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14.5 percent-increase over fiscal year 1975. Physicians' services, nearly one-half as large as hospital expenditures, were estimated at $26.4 billion, an increase of 15 percent over 1975 expenditures.

Continued increases of this magnitude jeopardize the availability of reasonably priced quality medical care for all Americans and delay any serious consideration of a national health insurance program.

Any effective program designed to limit the increases in medical care costs must control both the development and the reimbursement of health care facilities and services. AACHP believes that building on the existing certificate of need and rate setting authorities contained in Public Law 93–641, and on the integrity of the Federal, State and regional functions and relationships established under that legislation is the best way of achieving these goals. We believe that S. 1470 takes this approach and for that reason we endorse the fundamental principles embodied in the bill.

As you know, a major contributing factor to the rate of increase in health care facility costs is capital investment. Unnecessary capital expenditures are doubly inflationary. Not only must the public bear the development, construction and financing cost of unnecessary facilities, but it must also pay the significantly increased operational cost generated by those facilities.

Thus, while efforts are undertaken to control increase in operating costs through the introduction of measures designed to encourage efficiency among health care facilities, efforts should also be made to achieve other compatible basic changes in the health care system.

Specifically, unnecessary expenses for facilities and services should be prevented, excess capacity should be diminished, unnecessary utilization of facilities should be reduced, and the public should be educated to the relationship between the proliferation of facilities and services and increases in medical care costs.

A strong systemwide planning program is necessary to address these concerns so that imbalance in the distribution and mix of services and facilities is reduced and additional medical care resources are developed according to true regional and community needs. Without such an aggressive planning program restrictions in reimbursement for operating costs will do little to affect the long-range patterns of increasing health care costs.

Another major advantage of linking reimbursement and resource development controls is that it would more effectively involve wide public participation in the national effort to contain the rise in health care costs. This is important because these efforts will ultimately require highly unpopular decisions which can best be accomplished by maximizing citizen involvement, understanding and support. This is precisely the role of our member agencies.

As we have been most directly involved in the control and appropriate placement of health resources we would like to first speak to the provisions of the bill which directly affect these activities.

We are particularly pleased that S. 1470 contains authority in section 3 for the provision of a conversion allowance for underutilized facilities and services. Such an allowance has been one of the most essential missing ingredients in existing efforts to shrink excess capacity. We do believe, however, that State and local planning agencies should be provided with a more active role in selecting appropriate recipients of such allowances.

We also applaud the provisions contained in section 4 of the bill which would strengthen the section 1122 review process by increasing the sanctions for unauthorized capital expenditures, and by requiring that proposed capital expenditures in standard metropolitan statistical areas which encompass more than one jurisdiction receive the approval of all designated planning agencies in the area.

We do note, however, that underlying deficiencies remain in the review process under both Public Law 93-641 and section 1122. Specifically, we believe that the following additional provisions should be introduced :

One, the establishment of a national capital expenditures ceiling; while we cannot confirm the accuracy of the $2.5 billion ceiling contained in the administration's cost control proposal, our experience suggests that only a relatively low ceiling will allow us to achieve the rationality required. We believe the $2.5 billion suggested by the administration to be generous.

Two, the establishment of national supply guidelines. We accept the suggested maximum of 4 beds per 1,000 population and the 80percent occupancy factor contained in the administration's cost control proposal as general guidelines. Application of such "standards” as a ratio of 4 beds per 1,000 population, coupled with the 80-percent occupancy rate requirement, is a reasonable step in the right direction.

We wish to stress, however, that both guidelines must be viewed from a national perspective. Minimum requirements should not, in fact, become the norm. The health care delivery system in more than one-fourth of the Nation already functions more efficiently than the guidelines specify. Great care must be taken to avoid laxity or retrogression in areas that are already functioning relatively efficiently.

In this connection, we would point out that the old Hill-Burton occupancy norm, which many people felt was too lax, stipulated an average occupancy factor of 85 percent.

Three, the extension of controls on capital expenditure to all facilities, including Federal Government facilities.

Four, the inclusion of all expensive equipment in the range of $150,000 and above, regardless of location. Without this inclusion, planning, service delivery, and capital expenditure computations becomes distorted.

Five, the inclusion of explicit authority for decertification and/or conversion of facilities and services to assure success.

Six, the inclusion of provisions for discontinuation of FHA loan guarantees, tax-free bonding authorities or investment credits, or any other incentives for capital formation for unapproved facilities and equipment;

Seven, the inclusion of provisions specifically requiring that project approvals be consistent with the health facilities plans, State health plans, and national guidelines described in Public Law 93–641.

We also regret that DHEW is not currently compensating our member agencies for performing section 1122 review. The effectiveness of the review process depends in part on the payment for the functions required by that process.

With regard to the provisions of S. 1470 which are designed to impact on reimbursement principles we are strongly supportive of the principles contained in a number of provisions.

We support section 2 which calls for both an accounting and uniform functional cost reporting system as well as the classification of hospitals for purposes of limiting reimbursement. Additionally, we support the provisions which prohibits hospitals from increasing other charges to compensate for reduced medicaid and medicare reimbursement. Private patients should not be the victims of the regulatory process.

