by Medicare would come to an increase in income of $2.00 per patient encounter for the participating physician. Most doctors who refuse to accept Medicare assignments charge more than $2.00 over the usual and customary fee allowed by Medicare.

As an alternative to the bill's approach, we recommend a negotiated fee schedule in the various Medicare reimbursement areas for Part B of Medicare. Physicans should then be required to accept such fee schedules in full payment for services rendered. However, to be fully effective such fee schedules should be applied across-the-board, not just to Medicare. Otherwise physicians would likely raise their fees for private patients, thereby creating three levels of care: one level for private patients, another level for Medicare patients and a bottom level for Medicaid beneficiaries.

Physicians should also be free to select payment by capitation for patients who choose to receive all of their primary care from such physicians. Physicians who elect capitation as a method of reimbursement for their services might well discover that such a payment mechanism results in better continuity of care for the patient and almost no paperwork since a separate claim for each service is unnecessary.

The experience of HMOs has shown that capitation payments reverse the incentives of physicians. Under fee-for-service, doctors make more money for treating sick patients; and the sicker the patient, the more the doctor makes. Under capitation, doctors make more money if they keep their patients well.

Capitation is the way in which medical groups are generally reimbursed in prepaid group practice plans. This is the primary reason hospital use in such plans is two to two and one-half times lower than in fee-for-service reimbursement by Blue Cross-Blue Shield and commercial insurance plans.

We strongly support Section 4(d) (B) (2) which allows the Secretary to determine that an exclusion of expenses related to any capital expenditure by a Health Maintenance Organization which has demonstrated that it can provide health services economically and that such exclusion would discourage the operation or expansion of such HMO, then such expenses related to capital expenditures would, regardless of need, be allowed.

Section 12 of S. 1470 would not recognize for Medicare and Medicaid reimbursement purposes percentage or lease arrangements for radiologists, pathologists and anesthesiologists where such arrangements resulted in higher costs than if such specialists were employees of the hospital. We support this provision in the bill which would limit these arrangements.

We also are in favor of Section 14 which would permit payment by Medicare on the basis of a non-receipted bill for care directly to the legal representative of a deceased Medicare beneficiary but suggest this problem could better be handled by requiring all physicians to accept assignments for deceased Medicare beneficiaries.

The AFL-CIO strongly supports Section 22 of the bill which would make the Secretary of HEW the final certifying officer for skilled nursing and intermediate care facilities under both Medicare and Medicaid. Present law gives the Secretary this authority with respect to skilled nursing facilities participating under Medicare only, or both Medicare and Medicaid, but not where they participate only under Medicaid. Thus, substandard nursing homes have continued in operation by accepting only Medicaid patients.

We find Section 30 which establishes a Health Care Financing Administration by law redundant since the Secretary of HEW has already begun to reorganize the Department by establishing a Health Care Financing Administration,

Section 33 of S. 1470 would terminate the Health Insurance Benefits Advisory Council (HIBAC). The AFL-CIO deplores this provision. HIBAC does provide some measure of public accountability in the administration of Medicare and Medicaid and can make a major contribution to these programs. The advisory council should be continued.

We disagree, however, with Section 44 which would prohibit the release of the names of physicians who have been paid large amounts for treating Medicare patients. Admittedly, HEW has made some serious errors in releasing such information and such errors must be corrected in the future, but the public has the right to know what physicians are exploiting the program.

Section 46 of the bill increases the rate of return on net equity of for-profit hospitals and skilled nursing homes to two times the average rate of return on Social Security investment from the present one and one-half times. We feel this

is unconscionable since investigations by the Subcommittee on Long-Term Care of the Special Committee on Aging of the Senate have revealed deplorable and exploitive conditions in the for-profit nursing home industry. We oppose this provision.

In conclusion, Mr. Chairman, we believe the cost control provisions of Health Security that is, a budgeting system for institutional services-would be the most effective way by which the escalation of hospital costs could be contained. Admittedly, such a control would best be carried out if all payments for health services were channelled through a single agency of government such as in Health Security.

In order for such a program to work, it is quite clear, in our opinion, that the budget review must encompass the hospital's total budget and not just that part of the institution's budget that would apply to Medicare and Medicaid beneficiaries. Caps on part of the hospital budget for federal and state beneficiaries would leave health care institutions free to raise charges to private patients. This merely shifts costs but does not contain them. The premium cost to collectively bargained health plans would increase, along with all other premiums, to cover any shortage of payments for Medicare and Medicaid beneficiaries.

For physicians, we would support negotiated fee schedules which should be accepted by doctors as full payment for services rendered. These fee schedules would also have to be applied across-the-board. Capitation payments should be an alternative method of reimbursement for those practitioners who elect this method of payment.

We hope the Health Subcommittee of the Senate Finance Committee will give consideration to our views and that only a temporary cost containment program along the lines of the Administration's proposal but embodying the changes we have suggested should be enacted until such time as the Administration has the opportunity to introduce a national health insurance bill next year.

