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Needless to say, any major changes of this magnitude would require careful study and public debate. Although the hour is late and the need for action urgent, it would still be wise to establish a top-level public/private bipartisan Medicare commission, alongside the Social Security Commission, to come up with a specific legislative program in time for the next Congress

it is not understood by the public and is sometimes mistaken to mean payment in advance. It may also be argued that "prospective rates" really are more flexible, at least when applied to hospitals, in that they include "incentive schedules" which may vary up or down within a defined range, depending on the institution's performance. But this is not a good enough reason to use an ambiguous term. The question of incentive rates versus single rates is one to be determined as part of the suggested negotiations (see below). Even if a range were adopted, rather than a single rate, the range would have to be fixed. Any misunderstanding on the point of predictable prices must be avoided.

2. Fixed rate schedules could, of course, be drawn up in various ways: unilaterally by the consumers or payors, unilaterally by the providers, or through collective negotiations between the two groups. The latter is clearly the most equitable and in line with the general trend of decision-making in highly industrialized democratic societies. A negotiated approach to rate-setting was recommended by the author as early as 1977" and has recently received new support. The choice of Prof. John Dunlop of Harvard University, an internationally respected labor economist with a strong commitment to negotiations as a basis for decision-making, as chairman of a national health coalition, announced in January 1982,50 suggests an increasingly receptive atmosphere for such an approach.

Inevitably, there will be some thorny questions as to precisely who will represent the two groups for this purpose; what changes would be needed in current anti-trust legislation; what geographic areas would be served, etc. American experience with the gradual historical development of collective bargaining law and procedures, culminating in the National Labor Relations and Taft-Hartley Acts should be helpful, as well as the experience of many other Western democratic countries with respect to the health field. In many respects, however, the American situation is unique and participants in this development must be prepared to pioneer.

3. With a field as large and diverse as health care, it should be obvious that no one method of payment will prove most appropriate. Not only will there be differences between institutional and individual providers but within each of these groups, depending on the legal form of specialization, etc. For example, a case could be made for paying hospitals on the basis of per diem rates, per case rates, single rates, incentive rates within a range, etc. In the case of physicians, the schedules could be based on fee-for-service, using relative value scales for comparative weighting, salary, capitation, or some combination thereof.

In general, it would appear that fee-for-service is probably most appropriate for specialized episodic acute care; salary or capitation for continuing primary care. But these too should be matters for negotiation. There is no more basis for accusing fee-for-service of being the major cause of the current health care inflation than for fearing that capitation will result in inadequate care. Whatever the method of payment, professional self-regulation within a context of public accountability remains the ultimate guarantor of patient protection. One of the major goals of the negotiated approach to provider payments is reaffirmation of the necessity of professional selfregulation and the development of instrumentalities to make it effective

Other points which should be explored under this heading include nondeterrent cost-sharing, especially for long-term care, possible limits on payroll tax deductions for health insurance benefits, possibly some limits on the use of exotic technology-an extremely difficult but impossible-to-ignore topic, and some administrative reforms such as consolidation of Parts A and B of Medicare.

It is a cliché to point out that the term crisis means both danger and opportunity. The danger in the present Medicare situation and the possibility of irreparable damage both to it and to the nation's health is clearly with us. But so is the opportunity for a whole new approach to health care and health care policy. For years we in the U.S. have been criticized for being the only advanced democratic nation on earth without some form of national health insurance or national health service. Perhaps there was some Providential reason for this seeming lag. Perhaps we can prove the truth of the Biblical proverb, "The first shall be last and the last shall be first."

As we meet here today and debate the future-not only of Medicare but of our national health policy in generalnote that we are the first Western nation to do so in the wake of four historic developments: (1) after the genetic code has been broken, (2) after average life expectancy has passed the Biblical norm of "three score years and ten," (3) after chronic disease has taken the place of acute disease as the primary cause of morbidity, and (4) after medical science and technology have achieved the capability to give or to withhold life to specific patients in specific situations such as ESRD. These are developments no less important in terms of health care policy than the discovery of atomic fission and fusion in terms of international relations. Apropos that discovery, Albert Einstein said, "The splitting of the atom has changed everything save our mode of thinking, and thus we drift towards unpar. alleled catastrophe...."

Let it not be said of us as we scurry about thinking up vouchers, "indemnities," "Long-Term Care IRAs," and other gimmicks, that we were so preoccupied with rearranging the chairs on the Titanic that we missed altogether the great icebergs descending upon our health care system chronic disease, chronic disability, and the costs related thereto. On the contrary, let us recognize chronic disease for the challenge it is and set about learning how to prevent it, how to postpone its disabling consequences; how to live and function with it, when it cannot be prevented; how to die from itwith as little suffering as possible; and how to pay for it

Perhaps the most realistic diagnostician of our current health care problems is also the most optimistic as to future possibilities. Dr. James Fries of Stanford Medical School has coined the phrase "The Rectangular Society" to indicate one in which most people live, without much serious disease or premature death, to a ripe old age of about 85. I conclude with his words

"As chronic diseases are postponed, and as physiological aging is slowed by research and lifestyle changes, natural life will become more prevalent. Personal choice will come to play an increasingly dominant role in health, in the pre vention of premature disease, and in the favorable modification of those aspects of aging that are plastic. ...

