We list a number of factors for high costs in hospitals which the committee has heard before, but after this long list of cost-escalated factors, we still believe that the Nation's hospitals can hold the line on inflation given the proper incentives for sound innovative management. Now to do this we must first rid the system of its prime culprit-retrospective cost reimbursement.

In order to preserve and encourage a pluralistic system, and because there has been inadequate experimentation to date with prospective rates, even though this committee has called for such experimentation, and because we don't believe that we know the one way to do it yet that can be mandated, we favor several prospective rate systems being developed by hospitals, insurance carriers and other interested parties under Federal guidelines, and that the Nation's hospitals should have the option of selecting from those approved systems.

We recommend that any national health bill reported or drafted by this committee contain a hospital payment provision similar to that of the Kennedy-Mills bill with five modifications outlined.

The first is the prospective rate should be negotiated and developed in the private sector by providers, third-party payors, and other interested parties, which could include employers and employees as under Senator Fannin's bill. These should be negotiated under Federal guidelines and the guidelines should be set forth in the legislation as they are in the Kennedy-Mills bill.

The Secretary should then be empowered to disapprove agreed upon systems only upon finding that the methodology is inconsistent with the Federal guidelines.

We also believe that the Federal guidelines should encourage competition among similar providers by using payment methods under which similar rates are established for hospitals grouped on size, scope of service, and geographical areas.

The rate of return for investor-owned institutions is discussed in item No. 4 in our testimony. We believe it should be related to the fair value of total assets rather than equity as under medicare. The attraction of private risk capital is essential to meet the modernization needs of the hospital industry estimated at over $20 billion, and to replace substandard, antiquated beds. This can only happen if the basis of returns is related to investments of comparable risk, a fact recognized under the Kennedy-Mills bill.

However, the rate of return on equity under medicare would certainly prove to be far below any return for investments of comparable risk. The definition of equity under the medicare regulations is inconsistent with the meaning of that term under generally accepted accounting principles. In order to avoid any continuation or expansion of the equity based concept, we recommend that the phrase "total assets" or "fair value of assets" be substituted for the word "equity" in the reimbursement section of any national health plan.

We also strongly endorse the concept of incentive management payments contained in the Kennedy-Mills bill with certain modifications as listed in No. 5 of our testimony.

We oppose the concept of State rate regulation which is contained in the administration bill and other bills. We oppose this concept because we believe the creation of a new bureaucracy at the State level would be costly, because the expertise does not now exist upon the State level, and because we do not think from a rate point of view, hospitals should be treated as public utilities. We believe this would lead to even higher inflation as had been the case historically with other utilities.

In addition, 7,000 hospital budgets and 20,000 nursing home budgets to be considered individually by State utility commissions would produce administrative chaos, in our opinion.

Mr. Chairman, we thank you and the members of the committee for considering these views, and we appreciate this opportunity to appear before you.

The CHAIRMAN. Thank you very much for your very thoughtful suggestions, Mr. Bromberg.

Do you have any further questions?

Senator BENNETT. I would just like to ask one about a subject in which I have a personal interest. Has your association taken any position on the PSRO program?

Mr. BROMBERG. Yes, Senator Bennett, we have. We testified before this committee during the consideration of the old H.R. 1, and supported quite strongly the concept of PSRO's with some recommendations for change, some of which were adopted by the committee. We are also encouraging our membership, the medical staffs of our hospitals, as much as possible to not only support the concept, but to get in and participate in the development of PSRO's, so that it truly is a physician program as opposed to a Government-run program. Dr. Berson, our president, has sent such a letter to our entire membership in the past 2 months.

Senator BENNETT. That makes me very happy. I would appreciate sceing a copy of that letter.

Dr. BERSON. We will be happy to submit it.

[The letter referred to follows:]

Memo to Administrators of Investor-Owned Hospitals

From: Samuel L. Berson, M.D., President, Federation of American Hospitals Subject: Implementation of PSRO

Date: May 29, 1974

A PSRO Newsletter with an attached questionnaire was mailed to all members on April 3, 1974. The purpose of the questionnaire was to determine the degree of involvement of member hospitals in the implementation of PSRO legislation. Specifically, those polled were asked to indicate whether or not their hospital had someone on the medical staff presently working on PSROS on either the state or local level. As of May 23rd, the Washington Office had received a total of 72 responses: 37 responded affirmatively; 35 responded negatively.

