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quirements in support of our long-range planning. Planned earnings consist of two factors:

1. An amount equivalent to 4 percent of the recorded costs of the fixed assets in use, in addition to the provision for depreciation included in operating

costs.

2. An amount budgeted at a minimum of $.15 per health plan member per month. The actual budgeted rate will vary from year to year and from region to region depending on the long-range facilities programs and requirements for capital in each region.

1971 FINANCIAL REQUIREMENTS

Sources of revenue for financing the short-term requirements are shown in Table VII-2. Revenue from membership dues is computed by applying current dues rates to the detailed forecast of membership.

Supplemental charges cover proceeds from outpatient pharmacy and optical sales and certain point-of-service charges made to group members who are enrolled in the less comprehensive coverages. The revenue expected from such sources is estimated from current experience modified by predicted changes in coverage from a less comprehensive to a more comprehensive coverage or the reverse.

Payment for Medicare Part A-hospital, extended care, and home health services-is made to our hospitals and home health agencies in the same manner as to any other Medicare provider. We receive reasonable cost, less deductibles and coinsurance, in accordance with published regulations.

In the case of Part B-physicians' and other health services—since group practice prepayment plans did not fit the established procedure for reimbursement, special regulations were developed to cover payment to the health plan of a monthly amount for each Part B beneficiary enrolled in the health plan.

This per member per month amount relates to the established dues structure covering younger members but is adjusted for differences in utilization patterns of the 65-plus members compared with the younger members. The standard of "reasonable charge" is applied as provided for Part B services under the act. Both Part A and Part

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B payments are subject to retrospective adjustment based on actual costs and actual utilization factors. About 4 percent of health plan members are Medicare beneficiaries. Approximately 8 percent of all program revenues are derived from government reimbursement under the Medicare program.

Nonplan and industrial and other revenue sources are forecast from current experience.

The indicated deficiency of $19,000,000 between the operating forecast and predicted sources of revenue must be made up from scheduled increases in prepaid dues rates if the operating financial requirement, which includes the all important capital requirement, is to be developed from operations of the program during the coming year.

In describing the preparation of the short-term operating plan and its financing we have, in fact, outlined the procedure by which dues rates are reviewed annually and increased to meet short-term financial requirements. The $19 million additional, needed for 1971, will be developed by increasing dues in each region.

THE LONG-RANGE PLAN

A long-range plan for major medical facilities must span a period of at least five years to accommodate the four to five year cycle necessary for site determination, site acquisition, planning, architectural and engineering design, and construction of the najor expansion projects or new medical centers included in the plan. Since we have just concluded a major financing which will provide $80,000,000 of long-term borrowing to support a program of facility expansion estimated to cost $130,000,000, we will review some of the criteria and real considerations that entered into the longrange plans supporting this financing.

MEMBERSHIP GROWTH

The major factors affecting projection of membership growth include:

1. Historic patterns

2. Changes in demographic character

3. Penetration of sub-areas

4. General population movements 5. Increase in employer payment of dues

6. Economic conditions

1. Statistics maintained on a continuing basis over many years plot the course of membership growth by major groups of subscribers, many of which have distinctive characteristics. The demographic makeup is analyzed, not only for each region's total membership, but for the segments of the membership being served by each of the major medical centers.

2. Predictable changes in age-sex composition can be important to the detailed planning of facilities, the best example being the significant change that can occur in the need for maternity versus medical-surgical beds in the hospital located in the city as compared to the hospital in a suburban area.

3. Studies related to the concentration of our membership in major population sub-areas within each region are carried out since future growth patterns will be directly affected by the current proportion of members in the general population. Over the next five to six years a greater growth rate is predicted for the Southern California

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THE HEALTH PLAN-BUSINESS ASPECTS

Region where plan members make up 9 percent of the population than for the Northern California Region where the overall proportion is 17 percent with some sub-areas as high as 30 percent.

4. General population forecasts obtained from local planning commissions and other sources are studied to assist in identifying growth patterns in numerical terms as well as to identify where the members will live so that facilities can be developed that will best serve future members of the health plan.

5. Throughout the 25 years that the K-P program has been available to the general public, an increasing share of the dues has been paid by the group subscribers' employer or joint employer-union health and welfare trust fund. Measurable increases in the plan's share of available members of a group have been experienced since more eligible employees in the group sign up for health care benefits and other employees already in the plan add dependents. Where these increases in employer payment of dues can be predicted, the resulting increase in membership is taken into account in the forecast.

6. Last, and perhaps most important, is the consideration given to general economic conditions. The unsettled economic situation of the past two years has increased the difficulty of making accurate predictions of membership growth since every industry group has been affected to a different degree.

Our medical economics department plays an important role in translating the impact of current and foreseeable economic conditions on membership growth rates with recognition given to the great variety of industrial and public employee groups represented by our membership.