SUMMARY OF STATEMENT OF ANDREW J. BIEMILLER, DIRECTOR, DEPARTMENT OF LEGISLATION, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS BEFORE THE SENATE HEALTH SUBCOMMITTEE OF THE HUMAN RESOURCES COMMITTEE, ON THE HOSPITAL COST CONTAINMENT ACT OF 1977MAY 26, 1977

On behalf of the AFL-CIO we wish to express our appreciation for the opportunity to testify before the Subcommittee on Health on the Hospital Cost Containment Act of 1977 (S. 1391).

S. 1391 establishes a Federal program of hospital cost containment which is designed to place a ceiling on future increases in hospital costs. The average cost of a hospital stay has been increasing at about double the rate of the increase of the Consumer Price Index. Clearly, something must be done to contain the escalation in hospital costs.

The Administration's bill has some strengths and some weaknesses. One strength is its provisions to place a ceiling on total hospital revenues. This comprehensive approach would contain not only hospital charges but also ex

cessive utilization of hospital beds and extravagant use of personnel and capital resources, some of which is of marginal value in diagnosing and curing disease. However, a ceiling on hospital revenues can only be a short-term solution to the hospital cost escalation problem. As time goes on, any attempt to regulate a single industry to the exclusion of others tends to build up distortions and stresses with respect to the allocation of human and capital resources. The high cost inefficient hospital would receive the same nine percent increase in revenues as the low cost efficient hospital. Inefficiency would, therefore, be rewarded and efficiency would be penalized. Also, even if hospital costs are contained, S. 1391 does nothing about the escalation of doctor fees or the increasing costs of drugs, nursing home care and home health services. Voluntary hospitals will inevitably attempt to transfer their expensive patients on to the public hospitals in order to contain their costs.

We see no reason why big-city public general hospitals should be covered under the bill. Such hospitals are already under stringent municipal and county budget controls. In fact, these hospitals are underfunded.

A much more effective way in which to control hospital costs would be to phase-in the principles of the Health Security Bill (S. 3) introduced by the distinguished Chairman of this Subcommittee. Under this approach, the Health Security Board would be empowered to negotiate hospital budgets on a hospitalby-hospital basis. Such an approach would provide flexibility, equity and maximum adaptation to local circumstances.

The wages of nonsupervisory employees lag behind the wages of such employees in private industry generally and in the service industry. For this reason, the wages of hospital employees should be established through free collective bargaining and not be restrained by the hospital cost containment program. In recent years, the average wages of nonsupervisory employees in hospitals have risen less than nine percent annually and, therefore, pose no threat to the nine percent increase in hospital revenues which would be allowed by the bill.

The recent staff report of the Council on Wage and Price Stability, "The Rapid Rise of Hospital Costs," clearly shows that hospital wages have only been a minor factor in escalating hospital costs. Total labor costs were the source of only about one-tenth of the annual increase in average costs per patient, per day. According to the American Hospital Association, payroll expenses have steadily declined as a proportion of total hospital expenses from 66 percent in 1962 to 51 percent in the last quarter of 1976. But AHA payroll data includes salaries of supervisory employees. The percent of hospital expenses represented by nonsupervisory employees is only 35 percent.

Thus, since wage increases of nonsupervisory employees have no bearing on the runaway inflation in hospital costs, we strongly urge the exclusion of the wages of nonsupervisory employees from the hospital's base accounting year for purposes of determining the allowable increase.

However, request for such exclusion should not be optional with the hospitals as is provided in Section 124 of S. 1391. This section purports to exempt nonsupervisory personnel wage increases from the hospital revenue limit. Instead, it provides an incentive for hospitals to continue to increase expenditures in those areas which have been most responsible for health care inflation. This loophole is provided by the optional nature of the recalculation of revenue limits as stated in Section 124. In short, if hospitals request a modification of their revenues to eliminate the effects of nonsupervisory wages, then nonlabor costs can only rise by the permissible limit (e.g., nine percent). If, on the other hand, a hospital does not request such a modification, then it is possible for nonlabor costs to rise by as much as 14 percent by shifting the burden of the program onto the shoulders of low-wage workers by not granting such workers any increases.

The example that is contained in our full statement illustrates the problem. The solution to this flaw in the legislation is to require the Secretary to modify for all hospitals the inpatient hospital revenue limit to assure exclusion from the base of any wage increases of nonsupervisory employees.

This can readily be accomplished by dropping the language at the beginning of Section 124 (a) which states:

"At the request of any hospital which is subject ot the provisions of this title and which provides the data necessary for the required calculation." A major problem with the bill is that it initially allows a minimum of six states to opt out of the federal hospital cost containmest program and operate

their own program as long as such states meet the Federal criteria. However, the provisions in the Federal law which are designed to provide for free collective bargaining are not included as one of the requisites for such state administration. In addition, other states could opt out of the Federal program in future years thereby emasculating uniform and effective administration.

The AFL-CIO strongly favors a Federal program with uniform standards and uniform administration. If, however, states are allowed to administer their own program, one criterion that should be required of the states would be that they adopt the Federal standard which would exclude nonsupervisory wages from the cost containment formula. This is implied in President Carter's health message but it is not specifically included in the bill.

