creasing costs of these health programs. It must be recognized, however, that arbitrary curtailments of increases in costs will have natural consequences with respect to maintaining quality and availability of care. Each element cannot be treated separately without expectation of impact on the others.

In our foregoing discussion we have indicated those provisions which we believe will have harmful consequences and not be in the interest of program beneficiaries. We have also indicated our support for other provisions. Taken as a whole, the bill should not be enacted as it would not be in the best interests of Medicare-Medicaid patients.

As the Subcommittee explores the effects of the provisions of this bill, we continue to offer our assistance to the Subcommittee.

Senator TALMADGE. The subcommittee is indeed honored to have the Honorable Lloyd Bentsen, Senator from Texas.

STATEMENT OF HON. LLOYD BENTSEN, A U.S. SENATOR

FROM THE STATE OF TEXAS

Senator BENTSEN. Thank you very much, Mr. Chairman, I appreciate this opportunity to present my views on S. 3205, the MedicareMedicaid Administrative and Reimbursement Reform Act. This is an impressive piece of legislation and shows the insight of the chairman of the committee into the complexities of this Nation's health financing programs.

After 2 days of hearings I am sure I do not need to mention to this committee the enormous increase in the cost of health care nor the concomitant increase in Federal dollars allocated for health financing that has been one of the major catalysts to the development of this bill.

I will, therefore, limit my remarks to specific sections of the bill. Of all forms of medical services, inpatient hospital care is the most expensive to both the Federal financing programs and the consumer. Section 10 of S. 3205 marks yet another step in the development of Federal reimbursement to hospitals in an attempt to encourage efficiency and, therefore, reduce costs.

However, this section does not go far enough. It will only subject. about 35 percent of the hospital's costs to the limits it proposes. However, of even greater concern to me is the basic structure of Federal reimbursement which this section would perpetuate, that is, reimbursement on the basis of unit costs.

When the medicaid and medicare programs were first developed, one of the objectives was to design a reimbursement method that would have as little effect as possible on the existing health care system.

Thus, a system based on the cost incurred by the hospital of providing a day of service made sense. However, with 90 percent of hospital reimbursement now based on this method, the system has proven itself unduly inflationary.

In effect, what we have is a cost plus system. What we need to build back into this system is an incentive on the part of those administrative programs in the various hospitals to try to bring about some efficiencies of service and have some rewards for doing so.

Section 223 of the 1972 amendments to the Social Security Act was enacted in recognition of this inflationary trend. This section was an attempt to slow the trend by imposing limits on those hospital costs which were the least variable, routine costs.

No effort was made to reform the structure of the reimbursement system at that time. It was understood that HEW would try to extend the 223 limitations to hospitals' ancillary costs as soon as a workable approach was found.

As you are well aware, no approach to limit ancillary services, and thus their costs, in an equitable manner has been found.

Moreover, since the enactment of section 223, we have not seen any dampening of the inflationary spiral in hospital costs.

Mr. Chairman, the problem with our past attempts to limit costs is that we have attempted only to further refine the current system without facing up to its basic structural inadequacy.

Our efforts to tighten the definitions of the basic units of cost have led to one of the most expensive and burdensome set of regulations of any Federal program. Yet we have not altered the incentives in the current system that encourage hospitals to provide more days of care in order to receive higher payments.

This is one of the basic problems we have in the insurance business, in trying to carry out hospitalization insurance. Patients are checked in that really do not need hospital care; however, their insurance coverage is based on being in the hospital.'

Doctors check them into hospitals, hospital administrators desire to keep them in the hospitals- this is a problem.

The most obvious example of the structural inadequacy of the reimbursement system is its failure to recognize that small increases in the number of days of care a hospital supplies incurs only a marginal increase in cost to the hospital.

We reimburse the hospital as if the cost incurred were the full cost. Your hospital costs do not go up proportionately as you increase the Occupancy rate of the hospital.

I can recall one instance in the insurance business where we had an administrator of a small hospital who checked in his janitorial staff and all of their families and they all supposedly had the flu and he kept them all in there for 10 days.

We ended up having to pay that claim, we could not figure out any other way to do it.

Senator TALMADGE. We had some testimony Monday where a couple decided they wanted to go to Florida on a vacation, the mother was somewhat elderly so they checked her in the hospital.

