more efficient management and a more consistent system. But we are not sure that it would lead to better quality care nor are we yet convinced that organizational consolidation is the best way to achieve efficiency. The two financing programs have important fundamental differences with respect to their client populations, eligibility standards and benefits covered.

For example, even under the proposed reorganization, the medicare program would still have to rely on the Social Security Administration for eligibility determinations, but medicaid would continue to rely on State welfare systems. The medicare skilled nursing facility (SNF) benefit (average length of stay about 30 days) is quite different from the medicaid SNF benefit (average length of stay 2 years). In effect, the proposed reorganization runs the risk of mixing apples and oranges.

Furthermore, we are quite concerned about the coordination between medical care quality standards and reimbursement procedures to insure that the essential requirements of both are preserved. The Department is currently analyzing issues of this kind and is looking at alternative organizational patterns to bring about the efficiencies we all seek without destroying the benefits of the existing organizational relationships.

Since coming to the Department, I have become convinced that there is a real need for an Inspector General type of activity. The need for this organization, however, is not only in the health care programs but is department wide. Therefore, I have begun to make the necessary organizational changes to accomplish this end.

Last December I issued a reorganization order establishing an independent Office of Investigations reporting directly to the Under Secretary. This activity complements our audit responsibilities. In addition, a major Federal-State campaign was launched in March to curb fraud and abuse in the medicaid program.

These activities have been accomplished without new legislative authorities. In my view, a legislatively mandated system and particularly one that only partially addresses the problem, would retard the progress we are now making and would not work to carry out the objectives that we all seek.

In concluding, I would like to say that this bill has evoked a healthy debate about the problems in our health care financing programs. Because of the size and technical complexity of this bill, we believe that there is insufficient time during this session of Congress to fully debate and work out the best options to accomplish its objectives.

Over the next few months the Department will work closely with this committee and other components of Congress to develop the most appropriate and effective solutions to our health care financing and delivery problems. Mr. Chairman, this concludes my remarks. My associates and I will be pleased to answer any questions you have. Senator TALMADGE. Thank you. Mr. Secretary.

If there is no objection, we will limit the questioning on the first round to 5 minutes for each Senator, and each Senator who wants a second round and maybe a third will have such opportunity.

Mr. Secretary, you commented on some aspects of the bill but not others. Will you submit to us a detailed recommendation on each

provision in the bill and alternative recommendations where you do not think we have developed the best solution?

Secretary MATHEWS. I will be pleased to, Senator.

[The following was subsequently supplied by the Department of HEW.]

As I stated in my prepared remarks, we are currently analyzing the 27 provisions of this bill. Given, the size, technical complexity, interdependence among various provisions, and the many possible alternative recommendations for addressing the problems raised by the bill, the Department's in-depth analyses of the individual provisions are still underway. I have shared with you my preliminary views on several provisions; we will be happy to make available to you our final recommendations as soon as our technical analyses are completed. Senator TALMADGE. Mr. Secretary, the bill requires uniform accounts and cost reporting. We do not have that in medicare and medicaid today. I understand that hospitals can shift costs around under the present system and thereby avoid much of the impact of the present limits on excessive costs on the medicare. For example, I understand that one way of doing this is to shift excess inpatient cost to the outpatient cost. Is my information correct?

Secretary MATHEWS. I think substantially correct, Senator. There are those here who join me at the table who can comment on this but I believe you are substantially correct in your view on that matter.

Senator TALMADGE. Mr. Secretary, while it is true that the hospital reimbursement provision would initially set limits that apply to only about 35 percent of the hospital cost, there is the authority to go further as the Department develops the ability to correctly evaluate the value of the additional components of hospital costs. You state that at present section 223, which applies to about 50 percent of the hospital costs, might be more effective than the proposal we have offered. Exactly how effective has the present system been in reducing hospital costs?

Secretary MATHEWS. My statement was predicated really on the simple fact that 50 was more than 35. With respect to our current hospital cost limits, I certainly could not in light of the statistics that I cited in my report about rising hospital cost argue that these limits have been totally effective.

