ably including independent contractors of physical therapy, would not be recognized where compensation or payments are based upon percentage arrangements. The percentage prohibition would operate in both directions-either from the contractor to the provider or from the provider to the contractor. Section 40 (b) provides that the Secretary of Health, Education and Welfare must review and give prior approval to any service contract which constitutes an element of cost of any health service for which payment is authorized under Medicare and which involves payments "with respect to any consecutive period of twelve months which aggregate $10,000 or more." Thus under the terms of this provision, each time an independent practitioner of physical therapy seeks to enter into a contractual arrangement with a provider to furnish physical therapy services the value of which exceeds $10,000 (as it often does), prior review and approval must be given by the Secretary. For the reasons set out below, APTA recommends that $40 be deleted from S. 3205 or, in the alternative, tailored to exclude physical therapy services furnished pursuant to arrangement with providers.

First, §40 is unnecessary and, if adopted, would subject independent contractors of physical therapy services and contracting hospitals to several duplicative and conflicting cost-control requirements. Such a situation could only result in additional unjustified administrative costs for the independent contractor and provider alike, frustrate efficient and long-range planning for physical therapy departments and inject deleterious uncertainty into the entire reimbursement process.

As described in detail above, the reasonable and hence reimbursable cost of physical therapy services furnished under arrangement is limited to amounts -determined pursuant to the salary equivalence standard. Salary-equivalency is now in full force and effect and is the primary basis for evaluating the reasonableness of reimbursement amounts under contracts for physical therapy services. Despite the rigid limitations imposed by the salary equivalence standard, § 40 seeks to impose what APTA considers to be a wholly unnecessary requirement that the Secretary give prior approval to physical therapy service contracts.

The need for § 40 of the bill is also obviated by § 10 of S. 3205-a provision which predicates a hospital's reimbursement amount on its total operating cost. Section 10 sets a per diem target rate for hospitals for routine operating costs. Hospitals are encouraged to maintain their actual per diem routine operating costs below their respective target levels because they receive as an incentive one-half of the difference between their actual cost and their assigned target rates up to 5% of the target levels. Hospitals whose actual costs do not exceed their target rates by more than 20% are paid their actual costs. Hospitals whose actual costs are greater than 120% of their target rates are reimbursed only to the extent of 120% of the target rate. Thus, by its system of bonus payments to those facilities who successfully control their operating costs, hospitals are compelled to negotiate contracts which are as cost-conscious as possible. APTA submits that this pressure in itself is sufficient to insure that physical therapy service contracts are reasonable and that therefore there is no need for the type of lineby-line budget review called for in § 40.

Second, § 40 represents an unjustified governmental intrusion into the manage ment, administration and operation of hospitals. Congress recognized the necessity of preserving the ability of providers of service to manage their own businesses when it enacted § 1395 of the Medicare Act which provides that:

"Nothing in this subchapter shall be construed to authorize any Federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; or to exercise any supervision or control over the administration or operation of any institution, agency or person." 42 U.S.C. $1395.

Section 40, by denying reimbursement for all percentage-based contracts and requiring advance approval of most other service contracts, is certainly an exercise of "supervision or control over the administration or operation" of hospitals. As previously explained, there is no countervailing justification for such intervention because § 40 is not needed as a cost or abuse control measure.

Finally, § 40 contravenes the express purpose of S. 3205 to promote greater efficiency and economy in the delivery of quality patient care. The ultimate effect of

the contract review process proposed in that section will be to precipitate costly delays in the provision of needed services, preclude efficient and orderly hospital administration and planning, and to necessitate the expenditure of scarce health dollars to comply with diverse and duplicative review requirements. APTA suggests that the spectre of a hospital's entire administration collapsing while the inherently cumbersome bureaucracy of HEW reviews the numerous types of service contracts into which all hospitals must enter is not illusory.

