length transaction has occurred and that competitiveness is guaranteed. This, again, can be accomplished through an effectively operated prospective reimbursement mechanism. The "reasonableness" standard is, of course, a variable, but, nevertheless, is one that is capable of determination and implementation.

QUALITY ASSURANCE

The Catholic Hospital Association believes that, in the drive to control rising health care costs, questions of quality of care and effectiveness of treatment, both preventive and remedial, must not be neglected. The nation's health cannot be measured solely in dollar terms. In measuring the success of any cost control system, dollars and services today cannot be weighed against dollars and services of yesterday. If we can deliver more or better services for the same or even slightly more expense, then we can still consider our effort successful. We encourage the adoption of quality of care meaurements, including programs for preventive health treatment, physical development and training, recreation, maternal and infant care, as well as specialty programs for the aged and the handicapped, to expand the system of delivery and to improve our nation's health.

CONCLUSION

Rising costs in the health care industry are the joint responsibility of the public, the providers and the government. We at the Catholic Hospital Associa tion are concerned, however, that too much emphasis has been placed on the dollar aspect of the problem. Arbitrary cutbacks hit at quality and availability. And, the first to suffer are the sick, the poor and the elderly. We urge Congress to fully analyze the problem, seeking to preserve the best aspects of our current system, its pluralism, its voluntary character, its creativity and its service commitment, while, at the same time, remedying its deficiencies. We hope our remarks have identified some of these areas. We hope to be able to work together to resolve these problems in the future. Thank you.

SUMMARY OF RECOMMENDATIONS

(1) The Catholic Hospital Association believes that issues of quality and delivery of care cannot be separated from those of cost and financial reimbursement and, therefore, programs at the federal level should be coordinated through a single mechanism and not function in isolation.

(2) We strongly support the extension of the public comment period on proposed federal regulations from the current thirty to sixty days.

(3) CHA encourages the continued use of the "Notice of Intent to File Regulations" even further in advance of the actual rule-making.

(4) We continue to endorse the administration of Medicare and Medicaid on a private intermediary basis, subject to state coordination and federal standards. (5) The Catholic Hospital Association endorses the principle of prospective reimbursement adequate to meet the financial requirements of the individual health care institution.

(6) We advocate, however, the trial use of several alternative systems of prospective reimbursement and that individual hospitals be allowed maximum flexibility in adopting a system which reflects their local and patient needs.

(7) We encourage the adoption of incentives and shared savings in any reimbursement system.

(8) CHA insists on the continuation of the voluntary health care delivery system and that protection for such systems he structured into the law.

(9) We recommend that, in computing costs to be reimbursed prospectively, costs outside the management and control of the hospital be permitted to "pass through" as cost exceptions for reimbursement.

(19) The Catholic Hospital Association strongly opposes the implementation of any system of prior approval or restraint on hospital contracting.

(11) We also oppose arbitrary bans on the use of percentage payment contracts and urge the development of, and the adoption of a standard of reasonableness by which such contracts should be measured.

(12) CHA advocates the development of a system for recognizing quality of care in relation to costs, including the expansion of service.

Mr. MICHAEL STERN,

BOSTON UNIVERSITY MEDICAL CENTER,

UNIVERSITY HOSPITAL, Boston, Mas8., July 28, 1976.

Staff Director, Senate Finance Committee, Dirksen Senate Office Building, Washington, D.C.

DEAR MR. STERN. It is my understanding that the Subcommittee on Health of the Senate Finance Committee is holding hearings this week on the "Medicare and Medicaid Administrative and Reimbursement Reform Act" (S. 3205) introduced by Senator Talmadge. I would very much appreciate it if the following comments relating to Section 10 of S. 3205 were forwarded to members of the Subcommittee for their consideration during these hearings.

