatad In Tab la 50. Tha tabla alao ahowa tha aatlnatad raglonal dlatribution of cha ganaral hoapltala* axpandlturaa. According to thaaa aatlnataa, raglonal axpandlturaa— conalatlng of labor and othar raglonal Inputa— accountad for 86.9 parcant of all ax­ pandlturaa. Thla outcona la affactad aainly by tha larga proportion of hoapltal axpandlturaa accountad for by payrolla for raglonal realdanta, and to a laaaar dagraa by axpandlturaa for nonnadlcal, houaahold-typa gooda purchaaad within tha raglon. Tha franawork undarlying tha dlatribution of ganaral hoapltal axpandlturaa will ba uaad for tha othar haalth aarvlcaa. Hod if icatlona In tha franawork, auch aa tha lncluaion of aalf-anployad profaaalonalav will ba aada for Individual aarvlcaa aa nacaaaary. Pavchlatrlc Hoapltal Financial racorda for tha paychlatrlc hoapltal ara publiahad on a flacal yaar baala. Tha Incona axpandltura account a for 1967 and 1966 haua baan convartad to a calandar yaar baala to darlva aatlnataa for 1967. Thaaa accounta hava baan axanlnad and, following tha procadura davalopad abova and appllad to ganaral hoapltala, axpandlturaa hava baan dlatrlbutad according to an Input and raglonal claaalf Ication. raaulta of thla dlatribution ara ahown In Tabla 51. Tha 143 TABLE 50.--Distribution of tho Grand T r m r s c Raglon'a ganaral hoapltal axpandlturaa, by Input and raglon, 1967 Input claaalfIcation Expenditure Percentage Anount of total 1,000 dollara Percent Labor: Profaaalonal. . Nonprofeaalonal 3,425 1,946 39.3 22.4 Subtotal. • . 5,371 61.7 Othar Inputa: Regional-Nadlcal . . . Nonnadical. . 792 1,399 9.1 16.1 Nonreglona1— Nadlcal . . . Nonaadlcal. . 792 348 9.1 4.0 Subtotal. . 3,331 38.3 Total . . 8,702 100.0 144 TABLE 51.— Distribution of tho Traanraa City Stata Hoapltal*a axpandlturaa, by Input and raglon, 1967 Input daaalflcatlon Expandltura Pnrcantaga Aaount | of total 1,000 dollara Labor: Profaaalonal...................... Nonprofaaalonal ................. Parcant 1,770 4,319 23.3 57.2 6,089 80.5 Othar Inputa: Raglonal— Madlcal ........................ Nonaadlcal...................... 117 865 1.6 11.4 Nonraglonal— Madlcal ........................ Nonaadlcal...................... 235 249 3.1 3.4 Subtotal...................... 1,466 19.5 7,555 100.0 Subtotal. . . . Total ............... 145 T h a n w a n 905 aaployaaa at tha Traversa City Stata Hoapltal In 1967. In 1965, tha last yaar for which Information about tha different types of employees were available, there were 850 employees. Of these, 106 were professionals, 461 were psychiatric aides, and 283 can be assumed to have been other nonprofessionals. Thus, 744, or 87.5 percent, were nonprofessionals and 106, or 12.5 percent, were professionals.^ Assuming the same proportions held In 1967, it Is estimated that there were 791 nonprofessionals and 113 professional employees. The average wage in 1967 for nonprofessionals, obtained by adjusting the average 1966 non­ professional wage in Detroit's state and local government hospitals, was estimated to be $5,460; multiplying by 791, the number of nonprofessionals, yields $4,319,000 as the nonprofessional payroll.** The professional payroll was estimated as the difference between the total and nonprofes­ sional payrolls. The difference, $1,770,000, when divided by 113, the number of profeseional employees, yields an average professional wage of $15,664. The large differenees between both professional and nonprofesslonal average wages In the region's psychiatric hospital and the general hos­ pitals are explainable first, by the fact that national average earnings for most occupations are higher In psychiatric and government hospitals than In private hospitals and secondly, by the higher ratio of profes­ sional to nonprofessional employees In general hospitals. The fact that ^The 1965 data is based on: Hospitals. Journal of the A s m rlean Hospital Association (August, 1967), and State of Michigan, Michigan State Plan for Construction of Community Mental Health Facilities. 1965-66 (Lansing, Michigan: Michigan Department of Public and Mental Health, 1966), **Ibld., p. 6. 146 a high proportion of thtst professional* are nurses effectively reduces the average professional wage in general hospitals relative to that In psychiatric hospitals. Other Inputs Nonlabor expenditures are largely Incurred in the areas of plant maintenancet food and housekeeping supplies* nedlcal supplies* and em­ ployee fringe items. Host purchases of medical supplies are for special equipment and drugs used in the treatment of psychiatric patients. most part* are provided by nonreglonal sources. These* for the Everyday Items, however* such as iiisnrin drugs and medical sundries* are purchased locally. Assu­ ming that. In fact* a third of the hospital's medical supplies are pur­ chased locally and two-thirds nonlocally* the $352*000 spent on msdlcal supplies can be divided Into regional expenditures of $117*000 and non­ reglonal expenditures of $235,000. Other Items, food excluded, have been divided between regional and nonreglonal expenditures. Food expenditures* the major nonpayroll Item* were $516,000 and are assumed to be regional expenditures. Huralna Homes The 1967 Income of the region's six nursing hones was estlswted at $1*572*125. In the following analysis of Input expenditures* the homes are treated aa a group. Data from current national nuralng hone surveys and from the Annual Report of the Grand Traverse Msdlcal Care Facility (MCF) have been combined In order to develop employment and other Input estimates. shown In Table 52. The estimated distribution of expenditures Is TABLK 52.— Distribution of tho Grand Traverse ftttlon's nursing host •*pendltures, by Input and raglon, 1967 Input classification Anount 1,000 dollars Labor: Self-enployed professionals Professional ............. Nonprofassloual........... Percentage of total Percent 36.6 264.0 805.0 2.3 16.8 51.2 Subtotal ............... 1,105.6 70.3 Othar Inputs: Regional— Msdlcal................. Mownadlcal ............. 78.6 276.7 5.0 17.6 Nonreglonal— Msdlcal................. Nonnedlcal ............. 6.3 104.9 0.4 6.7 Subtotal . . ......... 466.5 29.7 Total............... 1,572.1 100.0 Labor Input* Four nursing h o M i were proprietary. operated by a self-employed professional. It Is assumed that aach was Nat lncoat on proprietary •tnlngs, eatlnated by nultlplylng the number of patient days In each bone by the difference In estimated costs per day between proprietary and nonproprietary hones In the sane else bracket, was $36,600. It was estimated that there were 306 other enployees: sionals and 251 nonprofessionals. 55 profes­ These figures were obtained by adding the known employment for the MCF and the estimated employment for the other nursing hoses. The latter estimates and the division between pro­ fessionals and nonprofesslonals were based on 1967 statistics relating to the types and number of personnel In varying sizes of nursing hones In the United States.^ Labor accounted for 68 percent of total expendl— turns In the MCF; the seam rate was assumed to apply to all the nursing bones In the region. Average professional salaries were estimated at $4,800 and nonprofesslonal salaries at $3,200. These averages end the ratio of professionals to nonprofesslonals are lower than In the general hospitals and reflect the need for less specialized staffs In nursing bones. Other Inputa As with employment, the distribution of expenditures among non­ labor Inputa was based on MCF and Professional Murslna Homes data. Pur­ chased medical eupplles are largely pharmaceuticals and Invalid equip­ ment. These tend to be purchased In relatively small quantities and for 7Profeaslonal Murslna Homes. 1968 Market Data and Planning Guide (Minneapolis, Minnesota: The Miller Publishing Co., 1968). ^This rate is also consistent with estimates for nursing homes re­ ported In Professional Murslna Homes. 1968 Market Data and Planning Guide. 149 the aott part, ara obtalnad locally* Administrative and d o M s t l c naads account Cor most nonmedical axpandlturaa. Tha regionalization was baaad on an assumed distribution of tha MCP's axpandlturaa. Profassional Sarvicaa Data limitations rastrlct tha possibility of davaloplng comp late individual breakdowns of tha expandlturas of the profaaalonal msdlcal services. Physicians, osteopaths, dentists, and othar professional ser­ vices are, therefore, analysed as a group. U.S. Treasury Departmsnt data are used for the initial classification by type of expenditure, but subsequent classifications by nonlabor Input and region of purchase will be based on the assumption that tha proportlonat distribution is tha same for aach service. Tha estimated distribution of 1967 expenditures according to tha Treasury Department classification is shown in Table 53. Where necessary. Treasury figures have been adjusted to account for dlfferencas between the Treasury's national estimataa and this study's regional estimates. For the remainder of this section the individual services will be analyzed aa a group; hence the relevant figures are in the "total" column in Table 53. Labor Inputs Three levels of labor Inputs are considered in analyzing professional services: self-employed professlonale, professionals, and nonprofessionals. The Income of self-employed professionals is shown as net Income In Table 53. The estlmatad number of self-employed professionals in the region was 177, so the average net income was approximately $31,500 ($5,566,300 * 177).9 9 Thare were 92 physicians, 27 osteopaths, 41 dantlsts, 15 nurses, 1 chiropractor, and 1 dental laboratory proprietor. TABU 53.— Distribution of expenditures for the Grand Traverse Region's professional nedlcal services, 1967 Itea Total Professional service Physicians Osteopaths Dentists 1,166.4 596.8 540.9 161.3 Other business expenses. . . . . . 2,566.0 Met lacoasb. . . . . . . . . . . . Payroll" . . . . . . . . . . . . . Purchases of asdical supplies. . . Business lncoae. . . . . . . . - 1.000 dollars 205.9 Other prof. services 354.2 7.5 137.2 231.1 11.3 1,392.4 547.2 613.4 13.0 5,566.3 3,225.8 964.3 313.4 62.8 9,837.6 5,376.3 1,854.6 2,512.1 94.6 "Payroll expenditures for hired professional and nonprofeaslonal help. Set lncoae for self-employed professionals. Calculated froa: U.S. Departnent of the Treasury, "Preliminary Statistics of lncoae*1, 1966 and 1967. 151 Payroll axpandlturaa ahown In tha tabla ara aaeuned to hava baan paid to hlrad profaaalonal and nonprofaaalonal haIp. Tha former would largely ba accountad for by regiatered nuraaa working in nadlcal practi­ tioner a 1 offlcea and tha latter by nonreglatered nuraaa, office ataff, and janitorial workara. In 1965, 37 regiatered nuraaa ware employed In offlcea In tha region.*0 Aaaumlng that tha number had incraaaad to 40 by 1967, and that tha average aalary waa $5,000, the aame aa the average for profaaalonala In general hoapltala, profaaalonal aalarlaa were $200,000 (Table 54). Deducting profaaalonal aalarlaa from tha total payroll ($1,164,400 $200,000) leevea $964,400 aa the eatlnated earninga of nonprofeaalonala. Baaed on tha avaraga $3,400 wage of nonprofeaalonala In general hoapltala, It la eatlnated that the nunber of nonprofeaalonala waa approximately 283.11 Othar Inputa Nonlabor axpandlturaa wara $3,106,900. Apart from nedlcal euppllea purchaaad and ra-aold to patlenta, the bulk of profaaalonal axpandlturaa are for nonnadical aarvlcaa, auch aa rant, lntaraat, and taxaa. *°1964-65 Annual Report of tha Mich * It la Board of Huraina. pp. 11-12. ^Calculated by dividing eatlauted nonprofeaalonal payroll expeneee ($964,400) by tha avaraga nonprofeaalonal wage ($3,400). Surveye Indi­ cate that phyaldana' office aalarlaa tend to at ay In line with hoapltal aalarlaa, and that, In 1966, mldveatern aalarlaa for lnaxparlanced office help ranged fron $2,500 to $3,000. Madlcal Econonica (Dacamber 12, 1966), p. 79. Copyright (c) 19 by Madlcal Econoadxa, Inc., a aubeldlary of Litton Publlcatlona, Inc., Oradell, N.J. 07649. Imprinted by pemleelon. Nona of thla material nay ba reproduced, etored In a retrieval ayaten, or traneadttad In any form or by any neana (electronic, mechanical, photocopying, recording, or otharwlaa) without the prior written peradaaloo of tha publlaher. 152 u s u M d that all nedlcal auppliaa are purchaaad froa nonreglonal sourcea and that thla expenditure la repreaented in Table 53 by the "coat of gooda sold" — $540,900. Other bualneaa expensea in Table 53, $2,566,000, are aaeumed evenly divided between regional and nonreglonal Itema. Summary Reaulta for the dlatribution of profaaalonal aarvlcaa* incone by type of input and region are aumnarlzed in Table 54. Drug Storea The value placed on retail drug atore aalea of preacrlption druga and aundry madlcal producta waa $4,525,500. 12 Eatlnatee of the propor­ tionate allocation of theae aalea among major expenditure iteme are ahown in Table 55. Labor Inputa The region*a drug atorea, approximately 40 in number, are proprletarlly operated and it la aaaunad that the proprletora are s«If-employed medical profaaalonala. Conaequently, aa in the analyala of profaaalonal aarvlcaa, net Income la regarded aa the labor expenae of aelf-enployed profaaalonala. Eatlmated total net Incoam la $624,522; net Income per atore, therefore, aeauadng 40 atorea and one proprietor per atore la $15,613.13 32See Table 35, p. 103. The aalea total waa obtained by adding preacrlption drug, madlcal aundry, and proprietary drug aalea, and rounding to the neareat $100. ^3Tha aaaumptlona of aole proprletorahlp and madlcal profeaalonallam ara made on the expectation that tha "average** owner a of amall town drug atorea are alao pharmaciata. Thla excludea tha poaalbllity that some atorea may actually be aaaociated with chain operatlona. 153 TABLE 54.— Distribution of tho Grand Travarsa legion'* profaaalonal anrvlea axpandlturaa* by Input and raglon, 1967 Input claaalflcatlon Rxnandlturns Parcantaga Aawunt of total 1,000 dollars Labor Inputa: Salf-anployad profaaalonala. . . Profaaalonala.................... Nooprofaaalonala ............... Parcant 5,566.3 200.0 964.4 56.6 2.0 9.8 6,730.7 68.4 Nonlabor Inputa: Raglonal— Madlcal........................ Nonawdlcal .................... 1,283.0 13.0 Honraglonal— Madlcal........................ Nonawdlcal .................... 540.9 1,283.0 5.5 13.0 Subtotal .................... 3,106.9 31.5 Total...................... 9,837.6 100.0* Subtotal . . ................. *Dat all doaa not add to 100 parcant dua to rounding. 154 TABLE 55.— Distribution of ths Grand Traverse Region's drug atore incone* by input end region* 1967 Item Amount Percentage of total 1*000 dollars Percent Business receipts................. 4,525.5 100.0 Costs of goods sold............... 2*652.0 58.6 Salaries and w a g e s ........... .. 606.4 13.4 Other business expenditures .................... 642.6 14.2 Net Income ........................ 624.5 13.8 Sources: U.S. Department of the Treasury, Statistics of Income. 1966 (Washington: U.S. Government Printing Office, 1967); U.S.* Con­ gress* Senate* Subcosssittee on Monopoly of the Select Coamlttee on Small Business* Competitive P r o b l e m in the Drum Industry, part 5* 90th Cong.* December 14 and 19* 1967, and January 18* 19* and 25* 1968* p. 1744; Report of the Commission on the Cost of Medical Care. I (Chicago: American Medical Association* 1966), 35. The estisMtes vers derived by adjusting the Treasury Department's distribution of drug atore earnings* in which nonmedical items are in­ cluded, to reflect returns and expenditures Incurred solely in the sale of medical itesm. 155 Payroll expanses for professional and nonprofessional employees are $606,420, or $15,160 on a per store basis. The average pay for employees In Munson Hospital's pharsacy was $5,043 In 1967. 14 If the ssee rste is appropriate for drug stores, the nunber of employees Is approximately three per store, or 120 altogether. These 120 esqployees are divided on the assumption of one professional and two nonprofesslonals per store. Using the average salary for medical technologists In the Detroit area In 1966 aa an estimate, professional salaries were $6,000 per employee, or $240,000 in total.16 Nonprofessional payroll expenses, calculated as the difference between total payroll and professional salaries ware $366,400 or $4,600 per eaq>loyee. Other Inputs Merchandise purchased for re-sale accounts for 58.6 percent of drug store expenditures. It is assumed that these expenditures are nonreglonal end made for medical supplies.1^ "Other business expenditures"— 14.2 percent of total Income— are assumed to be made for nonmedical goods and services and to be evenly divided between regional and nonreglonal purchases. Results for the distribution of drug store purchases by type of input and region are summarised in Table 56. 14 "Report on Examination," p. 12. ^U.S. Department of Labor, Industry Wane Survey, p. 37. 16The number of employees Is assumed to represent the use of full-tlam equivalents In the sale of amdlcal Items. ^ I t e m s such as packaging materials are assumed to be Included In "other business expenditures." 156 TABLE 56.— Distribution of the Grend Traverse Region's drug store expen­ ditures, by Input end region, 1967 Kxnendlture Input clesslflestIon *—« 1,000 dollars Labor: Self-enployed professionals. . • Professionals................... Nonprofessionals ............... I ’srsar Percent 624.5 240.0 366.4 13.8 5.3 8.1 Subtotal ...................... 1,230.9 27.2 Other Inputa: Regional— Medical........................ Nonesdlcal .................... 321.3 — 7.1 Nonreglonal— Msdlcal........................ Nonesdlcal ................... 2,652.0 321.3 58.6 7.1 3,294.6 72.8 4,525.5 100.0 Subtotal ................... Total...................... — 157 Eyeglass and Appliance Store* Stitt of tjrtglatt and nedlcal appliances trt included in U.S. Treasury statistlea for retail drug and proprietary stores. In contrast to the analysis of drug stores, there is a lack of data which can be used to nodlfy these statistics. It will be aesumed. therefore, that the regional distribution of eyeglass and appliance store incomes anong major items of expenditure is the same as the United States distribution of drug and proprietary store incomes. This distribution, applied to an estimated regional Income of $865,600. is shown in Table 57. Classification of Expenditures There are approximately six retailers of eyeglasses and appllancea in the region. The redlatrlbutlon of their expenditures by region and input is assumed similar to that previously used in the analysis of drug stores. That la. the cost of goods is a nonreglonal expenditure on smdlcal inputs; and aalarlaa and wages and net Income are regional expenditures for professional, nonprofaaalonal. and aelf-employed profaaalonal labor. Also, there are. In addition to the owner who la aaaumed to be a aelfamployed professional. thrae amployeea per store: one professional aarning $6,000. and two nonprofeaalonala earning approximately $4,600 each. nOther buelneae axpandlturaa** are evenly divided between regional and nonreglonal purchases of nonmadical supplies. The results are summa­ rised in Table 58. Fublic Health Servicea Income and expenditures of the region's public health aervlces were •ntinated at $186,900. Financial and employment data are available for 158 T A B U 57.— Distribution of tho Grand Travtrta Baglon'a eyeglass and appllanca otorn lncoae*, by typo of expenditure, 1967 Itea Aaount 1*000 dollars Percentage* of total Percent Buslnoss rocolpts................. 865.6 100.0 Cost of goods sold ............... 582.5 67.3 Salaries and wagss ............... 91.7 10.6 Other buslnoss expenditures ................... 97.0 11.2 Met lncoae . . . 94.4 10.9 ................. *The percentage distribution vaa derived froe U.S. Department of tho Trossury• Statistics of IncoaM. 1966 (Washington: U.S. Govorassnt Printing Offlco, 1967). 159 TABLE 58.— Distribution of tho Grand Travarsa fttgloa'a aysglass and appllanca stora axpandlturas, by Input and raglon, 1967 Input classification Exnsndltura Anount Parcantaga 1 of total 1,000 dollarg Labor: Salf-aaployad profasslonals. . . Profasslonals.................... Monprofssslonals ............... Pafcant 94.4 36.0 55.7 10.9 4.2 6.4 Subtotal ...................... 186.1 21.5 Othar Inputs: Kaglonal— Madlcal........................ Monnsdlcal ................... 48.5 5.6 Nonraglonal— Hadleal........................ Monnsdlcal .................... 582.5 48.5 67.3 5.6 Subtotal .................... 679.5 78.5 665.6 100.0 Total............... .. — — 160 the Grand Travarsa haalth department. 18 On tha assumption of a similar pat tarn of expenditures, tha distribution partlnant to tha Grand Travaraa department, which accountad for sora than half tha raglon's total public haalth Incoma, Is uaad as a frasm work for tha raglon. Classification of Expenditures Osar 70 percent of expenditures ware for labor. Employment data show that there ware approximately 20 professional and 12 nonprofessional public haalth employees In tha raglon. Average professional salaries ware $5,000; nonprofesalonals earned approximately $3,000. 19 Other expendi­ tures vara largely for travel, auppliaa, consultations, rant, and employee fringe itema. Regional medical expenditures Included all clearly medical expenditures and half the expenditures on supplies. Regional nonmedical expenditures are rent, travel, and the other half of the expenditures on supplies. Nonregional expenditures ere all nonmedical and are composed of employee fringe Items such as social security taxes. In Table 59, the region's public health Income Is distributed along the lines previously suggested. The percentages in the right hand coluam are derived from the Grand Traverse health district's financial statements. Other Health Services Approximately one third of the estimated mlecellaneous sector Income of $233,600 was attributed to the Central Michigan Children's Clinic. Information about the clinic's expenditures Is available but there Is no useful Information about the other services. It is assumed* therefore, ^*Grand Traverse District Health Department, "Financial Statement," January, 1968 (unpublished). 