HOSPITAL BED RequiremenTS

As already noted in Chapter VI (p. 65) our standard ratio for hospital bed requirements is 1.8 per 1,000 members. This is based on a utilization rate of 525 days/1000/year, and an occupancy rate of 80 percent. These ratios are only intended to provide an order-of-magnitude test of aggregate planning for acute hospital beds in each region and for the program as a whole. The detailed planning entering into the development of specific bed requirements must deal with requirements for the many specialized services, the age-sex composition of the subgroup of members to be served, and specific utilization patterns of that subgroup.

A major factor in planning for expansion of existing facilities is the extensive remodeling that is generally involved, because of building code requirements, and that may add several million dollars to a major expansion or improvement project.

MEDICAL OFFICE Requirements

Our standard ratio of 1 office-examining room suite per 1,000 members relates directly to the theoretical ratio of 1 physician to approximately 1,000 members (Chapter VI, p. 66). As progress is made in the future in the development of physicians' assistants and other direct personnel support, the facility requirement may not change materially within the medical office area of the medical center.

From one geographic area to another, many of the same considerations entering into hospital bed planning apply also to the development of medical offices, such as the age-sex composition of the members served and the utilization of services by specialty. In a number of service areas, small neighborhood medical office buildings are

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maintained. These are included in the overall 1 to 1,000 ratio and result in a reduction in space allocated to outpatient services in the medical centers.

GOVERNMENT REGULATION of New FACILITIES

One area of governmental control, potentially troublesome to organized health care programs, is the requirement of obtaining approval from a "comprehensive health planning" agency before constructing or expanding medical facilities. No state in which the program operates has yet enacted an absolute prohibition on construction of health care facilities without comprehensive health planning approval. California legislation, which could cause construction delays, contains specific criteria for approval which are favorable to organized health care programs.

The approval of our initial requests under the California legislation recognized our obligation to provide service and, therefore, to develop facilities to serve our defined population. Recognition was also given to the comprehensive services available to our members.

FACILITY COSTS

The major factors entering into facility costs include:

Land

Architectural and engineering fees

Construction

Equipment

Engineering

The financial support for the plan depends heavily on our ability to predict the rapidly escalating costs of construction. Contingency factors are included in project cost estimates to cover changes resulting from finalizing planning and preparing contract drawings as well as changes that arise during the course of construction. But, one of the most troublesome factors that has contributed to our falling short of longrange financial targets has been the escalation of construction costs. They have shot up at an unexpected rate over the last five years and the prediction for the future is uncertain. Not only do negotiated labor rates affect the rise but there is a substantial shortage of certain construction skills.

Planning for our major construction projects has been extended from a two-year to a three-year construction time. This extension can have a serious impact on planned completion schedules and costs so it must be built into the long-range plan.

Table VII-3 shows the dramatic increase in facility costs over the past decade and the costs planned in our recently completed financing of $130,000,000 of facilities which will be undertaken over the next two years. For each 1,000 members the facility cost has risen from about $100,000 in the early Sixties to an estimated $235,000 in 1971-1972. The cost per 1,000 members is the cost for approximately 1.8 acute hospital beds and the facilities to support one physician.

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FINANCING THE LONG-RANGE PLAN

THE HEALTH PLAN-BUSINESS ASPECTS

We obtain long-term capital financing from major institutional lenders such as banks, insurance companies, and pension funds on essentially the same terms and interest rates as commercial and industrial companies of similar size and financial strength. We can borrow up to 70 percent of the appraised value of a facility exclusive of movable equipment. This is approximately 50 percent of overall project costs including equipment. All debt cannot exceed net worth which is the sum of donated capital and accumulated net income from operations.

These conditions are reasonable and customary in the long-term money market. However, it means that we have to generate out-of-program operations: (1) the difference between major project costs and borrowing, (2) the ongoing cost of replacing equipment worn-out or technically obsolete, and (3) the funds to make principal and interest payments on long-term debt. These factors create the "capital requirement" or "plus factor" that has been the subject of so much discussion since the advent of the Medicare legislation in 1965.

A permanent need for working capital is also considered a capital requirement. In our case, however, the prepayment of approximately 90 percent of all revenues in the form of subscriber dues provides all of our working capital requirement. Therefore, we do not include in our capital requirements an ever-increasing need for more working capital since, as the program grows, the prepaid revenue also grows.

Table VII-4 summarizes the capital requirements of Kaiser Foundation Hospitals and Health Plan during the four years, 1971 to 1974, when we expect to have completed the new facility program. The requirements include completion of previously financed programs and initial costs under future programs not yet planned in detail or financed. The facilities costs are gross costs, part of which will be financed from operating revenues, and part from long-term borrowing.

The Kaiser Foundation Health Plan and Hospitals are nonprofit, tax exempt corporations; therefore, capital requirements do not have to include a return on stockholders, investment.

Table VII-5 summarizes the sources from which we expect to obtain the $331 million necessary to meet our capital requirements. The $4 million from grants and other sources may be contrasted with the $125 million in loans and $202 million in cash flow from operations.