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As was noted here today, hospital care constitutes 38 percent of the Nation's health bill. Hospital costs have continued to rise and we think this trend to higher hospital costs is largely a result of financing by the Government programs and by private insurance on a cost-reimbursement basis.

Part A of Medicare all along has provided relatively full cost reimbursement. Because this is the case, the level of hospital costs have been above the minimum level necessary to provide hospital services of a given quality.

Throughout the Medicare period, hospitals have been expanding their staffs and investing extensively in plant and equipment, in the complete absence of cost restraints.

Two questions therefore arise as far as we're concerned. To what extent does Medicare finance these outlays and to what extent have they been cost effective?

It is clear to us that hospitals are neither competitive nor profitmaximizing. Hence, there is nothing in the economic system that would tend to automatically keep cost down, with one exception.

That exception is the inability on the part of the patient to pay for the services. To the extent that Medicare has removed this rather crude constraint, it is logical that Medicare has contributed to rising hospital costs.

The Social Security Amendments of 1972 seem to have recognized this by introducing such things as the requirement that there be excluded from "reasonable cost"-costs found unnecessary in the efficient delivery of health care services, the requirement that institutional providers establish operating capital budgets, and the requirements for institutional planning.

We think this isn't enough. It's a good start, but it isn't enough. We think that methods must be found to analyze hospital spending plans to assure that proposed outlays are going to be cost effective.

Any system which tends to reimburse all costs by a third partyand I don't care whether we are talking about the employee business expense account, or whether we are talking about hospital charges is going to have to be closely monitored if costs are going to be held to reasonable levels.

As far as I can see, the administration's bill does nothing in this respect. It would pour a lot of money into the health care system, but it would simply leave the reimbursements procedures and standards to the uncontrolled discretion of the Secretary and the States imost as if dropping the problem of rising costs in the lap of the States is a cure-all for it.

While it has been said that the administration's bill contemplates a prospective reimbursement procedure-even negotiated fees-we don't see it in the bill. The procedures and standards are not there.

As long as those procedures and standards are not there they may never be.

Overall the administration's bill will probably exacerbate the problem of rising costs. That is a problem we tried to deal with in our own bill-and in very great detail.

Thank you.

Mr. BRICKFIELD. If there are no questions of Mr. Hacking

Senator MUSKIE. I wonder if he would give us briefly the approach in your bill to control of rising costs.

Mr. HACKING. Since our bill would provide coverage only for the aged and the disabled, we didn't feel that we could try to restrain rising costs by reorganizing the delivery of service mechanisms by mandating the use of HMO's such as would be done by H.R. 1, and the Kennedy-Griffiths bill.


Instead we had to turn to perspective reimbursement procedures for institutional providers. Basically, institutional providers would be required to submit annually a budget for the year and a schedule of charges derived from this budget.

All of these would have to be approved either by the Secretary of HEW or the State rate review agency, if one exists.

On this basis, payments would be made during the course of the year subject to a year-end adjustment if, in limited cases, costs exceeded what was planned for during the year. We really tried to limit the exceptions to the general rule of nonreadjustment at the end of the year.

We want to see institutional providers plan how much they are going to spend, and for what, during the course of the year. There has to be some planning.

They can't simply be allowed to spend freely and invest wherever and for whatever they want.

And with respect to noninstitutional providers-and here we are talking primarily about physicians, optometrists, dentists, and other licensed professional practitioners the country would be divided up into regions.

Within each region, or within parts of a region, the Secretary would attempt to establish a negotiated schedule of fees for services. However, in the absence of successful negotiations, the Secretary would have residual authority to prescribe the fee schedules.

The rates that are contemplated here are rates that would provide fair and equitable compensation but in no event more than what would be provided under the "reasonable charges" standard of present law.

We are not trying to prevent providers from getting back a fair return. We are simply trying to keep down costs.

Mr. BRICKFIELD. Standards would have to be put in the administration's bill by the Congress; they are not there now, Senator. They would be left to the discretion of the Secretary and the States.

And, you know, we're worried-we'd rather see them put in the bill-not the regulations themselves but the standards that would set the guidelines.

Senator MUSKIE. Does your bill contain such standards?

Mr. HACKING. Yes. As I just indicated with respect to noninstitutional providers, for example, the standard is fair and equitable compensation but not to exceed the "reasonable charges" standard of present law.

Mr. BRICKFIELD. This is Theodore Ellenbogen, Senator. He, for many years, was the Assistant General Counsel to the Department of Health, Education, and Welfare in connection with legislation.


Mr. ELLENBOGEN. I hadn't prepared anything for this. I was just called on. If I may, I may not confine myself entirely to the constitutional aspects. I think these aspects are tied in with philosophical aspects also in this administration proposal.

I might say, though, that obviously a tremendous amount of work has gone into the development of the administration's proposal. I'm not trying to-in raising certain questions-I'm not trying to belittle that effort.

The thing that concerns me in the context of what Mr. Brickfield was saying about the questions I have raised is something that permeates the entire bill, all three parts of the program, and that is that these programs would be inoperative in States that are not certified by the Secretary of HEW under the proposed section 1861 of the Social Security Act. This holds true not only for the assisted health insurance program, which would be a federally aided State program, but also for the new Medicare program, which would be a straight Federal benefit program, and for the employee health insurance program, which is a Federal regulatory program based on the commerce clause.

