planning

1. Economic Factors in Hospital Planning
in Urban Areas
HERBERT E. KLARMAN
THE
proof
ABSENCE of planning is not, per se,
that chaos or anarchy prevails.
Whether planning is called for depends on the
laws to safeguard persons and property. Anti-
trust laws are meant to inhibit both the power
of monopolies and their inefficiencies. Delivery
good (commodity or service) in question and on systems that are costly to duplicate, such as the
the circumstances surrounding its production telephone or the electricity networks, are ac-
and consumption. corded public utility status, to which stated
Forms of Economic Intervention
privileges and responsibilities attach. Eegula-
tion and licensure of certain categories of per¬
For a large variety of goods and services we sonnel are intended to safeguard the consumer.
tend in this country to accept the operating re¬ Subsidies (cash graiits) and tax credits or de-
sults of the market. This decision is rooted ductions may be employed as inducements to
partly in faith in the beneficience of Adam encourage desired courses of action. Sometimes
Smith's discovery, the invisible hand (by which Government serves as the producer of services
the individual in pursuing his own interests is that it sells (the post office) or as the purchaser
also promoting the general interest). In addi¬ of services it pays for (hospital care). Planning
tion, however, it partly reflects confidence in the is another vehicle of social control.
superiority of decentralized decision making, The dictionary defines planning as devising a
something that the socialist countries have re¬ scheme for doing, making, or arranging. A plan
cently come to acknowledge. It is buttressed by refers to any detailed method, formulated be-
the willingness of society to redistribute income forehand, for doing or making something. A
through various devices when the results of the statement of general principles does not consti-
market offend its sense of fairness. tute planning.
Society may intervene in economic affairs This paper focuses on areawide planning for
through additional devices (1). These devices hospital care because no other concrete body of
are listed here, without elaboration, in order to planning experience from the health field is
convey their number and variety. Thus, it enacts available to us in this country. Plans for mental
health and mental retardation services are just
Dr. Klarman is professor of public health adminis¬ coming off the drawing boards. Currently
tration and political economy, Johns Hopkins Uni¬ money is being allocated for drawing plans for
versity, Baltimore, Md. The article is based on a the regional medical programs which derive
paper presented before the medical care section from the De Bakey commission's report on
panel at the 94th annual meeting of the Ameriean heart disease, cancer, and stroke. It is known
Public Health Association, held in San Francisco, that these programs will encourage and facili¬
Calif., November 3, 1966. tate cooperative arrangements among providers
Vol. 82, No. 8, August 1967 721
268-233.67-5

2. of service in a region. The contents of these pro¬ frain from doing either. By contrast, a commu-
grams will evolve in response to local initiative nity's ability to influence its supply of physi¬
and will vary among regions, depending on cians appears to be small.
needs and opportunities and on whether pri¬ From the outset, planning for hospital care
mary emphasis is given to the wider delivery oi has been carried on separately from other social
services created by medical discoveries or to im¬ planning. City planning agencies have been
proving the overall quality of medical care. either unwilling or unable to assume responsi¬
Legislation authorizing comprehensive plan¬ bility for hospital planning. One can only specu-
ning of health services by health departments late on the reasons for their reluctance. Two
has just been enacted. factors appear to have been especially impor¬
My analysis of planning for hospital care will tant. One is the complexity of hospital services.
be limited to economic factors. Such an analysis Given the difficulties of measuring the quality
is incomplete, of course, lacking the political, of the output, the tendency is to resort to pro¬
social, and physical elements that also enter into fessional.medical.judgment. The second is
planning. the mixed nature of the hospital economy.gov¬
I strongly believe, however, that the analysis ernmental, voluntary (nonprofit), and proprie¬
of a concrete body of experience, though incom¬ tary (for profit). City planners are accustomed
plete, is more valuable than any amount of dis¬ to plan for facilities under a single, govern¬
cussion of generalities. The successes, opportu¬ mental form of control.
nities, and failures of planning can only be Economic Factors in Planning
appraised in the light of experience.
