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funds and assuring program effectiveness-is unprecedented in federal legíslation and welcomed with great enthusiasm. This provision will unquestionably strengthen the legislatures' ability to oversee the administration of their Mediaid program. Moreover, it should spur greater interest on the part of the appropriate committees to continually evaluate the performance of their own state agencies.

V. PROVISIONS FOR IMPROVING MEDICAID ADMINISTRATION

S. 1470 calls for specific reforms in the administration of Medicaid by establishing specific performance standards in four areas:

1. Eligibility determination;

2. Quality control;

3. Claims processing; and

4. Program reports and statistics.

While the introduction of performance standards represents an appropriate step towards improving program administration and management, NCSL feels the following specific concerns must be accommodated:

1. Since compliance with the performance standards in the four broad areas is largely dependent on the assistance of fully operating management information systems, state and local governments will need more lead time than the proposed October 1978 effective date offers. Additionally, we recommend that the federal government assume the full cost of the development and operation of these management information systems.

2. The Medicaid requirements are extremely detailed and specific. The advisability of locking such regulatory language into a statute is seriously questioned. 3. While several states already meet or exceed the performance standards in the bill, many other states will be unable to comply without a substantial increment in state expenditures.

4. The standards related to the area of quality control give us considerable difficulty. To begin with, a maximum error rate for eligibility determination set at the 75th percentile of rates reported by the states (between a specified time period) will always be an arbitrary standard. More equitable measures which recognize state capacities could be developed, rather than legislating such a rigid statistical requirement.

5. Even more troublesome is the tying of a fiscal penalty to certain tolerance levels. Given the fact that "quality control" is still an art and not a precise science that is to say no one has the answer as to what combination of factors will guarantee a reduction in errors-we find the attachment of fiscal penalties to tolerance levels unacceptable. Instead, we would prefer to see a nationwide quality control system developed as a management tool which will allow elected officials, program managers and the public to reliably and validly know the accuracy of the eligibility system at regularly recurring intervals.

The basic principles of this nationwide quality control system should be applied not only to medical assistance but to AFDC, SSI and food stamps as well. Additional administrative standards should not be mandated by the federal government without prior consultation with states and localities and until there is clear evidence of their cost effectiveness.

We further believe that no national performance tolerance levels should be established at this time. Instead, all states should be required to develop periodic corrective action plans, acceptable to the department of health, education and welfare, geared to the individual conditions of each state and including the state's specific targets for error reduction.

Sanctions, if necessary, should be applied only through the existing compliance procedure and only in those instances where a state clearly refuses to propose an acceptable corrective action or fails to appropriately implement the actions in the agreed upon plan.

We also recommend that the publicity of quality control findings should be continued with the following modifications:

More emphasis should be placed on publicizing in each jurisdiction the record of that single jurisdiction (national publicity makes it difficult for the public to evaluate the program which operates in their own localities.)

Public recognition should be given to those jurisdictions with low error rates or which are making significant improvements.

More emphasis should be placed on clarifying the causes of errors and the -content of corrective actions plans.

In addition to the preceding recommendations NCSL offers the following suggestions for enhancing the quality and effectiveness of the administration and management of the medicaid program:

Performance standards should be viewed as an essential management or information device by which an ongoing assessment of the effectiveness and efficiency of a state's medicaid program can be made and by which areas of deficiency can be identified and corrected. Standards should not be used as a vehicle for the application of fiscal penalties.

With respect to the application of fiscal sanctions, efforts should be made to distinguish between willful intent not to comply and management inefficiencies. Where the latter is the problem, technical assistance should be the initial remedy with a specified time limit established for compliance.

The application of penalties should be only a measure of last resort. When program deficiencies are identified, a corrective action plan should be formulated by the state and technical assistance should be extended by DHEW to help implement the plan. Only when further review indicates non-compliance should a penalty be imposed.

Penalties should be levied on a flexible basis, in accordance with the degree of non-compliance.

Positive incentives, e.g., higher matching ratios, should exist to encourage worthwhile programs.

One of the serious deficiencies in medicaid management is the lack of comprehensive and comparable program information, DHEW should work with the states to establish a common set of data describing each state medicaid program, including information on reimbursement.

DHEW should have the authority to reimburse states up to 90 percent for administrative costs. In return for the increased match, states must fulfill certain performance criteria in the administration of the program. HEW would negotiate with each state on the conditions and standards that must be met in order to receive the higher match.

