If such crudely drawn classification systems are allowed to go into effect and if states are allowed to use averages or medians within these groupings as the method for determining payments, then we will not have moved forward to a system of cost related reimbursement at all. The original problem that this Committee set out to solve that of overpayments as well as underpayments to facilities-will remain as serious as it has ever been.

We recommend that legislation be enacted to prohibit class-based payment rates which are not reasonably related to cost.

State medicaid administration

S. 3205 contains several provisions aimed at improving state administration of Medicaid.

One provision would require states to complete eligibility determinations for Medicaid applicants in a timely fashion; another would require faster and more efficient processing of approved Medicaid claims.

We strongly support both of these provisions.

We are opposed, however, to the provision calling for re-determinations of Medicaid eligibility on a six-month basis rather than on an annual basis as now allowed. We believe that the financial resources of the elderly do not change so frequently or drastically as to warrant re-determinations on a sixmonth basis.

HEW regulations, saving provisions

S. 3205 would require HEW to give the public 60 days instead of just 30 days to comment on regulations of a non-urgent nature. We support this and other provisions in the bill aimed at opening up the regulation-development process. Current rules and regulations, particularly in the field of long term care, have evolved largely without the involvement of people most directly concerned with the day-to-day operation of the programs, whether providers, professionals, or

consumers.

Among the most confusing sets of regulations pertaining to long term care now in force are the utilization review standards. There are rife with internal contradictions and inconsistencies. They are so poorly written and hard to understand that we believe a complete rewrite job is in order. Following a re-write, efforts should be made by HEW, in the form of special meetings and workshops in every region of the country, to explain and interpret the utilization review regulations to professionals in the field, many of whom now feel utterly perplexed by utilization review procedures currently in effect. Termination of HIBAC

S. 3205 proposes the abolition of the Health Insurance Benefits Advisory Council, which advises Congress and the Administration on Medicare and Medicaid matters, on the ground that it has outlived its usefulness.

We do not oppose the abolition of this Council, but in its stead call for the creation of a new, broadly-based council to advise on matters relating to long term care.

Earlier in our testimony we pointed out that Federal policies in long term care are not likely to improve unless and until Administration officials responsible for developing the policies are better informed as to the characteristics of the long term care population and the variety of institutions serving them. A broadly-based, high level advisory council on long term care, drawing from professionals, providers, and consumers, could serve a useful educational function and make a significant contribution to Federal policies in long term care which are now developed either in a vacuum by Federal bureaucrats or under pressure from special interest groups with narrow interests.

It is noteworthy that the current national advisory council for PSROS contains not a single physician knowledgeable about or experienced in dealing with the special health problems of the elderly. This is so, despite the charge given to the PSRO Council-to help develop criteria for determining "medical necessity" of services provided through Medicare funds, almost all of which go to the elderly, and Medicaid, which accounts for at least 60 percent of the long term care expenditures in the country.

There is no apparent effort being made by HEW to remedy this gap in representation on the PSRO Council in the appointments now under consideration, and there is every indication that the national advisory council to be created pursuant to the National Health Planning and Resources Development Act will also ignore representation from long term care.

We urge that the HIBAC Council be replaced by a special advisory council on long term care to give those concerned with policies in this area a more effective voice and channel of communication.

Procedures for Determining Reasonable Cost and Reasonable Charge: Disclosure of Ownership and Financial Information

S. 3205 contains a provision which would require prior review and advance approval whenever a provider arranges for a consulting, management, or service contract involving payments exceeding $10,000 and lasting twelve months

or more.

We believe that this provision could result in homes getting bogged down pointlessly in awaiting state approval for contract arrangements necessary and appropriate to the provision of needed services, and we recommend that it be deleted from the bill.

We are also concerned about the effects of Section 1133 (a) (2) of the bill, which calls for the setting of ratios relating to direct and indirect overhead costs and direct service costs. The full ramifications of this provision are unclear to us, but we hope that it will not work to the detriment of central management units which provide consultative services to homes and thereby increase their efficiency and quality of services.

SUMMARY OF RECOMMENDATIONS MADE BY THE AMERICAN ASSOCIATION OF HOMES FOR THE AGING, PRESENTED BY DAVID C. CROWLEY, EXECUTIVE VICE PRESIDENT We support the intent of the administrative reorganization provisions of S. 3205, but urge caution that the distinction be made between the need for uniformity and consistency in policy interpretation and the need for recognition of diversity and heterogeneity in the characteristics of the population and living arrangements of those served by Medicare and Medicaid.

