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Washington, D.C.

The subcommittee met, pursuant to recess, at 8:30 a.m. in room 2221, Dirksen Senate Office Building, Hon. Herman Talmadge (chairman of the subcommittee) presiding.

Present: Senators Talmadge, Dole, and Danforth.

Senator TALMADGE. The subcommittee will please be in order.

The first witness this morning is Mr. Bert Seidman, director, Social Security Department, AFL-CIO. We are delighted to have you, Mr. Seidman. You may insert your full statement into the record and summarize it in 10 minutes.


Mr. SEIDMAN. Thank you, Mr. Chairman.

With me this morning are, to my left, Robert McGlotten, member of the legislative department of the AFL-CIO and to my right, Richard Shoemaker, member of the social security department of the AFL-CIO.

Senator TALMADGE. I am delighted to have your gentlemen.

Mr. SEIDMAN. The AFL-CIO appreciates the opportunity to appear before the Health Subcommittee with respect to the Medicare-Medicaid Administrative and Reimbursement Act.

Medical care costs continue to escalate at about twice the rate of all goods and services as measured by the Consumer Price Index. The impact of these rising costs on the Federal budget is substantial. In fiscal year 1976, 42 percent of health expenditures came from public funds. Federal payments for medicare, medicaid, and other health programs totaled about $40 billion.

The combination of direct and indirect Federal, State, and local government payments to the health industry makes the health industry one of the most heavily subsidized industries in the country. This subsidy amounts to over $64 billion.

There is no way to control these escalating costs until Congress enacts a comprehensive national health insurance program such as the health security bill (S. 3). Under health security the Congress would establish a budget for health services and provide the financial resources to pay for these services. Medical societies would be obligated to negotiate realistic fee schedules so that the budget for physician services could not be exceeded.

Likewise, hospitals and other health institutions would have to negotiate their budgets so that total expenditures for hospitalization could not exceed the amount of funds allocated for institutional care. A budgeting system of cost control is far more flexible than regulation and is less costly as well.

Over the long run, the health security program is the least costly of all national health insurance proposals that have been introduced into the Congress. Under health security, and only under health security, could health care costs be held to a constant percentage of the gross national product which is, currently, 8.6 percent of the GNP.

Other national health insurance bills split up the funding of NHI between the Government and the private sector. The private sector is divided between Blue Cross-Blue Shield and about 2,000 private insurance carriers. Under such proposals, the providers of health care would continue to dictate their remuneration. There would be no outside limits to the amount of money the health industry could absorb.

The bill introduced by the distinguished chairman of this subcommittee is a step in the right direction but does not go far enough. There are two main thrusts in the bill:

One, it would establish a single prospective reimbursement system for hospitals;

Two, it would attempt to induce physicians to accept usual and customary fees under medicare.

If a prospective hospital reimbursement program is to control hospital costs, it must deal with three elements: One, intensity of care; two, utilization; and three, routine operating costs.

Intensity of care is the primary cause of hospital cost inflation. Excessive utilization of hospital beds is the second most important cause of escalating costs. But S. 1470 deals only with routine operating costs which have contributed to only a minor degree to this inflation. We conclude, therefore, that S. 1470 will not significantly contain the escalation of hospital and medical care costs.

We find particularly objectionable the provisions of S. 1470 which would, in effect, establish a system of wage control. Hospital wages are too low in most communities and average less for the Nation as a whole than those of workers generally or even service workers. They have played almost no role in generating the inordinate escalation of hospital costs. Yet, S. 1470, in effect, would place a ceiling on hospital wages keeping them permanently below general wage levels. These provisions are unacceptable to us as an infringement of the rights of hospital workers to negotiate their wages with hospital management through the process of free collective bargaining.

We believe that a negotiated budget is a far more effective and flexible tool for controlling hospital costs than the complicated system pro

vided in S. 1470. However, hospital budgets would have to be negotiated across-the-board and not just for patients covered by medicare and medicaid. Otherwise, costs could too readily be passed on to private patients whose premiums are paid by negotiated health benefit packages, group insurance, and individual health insurance policies.

bill treats physicians very gently. Physicians would be induced to accept assignments by a possible $2 per encounter increase in their income from medicare patients if they agreed to become participating physicians.

