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that the savings in the S. 1470 approach would derive from moderating the rise in hospital costs rather than the actual difference between the penalties and the incentive payments.

Some have engaged in a numbers game saying that my bill would only save such and

such an amount. Unfortunately, their calculations are based only on simple subtraction—that is, adding up all the incentive payments and then subtracting that total from the reduction in payments to excessively high-cost hospitals. I cannot stress too much that the real savings will come from cost moderation and not penalties.

The reason is that high-cost hospitals will act to bring down their costs to levels which are fully reimbursed. Other hospitals will act to moderate their costs so as to gain incentive payments or to avoid moving into the range where a portion of their costs are not reimbursable. The effect of all of this will be to moderate the average costs of hospitals as they are recalculated each year.

This would occur as the high-cost institutions—those hospitals close to or above the penalty levels—moderated their costs thereby favorably affecting the average cost which is, after all, determined by calcuJating in both the higher and lower cost hospitals.

S. 3205 contained a section establishing a new agency, the Health Care Financing Administration. That agency was intended to consolidate medicare, medicaid, the Bureau of Quality Assurance, and some minor offices in order to cut redtape, eliminate overlapping and duplicative activities and personnel, and do away with the pancake layers of bureaucracy which repeatedly hampered effective and timely policymaking by the operating agencies.

I was more than pleased when Secretary Califano and President Carter announced that, under administrative authority, they were establishing the new Health Care Financing Administration. This was the first major reorganization undertaken. Unfortunately, the concept I had appears to have lost a great deal in translation.

The new Health Care Financing Administration, as proposed, appears in large part to represent nothing more than another massive bureaucratic boondoggle. A boondoggle which occurred because the dismantling of the Social and Rehabilitative Service—the welfare bureaucracy-happened simultaneously with the establishment of the Health Care Financing Administation.

The task force established to develop the structure and functions of the new Health Care Financing Administration consisted principally of people—not from medicare, medicaid or the Bureau of Quality Assurance--but rather from the defunct Social and Rehabilitation Service. In fact, the five-member so-called core staff developing the reorganization plan came directly out of the Social and Rehabilitative Service.

The people from the actual agencies consolidated-medicare, medicaid and the Bureau of Quality Assurance—those with primary understanding of the tasks to be accomplished by the new organization, were not included in this select "core" group. To no one's great surprise, what evolved was a top-heavy superstructure designed to not only assure the survival of all existing grade levels and positions, but also to provide new opportunities for supergrades as well as provide the potential for a general escalation of grades at all levels.

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Let me be quite specific. Based on information in HEW memoranda and from HÊW staff directly involved in reorganization activities, the principal concern of the task force clearly appears to lie far more with the dismemberment of SRS and not the creation of an effective and efficient Health Care Financing Administration.

There was the task force concern over how to justify all the personnel in view of President Carter's desire to streamline the Government and make it more efficient. There was concern over how to broaden the administrative structure since there was no increase in statutory responsibilities. There was no discussion, however, of efficiencies such as elimination of duplicative jobs——that could be gained by consolidation; this was just not addressed.

One of the first tasks of the reorganization task force was not to develop a structure that would reflect the benefits of true consolidation where one chief might serve in place of two; it was to justify supergrades. Under the approach taken, the mathematics of consolidation did not have one and one equalling two or less but equalling three or more. It gets worse.

Before the so-called consolidation, the Bureau of Health Insurance, the Medical Services Administration, the Bureau of Quality Assurance, the Office of Long-Term Care, and the Division of Health Insurance Studies has a total of exactly 13 supergrade employees. In fact, there was one vacancy within that total of 13.

Our latest information is that the new Health Care Financing Administration will now ask for 29 supergrades, nearly 21/2 times the current number. This is apart from the confusing and unnecessary layer upon layer of staff offices that have been part of the problem in

a By last count there were 21 divisions and 18 offices being proposed as part of the Health Care Financing Administration superstructure and we have not started counting the offices and divisions and branches of the operating programs, many of which are being upgraded to cash in on the bureaucratic bonanza.

And there is more—the Medical Services Administration, the agency responsible for medicaid had a total of 387 central and regional personnel. But, 568 Social and Rehabilitation Service employees are coming in on top of medicaid's 387.