Speaking on behalf of one hospital that has been seriously affected by the Medicare routine cost ceilings imposed pursuant to Section 223 of P.L. 92-603, it is particularly gratifying that Section 10 of S. 3205 includes so many improvements over the comparable statutory provisions of Section 223 and its accompanying regulations. Section 10 of S. 3205 provides for the exclusion of several. particularly variable cost elements from routine service costs, ensures that area wage differences are reflected in hospitals' target rates, and modifies the hospital classification system now used for purposes of Section 223 cost limits to better ensure that comparable types of hospitals are grouped together. Further, the bill calls for the reimbursement mechanism described in Section 10 to be phased in over a period of three years. This feature not only will allow hospitals to better prepare for the impact of the routine cost reimbursement ceilings, but also will allow the Congress to incorporate "state-of-the-art" modifications in Section 10's methodology, in the event that modifications are deemed appropriaate, before the section becomes fully operational.

Without elaborating further on the many positive features of Section 10, I would like to make two suggestions that I hope would lead to improvements in the bill the first relates to the continuance of Section 223 of P.L. 92-603 in the light of the many modifications of Section 223 that have been incorporated in Section 10 of S. 3205; the second relates to a specific element of the hospital classification system calling for the separate classification (without regard to bed size) of the hospitals which are primary affiliates of accredited medical schools.

In my opinion, in view of the stated rationale for phasing in the provisions of Section 10 of S. 3205 over a period of years, it is both inconsistent and illogical that current regulations stemming from Section 223 of P.L. 92-603 will not be deferred or abrogated in the event that S. 3205 is enacted. Section 10 of S. 3205 was designed, in part, to overcome the deficiencies inherent in Section 223 of P.L. 92-603; further, by the degree of specificity of Section 10's provisions, the section was also designed, in part, to ensure that the Social Security Adminis tration, responsible for administering the law, would implement the statute, and enact regulations governing its implementation. in a manner that was consistent with the intent of Congress. Not to abrogate Section 223 and its accompanying regulations at a time when better and more equitable hospital reimbursement provisions are in the process of being phased in will guarantee that many hospitals will be seriously penalized before they are able to gain any relief in the form of the more reasonable treatment to be accorded them by Section 10 of S. 3205.

In regard to the hospital classification system envisioned in Section 10, it is noteworthy that many of the nation's teaching hospitals will be separately grouped for purposes of establishing these hospitals' target rates. In part, this should tend to ensure that such hospitals are not severely penalized because of the necessary and proper costs associated with their characteristically atypical patient mix and scope of services. However, the logic of allowing each accredited medical school to nominate only one hospital to be included in this separate grouping is unclear. In many areas of the country, medical schools in effect direct all of the teaching programs in more than one hospital-that is, medical school faculty select the housestaff, medical school clinical department chairmen or cochairmen supervise the training programs, and medical school faculty provide the teaching. If medical schools are unable to nominate each of their primary hospital affiliates (in the event that they have more than one) to be included in this separate grouping, it is inevitable that many key teaching hospitals typically providing specialized tertiary medical care will be grouped with non-teaching,

non-tertiary community hospitals and suffer the consequences of target rates reflecting the typically lower costs of providing care in such hospitals. While I recognize the extremely difficult task of developing appropriate definitions for teaching hospitals given the many different types and organizational models of teaching programs, I believe it is terribly important for the Subcommittee on Health to give additional consideration to the development of appropriate groups for teaching hospitals, in an effort, particularly, to accommodate those hospitals that are members of a group of two or more hospitals serving as a medical school's primary affiliates in an integrated program.

Thanks very much for your consideration of these comments and for distributing them to members of the Subcommittee on Health. My apologies for not getting this letter to you prior to the start of the Subcommittee's hearings. Sincerely,

JAMES L. DORSEY, Administrator for Fiscal Affairs.

STATEMENT OF THE NATIONAL COUNCIL OF STATE PUBLIC WELFARE ADMINISTRATORS OF THE AMERICAN PUBLIC WELFARE ASSOCIATION

(By R. Archie Ellis, Commissioner, South Carolina Department of Social Services and William Stewart, M.D., Commissioner, Louisiana Health and Human Resources Administration)

The National Council of State Public Welfare Administrators is composed of state welfare directors who, for the most part, are responsible for administering state Medicaid programs. We are acutely aware of the many shortcomings of this state/Federal program; and, thus, we welcome proposed legislation designed to improve its management and administration. Given the active role of Council in all aspects of Medicaid, its members are particularly well qualified to appraise the provisions of S. 3205. The Council conducted a survey in which administrators were asked to evaluate the Medicaid sections of S. 3205. Some 41 states responded. Our statement is based on the content of these responses and additional discusions held by the Council's Committee on Health Care.

