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Washington, D.C. The subcommittee met, pursuant to notice, at 8:30 a.m. in room 2221, Dirksen Senate Office Building, Hon. Herman Talmadge (chairman of the subcommittee) presiding. Present: Senators Talmadge, Matsunaga, and Dole.

. The first witness this morning is Mr. John Alexander McMahon, president, American Hospital Association, accompanied by Mr. Alan Manzano, vice president and Leo J. Gehrig, senior vice president.

Gentlemen, we are delighted to have you. Your entire statement will be inserted into the record and, if you will summarize it in 10 minutes, we would appreciate it.



Mr. McMahon. Thank you, Mr. Chairman.

As you noted, I am Alex McMahon, president of the American Hospital Association, accompanied by Dr. Leo Gehrig and Mr. Allan Manzano.

The AHA represents more than 6,500 member institutions, including most of the hospitals in the country, extended and long-term care institutions, mental health facilities, hospital schools of nursing, and over 24,000 personal members. We appreciate the opportunity to present our views and recommendations on S. 1470, the Medicare/Medicaid Administrative and Reimbursement Reform Act.

The AHA believes that your bill, S. 1470, Mr. Chairman, identifies and constructively addresses a number of critical issues important to the public, providers, and Government in the provision of health care services. Central among these issues is the rapidly increasing cost of health care services.

Hospitals are concerned and are working actively to restrain health care cost increases within their control. Health care cost increases are a complex problem; to address the issue requires the combined efforts


of all providers, consumers and Government and other third-party payers. Therefore, as we seek to bring the increase in health care costs in line with the growth of the general economy, it is essential that the actions taken be constructive to this end, and it must be recognized that this objective cannot be accomplished in a relatively short time.

What is forgotten is the fact that these 6,000 hospitals are governed by 100,000 community-oriented trustees who are very, very concerned, just as you are in the Congress and as other people are, about the rate of increase in cost. Sometimes, the allegations of what is going on in hospitals overlook the dedicated service of these trustees, many of whom both of you Senators know from your own States and your own communities. Hospitals are ready and willing to reduce costs, but not at the expense of reducing quality or turning away patients.

It is essential that the actions taken be constructed with all the ends in mind and it must be recognized that cost reduction objectives cannot be accomplished in a short timespan.

Hospital cost increases result from a variety of factors. On page 2 of our statement we have set forth, as we see it, the difference in impact of inflation on the economy as a whole versus that on the hospitals' market basket and the services that lead to the increase in cost.

We know that you recognize the unique characteristics of the health care delivery system, Mr. Chairman, and our analysis indicates that S. 1470 reflects an understanding and consideration of its complexities. S. 1470, in revising the method of payment to hospitals, establishes a system of incentives and disincentives based on target rates for groups of essentially similar hospitals. We strongly support the provisions allowing State rate review programs to serve as an alternative method for control over medicare and medicaid payments. In addition, we support your efforts not only to make improvements in the medicare reimbursement system, but also your efforts to improve the current medicaid program,

The approach of your bill, Mr. Chairman, which considers the operational differences between institutions, is a reasonable and equitable one that deals rationally with cost problems, unlike the inequitable and harmful approach proposed by the administration's bill, S. 1391. In your introductory remarks on S. 1470, you expressed several concerns about the administration's proposal which we share. We have concluded that S. 1391 is inequitable in design, wrong in concept, and impossible to administer.

If the committee would like, we can expand on that later on.

On pages 4 to 6, Mr. Chairman, we have noted some of the present hospital controls as well as hospital activities designed to reduce the rate of increase. We have touched upon the importance of planning and on the existence of capital controls and we have suggested the use of incentives to eliminate unneeded facilities. We are pleased with the provisions of your bill dealing with this matter. I will have more to say about that later.

Even unneeded facilities, Mr. Chairman, we must recognize, are depended on by some people. It is one of the reasons why it is difficult to say that there are a lot of excess beds or unneeded facilities, when the elimination of those would mean that some people would then have to go without.

We have touched on utilization, review, and medical audit. We have spoken favorably about the anti-fraud and abuse provisions which you began and which are now moving forward in the Congress.

We have talked about the impact of State rate review. We have noted the excessive regulation problems. We have suggested greater public disclosure of costs and charges. We have commented on the problem of patient demand, how the encouragement of better health practices could be a contributor to lower rates of increase in hospitals, as well as health care costs.