19 Information In a letter to the author from J. Clnco, Director of District Health Department Mo. 1, Lake City, Michigan, July 27, 1967. 161 T A B U 59.— Distribution of tho Grand Traverse Region's public hoalth ser­ vices expenditures, by Input snd region, 1967 Input dnsslflcstlon Expenditure Percentage Anount of total 1,000 dollprs Labor: Professionals.................... Nonprofesslonals ........... . . Percent 101.9 34.2 54.5 18.3 Subtotal ...................... 136.1 72.6 Other Inputs: Regional— Medical........................ Monnsdlcal .................... 12.3 22.2 6.6 11.9 Monreglonal— Medical........................ Monnsdlcal .................... 16.3 8.7 Subtotal .................... 50.8 27.2 Total...................... 186.9 100.0 — — 162 th«t the diatributlon of tha clinic*a and ■lactllanaout larvlctf' lnconti ire the aame and that an approximation of tha corract Income diatributlon can bn obtalnad by prorating tha clinic*a diatributlon to tha total income of thla consonant. Raaulta of thla procedure are ahown in Table 60. Claaalficatlon of Expendlturee Tha eetimated nunbar of employeea van 15 profaaalonala and 11 nonprofaaalonala; average payroll axpanaaa were $6,100 for profaaalonala and $4,500 for nonprofeaalonala. Theae flguraa vara obtalnad by pro­ jecting tha clinic*a employment and payroll atructurc to cover tha eatlaatad total payroll expandlturaa of tha "other haalth aarvlcaa" „ 20 coaponant. Nonnadical expandlturaa ware avanly dlatributad between regional and nonragional purchaaaa* towarda regional purchaaaa. Medical expandlturaa ware heavily weighted At tha clinic noat of theae axpanaaa rapre­ sent tha coat of medical care which, while free to tha conauatr, ia actually paid for by philanthropic aourcaa. Since aavaral of tha other haalth aarvlcaa covered in thla eectlon are alao likely to be charitable organlzatlona it aaana raaaonable to expect that they too incur aubatantlal regional medical expandlturaa. Nonragional medical expandlturaa repre­ sent a prorated eatinate baaed on the clinic'a expandlturaa on euppliea and equipment. Summary of Raaulta for the Input Suppllea Sector Estimetea of the diatributlon of the medical lnduatry*a income among major lnpute and by region of purchaae are auaaaarlsed In Tablea 61 and 62. 20 "Report on Examination." In fiacal year 1967, the clinic employed four profaaalonala and three nonprofeaalonala; total payroll axpanaaa ware $36,400. 163 TABLE 60.— Distribution of tho Grand Travarsa Bagion's **othar haalth sarvlcas" axpandlturas, by Input and raglon, 1967 Input elaaalfIcatlou ExpandjLtura Parcantaga AMuat of total 1,000 dollgfa Parcant Labor: Profaaalonala................. Nonprofasslonal............... 91.0 50.1 39.0 21.4 Subtotal ................... 141.1 60.4 55.1 14.7 23.6 6.3 Nonragional" Madlcal........... Nonnadlcal ................. 8.0 14.7 3.4 6.3 Subtotal ................. 92.5 39.6 Total................... 233.6 100.0 Othar Inputs: Regional" Madlcal...................... Nonasdlcal ................. TABLI 41.— Distribution of ths Grand Traverse Bagion's nsdlcal axpandlturas, by service, region, and type of Input, 1967 Input a d regional source Gen­ eral hos­ pitals Psychi­ Nur­ atric sing hos­ pitals hones Pro­ fes­ sionals Drugs and drug sundries Eye­ glasses Public and ap­ health pliances Total "Other" services -- 1.000 dollars - - legloaal expenditures: Labor— Salf-anployed. . . . 3.425.0 1.770.0 Professionals. . . . Noeprofessionals . . . 1.946.0 4.319.0 Total. . . . . . . . 624.5 240.0 366.4 94.4 36.0 55.7 101.9 34.2 91.0 50.1 6.321.8 6.127.9 8,540.8 5,371.0 6,089.0 1,105.6 6,727.7 1,230.9 186.1 136.1 141.1 20,987.5 55.1 14.7 1,055.0 4,230.4 36.6 5,566.3 264.0 200.0 805.0 964.4 Other inputs— Medical. . . . . . . . Nouedlcal. . . . . . 792.0 1,399.0 117.0 865.0 78.6 276.7 1,283.0 321.3 48.5 12.3 22.2 Total. . . . . . . . 2,191.0 982.0 355.3 1,283.0 321.3 48.5 34.5 69.8 5,268.4 Regional total . . 7,562.0 7,071.0 1,460.9 8,013.7 1,552.1 Nonragional expenditures: 792.0 235.0 6.3 540.9 2,652.0 Medical. . . . . . . . . 348.0 249.0 104.9 1,283.0 321.3 Noonedlcal . . . . . . . 234.6 170.6 210.9 26,275.9 582.5 48.5 16.3 8.0 14.7 4.816.7 2.385.7 111.2 1,823.9 2,973.3 631.0 16.3 22.7 7,202.4 8,702.0 7,555.0 1,572.1 9,837.6 4,525.5 865.6 186.9 233.6 33,478.3 Nonragional total. . . 1,140.0 All ex­ penditures . . . . 484.0 TABLK 62.— Percentage distribution of the Grsnd Traverse legion's nedlcal expenditures, by service, region, and type of input, 1967 Input and regional source legloeal expenditures: Labor— Self-eaployed. . . . Professionals. . . . lonprofessionals . . . Gen­ eral hos­ pitals Psychi­ Huratric slng hos­ pitals hones Pro­ fes­ sionals Drugs and drug sundries Eye­ glasses Public and ap­ health pliances Total HOther" services Percent 39.3 22.4 23.4 57.2 2.3 16.8 51.2 Total. . . . . . . . 61.7 80.6 70.3 Other inputs— Medical. . . . . . . . Bonasdical . . . . . 9.1 16.1 1.5 11.4 5.0 17.6 13.0 7.1 5.6 6.6 11.9 Total. . . . . . . . 25.2 13.0 22.6 13.0 7.1 5.6 18.5 29.9 15.7 86.9 93.6 92.9 81.5 34.3 27.1 91.3 90.3 78.5 9.1 4.0 3.1 3.4 0.4 6.7 5.6 13.0 58.6 7.1 67.3 5.6 8.7 3.4 6.3 14.4 7.1 13.1 6.4 7.1 18.5 65.7 72.9 8.7 9.7 21.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 laglonal total . . Honregional expenditures: Medical. . . . . . . . . Monnsdlcal . . . . . . . Total. . . . . . . . . All ex­ penditures . . . . 56.6 2.0 9.8 13.8 5.3 8.1 10.9 4.2 6.4 54.5 18.3 39.0 21.4 18.9 18.3 25.5 68.5 27.2 21.5 72.8 60.4 62.8 23.6 6.3 3.2 12.6 166 i In the M x t chapter, thaaa raaulta will ba coablned with thoaa froa tha pro duclng and consulting sactora to daplct tha pattern of Interactions result­ ing froa tha Grand Travarsa aadlcal econoay's network of Interindustry and Intsrreglonal trade. These tables bring together aany details which have already been considered Individually. They clarify the expected concentration of expenditures on labor Inputs. Yet with the labor coaponent broken down Into the three categories, there appears to be a reaarkably even distri­ bution of labor expenditures In the total for all nedlcal services. In sons respects this is the result of estlaatlng techniques, but there are sufficient factual data behind the calculations for the aajor services to alnlalse the possibility and lnportance of extraordinary errors. In teras of Incone, the aost laportant Input was nonprofessional labor. This, of course, was strongly influenced by the psychiatric hospital's large nuaber of workers. self-eaployed professional labor. The second aost laportant Input was The significance of this component is predictable and night be expected for any region's aadlcal econony. These figures also have evening In terns of the nuabers of people In the different occupations. In the next chapter, which deals briefly with the econoalc relevance of eaployaent In the nedlcal industry. It will be shown that the nuabers of personnel in each occupational classi­ fication are disproportlonal to Its total Incone. The lapllclt relation­ ship between high earnings and few self-eaployed professionals will then be addressed, albeit indirectly, in the following chapter. Expenditures on other Inputs clearly account for a far saaller per­ centage of nedlcal lncoaas than labor. Results show that they are alaost •venly divided between aadlcal goods and services and nonaadlcal goods end services. Most of the forner are purchased froa nonragional sources 167 and, b a n , by far tha largest It am is accounted for by drug store pur­ chases. This too will be the subject of further exploration as future chapters focus on the overall Interregional aovtstnt of funds and the Investigation of the drug Industry's profits. CHAPTER VIII INCOME AND EXPENDITURE ACCOUNTS— SUMMARY AND IMPLICATIONS FOR DEVELOPMENT AND TRADE For each component of the Grand Travarsa Raglon*a aadlcal producing sector, Tablas 63 and 64 show cha darivatlon of Its Incoaa froa aach com­ ponent of tha consualng sector and tha expenditure of its Incoaa on aach component of tha Input suppllee sector. Tha data In these tables are derived froa tablaa In tha two preceding chapters. Modifications In pre­ vious tables Include nerglng physicians, osteopaths, dentists, and "other professionals" Into "professional services;" deleting "asdlcal Insurance;'* and combining regional and nonragional expenditures previously shown separately so that there Is no distinction with respect to where income was earned or spent. In Tables 63 and 64 each figure In the total income row can be obtained either by adding the coluanar entries above It for the consuasr sector or below It for the Input supplies sector. Froa an overall point of view the results show the dominance of private consumers on the purchasing side and of labor on the Inputs side. Government expenditures are second in magnitude to consumer expenditures. In this region the psychiatric hospital enaures significant nonfederal expandlturaa. Federal expenditures are moat pronounced In services for which public Insurance prograas are operative: services, sad nursing hones. hospitals, professional This relative Influence Is, as might be expected, greatest In the last of these. This result would not have appeared had the aaalyele covered a period prior to 1967. 168 Item St 3 % u 44 H 4 4 ■H 44 « 4 O * J= g •H 4 S3 1b 14 h 4 3 14 4 M M II 3 a a 4 4 4 U as mn M 4 a ! •a M 34 b 9 a b so 44 Total 4 e H h a 4 44 b i-» ■o Public H 4 4 ■H b health TABU 63.“ Intersectoral distribution of tha Grand Travarsa legion's aedieal industry incoaa, 1967 - - 1.000 dollars (Vistuning sector: Soares of imcons— Frlvata: Consuasrs. . . . . . . Philanthropy . . . . Other Public: Federal. . . . . . . . Stats and local. . . . Total lacoas . . . . Input supplies sector: Expenditure of incoaa— Labor: Self-eaployed professional . . . . Professional . . . . Bonprofeaslonal. . . . Other inputs: Medical. . . . . . . . Hoaasdical . . . . . . 5,339.9 272. S — 866.2 8,356.7 6,366.5 — 89.9 1.9 — — — 90.5 2,576.3 33.0 996.1 513.0 6,587.9 686.9 90.5 8,702.0 7,555.0 9,837.6 6,525.5 868.2 “ — “ — “ 85.0 32.0 20,125.1 686.2 32.0 8.7 901.6 56.6 96.0 8.7 260.5 132.5 22.6 865.6 1,572.1 186.9 233.6 6,752.6 8,082.6 33,678.3 626.5 260.0 366.6 96.6 36.0 55.7 1,586.0 352.0 560.9 2,652.0 1,767.0 1,U6.0 2,566.0 662.6 582.5 97.0 5,566.3 3,625.0 1,770.0 200.0 1,966.0 6,319.0 966.6 - 393.6 36.6 — 36.6 266.0 101.9 805.0 36.2 91.0 50.1 6,321.8 6,127.9 8,560.8 86.9 381.6 63.1 29.6 5,871.7 6,616.1 12.3 38.5 I se X :s H M C a u 3 as UH o. t*a & e a u e X u O Total a s a u health « 1 Public si Drugs and drug sundries e Professional services Iten a h h a « h ■H :: Psychiatric hospital TABLE 64.— Percentage distribution of the Grand Traverse Region's nedlcal industry incone, 1967 Percent - Consunlng sector: Soares of incons— Private: Coaauners. . . . . . . Philanthropy . . . . Other. . . . . . . . . Public: Federal. . . . . . . Stats and local. . * . Total incone*. . . . Input supplies sector: Expenditure of Incoaa— Labor: Self-eaployed professional . . . . Professional . . . . Nonprofesslonal. * . . Other inputs: Medical. . . . . . . . Nonaedlcal . . . . . . 61.4 3.1 - 11.2 1.2 — 84.9 0.1 96.0 — — 98.0 — — 25.0 2.3 — 29.6 5.9 0.4 87.2 10.1 4.9 2.0 2.0 1.0 1.0 100.0 100.0 100.0 100.0 39.4 22.4 23.4 57.1 56.6 2.0 9.8 16.2 20.0 4.7 14.8 5.5 26.0 — — 36.4 13.7 60.1 1.4 0.1 57.3 15.3 29.1 70.1 40.2 9.7 14.2 24.2 100.0 100.0 100.0 100.0 100.0 13.8 5.3 8.1 10.9 4.2 6.4 2.3 16.8 51.2 54.5 18.3 39,0 21.4 18.9 18.3 25.5 58.6 14.2 67.3 11.2 5.4 24.3 6.6 20.6 27.0 12.6 17.5 19.8 — 171 As previously noted, labor la tha principal recipient of Incone expenditures. This Is heavily Influenced by the earnings of self-enployed professionals. It should be noted, however, that In nost components these earnings Include undistinguished profits. Developnenfel Aspects of the Medical Industry Zn terns of the nedlcal Industry's Inpact on developewnt, these large labor expenditures should constitute a positive factor. It Is not a major objective of this research to pursue the relationship between the nedlcal Industry and developannt, but the findings herein and the con­ temporary emphasis on new approaches In rural development are indicative of the need and timeliness of further research. Further exploration of the employment Impact would, as suggested later, be a potentially valuable approach. Data about labor expenditures were found to be specially amenable to accurate representation, particularly with respect to the large In­ stitutional employers. Among Individual health services, labor expenses ranged from 80.5 percent of all expenditures In the psychiatric hospital, to 21.1 percent In eyeglass and appliance stores.^ Total expenditures by the producing sector were estimated at approx­ imately $35,000,000. Labor expenses, including returns to the self- eaployed, were $21,000,000— 62.7 percent of total expenditures. Payroll expenditures In all Industries, again Including estimated returns to the self-enployed, were approximately $160,300,000. The medical Industry, therefore, accounted for 13.1 percent of the region's total payroll ex­ penditures. Furthermore, the medical Industry employed 3,214 people, *A11 the psychiatric hospital's labor expenses were for professional and nonprofeasional employees, whereas half of the eyeglasses and appli­ ances stores' labor expenses were for self-enployed professionals. 172 2 8.4 percent of tho region's work foreo of 38,485 people. Those esployssnt details establish the smdlcal Industry as a sig­ nificant economic force In the Grand Traverse Region. Other Industries such as agriculture, manufacturing, and services have larger payrolls and aors workers, but these are broadly defined major Industries; and services, for example. Include aost components of the medical Industry. If these broad industrial groupings are subdivided Into secondary, tertiary, and quaternary classes, it Is found that below the level of the major Indus­ trial groupings the smdlcal Industry Is, with the possible exception of fruit farming, the region's principal economic activity In nuabers of 3 employees and sixe of payroll. Tne major econoatlc effects are undoubtedly felt in Grand Traverse County, where the medical industry Is heavily con­ centrated. Nevertheless, the Industry Is so large and important that It encompasses all eight counties In Its predominant Industrial position. 2 This estimate was obtained by combining Infonsetion from the U.S. Department of C o m m r c e and the Michigan Employment and Security Commission. The former estimates employment for the first quarter of 1967 at 24,962. The Income of this group was estimated earlier In this study as $97.2 million. Department of Commerce estimates exclude: government employees, agricultural workers, the self-enployed, and, of particular Importance to this region, seasonal workers. A more realistic estimate of the total work force was obtalnad from Employment and Security Cossmlsslon figures. Their estimate of 1967 employment Is 42,525. This however, is for the eight counties plus Osceola County. The estimate can be adjusted to exclude Osceola by reducing it by 9.5 percent, the percentage of employ­ ment attributable to Osceola. The adjusted estimate of regional employ­ ment Is 38,485 (42,525 x .905). The difference between this and the Commerce estimate la 13,523 workers. The wage bill for these workers, obtained by multiplying 13,523 by the average wage, $4,667, Is $63,121,000. Total wages and salaries, obtained by adding this and the Commerce estimate, were $160,300,000. 3 U.S. Bureau of the Census, County Business Patterns. 1967. Michigan CBF-67-24 (1968). 173 Despite the evident importance of the medical Industry as an e m ­ ployer, the relativity of this role to development might be slight, or at least only expressable in terms of income distribution, were it not for the Industry's ability to attract substantial nonregional financing. It was shown (Table 47, page 133) that nearly $17,000,000 worth of medical services were paid for by nonregional sources. the region's total medical income. This Is approximately half Under the simple assumption that half the Industry's salaries and wages can likewise be attributed to non­ regional funds, $10,500,000 worth of jobs, about 1,600, were supported by 4 the Industry's export activities. It is a fairly straightforward matter to attribute the major share of employment-related development to the region's hospital structure. Nearly 70 percent of the combined Incomes of the psychiatric and the general hospitals originated externally (Table 30, p. 92). Furthermore, the hos­ pitals employed 2,162 people in 1967 (Table 37, page 108). While a large proportion of the psychiatric hospital's employees were nonprofessionals, most employees in the general hospitals were professionals. Thus, these institutions were not only able to offer substantial numbers of Jobs but also to offer opportunities in a wide range of akllls. And, though the hospitals do dominate employment, other employers are Important too, particularly nursing homes, professional offices and drug stores (see Table 65). In addition, medical employ ms nt is nonseaeonal, hence it incurs extra economic significance In terms of stability of employmsnt for msny people. more detailed analysis would require adjusting medical services* wags bill by its ratio of exports to total production. 174 TABLE 65.— Distribution of thn Grand Travarsa legion's aadlcal personnel, by place of work and occupational characteristics, 1967 Personnel Profes­ sionals Monprofesslonals Total Self-enployed professionals . . . 1,257 — 685 572 Psychiatric hospital . . 905 — 113 792 Nursing hones........... 310 4 55 251 Professional offices . . 500 177 40 283 Drug stores............. 160 40 40 80 Eyeglass end appliance stores ............... 24 6 6 12 Public health service............... 32 — 20 12 Other health service. . . . . . . . 26 — 15 11 Total............... 3,214 974 2,013 Place of work General hospitals. 227 175 Vary little r « M i r e h has barn conducted into the Impact of the medical Industry on raglonal economic d t v d o p a t n t . It la therefore diff­ icult to conclude that the Grand Traverse Region la particularly unusual. Where comprehensive medical industries are established, one would expect the economic effects to be relatively greater in rural than In urban areas. Whether there ere other rural areas where the scope and Impact of the nedlcal Industry are comparable to Grand Traverse remains for future study. Rut It should also be possible to study the expected Impact of increasing the else of the Industry In various regions. Policy Implica­ tions regarding econosdx criteria for regional medical planning have traditionally been focused on population needs. A result has been that demsnds for new services or additions to existing ones have consistently exceeded the supply of construction funds and human resources. Contem­ porary policies Indicate that a large share of new public expenditures will be devoted to helping the big cities' health care needs. are real, but so are rural needs. Theae needs Mot all of the latter can be solved by Increasing accessibility to big city facilities. It is believed that the Grand Traverse example of what the medical sector can do In a rural area should provide policy makers with an additional dimension In their struggle for a reasonable share of health planning funds. Interrealonal Trade In Medical Services Labor Intensity and the high proportion of total outlays spent on labor tend to enhance the developmental Impact of the nedlcal Industry relative to other Industries which might, for example, rely on larger proportions of nonregionally producad. I.e., Imported, Inputs. If, on the other hand, excessive profits are earned from the sale of some nedlcal goods end services, then the cost to a region of swlntalnlng Its medical 176 Industry nay also bs excessive and tha developmental impact moderated, particularly with raspact to expenditures on imported, aonopollstically produced goods and sarvlcas. In reality, tha Grand Travarsa medical In­ dustry expands about 21 percent of Its incoaa on iaports (Table 62, p. 165). How auch represents aonopoly profits will be the subject of ensuing chapters; for now, this chapter can be concluded by drawing together Its and the previous chapters' results regarding regional and nonregional ex­ penditures to determine whereabouts the region stands with respect to what might be called a "balance of medical trade." The esaentlal step Is to combine the results shown in Table 47, page 133 end Table 61, page 166. The latter table contains ax>st data for the region's aedical industry. as "nonregional expenditures." These are itemised, for each service, To obtain uniformity, the eight services are combined into the same groups used in the export analysis in the previous chapter.