"What will life be like in a rectangular society? There will not be an accumulation of debilitated elderly people exhausting the medical and social resources of the society On the contrary, granting a stable birth rate, there will be comparable numbers of vigorous, healthy people in each of the first seven decades of life, followed by a decline in the number of individuals between 70 and 100. Although death and debility resulting from congential defects and accidents will always be present, and some will consciously choose not to live out a natural life through personal choice of self-destructive behavior patterns, most persons in the rectangular society will succumb to relatively short-term illnesses in the final senescent period of life, natural death will occur at the end of natural lite.

"The rectangular society does not present a utopian society free from problems. The medical care delivery system must undergo a fundamental upheavalinternists will become geriatricians, and acute care hospitals will be occupied primarily by geriatric patients. Costs of medical care can fall it heroic treatment methods are abandoned in favor of more rational therapeutic approaches at home, in hos pice and respite care units, in convalescent facilities, and in modified nursing homes. When people develop cardiovascular or malignant diseases in their 80's and 90's instead of their 50's and 60's, therapeutic and diagnostic decisions should be more humane and less dramatic. Natural death cannot be avoided, no matter the expenditure

"The integration of the older members of society into the mainstream of life is the challenge for the coming era Free from the agony of lingering illness, filled with the vigor of natural life, the rectangular society represents a great hope for the fulfillment of human potential.'s!

In rethinking Medicare to meet future needs, I suggest we look to such a vision of the future, rather than retreat to the obsolete constraints of the pre-Medicare past.


15. Health US. 1981, . 111.
16. US Department of Health and Human Services. Arterio

sclerosis 1981. Report of the Working Group on Artena
sclerosis of the National Heart, Lung, and Blood Institute

(Bethesda, MD NIH Publ. No 81-2034, 1981), 0.4 17. Richard Freeman, President, National Kidney Foundation,

Wntten communication, June 8, 1982 18. G. Hirshman, Acting Director, Chronic Renal Disease Pro

gram, National Institutes of Health, Bethesda, MD. Orai

communication. June 16. 1982 19. JK Iglehart, Medicare s Uncertain Future." New Eng.

land Journal of Medicine 306 (May 27, 1982). p 1311. 20. Health-U.S 1981. p 148 21. D. P. Rice, Director. US Department of Health and Human

Services. National Center for Health Statistics. Wntten

communication. February 8. 1982 22 James Marshall American Dental Association, Oral com

munication, May 20. 1982 23. Arteriosclerosis 1981, op.cit. p. 31 24 MB Breckenndge. "The Senile Dementias. A Dual Per

spective on Their Epidemiology' in A A Somers and D R Fabian, The Geriatric Imperative: An Introduction to Gerontology and Clinical Geriatrics (New York City

Appleton-Century-Crofts, 1981). p. 156. 25. Somers and Somers. Doctors, Patients, and Health Insur

ance (Washington, DC. Brookings Institution, 1961). Chap

1. "The Paradox of Medical Progress 26. Health-U.S. 1981.p. 212 27. Medicare and Medicaid Data Book, op.cit., p. 15. 28 Medicare Hospital insurance and Supplementary Medical

Insurance Trust Funds, 1982 Annual Trustees Report 29. Health Care Financing Administration, unpublished data,

June 10. 1982 30. C. P. Fisher, "Differences by Age Groups in Health Care

Spending," Health Care Financing Review 1 (Spring 1980),

p. 76.

1. U.S. Department of Health and Human Services, Health

Care Financing Administration, unpublished data, June

10, 1982 2 New York Times, April 20, 1982. 3. R. M. Gibson and D. R. Waldo, "National Health Expen

ditures, 1980," Health Care Financing Review 3 (Septem

ber 1981). 4. Alan Gregg, Challenges to Contemporary Medicine (New

York: Columbia University Press, 1956). 5. AR. and H. M. Somers, "Coverage, Costs, and Controls

in Voluntary Health Insurance," Public Health Reports 76 (January 1961). pp. 1-9, excerpted in Somers and Somers, Health and Health Care: Policies in Perspective (German

town, MD: Aspen Systems Corp. 1977). pp. 125-126. 6. H. M Somers, "Medicare and the costs of Health Ser

vices," in W. G. Bowen et al., eds. The American System of Social Insurance (New York: McGraw-Hill, 1968), pp. 119-151; excerpted in Somers and Somers, Policies in

Perspective, op.cit., pp. 170-177. 7. D. N. Muse and D. Sawyer, The Medicare and Medicaid

Data Book, 1981 (Washington, DC: Department of Health and Human Services, Health Care Financing Administra

tion, Publ. No. 03128, 1982), p. 61. 8. Ibid., p. 60. 9. Health - U.S. 1981 (Washington, DC: Department of Health

and Human Services, Publ. No. (PHS) 82-1232, 1982), p.

