As a part of reforming and restructuring the reimbursement system, State mandatory rate review of hospital services should be encouraged and financial incentives provided by the Federal Government to encourage provider cost consciousness. With inflation constraining spending on private and public health programs to the limit, only through the substantial savings that can be generated from eliminating waste, duplication, and inefficiency in the current system of medical care and from stringent cost containment features can we expect to be able to improve our national health and quality of life with a minimum of additional expenditures on the part of each citizen and his Govern

ment.

Much like the inception of medicare and medicaid reimbursement for hospital care has led to a rapid growth in the demand for such services, enactment of catastrophic-only type protection would likely create more "catastrophic illnesses" than anyone ever contemplated with an even greater increase in demand for hospital and institutionalbased services.

This would in turn likely lead to a greater percentage of our gross national product being allocated to medical care, especially the hospital component. Furthermore, such limited proposals would do nothing to alter or reverse existing economic incentives in the health industry and would simply make these incentives even more powerful.

Those that are concerned about the Federal budget deficit and the spiraling inflation this Nation faces would be well advised to think seriously about the economic and health care cost consequences that such legislation would have. The basis of national health insurance must be strong cost containment provisions starting with hospital cost containment. The key to controlling costs in any NHI program necessarily lies in Government's ability to negotiate less generous terms of provider payment for the services it purchases than presently exists. At the same time, our associations strongly believe that the only viable way to control the rise of health costs over the long term is to foster the creation and development of a variety of health care facilities throughout the urban and rural areas of this Nation so that the demand on acute-care, high-cost, inpatient hospital facilities is greatly lessened.

The promotion of health maintenance organizations, intermediate and long-term care facilities, community health centers, local outpatient clinics and home health care should lower costs by creating alternatives to treatment in acute-care hospitals.

It is clear that episodic, incidental, or acute medical care is our present national response to the health needs of the elderly as well as other segments of our population. All proposed national health insurance programs, to the extent that they ignore the acute need for a national long-term care policy and program, reinforce this inadequate and inappropriate response.

This concludes my statement. I would welcome any questions the members of the subcommittee may have.

[The prepared statement follows:]

STATEMENT OF THE NATIONAL RETIRED TEACHERS ASSOCIATION AND THE AMERICAN ASSOCIATION OF RETIRED PERSONS

I am Melvin L. Levitt and I am here today representing over 1 million members of the National Retired Teachers Association/American Association of Re

tired Persons in the State of Florida. Our Associations appreciate having this opportunity to address this Subcommittee on a subject of great concern to our nation's elderly citizens-national health insurance. We further commend the Subcommittee for holding this regional hearing and thereby encouraging a continuing and active dialogue on this public policy issue of great importance.

OVERVIEW

The availability, affordability and accessibility of quality health care services is especially important to older Americans, who while accounting for only 11.2 percent of our population represent 29 percent of our nation's total health care expenditures. While reaching the age of 65 does not signify any inevitable uniform decline in physical or mental functioning, this segment of our population is clearly more likely to suffer from multiple, chronic and often disabling conditions than any younger age group. This is obvious. Yet, many have lost sight of the growing magnitude of this problem. As longer life has truly been one of our society's most conspicuous accomplishments, in combination with declining birth rates our nation is facing relatively rapid growth in the number of older Americans and therefore the demand that will be placed on our health care delivery system. The proportion of the total population in the 65-plus age group has risen from 9.8 percent in 1970 to 11.2 percent in 1980. In the State of Florida nearly 18 percent (or over 1.5 million residents) are over the age of 65. By the year 2025 a full 17.2 percent of our population (50 million people) will be over the age of 65. And while the death rate for older Americans compares well with that for older citizens of other countries (we still rank behind such countries as Iceland and Japan), chronic conditions such as arthritis, vision and hearing impairments, heart conditions and hypertension seriously affect large segments of our elderly population.

Simply stated, we believe that there are two primary obstacles to promoting improvements in the health status of our nation. The first is the belief that all needed levels of care can be supplied through the present medical system. The second is rapidly escalating medical care costs and our country's limited resources. For the elderly, health services presently available are often overlapping, confusing, fragmented and unevenly distributed.