Section 30 of S. 3205 relates to methods for determining payment rates under Section 249 of P.L. 92-603, reasonable cost related reimbursement under Medicaid. HEW Regulations on Section 249 issued July 1, 1976, delay the implementation of a cost related reimbursement system until January 1, 1978. We believe that the delayed implementation date for Section 249 regulations on cost related reimbursement under Medicaid is illegal and we recommend that legislation be enacted to require retroactive adjustments in payments as a means of correcting this delay.

We strongly oppose the class-based method for determining payments to skilled nursing and intermediate care facilities under Medicaid and recommend that legislation be passed to prohibit class-based rates which are not truly cost related. We support the provisions in S. 3205 aimed at improving state administration of Medicaid, particularly those sections relating to the time frame within which eligibility determinations and payment for approved claims must be made. We oppose the provision calling for six-month, rather than annual, Medicaid eligibility determininations and payment for approved claims must be made. that the financial resources of the elderly do not change so drastically or frequently as to warrant the six-month re-determinations.

We support the provisions in S. 3205 aimed at opening up the regulationwriting and policy-development processes to the public.

We do not oppose the abolition of HIBAC, but propose in its stead the creation of a new, broadly-based advisory group to advise the Congress and the Administration on matters relating to long term care. We point out that high-level national advisory councils typically ignore representation from the long term care field, and cite the PSRO Advisory Council as one example.

We believe that the provision in S. 3205 requiring prior review and approval of provider contracts exceeding $10,000 and lasting twelve months or more will result in homes getting bogged down and curtail efficient management. We recommend that it be deleted from the bill.

We recommend that the Senate Committee on Finance hold another round of hearings relating specifically to those aspects of Medicare and Medicaid which relate to long term care as distinguished from acute care provided in the hospital setting.

Senator TALMADGE. Our next and final witness for today is Brenda Ballard, director, employee benefits, National Association of Manufacturers.

You may insert your full statement in the record and summarize it as you see fit.

STATEMENT OF BRENDA BALLARD, DIRECTOR,

EMPLOYEE

BENEFITS, NATIONAL ASSOCIATION OF MANUFACTURERS

Ms. BALLARD. My name is Brenda Ballard and I am director of employee benefits for the National Association of Manufacturers. In this capacity, I am responsible for all legislative and regulatory issues related to corporate employee benefit programs.

I appreciate the opportunity to appear here today on behalf of the NAM'S membership of over 13,000 manufacturers and other business. organizations to comment on S. 3205. The NAM is extremely concerned about the problem of escalating health care costs. This is an issue of such complexity that there simply is no single solution. Therefore, our approach has become one of trying to identify specific areas within the broad cost problem and then offering recommendations on these specifics.

In our recent statement on health care costs before the Council on Wage and Price Stability, we stated that we would like to move away from quoting "percent of gross national product" spent on health as an indicator of the seriousness of the problem. The fact that in fiscal year 1975 we spent 8.3 percent of GNP on health really doesn't tell us much. The point is we really don't know how much of our resources we should be spending on health. Maybe 8.3 percent is too much; maybe it is not enough.

The NAM believes that a better approach to discussing the cost problem is in terms of how much of that 8.3 percent is being used inefficiently and what part of that resource allocation is being wasted. We believe that the lack of adequate quality and cost controls in the medicare and medicaid programs contributes to the overall escalation of health care costs, and that too much of the money being funneled into these programs is being wasted.

On June 30, our task force on health met to evaluate S. 3205. This was our first meeting devoted to a consideration of this bill and our objective was to reach a general policy position on the bill and to plan for more extensive, in-depth study of its provisions. I would like to present to you today our initial general conclusions in regard to

S. 3205.

The Need for Reform.-In all its statements on national health insurance legislation, the NAM has emphasized the fact that, before any national health insurance bill is enacted, an accurate and complete assessment of costs and financing must be made and a workable system of quality and cost controls must be included. In his remarks on introducing this bill, the distinguished chairman of this subcommittee stated that "The basic kinds of administrative and payment changes (contained in S. 3205) are absolutely necessary prior to any expansion of the Federal role in providing more health insurance to more people. That is true regardless of which national health insurance proposal is ultimately adopted. Without basic changes in the way we administer and pay for hospital and medical care under medicare and medicaid, any expansion would be an open invitation to fiscal disaster."

The NAM supports the objectives of S. 3205 as stated by Senator Talmadge, since these objectives are consistent with our belief that reasonable cost controls in the medicare/medicaid programs are an absolute prerequisite to any national health insurance legislation.

