research and demonstrations relating to health facilities and services. We are now in the process of evaluating program accomplishments and future requirements in the field of health services research and development, with particular attention to the program functions administered through the National Center for Health Services Research and Development which was activated only last June, pending the completion of this program evaluation. Therefore, at this time, we would recommend deferment of any legislative action to extend or otherwise amend the provisions of Section 304 of the Act.

Mr. Chairman, to achieve the goals outlined earlier, a redirected Federal effort is essential. Specifically, we would propose that grant funds be allotted to the States as a block, rather than earmarked for specific categories. A grant authorization of $150 million, limited to construction, replacement, or modernization of the most critical types of health facilities, would result in the most effective use of Federal funds. We have not included the construction and modernization of acute hospital beds because we believe these needs can better be met through a guaranteed loan program. Additionally, we recommend the removal of the existing Hill-Burton categories to provide a better balance of health care facilities in the community by assisting those kinds of facilities which have traditionally been neglected or in short supply.

The proposed redirection of grant funds would afford an opportunity whereby limited Federal resources could most beneficially influence the organization and delivery of health care. Such redirection would relieve the pressures on acute care inpatient facilities by encouraging the use of other types of facilities under conditions less expensive than the use of acute care hospital beds. While firm estimates are not available for all health facility needs, there is a known need for an additional 164,000 extended care beds, 177 additional facilities for rehabilitation, and 82 ambulatory care facilities. The well documented health problems of the Nation's disadvantaged compels a further development of the comprehensive health services currently being provided by neighborhood health centers.

We propose that 80% of the $150 million grant program be allotted to the States for these purposes on the basis of population, per capita income and the need for the construction or modernization of these facilities.

We further propose that before annual allotments are made to the States, twenty percent of the grant funds appropriated by the Congress be reserved for direct project grants to be made by the Secretary, after consulation with the States, for innovative projects or projects reflecting critical needs of national significance. Such projects would be eligible for assistance up to 90% of project cost. They could include those facilities described earlier, as well as projects of an innovative nature which would materially improve the organization and delivery of health care. The judicious use of this project grant authority would permit program flexibility in taking advantage of changing health facility relationships and would encourage new relationships among health facility construction and health services as they evolve.

Our recommendations would authorize maximum Federal support up to 66%%, except for projects serving areas of greatest financial need where the maximum would be 90%. In addition to the increased Federal share, we recommend that the applicants for the latter projects be allowed to include in their matching participation the current value of equipment, services and facilities dedicated by them to the project. This is a reasonable adjustment to provide greater opportunity for participation by those least able financially to produce local matching funds. At the same time, it recognizes the value of local participation in funding projects. In order to stimulate the maximum amount of needed health facility construction and modernization, we would add to the grant program a Federal loan guarantee authority which would guarantee a maximum of $500 million in loans annually. Within each State, the aggregate of loans to be guranteed annually would be determined in the same manner as the allotment of grant funds. All privately owned nonprofit health facility modernization or construction projects would be eligible for loan guarantees. Projects would be eligible to receive 90% guarantees on any loan. No loan, nor any combination of loan and grant under the grant program, could exceed 90% of the total cost of the project.

In addition to the proposed annual grant authorization of $150 million for health facilities other than hospitals, the $500 million loan guarantee authorization for nonprofit hospitals provides a substantially increased level of Federal support for facility construction beyond what Hill-Burton now provides. The repayment by hospitals of interest and loan principal will be especially assisted by the increasing and substantial Federal payments for depreciation under Medicare and Medicaid. Our estimates of these amounts are $295 million

32-346 0-69-pt. 1-16

for FY 1988. These payments are also available to public hospitals for repayment of tax-exempt public borrowings for the construction and modernization of such hospitals.

This Administration is pledged to consolidate, whatever possible, related programs. Last year the Congress enacted a program of guaranteed loans for the construction of hospitais. We recommend that this program, which is administered by the Department of Housing and Urban Development, be replaced by a broader authority covering the needs of all types of health facilities.

With the exception of modernization grants, the present annual appropriation for health facilities construction is allotted to the States on the basis of a formola using State population and per capita income related to the per capita income of the United States. In addition, the Hill-Barton Act requires that the per capita income factor be squared. This squaring method results in an inordinately large allotment to those States with relatively stable populations and relatively low incomes. It was adopted at the inception of the program for lack of any better method for determining definitive need for health facilities. However, a more accurate basis now exists for determining need for health facilities by type and number. We propose that grant funds and loan guarantees be allotted to the States on the basis of financial need, population and need for construction and modernization of health care facilities.