Moreover, we are pleased with the role of planning agencies in determining whether the adjusted per diem payment rate should apply to the portion of a hospital's routine operating costs attributable to the underutilized capacity, as well as the waiver provided to State ratesetting programs under section 222 of Public Law 92–603 and 1233 of the Public Health Services Act. However, we believe that individual planning agencies could be given a role in suggesting criteria for the hospital classification described in section 2.

We also specifically support section 10 of the bill which encourages physicians to accept assignments under medicare, Section 11 dealing with limitations on prevailing charges under medicare, and section 15 which authorizes the development of relative value schedules to be used in reimbursement.

These provisions are important in our view because they begin to give legislative recognition to the fact that comprehensive policy and planning cannot occur without addressing physician remuneration in a more rational fashion.

Nevertheless, we should not lose sight of the fact that such remuneration is substantially less important than the other medical costs which are controlled, but not received, by physicians. We must, therefore, also intensify our efforts to reduce unnecessary utilization of facilities and services and develop effective alternatives to inpatient facilities and services.

Finally, we would like to lend our support to the provisions in the bill relating to the streamlining of the administration of medicaid. We believe these provisions will help eliminate the second-class medical care which has all too often been the unhappy fate of those who require medicaid assistance.

Mr. Chairman and members of the subcommittee, this concludes our remarks. We reiterate our support for the principles involved in S. 1470. We believe that they merit consideration not only in relation to medicare and medicaid but as a model for desired changes across the entire health care system.

We look forward to working with you on the enactment of the bill as well as on other key issues of mutual concern.

Thank you.

Senator TALMADGE. Ms. Hansen, I believe you are the chairman of the board of directors, Mid-American Systems Agency?

Ms. HANSEN. Yes.
Senator TALMADGE. How many members do you have?

Ms. HANSEN. We are a 30-member board made up of 51 percent consumers, 29 percent providers. I am a consumer member of the board.

Senator TALMADGE. How many States ?

Ms. HANSEN. We are in two States, a five-State agency. We represent five Missouri counties, three Kansas counties in the statistical area of Kansas City, Mo.

Senator TALMADGE. Do you think this bill is a step in the right direction to try to control the very rapid escalation of medicare and medicaid?

Ms. HANSEN. I do, Senator, partly because it has in it provisions for the utilization of the already existing health planning network, although it is a network, as you well know, in a developmental stage and a planning stage, I think it is an appropriate means by which health care costs can be controlled.

Senator TALMADGE. If you have any further recommendations to improve the bill, we would appreciate your submitting them in writing.

Ms. HANSEN. Thank you.
Senator TALMADGE. Senator Dole?

Senator DOLE. I have only one question, based on paragraph No. 2 on page 4 that ends on page 5, with reference to the four beds per 1,000 and the 80-percent occupancy requirement.

What has been your experience in the eight counties that you are active in as far as occupancy? Does that cover any rural counties?

Ms. HANSEN. Partially rural, Senator. We have part of Platray, some parts of Cass and Clare are considered rural and other parts of Leavenworth are considered rural. We are a mixed region in that way.

We do not approach that kind of occupancy in the eight county metropolitan area. I would be naming the number. I guess overali, considering the 29 inpatient facilities in the region, somewhere about 72 to 75 overall. Senator DOLE. Is it lower in the rural areas, the occupancy rate?

Ms. HANSEN. I think not. I think it is lower in the central city area where we have clusters of facilities. They are uneven in their occupancy. Some are very much full most of the time. Others are finding it less easy to provide the same quality of service and obviously it has resulted in some lessened demand.

We are an overbedded area, however, in terms of the needs.
Senator Dole. You support the provision.

In rural areas I think there is some flexibility. We have the swing bed provision that indicates that you can use some of those beds for long-term care. Do you see that as a satisfactory provision ?

Ms. HANSEN. I think again, in my experience, being a local experience, I would have to view it on a case-by-case situation. In our region, I think it is certainly a reasonable alternative rather than allowing a capital expenditure that already has been made to be put to no function while over here, a long-term care institution is being constructed.

I think it is a rational alternative to be considered.

Senator Dole. That is the way Senator Talmadge views it, and I think that is the way others of us view it. If

you have the facility, it makes little sense to go out and build another.

Ms. HANSEN. It is true.

However, Senator, sometimes you do find in an inpatient facility that it is inappropriate for long-term care because of the building.

That comes down to specifics. But in general, it is an excellent principle.

Senator DOLE. I appreciate very much your testimony.

Senator Talmadge has indicated if you have any plans, or if you have an opportunity to read the testimony of the witnesses that will be here the rest of this week and have any suggestions or comments on that testimony, it will be helpful.

Senator TALMADGE. Thank you very much, Mrs. Hansen and Mr. Mott. We appreciate your contribution to the committee's deliberations.

Tomorrow we will hear from representatives of the Nation's hospitals.

The subcommittee will stand in recess until 8:30 tomorrow morning.

[Thereupon, at 11:20 a.m. the subcommittee recessed to reconvene at 8:30 a.m. Wednesday, June 8, 1977.]


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