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2. For investor-owned hospitals, this range implies a multiplier of 3.7 of the Hospital Insurance Trust Fund rate, rather than the 2.0 in the proposed legislation.

3. Depending upon the level of Medicare cost adjustments which represent necessary costs of doing business but unallowable by Medicare, the multiplier required to achieve reasonable returns for investors would be between 5.2 and 8.6.

We urge you to consider these alternative approaches to improve the current Medicare rate of return on investment:

(1) Provide for an annual determination by the Secretary of a return equal to rates of return on investments in industries of comparable risk;

(2) Recognize income taxes as an allowable cost of doing business, reimbursable under Title XVIII; or

(3) Increase the current formula to at least 3.7 times the trust fund yield.


Section 4 of S. 1470 provides that Medicare and Medicaid reimbursement of both capital and direct operating costs would be prohibited when a capital expenditure has not met with specific approval. We support this as a valid means of strengthening the health planning law in a manner which will effectively restrain increasing costs. We believe that it should be up to individual HSAs, working to meet the needs of the communities they oversee, to decide what new capital expenditures are justified. This is in marked contrast to the Administration's proposed dollar ceiling on capital expenditures on a state wide basis according to population, coupled with a fixed ratio of four beds per 1,000 individuals or occupancy of 80%

We do not, however, support the provision in S. 1470 which requires unanimous approval of a proposed capital expenditure when it involves an SMSA which crosses state boundaries. Although the other jurisdictions should certainly be actively consulted, the decision regarding approval should ultimately be left to the state in which the proposed expenditure will actually be made. That HSA should be equipped with sufficient data to accurately gauge the need-based on current and projected utilization trends-of the proposed project. It would be too cumbersome a process for approval to be secured from secondary jurisdictions and political stalemates could jeopardize needed health expenditures.

Finally we recommend an amendment requiring certificate of need agencies to solicit competitive applications for needed services, equipment, and facilities to stimulate competition and lower costs.


The Federation supports that provision of the bill which encourages closing or converting underutilized beds or services by including in the hospital reasonable cost payment, reimbursement for costs associated with closure or conversion. However, in the case of for-profit hospitals, only increased operating costs would be recognized; capital costs would be disallowed.

We believe that regardless of ownership, hospitals should have both their capital and increased operating costs associated with closure or conversion recognized. To differentiate on the basis of ownership raises serious constitutional questions. If there are two hospitals located in a community-one a non-profit the other investor-owned and the community believes that the investor-owned facility should be closed or converted to another use, the provision as presently stated provides no incentive for the investor-owned hospital to acquiesce. After all, no facility can be expected to shut down and retire its debt without benefit of patient income. The question should be “What is best for the community ?" Then all costs connected with closing or converting the facility-regardless of ownership-should be recognized.

This provision is essentially experimental, limiting transitional allowances to only fifty hospitals per year for the first two years of operation. The Secretary would review all recommendations forwarded by the Hospital Transitional Allowance Board ; however, there would be no appeal to the Secretary's final decision. We recommend that when the program becomes more than experimental, these decisions become subject to judicial review.

In addition, we recommend that total hospital closures be given priority under this voluntary program. Little or no dollar savings will be realized from closing some beds within an institution, but significant savings can be realized if an entire facility is purchased for fair value and closed.

HOSPITAL BASED PHYSICIAN BEIMBURSEMENT Insofar as control of physician reimbursement is concerned, we can understand the desire to discourage potential abuse or excessive payments by limiting the reimbursement for certain hospital based physicians. Howerer, we believe that the actual method of payment—be it fixed fee, or percentage, lease, or direct bill. ing arrangements—should be left to the discretion of hospital management. By restricting payments to a fixed fee, many rural areas might be unable to attract the services of these specialists.

We would not, however, be opposed to screens being applied to the final result of the hospital physician negotiations using a technique similar to the 75th percentile of the prevailing payment levels in the area.

Finally, there should be a "grandfather” clause covering all contracts made prior to enactment of S. 1470 between hospitals and hospital based physicians.

HOSPITAL CONTRACTS We are pleased to note that Section 40 has been modified substantially, deleting last year's requirement that all contracts of $10,000 or more be approved in advance by the Secretary. This modification reflects an awareness of the chaos that such a provision would have caused in the daily administration of a facility.

However, Section 40 still provides that no cost or charge will be considered reasonable for purposes of reimbursement under Titles XVIII or XIX if it represents a commission or finder's fee or an amount payable under rental or lease arrangement where payment is based on a percentage arrangement. The Federation objects to this provision which covers consulting and management contracts for the same reasons it rejects the restrictions imposed on contracts with hospital based physicians. We believe that these are matters properly left to the discretion of the hospital's administrator and Board of Trustees.

