culty is, Mr. Chairman, that in some cases competition exists when a hospital goes out to find a pathologist or a radiologist. Clearly today with the increase in the output of medical schools there is more competition than there has been before. On the other hand, there are some places where there is very little competition because it is a place that is not attractive to physicians, but there is and there will continue to be as the output of medical schools increases-there is an opportunity for a selection process.

From the conversations that I have had I do not get the impression that the situation is so dominated by the physician that we need this kind of drastic solution to interfere with the contractual arrangement. I would ask Dr. Gehrig-himself a physician-if he would have any comments to add to that?

Senator TALMADGE. Dr. Gehrig.

Dr. GEHRIG. Senator, I think the only thing I would add, and I think Mr. McMahon did allude to it, not being a lawyer I am not knowledgable of your "bona fide" discussion, but I do think that there are areas where competition exists such as the major urban areas, but I would think that we would be less than frank to say that there is not a real problem when you get to some rural areas where there is not a pathologist. In fact, a great deal of effort has to be made to bring one in, but I think it is equally wrong to suggest that in every rural area that lacks that type of manpower that there is necessarily not a good-faith effort to make an appropriate arrangement.

Now, this may be an example where the hospital has, if you will, less leverage; but I do believe that these physicians by and large are responsible people and while they need to be reimbursed, I just think that one cannot go from a bad example to saying the same thing about all of them. In sum, I think we do have a difference in competition when you look at the Johns Hopkins Hospitals of the world versus Ravenna, Nebr., where we have difficulty getting just a general practitioner.

Senator TALMADGE. Senator Dole.
Senator DOLE. No questions.

Senator TALMADGE. In 1975 the American Hospital Association Annual Report in criticizing arrangements to give gross departmental charges states as a matter of policy, and I quote:

This arrangement, however, provides no incentive to the physician for affecting economies and it brings about the rather incongruous situation in which any pertinent charge to patients, even one made solely to cover increased departmental operating expenses, accrues to a considerable extent to the financial benefit of the physician.

In general, the American Hospital Association policy statements are quite critical of percentage arrangements.

I have two questions. What are the advantages to the hospital of the percentage arrangements and when did the American Hospital Association change its formal policy?

Mr. MCMAHON. First, Mr. Chairman, let's be very clear about the nature of that statement. It was not a policy statement; it was a guideline statement and it is so labeled. I have the printed copy here in front of me. What we were doing in that statement through a broad consultative process was to provide information to hospitals for their

contractual arrangements with the hospital base affiliated specialist and in the general policy, for example, because what you were reading from was in the technical part of comments on certain kinds of contractual provisions, we said in the general policies part that the American Hospital Association recognizes that good medical care is being provided in hospitals by physicians under many forms of mutual agreement.

We believe it is the right and responsibility of hospitals to develop with physicians contractual terms on the basis of local factors that are fair to patients and provide high quality care.

The whole thrust of that guideline document, Mr. Chairman, is to recognize that there are all kinds of ways to deal with the compensation of hospital affiliated specialists from leases, which we did not embrace either, to percentage arrangements, either gross or net, and we attempted to point out all the way through what some of the problems were with different kinds of arrangements, even salary arrangements in areas where there is opposition by much of the medical profession to any salary arrangement whatsoever. This was an informational document provided to hospitals wherein we set out all of the advantages and disadvantages, but against a general policy that the way that a hospital deals with problems like this is a matter for the governing board, for its management and for its medical staff, to determine.

Senator TALMADGE. I am reading from page 41 of your annual report of 1975, line 3, under the lease provision. "A lease or concession arrangement is in view of the American Hospital Association generally not desirable."

Under what circumstances would lease arrangements be desirable? Mr. MCMAHON. Well, as the thrust of the statement indicates, Mr. Chairman, our problem with the lease arrangement is that under certain kinds of leases the hospital has given up complete control over the operation of the laboratory, let's say. On the other hand, a lease might be so detailed that it would be possible to retain as a condition of termination of the lease, certain kinds of control.

I don't know what the impact of other contractual activities would be, but we are concerned and I would say this with respect to the lease, that one of the things that concerns us about section 22, Mr. Chairman, in the outlawing of percentage arrangements in any case, is that there might be a total lease of the laboratory in order to provide services not on a percentage arrangement but on an outright lease which then would avoid the restrictions of section 22 but would leave the hospital in a worse position from the managerial point of view than would the percentage arrangement that exists at the present time.

Senator TALMADGE. Earlier I indicated that we have had conversations with a substantial number of hospital administrators and others on this matter of hospital-associated physicians. The large proportion in fact indicated that they are not free to manage in their relationships, that in fact they were negotiating under the gun; have little bargaining room.