^ Also included, in addition to those imports discussed in this chapter, are payments for nonreglonally produced Insurance. These are a direct consumer purchase which do not represent input pur­ chases by the producing sector and which, therefore, can be said to lie outside the actual trade patterns established by the region's aedlcal industry. Hence, a gross trade balance can be obtained which is concerned solely with the trade of the region's asdlcal Industry, and then a net balance which Incorporates the reduction in regional income resulting from Insurance expenditures. The detailed trade accounts are shown in Table 66. ^The relevant groups and components are: (1) Hospitals, both isaaral and psychiatric; (2) medical services Including professional ser­ vices, nursing homas, eyeglasses and appllancas, and "other" health ser­ vices; (3) drugs and drug sundries; and (4) public health. TABLE 66.— Balance of aadlcal payatnts of tha Grand Travarsa Eeglon, 1967 Madlcal aarvlca Total laoorts bv source NonTotal Madlcal nedlcal laoorts Total exports by source Philan­ Total Cootuners exports thropy . . . . . 1.000 dollars 348.0 3,947.3 1,059.4 General hospitals. . . . 1,140.0 792.0 484.0 235.0 249.0 7,269.2 758.8 Mad. sarvlcas group1 . . 2,588.8 1,137.7 1,451.1 3,544.7 Drugs and drug sundries . . . . . . . 2,652.0 321.3 1,904.8 — 163.0 120.7 2,532.4 16,786.7 Psychiatric hospital . . Public haalth. . . . . Total. . . . . . . . Gross export balance Insurance axpsndlture Bat export balance 2,973.3 163.0 7,349.1 4,816.7 Governaeat 2,887.9 89.9 6,420.5 1,122.8 — 2,421.9 1,750.8 — 154.0 — — 120.7 4,691.8 89.9 12,005.0 9,437.6 1,972.4 7,465.2 1lncludes profaaalonala, nursing honss, eyeglasses and appliances, and "other" haalth aarvlcaa. 178 The n l c v a n t balance for the M d l c e l industry is shown as the gross export balance. The amount, $9,437,600, is the difference between non- regional paymsnts to the industry and the industry's purchases of non­ regional ly produced goods and services. The net export balance, $7,465,200, is the excess of exports over imports after Insurance payments are accounted for. The gross export balance is approximately 28.0 percent and the net balance 21.0 percent of the region's total nedlcal incone. These results tend to confirm the previous suggestion that fruitful research can be constructed regarding the role of the nedlcal industry in regional economies. Apart from looking at the gross impact of nonregional paynsnts for nedlcal services, it should be possible to examine the import structure more closely to see what economic opportunities exist for re­ gional production of imported goods and services. A large proportion of these payments are, admittedly, for nonsubs tl tut able items such as social security. There nay be other items, some medical supplies for exsnple, which could be produced regionally or purchased from nonregional sources at lower prices than currently paid. The latter possibility is germane to the objectives of this paper concerning excessive expenditures for medical care. In subsequent chapters the drug industry and medical equipment industry will be examined to determine whether they are able to influence prices and thereby inflate the cost of smdlcal care. Before turning to these industries, however, an analysis will be made of com­ petition and profitability as they concern the region's physicians. Here, excessive earnings, if found, have little or no impact on imports, they would, however, increase export earnings and increase the cost of health care both to the regional and nonregional populations. CHAPTER IX ANALYSIS OF PHYSICIANS* PROFITS Tht Physician Shortatt A aajor conclusion of the National Advisory Commission on Haalth Manpower Is that "...there la currently a shortage of physicians and this shortage will worsen in relation to growing demand, despite the expected Increase in the supply of physicians In the years a h e a d , T h e commission's concern over a shortage of physicians restates the conclusions of many studies. In the early 1930's Drs. Robert I. Lee and Lewis W. Jones esti­ mated health manpower requirements for the nation. They found a total 2 need for 134.7 physicians per 100,000 people. This meant that at that time there was a shortage of approximately 13,000 physicians. They doubted that the country could economically support an increased supply of physicians and other health professionals at that tlam, and concluded that the provision of adequate medical care would depend more on reor­ ganisation of the delivery system than upon Increases in numbers of personnel. The shortage still exists, but because the delivery system has been reorganised, through the use of auxiliary personnel and new tech^Report of the National Advisory Commission on Health Manpower. 1, 13. 2 The Fundamentals of Good Medical Care (Chicago: of Chicago Press, 1933), p. 302. 179 The University 180 oology, tht services of physicians have incraasad far more rapidly than tha nunbar of physicians. It is sstiaatad that as a result of these changes, output per physician will have increased 50 percent between 1965 and 1975, whereas the growth in the mnsber of physicians is expected only to keep pace with the growth in population. However, as output per physician increases relative to the supply of physicians there will be a 3 growing shortage in consultation between patients end phyalcians. While the nunber of physicians per person has declined since the beginning of the century, the growth in the nunber of physicians has kept pace with growth of population over the past 20 years, and is expected to do so in the next 10 years. Despite this, eccess to physi­ cians has dlnlnlshed end physlciens areconfronted with new rationing their tine and services. problens in Factors largely responsible for the expected increasing difficulty of gaining easy access to personal services of physicians a r e : the trend towards specialization which has resulted in a reduction in the nunber of persons seen per generalist; the increasing aaount of Cist phy­ sicians nust devote to managerial, clerical, and other nonawdical re­ sponsibilities; and the increase in the nunber of hospital-based physi­ cians and in the amount of tine spent in hospitals by private practi­ tioners.^ Expected Increases in the supply of physicians will be less than sufficient to SMtch the forces which decrease access. There is, there­ fore, a need to Increase the nunber of physicians above presently planned ■ ■ ■ ■ ■ ■ ■ MM.. ■ ■ ■ ■ ■ — !■ * ■ — 1 Ie . ■ i ■— ■■ ■ ■ I ^Report of the National Advisory Const!salon on Health Manuessnr. I, 13. 4 Ibld.. 14-15. 181 levels. Though the full extent of the Incrense required le uncertain it is clear that there la a definite need for substantial Increases In the number of physicians required to provide adequate care for disadvantaged groups and to staff hospitals at a satisfactory level. Unfortunately, one of the major problems facing policymakers concerned with meeting these needs Is the difficulty of transforming needs into effective demands. Part of the problem stems from the high income elasticity of demand for physicians' services, which means that people are buying more services as their incomes rise. Another part steam from Increasing public Inter­ vention which has enabled the poor and the elderly to obtain more ser­ vices than previously. Tet the number of physicians In private practice actually decreased froa 109 per 100,000 people In 1950 to 97 per 100,000 la 1965. ^ The problems resulting from these tendencies have been aggra­ vated by Increasing specialisation and the extra—medical responsibilities. All these problems are compounded by the economic behavior of physicians. "A significant and articulate portion" of the medical pro­ fession opposes changes In the health care delivery system.6 Physicians appear to maintain the Irrational belief "...that there can be rapid and far reaching technological change without disturbing the traditional organisation of nodical practice."* They are able to hold to this posi­ tion because, and above all else, they are discriminating monopolists who csn directly Influence the demand for their services. Nevertheless, 5U.S. Department of Health, Education, and Welfare, Health Resource Statistics. 6U.S Dap artnent of Health, Education, and Welfare, Report of the Natlqnal Conference on Medical Costs, p. 25. 182 although physicians* Incomes have grown rapidly In tha past, thara la raaaon to believe that, rat ha r than axploltlng thalr market powar to max­ imise incoaa In tha short-run, phyalclana have controlled faaa and ser­ vices ao aa to aalntaln thalr ralatlva Incone position. Daspite tha rapid Increase In demand for thalr aarvlcaa since 1950, tha Incones of phyalclana have not Increased much more rapidly than Incomes of other professional groups (Table 67). Clvan tha rapid growth in demand, physicians' fees could have risen more rapidly than they have. g However, In addition to fees. Implicit pricing, through quaues and other rationing devices, has been used to control demand and thus maintain incomes. If expected trends materialise, physicians' fees will have In­ creased by three percent per year and productivity by four percent per year for the decade 1965-75. Assuming coats remain a constant share of gross Income, as they have In the past, average income will Increase by about seven percent per year. This means that physicians lncoams will just about double over the decade. Thla growth In income exceeda the growth in the previous decade, but is In line with the more rapid rate of growth projected for the economy over the decade ending in 1975. The rate would, therefore, tend to maintain physician Incomes relative to the Incomes of other professional groups If the letters' Incomes also o grow at the projected rate. Phyalclana' Market Power The large and rising incona of phyalclana la a clear reflection ^American Madlcal Association, *TFTr* °* tht C o i i e aion on the Coat of Medical Care. I, 66. 9«aoort of the Motional Advisory C o ^ l a s i o n on H e alth Manfffirfr II, 242-263. 183 TABLE 67.— Ir ) « u « of Id of phyalclana and salactod occupational classes, 1951-65 c o m I tan 1951 1955 1959 1963 1965 Phyalclana................. 100 122 168 191 220 Professional, technical, and kindrad workers . . . 100 124 154 — 205 Managers, officials, and proprietors ......... 100 128 161 — 197 Are rags annual earnings par full-tlna enployee, all Industries........... 100 119 141 163 176 Sourca: Baoort of tha Matlonal Adriaorr Coawiaaion oo Haalth Manoouar. II (Washington: U.S. C o w m — nt Printing Off lea, 1967), 2A2. 184 of the Mrlcat conditions surrounding ths profession and Is the most rele­ vant Index of the shortage of physicians.^ Were resources free to move, physicians would not have been able to maintain their high relative income position. In a competitive market situation with prices above equilibrium, supply should exceed demand and a surplus should result. of physicians is clearly not observable, It M y Since a surplus be concluded that supply Is being artificially limited.^ It is these associations that have led to charges of noncosq>etltlve behavior being levied against the medical profession, and to research into the amount of excess Income physicians have been able to collect as a re­ sult of this behavior. Modern analyses of professional Incomes originate with a 1945 study conducted by Milton Friedman and Simon Kurnets. 12 They found that the average annual Income of physicians exceeded that of dentists by 32 per­ cent. This differential can be translated Into an exposition of the actual excess earnings of physicians attributable to the ssrket power. 14 An i n c o M differential between professions does not, itself, estab­ lish a lack of adjustment between desand and supply. tical Incosms be evidence of a close adjustsmnt. Neither would iden­ One occupation's Incosm nsy be higher than another's In order to cosq>ensate for differences In 10Harrls, The Economics of 4 m ^ el" Medicine, p 147. 11H.K. Itlenten. The Economics of Health (New York: University Press, 1965), p. 88. 12 Columbia Friedman and Kusnets, Income From Independent Practice. 13Ibid.. p. 105. **Thls section closely follows Klarman's Interpretation of the Frledsmn and Kusnets study. 185 costs, nonnonetary advantages, and tha Ilka. Yat differencea in returns between broad claaaes of occupationa appear to be larger than can be ex­ plains d by these differences.^ If the higher training costs of physicians relative to those of dentists are allowed for, the estlnated equilibria* differential is re­ duced by 17 percent. Since greater variability of incones anong physicians than anong dentists probably side the forscr's occupation relatively nore attractive, and nonpecuniary advantages such as prestige, opportunity to render services and sake contacts, and working conditions also favored physicians, Frledattn and Kusnets concluded that the persistent Incone dif­ ferential between the two related professions could only be explained if there were restrictions on entry into n e d l d n e , and that the two were, in effect, nonconpetlng g r o u p s . ^ The authors discussed and rejected the possibility of a lack of persons with sufficient ability, and concluded that the restrictions resulted either fro* llnltatlons on the capacity of educational facilities or fron lnpedlnents to the granting of licenses by the states, or both. Frlednan and Kusnets calculated that there should be approxiawtely three tines as nany physicians as dentists in order to ellnlnate the ex­ cessive incone differential between the professions. study the ratio was 2:1. At the tine of their (Additional evidence of the ability of physicians to nalntaln their relative position is observable in that the ratio 15Milton Frlednan, Price Theory. A Provisional Text (Chicago: Aldlne Publishing Co., 1962), p. 222. ^ T h a greater attraction of occupations with relatively variable inconss sterna fron willingness of people to accept the chance, renote *s it nay be, that these occupations will offer a higher reward than other occupations. Frlednan, Price Theory, p. 218. 186 hat hardly changad In tha paat 30 yaara. In 1965, tha ratio was 2 .1 :1).17 In a more racant analysis Frladsan llkans tha medical profassIon to a craft union. Msdlcal profaaslonals ara highly skilled, closaly organ- lead, and strataglcally placad to rastrlct tha supply through control ovar both stata licansura and antry to sttdlcal schools. Friedman points out that tha ttadlcal profession differs from a craft union in that returns to labor (medical fees) account for a larger fraction of tha cost of tha product. But this difference can be overstated because of tha high costs of hospitals and treatment. Tha difference la further countar-balanced by the inelasticity of desurnd for medical care. 18 Despite their control over entry into tha profession, physicians have only succeeded in raising their average Income above the equilibrium level by approximately 15 to 20 percent. The reason for this relatively saall increase has been the growth In substitutes for physicians* services, which, according to Frledsttn, provides "an Impressive example of the possibilities of substitution in the long run." 19 Considerations in the Application of the Friadmsn-Kusneta Analysis In order to apply the Friadmsn-Kusnete* analysis of excess earnings to the Grand Traverse Region, the basic assumption Is side that differences exist between the earnings of physicians and dentists which can only be ^American Dental Association, The Distribution of Dentists in the United States. 1966. p. 22, and American Medical Association, The Distri­ bution of Physicians in the United States. 1966. p . 10. ^Friedman, Price Theory, pp. 158-159. 19Ibid.. p. 159. 187 attributed to tha Monopoly power of the former. 20 First, however, there are three points to be auide which, while not affecting the Methodology, are relevant to analyses of professional IncoMes in general and to regional application of the analysis in particular* It has been pointed out that physicians under-report incona on their tax returns to the sane extent as do other independent professionals. 21 An audit of tax returns raised physicians* gross IncoMes by two percent and net I d c o m s s by eight percent. Hansen has pointed out that the earnings of physicians and dentists nay be understated because they can easily write off certain consunptlon expenditures as business expenditures. 22 Were g o v e m n e n t estimates being used for the Grand Traverse Region, It eight be necessary to allow for the possibility of a discrepancy of this nature. However, the physicians* income estimates used in this paper were derived from a professional source which tends to emphasise the attrac­ tiveness of medical Incomes. estimates. These estimates are higher than government Accordingly, they will not be adjusted to account for possible understatement. The second point relates to the effect of progressive incoam taxes. Friedman has indicated that his and Kusnets* original analysis omitted this factor. 23 The fact that physicians have higher incomes before 20 Monopolistic practices may also occur in the provision of dental services. The present analysis, however, is concerned with relative dlfferencee between the incomes of physicians and dentists and it will be •asumed that dental incomes are an indication of the best a l t s m a t l v a income that would be available to physicians were there no restrictions on supply and after all allowances are made for differences in training coal 21W « « n , The Economics of Health, p. 90. 22 W. Lee Hansen, "Shortages and Investment in Health Manpower,** in The Economics of Health and Medical Care, p. 85. 23 Friedman, Price Theory, p. 220. 188 *nd after t a n s than do dentists does not w a n squally attractive before and after taxes. that tha occupations arc The reasons for this are that the tax base Is not the sane as the figure used in considering net pecun­ iary returns, and that the base does not allow for nonpecunlary factors. These adjustments can be accounted for by using net rather than gross in­ comes in cowparlng the occupations.24 The third point was raised by Frlednan and Kusnets themselves. 25 They indicate that their analysis probably understates the tine factor in­ volved in training swdical specialists. This is relevant to this study because a large proportion of the region's physicians are specialists. It has been pointed out, however, that increasing specialisation is a w j o r contributing factor to the ehortage of physicians. Furthermore, by the nature of their practice, specialists are in a relatively better position than are other eedicel professionals to control the prices of their ser­ vices. Thus, while in sons respects it nay be prudent to allow for the additional training costs of specialists, in other respects it nay be assusnd that speclallats are in an unusually good position to recapture these costs.24 It la intended to acconnodate these possibilities by using two ana­ lytical approachas. In the first, no allowances will be swde for special­ ists* training; and the average income of all physicians will be compared with that of dentists. In the second, it will be assumed that the addi­ tional training costs of specialists are Just recaptured by the difference 24Ibid., p. 220. 25 Friedman and Kusnets, Income From Independent Professional Practice. 26 Another criticism that has been leveled at this type of analysis is that physicians work much longer hours than do dantlata and that there­ fore they should earn more. Tha criticism, howeve r, tends to validate the supply restriction arguawnt. 189 b * C M « B their Ih c oms and tho«« of general practitioners; and tha average Incona for general practltionara will ba uaad aa tha baaa for comparison with tha average lneoma for dentists. This approach will yield two estl- aataa which night ba ragardad aa uppar and lowar bounds on tha trua value of ascass lnconaa. Maasuranont of Excess Inconaa Tha first stap in tha analysis is to conputa tha parcantaga diffaranca batwaan physicians* and dentists' nat inconaa. ba followad: Two nathods will A, using tha average nat incons of all physicians; and B, using tha average nat incoan of ganaral practltionars. An allowanca will than ba me dr for tha hlghar training costs of phyalclana, which, following Frlsdnan and Kusnete, will ba 17 parcant. Whatavar dlffaranca ranalns aftar this allowanca will ba takan as tha excess attrlbutabla to noaconpatltiva factors. Estimates of tha region's economic loss due to physi­ cians' monopoly power can than ba obtained by multiplying tha parcantaga differential by tha average incomes of tha two groups of physicians. nathods and resulting estimates are presented on tha next page. Tha 190 Derivation of 1967 »xc«»i incomes of the Grand Travtr— Region's phytlclant.27 Method A 1. Total nat In coma of all physicians......................$3,225,810.00_„ 35,363.00 2. Avaraga nat Incona of all physicians................... $ 3. Average net income of dentists.......................... $ 25,753.00 4. Parcantaga dlffarance batvaen 2 and 3 ................. 36.15Z 5. Parcantaga of axcass Incoma of physicians; obtained by reducing tha preceding figure by 17 to allow for differences in training costs............... 19.152 6. Regional axcass Incense: obtained by applying the preceding figure to the total net Income of the region's physicians......................$ 617,743.00 Method B 1. Total net income of all physicians (using general practitioner's Income as the appropriate figure).................................... $2,882,360.00 2. Average net Incoam of general p r a c t i t i o n e r s ............ $ 31,330.00 3. Average net income of dentists.......................... $ 25,753.00 4. Percentage difference between 2 and 3 ................. 21.652 5. Percentage of excess Income of physicians (same approach as In Method A ) ............................ 