Section 2 of the bill precludes the need for the kind of line-by-line budget examination proposed in Section 40. Under the proposed target rate, the concern is properly with the total costs, not with all the individual components that go into that final figure. Hospitals are given incentives to come in under the target rate, or at the very least make sure that their per diem routine operating costs do not exceed 120% of the average rate determined for their category. This factor in itself serves to prohibit the negotiation of contracts that are excessive. We, therefore, recommend that Section 40 be deleted altogether from S. 1470.


We believe that the stated purpose of Section 20 of S. 1470—to make better and more flexible use of underutilized hospital beds in rural areas by permitting their conversion to long-term care beds with appropriate reimbursement-is an excellent one. We would suggest, however, that this provision be amended to delete the requirement that limits the section to hospitals with less than fifty beds. Since a certificate of need would be required prior to conversion, planning authorities would not be faced with a surplus of long-term care beds. Therefore, we do not think that the potential success of this provision should be blunted by the currently suggested fifty bed limitation.


Turning lastly to the area of administrative reforms, the Federation shares Senator Talmadge's concern that the new Health Care Financing Administration may be guilty of furthering, rather than alleviating, the bureaucratic superstructure controlling the health sector.

We would suggest that in re-examining the purpose and proposed organization of such an Administration under Section 30 of S. 1470, that consideration be given to placing it under the direct supervision of the Assistant Secretary for Health or creating an Under Secretary for Health, rather than an Assistant Secretary for Health Care Financing. With the exception of the Secretary himself, the Assistant Secretary—or Under Secretary—for Health, should be the top spokesman and policy maker for departmental health policy. The position of Assistant Secretary for Health Care Financing could serve to undermine this authority.

In addition to weakening the basic powers of the Assistant Secretary for Health, establishment of an Assistant Secretary for Health Care Fiancing separates cost and quality issues, and places even more authority in the hands of health economists. We, too, support cost-consciousness, but we are concerned by the increasing preoccupation with budget that has come to characterize departmental thinking and regulation. Issues of cost and quality of care are appropriately addressed jointly. For this reason, we believe that the Assistant Secretary for Health should have jurisdiction over the new agency.


With few exceptions, a thirty day comment period is presently provided for public comment on proposed regulations. In order to assure that regulations affecting health care are representative of sound public policy, it is mandatory that the public and the health sector as a whole be given the time to respond with comments and constructive recommendations. However, as matters now stand, by the time that the proposed regulations reach our hospitals, particularly those in western regions, we are left with considerably less than thirty days in which to evaluate regulations that are often complex and lengthy. There is often not sufficient time available to study the regulations, gather information on their possible and probable effect, and then formulate and forward a response to the Department of Health, Education, and Welfare officials. Therefore, we strongly support the provision to extend the period for public comment on proposed regulations to sixty days except in those cases where the urgent nature of the regulations demands otherwise.


The effective administration of Title XVIII depends in part on the cooperation-not confrontation-between government and the health industry. HIBAC was created by Congress when Medicare was first passed as a means for affirming Congressional intent that industry advice and cooperation be sought by the department. Instead of abolishing HIBAC, as proposed in S. 1470, we recommend that the Council's role in the regulatory process be clarified and where appropriate, broadened.

We recommend that HIBAC be reconstituted as a ten member advisory body, broadly representative of health providers, consumers, and third party payors, a more workable size than the present nineteen members. HIBAC should be an advisory body of the legislative as well as the executive branch. It should meet more frequently and all proposed regulations under Title XVIII should be submitted to HIBAC thirty days prior to initial publication in the FEDERAL REGISTER. Any regulation which HIBAC determines to be contrary to the public interest or inconsistent with sound administration of the Medicare program, should be reconsidered by the Secretary prior to initial publication.

These recommendations, if adopted, would help restore confidence and trust in the system by assuring a real dialogue between the payor and provider of program benefits.


S. 1470 is the result of a great deal of well thought out labor on the part of the Subcommittee Chairman, the Members, and the Committee staff. On its own it may be considered a bill with a great deal of merit; compared to arbitrary cost control schemes, it is particularly commendable.

These attempts to place arbitrary limits on hospital revenues ignore the causes of rising health costs, and fail to provide incentives to counter this trend.

The impact of S. 1470 on reducing the rate of inflation in cost reimbursement under Medicare and Medicaid should automatically impact non-government program costs. Charges to private patients, for example, should rise less sharply because actual costs will be rising at a slower pace.

For this reason, together with our opposition to any government price controls over a single industry, we urge you to limit application of S. 1470 to government programs.