For example, in one hospital in New Jersey, the pathologist who was directly reimbursed $121,000 agreed under the terms of the con

tract to be present and in person at the hospital during the first 2 weeks of the term of the agreement. I wonder what it would have cost to have kept him there for a month.

Is this an example of the hardnosed bargaining by hospitals? Mr. MCMAHON. Mr. Chairman, that is an example of what happens under any kind of circumstances when you are trying to cover 7,000 health care institutions. I said in my statement that there are instances which are not appropriate. I think you and I would both agree that there are instances across the spectrum where with that many institutions, things have not been done as well as they might. I can't defend that kind of arrangement. It is the reason why we published that guideline document, Mr. Chairman, to give hospitals, their administration and their governing boards, some insight to the way that things can be done. We think there are ways to bring some arm's length bargaining into the proposition. As a matter of fact, we suggested the involving of the rest of the medical staff because the rest of the medical staff is really more the consumer of the laboratory service, for example, than the hospital itself or the patient because that is where the ordering begins.

Now, involving the medical staff in these deliberations, as we suggested, is one way to make sure that there is an appropriate tradeoff between the possible competition for availability of other kinds of services, and equity of compensation treatment among the members of the medical staff. So that while there are cases here and there, and I am surprised that with the people that have talked to you that none of them have said to me that our position is inappropriate because our position has been widely known in the hospital field for the past month or so on this section.

Nobody has come to me and said, "This is completely inappropriate. We need that kind of statutory help in order to manage our institutions."

Senator TALMADGE. Would you be agreeable to a joint poll of the hospitals?

Mr. MCMAHON. Mr. Chairman, if that is the way you want to proceed to provide additional information, yes. We will offer our help, Mr. Chairman, in any way that we can help.

Senator TALMADGE. The staff?

Mr. MCMAHON. Indeed we will, sir.

Senator TALMADGE. Thank you very much. We appreciate your contribution, Mr. McMahon.

[The prepared statement of Mr. McMahon follows:]

STATEMENT OF THE AMERICAN HOSPITAL ASSOCIATION

SUMMARY

I. The American Hospital Association represents more than 7,000 health care institutions, including most of the hospitals in the country. In this testimony we comment on Sections 2, 4, 6, 7, 8, 10, 11, 12, 22, 23 and 40 of S. 3205. We suggest a number of modifications to the bill as introduced and propose several additional provisions.

II. Introduction.-At the outset, we discuss the overall problem of rising health care costs and enumerate the major factors that have contributed to increases in the cost of hospital care. Further, we examine some short-term and long-range proposals for institutional reimbursement; we oppose arbitrary

reductions in the federal budget or limitations on hospital reimbursement which do not appropriately consider the health care promised to beneficiaries and the costs of providing the services.

III. Section 10.-We review proposals for hospital reimbursement outlined in section 10 and make several specific recommendations regarding them. We propose a provision for the participation of Medicare and Medicaid in certain state rate review programs.

IV. Section 2.-We support organizational changes along the lines contained in this Section. However, we recommend the authorization of a new position in the Department of Health, Education, and Welfare-an Under Secretary for Health to whom both the Assistant Secretary for Health and the Assistant Secretary for Health Care Financing would report.

V. Section 4.-We strongly support the provisions to improve administration of the Medicaid program, including federal assistance to states in this regard. VI. Section 6.-The provisions of this Section would assist hospitals by easing the administrative burden of multiple reporting systems which are costly and inefficient, and we support this Section.

VII. Section 7.-The AHA has been concerned with the process of regulation development and implementation, particularly the provision of an appropriate opportunity for public participation and comment. We support the requirement for a minimum 60-day comment period for proposed regulations under this program.

VIII. Section 8.-We believe that the use of expert, nongovernmental advisors has contributed significantly to the development and implementation of these federal health programs. We therefore recommend that either HIBAC be continued with increased responsibilities, or a new health insurance policy advisory council be formed.

IX. Section 11.-We support the provision for transitional allowances for the conversion or retirement of underutilized facilities. However, we propose a modification for this Section which would provide a commitment by government for such assistance in advance of the conversion or retirement action.

X. Section 12.-The AHA supports the increase in the rate of return on net equity for investor-owned hospitals. We also recommend an adequate margin of revenue over expenses for not-for-profit institutions.

XI. Section 22.-The AHA opposes this section as it would interfere with and circumscribe the rights and prerogatives of hospital management and governing boards to choose the form of contract for hospital-associated physicians. We recommend the collection of relevant data in this area in order to establish and apply tests of reasonableness of the charges of these physicians comparable to the tests currently applied to all other physicians.

XII. Section 23.-We support the provisions of this Section which are intended to widen the access of Medicaid patients to care in physcians' offices and clinics. XIII. Section 40.-We oppose this Section for the same reasons we oppose Section 22. Because of the volume of contracts that would be by this Section and the lack of detailed knowledge by government necessary to make these decisions, we believe this provision would be both costly and unworkable.