The development of MMIS within every state should be a major priority of DHEW. The matching ratios for development and operation of MMIS should be reconsidered in view of the disproportionate burden the costs have on predominantly low income states.

Staff to implement findings from the MMIS systems should be paid on a 75/25 percent matching basis.

The medicaid technical assistance role of the DHEW should be strengthened and upgraded and added emphasis should be placed on training federal staff on-site within the states.

DHEW--in cooperation with the major state and local public interest organizations should foster inter-state technical assistance and resource exchanges for the improvement of medicaid management and administration.

In conclusion, Mr. Chairman, we suggest that while S. 1470 contains numerous worthwhile features that deserve widespread support, the bill should not be represented as the exclusive answer to controlling health care costs. Medicaid and medicare account for only one third of the total health care dollars spent nationally; therefore, the regulation of medicaid and medicare cannot control costs throughout the entire health care sector. Even if the bill's provisions succeed in holding medicaid and medicare hospital costs in line, there are too few safeguards to prohibit the reallocation of those costs to other third parties. Furthermore, we feel that action must begin right away on comprehensive health care cost containment. A delay until 1981 is likely to mean that hospital costs will have increased another 45 percent before we start to deal with them.

We believe that the development of a national health policy offers the most effective means of containing costs throughout the health care sector in the long run. Such a policy at a minimum would link decisions on provider reimbursement to effective health planning authorities. It would correct the present imbalance in the health care system between the emphasis on treatment of illness and the deemphasis on promotion of health. A national health policy can begin to grapple with some of the difficult public policy. Issues being forced on society by the proliferation of expensive, sophisticated technologies, such as, what kinds of health services shall be provided and where shall our limited resources be concentrated?

Last year in your introductory remarks on S. 3205 you indicated, Mr. Chairman, that the kinds of administrative and payment changes advocated in the

bill "are absolutely necessary prior to any expansion of the federal role in providing more health insurance to more people". You went on to suggest that absent these changes, "any expansion would be an open invitation to fiscal disaster".

While, of course, our presence here today is not to debate the merits or demerits of the various national health insurance proposals pending before Congress, we do anticipate that that debate may be forthcoming fairly soon and when the time comes, state and local governments will be anxious to make a contribution to a consensus as to the kind of health care system America ought to have.

In preparation for that possibility, state and local organizations have been working together over the past year to learn how their constituents fell about certain key issues in the national health insurance discussion, as well as to delineate what roles and authorities state and local governments ought to exercise under any new health care system. For the record, I would like to submit some attachments which describe in detail our concerns in this area, as well as some of the tentative recommendations we have developed.

Thank you once again for this opportunity to meet with you.

Senator TALMADGE. The next witness is Dr. Robert P. Whalen, commissioner of health, New York State, on behalf of the Association of State and Territorial Health Officials.

Dr. Whalen, we welcome you to the committee. You may submit your entire statement for the record, and summarize it.

STATEMENT OF DR. ROBERT P. WHALEN, COMMISSIONER OF HEALTH, NEW YORK STATE, ON BEHALF OF THE ASSOCIATION OF STATE AND TERRITORIAL HEALTH OFFICIALS

Dr. WHALEN. Thank you, Senator.

As the chief framer of this legislation, Mr. Chairman, you are to be congratulated for your foresight and perception. The ever-increasing costs of medicaid and medicare have indeed become an intolerable burden for Federal and State governments and for the Nation's taxpayers. We at the State level need relief from our burden and we need it now.

We note with interest and approval your recent comments that this bill does not compete with President Carter's Cost Containment Act, but instead, complements that legislation. We endorse the concept of adopting immediate interim restraints on health care costs while longterm solutions are worked out.

At or near the top of every State's priority list is relief from the current provisions of so-called reasonable costs in paying for hospital and long-term care. This misnamed and misguided policy has provided the Nation's health care industry with carte blanche to pass through to the govermental payer whatever costs the industry chooses to charge for its services. As a consequence, many States and local communities have reached the limits of their fiscal resources, even for such socially beneficial programs as medicaid.

When hospital rooms cost upward of $300 a day, as they do in some metropolitan areas of our Nation, and when medicaid must reimburse some hospitals $70 to $80 a day for a single visit to a clinic or an emergency room, as was true earlier this year in New York City, I say to you that hospital costs are anything but reasonable.

Thus, our association strongly supports efforts to reform the administrative and reimbursement mechanisms in the medicare and medicaid programs. The bill before you represents a thoughtful ap

proach to this urgently needed reform, and is a signal improvement over kindred legislation offered last year.