184. 10. U.S. Department of Health and Human Services, National

Center for Health Statistics, unpublished data, June 14,

1982. 11. Health-U.S. 1981, p. 177. 12. L. B. Russell, Technology in Hospitals: Medical Advances

and Their Diffusion (Washington, DC: Brookings Institu

tion, 1979). 13. S. A. Schroeder, “Medical Technology and Academic

Medicine: The Doctor-Producer's Dilemma," Journal of

Medical Education 56 (August 1981). p. 636. 14. L. A. Fingerhut, “Mortality Among the Elderly," in Health

U.S. 1981, p. 17.

31. Ibid., p. 87
32. Medicare and Medicaid Data Book, op.cit. p. 13
33. US Department of Commerce Bureau of the Census,

Statistical Abstract of the U.S. 1980 (Washington, DC:

1980). p. 6. 34. Medicare and Medicaid Data Book, op.cit., p. 27 35. J. Lubitz and R Deacon, "The Rise in the incidence of

Hospitalization for the Aged, 1967-1979 Health Care

Financing Review 3 (March 1982), p. 25. 36. American Hospital Association, Hospital Statistics, annual

editions (Chicago: The Association) 37. A. A. Scitovsky. "Changes in the Use of Ancillary Services

for Common Illness." in S. H. Altman and B. Blendon. Eds., Medical Technology: The Culprit Behind Health Care Costs? (Washington, DC: U.S. Department of Health, Education, and Welfare, DHEW Publ. No. 79-3216, 1979). pp.

38. T. W. Maloney and D. E. Rogers, "Medical Technology,

A. Different View of the Contentious Debate Over Costs."
New England Journal of Medicine 301 (December 27,

1979). pp. 1413-1419.
39. Lubitz and Deacon, op.cit., pp. 37-38.
40. Gibson and Waldo, op.cit., p. 8.
41. U.S. Bureau of Labor Statistics, CPI Index for All Urban

Consumers, April 1982, Table 2. 42. 1981 White House Conference on Aging. Report of Tech

nical Committee on Health Services. J. C. Beck, Ch. (Washington, DC: Government Printing Office: 1981-720

019/6963). p. 41. 43. A. R. Somers, "Social, Economic, and Health Aspects of

Mandatory Retirement," Journal of Health Politics, Policy. and Law 6 (Fall 1981). pp. 542-557.

44. H. B. Curry, et al., Twenty Years of Community Medicine

(Frenchtown, NJ: Columbia Publishing Company, 1974). 45. LB Wescott, "Hunterdon: The Rise and Fall of a Medical

Camelot," New England Journal of Medicine 300 (April

26, 1979), pp. 952-956. 46. A S Relman, "The New Medical-Industrial Complex,"

New England Journal of Medicine 303 (October 23. 1980).

pp. 963-970. 47. J. K. Iglehart, "Health Policy Report: Health Care and

American Business." New England Journal of Medicine 306 (January 14, 1982), pp. 120-124.

48. R. Pear. "Hospital Industry Proposed Fixed Payments for

Medicare Patients." New York Times, April 20, 1982. 49. A. R Somers, "The Case for Negotiated Rates." Hospitals

(February 1, 1978), pp. 49-52. 50. "Coalition Seeks to Curb Rising Health Care Costs," New

York Times, January 15. 1982. 51. J. F. Fries and L. M. Crapo. Vitality and Aging: Implications

of the Rectangular Curve (San Francisco: W. H. Freeman & Co., 1981).

About the Author

Anne R. Somers, Protessor of Community Medicine, University of Medicine and Dentistry of New Jersey-Rutgers Medical School, is an author, teacher, lecturer, and widely acknowledged authority on health care organization and financing. She has published numerous papers in these fields and written Hospital Regulation: The Dilemma of Public Policy and Health Care in Transition: Directions for the future. With her equally famous husband Herman Somers, she coauthored two books in the fields of financing and hospital organization: Medicare and the Hospitals, Doctors. Patients and Health Insurance and Health and Health Care: Policies in Perspective. More recently Mrs. Somers has also published articles on disease prevention and health promotion. Mrs. Somers is a member of the Institute of Medicine, serves on a number of editorial boards, and is an honorary member of the American College of Hospital Administrators,