XIV. Other considerations.-We offer support for two additional provisions which are now pending before this Committee but are not included in S. 3205: (1) a simplified method of reimbursement for long-term care in certain hospitals; and (2) flexibility in standards and regulations for rural hospitals.

STATEMENT

Mr. Chairman. I am John Alexander McMahon, President of the American Hospital Association, representing more than 7,000 member institutions, including most of the hospitals in the country, extended and long-term care institutions, mental health facilities, hospital schools of nursing, and over 21.000 personal members. With me today are Leo J. Gehrig, M.D., Senior Vice President, Allen J. Manzano, Vice President, and Irwin Wolkstein, Associate Director of our Washington Office. We appreciate this opportunity to present the views and recommendations of the Association concerning the Medicare and Medicaid Administrative and Reimbursement Reform Act, S. 3205.

Your bill. Mr. Chairman, identifies and addresses a number of areas important to the public, providers, and government in the provision of health care services. We believe certain sections of the bill provide for positive reform in the administration of Medicare and Medicaid, and we commend you for your action, as well

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as for your understanding of the shortcomings of simplistic solutions. We appreciate the situation you described on March 25, 1976, when you introduced S. 3205 and said that "we may well be confronted with the need to cut and slash payments to hospitals and doctors indiscriminately, and often inequitably. This path is exactly what this bill seeks to avoid." We accept the opportunity you offered when you stated, "I want to emphasize that none of the proposed changes are frozen in concrete. They are all intended to deal with real problems. Hopefully, the hearings process will lead to refinements and modifications enhancing equitable and effective solutions to those problems."

There are sections of your bill which we support as they stand. In other areas, while we support the intent of the provisions, certain changes are necessary in our view, and we would like to make constructive suggestions in response to your invitation for refinement and modification of the bill. Further, the AHA believes some provisions should be deleted from the bill and we wish to suggest certain additional provisions. We wish to build upon the thoughtful efforts which already have gone into this legislative proposal, and the American Hospital Association wishes to continue to cooperate with this Committee in the search for appropriate solutions to the many problems and challenges which these vast programs present.

The problem of rising health costs

Foremost among the problems addressed in S. 3205 is that of the rapidly increasing cost of hospital services under Medicare and Medicaid. The solution is nade difficult by the very nature of the increase in hospital costs which is due primarily to four factors:

1. First, a portion of the increase in costs results from the rise in prices and wages in the rest of the economy which necessarily impacts on hospitals. The need to maintain competitive wage levels, particularly, has a heavy impact in a labor intensive industry such as ours.

2. Second, the hospitals' market basket is unlike that of any other sector in the general economy, and the costs of goods and services purchased by hospitals are more heavily weighted by those costs which are rising at a faster rate than the cost of living. For example, the average annual hospital liability insurance premium rose from $13,000 in 1970 to more than $110,000 in 1975. This represents a 1,000 percent increase in just five years. In Chicago during that period, according to a study conducted by the Chicago Hospital Council, hospital malpractice insurance premiums increased 200 percent, and it is estimated that the cost of such insurance for the hospitals surveyed is now between $40 and $43 per patient day. Although increases in costs of food and energy, two major staples in the hospital market basket, have not been as dramatic, they nevertheless have risen at a rate much higher than that of the Consumer Price Index. Food prices, for example, have risen an average of 8.4 percent per year over the past five years, and energy costs have risen 15.1 percent per year over that same period.

3. The third factor affecting hospital cost increases is the changing nature of the output of the hospital. As a result of continuing research and new technology, services provided by hospitals are constantly improving in terms of treatment methods and the expansion of capability for dealing with conditions previously untreatable or untreated. Renal dialysis, laser surgery, total blood replacement, cancer therapy and a host of new diagnostic approaches to disease are but a few of the many examples of the costly improvements and expansion of hospital services. From 1965 to 1975 the number of intensive care units increased by 130 percent. Further, there has been a very significant increase in the intensity of these services resulting from a variety of factors, including shortened hospital stay, increased clinical capability, defensive practice of medicine, and public demand. The American people expect these improvements in health services to be available, and their expectations intensify the use of such services and produce an increase in the costs of health care.

4. Finally, because S. 3205 is addressed specifically to the increasing costs of Medicare and Medicaid, it is important to note two special factors: (1) an ever-increasing Medicare population which is the result of increased aging in the population as a whole and (2) the special impact of the recession on the needs and numbers of beneficiaries of Medicaid. In addition, Congress has increased the scope of benefits under these programs-for example, through the inclusion of the disabled under Medicare, and the extension of Medicare catastrophic benefits to persons of all ages in need of treatment for renal failure through dialysis and organ transplantation.