This simply will not work because nonparticipating physicians in the medicare program make more than $2 extra per encounter from their over-65 patients.

The AFL-CIO strongly recommends a negotiated fee schedule for physicians. Such a fee schedule should be applied across-the-board and not just for medicare patients. In addition, physicians should be free to elect payment by capitation. It is quite possible that some physicians would prefer this method of reimbursement since it provides improved continuity of care for the patient and almost complete elimination of paperwork for the physician.

We strongly favor the provision in the bill which relieves HMO's of restrictions on reimbursement for expenses related to capital expenditures where the HMO can demonstrate that it can provide health services effectively and economically.

The AFL-CIO supports provisions of the bill which would place limits on cost reimbursement by medicare and medicaid to hospitalbased physicians who have percentage or lease arrangements with the hospital. Radiologists, pathologists, and anesthesiologists have made excessive profits from such arrangements.

Additional recommendations with respect to detailed provisions of S. 1470 will be found in our complete statement.

In conclusion, we believe the most effective way in which to achieve control over escalating health care costs is to budget health expenditures for hospital and physician services along the lines of the health security bill.

For the interim period, we favor the approach of S. 1391, the administration's hospital cost containment provisions with, however, some important reservations with regard to wage control features which we have set forth in our attached statement. We are strongly convinced that Congress should not now enact a long-term program which might have to be dismantled when a national health insurance program is developed. Therefore, we urge that only a temporary cost containment bill be reported out to be effective until Congress has an opportunity to review the national health insurance proposal to be submitted to Congress by the administration early next year.

That completes the summary of my statement, Mr. Chairman. The details on many of these points, and others, are continued in the full statement and we have also attached to our statement a copy of a summary of a statement that we submitted to another committee with respect to the administration's proposal, the Hospital Costs Containment Act of 1977, S. 1391.

Senator TALMADGE. Thank you, Mr. Seidman. All of that will be inserted in the record.

I congratulate you on a very thoughtful statement. The subcommittee has given consideration to broadening the hospital reimbursement provision to extend beyond medicare and medicaid as you recommend.

Mr. Seidman, if the Congress does, in fact, enact a national health insurance bill, are you saying that the Federal Government should pay without limit whatever wage amounts employees can negotiate with hospitals?

Mr. SEIDMAN. We are saying two things, Mr. Chairman. In the first place, we are saying that there is no evidence whatsoever that wage increases in the hospital industry have played any significant role in the escalation, the tremendous escalation in hospital costs which has occurred, not just within the past few years, but over a long period of time.

I have a report of the Council on Wage and Price Stability which was prepared by Prof. Martin Feldstein of Harvard University. I might say, Mr. Chairman, that Professor Feldstein and we disagree on many points. He is not particularly a friend of organized labor. But in this report he makes it quite clear that the responsibility for the rise in hospital costs does not rest at all with increased wages. He says, "Although hospital wage rates have risen more rapidly than wages in other parts of the economy"-and there he happens to be wrong; we have a table in our testimony that shows that this is not true, nevertheless, this is what he says: "These relatively greater wage increases are responsible for only a small part of the overall increase in the cost of hospital care.

"Had earnings of hospital workers risen no faster than the average for all private, nonfarm production workers, the annual rate of increase in daily hospital costs would have been only about 1 percentage point lower." Which makes it quite clear, therefore, that even with his assumption, which is wrong, that hospital costs have risen faster than other wages-this may be true in percentage terms, but not in absolute


The rise in hospital wages has had no appreciable impact on the rise in hospital costs.

Now, in addition to that, we see no evidence whatsover that there is going to be any tremendous increase in hospital costs in either negotiated situations where collective bargaining between unions and management prevails or in other situations.

Therefore, we can see no reason for singling out this one sector of the economy with imposition of wage controls on relatively low-wage earners in this industry. We are opposed to wage controls in the economy. I believe most of the Members of Congress and the administration are, as well, and we see no reason for imposing it in this industry. Senator TALMADGE. Is there any test of reasonableness that you can think of?

Mr. SEIDMAN. The test of reasonableness is the test that occurs in collective bargaining. Management has every incentive, particularly where there are any controls on cost, to hold down wages. They always do. The workers in this industry are not so well-organized that they can exact out of line wage increases and I have no reason to think that they will.

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