Among the economic factors that support
Public Concern About Hospitals community planning for hospital care are the
following: (a) the waste of a low rate of occu-
Why is there public concern for the proper pancy; (b) adapting to random variation in
development of hospital services? The reason is admissions; (c) the trend toward larger hospi¬
that from the very beginning hospitals have ab- tals; (d) the indivisibility of equipment and
sorbed large masses of social capital. In this teams; (e) the Hill-Burton program, rising unit
context, social capital includes both philan- costs, and Roemer's law; (/) the long life of the
thropic and governmental. physical plant; (g) changes in the population
It is perhaps an accident of history that the of cities and the growth of suburbs; and (h)
public has furnished the physician's workshop Federal grants-in-aid.
without expense to him.something it has not Low rate of occupancy. The high proportion
done for other professions in private practice. of overhead to total hospital cost was recognized
Certain factors, however, suggest that this pol¬ by accountants such as Charles Roswell and by
icy may have some rational bases. Seventy to administrators long before it was measured by
eighty years ago capital requirements for hos¬ economists (2). A low rate of occupancy reduces
pitals loomed large relative to operating expen¬ income much more than expenditures and can
ditures, and investment in one represented a big pose a threat to the financial stability of the
chunk of capital. Free care, or care at less than hospital.
cost, for the poor (who represented a majority During the depression of the thirties, Govern¬
of hospital patients) was the accepted mode. ment hospitals were overcrowded while volun¬
The education and training of new physicians tary hospitals had vacant beds. (Haven Emer-
was, in turn, closely associated with care of the son's "Hospital Survey for New York"
sick poor in the hospital. documents this point exhaustively.) This situa¬
The existence of public concern, however, is tion seemed particularly irrational, being con-
not a sufficient condition for action. Another trary to the interests of all concerned. The
necessary ingredient is the possibility of doing obvious remedy was to provide all patients equal
something about the problem. A community or access to all hospitals, regardless of who paid
neighborhood can, with its own resources, build the hospital bill. This policy also appealed on
a local hospital or enlarge an existing one, or re- another ground: a hospital open to all classes
722 Public Health Reports

3. of patients has a superior ability to serve its in favor of a U-shaped long-term cost curve
community. (The latter point is still valid, of for hospitals. On the one hand, specialization
course, and has gained in relevance with the and division of labor result in declining unit
enactment of Medicare.) cost as the scale of output increases. Beyond a
With high overhead costs, a low rate of occu¬ certain point, however, complexities of manage¬
pancy leads to a financial deficit. Therefore, it ment intrude and coordination of efforts be¬
is a sufficient deterrent to overbuilding to in- comes more difficult, so that unit cost rises.
form every hospital of events, plans, and prob¬ Application of the theoretical model to real
able developments elsewhere which are likely to data is complicated, unfortunately, by differ¬
result in overbuilding in the aggregate. The ences among hospitals in range, complexity, and
planning agency is in a better position to ascer¬ quality of services and by differences in salary
tain such information and to disseminate it levels and educational programs. Various at¬
than any individual hospital. tempts have been made to deal with these prob¬
Random variation in admissions. One of the lems in order to determine the relationship
chief contributions of operations research to the between output and cost (7, 8), and progress
health field is its exploration of the application is being made. It is only fair to say that a final,
of stochastic (random) processes to hospi¬ definitive answer is not yet at hand.
tals (3, If). A formal, systematic explanation of Economic analysis apart, small hospitals are
the persistence of average rates of occupancy unable to meet two other criteria for a satis-
below 100 percent is only one consequence. factory modern hospital. They cannot concen-
In addition, various devices to stabilize hos¬ trate enough patients for teaching, and they
pital patient load.and to raise average occu¬ cannot be truly general in the patients they
pancy.have been examined or suggested (5,6), serve and the services they render. These con¬
such as postponement and improved scheduling siderations, rather than economy, may have
of elective admissions, replacement of large been decisive in fostering the movement in cities
wards with small bedrooms, designation of against small hospitals of say 100 beds or so.
