of poor negotiating or of the hospital's lack of bargaining power. In such a market, the physician will be able to collect comparably high compensation no matter what arrangement (including fee-for-service) is used. The problem can best be faced by changing the market pressures, and the hospital's leverage, not by futilely trying to reverse the consequences of those pressures and reducing the hospital's leverage.

An increasing number of physicians are being produced. It is possible that within four or five years, the market will swing into a more realistic balance. Hospitals will then be able to negotiate more advantageous arrangements with physicians who wish to use their facilities. But Section 12 would prevent them from doing so (except to the extent they are able to obtain salaried physicians). Section 12 leaves no room for the hospitals to develop innovative arrangements with doctors in the broad area between fee-for-service on one extreme and physician employees on the other. Structural reform of the system requires the development of such arrangements, but Section 12 would deter that effort.

CONCLUSION

For these reasons, NCCH must respectfully oppose S. 1470 at this time. We urge consideration of our proposal for a short-term freeze, designed to contain cost increases immediately and to force a wide-ranging consideration of what kind of health care delivery system the American people desire. The ideas developed in S. 1470 could play an important part in formulating structural reform, although, as my testimony has indicated, ÑCCH believes the health care delivery system needs changes that go beyond those proposed by S. 1470.

I appreciate the opportunity to appear before you today.

Senator TALMADGE. The next witness is Dr. Charles E. Phillips, president, American Protestant Hospital Association. I understand he is not present. His statement will be inserted in the record.

[The prepared statement of Dr. Phillips follows:]

STATEMENT OF CHARLES D. PHILLIPS (ED.D.), PRESIDENT, AMERICAN PROTESTANT HOSPITAL ASSOCIATION

Mr. Chairman, I am Charles D. Phillips, President of the American Protestant Hospital Association, representing some 300 hospitals, homes for the aging and other health care agencies throughout the country, as well as some 2,000 personal members who are engaged in the delivery of health care services. The Association membership is dedicated to providing quality health care to patients within a Christian reference and to ensuring the strength and viability of our voluntary, pluralistic health care delivery system. With me is Michael S. Cassedy, the Director of our Government Affairs Department.

We greatly appreciate the opportunity to present the position of APHA on S. 1470. Mr. Chairman, let me say at the outset that the members of APHA appreciate your concern about the rising costs of the Medicare and Medicaid programs to the taxpayers of this nation. We are grateful for your commitment to the development of reforms which will prevent the cutting and slashing of payments to hospitals and physicians indiscriminately and inequitably and the imposing of arbitrary controls and indiscriminate limits on payments to hospitals such as the Administration's proposed ceiling on hospital cost increases.

We are concerned, however, that the reforms which are proposed as solutions to the problem of escalating costs of hospital services under Medicare and Medicaid be based on an awareness of the factors which are responsible for such increases, and that the reforms address those factors rather than taking a simplistic approach of limiting reimbursement. We believe that this bill demonstrates your awareness of the enormity of the problems faced both by the federal government and the health care institutions of this nation and that it is a step in the direction of addressing needed reform.

Mr. Chairman, we will comment on only certain sections of this bill which we feel are of more crucial significance to our members.

SEC. 2. Criteria for determining reasonable cost of hospital services

APHA is confused over the intent of the provision whereby the Secretary shall establish an "accounting and uniform functional reporting system" to

determine hospital operating and capital costs. If this means a uniform accounting system will be mandated for all hospitals, then we must oppose it as an infringement upon management prerogative. However, if the intent is for the Secretary to devise a uniform cost reporting system in order to facilitate cost comparisons between like hospitals, then we support the proposal.

The APHA is also concerned with the proposal for the classification of institutions for the purposes of reimbursement on a comparative basis. We can understand the attractiveness of such a methodology to the federal government. However, we feel that great difficulty will be experienced in the technical aspects of devising such a methodology for classifying institutions for purposes of reimbursement. The fact that S. 1470 deletes from the comparison procedure for routine per diem hospital costs some of the elements over which an institution has little or no control is a vast improvement over section 223 of Public Law 92-603.

We suggest that the classification system be devised with full consultation from the field of health care and government agencies. We therefore recommend that this committee bring together a group of technical experts who have been involved in Medicare-Medicaid reimbursement matters over the years. Representatives should include persons from associations of providers, Social Security Administration, health care institutions, congressional staff, Blue Cross Association, and etc. These experts would discuss in depth the basis for the classification system and the appropriateness and the validity of the components now included in this bill. We believe that the formation of such a panel of experts would be in keeping with the spirit of openmindedness expressed by the chairman when you introduced the bill and that it would prove to be of substantial assistance in forming a workable and equitable method of classification.

