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terday that the proposal would not have much of a moderating effect on hospital costs.

I gather that your stand is just the opposite, that we might moderate hospital costs too much. Is that what you are saying ?

Mr. MCMAHON. We are concerned-well, it really goes to the workability, Mr. Chairman, of the incentive activity. If you take an average and then give the incentive for the hospitals to come below the average through an award, we are not sure on what the effect of that on the average as well as the effect through the elimination or the reduction of rate of increase of the high costs will have. That is the reason that we have suggested the possibility of the use of a median which would avoid what I am talking about.

It might be useful—why we suggested what we did in the testimony, the reevaluation very 2 years might be useful. We are concerned. We know it is going to have a very positive effect, Mr. Chairman, in focusing on and giving notice to the institutions who are above, substantially above, the average to bring themselves in line.

I think this is a very useful concept, because it zeroes in on those where savings are possible and we are convinced that that program will have a beneficial effect.

Dr. GEHRIG. May I add to that?

As Mr. McMahon has stated, I think this is going to have a very positive effect. I think it is important to note that the plan in the bill would provide, prior to initiation, data for hospitals to look at. I believe its effect will occur before, in fact, it becomes fully in force, because it would have provided fuller data to hospitals in which those costs are high. They can begin to make management changes prior to the effective date of this bill and adjust accordingly. It will have a real effect in moderating costs. It will occur early.

Senator TALMADGE. We are concerned with the need for accurate measures and methods for hospital wage levels in geographical areas. Both you and the Department of Health, Education, and Welfare, say that such methods are not now available.

HEW says, however, that they can be developed in a reasonable period of time. If these methods are not now available, what yardsticks do you people use who say that hospital wages are too high, too low, or average ?

Mr. McMahon. Mr. Chairman, we have always thought that the issue there is one to be determined by the institution itself. Again, as I say, governed by those community-oriented trustees who are very much concerned, both about the rates of increasing costs and about the ability to obtain and retain qualified people.

We have had some experience and tracked very closely, Mr. Chairman, some of the impact of section 223, and we know that hospitals in a specific community are influenced by activities outside of that community.

For example, you may have a State institution in a relatively moderate wage-level community, but it is tied to its own State Wage programs and cannot really be measured by that community wage level. There are other problems as well.

When the need comes to recruit nurses out of that community, we have always been very careful to try to measure or make comparisons about the wage level from institution to institution, because we know what the problems are.

We pointed out in the testimony, as you note, there are some problems with that concept. We have no solution at this stage. We would certainly be pleased to work with you and the staff to see what we might be able to do.

Senator TALMADGE. Thank you for that suggestion.

Should the wages of nonprofessional hospital employees be in a class by themselves, or is it reasonable to relate them to general wage levels in a given geographical area, or similar areas?

That is, are there not broad types of employment related to the work which janitors, electricians, orderlies, and administrative and clerical personnel do in hospitals?

Mr. MANZANO. We do not have specific data on a national basis on what those wage comparisons are, but there are indications, when you are talking about classifications of employees that are representative of the general employment market, that is a market in which hospitals must compete, their wages are generally comparable.

Senator TALMADGE. Is it not reasonable to use those as benchmarks?

Mr. MANZANO. In the case of classifications of employees that are represented in the general wage market, it would be, yes, Mr. Chairman.

Senator TALMADGE. Senator Dole?
Senator DOLE. Thank you, Mr. Chairman.

I think Mr. McMahon touched on the administration proposal. We are not having a hearing on that as such, but you might briefly tell us, at this point, what you think the principal defects are in that approach, the approach that Secretary Califano discussed briefly yesterday and also your comments or suggestions, if any, on having the Comptroller General take a look at what they are attempting to do in reorganization.

I might say GAO is already starting that investigation. They are going to start at 2 o'clock this afternoon with a meeting with the Finance Committee Health Staff. Your comments might be helpful.