Although I was pleased to note that a slight majority of the respondents indicated involvement in professional standards review, I would like to personally encourage all hospital administrators to see to it that one or more members of the medical staff is actively involved in the implementation of PSRO. Although the involvement can be on either the state or local level, it is extremely important that all administrators and their medical staffs make every effort to understand the legislation and help shape its development, so that professional standards review is administered by physicians themselves and not by the government.

The PSRO National Advisory Council will be meeting again on April 22 and 23. They are presently at work on finishing up details on the draft manual and are also busy preparing a second manual on reimbursement which may be available at the next meeting.

If your hospital has someone on the medical staff presently working on PSROS on either the state or local level, please send in their names and addresses as soon as possible. It is important that the Federation be aware of any such activity at these levels in order that we may compile an overall picture of FAH involvement in PSROS.

Please fill out the following and return it to the FAH National Offices, Suite 810, 1101 17th Street, N.W., Washington, D.C. 20036.

YES We have someone working on PSROS.

NO We do not have someone involved with PSROs.

Zip

If your response to the above is "yes," please give the name and address of the individual/s. If you plan to become involved, please indicate that fact and list a contact person if possible.

Name and address of individual/s:

Senator FANNIN. Thank you, Mr. Chairman. Doctor, I have just one question.

In your statement, you talk about rate of return for investorowned institutions projected for members be related to fair value of total assets. And I can understand that, but I just heard something that was very disturbing to me, and of course this would not pertain to the type of hospital you are talking about. This would be a county hospital at Watts. I think you know the Watts area in Los Angeles. It's costing the county $300 a day per bed.

Mr. BROMBERG. Senator, there is one trend in our industry which you might be interested in, which seems to have also had a direct relationship with the operation of county hospitals. Not only does our industry represent institutions which own and operate over 1,000 hospitals, but in the last two years we have signed our industry has signed-more than 60 management contracts with nonprofit institutions, many of which are county hospitals, to in effect, have them join the management team of a central, multifacility corporation. Senator FANNIN. Well, it is gratifying to me to hear that because can see how well it is completely out of hand. We have had reports I haven't checked it out, so I certainly can't say for sure that this is true-but you do have a number of contracts now where you are operating hospitals for municipalities?

I

Mr. LEVITAN. Senator, over the last few years, as Mr. Bromberg has pointed out, management companies in the industry have made their expertise available for nonprofit hospitals and municipal hospitals, and brought to bear the same principles in management as have been successful in our own institutions which we own, and that trend seems to be accelerating in the industry, and a lot of the activity has been very meaningful.

Senator FANNIN. Thank you very much. Thank you, Mr. Chair

man.

Senator PACKWOOD. To the best of your knowledge, does the American Hospital Association support your position in negotiating prospective rates?

Mr. BROMBERG. Senator Packwood, I am sure you will hear directly from that organization. My understanding of their position. is, that they support the concept of State rate regulation as contained in Congressman Ullman's bill in the House, H.R. 1, which I don't believe has a counterpart in the Senate.

We sharply disagree. In fact, that is one of the few issues we really have a major disagreement on with that group. As I tried to point out at the end of our testimony, we oppose the concept of public utility or State rate regulation. However, I believe since the introduction of the Kennedy-Mills bill, I do not believe that organization has issued any statement necessarily opposing this move, so we are hoping that they have an open mind, and I hope you will ask them that question.

Senator PACKWOOD. Secondly, do you have any suggestions for cost controls on the noninstitutional providers?

Dr. BERSON. The only type of control of course, that comes to my mind on cost control for physicians is setting some type of rate schedule on rate fees, which as you know, the American Medical Association is so strongly opposed to. Other than that, I have no suggestions as to cost control for physicians.

Senator PACKWOOD. That is the same kind of fee schedule you would not want imposed on you? You wouldn't want a State regulating body or national health agency that might be imposing fees! Dr. BERSON. No, I think we are in favor of negotiating some sort of prospective fee.