In comparison, the costs of health care are sharply increasing, adding to the general rate of inflation and threatening the very stability of government budgets. National health spending will rise from $206 billion in 1979 to $393 billion in calendar year 1984-up from 9.1 percent of our National Product (GNP) to 10.2 percent. Federal health care expenditures will, if unchecked, also increase from $62.0 billion in 1979 to over $110 billion by fiscal year 1984or more than 15 cents out of every Federal tax dollar for that year (under current law projections and without hospital cost containment legislation). For individual health care the cost will also rise steeply. Unless strong and effective cost containment measures are adopted, the average annual health care costs of a family of four will jump from $2,373 in 1978 to $4,064 in 1984. During the same period of time, the cost for a single aged person will rise from $2,259 to $3,868 per year.

Medicare was designed to pay 80 percent of the elderly's hospital and physician costs. In 1977 it covered only 73 percent of the former and only 55 percent of the latter. The result of this, plus escalating costs for other needed services such as nursing home care, drugs, dental care and eyeglasses (which are uncovered or inadequately covered) is that older Americans are spending more out-ofpocket for health care today than they did before the inception of Medicare.

The per capita health bill for persons 65 and over in 1979 was approximately 31⁄2 times that for citizens under 65. While Medicare picks are approximately 38 percent of the bill (when beneficiary deductibles and cost sharing are considered), the elderly are in a relatively worse position because of the extraordinary rise in health care costs not covered by Medicare. A full 35 percent of the average health bill is paid for out-of-pocket by the elderly. Private health insurance covers only 6 percent of the total per capita expenditures. In 1977 older Americans were personally responsible for 98 percent of their total expenditures for eyeglasses, 94.5 percent of their dentists' fees, 86 percent of their drugs, 51 percent of their nursing home costs, plus other professional and health services. Clearly, increases in health costs and diminishing benefits are financially constricting the elderly's access to needed health services.

There are problems with our present health care system that can only be addressed through comprehensive structural and system reforms and the passage of a national health plan. At least 22 million Americans have no health insurance coverage. Due to the variable, categorical eligibility tests employed by the States, Medicaid now covers only 35 percent of the nation's poor. An additional twenty million Americans have inadequate insurance that fails to cover basic hospital bills, physicians' services or medical tests. Also, 41 million Americans have no insurance against very large medical expenses (i.e. those that exceed 10 percent of annual income). While 62 percent of persons over the age of 65 have at least some private insurance coverage to supplement Medicare, only 20.4 percent of this group have insurance that covers nursing home care-and this protection is in most cases extremely shallow and of short duration. The greatest deficiency in all the national health insurance proposals introduced to date is their uniform failure to address the primary source of catastrophic expenses for the aged, the need for chronic, long-term care.

Because the elderly often have multiple chronic conditions, as a group they utilize medical services (both public and private) at a higher rate than younger adults. A full 68 percent of all money spent on health care for the elderly in fiscal year 1976 was spent on hospital and nursing home care. By 1978 this percentage had risen to 76 percent. Moreover, results from the most recent Bureau of Labor Statistics national survey of consumer expenditures indicates that those over the age of 65 are spending a full 73 percent more on health care than those under the age of 65.

As our remarks indicate, our Associations are very troubled by the bias of the Medicare system toward acute, episodic and institutional (hospital) based health care *** often at the expense of effective programs of health prevention and maintenance as well as ambulatory services. Quite clearly, catastrophic-only type health plans merely serve to reinforce this bias while perpetuating and broadening the impact of current problems in the Medicare system. We do not feel that it is advisable public policy to only provide protection against catastrophic hospital expenses and thereby "create" additional demand for these services, and coincidentally fill many of our presently empty hospital beds. To the contrary, the premise we work from is that Medicare is far from a model or exemplary public health care program and in fact it may be preferable to work towards improving the current program before replicating it on a widespread basis. In any event, most of the NHI proposals that have been offered for certain limits on out-of-pocket expenditures. However, most of these limits or caps are for covered services only (e.g., hospital care, physician services, etc.) and do not include significant out-of-pocket health care costs faced by the elderly for such goods and services as skilled nursing care, prescription drugs, eyeglasses and hearing aids.