Mr. MCMAHON. All right. Let us take those, Senator Dole, one at a time.

When one from the hospital field tries to pick a beginning point to analyze the administration's proposal, one is at a complete disadvantage, because it is all bad. Whether you are talking about the use of a specific percentage or whether you are talking about this extremely complex system that the bill sets forth, the whole thing is based upon a series of misunderstandings and miscomprehensions of the ways hospitals work.

For example, the Secretary said that 20 percent of the hospitals are already below 9 percent and he does not see why the others cannot do so. When you look at it, hospitals vary so greatly that those who are in a steady state, you might say, operating at about the same occupancy, providing the same services, ought to be under 9 percent.

An institution, as you know, that I am familiar with, will operate at less than a 9-percent increase next year, but it will not the following year, when some new services come into play.

The difficulty is, in many institutions, they are undergoing changes, changes in services, changes in patient mix, changes in the services that they provide for the community or changes in the community itself. It is that attempt to use a single yardstick that leads me to say that the bill is unworkable in concept.

I have also said that it was administratively impossible. You start off a year under the administration's proposal, and you are given a target, but that target is subject to change during the year. It is subject to change if the number of admissions change, and also because it says that we assume the same patients will come in next year as last year. This makes it impossible to adjust as circumstances change.

You do not know, Senator Dole, until well into the second year whether you have met the compliance requirements of the first year, because it does not do away with retrospective cost reimbursement. You are given a target and then you have to go through the accounting for the year and into the second year, make your calculations to find out whether you did meet the targets of the first year.

Nobody can budget under those circumstances. It would make the management of the institution absolutely impossible.

On top of that, you have the imposition of a class of purchaser concept, medicare, medicaid, the Blues, the commercial carrier are given some targets to meet with no recognition of the fact that their subscriber or insured or beneficiary mix might change.

For that reason, with the supervision of the third parties coupled with the managerial problems that make this the absolutely worst mish-mash we have ever experienced. It even goes beyond the so-called phase 4 of the economic stabilization program. That we found very difficult because it, again, was based on the assumption that a hospital operates in similar fashion from year to year, and that just is not the case.

We think that the only way to deal with the problem of the rate of increase in hospital costs is to understand first, why they increase; second, what the differences are from institution to institution. That, then, will enable you to say, as the bill that is the subject of this hearing does, let us begin by focusing in on the high cost of what seem to be high-cost institutions and make our savings in those areas first, giving notice, and target through an appropriate classifications scheme.

If there are further aspects of these problems the committee would like to examine or the kind of example that I have tried to sketch out of what happens over the course of a couple of years or to see why we say that the institution would be unmanageable and the third-party relationships impossible, we would be glad to submit that.

As far as the reorganization, of course, we have seen this only from the outside. I was aware of the testimony of yesterday. I have been aware of some of the reorganization plans and the criticism laid against it.

We have been so worried about other aspects of the administration's activity that we have not tracked that as closely as we might have.

Senator DOLE. You know, there was some comment yesterday-I guess “fat” is an easier word to understand than "obese." Do you have any fat hospitals in your association ?

Mr. McMahon. Mr. Dole, it would be impossible to answer that in the negative. I am sure that there are areas where savings are possible. I am sure that there are savings in the areas, each of us know. But to say that all institutions are similarly obese or fat or inefficient is to say that they all similarly efficient or slimmed down.

It is just inappropriate, inaccurate, and does not contribute to the solution. The reason I mention those trustees, along with the professional administrators, and now, fortunately, the medical staffs, I have seen more concern on the part of medical staffs in recent years than ever before. They are becoming acquainted with their hospitals' budgets, with their hospitals' financial problems, because they are absolutely dependent upon the hospital for the care of their sickest patients.

We have seen more concerned administrators and concerned medical staffs working together to see how increases in costs can be contained.