About Government Research Corporation

The Government Research Corporation (GRC) is a private professional organization established in 1969 to provide independent analysis. forecasting and counsel on government politics and public policy issues

GRC provides direct and specific public policy research and analysis to clients to assist them in making decisions that appropriately reflect government developments in Washington

GRC publishes the National Journal, a weekly publication providing in-depth coverage of Washington policy making, which has twice won the National Magazine Award for Specializeu Journalism in 1979 and for Reporting in 1981 GRC also publishes Opinion Outlook, a twice monthly report on the latest public opinion survey relating to government, the economy, business, labor, foreign affairs and domestic social trends

GRC also sponsors seminars and conferences on a wide variety of public policy issues Since 1976. GRC's annual Leadership Conference on Health Policy has provided a foruin for policy makers to meet and debate health issues with participants from labor, business, the professions, academia and state and local governments.

Mr. RINALDO. Thank you very much for a very well-thought-out presentation.

Ms. Goldschmidt.

STATEMENT OF FAITH GOLDSCHMIDT Ms. GOLDSCHMIDT. Mr. Chairman, members of the committee, I am Faith Goldschmidt, a health economics research specialist, of the New Jersey State Department of Health's DRG project.

New Jersey acute-care general hospitals instituted the diagnosis related group (DRG] system as a means of hospital reimbursement for all patients, all payers in 1980.

Our hospitals were phased in over a 3-year period and all had implemented DRG's as of December 1, 1982.

We feel that the DRG system has the following benefits:

One, it is a clinically based system. The allocation of resources is equitable and based on a specific product, a DRG. Each hospital is reimbursed according to the complexity and volume of the cases it treats, not according to a fixed rate per day.

Two, hospitals and physicians are encouraged to use resources in an efficient manner by focusing on the DRG as the product plus the use of payment incentives for efficiencies and disincentives for inefficiencies. The DRG system provides valuable information for the hospital's management to communicate with its medical staff.

The physician is the resource consumer, because he or she admits the patient, orders all services and discharges the patient. Using a variety of reports, hospital management can and does work with physicians to more effectively and efficiently manage their patients. Three, in New Jersey, there is equity across all payers. Therefore, the massive cost shifting that occurs elsewhere in the country to cover discounts and uncompensated care does not occur in New Jersey. Four, uncompensated care, which primarily includes indigent care, is one of the hospital's financial elements.

By including uncompensated care as an element of cost, well managed inner-city hospitals can concentrate on effectively providing quality medical care to all patients regardless of social or economic status.

The following information might be of interest also: One, the DRG construction. The 467 DRG's used in New Jersey were constructed by Yale University and the National Steering Committee. There was a great deal of clinical input into these new DRG's, and they are meaningful both in a medical and a financial sense. New Jersey also uses seven categories to describe patients atypical in length of stay or resource consumption. The patients are called outliers and they are billed charges. Two, data requirements. There must be extensive computer capability for the hospital, the fiscal intermediary and for those who set the rates. There must also be the ability to check and correct DRG assignment and claims, and generate and interpret reports.

Three, implementation. Based upon New Jersey's experience the phasing in of the hospitals over a 3-year period was very important. It is not until a system is actually in place and being used, that many of the problems will be discovered.

Four, education. There is great need for education about the system at all levels, regulators, payers, hospitals, physicians, and patients.

Five, independent monitoring. There also is need for an independent monitoring system to insure that quality of care does not deteriorate because of the incentives to reduce expenditures. The department has seen no hard evidence in New Jersey that the DRG system has had any negative impact on the quality of care, and we can discuss that later if you would like.

Six, new technology. New technology and procedures are addressed in New Jersey by the Rate Setting Commission, either by a specific clinical appeal process or by the certificate of need system. Periodically, rebasing the system also will help incorporate advances in medical practice. Therefore, such advances are not stifled.

Seven, flexibility. Allowance should be made for States to have the flexibility to implement their own systems, provided such systems will meet the Federal objectives of cost containment. Of particular importance is to allow these States that are inclined to incorporate all payers to minimize cost shifting to do so.

In New Jersey we have found that management of the DRG system by the local State government allows rapid response in identification of problems, gathering of information, identification of solutions and implementation of solutions. Rapid resolution of problems encourages cooperation and leads to a better system.

In conclusion, we feel that the DRG system has been successful in containing health care costs in New Jersey. Former Secretary Schweiker's report shows that, in 1981, New Jersey was lower in percentage increase in cost per capita and in cost per adjusted admission than both the national average and the other regulated States. Now that all New Jersey acute-care general hospitals are under the DRG system and extensive data is being collected, we hope to demonstrate even greater savings in health care.

(Material submitted for the record by Ms. Goldschmidt follows:)

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