We wish to offer the following comments concerning the bill and some of its provisions.

Our principal concern is with the level of consultative and administrative control that this legislation would accord to the States, which together with localities, are legally responsible for the operation of the medicaid program and are expected to fund half of its costs.

Many States, New York among them, have been working for years to refine and implement effective programs aimed at controlling everrising hospital expenditures, and to do so without denying vital health services to those people who need them. These State programs represent a pluralism that should be encouraged to continue and

progress.

This would not only give the Federal Government a benchmark against which to measure its programs of hospital cost containment, it would also permit these States to serve as laboratories for the development of innovative cost control procedures. We strongly recommend that States with existing and effective programs of hospital cost control be exempted form the hospital reimbursement provisions of this bill and that this waiver be granted without prejudice.

We endorse the concept of rewarding hospitals whose routine costs are below the average of their groups, and penalizing hospitals whose costs exceed the group's average.

But the classification of hospitals into groups differentiated only by bed capacity seems inflexible and unwieldy. More sensitive criteria may be needed to account for geographical differences, different sponsorship and variabilities in level of care that is provided. In New York State, for example, the character of the hospital industry in New York City is far different from that in rural areas upstate.

When New York State first sought to control hospital costs in 1970, we began by examining certain routine costs of inpatient care, as this bill does. Many years later and wiser, we have become more sophisticated in our efforts to contain hospital costs. We found that, when certain cost components are left out of a reimbursement formula, these costs often become artificially inflated in an effort to counteract restraints contained in the formula. Thus, when we placed stringent controls on reimbursement for inpatient care, we found that the average length of stay began to increase and that charges for outpatient and ancillary services shot upward at a precipitous rate.

Accordingly, we found it necessary to broaden our cost containment efforts to include ancillary costs, to set standards for average length of stay, and to place a ceiling on reimbursement for clinic and emergency room services.

I offer this experience as proof that cost control legislation, if it is to be effective, must cover ancillary as well as routine care.

This bill would allow hospitals to receive full reimbursement for costs up to 20 percent higher than the average of their peer group. In our view, this is far more permissive than the limit already set by some States. In New York State, for example, medicaid and Blue Cross reimbursement is limited to the average of the group. Those hospitals exceeding the average are penalized.

The concept of conversion allowance is, we believe, an ingenious answer to the problem of unneeded, underutilized hospital facilities. We believe such a provision would overcome the opposition many States have experienced when they have tried to close or consolidate unnecessary hospitals and hospital services.

Such efforts, however, should be closely linked to health planning at the State level, and should involve both health systems agencies and State health facilities planning agencies. Through this interface, the States would be in a position to identify those institutions and services. that are redundant to need.

Many States have sought permission for hospitals to convert some beds to the level of nursing home beds, with appropriately reduced reimbursement. Heretofore, Federal health policy has not permitted this. Thus, we are pleased to endorse this provision in the bill.

And we also endorse the constraints placed on reimbursement of hospital-based physicians, such as anesthesiologists and pathologists, for services not directly related to patient care.

The performance criteria, reporting requirements, and penalties specified in relation to eligibility determination, claims processing, and data retrieval are, in our opinion, unrealistic.

In summary, may I say that we States, much like the Federal Government, need to coordinate our cost control efforts with related activities in health planning and development. The proposed legislation could be more supportive of such efforts by closely involving the States with the administration and intent of the legislation. For example, States could be asked to submit administrative programs that would integrate cost control, planning, and policy linkages at whatever level they might be currently operating.

In some States, this would be development of a strong capital expenditure control system, while in others it would be a coordinated and complex system of ratesetting, planning, and capital expenditures controls.

This could be at least partially accomplished through a State administrative program requirement. Such a requirement would need to be supported by federally established performance criteria tied to the intentions of the act, but in keeping with the unique situation of the various States.

Inherent in my testimony is the belief that something must be done immediately to cope with the explosive rise in State and local, as well as Federal Government, share in health care costs. But at the same time, we need a long-term approach, such as this bill, to the problem. We believe that considerable attention should be given to increasing State resources so that health care cost containment can be effectively planned, implemented, and evaluated.

I want to stress that ASTHO strongly endorses the intentions of this legislation. Our commentary is presented from the perspective of strengthening a useful and necessary proposal.

And if we may be permitted one final observation, it is that the increase in expenditures by the health care delivery system over the past decade has not demonstrably benefited the health status of the American people. We are confronted with rapidly increasing expenditures for new technology, more personnel, and new facilities, without a nec

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