Highly objectionable to the AFL-CIO is the provision in the bill which provides that the Secretary of the Department of Health, Education and Welfare would have the authority to review but one aspect of the program-the provisions relating to wages-and subsequently be able to modify or eliminate the exclusion of nonsupervisory wages. It is the position of the AFL-CIO that the Secretary should report to the Congress as to how the entire program is working within eighteen months so that Congress can take whatever action it deems appropriate. S. 1391 cannot be more than a temporary program since the regulation of a single industry involves many complexities and potentially serious distortions. The entire program, therefore, should be reviewed by March 31, 1979. The disclosure requirements of the bill are completely inadequate. As stated by AFL-CIO President George Meany, "for too long, hospitals have operated under a veil of secrecy despite the fact that tax dollars are a major source of hospital income. Taxpayers have a right to know how these funds are expended." Public disclosure of each hospital's total receipts, expenses, assets and liabilities should be required. Hospitals should disclose the salaries of all highly paid employees including their fringe benefits. Detailed conflict-of-interest statements should be required of highly paid administrators and hospital trustees. In particular, the total receipts of a hospital's pathology and radiology departments should be disclosed. If anesthesiologists, pathologists and radiologists bill separately for their services, all such physicians should disclose their gross and net incomes. Additional information that the public should know would be hospital charges and whether the hospital has a preadmission certification program, whether the hospital requires a second opinion for elective surgery and whether the hospital shares services with other hospitals to avoid duplication of services.

Voluntary nonprofit and for-profit hospitals should not be allowed to transfer their expensive and nonpaying patients onto the public hospitals. The provisions of S. 1391 intended to deal with this problem need to be strengthened.

The AFL-CIO favors the proposed limitation on hospital capital expenditures but would suggest prepaid group practice plans to be given a priority for such capital expenditures as HMO hospitals reduce the total need for hospital beds.

In conclusion, Mr. Chairman, we approve the basic thrust of this bill which would establish a ceiling on hospital cost increases but the burden of cost containment must not be borne by low-paid hospital employees. We strongly urge that the improvements we have suggested be incorporated into the final bill that is reported out and passed by the Senate.

Senator TALMADGE. All too often we do not give enough recognition to those outstanding Federal employees who do a really good job. The health staff of the Education and Public Welfare Division of the Congressional Research Service typifies what good public service should be. The health staff has just produced an outstanding document entitled "Health Care Expenditures and their Controls." In one place, we can find virtually all of the information necessary to evaluate the present health care picture in the country. I commend the publication to all those interested in health care and its financing.

I ask, without objection, that the document be made a part of the record at this point.*

*See app. B, p. 588.

The next witness is Dr. Raymond T. Holden, chairman of the Board of Trustees of the American Medical Association; accompanied by, Edgar T. Beddingfield, Jr., chairman, council on legislation.

We are delighted to have you gentlemen. You may insert your statement in the record in full and summarize in 10 minutes, if you will.

STATEMENT OF RAYMOND T. HOLDEN, M.D., CHAIRMAN, BOARD

OF TRUSTEES, AMERICAN MEDICAL ASSOCIATION; ACCOMPANIED BY EDGAR T. BEDDINGFIELD, JR., M.D., CHAIRMAN, COUNCIL ON LEGISLATION

Dr. HOLDEN. Mr. Chairman, Senator Dole, we are pleased to present to this subcommittee the views of the American Medical Association on the important legislation, S. 1470, before you.

We have reviewed S. 1470 extensively and we commend the sponsors of this legislation for its broad coverage of a variety of issues in the medicare and medicaid programs. While we find that there are some provisions that we do not support, there are many others which we believe would be beneficial and for which we urge your favorable consideration.

One of the initial issues addressed in the bill relates to hospital costs. The intent of the hospital cost provisions is to provide a mechanism for controlling rising hospital costs. In any approach to this problem, it is important that solutions are not imposed that will adversely affect the quality of care available to beneficiaries of the Federal programs. As a matter of fact, it is important to note that attempts to curtail costs in those programs do in fact have a direct and substantial spillover effect upon all patients.

It is important that any cost containment measures be equitable for institutions, for patients and for third party payers while at the same time not compromising essential and desirable services and allowing for continued advances in hospital services incorporating the latest in technological developments.

One approach, Mr. Chairman, that of the administration, would impose an arbitrary ceiling or "cap" on total hospital revenues. We have opposed this approach because we feel it lacks appropriate flexibility, provides disincentives for efficiency and in fact would reward inefficiency. Most importantly that proposal would impact unfavorably most directly upon the continued provision of quality care.

On the other hand, S. 1470 contains provisions which attempt to meet the hospital cost problem in a more positive and equitable manner. Mr. Chairman, notwithstanding our belief that S. 1470 is a more realistic program, we also believe that adoption of the program in the manner presently proposed could have uncertain and perhaps even undesirable effects. Risks of any single new program imposed nationally are not warranted at this time especially when there are other potential alternatives which merit similar consideration. Experiments with various reimbursement methods have not been fully implemented and evaluated.

We would recommend that the cost containment incentive program of S. 1470 be the subject of experiment and demonstration in a limited