Senator TALMADGE. Mr. Secretary, I notice your concern that cost determination is excessive under medicare and medicaid and might be passed on by a hospital in nonmedicare and medicaid patients. It is our intention to handle this possibility by including in the provider contracts of the hospitals and skilled nursing, a provision precluding the transfer of costs found to be excessive under medicare and medicaid. How does the Department propose to deal with the same problem where you call for a 7-percent limit on the cost increase?

Secretary MATHEWS. In both of these cases we would run into the problem that we are in effect controlling only part of the total health care financing in these hospitals and the contingent that the hospitals made when we made our proposal-and I feel they would make in this case that they have costs that they cannot control and that these costs build up. If we put in our official barrier or an artificial barrier or a legislative barrier holding down part of the costs and yet do nothing to affect the source of those costs, there are costs really between two forces with no place to go. That is really a major difficulty

in our health financing system and nobody yet has come up with a good solution for that problem.

Senator TALMADGE. Is there an artificial barrier where hospitals are measured against other hospitals?

Secretary MATHEWS. I think that is reasonable but I think we would still have to deal with their argument that even as compared to other hospitals their costs are driven by forces over which they have no control. I said arbitrary. Perhaps a better term would be fixed limits. Senator TALMADGE. Senator Packwood.

Senator PACKWOOD. Mr. Secretary, on page 1 of your statement you say:

For example, hospitals which are, for the most part, nonprofit institutions are generally reimbursed for all reasonable costs associated with patient care. This reimbursement method is inherently inflationary, since there is little formal incentive to keep the hospital's costs down. Similarly, it is generally the physician, who is reimbursed on the basis of his billed charge, who decides on the amount and type of services to be provided. Thus, the higher the billings and the more services provided, the higher the physician's income.

Then you note that the bulk of the money received comes from private or public insurers.

Are you saying as a general rule that hospitals, physicians, and nursing homes are charging unduly high prices or providing unnecessary services because they know these will be paid for?

Secretary MATHEWS. No; I am not impugning them that way. I was simply drawing the distinction between the way that the healthfinancing system operates and the way any other economic system operates. There is an inherent difference and the hospital medical system is simply much more vulnerable to inflationary pressures because of its billing practices, not because one would make the case that they are bent and bound and determined to do that. All the hospital administrators I talked to have yielded to no one in their concern about controlling these costs.

Senator PACKWOOD. I think I agree with your conclusion, although there are a few bad apples here, most try to be honest and cost

conscious.

Now if that is true. in your estimation what percent of the cost of medicare and medicaid could be saved if you had perfect administration of this program?

Secretary MATHEWS. I will turn to Dr. Altman who is a known national authority on this subject.

Senator PACKWOOD. I am premising it, Doctor, not on changing the benefit levels that you are entitled to but on the perfect management of the present system.

Dr. ALTMAN. When you speak about management, it is really not the management of the program. Let me just back up a minute on the question you asked before. If you forgive me, Mr. Secretary. I would answer it slightly different. I think you have to answer it slightly different in order to answer the second question. When you get to the medical community you are dealing with professionals who are trained to do a particular service and to whom you have provided all the resources they need to do it. It is not that they do things that are really unnecessary or that they do it in a way just to line their own pockets, but any professional faced with the need to do good and all the money

they need to do it, is bound to err on the margin of doing more rather than in the middle or less. I think what you have to consider if you want to cut down on the spending of this program is that this profession would have somewhat fewer resources to do what it needs to do. Senator PACK WOOD. You are going to have a reimbursement schedule of some kind. You are in a position for certain kinds of services. We are going to pay you a dollars or you say we are not going to reimburse you for certain services, we are going to cut back your resources. Dr. ALTMAN. If you take the proposals in S. 3205, the idea there is that a comparable hospital can do things at a different cost than others and that there are different ways of putting together the costs to do the same service. We don't question the need for that. We have some concern how maybe it is put together. By and large there is a feeling that the resources that are better being used in this industry are excessive and that the services of high quality medical care can be provided for less percentages in the order of 10 percent or 15 percentwhat we can't say-but there is little question among people who have analyzed this industry is that because of the reimbursement systems and because of the way patients view this type of service more resources are being used than needed.