The most serious benefit gap within the catastrophic health care proposals as well as the more universal and comprehensive NHI plans is the limited coverage of skilled nursing home care. The non-coverage of long-term care services makes these so-called "catastrophic" plans somewhat of a mirage for a large number of elderly Americans. Long-term care is the primary cause of catastrophic health expenses for the elderly. The lack of a well-designed long-term care system encompassing both health and social services in nursing facilities, the community as well as the home is without question the greatest deficiency in the present health care delivery structure. Catastrophic-only plans serve to perpetuate this deficiency at the very time that long-term care program costs are being driven up by high rates of inflation, emerging demographic trends and increased utilization of services. We believe that whether or not the Congress adopts a national health plan in the near future, legislation should be enacted providing for a long-term care assessment program of pre-admission screening (see H.R. 6194 introduced 12-19-79 and GAO Report No. PAD-12, 11-26-79). To the extent that such a screening mechanism is included as part of any national health insurance legislation or separately approved, it can be cost-effective in reducing needless institutionalization and encouraging the development of a coordinated range of community and home-based health services.

Philosophically, our Associations strongly oppose the statutory bias toward institutional care within our present health care delivery system and the prevalent practice of divorcing the medical aspects of health services delivery from the social services component. The need in any NHI program is for a greater degree of coordination and integration of institutional and non-institutional providers.

Today's health care system is concerned almost exclusively with the treatment of illness and acute care intervention. Yet health status is affected far more by such factors as education, nutrition, housing, lifestyles and environmental pollution than by medicine. Therefore, this nation should not be allocating, almost automatically, an increasing proportion of its scarce resources to medicine for the treatment of illness after the fact but instead should be devoting a relatively greater share of its health care resources under NHI toward the implementation of effective programs of health prevention and maintenance.

DEVELOPING COMPETITION IN THE HEALTH CARE MARKETPLACE

The health care industry is one of our nation's largest economic sectors. Since Medicare began health spending has increased at an average rate of 12.2 percent per year while the economy as a whole has expanded at an annual rate of 9 percent. This rapid growth has been fueled by the expansion of the third-party, cost-plus reimbursement system and by government subsidizing both the demand and supply sides of this growth. By 1978, third-party payments accounted for slightly over two-thirds of personal health care expenditures, 91 percent of hospital expenditures and 65 percent of expenditures for physicians services. Government subsidy of the demand side has taken place largely through the tax laws. In 1980, revenue losses to the federal government from the exclusion of health insurance premiums from taxable income, the deduction on personal income tax returns of medical expenses and tax-exempt hospital bonding will total approximatley $21 billion. Furthermore, government has subsidized the supply side (and hospital expansion) through the Hill-Burton program and by the tax exemption of hospital construction bonds.

Government subsidies to increase the supply of medical facilities and services were expected to moderate costs for health care. However, the third-part payment system has made the patient indifferent to cost, except the part for which he is responsible. Consequently, there is little restraint on the rate of increase in provider charges or the rate of increase in the costs they incur. Third-party payers reimburse hospitals for virtually all costs incurred and cover much of the fees charged by physicians and other professionals. And as we have already noted, doctors tend to overutilize hospitals, the most expensive component of the medical care system. This overutilization is promoted by the third-part payment system which tends to cover hospital services but not less costly, ambulatory services.

A number of members of Congress have introduced legislation in this Congress aimed at promoting competition (and thereby containing costs) in the health care industry, largely through reforms in the federal tax laws. Chairman Ullman's bill (The Health Cost Restraint Act of 1979, H.R. 5740) and Representative Martin's bill (The Medical Expense Protection Act, H.R. 6405) are examples of this type of legislation. Generally, these proposals would require that employers offer their employees a choice of health insurance plans, that the employer contribute equal amounts for all employees (regardless of the type of coverage the employee chooses) and some sort of cash rebate system to employees selecting a plan costing less than the basic employer contribution. These proposals would be enforced through changes in the federal tax law whereby only plans meeting certain specified criteria would remain eligible for favorable tax treatment.