4.652 6. Regional excess income (same approach 134,030.00 as in Method A ) ......................................... $ The results show that excess earnings of physicians over those of dentists In 1967 lay approximately between $134,000 and $618,000. These are estimates of the financial benefits to the region's physicians re­ sulting from artificial controls on the supply of physicians. 27 The analysis Is based on estimated incoams presented earlier on page 97. 28thi. mv.r.,. Income Is approxismtely $6,400 less than that reported by Sarkar for the Copper Country Region (Sarkar, pp. 60-62). The difference •ay result from the use of different sources or the relative shortage of physicians In the Copper Country. It may also reflect the fact that in computing his average Incosm, Sarkar Included approximately $5,000 for under-reported Incomes. For two reasons this factor was not included In the overall average used here: first, because the evidence was based on 1950 data, whereas the Incomes used In this analysis were baaed on current •urveys conducted to show doctors where their best Income opportunities lie; and secondly, because not all physicians' lncomss are necessarily ••tmed from medical practice. Removal of the $5,000 brings Sarkar*s and ■y estimates much closer together. 191 Conclusion T h c M tstlaitM tra 0.40 and 1.85 percent of the region's total medical I n c o M . In an article for the National Conference on Medical Coats. Victor Fuchs indicated that physicians' nonopoly Incone is not too relevant to tha physician shortage problem because, even If it does exist, it amounts to a very snwll part of total medical spending. 29 This ar­ gument sidesteps the point that monopoly Incomes result from artlflcally created shortages of physicians. Regardless of the share of medical spending taken In monopoly incoams, and whether 0.40 percent or 1.85 per­ cent amounts to a small or large part of tha Grand Traverse Region's medical spending, the conclusion here Is that such excess incomes do exist. As such, they represent sa amount that could, theoretically, be taxed or otherwise redirected towards alternative uses, without disturb­ ing the output level of physicians' services. Or, their existence could be used as a base from which to argue for Increasing output to a more socially acceptable level such as might be defined In the area of equality between price and average cost. Finally, their existence, and Fuchs implicitly admits that they do exist, In no way detracts from, but rather heightens, the necessity for increasing the numbers of physicians. 29Fuchs, p. 25. CHAPTER X ANALYSIS OF THE DRUG INDUSTRY'S PROFITS Characteristics of the Industry In The Economics of American Medicine. Seymour Harris has this to say about the drug Industry: Many are concerned that an Industry which cosies close to being a public utility achieves the highest profits In relation to sales and investment of any industry; is highly concentrated in its control of the market; reveals serious monopolistic trends; increases the costs to consumers by differentiating products at a dissy pace, with the differentiated product usually slsri.lar to or identical with existing products; and greatly Inflates costs through record expenditures on selling. The competition among the companies to overwhelm the doctors by repetitious and often misleading advertising, and a failure to give as much publicity to bad side effects as the Isasedlate beneficial effects, are unfortunate. Thus competition forces even the highly moral firms to become less ethical in their behavior. In the drug Industry the relation of labor to total costs is mlnlawl; and like the soap and tobacco industries, using similar selling techniques, their relation of labor to value added la a minimum— selling expenses and profits are the large items in gross receipts. The cost of drugs is too high. I say this, though I am aware that the research contributions of the industry are important and that the lives saved, suffering averted, and acceleration of recoveries are worth more than the $4 billion spent on drugs. But the cost could be substantially less.*This statament vividly sumsMrises the conclusions of many researchers regarding tha Industry's market performance. have been reached in recent years. Most of these conclusions Prior to the Kefauver hearings on ad- ministared prices in the drug Industry in 1959-61, no articles concerning the Industry had been published in professional economic journals. 2 ^Harris, p. 6. 2 Hugh D. Walker, "Market Power and Price Levels in the Ethical Drug Industry" (unpublished Ph.D. dissertation, Vanderbilt University, June, 1967), pp. 2-3. 193 As sources of current information the earlier hearings have now been superseded by congressional reports on Senator Nelson's hearings on com­ petitive problems in the drug industry* These were conducted in 1967-68. The Nelson inquiry was the culmination of all the previous hearings and research. It has added to and validated many of the charges made In earlier inquiries, and, because of its professional and scholarly approach, has been less criticised and disputed than the Kefauver Inquiry. The objectives of this chapter are to review some of the salient points brought out in the Nelson hearings as they relate to the monopo­ listic structure of the drug Industry and to the industry's ability to convert its market power into excessive profits. In a highly critical testimony given before the Senate Subcommittee on Monopoly, George S. Squibb, a former vice president of the Squibb drug company, indicted the industry on the grounds that (among other things) its pricing and marketing policies were discriminatory and led to ex­ cessive profits which in his view were inconsistent with social responsi­ bility. A product that does tha Job that modern drugs often do, affords under any comparative value approach, a most unusual temptation for the pricer to set his figure much higher than might otherwise be the case. Classic theories of price established to get a share of a coarpetltlve market are applicable only to a very slight degree. In fact, it often might be said that each drug product can be established in its own msrket by skillful promotion and exploitation of its own par­ ticular virtues. Not only has the pharmaceutical industry been suc­ cessful In maintaining the conviction with many physicians and buyers that not all drugs are alike, but It haa even succeeded in persuading them that all products are different, which is a much more effective argumsnt from a sales point of view. Leaving aside at this point the validity of this claim, the mere fact that it has been frequently and effectively established, and continues to be, even under the condi­ tions of current controversy and attack, gives the pricer a unique opportunity to set his figure without relation to any factor except what he believes the market can bear. He, of course, will take into consideration, in a general way, the existence and success of comparsble products, or products used for the same therapeutic or diagnostic purposes, but not by definition any product exactly like the one to be 194 priced because there Is none. It Is veil to renumber here thst diff­ erences for pricing purposes srlse not only from varying chemical or molecular structures, but from differing manufacturing sources or brand nemos and sales programs as veil. Prices set In this vay on prescription products lead to the very situation that Is so often criticised today; an enormous range betveen trade or retail prices and those given to Institutional or government purchasers. The rigidities of prices at the trade level already described tend to freese the prices at the top level for at least a considerable period of time during vhlch the disruption of the Insti­ tutional pricing structure occurs, and the perplexing and dismaying situation nov deplored by retail pharmacists, legislators, and the general public arises.^ On social responsibility, Mr. Squibb quoted from a book published in 1932. The manufacture and distribution of medicines, because of their intimate relation to the health and velfare of a community or nation, partake of the nature of public utilities. In vlav of the shifting control from professional to financial hands, manifested by recent developments In the drug Industry, tha public Interest may require "regulation" of the industry, through the guarantee of a fair return ^ to investors and the lisd.tatlon of prices to be charged to consusmrs. He Indicated that these reswrks vere even s»re applicable today. He vas, however, opposed to treating the Industry as a public utility.5 Rather, It should be left to the industry to "...restore Its reputation anong the general public and among the legislative bodies, Congress, State and Federal, that It is operating within reasonably normal economic limits."^ Squibb equated normal economic limits vlth his concern about social responsibility. He noted that the drug Industry was the most profitable 3 U.S., Congress, Senate, Subcomlttae on Monopoly of the Select Com­ mittee on Small Business, Competitive Pr^K1*n* *p the Prus Industry. 90th Cong., December 14, 19, 1967, and January IB, 19, and 25, 1968, Pt. 5, p. 1580. 4 C. Rufus Rorem and Robert P. Flschells, The Cost of Medicine (Chicago: The University of Chicago Press, 1932), pp. 233-234. 5U.S., Congress, Competitive Problesm In the Drug Industry. Pt. 5, p. 1604. 6Ibld. 195 industry in the country. percent. In 1966 the rate of return after taxea was 21.1 MA fair return" would be "the average return of comparable con­ sumer goods industries that have a broad base of utilisation" — about 12 7 percent. This profit rate level would not drive out smaller companies but it would result in lower prices to consumers. The drug Industry could achieve this level by planning and budgeting, and by reconstructing Itself in a "believable or credible fashion for public acceptance rather than leaving the situation as it la now which is out of control."8 Were the industry to take it upon itself to adopt such comparative measures, it might succeed in avoiding restrictive legislation while simultaneously restoring public confidence. This discussion of restrictive practices and excessive profits has been corroborated and expanded by others. Henry Steele presented evidence that the patent privilege seriously limits effective price competition.9 The patent privilege, by enabling holders to restrict output and maintain prices at a substantial mark-up over production costs, results in large profits, a substantial share of which are used to finance sales promotion. This in turn extends monopoly power into other parts of the drug markets, thereby creating "grave imperfections" in the market information system. Defendants of the industry produced evidence to support their contention that high profits in the drug industry were related to the risks Ibid. , 1605. Also, the rate of return (on stockholders* investment) for all drug manufacturers was 20.3 percent; the rate cited here, 21.1 percent, is applicable to "leading" drug manufacturers. Ibid., 1826-1827. 8Ibld. 9 ibid.. p. 1995. Also: "Monopoly and Competition in the Ethical ^ 1 * Market," The Journal of Law and Econosd.cs. V (October, 1962) and Patent Bestrlctlons and Price Competition in the Ethical Drugs Industry," The Journal of Industrial Economics. XII (July, 1964). Both reprinted in J'J'i Congress, Competitive Problems in the Drue Industry. Pt. 5, pp. 196 involved, not to the c x t r d a * of noncompetitive power. 10 These dofondnnts' findings wir* disproved, end their methodology cestigeted by Willerd Mueller, the director of the Bureeu of Economics st the Federal Trade Commission. Upon coupleting our analysis of the Conrad-Flotkln, MarkhamCootner explanation of risk and profits in the drug Industry, I recalled the sdncmItion once given by the greet classical economist and logician, John Stuart Mill, Mill cautioned economists against the pitfall of multiplicity of causes. We must always be skeptical of simple statistical associations among complicated econoatlc phe­ nomena. Professor Kenneth Bouldlng put It well when he said, 1Some of us, perhaps, still have to learn that arithmetic Is a complemen t to, not a substitute for, thought and that what my spy in IBM calls the "glgo principle," (that Is, garbage in, garbage out) Is s sound approach even to the most elegantly computerised simulation.* This BK>re or less capsules my findings In reviewing the analysis of drug profits and their possible association with risk. I find, to be very brief, chat the high profit experience of the drug Industry Is related only minimally to risk and uncertainty In a causal way. On the other hand, the high profits of the drug Industry are more closely associated with high barriers to entry of new competition. In other words. In the classic tradition, the market power enjoyed by drug firms has been achieved primarily because the leading drug companies have been able to fence themselves off from effective competition, and in this sheltered position they have garnered extremely high profits— profits which the economist would label as 'abnormal* or 'excessive,* profits substantially above the competitive norm. Mueller showed that the Conrad-Plotkln measure of risk was actually a good indicator of the relative market power. This finding coincides with research results of many economists which have shown that high profits in the drug Industry result from the lack of price competition; and com­ petition is lacking because of the patent privilege which leads to con­ centration of production. Even when there are many sellers and potential Ibid.. Statement of Simon N. Whitney, pp. 1760-1766; and Gordon R. Conrad and Irving H. Plotkln, "Risk and Return in American Industry-' An Econometric Analysis," pp. 1766-1805; and statements of Jesse W. Markham and Gordon R. Conrad, pp. 1667-1689. ^ I b i d . . Statement of Willard Mueller, p. 1840; in part quoting Kenneth Bouldlng, "The Economics of Knowledge and the Knowledge of Economics," American Economic Review (May, 1966), p. 10. 197 sellers, price competition le suppressed by sales techniques which diffe­ rentiate products In the nlnds of doctors and conauasrs. Generic drug manufacturers have difficulty selling their product at any price even when it la chemically Identical to an advertised product. Market struc— ture elements which are responsible for high noncompetitive profits are ••ll** concentration, barriers to entry, and product differentiation. One or more of these Is present when price competition Is Ineffective; but "the most pervasive factor blocking effective price competition In drugs is the presence of substantial product differentiation of branded drug items."12 Measurement of »««*ess Profits In reporting Mr. Squibb*s testimony above, reference was made to the difference between the profit rates of the drug Industry and other in­ dustries as aa indicator of excess returns. There is considerable prece­ dent for using such a c o m p a r i s o n . I t will, therefore, be used here. 12 Ibld.. p. 1828. 13See for example, Bain, Quarterly Journal of Economics. LXV, 293324; Joe S. Bain, Barriers to Mew Competition (Cambridge, Massachusetts: Harvard University Press, 1962); L. W. Weiss, "Average Concentration of Batlos and Industrial Performance," The Journal of Industrial Economics (July, 1963); Norman R. Collins and Lee Preston, "Concentration and Price Margins In Food Manufacturing Industries*" The Journal of Indus»y|*^ nouica (July, 1966); National Commission on Food Marketing, Tha Structure of Food Mfl«m*ncturina. Technical Study No. 8 (Washington: Federal Trade Commission, June, 1966), pp. 202-210; H. Michael Mann, "Seller Concentration, Barriers to Entry, and Rates of Return in Thirty Industries, 1950-1960," lovlaw of Bconomlcie and Statistics (August, 1966), pp. 296-307; Norman R. Collins and Lee Preston, Concentration and Price Coat M a m i n s in ManefacturBi hldUBtFlTf (Berkely, California: University of California Press, P* 163; and William S. Comanor and Thomas A. Wilson, "Advertising Market Structure and Market Performance," Review of Economics and Statistlca (November, 1967). 198 T«blt 68 shows ths average rstss of return on stockholder invest­ ments for ths drug Industry and all manufacturers. From 19S0 to 1955, drug company profits ware approximately equal to those of other manufac­ turers. Since 1956, however, drug company profits have been consistently above the average of other companies, and with the exception of one year, have occupied the highest position In the economy. Normal returns may be presumed to be a rate of return on capital — measured as a percentage of equity per year — which an entrepreneur could reasonably have expected to earn had he Invested In an alternative enter­ prise. If the average rate of return In other Industries Is used as a proxy for normal returns, returns to the drug Industry which exceed this rate may be regarded as abnormal returns or excess profits. Accounting profits rates, or returns on equity, may not accurately represent the theoretical long-run tendency of profit rates, though they nay provide a rough guide for use In long-run averege profits coaparisons. To determine theoretical or true profits, revenues and costs "are strictly Instantaneous swgnltudes having generally an Identical price level refer­ ence and time reference."*’* Analyses based on such a model can be ex­ tended over tine If what holds for long-run static equilibrium can be Justified as also holding for average performance over time. Cost and revenues which determine accounting profits, on the other hand, will not usually have the same price level and general time reference and could, therefore. Inaccurately represent the corresponding figures Implied In the theoretical approach. While this and other "aberrations" In the measurement of theoretical profits by accounting profits are still likely to cause problems in **Bain. Quarterly Journal of Economics. LXV, 306. 199 TABLE 68.— t « u « of return of drug Manufacturer* and all manufacturing induatrles, 1956*67* Tear Profits after taxes as a percent of stockholders * eeultv All drug | All manufacturers ! n anufacturers Profit rank of the drug Industry among all manufacturing industries 1956. . . 17.6 12.3 2 1957. . . 18.6 11.0 1 1958. . . 17.7 8.6 1 1959. . . 17.8 10.4 1 1960. . . 16.8 9.2 1 1961. . . 16.7 9.8 1 1962. . . 16.8 9.8 1 1963. . . 16.8 10.3 1 1964. . . 18.2 11.6 1 1965. . . 20.3 13.0 1 1966. . . 20.3 13.5 2 1967. . . 18.7 11.7 1 Average 18.0 10.8 *Rates of return in thl* table are Identical ulth those used by Barker (Barker, o n . d t .. p. 70). 8ource: Federal Trade Commission and Securities and Exchange C o m mission, Quarterly Financial Report. 200 analysts of Individual firms, tha apraad of standardized accounting pro­ cedures has probably diminished their Impact relative to what they were in the past• Furthermore, Bain indicates, in analysing relatively large groups of firms and industries, one may expect that in general, pricechange effects on accounting profit rates will be sls^ler. Hence for such groups, potential aberrations built into the estimation of theoretical profits by accounting will tend to average out, and theoretical profits can be reasonably approximated by accounting profits. Another source of potential aberration, though again probably more relevant to individual firms than to groups, has been brought out by Stlgler* He has argued that firms possessing market power may be able to Increase certain expenses and emoluments within the firm rather than, or as well aa, in reported profits. In alluding to the existence of monopoly gains in payment to noncapital inputs, he claims that monopoly elements in wages, executive compensations, royalties, and rents may be substantial.1* Also, Williamson has pointed out that some expenditures yield positive utilities to smnagers, and are Incurred for the manner in which they enhance these utilities, rather than for their contribution to produc­ tivity, if any. A significant part of true monopoly profits may therefore be absorbed internally.1^ One might argue that, because of its relatively large outlays on selling and research, the drug Industry is in a relatively good position 15Ibid., p. 309. 1*George J. Stlgler, "The Statistics of Monopoly and Merger," The Journal of Political Economy. LXIV (February, 1956), 35. ^ O l i v e r E. Williamson, "Managerial Discretion and Business Behavior." American Economic Review. LIII (December, 1963), 1032-1057. 201 to capitalist on such techniques. But there are likely to be other In­ dustries with the sans "advantages.'* These "advantages," If they do exist, are In reality more likely to accrue to Individual firms within Industries than to Industries as a whole, unless perhaps the Industry Is actually composed of very few firms as, for example, the autoswblle In­ dustry. Attempts have been made to measure the difference between accounting profits and true profits attributable to Intangibles. It might be Instruct­ ive, however, to consider such an estimate In terms of the difference it actually makes in the results. In general, however, to attempt to explain and account for all the problems Involved in the accurate measurement of profits and to draw valid Inferences from the observed empirical relatlonships, is to run the risk of obscuring meaningful results. 