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The incentive reimbursement system applies only to routine operating costs such as the cost of supplies and food which are only marginally controllable by the hospital. The controllable items of routine operating costs, the wages of nurses, the wages of clerks and stenographers, the wages of janitors and engineers in the maintenance department, would be controlled by the bill. The costs of capital, costs of education and training, physician costs, energy costs, fuel costs, malpractice insurance expense and ancillary service costs (not defined) would continue to be reimbursed on a cost-plus basis under Medicare and Medicaid. In fairness, routine operating costs would include the salaries of management and supervisory personnel. However, we consider it highly unlikely that management would cut their salaries or even hold them constant. In our judgment, S. 1470 is not a cost containment bill. Rather, it is a wage control bill. No wonder the hospitals favor S. 1470 over the Administration's Bill, S. 1391.

Hospital wages still lag behind the average wages for all private nonsupervisory employees and even behind the average wages for service employees. In 1976, the average hourly earnings of nonsupervisory employees in all nonfarm employment amounted to $4.87. For service employees, it was $4.36 and for hospital workers only $4.18. Assuming a full work-year of 2080 hours, the annual earnings of the average hospital worker would come to $8694, substantially below the level of an austerity budget of $10,041 for a family of four in an urban community. From 1968 to 1976 the wages of hospital employees increased by only $1.87 while those of employees in service jobs increased by $1.93 and of all nonsupervisory employees in private industry by $2.02 even though it was during this period that hospital employees gained coverage under the Fair Labor Standards Act and for the first time large numbers of them were benefited by collective bargaining negotiations. (See Appendix A for the average hourly earnings for all private employment, all service employment and hospital employment from 1968 to 1976).

Collective bargaining settlements in the hospital industry have been modest. In 1975, the median bargained wage increase amounted to 7.7 percent. In that year, the cost-of-living rose 9.1 percent. Even organized hospitals were unable to keep up with the cost-of-living. In 1976, the average negotiated wage increase amounted to 6.4 percent while the cost-of-living increased 5.8 percent which still meant a drop in real wages over the two-year period.

The AFL-CIO unions with substantial membership in the hospital industry are the Service Employees International Union and the American Federation of State, County and Municipal Employees. These unions will be testifying in more detail with respect to wages in the hospital industry and with respect to their collective bargaining contracts.

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 expense 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, wage increases of nonsupervisory employees have almost no bearing on the runaway inflation in hospital costs.

The principal cause of hospital cost inflation is not wages but the control doctors exercise over the manpower and capital resources of the hospital. This control in voluntary hospitals is exercised without any accountability to either the hospital or to the public. The result is dual administration, poor planning, duplication of expensive and seldom used equipment and the purchase of new equipment the effectiveness of which is seldom evaluated.

Therefore, we find particularly objectionable Section 2(b) (aa) (3) (E) of the bill which, in effect, would establish a system of wage control. It would limit wages and salary increases for hospital employees, but not for doctors, in areas where wages and salaries are generally low. Paradoxically, in highly organized areas where wages were already at more adequate levels but where wages in some hospitals lagged behind the average, some hospital wages would be allowed to rise to the average wage level provided the hospitals were not in the high cost bracket. But high cost hospitals, at or close to, the 120 percent ceiling would not be able to raise the wages and salaries of their employees even if they were below the average in a given area. Where hospital wages are higher than the

average wage level, such as might happen in small communities where the only organized employees are hospital workers, the wages of hospitals would have to be lowered to the average wage after October, 1979. We find this is completely unacceptable and clearly inconsistent with the principles of free collective bargaining.

There are other difficulties. The average general wage levels are simply not available throughout the country. Nor are the average wage levels of hospital employees. The gathering of such information would run into millions of dollars. Moreover, even if it were possible to gather this data it would not be useful. It would be like trying to compare oranges and apples. The mix of skills in hospital employment is very different from the mix of skill in the general community.

Another weakness of the bill is that the reimbursement method would apply only to Medicare and Medicaid payments.

In our opinion the approach to hospital cost containment of the Administration's Bill, S. 1391, is far superior to that of S. 1470. S. 1391 establishes a ceiling on each hospital's total revenue. The result would be that each hospital would have to address itself to all three elements that cause hospital cost inflation, namely: (1) intensity of care, (2) utilization and (3) efficiency of operation. Although the cost constraints would be more effective each hospital would have more flexibility than under S. 1470. To hold to the estimated "cap" of an allowable nine percent increase in total revenues, a hospital could, for example, close down a seldom used open heart surgery unit, eliminate its intensive care unit, sell its seldom used high voltage radiation therapy unit or defer purchase of a CAT scanner provided, of course, such units and scanners were available in the community. The hospital could bring pressure to bear on its medical staff to reduce unnecessary utilization or increase the efficiency of its operation or even resist wage increases for their underpaid employees. All these options and more would be available to the hospital.

The Administration Bill, moreover, would only require a small staff to enforce its provisions. S. 1470, on the other hand, would require an army of investigators and volumes of regulations.

We do recognize that S. 1391 can only be a short-term solution to escalating hospital costs. The high cost inefficient hospital can increase revenues by nine percent-the same percentage increase that is allowed an efficient low-cost hospital. In short, inefficiency is rewarded and efficiency penalized. But all that is required is a short-term program. Our main objection to the Administration Bill is that it also attempts to control wages. (See Appendix B for the summary of our statement on S. 1391 before the Senate Resources Committee).

The Carter Administration plans to introduce a national health insurance bill by March 31, 1978. Whatever program the Administration proposes, it will have to deal with escalating medical care costs. We think the most effective and flexible cost containment measure would be a negotiated budget on a hospital by hospital basis. In any event, we are strongly convinced that Congress should not enact a long-term program which might have to be dismantled when the thrust of the Administration's national health insurance program becomes clear.

SEC. 10. Agreement by physicians to accept assignments

With respect to physician reimbursement, S. 1470 treats doctors very gently. Under the bill there would be "participating" physicians under the Medicare program. A participating physician would be one who agrees to accept assignments in full reimbursement for services to Medicare patients.

Participating physicians would be allowed to submit their claims on a simplified, multiple-listing basis rather than submitting individual claim forms. It is estimated that the simplified multiple-listing form would save $1 in administrative expense which would be passed on to the participating physician. In addition, it is claimed that the simplified multiple-listing forms would also save the participating physician another $1 in billing, collection and office paperwork costs and thereby result in an extra $2 of income for the participating physician.

While we find the $1 reduction in Medicare administrative costs creditable, the experience of the United Mine Workers of America with their simplified multiplelisting claim forms for their participating physicians indicates the doctor does not save anywhere near an additional $1 in his office costs.

But even if participating doctors could save $1 in their office expense by using simplified multiple-listing claim forms, this together with the extra $1.00 allowed

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.


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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

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