Blue Cross, the nation's largest hospital insurance carrier, experienced a record decline in hospital use last year and predicts the downward trend will continue.

Among Blue Cross subscribers, the rate of hospital admissions fell 7.4 percent last year. Time spent in the hospital dropped 10.5 percent, from 671 to 602 days per 1,000 subscribers. Days in the hospital fell more than admissions because the average length of a stay also declined to a record low of about six days.

"This is the biggest drop ever," says Bernard Tresnowski, president of the Blue Cross and Blue Shield Association, which coordinates 90 Blue Cross and Blue Shield plans with some 80 million subscribers around the country.

"There's been a trend of declining hospital use, but it's been a gradual, modest one. In 1984, it just . . . choonk!" Tresnowski says, chopping downward through the air with his hand.

Hospital use, as reflected in a variety of measures, is on the steepest decline in two decades. Health experts attribute the drop to many factors, including federal cost-containment policies, expanded outpatient and home care, new competitive pressures within medicine and a growing emphasis on preventive health.

In Tresnowski's opinion, the biggest reason is a "fundamental change" in attitude toward institutions and medicine.

"There was a time when we were enamoured of the health care establishment," he says. "We looked to the institution as the solution to all our problems." Now people, particularly the young, seem to have "turned away from technology and the institution."

"I go to the Y at 6 o'clock on Saturday morning," Tresnowski says, "and the place is jammed. These people are saying, 'I'm not going to let that happen to me. I'm going to control my life. I'm not going to throw myself at the hands of the medical establishment.' "

Wariness toward institutional medicine works hand in hand with growing pressure from cost-conscious government and employers to discour-age hospital use, which accounts for nearly half of the nation's health care bill.

Until a few years ago, most economists agreed that the health industry was an economic anom- aly where traditional forces of supply and demand did not apply. The suppliers of medical care -- doctors -- also determined medical demand by ordering tests, diagnosing illness and deciding what treatment was appropriate.

Moreover, the way hospitals and doctors traditionally have been paid, no one had much incentive to worry about cost: Not the patient, whose hospital care was usually covered by insurance; not the hospital or doctor, who would be reimbursed regardless of cost; not the insurance company, which simply kept raising premiums to cover rising costs.

Most care was actually purchased not by patients or doctors or hospitals but by so-called third-party payers -- insurance companies and, in the case of Medicare and Medicaid, government.

But when hospital costs rose through the roof in recent years, these third-party payers finally woke up to the crisis.

"There's been a fundamental change in the behavior of the buyer," says Tresnowski.

The federal government last year changed Medicare's traditional payment system to give hospitals an incentive to curb costs. Medicare now classifies all patients by diagnosis (in one of nearly 500 diagnosis-related groups known as DRGs) and reimburses hospitals a set amount for each case. If the hospital can keep its cost below that amount, it pockets the difference.

Employers, who now spend about $100 billion a year on employe health benefits, also woke up.

After years of being hit with double-digit increases in health insurance premiums, corporations "finally got fed up," Tresnowski says. "They educated themselves. They formed business coalitions. They said, 'Let's ask a lot of questions and demand information.' They put tremendous pressure on us Blue Cross and Blue Shield for data."

And they began to redesign their benefits plans to build in incentives to control cost.

Many boosted deductibles (the amount employes must pay out of their own pockets before insurance coverage begins) and copayments (the portion of a covered expense that employes must pay).

They discovered alternatives to the traditional fee-for-service health plans, such as health maintenance organizations (HMOs), which provide comprehensive coverage for a prepaid fee. HMOs have been found to reduce health care costs substantially, mainly by a reduction in hospital use.

Some set up preferred provider organizations, or PPOs, by signing an exclusive contract with a hospital or group of doctors to provide care for the company's workers at a discounted price.

A third strategy, called "managed care," combines many of these tactics. The leading example of managed care is the new General Motors Corp. contract that took effect last month. Covering 800,000 workers, the contract gives employes three choices: an HMO, a PPO or "managed care," a traditional insurance plan with toughened controls. These controls include:

* Pre-admission review. All admissions except maternity and emergency must be submitted to a panel of doctors and nurses. If hospitalization is deemed appropriate, coverage is approved. But if the panel decides that another setting -- such as a doctor's office -- would be more appropriate, both doctor and patient are notified. The decision can be appealed, but the penalty for a hos- pital admission considered inappropriate is a substantial reduction in benefits.

* Concurrent review. During hospitalization, reviewers visit the hospital to make sure continued hospitalization is necessary. If not, hospital coverage may be reduced.

* Discharge planning and home care. The nurse reviewers may consult with the attending physician to determine a more appropriate setting for the patient and arrange for the safe transfer of the patient. If the patient chooses to stay in the hospital longer than is deemed medically necessary, further benefits will be withheld.

* Mandatory second opinion. Subscribers must get a second opinion for certain operations. If the second opinion differs from the first, the patient can seek a third opinion or have the surgery. But if no second opinion is sought, coverage is reduced.

* Ambulatory surgery. About 100 procedures, such as tonsillectomy and cataract removal, are covered only if the operation is done on an outpatient basis, in a doctor's office or clinic.

Before contract negotiations began last year, GM and the United Auto Workers agreed on the general principles of controlling costs and giving workers a choice of health plans. Then, says Tresnowski, they agreed to put the pressure on the insurance carrrier, Blue Cross and Blue Shield.

They went to the Blues and demanded, in return for 800,000 subscribers, a 10 percent discount off the premium.

"We're talking about a $1.4 billion annual premium by GM," Tresnowski says. "That's a big piece of business. We guaranteed the 10 percent and then we got lucky" -- other factors were helping to curb the rise in health costs.

Ford Motor Co. and Chrysler Corp. have adopted similar controls, and Tresnowski said he expects these plans to become models nationwide.

Given the downward trend in hospital use and the changing economics of health care, Tresnowski says, "you have to think about the future of the hospital industry in the United States."

Although the number of hospital beds declined last year by about 11,000, occupancy rates nationwide fell by 7.8 percent to 66.6 percent, the lowest since the American Hospital Association began keeping records in 1963. Nearly every major city in the country has excess hospital beds, built before DRGs and competitive forces began restructuring the health care industry.

"We grew up with building a hospital system under the assumption of growing demand and new technology," Tresnowski says. "All of the forces and incentives are changed.

"I remember when you used to go 10 days in the hospital for cataract surgery. Now you go in, have the surgery and get up and go home."