It is also APTA's belief that the criteria specified in § 40(b) (2) which the Secretary is required to utilize in determining whether to grant approval of a service contract are particularly inappropriate for such a task and require intrusions into the administration and operation of a provider which can only be considered to be completely unjustified. For instance, the Secretary may give advance approval to a service contract "only if . . . the services to be furnished thereunder are found to be services which may appropriately be furnished on a -contract basis." Since the bill provides absolutely no guidelines as to what types of services would be considered to be appropriately furnished pursuant to contract, $40 leaves the door open for the Secretary to make completely arbitrary decisions with respect to whole types of services. There has been some evidence over the past few years that HEW has been actively encouraging providers of services to refrain from contracting with independent practitioners of physical therapy and instead to hire physical therapists as members of their staff. APTA submits that the unbounded flexibility which this criteria vests in the Secretary will provide HEW with exactly the vehicle which it needs to eradicate the furnishing of physical therapy services by independent contractors.

With the exception of § 40 of the proposal which APTA strenuously urges to be deleted, APTA believes that Senator Talmadge's proposal is a decisive and significant approach to controlling runaway Medicare and Medicaid costs. Further, APTA commends Senator Dole for his proposal and draws it to the attention of this Subcommittee as a measure eminently compatible with S. 3205 and which would aid that proposal in initiating much needed efficiency in the delivery of health care services under the Medicare program.

STATEMENT OF THE AMERICAN SOCIETY OF INTERNAL MEDICINE

SECTION 2. ESTABLISHMENT OF HEALTH CARE FINANCING ADMINISTRATION

The American Society of Internal Medicine (ASIM) supports the establishment of a Health Care Financing Administration as an interim step in reorganization of the administrative agencies for federal health programs. Such reorganization should result in greater administrative efficiency and better enable the public, physicians and the Congress to identify the accountable unit.

The major deficiency of this proposal is that responsibilities for financing and health services will still be divided. In the past many administrative decisions based on financial considerations have compromised the quality of health services. We strongly recommend that the bill be amended to specify that the Assistant Secretary for Health Care Financing be a physician. This should ensure that decisions due to financial considerations are not made in a vacuum without regard for quality.

ASIM believes the optimal administrative structure should be designated to consolidate all federal health programs to allow better coordination such as the establishment of a separate cabinet-level department of health.

SECTION 3. INSPECTOR GENERAL FOR HEALTH ADMINISTRATION

ASIM concurs that fraud and abuse must be eliminated from federal and other health programs. However, the authority proposed for the Inspector General seems dangerously broad and we suggest three minor modifications which should not restrict the ability of the Inspector General to carry out his assignments.

First, the apparent blanket access afforded to the Inspector General to all DHEW reports, audits, documents, etc., necessary to discharge his responsibilities should be modified to assure confidentiality and to require adherence to the -confidentiality requirements of the affected federal programs.

Second, the subparagraph providing the Inspector General with $100,000 "bag money" should be deleted. It should not be necessary for the Inspector General to engage in clandestine activities.

Lastly, because one of the apparent purposes of the Inspector General and the Office of Central Fraud and Abuse is to control program costs, the Inspector General should be required annually to report the cost effectiveness of his activities.

SECTION 7. REGULATIONS OF THE SECRETARY; SAVINGS PROVISIONS

ASIM supports this provision which would prevent a proposed rule or regulation from becoming affective in less than 60 days following publication in the Federal Register unless it states that prompt promulgation is urgent. However, any stated need for prompt promulgation should be supported by fact.

SECTION 8. TERMINATION OF THE HEALTH INSURANCE BENEFITS ADVISORY COUNCIL The stated reason for discontinuing the Health Insurance Benefits Advisory Council (HIBAC) is that it is no longer significant in policy development for Medicare and Medicaid. What has not been stated is that the reason HIBAC has not recently played a significant role is that it has been denied the opportunity to do so. Initially HIBAC served as a value advisory group. But as the programs evolved, bureaucratic policy direction appears to have replaced outside advisement. Non-governmental input into federal policy making is an integral part of our democratic process and we strongly recommend that HIBAC be continued and assigned a meaningful advisory function.

SECTION 20. CRITERIA FOR DETERMINING REASONABLE CHARGE FOR PHYSICIANS

SERVICES

Because much of this section is a restatement of existing legislation governing the determination of prevailing charge levels, we believe it is appropriate to again express ASIM's opposition to the inadequate reimbursement to patients for physicians' services. The intent of the original Medicare legislation was to reimburse beneficiaries based on the usual, customary and reasonable (UCR) concept. Subsequent amendments and regulations eroded and distorted the original UCR concept and have caused a widening disparity between program reimbursement and physician charges. This accounts for most of the increased out-of-pocket expenditures by beneficiaries and the declining rate of assignment acceptance by physicians.