swing beds between intensive and intermediate While the average size of hospitals has in¬
care units in a progressive care facility, occa- creased, no hospital, however small, has been
sional attempts to end the physical separation debarred from caring for any category of pa¬
of maternity patients, and recommendations to tients. Moreover, a small hospital has fre¬
transfer excess patients to other hospitals. Al¬ quently ceased to be one by expanding. Hos¬
though such transfers are customary from pri¬ pitals of larger size permit a concentration of
vate to governmental hospitals, they rarely take patients for the convenience of physicians. In
place in the opposite direction. sum, this policy poses no disadvantage to pro¬
All these devices except for interhospital viders of service, except possibly to hospitals
transfers can be introduced within an individ¬ that are unable to expand.
ual hospital at the wish of its management and Two sets of objections can be advanced
professional staff. The transfer of patients against the trend toward larger hospitals. Pa¬
among hospitals, however, encounters the tients and prospective visitors may prefer
troublesome problem of staff appointments for shorter travel time to one of the more numerous
physicians (dealt with later). smaller hospitals over longer travel to fewer
Trend toward larger hospitals. In the large and larger hospitals. In the production of
city, interest has focused much more on the goods, the lowest cost for a specified quality is
deficiencies of small hospitals than on the pos¬ an unexceptionable objective. In the production
sible inefficiencies of large ones. A rule of thumb of a service, the consumer must travel to the
I have learned from several administrators is place where it is produced (or less often, the
that the best size of hospital is the current size provider of services visits the customer). The
of his hospital plus 100 or 200 beds, depending cost of production is only part of the real cost
on the administrator's assessment of prospects involved, travel time and inconvenience being
for financing an expansion. others (9).
On theoretical grounds alone, one can argue The second objection is that the optimum size
Vol. 82, No. 8, August 1967 723

4. of hospital for inpatient services may differ it and its staff gain while hospital B and its
from that for outpatient services. When the staff lose, but the community may incur an ad¬
patient has a family physician, there is less ditional loss through the deterioration of the
need for all medical services to be integrated at skills of hospital B's staff and the obsolescence
a single facility than when the patient depends of their knowledge. These losses can be averted,
on that facility exclusively. The original basis however, by a policy of selective duplication of
for promoting integration of medical care serv¬ hospital staff appointments for physicians. (Un¬
ices was to assure continuity of care and to der this policy, not all physicians but only phy¬
avoid fragmentation and the poor quality of sicians who require access to the special
care associated with it. More recently, integra¬ facilities.which are to be located in a small
tion of services is also intended to help certain number of hospitals.would have appointments
people who are regarded as incapable of mak¬ to staffs of hospitals other than their own.)
ing good choices in buying health services. The presence of a facility or program has
Indivisibility of equipment and teams. The spillover effects for the other parts of an insti¬
hospital today has much more expensive equip¬ tution. Renal dialysis is intimately connected
ment than formerly and employs large special¬ with advances in kidney transplantation, for
ized teams to perform certain diagnostic and example. Radiation therapy is only one of the
therapeutic procedures. Good, almost ubiqui- modalities applied in treating cancer.
tous, examples of facilities that come in fairly Let us consider a more common facility, the
large units are cobalt bombs for radiation obstetrical service. In many hospitals its rate
therapy, teams for open heart surgery, and. of occupancy is low. Yet the presence of such a
just emerging.renal dialysis units for chron- facility affects the strength of the pediatrics de¬
ically ill patients. The costs of larger pieces of partment, the gynecology service, and intern
equipment are given in an earlier article of and nurse training. A service that is too costly
mine (10); the cost of chronic renal dialysis in terms of unit cost may make sense in terms
is estimated at $15,000 a year. of the overall mission of a hospital, once it is
To serve but a few patients a facility must be determined that this hospital should continue
established that could serve 10, 20, or even 100 in operation. A decision by a hospital to round
patients at relatively little additional cost. out its services tends to be both self-confirma¬
When many such facilities are set up in a com¬ tory and cumulatively reinforcing.