18 It has, therefore, been decided to proceed with an analysis based on broad crosssectional evidence, using the Departsmnt of Commerce's accounting profit data as reasonable measures of the theoretical profit tendencies relevant to the hypothesis of excessive earnings in the drug industry. The struc­ tures outlined above are important, but on balance they seem less Impor­ tant than the usefulness of a straightforward approach. As Bain has observed: There Is thus a strong case. In the present state of investigation and knowledge, for eschewing the easy road of presenting a few Iso­ lated case studies and encouraging facile and unsupported generalisa­ tions from them. Instead, we may find It is scientifically more satis­ fying to emphasise the cross-sectional analysis of certain basic di­ mensions of performance in nuaarous industries, striking directly at 18 Frits Machlup, The Political Economy of Monopoly (Baltimore, Maryland: The Johns Hopkins Press, 1952), p. 496. 202 the good of valid generalisation, even though tha d Inane ions of par* foraanca cone Ida red aust be vary fav In nuabar and though a great deal of tha unique and eoaetines important detail concerning Individual lnduatrlaa la neglected in the process*** Method of Analysis Excess profits of the drug Industry are defined as the difference between the profits of drug aanufacturers and all manufacturers. In 1967 the excess profit rate was 7.0 percent of the drug companies' equity (Table 68). The average differential for the period 19S6 through 1967 wae 7.175 percent. 20 It Is unlikely, therefore, that In this case the selection of a single year would violate Bain's recommendatloo to use the average over tlae when using accounting profits to estimate theoretical profits. The lower, short-run profit rate is a pure accounting figure which, were It slgnlficantly different from the long-run rate, would provide aa alterna­ tive estimate. The higher, long-run rate, however, should accoasK>date aberrations In profit calculations and provide a relatively accurate esti­ mate of the true theoretical profit rate. Since the difference between the two measurea Is small, It alone will be used In the calculation to follow. 19 Bain, Induatrial Oraaniaation Inc., 1959) p. 342. 20 (Mew York: John Wiley and Sons, Sarkar, ualng the period 1963-67, found an excess profit rate on equity of 6.84 percent, p. 72. 203 Calculation of Excess Profit Rataa Stockholders equity in tha drug industry in 1967 was approxlswtely $4,498,000,000. 21 Total axcass profits can ba obtained according to the foraula: Excess profits - Stockholders equity x percent excess profit. The c s t l M t e is: $4,498,000,000 x .07175 - $322,730,000 Total sales revenue in 1967 was $8,318,000,000.22 Estimated excess profits as a percentage of sales revenue can be obtained by the forxula: Percentage of excess profits on sales • excess profits sales revenue inn The estimate is: $ 8,3 18 :00 11 100 - 3-88 p * « e n t . 23 21 Federal Trade Commission, Quarterly Financial Report. Fourth Quarter, 1967, p. 47. The Trade Coenlsslon notes that ideally, stock­ holders equity should be represented by the average of stockholders equity at the end of the year and at the end of the preceding year. The figure used above is the average for the four quarters of 1967. This approach is consistent with the methods used to derive Table 68. The difference would be insignificant were the alternative approach used. 22 23 Ibid. Approximately similar estimates to these have been found by other researchers. For example: Statement of Simon M. Whitney in U.S. Congress, Competitive Problems in the Drux Industry. Pt. 5, pp. 1760-1764. Sarkar (pp. 72-75) found a low estlmats of 4.17 percent and a high estimate of 10.63 percent. The low estimate was computed with basically the seme method as in this paper but with the use of different periods in the com­ putation of equity and a different value of manufacturers* sales. The high estimate was obtained by calculating the difference between a 7.0 per­ cent normal, competitive return on industrial capital and a profit rate that was adjusted upwards to account for advertising, royalties, and in­ tangibles. After consideration of theoretical and empirical questions involving the relationship between advertising, sales, and profits, this approach was not adopted here. 204 Analvit The t a t l M U d value of drugs and related products sold In the Grand Traverse Region In 1967 was $4,525,520 (Table 35, page 103). This Is an estlnate of sales by retail drug stores; It does not Include drugs pur­ chased directly fron wholesale drug Merchants by hospitals and other In­ stitutions. The asount and distribution of these Institutional expendi­ tures oust be estlasted and added to retail sales to approximate total regional sales revenue. Institutional Drug Purchases Hospitals usually have a pharmacy department, the main function of which is to dispense drugs and other pharmaceutical products to Inpatients. About 4 percent of a hospital's operating costs are Incurred by pharma­ cies and from 2 to 3 percent by pharmaceutical purchases. on the other hand, rarely have pharmacies. Nursing homes, Host pharmaceuticals are pre­ scribed on an Independent physician— to—patient basis and are purchased for individual patients fron retail druggists. Once again, using the accounts of Munson Hospital as a benchmark, At esaumed that the region's general hospitals spent 2.5 percent of 2A total 1967 expenditures on pharmaceuticals. Total expenditures by the general hospitals were $8,702,000 (Table 63, p. 169). The estimated pharmaceutical expenditures by ths general hospitals, therefore, were $217,550 ($8,702,000 x .025). The psychiatric hospital spent $198,400 for pharmaceuticals In the name period. It Is assumed that nursing toonea **de no pharmaceutical purchases. The Grand Traverse Medical Care 24,,iUpnrf 25 nation.” State of Michigan, Detail financial Statement. 1966-67, p. 63, and 1967-68, p. 60. 205 Facility does operate a pharmacy; however, Ita purchaaaa ara made through tha general hospital and ara accounted for In its expenditures. 26 The psychiatric and general hospitals purchased approximately 75.0 percent of their pharmaceuticals from manufacturers' representatives located outside the region and 25.0 percent from local drug stores. 27 Thus, total regional pharmaceutical purchases can be obtained simply by adding 75.0 percent of hospitals' purchases to the retail stores' sales. The reamlnlng 25.0 percent of hospital purchases are essumsd to be in­ cluded In the retell sales. Manufacturers' Sales Revenue Manufacturers receive 46 percent of retail drug sales revenue. 28 The return to manufacturers from retail sales In the region In 1967 Is, therefore, estimated to have been $2,081,700 (0.46 x $4,525,500). purchases from nonretail sources are ueuelly made from wholesalers. Hospital Total hospital phansaceutlcal expenditures in the region In 1967 were $415,950. Seventy— five percent, $309,300, were purchases from wholesalers. 30 29 Whole­ salers receive a mark-up of 10 percent; the remainder is assumed to be manufacturers* revenue, and for the region In 1967, this amount Is estimated 2^Other nursing homes are likely to have small pharmaceutical ex­ penses but these are ss>re likely to be associated with operational charges than with drug purchases at anything sore than a minimal level. 22Th« percentages were deduced from Information learned In conver­ sations with hospital administrators in the region. 28U.S., Congress, Competitive Problems in ths Drug Industry, Ft. 5, p. 1744. ^Calculated as the sum of general and psychiatric hospital pharma­ ceutical expenditures: $217,550 and $198,400, respectively. ^ T h e remaining 25 percent Is accounted for under drugstore sales. 206 to bo $278,400 (.90 x $309,300). All thot lo necessary now lo to add tha raturns fron hoapitala and ratall stores. Thaaa vara $278,400 and $2,081,700; thalr atm, $2,360,100, la tha estiawte of aumufacturers* 1967 aalaa ravanua fron tha region. Calculation of Excaaa Profits Estimates of nanufacturara* axcati profits from drug aalas In tha raglon can now ba obtalnad with tha fornula: Raglonal axcass profits • Parcantaga of axcass profits on all salas x regional salas ravanua 100 Tha astlaata la: 3.88 x $2.360,100 100 _ $ SVJ.,3/*. Significance of Estlatatad Excaaa Profits Essentially this Is an aatlnata of axcass raglonal axpandlturaa on drugs. It raaults directly fron tha ability of nanufacturara to stain— tain high profit ratas ralatlva to thoaa of othar Industries. It la, in effect, one measure of the cost of excessive laq>ort expenditures, to tha region, and foregone purchasing power, to tha consumer. But In reality, these conclusions ara valid only If It la assumed that the price of a dollar's worth of drugs would ba 3.8 cants lass If manufacturers actually earned average profits and tha same quantity of drugs vara sold. Alter­ natively, and again assuming no change In tha output of drugs. It Is theoretically feasible to believe that excess profits could ba taxed, as a lump sum, and returned to tha raglon, possibly In soma form of health assistance grants. CHAPTER XI PROFITS IN THE HOSPITAL SUPPLY INDUSTRY Characteristics of the Industry The hospital supply Industry can be loosely defined as comprised of fires whose primary business is the production of nonpharmaceutlcal nodical equipment and supplies. mented. In reality, the Industry is highly frag­ Hospitals, the largest consumers of the Industry's products, re­ quire a vast quantity and variety of goods. different types of firms. These needs are net by many Thus, s broader definition would Include drug, electronic, coaqmter, areospace, automotive, building materials, paper, rubber, synthetics, and many other types of companies that produce medicallyoriented goods as sidelines. Many firms have only recently become involved in the health field. Others have expanded and diversified their operations within the field. As a result, and as a reason, the industry has become cheracterlsed by rapid growth. Behind the growth, entry of new firms, and expansion of ex­ isting ones, lies the increasing demand for smdical care, technological breakthroughs, and a concomitant, rapid developsmnt of new products. There are over 6,000 general hospitals in the United Staten with about 900,000 beds. Hospital construction expenditures have risen from less than $1.0 billion in 1959 to an estimated total of $2,5 billion in 1969. Crowth of hoapltal expenditures has averaged 10.5 percent annually since 1960, with the rate accelerating to 12.0 percent in the past few 207 years. Tht recent incrsass is largely In response to demand lncreaeee re­ sult lag from the growth of public end private insurance coverage. Excluding construction expenditures, which were in excess of $2 bil­ lion, hospitals spent approximately a billion dollars on medical supplies and equipment in 1967.1 These expenditures account for about 6.S percent of a typical general hospital's total expenditures. The growing use of disposable products is an important factor in the market. Hospitals have found that it is more economical to use an item once and dispose of it than to sterilise and re-use it. Some of the products In this category a m surgical gloves, syringes and needles, kits for various operations, and bed linen. In 1950, about $14 million was spent on disposable products by 1960, purchases were up to $200 million and they are expected to exceed $300 million by 1971. Sales of medical electronic equipamnt were approximately $350 million in 1967, with most of the sales going to hospitals. Types of products in­ clude X-ray equipment, cardiac pacemakers, patlent-monitoring systems, and electro-cardlographs• For many years the industry has operated with little external super­ vision or attention. While the Food and Drug Administration has had re­ sponsibility for banning the sale of drugs of doubtful safety or efficacy, its authority over medical equipment has been vague. In 1968, the Second Circuit Court ruled that the Food and Drug Administration does have this authority, and the ruling was upheld by the Supreme Court. The effects of this decision may be broadened if Con grew a passes a bill that It has before it that requires premarketing clearance of medical devices and 2 instrumentation • *The Medical Care Industry (Hew York: 2lbid.. p. 5. Coodbody and Co., 1969), p. 3 209 Unlike the drug industry, the medical equipment industry has not bssn conspicuously involved in allegations of noncoaq>etltlve behavior. Thars has only baan ona anti-trust suit involving a aadical company, out­ side the drug industry, in recant years. 3 alleging unfair competitive practices. It is a relatively erinor suit The lack of specific evidence regarding noncompetitive behavior does not mean that the industry Is not characterised by high profits; nor mould the existence of such profits by themselves swan that the Industry is non­ competitive. Indeed, the fact that new firsm have been entering the in­ dustry at a rapid rate conforms more with the theoretical expectations of the growth of a competitive rather than a noncompetitive industry. Eco­ nomic theory also holds that new firms enter an Industry In the expectation of profits which exceed returns from alternative ventures. It should be ex­ pected, therefore, that the industry is relatively profitable regardless of its competitive structure. Consequently, no necessary connotation of monopolistic behavior may be inferred If the industry's profits are, as hypothesised, found to be substantially greater than those in other menu— facturlng industries. Such findings could, however, be used to obtain a rough indication of the difference between what is spent on equipment end what might be spent were profits at a sore normal rate. Method of Analysis The analysis is based on a comparison of the 1967 accounting profits for all manufacturing industries and of a sample of firms engaged pri­ marily in producing medical supplies and equipment. The cross-sectional approach was adopted because the dynamic charac­ teristics of the Industry Itself, together with the unusually sharp 3 ___ "Standard and Poor's Corp.," Standard Listed 8tock Imports. XXXVI (April 18, 1969), 1252. 210 increase* in medical expenditures which started to occur in 1966, violated the essence of Bain's proposals regarding relevance of using long-run profits to estlsite short-run theoretical profits. The sample is composed of tsn f l m of the industry. believed to be representative Criteria used in making the aelectlon were: 1. That the f l r w were engaged primarily in producing medical equipment and supplies; 2. that, as a group, the firms produced a complete range of the In­ dustry's products; 3. that the firms had been in buslneaa a sufficient number of years so that their profits would reflect as stable a situation as possible; and 4 4. that the firms produced more than half the Industry's output. Satisfaction of the first three criteria was accomplished by refer­ ring to company financial statements and related narrative accounts of the compsnles. The final criterion was satisfied by including in the sample four companies which, in 1963, accounted for 48.3 percent of the value of shipments of surgical and nadlcal instruments and surgical appli­ ances and supplies.^ It is believed that these companies have been rela­ tively successful in maintaining their market share. The estimated industry profit rate Is derived by calculating for 1967 a weighted average profit rate for the firms in the sample. The weighted average is the sum of firm profits divided by the sum of firm net worths. This method is used to avoid a bias, attributable to dlff- *Sarkar, chap. VII, analysed the five-year profits of three firms. Subsequent information regarding both the financial status of more firms end the method of analysing profits enabled the uae of a larger sample and a single year in the present study. ^U.S. Department of Commerce, Concentration Ratios in the Manufact­ ories Induetrv. 1963. pt. II (Washington: Bureau of the Census, 1966), pp. 562-563. Mote: More current data which would have been relevant to tbs criterion would not have been available until publication of the 1968 Census of Manufacturers. 211 t n a t a l M s of flrma, that would antar war a an average of Individual flrn profit rataa taken. Am Bain haa Indicated, "In dariving an Industry profit rata for any year, It seems obviously approprlata to walght tha Individual flrn ratios according to firm slse, slnca our Intarast la In tha profitability of tha total Investment In tha Industry. „6 Tha avaraga profit rata for tha medical aqulpnant Industry will than ba compared with tha rata for all manufacturers, tha sana rate as used In tha drug Industry analysis. Conclusions about tha relative profitability of tha equipment industry will ba based on a subjective Interpretation of this cosq>arlson. * Analysis The 1967 net Income, equity, and weighted avaraga profit rata for the tan firms cosq>rlslng tha madlcal equipment Industry sasq>le are shown in Table 69. The table shows a 1967 avaraga profit rata for tha tan firms of 13.2 8 percent. Tha comparable rate for all manufacturers was 11.7 percent. The difference of 1.5 percentage points Is small and Insubstantial com­ pared to tha 7.0 percentage points difference found for tha drug Industry. Furthermore, tha 1967 profit rata for tha Instruments and related products Industry, of which tha madlcal equipment and supplies Industry la a sub­ set, was 17.9 percent.^ Thus, not only Is tha difference between the S a i n , Industrial Organisation. p. 311, n. ^Statistical testing Is precluded by data limitations and the ex­ perimental design. ^Federal Trade Commission, Quarterly Financial Baoort. Mote: Sarfcar, p. 77, found a 15.0 percent rate for the equipment Industry and a 12.0 percent rate for smnufacturers. 9 Fedaral Trade Commission, Quarterly Financial Report. 212 TABLK 69.-— Profits In ths hospital supply Industry, 1967 Pirn identification Net incoee Million dollars S tockholda rs * equity Million dollars A ..................... 28.1 216.4 B ..................... 2.8 15.7 C ..................... 8.8 59.9 D ..................... 19.0 195.6 E ..................... 12.4 108.1 1.9 9.0 G ..................... 41.3 337.5 H ..................... 4.2 20.1 I..................... 52.4 338.0 J ..................... 3.4 17.1 Total............. 174.3 1,315.4 F .......................... Weighted average profit rate: total Incone x 100 - 13.2 percent total equity Source: Incoae and equity data were obtained from financial stateasnts pertaining to the tan f i n e . 213 equipment Industry's and sll nsnufsctursrs* profit rstss rslstivsly In­ significant,. but tha Industry's profit rats Is also substantially lass than that aaraad in cosq>arable sntsrprlsas. On tha basis of this evidence, tha hypothesis of axcasslva profits aust ba rejected. Likewise, it would seen inappropriate to suppose that the difference between the equlpsmnt in­ dustry's and all manufacturers' profit rates could validly be used for measuring abnormal-profit-Induced excessive expenditures. firms had profits in excess of 16.0 percent. Four individual However, these were relatively small firms which, together, accounted for only 9.0 percent of the sales of all the firms in the sample. As noted earlier in chapter five, the percentage of current hospital expenditures allocated to medical equipment and supplies Is small. Un­ doubtedly, large expenditures are initially Incurred in construction. In this case, if excessive profits were earned in the industry, they would be capitalised into a hospital's asK>rtlsation payments and increase them; and, consequently, the cost of hospital care. However, on the basis of this chapter's findings there can be little reason for belisvlng that this has occurred. CHAPTER XII EFFICIENCY IN THE DISTRIBUTION AND UTILIZATION OF HOSPITAL SERVICES Introduction Central hospitals are to a region vhat the single hospital Is to a community, tha nucleus of tha nodical complex. Most hospitals perform outstanding services, but one may legitimately query whether there are Inefficiencies In the hospital system which create needless costs, and hance, wasted resources. In recent years several studies have indicated that defective In­ ternal and external organisation of hospitals and hospital systems have contributed to the rapidly rising cost of hospital care.** A theme c o m u n to many of these studies Is the allegation that hospital adarinlstrators lack Incentives to reduce production coots. Some of the major thrusts of these studies are summarised In the words of Walter Landgraff, who stated that: In the voluntary hospital, as In many other social and political institutions of a nonprofit nature where survival and productivity are not related to the cost-effIclency factors, there has been no Incentive or need to effect warranted changes In concept, organisa­ tion, and operations; and to eliminate the expenalve vestiges of past usefulness. Some of these problems are an outgrowth of the fact that, In the p a s t , decisions regarding else and location of hospitals have been based *Hote: In the period 1957-59 through 1967 Indices of consumer prices and hospital room rates rose 16.3 percent and 100.1 percent, reapectively. 1968 Source Book of Health Insurance Date, pp. 57-60. 2 Landgraff, Harvard Business Review, pp. 75-76. 