The Council believes strongly in the need for a national health policy which adequately reflects the interests of its citizens objectives of state and Federal government. Our present health system is fraught with difficulties and problems. Our resources are misdirected towards the treatment of illness rather than the prevention of disease. As a country, we need to reassess the role of medical care and spur increased emphasis on the promotion of health.

Medicaid and the problem of rising costs

Perhaps the greatest symptom of this lack of clear national objectives is the continuous disproportionate rise in the cost of health services. Federal and state expenditures alone for health care have been rising at an annual rate of 15%. Increasingly, states have been forced to cut back on the Medicaid program to reduce expenditures. Most states have managed to maintain benefits and eligibility levels-thus, not directly affecting service beneficiaries. For some, however, the time for short term solutions is running out; these states will need some form of assistance and reform that will allow them to maintain existing services. However, cutbacks and changes in Medicaid will not curb the unabated growth in the cost of health services. For the underlying causes of this long term health cost inflation--increased costs of labor, supplies and technology-will no doubt continue to plague Medicare, Medicaid and all consumers of health care until definitive national strategies directly targeted to these sources are implemented.

The possible solutions

Despite the enormity of these problems, there appear to be few options available to Congress likely to have a substantial impact. To a great extent, the Congress must work through those programs funded either in whole or in part by the Federal government-Medicare and Medicaid. Options under these programs include the following:

Adoption of specific incremental program reform;

State assumption of Medicaid management exclusive of Federal controlsthe block grant approach;

Federalization of Medicaid with little or no involvement of state government;

and

Enactment of national health insurance, ending distinctions between state and Federal programs.

While the latter three options have obvious appeal to certain parties, only incremental program reform is feasible at this time. The others call for a greater commitment of funds and energy not likely to be forthcoming in our present economy. It is the incremental approach that is adopted by S. 3205 and which is under discussion today. Through reforms in Medicaid and Medicare designed to improve administration, foster efficient management, encourage coordinated policy development and curb fraud and abuse, the legislation ultimately seeks to reduce program costs.

The National Council supports these objectives. Moreover, we fully support several of the bill's provisions designed to satisfy these objectives. In some instances we believe alternate strategies would better serve the intent of the legislation. Again, our testimony is largely based on a survey conducted of Council membership.

Summary of general positions: Consolidation

The bill would consolidate Medicaid and Medicare into a single administrative entity.

The National Council of State Public Welfare Administrators supports this effort. The need for coordinated policy development has been evident for some time. We do urge, however, that states have an active role in the development of policy. Medicaid agencies have no wish to become "mini-Medicare's"; the tremendous variability among states has already demonstrated the inadvisability of forcing identical administration upon them. We also urge that related programs such as Title V be included in the consolidated effort.

Summary of general positions: Medicaid administrative reform

The legislation seeks to adopt minimum, uniform standards of performance for the administration of Medicaid.

Again, the states recognize the necessity of improving Medicaid administration. Their comments reflected the following concerns.

Specificity. The Medicaid requirements are extremely detailed and specific. The states questioned the advisability of locking such regulatory language into legislation.

Flexibility-Related to the above concern was the lack of flexibility that the legislation would allow. Granted, some of the requirements are necessary to sound program administration. We do, however, question the reliance on process oriented criteria rather than outcomes. For example, collecting information on a quarterly basis does not assure that it will be utilized in an effective manner. Cost of compliance.-While there are some states already performing the bill's required procedures a number of states have indicated that compliance is not feasible without significant expenditure of state funds. Additional personnel would be necessary in several instances; claims processing systems would require substantial modifications. Therefore, initial compliance efforts would be costly to some states.