While our Associations would be supportive of efforts to combine elimination of this tax break with strong cost containment measures and minimum federal standards of coverage for all Americans, we see a number of problems with this type of proposal. Given the uniqueness of the health care marketplace with thirdparty, first-dollar coverage insulating it from normal competitive forces, there is definitely a pressing need to inject a much greater degree of consumer and provider cost consciousness. However, annual copayments or deductibles on the order of 15 to 20 percent of annual family income are highly inequitable for the elderly who already pay a disproportionate share of their disposable incomes for out-of-pocket health care services. Moreover, these proposals assume that, on balance. Americans can be effective shoppers of health care. Plans such as Chairman Ullman's (H.R. 5740) make the choice of a health plan critical. In this respect, it should be noted that most Americans deeply fear medical bills and prefer paying predictable, fixed amounts for health care even if they do not fully use the benefits that are available. This preference is exemplified by the Medicare programs, where in 1978 a total of 15 million elderly Americans

spent nearly $4 billion on insurance policies to supplement their benefits under this entitlement program. The House Select Committee on Aging has estimated that nearly $1 billion of this total was wasted on overlapping or duplicative coverage.

Contrary to what the proponents of these pro-competition, consumer incentive plans would have us believe, purchasing health care is most unlike purchasing any other commodity since the consumer is seldom involved in deciding on either the form or the duration of the purchased service. tI is still the physician who makes over 80 percent of all cost decisions while the third-party reimbursement system insulates both the patient and the physician from most of the normal supply, demand and cost decisions. Understandably, very few patients, especially older patients, feel qualified to challenge the physician's decision-especially in cases of major, costly illness.

Chairman Ullman and others have pointed to the Federal Employees Health Benefit Package (FEHBP) as indicative of the wide range of choices employees would be given under the consumer choice, free market approach to health care system reform. While employers under H.R. 5740 would be required to make equal contributions to all employee health plans as well as offer pre-paid, HMOtype health plans (where available) as an option-in order to obtain favorable tax treatment of employer premiums-experience with the Federal Employees Health Benefit Package indicates that younger as well as older workers are quite willing to pay higher premiums for high option, first dollar coverage and thus avoid paying for a greater share of medical costs out-of-pocket. The Department of Health and Human Services has in fact reported that the majority of its "younger" employees still choose the more costly, high-option plans which pay for more services and have lower deductibles.

We would question, therefore, whether proposals such as Chairman Ullman's or Representative Martin's will actually expand consumer choice given the rather limited ability of most consumers to adequately judge the appropriateness and cost effectiveness of competing plans. Reliance on market forces to distribute health services could further encourage the development of dual systems of health care and exacerbate the already serious problem of maldistribution of physicians and other health care professionals. In those areas of the country where there are no viable alternative delivery systems (e.g. HMO's), many of the working poor and elderly may be faced with being able to afford only low-cost plans with substantial copayments and deductibles. Such a situation would likely preclude the health care consumer from making reasonable judgments about the quality, cost and accessibility of services.

A major attribute of both the Ullman and the Martin proposals is that they both start to address the need to move away from first dollar coverage through the tieing of federal minimum standards for employee health plans to favorable (and costly) tax treatment of employer and employee insurance premiums. Tax exclusions, deductions and exemptions need to be held out as a "quid pro quo" of sorts to encourage not only protection against catastrophic illness but also more comprehensive coverage of preventive, health maintenance and ambulatory health services.

Also contained in H.R. 5740 is a provision which would extend to Medicare and Medicaid beneficiaries the option of participating in a local Health Maintenance Organization (HMO). Our Associations strongly support efforts such as this to enroll a greater number of Medicare beneficiaries in HMO's. I might add, that we have also actively supported a similar HMO reimbursement reform contain in H.R. 3990, the 1979 Medicare Amendments. We commend this Subcommittee as well as the full Committee on Ways and Means for its prompt approval of this proposal (section 24, H.R. 4000) and look forward to passage by the full House in the near future. Concerning the HMO provisions of H.R. 5740, we might note that requiring new enrollees to live within the service area of federally qualified HMO's could prove to be counterproductive in expanding HMO membership among the elderly. HEW has estimated that as few as 48,000 new elderly individuals would be added as new HMO subscribers under such an approach in light of the fact that less than half of all HMO's are presently federally certified.

Right or wrong, the nearly universal perception then is a need for insurance (protection) before one becomes poor and not after. At first glance, prerequisites for tax-deductible treatment and increased Medicare benefits is most attractive. However, in the long run this will not alter the retrospective, cost-based reimbursement system which is the crux of the problem and which is in need of radical