munity, the average workload for each is small For the first time in this analysis one en-
(11) and the unit cost high. Moreover, the counters possible conflicts of interest between
skills of the personnel may deteriorate through the individual hospital and the larger com¬
disuse. munity, the individual hospital being con¬
An obvious remedy is to restrict the number cerned with overall institutional strength and
of facilities in an area. Some planners expect the community seeking to minimize the total
that knowledge of the facts would lead hospi¬ cost of a particular service. The hospital may
tals to cooperate in meeting the community's exaggerate the adverse spillover effects of fail¬
needs. Failure to cooperate is regarded as a fail¬ ure to establish a certain facility. In addition,
ure to understand or as the unfortunate by- the hospital tends to assume little responsibility
product of institutional vanity. for the quality of medical care in the commu¬
This view of the situation may be too simple, nity outside its walls. Decisions on its staff ap¬
in my opinion, for at least two reasons. When a pointments of physicans are made without
hospital establishes a specialized service facil¬ regard for services supplied to ambulatory
ity, the physician associated with it who is pro- patients.
fessionally qualified to use the facility benefits. In its present dimensions, the problem of hos¬
A decision not to establish the facility in the pital appointments for the visiting staff has
physician's hospital deprives him of income and emerged only within the past generation. The
of the continuing learning experience on which presence of a resident staff, and more recently
his specialized skills depend. Moreover, if hos¬ of a full-time clinical staff, reduces the value to
pital A establishes such a facility, not only does the hospital of the voluntary attending staff.
724 Public Health Reports

5. At the same time the staff appointment no longer rent cost. Incentives to operate efficiently are
serves as the vehicle for training toward spe¬ lacking.
cialty practice,
so that the practicing physician To keep expenditures for hospital care under
is not so willing formerly to give the hospital control, it would be necessary to curtail the use
as
his time and energies (12). of hospitals.
The regional medical programs for heart dis¬ Perhaps the major impetus for hospital plan¬
ease, cancer, and stroke may substantially affect ning recently has come from still another source,
this situation. On the one hand, in the hospital namely, recognition that hospital use may not
selected to house a unique facility, the need for be a good thing, per se, that relatively low use
an equitable distribution of staff privileges to need not reflect deprivation (16,17), and indeed
physicians on other hospital staffs who need to that the basis for determining the proper level
use the facility will be made explicit. If public of use is constantly shifting, with the available
funds are employed, such a distribution of staff supply of beds possibly exerting a strong influ¬
privileges may become imperative. On the other ence on demand (18,19). One can no longer as-
hand, there may ensue an increasing concentra¬ sume that need, as medically determined, and
tion of specialists in hospitals who will spend financial ability to pay combine to create a
full time on clinical services, rather than in uniquely determined, appropriate criterion for
research. planning hospital use. Controversy still sur-
Hill-Burton, unit cost, and Roemer's law. rounds the so-called Roemer's law.that under
Three sets of events have led to increased recog¬ financing through prepayment newly built hos¬
nition of the advantages offered by coordinated pital beds do not go empty (20-22). Acceptance
community action. of the law, however, directly points to the de-
The Hill-Burton program for assisting in the sirability of limiting the total number of beds
construction of nonprofit (voluntary or govern¬ in an area. If under third-party financing and
mental.mostly the former) hospitals seems to variable standards of hospital use, the threat of
have accomplished its mission of bringing hos¬ vacant beds in the individual hospital has lost
pital services to the rural population. The major its potency, recourse to direct control or veto of
problems are now in the cities, where moderni¬ hospital building plans by an outside agency
zation, improvement, and coordination are seen may be necessary.
as the imperative goals, rather than expansion. The obvious desirability of avoiding recur-
The unit cost of hospital care continues to rise ring, periodic requests for increases in the pre-
at a high rate. The explanation that hospitals miums of Blue Cross hospitalization plans
are catching up with other industries in wages
points in the same direction. State commis-
and working conditions fails to explain remain¬ sioners of insurance who review these applica¬
ing inequities, which require correction from tions recognize the advantages of financing the
time to time. Medical progress accounts for only operations of a smaller supply of beds.
part of the cost increase. Many economists be¬ A^ain, a potential conflict of interests arises
lieve that the most important factor is the con¬ between the individual hospital and the commu¬
tinuing lag of the hospital industry in achieving nity. It may make sense to exhort the public not
gains in productivity comparable to those to abuse health insurance benefits and not to ask
achieved in the economy at large (13, 14). for expensive amenities in the hospital; but it is
Somers, however, dissents (15). If this explana¬ pointless, if Roemer's law is valid, to exhort
tion is correct, then, in the absence of substantial hospitals not to build. A firm No is required, as
opportunities for automating many functions in New York State, where areawide planning is
of the hospital, the high rate of increase in the now compulsory instead of voluntary.