The validity of penalties.-The bill includes both positive and negative incentives to encourage compliance. Both are targeted to administrative costs. The rationale is to penalize-at least to some extent-those states found with deficiencies and to reward those demonstrating superior effort. In the case of penalties, the objective is to encourage action without harm to program recipients (administrative costs average 5% of Medicaid expenditures). Virtually all states are opposed to the use of penalties to spur compliance efforts. In particular, they questioned the effectiveness of such sanctions. The loss of Federal revenue, no matter how small, may generate additional program cutbacks which ultimately harm recipients. In addition, state legislatures generally do not differentiate be tween the cost of program benefits and administrative expenditures; a single budget allocation is made. The states recommended that instead of penalties, additional Federal funds be made available to assist states in compliance efforts. Applicability.-The legislation calls for consolidated and coordinated policy development for Medicare and Medicaid. Yet, as the states point out, the legislation adopts requirements for Medicaid alone. We urge that any requirement adopted for Medicaid administration be applied to relevant counterparts of Federal administration. For example, time limits on eligibility determination should

apply equally to the Social Security Administration. Claims processing and report requirements should apply equally to Medicare and its fiscal intermediaries. (The legislation is predicated on the assumption that administration of Medicaid is inefficient and not uniform.) Regardless of the validity of this assumption, it is clearly the case that Medicare intermediaries do not hold an unblemished record. We further urge that coordination between Titles XVIII and XIX be assured at the local levels as well.

The means of evaluation.—There is widespread agreement that DHEW has not monitored state compliance efficiently and consistently over time. The bill would seek to remedy this situation by involving another government agency, GAO, in program evaluation, removing considerable discretion in program monitoring from DHEW. Presumably (although not specified) this partnership would function on the regional level as well. The implications of such a development are enormous since GAO, an independent investigatory agency of Congress-the legislative branch-would be directly associated with DHEW-the executive branch-in program evaluation. We are opposed to this monitoring strategy. Medicaid administrative reform: Specific comments

(1) Eligibility.-The legislation would place time limits on determinations of Medicaid eligibility.

The states questioned the need to adopt a 30 day processing standard for Medicaid when a 45 day standard exists for AFDC. It must be remembered that the determination process is identical for cash assistance and medical assistance. We recommend that redeterminations for the aged, blind and disabled be required once annually. This population is generally stable; our attention should be directed to the medically needy under AFDC. In addition, we recommend that states have 90-rather than 60-days to process medically needy disabled applications, since verification in this program is often lengthy and detailed.

(2) Claims processing.—The bill would require Medicaid claims be processed within specific time limits.

Most states indicated that this requirement would present few difficulties upon implementation of the Medicaid Management Information System. We do recommend that given the variation in MMIS implementation schedules, that the requirements allow more lead time before requirements become effective.

(3) Quality control.-The bill would target maximum allowable errors to results of the first survey (October 1975 to March 1975).

We believe that this first survey of error rates is an arbitrary and likely inaccurate standard to utilize as a target for compliance. As a result, we recommend that no absolute maximum be adopted, but rather target rates on an individual state-by-state basis. Each state should then work toward this individual rate which gradually changes over time to reflect improvement. Too much emphasis on the accuracy of determinations will no doubt force some states to adopt policies which encourage denial of eligibility-even to those who satisfy the criteriain the name of quality control.

(4) Publication of State error rates.—The bill would require publication of state error rates in eligibility determination.

Publication of state error rates is essentially a political tool. On the one hand, it may encourage corrective action by reluctant state agencies and legislatures unwilling to appropriate necessary funds. On the other, it may generate widespread public displeasure, but with little substantive response by the state.

Most states indicated that a fair presentation of state performance in all areas would be far more effective. In addition, they recommended corresponding publication of Federal government performance in Medicare.

(5) Reports.-The bill would require preparation and submission of numerous Medicaid reports to the Federal government on a periodic basis.

Again, most states indicated that they could satisfy requirements upon implementation of MMIS, presuming state formats were acceptable as reporting techniques.

A note on MMIS: the requirements were clearly drafted in light of the capabilities of the MMIS-a program originated and advocated by the Federal government. Many states indicated that while they were implementing the system, they questioned its ultimate worth. S. 3205 mandates a number of processes be performed and material generated that are largely products of this program. It is not clear, in the states' opinion, that such processes will contribute to improved program management or ultimately, containment of costs. Some key areas, such as collection of third party liability, are not included in MMIS.

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