Imposition of the state-wide prevailing charge levels called for in this section may further increase this disparity. While ASIM concurs with the goal of attracting more physicians into rural areas, it does not believe restricting reimbursement differentials between patients of urban and rural physicians in this manner will accomplish the intended goal. A more obvious effect is likely to be a curtailment of patient reimbursement for the services of urban physicians rather than a positive economic incentive for rural physicians. ASIM recommends that this provision be deleted or at least amended to include authorization for exceptions in instances where large differentials appear warranted because of high overhead expenses in urban areas.

SECTION 21. AGREEMENT OF PHYSICIANS TO ACCEPT ASSIGNMENT OF CLAIMS ASIM strongly supports the retention of the individual patient assignment option. We are adamantly opposed to the creation of two classes of physicians under Medicare "participating physicians" (those agreeing to accept assignment on all Medicare patients) and "non-participating physicians" (those not permitted to accept assignment on any Medicare patients).

It has been a tradition of medicine to treat patients individually, and to seek reimbursement according to their ability to pay. The individual patient assignment option has allowed continuation of this tradition for Medicare patients. Because of the increasing disparity between program reimbursement and the actual charges, the majority of primary care physicians would be forced to assume a non-participating status, thereby denying them the opportunity of assisting poorer patients by accepting assignments. This would make access to care more difficult for poorer patients.

The proposed provision would allow participating physicians to bill on a multiple-listing basis, would pay 50% of those bills within five days and would

provide a $1-per-patient "administrative cost-savings allowance." ASIM believes
these would not be sufficient incentives to override concern with low program
reimbursement or to induce physicians to forfeit their freedom to bill directly.
While the ideas of multiple-listing billing and more rapid payment are com-
mendable, they should be accomplished without requiring physicians to accept
assignment on all patients. The $1 cost-savings allowance is arbitrary and its
effect would vary from physician to physician. For example, physicians who
see fewer patients will find the $1 less of an incentive. And, for physicians pro-
viding more comprehensive services, this amount is insignificant when compared
with the differential in reimbursement between accepting and not accepting
assignment. What adoption of this provision will probably do is encourage low
quality, frequent return type practices specializing in Medicare patients in order
to capitalize on the $1-per-patient incentive. Although a very small minority of
physicians are likely to be involved in such practices, the result could be inferior
care to a significant number of Medicare patients.

SECTION 22. HOSPITAL-ASSOCIATED PHYSICIANS

This section, although titled "Hospital-Associated Physicians" would establish
a new legislative criteria for defining all reimbursable physician services under
the Medicare program. The new definition of "physician services" would exclude
services performed as an educator, an executive or a researcher, and would
exclude any patient care service unless such service was (1) personally per-
formed or personally directed by a physician for the benefit of such patient and
(2) is of such a nature that the performance by a physician is customary and
appropriate.

ASIM objects to this definition of what constitutes physician services. Phy-
sicians should be reimbursed under Medicare for services which are recognized
as appropriate medical practice within their state. The proposed definition is
vague and could be subjected to varying regulatory interpretation. Because of
its vagueness, it could be interpreted in ways that would further limit services
reimbursable under Medicare.

SECTION 25. PAYMENT UNDER MEDICARE OF CERTAIN PHYSICIANS' FEES ON ACCOUNT
OF SERVICES FURNISHED TO A DECEASED INDIVIDUAL

ASIM supports this provision to provide greater flexibility for survivors of
deceased beneficiaries in obtaining payment for services rendered to the
beneficiary.

SECTION 26. PROHIBITION AGAINST ASSIGNMENT BY PHYSICIANS AND OTHERS

This section would limit the circumstances under which payment for services
could be assigned to a third party (agent). Such assignments could only occur
pursuant to an agreement with an agent under which the compensation to be
paid to the agent was not dependent either upon the amount of billing in pay-
ment, or upon the actual collection of any such payment. ASIM recommends
that this section be deleted since it interferes with the contractual rights of
individuals.