hospital's unit cost is likely to continue. Indeed, Life of physical plant. In depreciation tables,
the more progressive the economy as a whole, hospitals are shown with a life of at least 40
as measured by increases in productivity, the
years. Hospital facilities, therefore, must be
greater the increase in hospital unit cost. planned for a long time ahead. Since nobody
Another emerging factor is the increasing owns a clear crystal ball and the years between
tendency to reimburse hospitals at actual cur¬ the decennial censuses do not provide firm base
Vol. 82, No. 8, August 1967 725

6. lines, planning agencies usually compromise a hospital with a large teaching program will
and project bed requirements 10 to 15 years be freer than formerly to move from one site to
ahead. another. The advantage in quality of care that
Planning for hospital care always entails accrued to an inner-city location will diminish.
planning for small geographic areas. Popula¬ One alternative to removal will be an intensified
tion projection is difficult from a technical concern on the part of the hospital for renewal
standpoint and always subject to outside forces of the area in which it is located. Acting alone
that are neither well understood nor readily to carry out renewal, a hospital can accomplish
controlled. Allowing a margin for error is a safe little. Acting in concert with other agencies and
precaution. The demographic and socioeconomic groups, it may contribute to the conservation
composition of the population is even more un- of its community.
certain than its total number, and the implica- An independent hospital is likely to feel freer
tions for hospital use of differences or changes to move than one that is a member of a religious
in a population's composition are by no means or ethnic network. In the case of the hospital
clear (23). The effects of future technological that is a member of a network more of the fac¬
change are certainly not known, other than the tors that reflect the community's diverse needs
steadily increasing ratio of square feet per hos¬ can be brought to bear on its decisions, while to
pital bed. It is no exaggeration to say that a the independent hospital some of these factors
large proportion of a given total of forecasts of appear to be beyond its ability to control.
required hospital use are bound to be in error. One of the important contributions of a plan¬
I infer that sound judgment as to direction ning agency is to make relevant to the decisions
will probably be more helpful than precise of an individual institution certain factors that
arithmetic calculations. The most reliable de¬ normally do not concern it. By enlarging the
vice for minimizing the consequences of error is area of planning, benefits or costs accruing else¬
not more careful long-range forecasting but pro- where are converted into factors that may be
vision for as flexible use of facilities as possi¬ taken into account explicitly.
ble (21^, 25). It should be recognized that a Federal grants-in-aid. Rufus Rorem has said,
plant built today will not be ideally suited -for "Cash is the prince of coordinators." At the time
the conditions foreseen for a decade hence; nor he was referring to the leverage that could be
will the plant be precisely adapted to today's exercised through construction grants. Federal
conditions or volume of output. The extra cost matching grants to areawide planning agencies
of flexibility represents a built-in diseconomy were still in the future.
of operation (26). Matching grants have proved to be very in¬
A major task of planning agencies, I con- fluential. Of 63 hospital planning councils now
clude, is to search for, develop, and test devices in existence, 55 have been organized since 1962,
that will promote the flexible adaptation and use when Federal monies for this purpose began to
of hospital facilities over time. flow. Before 1962 the hospital planning move¬
Population changes and shifts. Certain ment was making slow headway. One agency
changes in society at large affect planning for was founded in the 1930's, two in the 1940's,
hospital care. The close tie between medical two in the 1950's, and three in the early 1960's.
education and the provision of free hospital In 1962, 13 councils were organized, followed
care has kept the ratio of beds to population in
the central cities higher than it would otherwise by 13, 5,11, and 13 in each of the next 4 years.
be. The institutions supplying hospital care (These data are from the Division of Hospitals
have also supplied care to indigent ambulatory and Medical Facilities, Public Health Service.)
patients on an organized basis. It is evident that few communities were will¬
With the advent of Medicare, and if liberal ing to spend their own money on hospital plan¬
Medicaid plans are adopted by the States, pa¬ ning activities. In one city, for example, when
tients who receive free care will furnish a stead¬ outside funds were withdrawn, operations were
ily declining fraction of all teaching material. curtailed substantially.