Senator BENTSEN. We had one case where they decided they wanted to go to the Cotton Bowl to see the New Year's Day game and just hauled the kids into the hospital, said they had the flu.

Currently if a hospital's utilization increases by 3 percent, its reimbursement is also increased by 3 percent. Yet, even small hospitals do a large enough volume of business to achieve economies of scale.

As long as we fail to recognize these economics of scale, we also fail to encourage efficiency. As long as we continue to apply limitations to only some units of a hospital costs and not to others, we encourage hospitals to allocate their costs to areas not curbed by Federal limitations. In my opinion, we do not have the fiscal leeway to continue to make only marginal changes in a system based on unit costs that has, over the past decade, proven itself highly inflationary.

It is time to take a gross revenue approach to hospital payments, to provide hospitals with lump sum payments on a prospective basis. This

kind of system is being tested on a limited basis in several States and has been endorsed by both public and private organizations as a method of encouraging hospitals to budget their resources and then manage efficiently.

I am delighted to see that you built some strong audit processes into this piece of legislation, I think that is very important. If you allocate somebody's payments on a prospective basis, then go back and audit them at the end of the year, and do your spot check audits, that is one of the ways to encourage some of the efficiencies.

One of the things I learned in business is that you can expect what you inspect. If you go back and do spot check audits, you will find just what the true costs are.

The hospital administrator has a better idea of how best to manage his own business than does the Federal Government.

Let us give him the incentives to do the best job he can within a specific budget. Prospective lump-sum payments not retrospective unit cost payments can provide this kind of incentive.

Mr. Chairman, there is one other section of S. 3205, that I would like to comment on briefly. Section 40 of this bill would require HEW to review and approve tens of thousands of contracts above $10,000 that are negotiated by hospitals and other health care institutions each

year.

Senator TALMADGE. That really was to flag a probem, that $10,000. We had considerable criticism of that figure and I concur with the criticism that it is being corrected.

Senator BENTSEN. You just finished my speech for me then. I never argued with the Chair when I found we were in agreement.

Senator TALMADGE. That was my practice when I was practicing law too, Senator.

Senator BENTSEN. Thank you very much.

Senator TALMADGE. I want to compliment you on your statement. This bill tries to give incentives for efficient performance. Heretofore, we have had penalties for inefficient performance, but no incentives for efficient performance.

As I read your statement and listened to it, that was the total thrust of your argument and this bill is aimed at exactly that direction. I hope it can become law and I believe that it would ameliorate this fantastic increase in expenses for medical care and deliveries.

As you know, it has been increased from $30 billion this past year to $37 or $38 billion this year and the Budget Committee on which Senator Dole sits has mandated a $700 million decrease in expenditures.

This committee, as I see it, is confronted with some decisions it must make. First, we can cut back services; I do not think anybody wants to do that. Second, we can continue to let the law run as it is now, open ended, the sky is the limit, bill whatever you want, kickback whatever you want, put patients in the hospital for no reason at all and keep them there as long as you want.

It is intolerable the way it is working. Every witness we have had to date has complained about it. There are practically no exceptions, so we are going to have to take action to correct it and I believe this Congress or next Congress will.

Senator Dole?

Senator DOLE. No questions, thank you.

Senator BENTSEN. Thank you. What we have seen operating in Texas in nursing homes on the medicaid, they will bring in the nursing home operators at the end of the year, the Department will look over their costs they have had during the year, then they will go in and do spot audits to determine the validity of those costs and then make a cost effective allocation for the forthcoming year.

Then they also go back and spot them with an audit for services to see that they are really doing the job in the services for the people. Something like this for hospital and medicare, I would like to see given consideration.

Senator TALMADGE. Thank you, very much, for a helpful statement. We greatly appreciate your contribution, Senator Bentsen. When I introduced S. 2305, I referred to the desirability of the subcommittee examining the potential legitimate role of relative value guides or scales in determining appropriate reimbursement of physicians under medicare and medicaid.

Since that time, at my request, the staff of the subcommittee has been engaged in discussions on this subject, both with some representatives in the medical profession and with officials of various Federal agencies.

As a result of these discussions, the staff has prepared a working draft of specifications for legislative provisions. It is designed to authorize Federal medical insurance programs to use relative value to the extent the programs determine themselves to be useful, appropriate, and noninflationary.