Senator PACKWOOD. Well, as I understand your testimony. what you are asking for is prospective negotiated rates, which I suppose you could call a fee schedule. It's not the same as the administration's concept of a fee schedule where the bill provides that the States will tell you and the physicians what you will receive.

Mr. BROMBERG. If I may try to clarify that point, I think what we are opposed to is Government-set fees. If a fee or a charge could be negotiated in the private sector under Federal guidelines we would accept that approach because the fee is not being set, it is being negotiated in the private sector and we would favor that. We have no official position on how physicians should be paid and we would not want to get into it, but I would just note that the Kennedy-Mills bill has a similar approach which in effect says physicians fees, a fee schedule should be negotiated, to be set by the State medical society, not by the Government. That would be one possible approach, and I'm not sure I know the position of various groups on it, but we have no official position on how physicians should be paid.

Senator PACKWOOD. The Justice Department is suing the Oregon Association for setting a fee schedule for lawyers. I am not sure we would want to try it for doctors.

I have no other questions.

The CHAIRMAN. Thank you very much for your statement here today, gentlemen. It will be very helpful to us.

[The prepared statements of Messrs. Bromberg, Levitan, and Dr. Berson follow:]

PREPARED STATEMENT OF MICHAEL D. BROMBERG, DIRECTOR, NATIONAL OFFICES, DR. SAMUEL L. BERSON, PRESIDENT, AND MARK S. LEVITAN, PRESIDENT-ELECT, ON BEHALF OF FEDERATION OF AMERICAN HOSPITALS

Mr. Chairman and Members of the Committee, my name is Michael D. Bromberg, Director of the National Offices of the Federation of American Hospitals. With me are Dr. Samuel L. Berson, President of the Federation and Executive Medical Director of Kings Highway and Flatbush General Hospitals in Brooklyn, New York and Mr. Mark S. Levitan, President-Elect of the Federation and Senior Vice President of American Medicorp, Inc., a hospital management company headquartered in Bala Cynwyd, Pennsylvania. We would like to thank the Committee for this opportunity to appear and to present the views of our organization on pending legislation to establish a national health insurance program.

The Federation of American Hospitals is the national association of investorowned (proprietary) hospitals. There are presently more than 1,000 acute care short term investor-owned hospitals in the United States, representing approximately 25% of the non-government hospitals. In some areas of the country investor-owned facilities represent up to 100% of the hospitals serving the population. These hospitals have served to prevent a health crisis in a number of areas by filling a gap in construction of hospital beds in both those communities which were too poor to finance tax-exempt hospitals, or in those new towns which grew so rapidly that they could not keep up with the health needs of exploding populations.

Not only do investor-owned hospitals deliver quality health care, they also pay a substantial amount in taxes, amounting to $110 million in federal and state income taxes and $27 million in local property taxes last year alone. It would cost approximately $5 billion in public funds to replace the beds built by investor-owned hospitals.

Investor-owned hospitals have been founded by local citizens to fulfill urgent community needs, but more significantly to the scope of these hearings is the fact that investor-owned hospitals have been able to operate at a rate commensurate and competitive with the rates of other hospitals. This is true even though proprietary facilities pay taxes and are subject to the same requirements for licensing, accreditation and certification for Medicare, Medicaid and various Blue Cross programs as are other hospitals. Not only are our hospitals committed to providing quality health care at reasonable cost but we believe the free enterprise sector of the hospital field can make a significant contribution in the development of a more effective and efficient health care delivery system.

According to the latest available statistics there are more than 85,000 beds in investor-owned hospitals located in 42 states and the territory of Puerto Rico. Member facilities of the Federation include hospitals owned by practitioners: groups of physicians, businessmen and community leaders, and hospital management corporations.

While there is no single national health insurance program or bill endorsed in its entirety by our organization, we believe that certain features of each bill under discussion merit individual endorsement. The Federation supports the general philosophy of the Administration bill (S. 2970), in that it relies on the already existing strengths of the private sector, using insurance companies as private enterprises rather than fiscal intermediaries. In addition to this, we strongly endorse the concept of multiple prospective payment methods for hospitals with quality management payments, as advocated in S. 3286, sponsored by Senator Kennedy and Congressman Mills. These two proposals incorporate many of the ideas and provisions of other national health in