If private patients are used for teaching, then The history of areawide planning agencies
726 Public Health Reports

7. once more demonstrates the magic discovered recommendations on those for which a solution
by the Rockefeller Foundation, namely, the is known or for which a solution is impera¬
multiplicative power of the outside dollar that tive.whatever the current state of knowledge.
is to be matched locally. It is not possible to A knowledgeable and sensitive planning agency
gauge what would happen if Federal funds were will be able to anticipate some of the problems
withdrawn or what will happen when grants that will emerge in the next few years, before
are no longer earmarked for hospital planning. they become acutely pressing. An effective
It seems prudent to begin thinking, however, agency will divorce itself from current fads and
about evaluating the programs for planning and escape the awesome authority of arithmetic,
justifying them. relying instead on the skillful analyses of its
How to evaluate? We cannot conduct con¬ staff and the mature judgments of its board.
trolled experiments comparing what is with
what would otherwise have been. One possible Summary
device is to set targets and to measure how Economic intervention by Government can
closely they are approached. take many forms. Planning is one of them. In
How is one to justify? This effort is best recent years the Federal Government has sup¬
undertaken in the light of available and prob¬ ported the large-scale expansion of areawide
able alternatives. Why is the course recom¬ hospital planning agencies in this country.
mended by the planning agency believed to be The original basis for areawide hospital plan¬
the superior one? Its recommendations usually ning in the 1930's was recognition that overhead
reflect a balancing of competing objectives. cost contitutes a high proportion of total hos¬
What are they, and what scale of importance is pital cost. It follows that a low rate of bed oc¬
attached to each? The spelling out of objectives cupancy reduces income much more than ex¬
and of their respective weights, along with a penditures do and that large numbers of
presentation and evaluation of alternative ways vacant beds threaten the financial stability of
to achieve the objectives, will enable the public hospitals.
to judge the desirability of recommendations. Avoidance of duplication among hospitals of
expensive facilities and services requires
Implications recognition of the importance of selective
In relation to total expenditures for hospital duplication of staff appointments for physi¬
care, the costs of maintaining a hospital plan¬ cians. (Through selective duplication of ap¬
ning agency are modest. Both the modal and pointments, facilities located in only a small
median annual budgets for such an agency to¬ number of hospitals can be made available to
day are less than $80,000 (according to Division physicians on staffs of other hospitals who need
of Hospitals and Medical Facilities, Public to use them.)
Health Service). The potential benefits.posi¬ In a number of instances, possible conflicts of
tive or negative.are large. If a planning interest are noted between the individual hos¬
agency is effective, it reduces the risk of a multi- pital and the community. Under these circum-
tude of small or moderate mistakes but it raises stances, voluntary cooperation may not be forth-
the risk of a few large ones. coming. Perhaps the outstanding example of
We must try to develop planning agencies for such conflict is the possibility that additional
health care that will make sensible analyses of hospital beds will tend to be used whenever
the important facets of a problem and advance third-party financing of hospital care is pre¬
recommendations which are geared to flexibil¬ dominant.
ity. Such an agency must play several parts If the increase in hospital unit cost is largely
simultaneously. It needs to know almost every attributable to productivity gains in the hos¬
thing concerning the community and its health pital lagging behind the rest of the economy,
services; it should also be aware of what it does primary reliance in controlling hospital care ex¬
not know about them. Such an agency should penditures must be placed on the control of hos¬
keep abreast of the significant issues of health pital use. A firm No to hospital building plans
policy, study some of these in depth, and make may be required.
Vol. 82, No. 8, August 1967 727

8. The prospects for accurate forecasting of hos- (12) Klarman, H. E.: Hospital care in New York City.
pital use in a given local area are not bright. Columbia University Press, New York, 1963,
pp. 155-157.
Planning should therefore concentrate on de- (13) Brown, R. E.: The nature of hospital costs.
veloping devices that will permit flexible use of Hospitals 30: 46, Apr. 1, 1956.
facilities. (14) Kilarman, H. E.: The increased cost of hospital
care. In The economics of health and medical
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728 Public Health Reports