215 primarily on local aspirations and needs, whila considerations regarding area naads or cooperation with other hospitals haws often been treated in­ differently. An unfortunate outcoee is a national hospital network narked by excess facilities in sons areas and shortages in others. Conbatlng these inefficiencies is one of the functions of regional hospital planning which ...Is concerned with the consolidation and coordination of facilities and services in the interest of the best posslbls standard of care for the patient, savings in capital Investnent and operating costs to the community and efficient use of p e r s o n n e l . ^ In Michigan, two operational criteria are the division of the state into major hospital regions and the subdivision of these into hospital service areas. The approach is designed to assure each service area's population access to adequate local hospital facilities and referral to regional centers. The objective of this chapter is to gain a general perspective on the efficiency with which general hospital resources are developed and used in tha Grand Traverse legion. Four topics will be discussed: the availability and distribution of hospital beds; the shape of the hospitals' long-run average cost curve; the comparison of the region's short-run average hospital costs with such costs in similar hospitals elsewhere; and the question of how the quantity and quality of services affect the use of the hospitals. The Distribution of Beds The analytical approach used here is to test the actual 1967 dis­ tribution of hospital beds against two alternative distributions: 3 one. Michigan Department of Public Health, gen State Plan for Hospital and Medical Facilities Construction. 1966-67. p. 3. 216 a statistically derived optlsus, and tha otherv the distribution suggested in the Michigan State Plan. Because the distribution of the beds can be viewed fros the perspective of Individual hospital requirements, total regional requirements, or subregional requirements, three organizational systems are utilized with the tests. That Is, with seven hospitals in the region, the hospital structure can be considered as composed of seven separate units, seven cooperating units, or some number of cooperating units less than seven. It Is desired to find which bed distribution by organizational structure minimizes the musber of hospital beds, and thereby to determine whether the hospital system could have been designed better, from the point of view of providing an equivalent output of services (ssasured In patient days) for a smaller Investment In hospital structures. Should It be found that one or sore alternatives were able to provide the seme patient care with significantly fewer beds, it will be taken as evidence of a probable mlsallocatlon of resources. On the other hand, should It be found that the number of beds In the existing system approximated some measure of optimality. It will be concluded that in this respect, the hos­ pitals were performing efficiently. The statistically derived optimum distribution Is based on the msasure usually employed to determine whether a hospital's size adequately provides for expected needs. This msasure, the hospital's occupancy rate (OR), Is defined as the number of beds used as a percentage of beds avail­ able. It may vary according to changing demand conditions, yet it is usuall regarded as fairly predictable. A 100 percent OR would Imply that all the beds In a hospital were being used every day over a given period, usually a year; a 50 percent rate would imply that only half the bed capacity was ua 217 In fact, hospitals rarely attain full occupancy; In ordar to paraIt amurgency accoemodatIon, an 80 parcant OR la usually ragardad aa tha maximum, reasonable, normal capacity. A sustained higher rata places a hospital Into a "critically orercrowded" classification and can lead to tha hospital obtaining a high priority rating for expansion. In Michigan, desirable occupancy rates are determined by state and local authorities in accordance with state and federal guidelines. The essence of the approach is to distribute facilities of the right slxe to meet existing and expected demands in different geographic areas. Optimisation with Separate Hospitals It may be helpful to start with the assumption that an 80 percent occupancy rate, mentioned above aa the saxlmum, normal rate, represents optimum hospital use and to consider the hospitals as relatively separate, b not totally Independent entitles.* The focus will be on determining the perforsumce of each hospital relative to the 80 percent norm. Occupancy rates in the five larger hospitals either slightly ex­ ceeded 80.0 percent or were close enough to represent significant under­ occupancy (Table 19, p. 67). The two smaller hospitals had occupancy rates of 58.3 percent and 66.1 percent. To obtain 80.0 percent rates In these hospitals, the number of beds should hare been leas. Kalkaska's hospital, which had 20 beds and 4,259 patient days, needed only 15 beds to obtain the 80 percent OR; Leelanau's with 29 beds and 6,995 patient ^Hospital planners hare traditionally regarded 80 percent as the optimum occupancy rate. Klarmaa has pointed out, however, that 85 per­ cent la more In line with current thinking; The Economics of p. 125. The lower rate la used here bacamas It appears to be more con­ sistent with rates used by Michigan hospital planning authorities. 218 days, would hava had an o p t i m a rata with 24 beds.^ Thla means that, according to tha criteria uaad, thara wara actually only 10 excess bads In tha region In 1967, five In each small hospital. Thla is a small number from which to draw hard conclusions about underutilisation. More­ over, It la predicated on an overly stringent assumption of Independence. As will be seen in the next sections, where there is substitution among hospitals, as there Is In fact in the region, patient transfers could be used to adjust a small differential such as thls.^ Optimisation with a Regional Cooperative Syatem One of the aost widely held views In hospital planning and medical economics Is that hospital coats would be lower were there greater co­ operation among hospitals In the same area. Because ssxlsua patient de­ mands are unlikely to occur In all hospitals at once, the census for a single large hospital— serving the same population as several hospitals— would vary less than for Individual hospitals. This means that fewer beds would be needed In the large hospital to provide the same level of protection as could be provided with a given number of beds in several independent hospitals.7 As an Independent unit a hospital muat have the capacity, in terms of staff and equipment, to handle Its own maximum load. In cooperation, however, each hoapltal would require less staff and equlp- ^The optimum number of beds is calculated by converting patient days Into an average dally census figure and dividing by .80: optimum number of beds - patient davs ♦ (.80). 365 ^Large hospitals tend to offer more services than small hospitals; for many of these services the small hospital Is an unsatisfactory sub­ stitute, but as may be seen later, there are other services which can be adequately provided at both large and small hospitals. 7Long, The Economics of Health and Medical Care, p. 214. 219 M n t btctuft patients could ba readily transferred to other hospitals in case of emergency desands or denands for specialized treatssnt. The regional cooperative sodel can be designed two ways: one large hospital; or a nusber of hospitals whose total beds could equal those needed for one large hospital If they cooperated fully with each other by being open to all patients and by avoiding unnecesaary duplication of services. The Ispllcatlons of cooperation for bed saving are denonstrable statistically. The average daily census in the region's hospitals In 1967 was 489 patients. It say be assumed that the dewand for hospital facilities has a Polsson distribution. g Hence, a single large hospital, or a group of fully cooperative hospitals, with 577 beds (489 + 4/489) could neet expected needs with the probability of .0001 that denands would exceed 57 7 on any given day. The expected occupancy for either systew would range from 401 to 577 patients and the normal occupancy rate would be 84.7 percent. Since the actual nusber of beds was 611, this result shows that there were 34 potentially excess beds In the region in 1967. If, at the opposite extreme to full cooperation (or one large hospital), there were complete Independence, each hoapltal would have to allow for over­ crowding. As shown In table 70, total bed needa would rise to 857, and the normal occupancy rate for the group of hospitals would be 39.2 percent. 9 This analysis shows that It takea 857 beds for 7 hospitals operating Independantly to provide the same level of service as one 577—bed system. With 577 beds the OR would be 84.7 percent. The actual rate, with 611 beds, 8lbid. o This analysis helps explain observed low occupancy rates In small hospitals. Tor example. In the 20-bed Kalkaska hoapltal, the average dally census was 11.7. Were it an Isolated hospital, It would need, to guard against a .0001 probability of overcrowding, a total of 38 beds. With this number of beds, the normal occupancy rate would have been 30.8 220 TABLE 70.— IIunbar of bo do in tho Grand Trswarsa laglon's ganaral hoop 1 tola, 1967, and tho nunbor noodod If ooeh hospital wars conplataly Indapandant Hospital location Actual nunbar of bads Ifunbar of bads naadsd* Bansia................................ 43 69 Crawford.............................. 68 101 Grand Trawarsa........................ 250 313 Grand Trawarsa........................ 73 107 Kalkaska.............................. 20 38 Laalanau.............................. 29 56 Uaxford .............................. 128 173 Total ............................ 611 857 *Calculatad as bad naads • v + 4 / v • whara y ■ tha actual nunbar of bads. 221 was 80.0 percent. Hence, this example does uee e more etrlngent occupancy criterion than that actually applicable. The disadvantage of a cooperative system whether It Is one large hospital or a group of hospitals, is that it would mean extra traveling costa for patients, visitors, and medical per­ sonnel.^ The Grand Traverse Region, however, Is lightly populated, fairly cosqiact, and laced by an adequate road network, Therefore, it probably possesses the major physical characteristics for the implemen­ tation of a cooperative system. Furthermore, the region is served by remarkably adequate hospital facilities so conceptually, the system could be implemented within the framework of full degree of needed cooperation the existing structure, provided the were forthcoming. The model is useful for its ability to demonstrate the benefits of cooperation in terms of savings in bed needs. As such it can form a use­ ful base for analysis of hospital needs particularly in rural areas, for they tend to have relatively more underutilized hospital beds than do urban areas. Assumptions of the model also show that the earlier analysis, based strictly on established optimum OR rates, contains an invalid "Independence" assumption. There it was shown that the nuofeer of beds was close to actual needs; this section shows that If the hospitals were independent, they would need many more beds to guard against the risk of overcrowding. that the hospitals are not independent; It seems therefore and it is concluded that the 611 beds and an 80 percent criterion reflect efficient cooperation asxmg the seven, and that little further efficiency may be gained from increased cooperation. To see how closely these conclusions predict the actual situation in the region, the following ^ W h e n more than one hospital Is involved in the system this is attributable smlnly to the degree of cross regional referral necessi­ tated by the division of specialised services asxmg the hospitals. 222 material discusses 1967 and future bed needs es determined by state planning authorities* Optimisation with a Subreslonal Cooperative System Details of the approach actually planned for the region are contained in the Michigan State Plan. It is based on essentially the sane patient data as used in the previous analyses but also allows for population growth until 1973. The fundamentel difference from the previously dis­ cussed systems is that it is predicated on the needs of the region's four hospital service areas. earlier on page 47. The elements of this system were outlined Basically they were that each subregion should be desig nated as a hospital service area to be served by one adequate hospital or by cooperation among hospitals where more than one is present. The region's hospital service areas are: Cadillac, and Traverse City. single hospital. Frankfort, Grayling, Each of the first three is served by a The Traverse City area is served by four, two in Traverse City and one each In Leelanau and Kalkaska Counties. The nusber of beds existing in 1967 and the number needed to provide adequate hospital care for the population using the service areas in 1967-73 are shown in Table 71. On an overall regional basis, the table shows a bed deficiency. But In the present context of subregional or service area needs, the Cadillac, Frankfort, and Grayling areas had too few beds, while the Traverse City area had too many. In 1967 the percentage occupancy rates in the three deficient areas were 81.2, 78.6, and 82.8, reepectlvely (see Table 19, p. 67). Hence, while more beds need to be provided during 1967-73, it seesw 223 TABLE 71. — )haab«r of hospital bads lit tho Grand Travaraa Baglon'a hoapltal aaralca avaas, 1967, and projactlona for 1967*73 Hoapltal saralca araa Nunbar of bada, 1967 Nunbar of bada naadad, 1967-73 Cadillac.................... 128 134 Frankfort ................. 43 50 Grayling................... 68 77 Trararaa City ............. 372 364 Total ................. 611 625 Notat Bad naada ara datarmlnad for aach aarrlca araa by tha fornula: bad naada ■ orolactad avsraas dally canaua + 10. Tha pro80 jactad canaua la baaad on currant (1967) patlant days walghtad by ax* pactad (1973) patlant daya. Tha actual nunbar of bada la baaad prlnarlly on data In Hoapltala. and la laaa than tha nunbar raportad In tha Mlchlnan Stata Plan. 224 reasonable to conclude that these areas were almost optimally supplied with hospital beds as of 1967. The Traveree City service area, on the other hand* had eight excess beds. But since the area occupancy rate was 79.3 percent ^ (a am re 1.7 percentage points less than the 81.0 percent occupancy rate that would have occurred had the optimum number of 364 beds been available), no more can reasonably be gained from debating relative optimalities In this sub­ region on the basis of eight excess beds then could be gained from the finding of ten excess beds In the first analysis. It should be pointed out, however, that the need for more beds during 1967-73 can probably be accommodated assuming the hospitals continue their cooperation with each other. Only 14 extra beds are needed to provide adequate services In the three areas outside Traverse City. It seems reasonable to assusw, the unlikely event that the whole region experienced a major emergency aside, that excess demands, which might affect one or more of the three areas, could actually be satisfied by utilising either the hospitals In Traverse City or In one of the other areas. In conclusion, therefore. It is prob­ ably fair to say that there la no evidence to suggest that the cost of hospital care in the region is Increased by the presence of an excessive number of beds. Economies of Scale Turning now to the second point In the discussion of hospital ser­ vices: Through economies of scale, could fewer but larger hospitals serve the region's needs more efficiently than the existing structure? ^ O b t a i n e d by adding the number of patient days for the four hos­ pitals (107,627), converting to an average daily census (107,627 * 365 ■ 295), and expressing the result as a percentage of the number of beds (295 x 100) ■ 79.3 parcent. 372 225 The rational* for supposing such a possibility dlffars from tha prsvious saction's lapllcit rational* that bacausa tha canaua for on* larga hospital or for a group of hospitals acting as on* would vary lass than for indapandant hospitals, lass bads would ba needed. Rathar, hara, tha rational* is basad on findings of aconcmlas of seal* In hospitals. Paul Faldstaln, in a study of 60 hospitals ranging in six* frosi 48 to 453 bads, found that for long-run adjustswnts to variations in patlant load, the long-run avaraga cost curve was falling throughout tha whole rang* of hospitals included In tha study. 12 As a result ha was able to conclude that lower costs could ba obtained were tha six* and output of hospitals increased. 13 Tha implication of this finding, for areas suited to tha construction of one larga hoapltal, is that with increased use tha total cost of hospital care could ba reduced by increasing tha six* of existing hospitals rathar than by building new ones. 14 Although, as shown in the preceding section, tha Grand Traversa Region appears to have sufficient bads to meat present and expected needs, a perspective on the efficiency with which they meat tha naads say be gained by considering tha relation between their costs and hospital six* along the lines suggested by Faldstaln. Should they, as did tha hospitals in tha Faldstaln study, exhibit increasing returns it M y ba possible to show that tha cost of hospital car* in the region exceeds that 12Paul J. Feldstain, An Empirical Investlxation of the Marginal Cost of Hospital Services (Chicago: University of Chicago Graduate Program in Hospital Adsd.nlatration, 1969), pp. 60-64. 13Klarman, The Economics of Health, p. 107, takes not* of other studies which have found a typical U-shaped cost curve. He points out that the discrepancy between these and Faldstaln findings M y result from Faldstaln* s removal of the Influence of six* or the rate of occupancy by the substitution of patient days for bed capacity. 14 Feldsteln, An Empirical Investisation. p. 64. 226 which aight have been possible had, st sose time in the pest, s decision been made to centralize hospital facilities. In Figure 6 the total operating expense of each hospital is plotted against the number of patient days for the year 1967. The small sample size limits the possibilities of developing sta­ tistically significant relationships from these observations. Nevertheless, they appear to lie in an approximately linear pattern, which agrees with Feldsteln's findings. On observation it also seems likely that a least squares line fitted to the observstions would psss close to, if not through, the origin. To check this possibility, an equation fitted to the data with an assumed zero Intercept gave the following results: Y - $48.76 PD R - .92 w here: Y * total cost PD ■ number of patient days Because there is no constant term, marginal cost is equal to average cost. Hence, for size of hospitals included in the sample of seven the average cost curve is constant, and the hospitals in the sazq>le are in the range of constant returns. 16 An alternative technique would have been to plot average cost per patient day against hospital size, but because size would have to Include the number of services offered and the nature of the hospital as a teaching or a research institution, as well as the number of beds, it cannot be adequately represented by any one variable. And though these other vari­ ables stay be correlated with the number of beds, the number of beds la highly correlated with the number of patient days. Faldstaln, p. 62. ^ T h e s e findings differ from Feldsteln's In that he found slightly Increasing returns; nevertheless, the equation used here fits the data ap­ proximately as well as Feldsteln's— the R value in each study being .92. 227 $4,000 $3,500 $3,000 V— Y $48.76 PD $2,500 $ 2,000 $1,500 $ 1,000 500 $115,894 + $53.30 PD 10 20 30 40 50 60 70 80 90 100 Thousand patlant days 500 FIGURE 6.— Tha relationship between total operating expense and patient days in the Grand Traverse Region general hospitals 228 A nonrestricted linear equation fitted to the sane data gave the following results: T - -$115,894 + $53.30 PD R - .99 This equation fits the data better than the restricted equation but it suggests slightly Increasing costs. Given the snail sanple and slnple assunptions used here the results of either equation should be treated with a degree of caution. Nevertheless, increasing returns are not conformable with results of other findings, including Feldsteln's about hospitals In this slse range. For this reason the first equation appears to present nore realistic results and Is therefore, preferred for this analysis. Feldsteln's study suggested soan econoales of scale and concluded that larger hospitals night result In sons savings. The evidence based on a sanple of hospitals In the Grand Traverse Region gives reason to prefer an assunption of constant returns rather than decreasing costs. There is, therefore, no basis for concluding that costs could be reduced or would have been lower were greater attention paid to the scale of the region's hospitals. Short-run Costs Ths previous section ejcaarines the possibility of reducing the cost of hospital care through utilising advantages of econonlss of scale. How­ ever, the findings of constant or possibly Increasing cost negated this approach. Ths focus Is now turnsd to a further possibility of reducing average costs. That Is, without diminishing the quality of care, are there possi­ bilities of short-run modifications, such as changss In production tech­ niques or factor costs, that would enable the hospitals to produce an unchanged output, but at a lower cost? 229 A thorough study of this quostion Is beyond ths scops of this paper and would require detailed research Into the operation of the region’s hospitals. The emphasis hers will be placed only on a general indicator and conclusions will be drawn with respect to the Inforaation it provides. The region's hospitals are classified as short-term general hos­ pitals. Average cost per patient day in 1967 was $48.76. Under the as­ sumption that the hospitals are a representative sample of similar hos­ pitals In Michigan and the U.S. and that on the average there is no dif­ ference In the quellty of care. It should be possible by comparing regional costs and other data with that from similar hospitals to gain a rough per­ spective of how efficiently hospital care Is provided in the region, relative to other areas. In order to maintain the concept of a regional hospital system serving a given population, the hospitals will be treated as a group. In other words, comparisons will not be drawn about partic­ ular hospitals. Hence, it will not be possible to conclude that one hos­ pital in the region la "better" or "worse" than another hospital in or outside the r e g i o n . ^ Relevant data for the region, the state, and the U.S. is given In Table 72. Average costs are signlfleantly lower In the region than In the state or nation. The m m b e r of personnel used la lower than in the state and approxlautely the same as In the nation. The difference in 17Thl« approach differs from Sarkar's which was to rank the Copper Country hospitals by order of efficiency. However, the Copper Country Is about the same else aa the Grand Traversa Region, but only half as densely populated; hence, the hospitals, of which there are fewer than In ths Grand Traverse Region, do not comprise a similar sort of homo­ geneous system. As a result there is less patient movement among the hospitals and, therefore, s o n to be gained from treating the hospitals individually. Sarkar, pp. 84-99. 