With regard to non-government patients, we recommend use of the President's general economic policy of jawboning to hospital rate increases in excess of an


agreed upon percentage. The threat of adverse publicity from findings of local insurers and the President's Council on Wage-Price Stability would certainly create a climate in which most hospitals would attempt to hold down spending increases.

For example, all hospitals seeking charge increases in excess of 80% of the hospital service charge component of the CPI could be required to disclose and justify their budgets to their local Blue Cross plan and commercial insurance companies.

A national guideline for hospital price increases could be established with review of increases above that level by the President's Council on Wage-Price Stability, utilizing publicity as a disincentive to unrestrained price increases.

We commend the Committee for taking the lead in revitalzing and reforming Titles XVIII and XIX of the Social Security Act, and thank you for this opportunity to present our views.

Senator TALMADGE. Our next witness is Mr. John F. Horty, president, National Council of Community Hospitals.

You may insert your statement in full in the record and summarize it in 10 minutes, if you will.



Mr. HORTY. Thank you, Mr. Chairman, for the opportunity to appear here this morning. I have with me Mr. John Huff, legal counsel for the National Council of Community Hospitals. I will not read our statement to you, but rather attempt to summarize what we have said in our prepared statement, which we ask to be inserted in the record.

We have taken the position that the approach taken by this committee is a very constructive approach in an attempt to enact and formulate long-term reform in the health care system and we would welcome working with the committee in this effort. We do, however, urge the committee to consider postponement of the enactment of this kind of long-term reform because of our feeling that the present situation with respect to hospital costs is one which requires drastic action and also one which requires us to examine not merely the inequities in the present system, but also the possibility of total reform of the entire concept of the way in which hospitals are paid for their services. Not only the way in which hospitals are paid, but the way in which all sectors of the health care field are paid, physicians, and others.

In fact, it is our belief that the philosophy of reasonable cost reimbursement as such no longer provides the kind of incentives that this field needs, and therefore that the very excellently conceived and stated reforms of this bill would find the reasonable cost reimbursement systems do not get at the root problems of the entire industry at this point in time.

We therefore, in a sense, join with the administration in their concern with the immediate cost problem in the hospital field. However, as other witnesses have stated, we do not believe that the vehicle that the administration has adopted is a satisfactory vehicle. We have stated so in our testimony in detail. I will not go back over the litany of reasons that other witnesses have provided and which the committee already understands.

It is our belief that another action is necessary and we have proposed that action in our prepared testimony and propose it now. What we are suggesting is that this committee consider a freeze on hospital capital construction, on capital construction in this entire field-that includes nursing homes, governmental hospitals, and doctors offices, for not only equipment and facilities but across the board for 24 months.

That the committee also consider a freeze on full-time equivalents per patient day which would, in effect, have a dampening effect upon the rise of the intensity of services in the hospital field.

Several other proposals are a part of this package which we have made. We stated in our testimony that we ask that this freeze be applied for 24 months. The purpose of, the limitation that the freeze would end at the end of 24 months, is to use that period of time to consider real long-term and radical reform of the entire system, including the possibility of building in meaningful free enterprise incentives into the structure of payment, not into the structure of "reimbursement,” a term which, in itself, characterizes certain philosophical concepts that perhaps are outmoded.

I think that the bill that you are considering today is one of the alternative methods of reforming the system. We would like to see it go much further than it does. We would be happy to provide technical amendments and changes and to work with the subcommittee and its staff, but it is our feeling at present that it is time to not only call a halt to what is going on, but to do so in such a manner that gets the issues out on the table—that is, to determine whether in fact the American public wants a growth system in this field; whether the American public wants a no-growth system.

The hospitals, I believe, have been unfairly accused of fostering unlimited and unrestrained growth. It may well be that that is precisely what the American public desires and that the trustees and other members of hospital boards and members of the hospital management and leadership are doing precisely what the country wants, or that may not be so. Let's see !

If the country wants a very modified or no-growth industry, it is my view that the hospital trustees and administrators could provide that service as well, without any new or increased intensity or increased services.

In short, Mr. Chairman, what we ask is a consideration of a very tough concept of going beyond the reasonable cost reimbursement system that was put in place 10 years ago for medicare and medicaid, and really looking at what other possibilities there are.

In that regard, I would like to make one or two statements with respect to the testimony that the Secretary of HEW made yesterday. I believe for the record there should be a couple of comments made with respect to his so-called fat list which unfortunately, because of the term, tends to excite media interest, which the actual facts do not justify. The $1 billon profits which the Secretary characterized, involves the entire hospital industry; not as the Secretary implied, solely to nonprofit community hospitals, whom I represent; I think the Secretary's discussion of profit deserves response.

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