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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. Medicaré 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 SEC. 20. Hospital providers of long-term care services

There has been considerable discussion recently of the feasibility of simul. taneously 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 post-hospital 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 certiticate of need, and the limitation of per diem payments for routine services to the prevailing rates for free standing facilities in the state. SEC. 4. Federal participation in hospital capital expenditures

AHCA urges that these suggested modifications in Section 1122 of the Act be further amended to make clear that prior approval is not required of simple changes of ownership involving no addition of beds or equipment and no change of service. A number of provider organizations, including AHCA, raised this point in testimony on S. 3205 and understood that our suggestion conformed with the original intent of the Finance Committee when it enacted Section 1122. I therefore suggest again that S. 1470 be so amended. SEC. 21. Reimbursement rates under medicaid for skilled nursing facilities and

intermediate care facilities AHCA strongly supports this amendment to present law. Section 21 would make it clear that states may include reasonable amounts for profit as part of its payments on a reasonable cost-related basis. It further specified the manner in which these amounts can be earned. Recent HEW policy limits these parments to an amount figured on the invested equity of the proprietary owner and permits no earnings allowance whatever for non-proprietary facilities. This policy is unduly restrictive, and effectively prevents the establishment of incentive based payment systems by removing the incentive feature. Therefore Sectin 21 is crucial to assure that states are able to establish cost-effective payment methods while attracting necessary capital investment in nursing homes. SEC. 22. Medicaid Certification and Approval of Skilled Nursing Facilities and

Intermediate Care Facilities This section, which transfers to the Secretary of HEW final authority for the certification of Medicaid SNF's and ICF's, has been greatly improved over a comparable provision of S. 3205 by the addition of provisions for hearings and appeals which AIICA strongly supports.

In all candor, however, we remain skeptical that this transfer of authority is 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. Sec. 23. Visits away from Institutions by Patients of Skilled Nursing or Inter

mediate Care Facilities AHCA continues its endorsement of this provision which recognizes the therapeutic value of visits away from an institution and provides a more flexible policy on such visits. Additional Provisions

AHCA is supportive of the administrative and other miscellaneous improrements contained in S. 1470. The only exception is Section 33, which would abolish the Health Insurance Benefits Advisory Council. AHCA supports the continuation and revitalization of IIIBAC. S. 1391, H.R. 6575

Mr. Chairman, the President's cost containment proposal would not apply to long-term care facilities. We believe there are excellent reasons to support this

exclusion. Among the best reasons are: (1) nursing home per diem costs have risen relatively modestly; indeed a 9% cap would be almost completely superfluous; (2) there is no surplus of long-term care beds nationwide, hence an overall capital expenditure limit without regard to need would be very unwise; and (3) utilization, not inflation, has been the primary force behind the rapidly increasing Medicaid expenditures for nursing home care. (Medicare expenditures for extended care are currently less than they were in 1969 in real dollars).

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.

CONCLUSION

In summary, AHCA urges this subcommittee to proceed expeditiously on the mark-up and reporting of S. 1470. I would also like to thank the Chairman for eliciting the cooperation of the many groups affected by this legislation. The results of this process are evident. S. 1470 is realistic and constructive legislation which recognizes that our present programs must be put in order before any attempt to expand benefits can be seriously contemplated.

Senator TALMADGE. The next, and final, witness today is Mr. Harry Asmus, president, National Council of Health Care Services, accompanied by Jack MacDonald, executive vice president.

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

STATEMENT OF HARRY ASMUS, PRESIDENT, NATIONAL COUNCIL

OF HEALTH CARE SERVICES, ACCOMPANIED BY JACK MacDONALD, EXECUTIVE VICE PRESIDENT

Mr. Asmus, Mr. Chairman and members of the subcommittee, my name is Harry Asmus. I am the president of the National Council of Health Care Services which represents a select group of proprietary multifacility nursing home firms. Members of the national council own and/or administer more than 80,000 beds in long-term care facilities throughout the country.

We appreciate this opportunity to appear before you today and submit a brief statement concerning s. 1470. The national council commends you, Senator Talmadge and the committee members, for taking the initiative in this bill to correct, and hopefully reform, the medicare and medicaid programs.

We strongly support the intent of S. 1470 as reflected in the title of the bill, "Medicare and Medicaid Administrative and Reimbursement Reform Act." That title effectively delineates the two areas that are the cause of the major problems of the medicare and medicaid programs.

The present diffusion and confusion in the administration of the medicare and medicaid programs has created a regulatory quagmire that has prevented the effective operation of the two programs. It has also created problems in the enforcement of standards which, in many instances, have led to the abuses noted by various critics of the health industry. These problems involve eligibility criteria for beneficiaries, the delivery of services, certification of providers, and payment for services rendered under the program.

A more effective administration is required if this situation is to be corrected. This can only result, however, if a single authority has the overall responsibility and accountability for determining the acceptable scope and levels of services and monitoring and assuring that the budgetary constraints are met for services rendered to beneficiaries.