230 T41I.1 72*— Avtragt costs, psrsoonal, sod lsngth of stay In short-tsra ganaral hospitals In tbs Grand Travurss Ksglsn, Michigan and tha U.S., 1967 Itan Baglon Stata U.S. Coat par patlant day. . . . 48.76 59.22 54.08 Nunbar of parsonnal par 100 c a u s u s * ............. 264 271 265 Lsngth of patlant stay par patlant (days)........... 8.5 8.5 8.3 aCansus rafars to tha avaraga nunbar of patlsnts traatad on a glvan day. Sourcat Hospitals. Journal of tha Anarlcaa Hospital Association, XL11 (August, 1968), 454-458; and Mich igan Stats Plan. 231 costs bstwssn ths ststs snd ths nation is partially attrlbutabls to tha extra psroonnsl ussd In ths stats. But this doss not explain ths dlf- fsrsncs In cost between ths region and ths nation or stats; furthernore, ths difference cannot ba attrlbutsd to lsngth of patlant stay bscauss thssa ars squal for ths rsgion and ths stats, and barsly lass in ths nation. It sasns, therefore, that ths rsgion*s hospitals provide hos­ pital cars at lower cost than In othsr arsas; hence, for an assuned quality of cars that Is conparabls to ths avaraga quality In Michigan or ths Unltsd States, It is concluded that In this rsspsct, too, ths Grand Travarsa Rsgion's hospital systsa Is rslatlvsly sfficlsnt. Ths Quantity and Quality of Hospital Ssrvlcss It Is a gansrally accsptsd n o n that a positive rslatlonship exists bstwssn a hospitals* slss, nOasurad in bad nunbsrs, and ths quantity and quality of nodical ssrvlcss It providso. Ths quantity of ssrvlcss Is nsssursd by ths nunbar of dlffsrsnt nodical functions a hospital is squlppsd to provlda; and ths quality of cars Is usually rsgardsd In tarns of a hospitals* seersdieatIon, nodical school affiliation, training prograns for lntsrno snd rssldsnts, staff qualifications, and with ths nunbar and sophistication of Its ssrvlcss. As nay ba sxpsctsd, thsss quality factors tsnd to ba nors clossly assoclatsd with largo hospitals than with snail hospitals. Ths Grand Travarsa Rsgion* o hospitals d s a r l y follow ths n o n In tarns of ths quantity of ssrvlcss, as ths nunbar provided ranges upward fron two In ths snallast hospital to nlns In ths largast. And, If Indssd quality of cars Is ralatad to ths factors nsntlonsd abova, than thsre la also rsason for supposing that ths largsr hospitals ars battar squlppsd to provlda quality cars. 232 Because the larger hospitals offar sore services, It may be expected that this would Increase their costs. Figure 6 shows that the larger hos­ pitals do have higher total costs than smaller hospitals, but as sise In­ creases average costs, rather than declining as Faldstaln found, Increase slightly or, as we have assumed, remain constant. 18 But, In deriving these relationships no explicit allowances were made for the quantity or quality of services. So It would seem that gains from more and better services are only partially or not at all offset by Increasing costs. The Implication of this is that were allowances mads for the quantity and quality of services, total costs would probably increase at a de­ creasing rate. In this respect, then, there may be some advantages to larger hospitals; they can offer better quality care and ax>re services than the sswller ones. A patient faced with a choice between a large and a small hospital, with everything besides the quantity and quality of services equal, say be expected to choose the larger hospital. And this is the observed pattern of behavior in the Grand Traverse Region, where, as shown In Table 19 (page 67), rates of use Increase with hospital slse. Nevertheless, It also means that when other things vary, such as time and distance, which can be particularly expensive for a farmer and his family, there say be advantages to a network of hospitals, whereby, at least for simple disorders, adequate health care can readily be obtained In small facilities. Thus on this count, too, as with the other Indicators pre­ viously discussed, It say be concluded that hospitals in the region are reasonably efficient. 18 Feldstain. An Bswlrlcal Invasfixation, p. 64. Four subjects have boon covorod in this approlool of tho adequacy of hospital aorvlcos In the Grand Traverse Rsgion. The actual nusber of beds In 1967 was found to conform closely with optimum requlreamnts and. although In sons areas additional beds were needed to fulfill projected 1973 requlresttnts. It was felt that these needs could probably be net with existing facilities provided there was sufficient cooperation anong the hospitals. A U n i t e d analysis of the hospitals' long-run average costs showed that average coats were constant and equal to auirglnal costs. Hence, there appeared to be no reason for concluding that fewer, larger facilities would provide services ss>re econonlcally than the existing facilities. When cosq>ared with short-run average costs In slnllar hos­ pitals In other areas, the region's costs were found to be lower. Hence, there appeared to be little reason for supposing that operational Inef­ ficiencies were responsible for abnormally high costs. Finally. It was Indicated that some of the higher total costs In large hospitals can be attributed to their ability to offer more and better services than do small hospitals. This ability appears to be recognised by patients In the region because hospital occupancy rates Increase with hospital slse. Nevertheless, when other factors such as traveling costs are Included, the advantages of readily accessible ssall hospitals become sx>re apparent. In sussesry. the four subjects considered in this chapter Indicate that the region is served by a relatively adequate and reasonably effici­ ently operated network of hospital facilities. CHAPTER XIII REVIEW AMD IMPLICATIONS This chapter's primary objective is to review the information already learned about tha Grand Traverse Region's medical Industry and merge it into an appraisal of the medical sector's performance in M e t i n g the region's health needs. Review The eight counties comprising the Grand Traverse Region contain a fairly stable population of approxlsmtely 100,000 people. The economy is supported mainly by the tourist industry, fruit farming, some manu­ facturing, and, as shown In this study, a medical Industry. Because of these activities the region evinces a relatively prosperous appearance. This point was emphasized by Sarkar in his study of the medical industry in the Copper Country, in which he drew a vivid contrast between the economi conditions of the two reglonu.^ It is Indeed true that the Grand Traverse Region is wealthier, s»re urbanized, and endowed with better nadlcal facilities than many rural areaa. This, however, should not be construed as Implying that the region la nonrural or affluent. Poaslbly the one feature that does dis­ tinguish it from its essential rurallty Is Its medical Industry. respect It compares favorably with affluent urban areas. In this But in many respects, unfavorable but not uncommon rural characteristics predominate. ^Sarkar, p. 6. 234 235 So m of those are low par capita Incomes, high unemployment, lack of population growth, and a high proportion of elderly people. It la quite Important to understand how an urban medical industry has been able to flourish In a rural area. The answer may provide use­ ful clues towards solving problems In arsas with relatively Inadequate medical services. While the present study only addresses this question indirectly, the findings do have an important bearing upon It. What was attsmpted was to consider the industry as a regional economic entity, to estlswte and describe the Income and expenditure flows connecting Its elemsnts, and to sake some judgswnts about the efficiency with which Its services were produced. Traverse City, an attractive resort with a residential population of 20,000 and located at the southern end of Grand Traverse Bay, is an es­ tablished medical center. The city's swdlcal significance derives from the presence of a state psychiatric hospital and the progressive trauisfonset ion of a general hospital Into a cosiprehens ive swdlcal center known as the Munson Medical Center. It Is composed of a fully accredited general hospital with a bed capacity of over 200; an extended care facility that is fully coordinated with the hospital; and a children's clinic, through which the center Is affiliated with the University of Michigan for intern and resident training In pediatrics. Munson's facilities and Its signif­ icant open staff policy, by which all qualified physicians In the ares say use Its facilities, have helped attract a highly qualified corps of specialised swdlcal professionals Into the region. To many of these pro­ fessionals, the region offers the advantages of practicing In an advanced medical environ swat without the disadvantages of heavily urbanised surroundings. 236 A new recent addition to Traversa City's medical 7 8 - bed osteopathic hospital. A complex i8 8 fairly favorable attitude towards osteopathy and an appreciation of an adequate medical sector's value, have enabled osteopathic medicine to play an Important role In the developamnt of the region's medical Industry. In addition to these hospitals In Grand Traverse County, there are general hospitals, ranging In slse from 20 to 138 beds. In six other counties. Emphasis has also been placed on the special needs of the region's large elderly population. This subject has received special attention since the Inception of Medicare and has re­ sulted In the growth of an Impressive network of extended care facilities. Medical facilities and professionals cannot, however, exist In an economic vacuum. A region's ability to support Its medical structure Is very much dependent on adequate financing. focus of a large part of the present study. This subject has been the The financial structure of the region's medical Industry was examined In a framework which traced the flow of expenditures from the consuming sector (private consumers, government, and philanthropy) into the Incomes of the producing sector (doctors, dentists, hospitals, nursing homes, etc.) and then from the producing sector Into expenditures on human and nonhuman inputs. This framework was developed In the context of a regloual-nonregional model. The reason for this approach derived from observations that the producing sector attracted patients from a wider geographic area than the eight counties, that a large share of Its Income was obtained from the federal and state governments, end that some proportion of these incomes was redirected to Input suppliers located outside the region. Utilisation of this approach made It possible to isolate the total coat 237 of producing Che region's medical services end show Che nec resulcs of Inflows end ouCflows of expendiCures. Important for Chelr economic Impacc. Inflows were felc Co be especially Because chey represenc exCernally orlglnaClng paymenCs for a pare of Che region's producClon of medical services, chey represenC a nec addlclon Co Che region's Income and exporc receipCs. Buc, In Curn, Che ImpacC of Chese payments would be diminished if Chey were found Co be largely respenc by Che producing secCor for ex­ ternally produced Inpuca. In Che period sCudled, Che calendar year 1967, Cocal Income of Che region's medical producing secCor was approximately $33,500,000. Of chls, externsl funds were esClmaCed Co have paid 50.1 percenc and regional funds 49.9 percenC. AdmlCCedly, nearly all Che psychlacrlc hospital's seven and a half million dollar budget was paid from external funds. This clearly Influenced Che regional payments pattern In a manner that would rarely be duplicated in other rural areas. Nevertheless, removal of this factor from the accounting framework still left Che Industry with more than a third of Its Income coming from external sources. Ex­ cluding consideration of Che psychiatric hospital, Che main sources of Chls external Income were the federal government and nonregional private consumers. Federal payments were largely represented by Medicare reim­ bursements which, incidentally, were greatly In excess of premlusw collected from the region. Private payments cane mainly from patients living In nearby counties that were dependent on the specialised services available at the Munson Center, from tourists, and from seasonal workers. Including the psychiatric hospital's Income, the total amount re­ ceived from external sources was nearly $17,000,000. But when the analysis was shifted to the Input structure. It was found that 78.5 238 percent of th« producing sector's I n c o w was spent on regionally pur­ chased Inputs and only 21.5 percent on nonregloually purchased Inputs. This left the region with sons seven and a half el 11ion dollars repre­ senting the excess of externally originating Incone over external expen­ ditures. Sons attention was paid to the econonlc Inpact of these Incone flows on the lebor market. quite labor intensive. The production of most medical services Is It was found that, including remunerations to the self-employed, the region's producers spent some 62.8 percent of their Income on wages and salaries. The number of people employed In the Industry was In excess of 3,200 and though a large share of the earnings did represent the Income of relatively few self-ehployed pro­ fessionals, many jobs were made available at around the region's average wage. When these employment data were compared with data for other In­ dustries, It was found that the medical Industry had one of the largest payrolls and was one of the largest full-time employers In the region. This clearly emphasised its relative economic.significance. This discussion provided ample Information about the level of ex­ penditures and the Industry's economic standing. paid to questions about health needs. Little attention was What was shown was how much was spent for the amount of health care received; that is, the Industry's total revenue. Subsequent chapters examined the hypothesis that medical care expenditures In the Grand Traverse Region, In 1967, could have been lower had it not been for identifiable Inefficiencies In the production of certain services. 239 An investigation was made of possible excessive expenditures for nedlcal doctors* services, for ethical drugs, and for nodical equipment, and of possible inefficiencies In the production of general hospital services. Evidence of excessive earnings, attributable to nonconpetitive narket practices, was found In the incone structure of doctors snd drug Manufacturers, but not for equlpnent Manufacturers. Estlnated excess earnings of doctors and druggists combined have an upper bound of $709,315 and a lower bound of $225,582. These estlnates rsnge from 2.12 to 0.67 percent of the region*s total nedlcal Incone and fron about 2.73 to 0.87 percent of the incosm exclusive of the psychiatric hospital's. They repre­ sent excessive medical expenditures attributable to nonconpetltive elenents in the structure of the nedlcal snrket. No evidence of organisational or operational inefficiencies was uncovered in the exaninatlon of the region's hospitals. There were approxlnately the right nuaber of beds to neet demands; the hospitals ware producing in a range of constant costs; average costs were lower than in conparable hospitals elsewhere; and It was found that though costs increased constantly with hospital sise, the number and quality of services also Increased. This indicated that in addition to health advantages there were economic advantages to larger hospitals not un­ covered in the earlier analyses. These advantages, nay, nevertheless, have been recognised by the patients in that the hospltala* occupancy rates also increased with else. Though there may be a need for sons greater cooperation among the hospitals in the future if they are to avoid adding more beds, it would seem, on ths basis of the evidence presented, that the hospital system is reasonably efficient. 240 Unnat M o d i Evldtnct of « x c « m 1 v « earnings lap licit ly c o n f i n e d the euppoeltlon thet heelth eervlce purcheeere spent sore soney then wee necessary for the anount of cere received. Deeplte this, it is reasonable to expect that sone greater output of nedlcal care was, In fact, desirable, con­ ceivably to fulfill real but unnst nedlcal denands of the needy. In­ creases In the output of nedlcal services needed to fulfill these unsnt denands could, under “nornal" supply and denand conditions, be obtained by increasing the needy*a real Incones* Various Incone nalntenance and subsidised nedlcal care schenes can be used for this purpose. This policy would have the short-run effect of Increasing the quantity of nedlcal services supplied, but would also increase nedlcal lnconea and prices to the nonsubsidised nenbere of the population. 2 The alternative, but undoubtedly longer run, approach le to In­ crease the supply of nedlcal services. This, assunlng a negatively sloped denand curve, would result in lower sndlcal prices. Medical incone would change according to the elasticity of denand, increasing if it is elastic and decreasing if it Is Inelastic. perience suggest the likelihood of the latter. Evidence and ex­ Feldsteln and Severson, for exenple, found that price elasticities were 0.2 for physicians and 0.0 for hospitals.** These results bear out the fair expectation that within sons rea­ sonable price range, the quantity of najor nedlcal services (those of physicians and hospitals) desnnded la not too responsive to price changes. 2 The Increase In nedlcal incones nay have beneficial economic effects in areas like the Grand Traverse Region, but It la unlikely that such Incidental effects would weigh heavily In national policy decisions. ^Peldeteln and Severson, Report of the Conn!salon on the Cost of Medical Care. 1, 34-40. 241 The reason, as Greenberg has Indicated, is that moat visits to doctors 4 and hospitals are for curative services. The latter cogently suggests the rather obvious observation that the denand for noncurative care Is relatively elastic. As far as the needy are concerned, this largely lnplles the need for sore preventive care. Especially In rural areas, where there Is often a scarcity of in­ format ion and services pertaining to preventive care, the needy are less likely to seek noncruclal medical attention than are their urban counter­ parts. Even in an area such as the Grand Traverse Region, where essential curative services are readily available, there is a problem in fulfilling needs which, while regarded by individuals as nonessential, ■ay be for the kind of preventive care that can avert later, curative care. A high rate of private Insurance coverage. Medicare and Medicaid programs, and special provisions for migrant workers contribute to heavy demands on the region's medical personnel and facilities. The region's medical complex, however, Is heavily concentrated in Traverse City. As a result, there Is a tendency for people living In outlying areas to avoid seeking medical attention unless or until their needs becoorn acute. Conaequently, Traverse City receives more cases that it would had the patients concerned sought preventive or diagnostic attention earlier.^ *Harry 1. Greenfield, "Medical Care In the United States: An Eco­ nomic Work-up," paper presented at meetings of the American Association for the Advancement of Science, Cleveland, Ohio, December 26, 1963, p. 15. 5Interview with William Hansen, Assistant Administrator, Munson Medical Center, July, 1968. 242 Two facts substantiate this view. First, the average rate of hospital adariasions for Grand Traverse residents Is 157 per 1,000 people while the rate for residents In the surrounding counties Is 203 per 1,000; secondly, patients from the outlying areas tend to have longer hospital stays than those frost the central area.