Senator PACKWOOD. I will come back to this.

Senator TALMADGE. Senator Dole.

Senator DOLE. Thank you, Mr. Chairman.

I only want to echo much of what has just been said regarding the pressures on our medicare and medicaid budgets, and commend Senator Talmadge for his dedicated efforts at bringing about the kind of reforms it will take to achieve some measure of control in this area.

I think the seriousness of the task before us is illustrated by the very occurrence of these hearings. We as a subcommittee do not meet very often, so when we do convene formally, it has to considered a significant occasion.

The fact that we would choose the hour of 8 in the morning is further indication, perhaps, of the importance of the subject matter involved. It may be, too, that since the committee has been accused of writing its tax legislation in the dark of night, we want to demonstrate our versatility by deliberating health legislation at the crack of dawn. In any event, I believe we are all in agreement that something has to be done about the soaring cost of Federal health programs generallyand the intolerable abuses revealed over the past years specifically. S. 3205 is one comprehensive attempt at addressing the problems inherent in both.

Speaking for the minority members of the Health Subcommittee I might just say the fact none of us has yet become a cosponsor of this proposal does not mean we are not interested in the objectives it seeks. Certainly, as a member of this committee as well as the Committee on Budget-which this spring tried to mandate a $1.2 billion cutback in medicare and medicaid expenditures-I feel a special obligation in this

area.

We do, however, want to demonstrate that there is room for difference of opinion as to how those goals should be reached. Moreover, we want to remain open to alternative approaches that might be worthy of our advocacy.

Senator Talmadge has said several times since introducing his bill that he is not trying to engage in legislative overkill and that none of its provisions is locked in concrete. Certainly, the whole reason for holding these hearings is that of capitalizing on such flexibility by receiving and reviewing new ideas and opinions which can hopefully lead to development of a consensus response.

To that end we are all committed-and look forward to the challenge of the week ahead. Seldom do we have the opportunity to discuss something that touches every aspect of the health industry as deeply as do changes in our medicare and medicaid administration and reimbursement systems—and we appreciate highly the participation of those joining us for that purpose.

May I just add a special welcome to those testifying today from the National Association of Counties; the National Conference of State Legislatures; Governor Busbee of the National Governors Conference; and Secretary Mathews. I believe this is the Secretary's first appearance before any part of the committee since his confirmation hearing over a year ago-and that in itself should underscore the importance of this undertaking.

Mr. Chairman, I thank you for the courtesy of these few comments and pledge my cooperation and support in trying to get a handle on the problems which confront us.

Now, to proceed with the questioning I had wanted to direct to Secretary Mathews, I would just note that there have been many investigative journalism articles and horror stories about medicaid scandals, but one of the first to catch my attention appeared in the Time magazine dated May 26, 1975. It stated therein that according to a recent GAO check, 28 percent of those receiving medicaid benefits in New York City were generally ineligible for them.

So I would just ask, what has been done in that area to make certain that we provide benefits to those who should be eligible and deny benefits to those who should not?

Secretary MATHEWS. Two things, Senator, and I address these in the last section of my remarks. There are some people who are receiving benefits. I think the article you have reference to concerns medicaid applicants who are simply not eligible or the moneys are spent in cases where people are fraudulently abusing the system. The best way to deal with that problem is to deal with it directly-we have to improve our capacity to deal with fraud and abuse in the system.

We have had up until about 8 months ago only 10 criminal investigators working on this program. Now mind you it is a program administered at the State level. We have in the creation of this new Office of Investigations, significantly with the assistance of Congress, increased the size of that staff, integrated it with our audit effort and are working with States using their own resources to try to cut down on the expenditure. However, despite whatever we might do in trying to control frand and abuse we cannot by those efforts make up for poor program design.

One difficulty the States have is that they simply cannot keep up with this program. Their management information system for this program is inadequate to its size and complexity and we have developed what is in effect a model management information system and we