As you know, the existing Hill-Burton legislation further requires that the States, in approving projects, give special consideration to health facilities serving rural communities. Although this provision does not apply to determining the priority among facilities in need of modernization, it does cover the construction of new facilities or additions to existing facilities. The provision had substantial validity during the early years of the program when the major national health facility problem was to provide additional health facilities for rural communities. However, as the population has shifted in the last two decades from rural to urban areas, so has the greatest need for health facility financial assistance shifted from rural to urban areas. We, therefore, recommend that the rural area priority requirement be eliminated, since it is no longer responsive to the health facility needs of today.

Mr. Chairman, the extension and revision of Title VI of the Public Health Service Act now pending before this Subcommittee must be considered, and its final form determined, in the light of the fact that it is but one part, though an important part, of the Nation's overall health program. It is the point of departure in this Congress in our joint efforts to increase the efficiency, strengthen the capacity and control the alarming rise in cost of our country's health care delivery system. The directions charted by this legislation can have a positive impact on each of these areas of legitimate Federal concern far beyond the initial impact of the dollars directly authorized.

The maximum utilization of local and State health planning agencies must be included in this legislation in such fashion as to anticipate the equivalent utilization of such agencies in other Federal programs. Accordingly, each project seeking financial assistance under this title should be submitted for review and comment to the appropriate areawide planning agency created under the provisions of Section 314(b) of the PHS Act. The State Hill-Burton plan should be approved by the State health planning agency created under Section 314 (a) before awards from the State allotment are approved and funded.

We also have under consideration legislation that would provide for reimbursement through Medicare and Medicaid only to institutions whose future capital expenditures are in conformance with State and local health plans. These provisions will strengthen and reinforce the role of our local and State partners who have primary responsibility for planning their own health systems. This will be consistent with public statements in support of planning recently made by the Blue Cross Association and the American Hospital Association.

The success of the Hill-Burton program, is attributable in large part to the competence and integrity of the State agencies in formulating and implementing their plans. The States have proved that they are able to develop plans responsible to the needs of their citizens and we, therefore, propose that the statute no longer require issuance of Federal regulations setting Federal criteria that the States must follow in the formulation or modification of their State plans. The State plan would include methods of determining need and priority which provide reasonable assurance that projects would be approved in the order of need and that the purposes of the proposal would be met. In addition to uniform construction standards, we would, of course, continue to require uniform data cri

teria for use in the development of the formula grant equation in distributing grants among the States.

Mr. Chairman, we have learned a lot about the Nation's changing health facility needs in recent years, and we now have both the opportunity and the responsibility to fulfill those needs. Legislation within the substantive and fiscal framework which I have outlined to the Subcommittee would go a long way toward achieving the maximum benefits for the American people in the most efficient and effective manner. The circumstances are too compelling to warrant delay in obtaining a better health return on the dollars we are spending in the health facility field. Accordingly, I am recommending that we not wait until expiration of the current Hill-Burton authorization but that the Congress enact a redirected program along the foregoing lines effective with the fiscal year commencing July 1, 1969.

My colleagues and I would be pleased to answer any questions which you, Mr. Chairman, and the members of the Subcommittee may have.

EXHIBIT B. RESPONSES FROM COMMMISSIONER BALL TO QUESTIONS SUBMITTED BY SENATOR MILLER

Question 1. What could be done through social security to move still more aged persons off public assistance?

Answer. Clearly, Senator, any improvement in benefit levels will help. Many of the changes which I discussed earlier would also be of help in reducing the need for public assistance. These changes will undoubtedly be considered by the new Advisory Council.

Question 2. Mr. Commissioner, you talked about the problem of early retirement. How many people are now drawing reduced benefits?

Answer. At the end of 1968, 5 million retired workers were getting reduced benefits.