We have touched upon the individual hospital efforts. We have noted that we would certainly support reasonable efforts to go further, as we did in the testimony on your bill last year, and as we hope to do today.

The balance of the testimony, Mr. Chairman, deals with S. 1470. It is basically supportive with a few suggestions which, we believe, would improve the workability of the approach. We began the discussion of that on page 7.

We believe that the provisions, Mr. Chairman, of section 2 would result in significant improvement of the existing methodology of section 223 of the 1972 amendments, which it is intended to replace, and we strongly support the provision in the bill that permits State rate review programs as an option to the bill's federally administered controls. We are pleased with the addition of those provisions which we take as responsive to our suggestions last year. However, the proposal we think and we noted this, Mr. Chairman, on page 7-is a narrow delegation to the States because of the requirements that delegation would be only to those States where hospital payments would be less than would be paid under the Federal program, are perhaps too re strictive.

Governors would have difficulty in determining whether or not they could meet that challenge. We think probably, with the present situation of the rate review programs, broader opportunity for delegation would be advisable, and we noted that.

On page 8, we have commented favorably on the proposal for uniform functional costs reporting systems without the requirement of a uniform functional accounting system. We think that uniform reporting will deal with the problem. Of course, a problem basic to the workability of the classification system is the need to get uniformity of reporting.

Toward the bottom of page 8 we begin noting the number of recommendations which we believe, as I said earlier, would make the provisions of the bill more workable and I would like to highlight several of them.

In the middle of page 9, under item 3, we noted that the proposed system of classification continues to be based on bed size and type of facility. We suggest a consideration of other variables, such as case mix and length of stay which would provide more flexibility:

On page 11, under point 7, we suggested a somewhat broader exception process because the assessment of intensity and complexity of care, as we noted on the bottom of the page, in addition to patient mix, would add a needed flexibility and would give opportunity to expand on the evaluation of the workability and classification system.

On page 12, we expressed a concern about the possibility that, over time, the incentive formula, the average per-diem cost within a group of comparable institutions which may have a ratchet effect. We suggested a 2-year review.

We might also, and will discuss this further with the staff, Mr. Chairman, consider the use of the median rather than average to make the system more workable.

We have suggested, at the bottom of page 12, two important issues, the first being a provision for charity care and bad debts incurred by hospitals. Some attention might be given to that,medicare and medicaid might share in the ocst of treating all unsponsored patients.

We have suggested at the bottom the need to provide for the financing of necessary replacement of hospital plant. The problem of surplus revenues, or an operating margin, Mr. Chairman, is not understood as the testimony of the Secretary yesterday seems to indicate. Section 46 addresses another question, and we must provide for the effect of inflation on working capital and provide the equity needed for the improvement of plant or replacement of wornout facilities.

Mr. Chairman, hospitals, as a whole, do not have a surplus, an operating surplus-hospitals as a whole, across the field—we have tracked this for a number of years, the field operates at an operating loss. What does bring about excess of revenues over expenditures are nonoperating revenues, donations, and so on, that make it possible for expansion; and this is an absolutely necessary part of hospital operations.

Finally, Mr. Chairman, from pages 13 through 17, we have offered comments on other sections. We were particularly pleased with several sections, such as section 3, to encourage the closing and conversion of unneeded facilities, and section 24, the conversion of unneeded acute beds in small institutions.

We made a minor suggestion or so on that. We are not quite sure, I will say, Mr. Chairman, that we completely understand the new sections 12, 15 and 40, although we do see improvement over the earlier version and will be pleased to work with the committee staff on needed clarification.

Finally, Mr. Chairman, as I noted in the concluding remarks on page 17, we believe that your bill includes many constructive and important reforms in administration and reimbursement for services under medicare and medicaid programs. We support them and have suggested some modifications, and we do appreciate the opportunity to continue to work with you and your staff and in participating in this hearing.

I would be glad to respond to questions.

Senator TALMADGE. Thank you very much, Mr. McMahon, for your very helpful testimony.

On page 12, vou express concern over a possible ratchet effect on average hospital costs under the reimbursement plan in the bill. Do you believe that that would occur because the average cost would be reduced as above average high cost hospitals brought their costs down?

That, of course, would tend to lower the average when it was next calculated. I agree that we should avoid forcing the average down to unfair and inequitable levels, but Secretary Califano testified yes

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