SECTION 33. VISITS AWAY FROM INSTITUTIONS BY PATIENTS OF SKILLED NURSING OR
INTERMEDIATE CARE FACILITIES

This section allows a Medicare patient in a skilled nursing facility or in an
intermediate care facility to make visits outside the institution without such
visits being conclusively regarded as indicating that the patient is not in need
of the facility's services. This is highly commendable. If more regulations which
affect patient care were similarly flexible to allow application on an individual
patient basis, physicians would find federal health programs much less
objectionable.

SECTION 42. AMBULANCE SERVICE

This section extends Medicare coverage to provide ambulance service to the
nearest hospital only if it is adequately equipped and staffed to provide the
necessary treatment. This addresses only part of the identified problem. While it
fills the obvious need for adequate facilities, it ignores the desirability of having
the patient treated by his personal physician. The proposed wording of this sec-

tion perpetuates this problem in many cases. It is recognized that there areinstances which preclude taking a patient to the hospital where his physician has privileges (i.e. when there is an unreasonable distance to travel or when there is an emergency requiring prompt treatment). However, it is often unreasonable to deny a patient treatment by his personal physician in the absence of such conditions. When treatment is provided by another physician unnecessary repetition of tests and longer hospital stays often result adversely affecting the cost of medical care.

POSITION OF THE CALIFORNIA STATE DEPARTMENT OF HEALTH REGARDING S. 3205The California State Department of Health opposes S. 3205, Medicare and Medicaid Administrative and Reimbursement Reform for the following reasons: (1) The Administrative Reform components of this proposal would consolidate the federal administration of the Medicare and Medicaid programs. Although there might be some cost savings due to this consolidation, there is no reason to think that there would be any greater coordination of these programs. In fact, the consolidation would most likely cause confusion between the two programs and make it more difficult for the individual states to obtain decisions on their Medicaid programs. For example, it appears that the newly formed Inspector General for Health Administration is a duplication of the United States General Accounting Office assignments. This means that the states' Medicaid programs have two auditing factions to deal with instead of just one.

(2) The Hospital Reimbursement Reform portion of the proposal would be costly to the federal government, costly to Medi-Cal (California's version of Medicaid), and would do little to restrain inflation in hospital costs.

Actually, it increases the acute hospital costs for Medicare by allowing additional costs not currently allowed. Although the proposal to encourage the closing of underutilized facilities appears to be a good one, it is only a small part of this reform package.

(3) The Practitioner Reimbursement Reforms would be damaging to the MediCal program. It is important for California and other states to maintain fiscal and programmatic flexibility. The portion of this report which requires the Medicaid programs to pay not less than 80% of the Medicare allowable charge for non-surgical care provided by physicians outside of a hospital would undermine flexibility in both of these areas. In the short run, this change would be costly to California and it would greatly inflate the current allowable charges under the Medi-Cal program. In the long run it would tie Medi-Cal's fee structure to whatever policies Medicare adopts in the future.

STATEMENT OF THE CHAMBER OF COMMERCE OF THE UNITED STATES
BY ROSE P. WOODEN 1

The National Chamber, on behalf of over 60,000 members, welcomes this oppor tunity to comment on the "Medicare and Medicaid Administrative and Reimbursement Reform Act," (S. 3205).

We commend this committee's effort to design legislation to contain the burgeoning expense of these programs, which are expected to cost $38 billion in fiscal 1977, up $7 billion from fiscal 1976.

We agree with Senator Talmadge's remarks when introducing this bill. He said,

"We just cannot go on this way. The increasing cost of these programs consistently outstrips the rate of rise in Federal revenues. The choice is a simple one either we make Medicare and Medicaid more efficient and economical or we reduce benefits. We have just too many worthwhile demands on the limited Federal dollar to be able to allocate increasingly disproportionate amounts to Medicare and Medicaid."

The National Chamber supports access to medical care for all Americans at reasonable costs, but is concerned with the runaway inflation in health care costs. We support the intent of S. 3205 to contain costs but we oppose the bill due to the questionable effectiveness of certain concepts in it. We believe the methods chosen in S. 3205, to seek economies in federal health programs, will

1 Associate Director. Economic Security, Education and Manpower Section, Chamber of Commerce of the United States.