Of the men who started getting retirement benefits in 1968, 54 percent got reduced benefits. Of the women, 71 percent got reduced benefits. At the end of last year the average monthly benefit of men who did not start getting benefits until age 65 was $115, as compared with $95 for those who took benefits before age 65. One reason for the lower benefit for those who come on the benefit rolls early is, of course, the reduction in their benefit amount that is made to take account of the longer period over which the benefits will be paid. Another reason is that the benefits of men who come on the rolls before age 65 are nevertheless based on their average monthly earnings up to age 65-their average earnings (and consequently their benefit amounts) are reduced because years in which they had no earnings are included in the computation of the average. Question 3. What is the status of the social security trust funds? Is there enough money in the funds to help support an increase in monthly cash benefits at this time or would contribution rates have to be increased?

Answer. Contribution rates would not have to be increased to support the benefit increase that the Administration has recommended. Under present law income to the old-age, survivors, and disability funds is expected to exceed outgo over both the short and long range. Over the long range, the income to the two funds is expected to exceed outgo for present-law benefits and administrative expenses by 0.53 percent of taxable payroll. This long-range surplus makes possible the 7-percent across-the-board increase in benefits being recommended.

As you know, the Administration is also recommending a liberalization in the retirement test and an increase in the contribution and benefit base from $7800 to $8400. If the several recommended improvements were enacted, the social security cash benefits program would be in close actuarial balance.

According to the most recent estimate, based upon revised assumptions which include higher-than-anticipated increases in per diem rates and utilization rates in hospitals and extended-care facilities, the hospital insurance trust fund has an actuarial deficit of 0.29 percent of taxable payroll. Under the Administration bill, this imbalance would be corrected.

Question 4. I understand that retirement benefits for women are figured only up to age 62 but the benefits for men are figured all the way up to age 65. Wouldn't men get higher benefits if they were figured only up to age 62 the same as for women?

Answer. Changing the law to provide for shortening by 3 years the period for computing benefits for men in retirement cases, making it the same as for women, would result in an increase in the retirement benefits payable to men and on the benefits payable to their wives and, in the case of those living beyond age 62,

to their survivors. Men forced to retire before age 65 now suffer a double reduction-their average earnings (and consequently their benefit amounts) are reduced because years in which they had no earnings are included in the computation of the average, and the benefits based on those earnings then are reduced. Shortening the period by 3 years would not only get away from the double reduction that occurs under present law for men who retire before age 65; it would liberalize the benefit computation for all men, including those retiring at age 65 or later, and would also make payable more quickly the higher benefits that will become possible under the $7,800 contribution and benefit base that was provided under the 1967 social security amendments. The reason why this happens is that with a computation period shorter by 3 years than it would be under present law, fewer years prior to the effective date of the new, higher base would have to be included in the computation and the average monthly earnings would consequently be higher.

This would be an equitable change in the social security law, and would generally result in higher benefit levels. I do not think there are any considerations against the change except that it would increase the cost of the program-by about 0.10 percent of payroll. It thus needs to be evaluated in terms of priority against other changes which would affect costs. The new Advisory Council will undoubtedly consider this change in relation to other desirable changes.

EXHIBIT C. RESPONSES FROM COMMISSIONER BALL TO QUESTIONS BY
SENATOR PROUTY AS SUBMITTED BY SENATOR MILLER

Question 1. Commissioner Ball, for at least the last five years, I have attempted to have legislation passed which would either eliminate or significantly liberalize the "retirement test" or “earnings limitation." Do you feel that in this period of almost full employment there can be any justification for the continuation of the carnings limitation?

Answer. The present retirement test is not satisfactory. A problem that concerns us greatly is the effect the test has on incentives for people to work. Under the present test it is possible for people at certain earnings levels to actually have less income-that is, social security benefits plus earnings after taxes-than if their earnings from work were lower. It is not right that people who do additional work or take a job at higher pay are disadvantaged. The test should be revised so that people would have an incentive to earn more and so that the more they earn the more income they will have.

The President has recommended a change to accomplish this. Under present law, $1 in benefits is withheld for each $2 of earnings between $1680 (the annual exempt amount) and $2880, but above $2880, $1 in tax-free benefits is withheld for each $1 of earnings. Under the President's recommendation, only $1 in benefits would be withheld for each $2 of earnings above the annual exempt amount regardless of how high the earnings might be; there would be no point at which $1 in benefits would be withheld for each $1 of earnings.

The President has also recommended that the exempt amount be increased from $1680 to $1800. This change would update the test to take account of the increases that have occurred in earnings levels.