I would like to submit this working draft to the record and I am hopeful that it will receive the careful attention of members of the subcommittee as well as witnesses appearing before today and during the remainder of these hearings.

Relative value guides can play a legitimate role in assisting the Bureau of Health Insurance in its various intermediaries in determining appropriate physician reimbursement levels.

I am hopeful that these hearings will provide the basis for inclusion in the bill of a specific provision which will better take the use of these guides in appropriate circumstances.

[The working draft follows:]

RELATIVE VALUE GUIDES

When I introduced S. 3205, I referred to the desirability of the subcommittee examining the potential legitimate role of relative value guides or scales in determining appropriate reimbursement of physicians under medicare and medicaid. Since that time, at my request, the staff of the subcommittee has been engaged in discussions on this subject, both with some representatives of the medical profession and with officials of various Federal agencies.

As a result of these discussions, the staff has had prepared a working draft of specifications for a legislative provision. It is designed to authorize Federal medical insurance programs to use relative value guides to the extent the programs determine them to be useful, apppropriate and non-inflationary. I would like to submit this working draft for the record, and I am hopeful that it will receive the careful attention of the members of the subcommittee, as well as the witnesses appearing before us today and during the remainder of these hearings. Relative value guides can play a legitimate role in assisting the Bureau of Health Insurance and its various intermediaries in determining appropriate physician reimbursement levels. I am hopeful that these hearings will provide the basis for inclusion in the bill of a specific provision which will validate the use of these guides in appropriate circumstances.

Amend title XI of the Social Security Act to provide that, to assist in determining payment for physicians' services covered under any title of the act, the Secretary may authorize the use of studies, guides, scales, or tables formulated and adopted by a bona fide national, State or local professional society or association of physicians or health benefit organization, the purpose or effect of which is to establish, on the basis of complexity of procedure, time or effort necessary for completion, and/or other relevant medical considerations, a relative value for one or more medical procedures of the type normally performed by the members of such a society or association in relation to or compared with other medical procedures of the type normally so performed: Provided, That such study, guide, scale or table does not assign a monetary value to the procedures covered thereby or to the unit employed in establishing relative value.

In determining whether such authorization will be given, the Secretary shall take into account such evidence as the sponsoring organization shall provide concerning its impact on program costs as well as the appropriateness, clarity and usefulness of the proposed system. The formulation adoption, dissemination or use of such a study, guide, scale or table, whether or not authorized by the Secretary for use under the Act, shall not in itself be deemed a violation of any antitrust law. Nothing herein shall be construed as compelling any person to use such a study, guide, scale or table in connection with either the seeking of, or the making of, payment or reimbursement for physicians' services under the Act, or otherwise.

Senator TALMADGE. The next witness is Dr. John M. Dennis, president of the American College of Radiology, accompanied by Dr. Frederic D. Lake, M. I., chairman, board of chancellors and Otha W. Linton, director, governmental relations.

At this time, Dr. Dennis, I want to thank you and the American College of Radiology for your very helpful contribution in drafting this bill.

STATEMENT OF DR. JOHN DENNIS, PRESIDENT, AMERICAN COLLEGE OF RADIOLOGY, ACCOMPANIED BY FREDERIC D. LAKE, M.D., CHAIRMAN, BOARD OF CHANCELLORS, AND OTHA W. LINTON, DIRECTOR, GOVERNMENTAL RELATIONS

Dr. DENNIS. Thank you, Senator. These comments on Senate bill 3205 are offered on behalf of the 12,000 members of the American College of Radiology. I express their gratitude to the chairman and members of the subcommittee for this opportunity.

I am Dr. John M. Dennis, of Baltimore, president of the American College of Radiology. I am accompanied this morning by Dr. Frederic D. Lake of Chicago, chairman of the college board of chancellors, and by Otha W. Linton, director of Government relations for the college.

The American College of Radiology is the major national professional society of physicians who use X-rays and other forms of energy to diagnose disease or who utilize high energy radiation for the treatment of cancers.

The college has a range of activities which support our obligation to provide the radiologic services needed by Americans. Since provisions of S. 3205 would have an effect upon the circumstances in which radiologists provide their services, to beneficiaries of Federal programs, we offer any possible assistance.

Almost all of the members of the college are also members of the appropriate local and State medical societies and of the American Medical Association. In what follows here, we will attempt to limit

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