APHA is on record as supporting a reimbursement system which includes prospective reimbursement administered on a state level under federal guidelines. We are pleased to see the inclusion of a state administered rate review option for the determination of institutional reimbursement that could be based upon prospective payment methodology if a state so chooses. APHA feels that state level rate review on a prospective basis is more likely to assure that the variables among institutions, which are often very local, are taken into account and that the full financial requirements of the institutions are provided.

SEC. 3. Payments to promote closing and conversion of underutilized facilities

We support the demonstration project proposed in Section 3 by which federal financial support would be provided institutions which apply for such support on the basis that their operations would be made more efficient or cost-effective by the closing or conversion of underutilized beds and that they would also become eligible for positive incentives under the provisions of section 2.

SEC. 12. Hospital-Associated physicians

We recognize that the problem which this section attempts to address is not a new one for hospitals or the government. We express grave concern, however, over the proposal that the federal government involve itself with such specificity in determining the types of contractual arrangements between hospitals and physicians. We recognize that cases of unreasonable compensation can be documented, but believe that to enact legislation prohibiting a specific type of contract removes decision making from its proper authority-management and the governing boards-and places it in Washington. Financial incentives for efficient hospital administration contained in other sections of this bill will effect the desired result by encouraging the administrators to find areas in which savings might be made, including this area of contractual arrangements with physicians if an individual administrator so chooses.

We are concerned further that as section 12 is written, it will not accomplish the intended result of reducing hospital costs. There are those who have studied this proposal who are convinced that the aggregate costs resulting from categorizing the various services of these physicians and the mandating of a feefor-service basis of reimbursement for personal patient services will be greater than those now being experienced.

SEC. 30. Establishment of Health Care Financing Administration

We are pleased to note that the President and the Secretary of HEW have adopted administratively your proposal for a Health Care Financing Administration, incorporating the old Bureau of Health Insurance, Bureau of Quality Assurance, Medical Services Administration and the Office of Long-Term Care.

However, we share your concern that the new agency, rather than collapsing overlapping positions and clarifying lines of authority, may do the opposite and establish a new bureaucratic superstructure as a haven for displaced bureaucrats. We support, therefore, your keeping this provision in the bill. In addition, we continue to recommend, as we did in testimony before you last summer, the creation of a cabinet-level Department of Health as a mechanism for the most effective coordination of the setting of national health policies and administration of federal health programs.

SEC. 31. State medicaid administration

This section reflects the awareness of the Chairman of the problems besetting hospitals because of the performance of states in administering Medicaid. We support the proposal to establish specific performance criteria for state administration of Medicaid which will result in more prompt payment of claims and vastly improved administration of the program.

SEC. 40. Procedures for determining reasonable cost and reasonable charges

APHA vigorously opposes this section. The Medicare law already contains adequate provisions to determine reasonable costs. Further, the proposal is a gross infringement on the management prerogative of individual institutions. SEC. 46. Rate of return on net equity for for-profit hospitals

APHA supports the principle implemented in this section-that an adequate return on investment is a reasonable expectation in business. By the same principle, we urge the Committee to amend this section to provide for an adequate operating margin on reimbursement by Medicare and Medicaid to not-for-profit institutions, since no institution can continue to operate only on the basis of costs. Determined for the various classes of nonprofit hospitals, the operating margins would reflect factors unique to these facilities such as the costs of charity care, educational programs, and generally more acute level of care provided.

SUMMARY OF RECOMMENDATIONS

Mr. Chairman, in conclusion we would like to summarize some of the recommendations that we have made here today.

Under Section 2:

1. We support a uniform functional reporting system to facilitate cost comparisons between like hospitals. However, we are opposed to a mandated uniform accounting system for all hospitals as it would be an infringement on a right of management.

2. We recommend that the Committee, in devising the classification system to determine reimbursement, consult in depth with a panel of experts drawn from association providers, hospital executives, Social Security Administration, Blue Cross and other third party payers, congressional staff and others.

Under Section 12:

3. We recommend leaving the choice of hospital-physician contractual arrangements with management. The financial incentives for efficient hospital management contained elsewhere in this bill are adequate to address the problem of unusually high payment to hospital-associated physicians.

Under Section 30:

4. We support keeping the legislative provision for the creation of the Health Care Financing Administration. We further recommend the creation of a cabinetlevel Department of Health as a mechanism for the coordination of the setting of national health policies and the administration of all federal health programs. Under Section 40:

5. We recommend the deletion of Section 40 in its entirety.

Under Section 46:

6. We recommend the Committee amend this section to provide an adequate operating margin, since no institution can continue to operate only on the basis of costs.

Mr. Chairman, we thank you and members of this Committee for considering these views and for giving us this opportunity to appear before you. If we can answer any questions you might have now or later on any technical aspects of our recommendations, we will be happy to do so.

Senator TALMADGE. The next witness is Bruce D. Thevenot, administrator, Government Services Division, American Health Care Association.