^ The central Issue In this problem appears to be the difficulty of getting the affected people in these outlying areas to realize their needs at an early stage. This cannot be accostpllahed by persuasive progress designed to alert these people of their need for regular medical attention, if the progress also naan the necessity of travsllng to Traverse City. Most of the people In the outlying areas are — where of f a n faari.lias. As discussed at the beginning of thia study, farm residanta receive less health care than other residential groups. Low incones and lack of insurance coverage have commonly been used to explain this situation. but nowadays the effects of these have been diminished, at least In Michigan. bility. A more relevant explanation Is the lack of accessi­ In Its usual presentation the problem Is expressed In terms of so many miles or so much traveling time. explanation. But this is only part of the The other part Is the problem of distance as seen by the farmer In terms of what he conceives as the opportunity cost of receiving medical attantlon. Simple physical Isolation Is not a problem In the Grand Traverse Region. The problem is to persuade the farm popu­ lation that It makes economic sense to obtain medical attention whether or not the need Is felt. This cannot necessarily be accomplished by In­ creasing the centralisation of services In Traverse City. A farmer or ^Michigan Department of Public Health, Michigan State P l « , pp. 175-181. 1968-69. 243 a member of hla family may be perauadtd to visit hla local physician, son one ha knows and can communicate with, and sons one who Is within aasy and, tharafors, economic raacb. Travsrsa City. Ha mmy ba lass aaslly parsuadad to visit Most of tha physicians In Travarsa City ara spaclallsts. Thay may althar raqulra rafarral or ba regarded by farm paopla aa liparsonal and expensive, and tharafora, to ba avoldad— particularly, whan tha cost also Involves tha additional traveling tIsm of going to Travarsa City Instead of tha local town. All these factors affect tha opportunity cost of receiving adequate health care and thus tha value a relatively Isolated parson places on health care. If the cost as ha seas it Is greater than tha return aa ha sees it, ha may vary wall do without medical attention. This may actually prove BK>ra axpanslva In tha long run, but In terms of short-run maxlad-xlng criteria, tha approach has degrees of rationality. Tha solution to tha problem is to place more medical services within aasy access of tha people living In the outlying areas. This does not mian placing facilities such as hospitals In every small town. This solution was triad In tha early post-war period and, as was shown in the previous chapter, actually represented a serious adnallocatlon of resources. Tha real need Is for arnra health personnel such as general practitioners, dentists, and nurses. most paopla turn In case of need. These ara tha producers to whom Ware there more available In tha region's outlying areas, not only would tha pressure on Traverse City ba relaxed but tha health standards of tha Isolated population would ba raised. 244 Physicians Ths aoat critical naad in t a n a of fulfilling urgent health needs is to Increase the nunber of general practitioners. general practitioners in the region in 1967. There were 37 Of these, 18 were located in Grand Traverse and Wexford Counties, and 19 were located in the six Isolated rural counties. Populatlon-to-general practitioner ratios for the individual counties are ahown in Table 73. Relevant ratios are those In the six Isolated rural counties. While the ratios are actually loweat in the more urban Grand Traverse and Wexford Counties, their populations are less sparsely distributed, have higher incomes, and furthermore, have easier access to a larger supply of substitute services than do the populations in the six really rural counties. The critical question to be asked about the six counties Is, how many additional general practitioners are needed to aasure the avail­ ability of an adequate supply of services? To obtain an anawer, it la necessary to consider the needs of the total region and the availability of substitute services. In the first place, the population actually using the region's doctors services on a regular baals was estlsmted to have been 110,400 (page 125). tial and vialtlng populations. Thle includea both the region's residen­ It is against this actual population that physician needs must be balanced If It la to be assusmd that the region la the regular source of supply for a nonregloual population. Secondly, In addition to 37 general practitioners there were 91 specialists (M.D.*s) end 27 osteopathic physicians in the region. 155 physicians serving the actual population. Thus, there were altogether 245 TABLE 73.--’Distribution of general practitioner* (M.D.'e) and population In tha Grand Traverse Region, 1967 County Popula­ tion General practi­ tioners General pract itloners per 100,000 oeonle Isolated rural countlaa: Antrim. . . . ............. 9,000 4 44.4 Bensle...................... 7,900 4 50.6 Crawford.................... 5,400 2 37.0 Kalkaska................... 4,600 3 65.2 Leelanau................... 9,600 4 41.6 Missaukee ................. 6,300 2 31.7 Isolated seml-rural countlea: Grand Traverse............. 37,000 13 35.1 ............. 17,700 5 28.2 Region................... 97,500 37 37.9 Wexford . . . 246 On* of the queacions confronting « 1959 Conaultant Group on Medical Education waa to find out if and how tha nation could ba auppllad with adequate number a of wall-qualified phyaiclana. Tha group found that demanda ware going to incraaaa ao auch that to maintain axleting lavala of phyaician aupply over tha yaara ahead waa clearly enough of a challenge in itaalf that no additional help could ba obtained. Inataad of develop­ ing a aophiatlcatad index of need, tha group aat maintenance of tha 1959 ratio of 141 phyaiclana par 100,000 paopla aa both feaalble and raaaonabla and conforming to tha minimum number required to provide adaquata care.7 On tha baala of a population of 110,400, tha region needed, accord­ ing to tha group'a criterion, a minimum of 155.7 phyaiclana (110.400 x 141). 100,000 Since thla la only 0.7 more phyaiclana than tha actual number, it aaama raaaonabla to conclude that tha region actually had Juat enough phyaiclana to meat tha minimum atandard nacaaaary to serve the total population. But tha major factor behind thla favorable poaltlon waa tha large number of e p e d a l l a t a in Travaraa City. Tha original problem regarding tha out­ lying araaa la not aolvad by the region aa a whole maintaining the minimum atandard, if moat of the phyaiclana are, in some manner, relatively lnacceaaible. A better idea of adequacy in the alx laolated rural countiea themaelvea can be obtained by conaldering the number of general practltlonera needed to aerve their populatlona at the minimum level. In 1967 the average patient in the United Statea vlalted a apeciallat aa often as he vlalted a general practitioner. Let it be aaaumad, 7Report of the National Advlaorv Commlaaion on Health Manpower. II, 272-273. 247 therefore, thet e population can receive a BinInally adequate level of physician care if it is served by equal numbers of specialists and general practitioners and that these are available in a combined ratio of at least 141 physicians1per 100,000 people. On this basis, the needed number of general practitioners can be found by halving the overall physician requirement, that is 70.5 general practitioners and 70.5 specialists per 100,000 people. Table 74 shows the actual and needed general practltioner-to-populatlon ratios for the six counties, but this time osteopaths are Included (all the osteopaths operating in the six counties are general practitioners). These calcu­ lations show that whereas there were 26 general practitioners in the rural counties in 1967, 31 were required to provide a minimally adequate level of physician services. This means that there waa a deficiency of five physicians. Antrim had two s»re, and the other counties seven less, than the minimum* Presumably the costs of meeting specified needs could be lessened if the two extra physicians were to practice in the deficient counties. Dentists The importance of dentists in fulfilling people's health needs is often unde r e a t I s m ted. In many raspecta this is the result of an attl- tudinal lag with respect to conceptions about the need for dental service. People generally view dental services leas urgently than they do physician services. They take the position that the former are not only sx>re easily postponable but postponable at a lower personal cost. That such attitudes may prove costly In the long run is implicit in the emphasis modern g denistry gives to the prevention and control of disease. g Thla is probably nowhere more strongly brought out than In tele­ vision advertising in which toothpaste sumufacturers, often with the apparent blessing of the American Dental Association, extol the virtues of fluoridation, dental health education, and early detection and correction 248 TABLE 74.— Actual and M a d a d g m a r a l practitioners (M.D.*a and D.O'a) In tha laolatad counties of the Grand Traverse Region, 1967 Popula­ tion County Nuaber of G.Ps. Nuaber of G.Ps. per 100,000 people Mlnlaua nuad>er of G.Ps. needed* Mlnlaua nuaber of G.Ps. needed per 100,000 people ... 9,000 9 100.0 7 70.5 Benxle. . . . 7,900 5 63.2 6 «f Crawford. . . 5,400 3 55.5 4 ft Kalkaska. . . 4,600 3 65.2 3 •• Leelanau. . . 9,600 4 41.6 7 Tha previous sections have shown that despite the overall high quality and quantity of nedlcal services available In the Grand Traverse Region, personnel shortages did exist. Such shortages can be particularly telling In rural areas because the people, by reason of locational, eco­ nomic, and cultural factors, generally receive less adequate levels of health care than their urban counterparts. This la especially noticeable when the health services are highly centralised, as In Traverse City. The lack of services In outlying areas has two effects. First, It neans that sons of the people will not be receiving a nlnlnun standard of adequate health care and, second. It neons that when the sane people do seek care, they nay have allowed their health to deteriorate to the point where they need more skilled attention than their local practitioners can provide. Hence, they find thenselves hospitalised or required to visit specialists. The latter effects can place undue strains on the ability of central facilities to operate effectively. The services needed In out­ lying areas, to prevent the sort of situation described above fron occurr­ ing and to assure that the people have an ansnable source of adequate health care, are personal services of general practitioners, dentists, and coessmlty nurses. What has been suggested above is that the addition of five general practitioners, three dentists, and 45 nurses could have net these needs In 1967. Financial Reeuirenents Two questions nust be answered In this section. it have cost to provide these additional services? source could the finances have been generated? forward. First, what would Second, from what These questions are straight To answer then In a slnllar vein requires some assuaq>tlons. 253 Ai i u m , first of all. that thesa sarvlcea had baan provldad and that thalr addition did not change tha output of other producers; that la. denands on tha added peraonnel ware generated by people with unnet health needs. Also assune that the costs of adding these services were paid froa public funds, though the revenue source had not been determined. lav, In order to persuade these health professionals to practice In the deficient areas they would, unless charitably Inclined, have to be paid salaries equivalent to those of similar professionals In the region. Thus, gross reimbursements would have been $52,216 for a general practi­ tioner. $49,257 for a dentist, and $5,000 for a nurse. The total bill obtained by multiplying these figures by the respective number of needed professionals, would have been $633,851. include all expenditures. Dentists* and doctors* Incomes However, assuming the additional nurses are employed In the public health service, there would have been complemen­ tary expenditures of approximately $710 per nurse ($31,950 in total) by the s e r v i c e . ^ Adding this to personnel expenditures ($31,950 + $633,851) gives $665,801 ms the minimal amount of additional expenditures needed in 1967. Given the cost of providing the extra health professionals, the next step is to examine alternative financial sources. The presumption was made that, for the most part, these additional services were needed for remotely located populations. Since the economic status of most of the region's counties Is depressed and since the people most in need of more medical attention are relatively poor, It is unlikely that they could be persuaded to divert more personal expenditures into health care. Philan­ thropic sources, another possibility, are already well extended In the 12 It was estimated In chapter VII that 70 percent of public health expenditures were for salaries and 30 percent represented other expenses. 254 region. But the role of philanthropy has been declining on a national basis, so it is probably unrealistic to expect much from this source. This leaves government as the only feasible source of sufficient funds. However, for government to underwrite the cost of additional medical expenditures, taxes must be raised. 13 Average per capita disposable in­ come In the region was $2,009 in 1967, well below the U.S. and Michigan average (see p. 37). But, taxes would have to be raised by approximately $6 per person or $34 per household* 14 This is more than the counties could be expected to raise in addi­ tional taxes. For the federal or state government to undertake the task there would, normally, have to be a general increase in taxes or a shift in existing expenditures. Beceuse of the region's relatively low income status, it would probably be the recipient of a net inflow of funds were either of these adopted. Since the funds would be channeled through the medical industry they would raise its export income and increase its importance in the regional economy. It m a y , however, be unrealistic to assusm that governments will automatically be able to finance more health services then they do. Cur­ rent programs, such as Medicare and Medicaid, are under constant adverse criticism, mainly on the grounds of their great cost end great pecuniary benefit to the Incomes of the medical i n d u s t r y . I t is unlikely there­ fore that the Congress or state legislatures will readily approve large additional health relief programs until some of the problems with the present programs are solved. 13 That is assuming no change in government spending priorities and avoidance of deficit financing. ^ A v e r a g e disposable income per household was $6,858. ^ U . S . Congressional Record. 91st Cong. 2nd Sess., 1970, Vol. 116, Mo. 17, pp. H694-H697. 255 Several chapters have baan devoted to this question of the high cost of medical care. Estimates were derived of the potential saving to the region that would result from the elimination of exceaslve Incomes and Inefficiencies. In particular, medical doctors and drug manufacturers were found to be earning excessive incomes; no evidence of excessive earn­ ings was found for the medical equipment Industry; and no really significant evidence of hospital Inefficiencies were found. Estimates of excess costs attributable to these activities are shown In Table 76. Suppoae now that, Instead of taxing the population to support needed medical services, it were possible for the government to have Imposed lump sum taxes on doctors and drug sanufacturers equal to their excess e arnin g s . ^ In this case there would be soma amount between approximately $225,000 end $710,000 available for financing additional medical services in the region. $660,000. The estlsated cost of needed services was approximately These findings point to an obvious conclusion. At a minimum, excess expenditures were sufficient to finance more than a third of the needed services, while at a maximum they were more than sufficient. All this could have been achieved at no direct cost to the people served, pro­ vided the additional services could have been obtained. Even the lower bound eatlmate would be sufficient to pay for the five additional general practitioners and the three nurses needed for the purely regional popu­ lation.^ But the upper bound estimate provides enough funds to have assured the availability of at least minimally adequate services for all the people using the region. ^^The basic assumption behind a lump sum tax is that because it has no effect on a firm's marginal cost curve. Its Imposition will not affect the profit sMxlmlslng level of output. ^ F l v e additional doctors, assuming they were paid at the competitive rate, would earn In total excess incomes of between $5,236 and $24,131. This, too, would be available for further health aeslatance. 256 TABLE 76.— Bxcaee txpcndlturta In the Grand Travtraa Region'• and1eel induetry* 1967 Excaee earnlnee Medical eenrlce High eetiaate Low eetiaate ---------------- Dollere -----------------Medical doctore............. 617,743 134,030 Drug indueCry............... 91,572 91,572 Total................... 709,315 225,582 257 Cooclmion The rather distinct and provocative finding that there were suffi­ cient excess expenditures to finance enough additional servlcea to assure an adequate supply of nedlcal services In the region nust be treated cautiously. In the first place It does not, nor Is It Intended to, prescribe a policy for overconing the problen of u w w t health needs In rural areas. It draws on findings of excessive nedlcal expenditures t r a n s f o m a d Into Inexplicably high Incoans of nedlcal doctors and drug nanufacturers. It takes a sinple naasure of unnst health needs, seen strictly fron the supply or need for nore services side, and shows the cost of nesting then. And, In the quest for a naans to finance the additional services, It Indicates a need for g o v e m n e n t involvsnsnt. Should governnant undertake the task of financing the extra services, taxes would have to be increased or pri­ orities altered. It Is unrealistic to assune, however, that additional health funds will be appropriated In the absence of radical changes in the health delivery systen. Inpelled by crltlclsn of profiteering by doctors and drug suppliers, by inefficiencies In hospitals, and by abuse of prograns for the elderly and the poor, the federal goveranent Is prinarlly concerned with finding ways of reducing or allaying Increases In the cost of nedlcal care. Under current welfare prograns the gap between the price received by the nedlcal Industry and the price paid by the consuner la wide and represents the subsidy paid by goveranent. of nedlcal services nust be Increased. To reduce the gap the supply If this happens, continued sub­ sidies nay be needed to assure adequate Increases In output, but the result. In the absence of cosqvletely offsetting Increases In denand, would be lower unit costs. This study does not show how this can be achieved. 258 It does show that there ere excess funds actually generated in the in­ dustry itself which, if accessible, could be directed towards the provision of more services. The fact that the financial estimates of excess incosms and unset needs are so close is, of course, coincidental. The fine balance stimu­ lates the quest for imaginative theoretical Inference. Joan Robinson's discussion of using equal subsidies and lump sum taxes to force monopollsts into producing a competitive level of output seems obvious. 18 Yet, as Mrs. Robinson points out, there is little hope for practical application of such schemes; which, among other things require unchanging and wellknown demand and supply curves. But there le another, more fundamental, point. are only drawn with respect to one region. These conclusions Sarkar, in his study of Michigan' upper peninsula, found that excess Incomes would provide only 44 to 48 percent of the amount needed to finance unmet needs. amount might be greater. 19 In other areas the But it is difficult to conceive of many rural areas like the Grand Traverse Region, where there would be sufficient excess funds in the medical industry to cover the cost of its own deficiencies. The Grand Traverse Region is unusual, medically. Although medical facilities and personnel are located in all eight counties, it is Traverse City, with its comprehensive structure of medical facilities and atten­ dant highly specialised medical manpower pool, that has developed into an acknowledged nedlcal center. This complete system provides medical services for moot of the region's population as well as for a large number of nonreglonal residents. 18 As a result, it generates spending both from Joan Robinson, The Econosd.es of Competition (London: Macmillan and C o . , Ltd. 1933; rmprlnted 1954), pp. 163-165. ^Sarkar, pp. 118. 259 regional and nonragloaal sources. Tha sun and distribution of thaaa ex­ penditures is sufficient to place the industry among the region's leading econoalc sectors. This study has shown the importance of a large medical sector not just from the perspective of its potential economic Impact but, fundamen­ tally, from the perspective of the Inescapable conclusion that the potential for eliminating waste and unmet needs Increases with the else of a region's medical industry, but since the reverse is also likely to be true, few rural areaa possess the Internal possibilities of the Grand Traverse Region. Bibliography Bibliography Aacrican Dental Association. Tha Distribution of Dantlats In tha United States bv State. Reaion. District, and County. 1968. Chicago: Asarlcan Dental Association, 1969. * ________ . "Income of Dentists by Location, Age and Other Factors," 1968 Survey of Dental Practice. Volusm II, Report of Councils and Bureaus. Chicago: Anarlean Dental Association, 1968. Aamrlcan Medical Association. The Distribution of Physicians. Hospitals. »nH Hwapital Beds in the United States. 1966 and 1967. 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