In the case of the employee health insurance program, the employee is protected only if employed in a State that is certified under section


In the case of the assisted health insurance program a State plan qualifies only if the State is certified under that section and the individual must be a resident of such a State, or, if brought in by his employer, must be employed in the State. And in the case of the new Medicare program, the individual would have to be a resident of such a certified State. If he is not, the old Medicare program would apply to him.


The result of that-focusing now on the special interest of your committee in relation to the aged-is that the bill envisions the possibility-and the administration hopes otherwise, I'm sure that there may be two so-called Medicare programs operating side by side-one for the aged in States that are certified under section 1861, and one for the aged and disabled in States that are not certified.

And also, as has been mentioned this morning, I believe, the disabled would not be eligible under the new Medicare program. They could qualify under the old Medicare program if resident in a non

certified State or under the assisted health insurance program if resident in a certified State.

Even the truncated Medicare program, as proposed by the bill, would be available only in States certified under section 1861.

Section 1861 is a section which looks to the States for regulation of insurance carriers, including keeping their rates within reasonable limits for the employee insurance program.

It looks to the States for regulation of the charges or rates of institutional and other health care providers, and it looks to the States for the certification of participating providers, both institutional and noninstitutional.

I think the whole trouble of the administration's bill in this respect springs from the fact that it looks to the States for this and has no substitute in the event that a State either chooses not to participate in this regulatory program, or does not meet the Federal requirements.

To me, it is unthinkable that a straight Federal program would be created-there are two such programs here, the new Medicare program and the Employee Health Insurance Program-which relies entirely on the cooperation of the States.

It may be entirely appropriate for the States to be invited to discharge these functions even in those two programs, but if a State chooses not to, that should not result in penalizing individuals that live in such a State.

So I think it would have been essential for the bill to provide that if a State does not undertake these functions, or, having done so, does not carry them out, the Federal Government would do so. The bill not only fails to provide for this but does not even provide for decertification of a certified State that so changes its law as to be no longer certifiable, or that fails to carry out its law.

It seems to me that when a straight Federal health insurance benefit program denies to an individual participation and eligibility unless he resides or is employed in a certified State, it thereby discriminates against individuals residing in another State in such a manner as to raise a serious question of constitutionality under the Fifth Amendment, which in recent times has been interpreted by the Supreme Court to embody in effect an equal protection clause.

Apparently, the administration just shrank from the idea of having a so-called march-in provision in the bill which would operate in the event the State does not participate, even though such a provision had been included in amendments submitted by Secretary Richardson to the administration's health insurance proposal in the 92d Congress.


Again, on the last page of the bill-and this is all connected with this. pervasive problem-the bill amends the Internal Revenue Code so as to make subject to Federal employer and employee hospital insurance taxes the States of the Union and municipalities and employees thereof that are now exempted from these Federal taxes, but this is effective only with respect to wages in States certified under section 1861. In

other words, States would be taxable as employers if they are States certified under section 1861. So would municipalities in such a State.

And they would not be so taxable if the State is not certified under that section. Here again, I think a serious constitutional question is presented, and this wholly apart from the unsettled and sensitive question whether States may be federally taxed on the privilege of employment. The tax on employers is an excise tax. The Constitution of the United States, if I remember my constitutional law, requires that Federal excise taxes shall be uniform throughout the United States. With respect to the tax on wages of employees of States and municipalities, which is an income tax, the fact that the tax would be laid only on employees in States certified under section 1861 raises a question under the due process clause of the Fifth Amendment, which has in recent years been held to embody the concept of "equal protection."

So this, I think, raises serious questions.

For noncertified States, what the administration bill would do is amend section 218 of the Social Security Act, which now provides for Federal-State agreements for coverage of State and local government employees under title II of the Social Security Act (including Medicare), in return for the State's undertaking to pay amounts equal to payroll and wage taxes. Under the amendments, States that have such agreements would have to pay the equivalent of the Federal hospital insurance taxes, only if the State is not a State certified under section 1861.

The mobility of our population also poses a problem as between the so-called "old Medicare" ssytem, which would be continued for persons who reside in States that are not certified, and the new system which would be available only to residents of certified States.


Thus, as a person changed his residence from one State to another, he could move from the old Medicare system to the new one and vice versa, regardless of the State in which his qualifying wages were earned, yet wages and self-employment income earned in a certified. State would go into the new trust fund and those hereafter earned in a noncertified State would go into the old hospital insurance fund. This could create quite a problem especially for an aged person who wishes to move from a certified State in which he has earned his wages to a noncertified State.

It also might have a chilling effect on the freedom to travel from State to State to which the Supreme Court has paid much attention in recent years. I am not prepared to say that that aspect would necessarily be unconstitutional, but it raises a real doubt on that score, too, and would seem to put a heavy burden on the Government to sustain the approach of the bill against attack on that ground.

On philosophical grounds, as I indicated at first, all of these matters. are also very, very questionable in my view.

Mr. BRICKFIELD. Finally, Mr. Larry Lane on the disclosure provisions on the ownership of nursing homes.

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