We are delighted to have you back before our committee as a witness. You may insert your full statement into the record and summarize it.

STATEMENT OF BRUCE D. THEVENOT, ADMINISTRATOR, GOVERNMENT SERVICES DIVISION, AMERICAN HEALTH CARE ASSOCIATION

Mr. THEVENOT. My statement is brief this morning. I will confine my comments principally to those which relate directly or indirectly to long-term care providers.

As you know, the American Health Care Association is the Nation's largest organization representing nursing homes. Presently, Mr. Chairman, we have some 7,500 members in the association which represent about half of the industry nationwide. That includes about 600,000 beds at the present time.

As I said, in view of our lengthy testimony on S. 3205 last year, I shall make my comments brief today.

I should first like, however, to commend the chairman of this subcommittee for his willingness to incorporate a number of constructive suggestions made during last year's hearings. As a result, a good bill has been made better. It seems to me that S. 1470 is on target in its overall approach and concept, and is well thought out in its particulars. This legislation should be enacted as soon as possible.

While the reimbursement reforms proposed in section 2 would not initially apply to long-term care facilities, AHCA would like to indicate its support of the important principles upon which these reforms are based. Section 2 is a large step in the direction of rational pricing of institutional health services. This step, and succeeding steps, must be taken now if long-range price stability is to became a reality in the health care sector. By contrast, the President's proposed cost containment plan, though well meaning, is simplistic, inequitable and potentially disruptive.

I would like to point out to the subcommittee that reimbursement systems similar in concept to the methodology proposed in section 2 have been and are being put into effect for nursing homes by a number of State medicaid programs under the requirement of section 249 of the 1972 amendments that skilled nursing and intermediate care facilities be paid on a reasonable cost-related basis. Currently by our count, some 29 States have in place some form of prospective rate setting for nursing homes which includes incentives designed to reward efficient performance.

In this respect, reform of payment methods for nursing homes are somewhat farther advanced than for hospitals, owing to the earlier legislative mandate and the relatively smaller degree of complexity involved.

Therefore, while we strongly support the approach suggested in section 2, we believe that any future consideration to apply this particular system to long-term care facilities should take into account the status of the implementation of section 249.

I would like to comment on two additional sections of the bill that are quite similar in approach. Section 3 would authorize payments to

promote the closing or conversion of underutilized facilities; section 20 would make changes in current law designed to facilitate the conversion of excess hospital capacity to long-term care services. I am aware, Mr. Chairman, that there has been considerable discussion recently of the feasibility of simultaneously solving the problems of too many hospital beds and too few nursing home beds by placing the excess hospital beds into service as long-term care beds.

AHCA believes this assumption has practically no validity in the case of truly long-term patients, and only limited potential in the case of posthospital convalescent patients.

We are therefore pleased to see that S. 1470 takes a cautious and measured approach to the conversion of excess hospital capacity. In general, it is our expectation that closure or "mothballing" will be the most practical solution in the majority of instances, and we support the provisions in section 3 for financial assistance to hospitals to discontinue underutilized operations.

Section 20 permits, under limited circumstances, certain rural hospitals to provide long-term-care services. AHCA supports the requirement in this section for a certificate of need, and the limitation of per diem payments for routine services to the prevailing rates for freestanding facilities in the State.

We would like to suggest again a modification, this time to section 4, in that provision relating to Federal participation in disapproved hospital capital expenditures. A number of provider organizations, including ours, raised the point in testimony last year suggesting that section 1122 be further amended to make it clear that prior approval is not required of simple changes of ownership-that is, where there are no additional beds or equipment and no change of service.

It was our understanding that this suggestion conforms with the original intent of the Finance Committee.

Senator TALMADGE. I think that is a good suggestion, and we will probably agree to that.

Mr. THEVENOT. Thank you, Mr. Chairman.

Section 21 relates directly to reimbursement of skilled and intermediate care facilities. It would make the statute clear with regard to the flexibility given to the States to include as a part of its payments to nursing homes reasonable amounts for profit and it specifies the methods by which these amounts can be earned.

Recent HEW policy limits these allowances to an amount figured on the invested equity of the proprietary owner and permits no earnings allowance whatever for nonproprietary facilities. This policy is unduly restrictive, and effectively prevents the establishment of incentive based payment systems by removing the incentive feature. Therefore, section 21 is crucial to assure that States are able to establish 'cost-effective payment methods while attracting necessary capital investment in nursing homes.

Section 22 would transfer the final authority to certify and approve for medicaid purposes skilled nursing and ICF's to the Secretary of HEW. I believe, Mr. Chairman, that this particular provision has been greatly improved over the comparable provision in S. 3205 by the addition of provisions for hearings and appeals with AHCA strongly supports.

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