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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.

92-202-77-14

Frankly, though, Mr. Chairman, we remain skeptical that this transfer of authority will be the secret to uniform application of health and safety standards. The unnecessary complexity, paperwork, and duplication of inspections by Federal, State, and local health, licensure and other related and unrelated authorities seem doomed to continue as long as these agencies refuse to recognize standards and surveys on a reciprocal basis.

We continue to support the provision in section 23 which would liberalize the policy toward permitting patients of nursing homes to make visits away from the facility. We believe this provision recognizes the therapeutic value of these visits away from the institution, therefore, we think it is certainly in the best interests of the patients, and we support this change without reservation.

I would like to make a final comment concerning the President's cost containment proposal at this point. Mr. Chairman, as you are aware, the President's proposal does not presently apply to long-term care facilities. I am certainly not here to allege any discrimination in that respect. We believe that there are excellent reasons to support the exclusion of nursing homes from the President's proposal.

Among the best reasons are No. 1, that the nursing homes per diem costs have risen relatively modestly. Indeed, it seems to us that the 9-percent cap would be almost completely superfluous.

Secondly, there is presently no surplus of long-term care beds nationwide, hence an overall capital expenditures limit without regard to need would be very unwise indeed at this time.

Third, it should be understood clearly that the very real problem that exists, insofar as medicaid expenditures for long-term care are concerned, is largely the result of increased utilization and not due to increases in the per diem costs or rates being paid to nursing homes. For these reasons, AHCA would be strongly opposed to any congressional decision to broaden the President's plan to include long-term care facilities. On the contrary, we would urge greater incentives for the use of long-term care facilities, HMO's, home health care and other alternatives to hospitalization where appropriate.

I would conclude my remarks, Mr. Chairman, by thanking you again for enlisting the cooperation of the many groups that will be affected by this legislation. The results of this process are evident. It seems to us that S. 1470 is realistic, it is constructive, and it ought to be given expeditious consideration by the Senate and by the House.

Thank you.

Senator TALMADGE. Thank you, very much, Mr. Thevenot for your constructive suggestions. We also appreciate the fact that your American Health Care Association has worked closely with our staff in drafting our bill.

Do you have any questions, Senator Dole?

Senator DOLE. Is it true that we spend more for long-term care in nursing homes and medicaid than we do in hospitals?

Mr. THEVENOT. According to the most recent statistics I have seen, they are both in the neighborhood of 39 to 40 percent of the total medicaid expenditures. That is an important point, Senator Dole. Expenditures for nursing home care tend to be located primarily in the medicaid program; somewhat more than 50 percent, I believe, of

all of the revenues derived by nursing homes are coming out of the medicaid program, so that the impact of expenditures has a disproportionate effect on that particular program.

I might point out to you that the medicare program, by contrast, is spending less money in real dollars than it was in 1969. Medicare accounts for a very marginal share of any of the expenses related to nursing homes.

Senator DOLE. The only point I make, all the focus has been, at least as I look back on it, has been on hospital costs as it relates to medicaid-maybe not on nursing homes or other long-term care facilities. The primary focus has been on hospital costs. Most of the comments and things I have read have dealt with the hospital costs rather than nursing homes, or long-term care facilities.

I can understand that there would be an impact on these as well. Mr. THEVENOT. You are quite correct, sir. It is, however, a question. of unit prices versus program expenditures.

Senator DOLE. Thank you.

Senator TALMADGE. Thank you very much for your testimony. [The prepared statement of Mr. Thevenot follows:]

STATEMENT OF BRUCE D. THEVENOT ON BEHALF OF THE AMERICAN HEALTH CARE

ASSOCIATION

Mr. Chairman and members of the subcommittee, I appreciate this opportunity to share with the subcommittee the views of the Nation's largest organization of long-term care facilities concerning S. 1470. In view of our lengthy testimony on S. 3205 last July, I shall confine my comments to those provisions of S. 1470 which are of direct or indirect interest to long-term care providers.

I should like first, 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.

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

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 become 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 costrelated basis. Currently, by our count, some 29 states have in place some form of prospective rate setting 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 longterm care facilities should take into account the status of the implementation of Section 249.

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

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