As to whether there can be any justification for the continuation of the earnings limitation in a period of almost full employment: I think the issue is not, as the question implies, primarily a matter of the test encouraging people to retire so as to make jobs for other people. Instead, it is a matter of the basic structure of the program. I thing there is much to be said for the idea of a. program which partially makes up for income lost as a result of retirement, which the present program does, as against a program which pays benefits merely on the basis of the attainment of age 65. And this would be true regardless of whether we were in a period of full employment or not. Moving over to a straight annuity program instead of a retirement program would increase program costs by about $2%2 billion for the first year and by a larger amount in future years. The increase in benefit payments would go largely to people who are still earning as much as they ever did.

The retirement test provisions are of course continually under study and this is one of the areas that the new Advisory Council on Social Security will no doubt examine.

Question 2. Considering the overall strategy behind the workings of our income maintenance system do you feel that the time has perhaps come for increasing the minimum social security payment to a level adequate for eradicating poverty?

Answer. Social insurance in the United States and in most other countries is designed as a partial replacement for earnings that are lost when an individual retires in old age or becomes disabled or dies or is unemployed. The fundamental concept is that the program provides insurance that partly makes up for this loss, and the amount of benefits paid is a proportion of past earnings. This is a very powerful idea, and throughout the world has made a very substantial contribution to social and economic security. But the concept does have limitations. In some instances a person who reaches old age has worked only sporadically during his life, and then at very low wages. In a system with limited coverage, he may have worked only part of the time in covered employment. The question arises whether, in seeking a minimum income guarantee for all older people, it is wise to rely entirely on the method of social insurance, as I have described it, or whether it is better, for people with little or no covered earnings, to supplement the social insurance approach through some other system-possibly through an improved public assistance program, perhaps operated by the Federal Government, or possibly through some other general-revenuesupported system.

If the minimum payment under the social insurance program were to be increased so that in all instances the payments were high enough to eradicate poverty, a considerable proportion of the contributions of workers and their employers would go to people who have worked little under the program and contributed very little to it, with a consequent reduction in payments to regular, long-term workers.

There seems to be quite general agreement that the level of social security benefits for a regular, full-time worker at low earnings should be at least sufficient so that he would not have to apply for assistance, even if his social security benefit is his only income. The minimum payment now does not go to people who worked regularly under the program at low wages (at an average wage of $200 a month the benefit for the retired worker is somewhat over $100) but goes rather to people with relatively short periods of covered employment. Social security was designed from the beginning to play a major role in the prevention of poverty among low-income workers, and there has always been a weighted benefit formula favoring those with low earnings. The thought was that although benefits should be essentially wage-related-that is, higher benefits for those who earn more and pay higher contributions-the replacement of past earnings should be at a higher percentage for low earners than for middle or high earners, since the low-paid worker and his family have less margin for reduction in their income than does the worker with average or above-average earnings.

Represented in your question is one of the basic theoretical problems on the benefit side of the program. How far should we go with a weighted benefit formula and with a minimum benefit within the framework of contributory social insurance? And how much of the job of providing a minimum income guarantee to all people is compatible with the social insurance approach?

Question 3. If we should increase the minimum social security benefit to an adequate level, do you feel as a matter of policy it would make more sense to utilize general revenue financing or social security trust fund financing?

Answer. As I indicated in my answer to question 2, the underlying issue here is whether a minimum-income guarantee should be provided under social security to everyone regardless of the amount of his earnings under the program and regardless of the extent to which he has participated in the program. I believe it is important to preserve in social security the concept of partial replacement of past earnings. Over time, with the nearly universal coverage that social security has, we will get away from the present situation in which many people are getting low benefits because they had less-than-full coverage in the past and therefore get benefits based on spotty or irregular records of covered employment. I believe that an improved social security program following the principles of contributory social insurance, with the benefits continuing to be related to earnings, will very greatly reduce the extent of poverty among older people in the future. I also believe that if, beyond that, a minimum income in old age were guaranteed-either through social security or a supplementary system-a good case can be made for financing from general revenues the amounts by which the payments exceed what can be justified in the wage-related contributory system. Question 4. Mr. Ball, I have been equally concerned over the years about those individuals who through no fault of their own were never covered by the social security system and consequently are unable to receive benefits when they reach age 65. It was for that reason that I introduced an amendment to the Tax Ad