hospitals clearly affect the health resource supply and distribution requirements of non-federal facilities and services.

Third, the Planning Act should provide that alternative delivery systems, such as HMOs, are subject to no more, and no fewer, CON controls than are imposed on capital expenditures sponsored by providers in the traditional health delivery system. Therefore, we do not support that portion of the proposed amendment (set forth in Section 141) which would exempt, in most cases, major medical equipment acquisitions for the provision of services to HMO members.

At the same time, we recognize that in some instances potential problems may arise where an HMO's intent to use existing inpatient care or other facilities on a contract basis may be thwarted for one reason or another by local institutions. Thus, such an HMO may be forced to propose a capital expenditure to provide such services. To address this potential problem, we recommend that the Act's provision for "special consideration" review criteria with respect to HMO applications be maintained, with the intent of Congress strictly expressed on this matter. This provision further helps to insure that HMOs are treated equitably while, at the same, it provides the public with the opportunity to examine the merits of the individual planning processes of such entities.

Fourth, we feel that the Act should be amended to insure that a wider spectrum of entities and persons are eligible to appeal state CON decisions. Specifically, we would urge that such appellate rights be explicitly made available to third party insurors and other relevant organizations. In this way, an additional "check and balance" is introduced in the review and approval process, especially in cases where it is possible that an HSA and state agency have approved a project which is questionable in terms of need or affordability, or where the positions of the two agencies conflict. Accordingly, we recommend that the proposed

amendment (Section 132) pertaining to judicial review of CON (and other review)

decisions for "adversely affected parties" be definitionally expanded to specifically include third party insurors and any other relevant entities substantially

affected.

Fifth, we support the intent of the proposed amendment (Section 142) to the
project review procedures which would require the "batching" of similar projects
such that these projects are considered in relation to each other. We do not
believe, however, that such an amendment will insure that the necessary cost/
benefit trade-off decisions are made among projects unless some form of capital
spending limitation program is established. While batching has merit, it can
be most effective as a procedural component of, rather than a substitute for,
a capital limitation program.

Sixth, we recommend that the subcommittee address the question of the results
of SHPDA inaction on proposed projects. The Act now requires that State
Health Planning and Development Agencies (SHPDAs), in the administration of
Section 1122 programs and federally approved CON programs, ". . . provide
that only those services, facilities, and organizations found to be needed
shall be offered or developed in the State." Thus, if a state does not act
on a proposed project, de facto, the project is disapproved. We believe
this loop-hole, by which proposed projects are disapproved in the absence
of a formal review decision, should be eliminated. To address this problem,
we recommend that Section 1532 (b)(2) of the Act be amended to provide both
that no review shall take longer than one year and that consideration be given

to the imposition of financial penalties on agencies which are unable or unwilling to perform review functions as required by P.L. 93-641.

Finally, we support the proposed amendment (Section 135) requiring federally approved state CON programs to require SHPDAs to review, at least every 24 months, the progress being made on granted certificates of need and to authorize the SHPDA to withdraw certificates of need on which substantial progress has not been made. This amendment effectively addresses the problem of granted certificates of need which are not acted upon by project sponsors for indefinite periods of time during which time, substantial changes may occur with respect either to the capital expenditure required or the health services needs of the area.

Appropriateness Review of Institutional Health Services/Recertification The identification of excess capacity through the HSA and state agency appropriateness review function raises a set of problems that should be addressed by Congress. The Act now specifies that all institutional health services must be reviewed periodically to determine their appropriateness. It is not clear that health planning agencies will have, in the foreseeable future, the necessary resources, the technical competence, or the real need to review all institutional health services simultaneously or over a short time period. Accordingly, we support the proposed amendment which states that only those institutional services identified in the State Health Plan (SHP) are required to be subject to appropriateness review. We will recommend below,

however, that the services required to be covered in the SHP be modified to emphasize those particular institutional health services which bear the potential for significant and costly duplication.

It is clear that one obstacle to the elimination of excess capacity relates to the financial consequences of such elimination to the provider. The creation of financial incentives for providers to reduce unneeded operating capacity can play a key role in efforts at the local level to redistribute capital toward a more efficient delivery system. Congress should provide financial incentives which may, in the short term, stimulate voluntary provider initiatives and, in the longer term, complement any needed regulatory initiatives.

Accordingly, we support the direction of the proposed Program To Assist and
Encourage the Voluntary Discontinuance of Unneeded Hospital Services.

However, we have the following recommendations which we believe will improve the program.

First, the federal grant program should be applicable only to complete closures of hospitals, with the financial requirements of partial closures and conversions being met through the provider payment mechanism, with all payers required to recognize the fixed costs associated with conversion or partial closure. A federal grant program for full closures signals public acceptance of responsibility for existing excess capacity, much of which was constructed with public funds.

Second, we do not support the incentive payment provisions of the proposed program for hospitals. Rather, we continue to urge reforms in provider

payment mechanisms which provide positive and/or negative incentives for effective voluntary action to eliminate excess operating capacity and otherwise insure a more efficient health delivery system.

Third, the proposed formula for determing an individual hospital's debt payment should be modified such that the payment is reasonably equivalent to the institution's long term indebtedness (up to, but not exceeding, the undepreciated book value of plant and equipment assets), less the sum of the value of other assets in excess of other liabilities and the salvage value of physical plant and equipment. Further, a reasonable allowance for severance pay should be added, where necessary, to the debt payment.

A serious issue raised by the determination of an appropriate debt payment to an institution concerns the problem of guaranteeing full payment of an institution's debt when in fact such indebtedness was incurred with an associated interest rate that reflected the degree of investment risk. In other words, should financing institutions and other investors have greater assurance of debt repayment in the case of health care institutions than exists in other industries. Given the magnitude of the excess capacity problem in the hospital industry, coupled with the need to stimulate voluntary action to address the problem, reasonable recognition of long term indebtedness seems to be the most practical, short term solution.

Finally, Congress should authorize federal funding to test recertification program concepts through a limited number of state demonstration projects. Emphasis should be placed on evaluating the unresolved legal, financial and technical issues associated with the design and administration of such programs.