Unfortunately, for too many people involved, particularly the physicians—this is a new exercise, because the total concern used to be, let us have everything available in case something goes wrong. Now we are beginning to see that that probably imposes—not probably, but it does impose—too large a bill on the public, on the Government, on the third parties, generally.

We are beginning now to look at ways in which some of those standby activities can be eliminated, but once again, it is dependent upon judgment, dependent upon people to make appropriate decisions.

Senator Dole. My point was, do you have any control, if you see an area where costs are perhaps excessive, and where there may be some ways to reduce them?—What can you do as an association if you find such a hospital?

Mr. McMahon. We have no control, but we certainly have been pointing out illustration after illustration in our publications and bulletins, in our cost containment manual, the manual for cost containment committee, pointing out areas where we know some institutional savings have been made, and suggested that those areas be looked at, whether they be staffing patterns or the use of service contracts as opposed to employed labor, and so on.

Our responsibility, as we see it, is to provide information to the management of institutions as to areas that they might find further savings.

Senator Dole. Not only provide information on what they may receive, but also what they may be able to do without?

Mr. MCMAHON. Yes.

This is the reason why we have spent a lot of time in the planning area in urging more care before capital expenditures are made and in the sharing of services, and we have seen it is a result of those encouragement efforts, seeing substantial progress made in all of those

Senator Dole. You talk about State review programs, not necessarily mandated by law. I guess the obvious question is, how can we insure compliance if the rate control program is only voluntary?

Mr. MCMAHON. Again, I imagine, Senator, because of the peculiar nature of the hospital field, the programs have been extremely workable. Quite often, it is the old business of leading a horse to water.

areas.

When you have the hospitals in the State working together, it tends to bring others into line. There has been, for a number of years in Indiana, a voluntary program that has been quite workable. What we have suggested is, let's take a look at it. We have a lot to learn about State rate review programs and we think the broader the delegation-we do not think if the Federal Government would delegate, whether a mandatory program, mandated by law, or a voluntary program, that you are going to find much difference in the ultimate payment by medicare and medicaid over what would otherwise be the case.

We think the evaluation that can take place, because they are doing things in different ways, might have a very beneficial effect of showing what kind of approaches seem to work the best, not that we would say that a voluntary program over a long period of time would be appropriate, but some of the voluntary programs are using different mechanisms to control rates of increases in cost and in charges.

We think it would be worth looking at them, too. It is a question, even in the voluntary program, of the peer pressure itself, not unlike this committee's longtime interest and involvement in professional standards of review organizations on the political side, the same kind of peer review on administrative costs.

We are convinced that would have a very strong and beneficial effect.

We are saying, the more delegation that there is, because we are convinced that it will not lead to excess payments, then we will all be able to see what kind of rate review mechanisms directed at individual hospitals work the best and bring about the best balance between the reduction in the rate of increase in cost, on the one hand, and an appropriate improvements in the quality of care over time on the other.

Senator DOLE. I think, finally, you talked about the need for comparing hospitals, considering variables other than size and types. I think in the bill itself, on page 4, subparagraph (iii) and subparagraph (viii) on the bottom of page 9, as well as paragraph (c) (1), you will find the language of those three references would authorize the inclusion of any justifiable variables of possible costs. Perhaps if you have any comment, you would submit it for the record.

Mr. MCMAHON. We will take a look at it. I think our concern went to the idea that we were not at all sure that that, in effect, did not mean other criteria of the same kind as size and geography.

If it does what we are talking about, then obviously-except, you know, sometimes we do hare difficulty and the Congress, I am sure, is aware of it, too, of having the spirit of something carried into effect by an administration that has its own priorities.

We would always be more comfortable with some spelling out before you get to other considerations or other criteria, other criteria such as patient mix, length of stay and the things that would give us then some thing to hang our hat on as we went to encourage the people in the Department of HEW charged with the administration to take into account some of these other matters.

We will take a look at that, and offer additional comment. [At presstime no additional comments had been received.]

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