Although one may argue that medicaid is significantly different from medicare because it is administered by the States, nevertheless, the States are administering the medicaid program under federally mandated regulations. These regulations presently leave the States with little flexibility once they have determined the beneficiary's eligibility and that individual's need for services under the medicaid program.

For these reasons, the proposed consolidation and restructuring of the responsible Federal agencies under a single authority, the Assistant Secretary for Health Care Financing as set forth in S. 1470 would greatly assist in resolving the confusion in the administration of the medicare and medicaid programs.

We are of the firm opinion that this type of massive restructuring of the administrative bureaucracy of HEW requires the "advice and consent” of the legislative process. Therefore, we firmly support section 20 in S. 1470. While there is a strong need to restructure the administrative system of the two programs, there is a counterbalancing need to stabilize the medicare and medicaid payment standards for longterm care providers. The changes made as a result of the Social Security Amendments of 1972, Public Law 92-603, need to be evaluated as to their impact before any major revisions, such as instituting percentage caps on revenues are made involving the skilled nursing and intermediate care facilities. Mr. Chairman, in our opinion, this can best be achieved under the format proposed by S. 1470.

Based on that view, the national council offers specific comments and recommendations concerning the following sections of S. 1470.

In our summary on page 3 of our statement with regard to section 2 criteria for determining reasonable cost of hospital services—it is our understanding that this section, as proposed in S. 1470, only pertains to hospitals. As a result, it would not preclude the use of medicaid payment systems for nursing home services which have been developed by States pursuant to section 249 of Public Law 92-603. These systems we feel should not be encumbered by the system outlined in section 2 of S. 1470 or the concept of revenue caps which has been introduced in other legislation currently pending in Congress.

It is our recommendation that the Secretary should be strongly encouraged to utilize section 249 of Public Law 92-603 as a means to develop "improved methods” for establishing prospective payment systems which contain costs for nursing home services for both the medicaid and medicare programs.

On pages 5 and 6 in our statement, section 3, pavments to promote closing and conversion of underutilized facilities, the National Council would acknowledge the fact that there may be at the present time, an excess of hospital beds in some parts of the country. However, we are concerned with the possible long-range results of these sections of S. 1470.

It should be noted that the shifting of excess hospital heds to another purpose could easily result in an excess of beds in that latter area. At the same time, it might be necessary at a later date to switch the

hospital beds back to their original purpose which could result in a shortage in the alternative service area.

Senator DOLE. If I may interrupt there, do you represent any rural a reas?

Mr. Asmus. Yes. I personally am from Colorado.

Senator DOLE. Very small hospitals, that we think this section may be very helpful to? Mr. Asmus. In very remote areas—it would have to be very

remote areas, Senator.

Senator DOLE. I understand the problem you raise. I just wonder what the alternatives may be in some of the small towns like Russell, Kans., where we have a very small hospital. I am not sure what the utilization rate is.

Mr. Asmus. I would say it would have to be very remote areas where the hospitals are maybe 15 to 20 beds or less, and this is very remote.

On pages 6 and 7 of our statement, section 20, hospital providers for long-term care service. It is our understanding that this section would require parity in payments between free standing skilled nursing facilities and hospital skilled nursing units on the basis of "an average rate per patient-day paid for routine services." The National Council strongly endorses the payment provisions set forth in this section for the payment for skilled nursing services furnished by a hospital.

On page 8 and 9 of our statement, section 21, reimbursement rates under medicaid for skilled nursing facilities and intermediate care facilities, we strongly support this provision. It is our opinion that this section would clarify the intent to allow State medicaid agencies the discretionary authority to include a “reasonable profit" in cost-related payment systems and rates developed pursuant to section 249 of Public Law 92-603.

We would urge the committee to reaffirm its original intent of this subsection as expressed in the committee's report on the Social Security Amendments of 1972.

On page 10 and 11 of our statement, section 22, medicaid certification and approval of skilled nursing and intermediate care facilities, Mr. Chairman, the problem in the area of certification and enforcement of standards is not one of who should be certifying, inspecting, and enforcing, but rather one of unifying the standards and surveys under a single authority. There is presently no one authority empowered to say "yes" or "no" on a timely basis in response to a certification finding.

As a result, this process can often be dragged out for an extended period of time.

In regards to section 32, regulations of the Secretary, Mr. Chairman, this provision is long overdue. It would directly address the type of situation that has occurred under section 249 of Public Law 92-603 where the Department of HEW delayed implementing that section for 512 years.

The lack of timely implementation of provisions of the Social Security Act has plagued the medicare and medicaid programs since their inception. The damage which has occurred as a direct result should not be underestimated.

On page 14 and 15 of our statement, section 46, rate of return on net equity for for-profit hospitals, we support the percentage change in the rate of return on net equity for proprietary hospitals and skilled

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