We commend the drafters of this bill for the conscientious and apparent intensive research into the problems of the medicare/medicaid programs and, while we anticipate refinement of the bill as it moves through the Congress, the NAM views S. 3205 as a good first step toward long-overdue medicare/medicaid reform.

The Methodology of S. 3205.-The approach taken through S. 3205 does not seem to us to establish unreasonable constraints on the health care industry. The incentive system which would be applied to hospital operations is compatible with the NAM's position on health care containment. In regard to reimbursement of physicians, we question whether or not the allowance of $1 will really provide any great incentive to doctors to accept assignments.

However, we have no strong objections to establishing regional limits on increases in prevailing charge levels. We believe that it is not unreasonable to apply some restrictions on variances of charges for a given procedure in a State.

When compared to the administration's proposal of establishing ceilings for increases in payments to health care providers, the NAM sees the approaches embodied in S. 3205 as being more flexible and much preferable.

Cost of Reform Versus Savings. Our initial reaction to the administrative reform established by S. 3205 is one of tentative support. But before giving full support to the recommended changes, we would want to be sure that the cost of reform does not exceed the savings which would result. The establishment of an office of Central Fraud and Abuse Control is a very good feature of the bill, providing the cost of enforcement does not exceed the savings gained. We would suggest that, since S. 3205 stresses incentives for efficient performance, the budget and staffing of this office, after the first 3 years of operation, be tied to a percentage of the recoveries achieved through that office. The Spill-over Effect.-NAM support of S. 3205 is contingent upon language being added which would prohibit health providers from passing on to the private sector any excess expenses which result from tightened cost control under the medicare and medicaid programs. In other words, industry cannot support a bill which leaves open the possibility of greater costs being shifted onto the private sector.

In his remarks upon introducing S. 3205, Senator Talmadge noted that preliminary work is being done on such a provision. We trust that the subcommittee will act quickly to remedy this flaw in the legislation which would have an adverse effect on the thousands of insured health care plans provided by NAM member companies.

The NAM Task Force on Health will continue its evaluation of this important and complex bill. We also plan to study the testimonies presented at these hearings in order to synthesize the various views of other groups, such as the insurance industry and the health care providers.

We know that some clear choices must be made in regard to these two Government-sponsored health care plans. Either we do something

to curtail cost escalation, we cut back on benefits, or we pay higher taxes. Of these three choices, the first is certainly the most difficult but it is by far the best.

The NAM fully recognizes the need for medicare/medicaid reform and will continue its support of the specific reforms embodied in S. 3205, provided language is added to prevent any shifting of costs to privately sponsored health care plans.

Again, I appreciate the opportunity to present the NAM views, general as they are at this point, on this important bill and I will entertain any questions you may have.

Senator TALMADGE. Thank you very much for your very constructive statement. I want to thank the National Association of Manufacturers for its support of S. 3205, as well as your helpful comments on ways of improving the bill.

You indicate that the incentive allowance for physicians to accept assignments might fail in its objective. Does the NAM have any recommendations as to a substitute approach which would be

noninflationary?

MS. BALLARD. We have discussed this to some extent and the one general recommendation that was tentatively agreed upon was that you might tie it to a percentage of the doctor's income through the program, income rather than a dollar per head.

Senator TALMADGE. Submit that proposal to the staff, will you?

Ms. BALLARD. Yes; we will be submitting detailed comments as we are able to formulate them.

[The material referred to above follows:]

The National Association of Manufacturers recommends that the physicians' allowance designed to encourage doctors to take assignments be tied to a doctor's billing under Medicare and Medicaid. The allowance should be relatively small, .5% or 1% perhaps. This approach, we feel, would be a greater incentive since it would serve to avoid the possibility of doctors accepting for assignment only patients in relatively good health and refusing those patients who might require substantial amounts of the doctor's time.

Senator TALMADGE. This concludes this phase of our work on medicare and medicaid reform. It is clear that the hearings this week have developed a comprehensive and forthright record with which to work. Starting Monday, with the help of the Congressional Research Service, we will carefully review the testimony. Many worthwhile changes have been recommended to us. I am anticipating incorporating most of these in the revised version of S. 3205.

It would be a mistake for anyone to conclude that these hearings have been simply an exercise. Hopefully in this Congress, and most certainly early in the next Congress, we will legislate and we will legislate, I believe, along the lines of S. 3025.

These hearings now stand in adjournment subject to the call of the Chair.

[Whereupon, at 9:25 a.m. the hearing adjourned, subject to the call of the Chair.]