Time after time we have been told by responsible and very much concerned and outraged HEW employees at all levels that the basic mission has become one of protecting grades and positions. Our files show instance upon instance where this new agency is breeding duplication and overstaffing and not eliminating them as we in the Congress intended.

The proposed Health Care Financing Administration appears to be another good idea bogged down in the quagmire of bureaucratic self-interest. The President and the Secretary could use a little help from the Congress in dealing with these elements of the HEW bureaucracy. It may well be necessary for us to specifically legislate the organization and staffing of the new Health Care Facilities Administration. For that reason, S. 1470 includes the section statutorily establishing the new agency.

In fact, the simplest thing to do might be to just incorporate all the medicare and medicaid activities into the Bureau of Health Insurance and then rename that agency the Health Care Financing Administration. I believe we have a representative range of witnesses this week.

It is my hope that these hearings will provide the basis for timely congressional action on necessary changes in the way Government conducts medicare and medicaid. As I have stated repeatedly, none of the provisions in S. 1470 are locked in concrete. Hopefully, constructive changes and improvements will be a product of these hearings.

Senator Dole, do you have a statement that you wish to make ? Senator Dole. Thank you, Mr. Chairman. I have a brief statement.

I am pleased to join with you and other members of the subcommittee, when they appear, to hear comments on S. 1470. I can only echo much of what you have said, Mr. Chairman, regarding the rapid rise in health care expenditures, particularly the Federal share of these expenditures. I, like you, Mr. Chairman, feel that the hearings held last year on your similar proposal provided us with many constructive suggestions. The result we have before us today is this bill.

As ranking Republican member of this subcommittee, I am particularly interested in seeing that meaningful improvements are made in the medicare and medicaid programs.

We are familiar with the figures which show that total health care spending comprised 4.5 percent of the GNP in 1950, while today it amounts to approximately 8.6 percent. Projected fiscal year 1978 spend ing for medicare and medicaid programs alone account for $47.5 billion. But the significance stretches beyond those expenditures. · The average American citizen is also required to spend increasing out-of-pocket costs for health care either directly or indirectly through insurance premiums and taxes. We must recognize that the delivery system itself is not completely responsible for generating those inflationary pressures. Rising labor and supply costs, the need to constantly upgrade equipment and physical facilities, skyrocketing malpractice premiums, and compliance with proliferation of new regulations have all contributed.

In my view, the proposal we are discussing today addresses many of these problems realistically. As a Senator from the State of Kansas, many sections of which are less densely populated, I understand the importance of provisions that consider the differences in hospital needs because of their differing location, size, and patient mix.

Section 11 which provides incentives for physician practice in lowfee shortage areas is of special importance to States such as my own, where physicians are badly needed, but where recruitment is difficult.

Mr. Chairman, I join you in welcoming the witnesses who are with us today and those we will hear from in the next 3 days. I believe that there is a consensus among the members of the committee that no provision of this legislation is written in concrete. We look forward to hearing suggestions and possibilities for improvement.

I will be particularly interested in hearing Mr. Califano's remarks regarding the proposed organization of the new health care financing administration. I share Senator Talmadge's concern that as proposed, --the new administration would not only not reduce the bureaucracy but

would add to what has already become the catastrophic illness of our multifaceted, poorly functioning governmental structure.

For example, it has come to my attention that in the Kansas City HEW regional office, the social rehabilitation service has 76 employees. Of these, only 14 have responsibility for medicaid. Under the new reorganization plans, 36 of the 76 employees are being sent to the health care financing administration. So above the 14 medicaid employees, 22 additional social rehabilitation service personnel are being superimposed. The balance—40—will go to the Office of Human Development and the Social Security Administration.

Mr. Chairman, I am convinced after hearing your remarks and after having heard of the instance I mentioned, that the issue of the present reorganization plans should be considered carefully by our subcommittee. It is quite clear that there are serious problems with the proposed reorganization of the health care financing administration.

I would respectfully suggest that the subcommittee request the Comptroller General to evaluate the entire situation and report back to us within 30 days. I think he should find out whether this new agency is developing more as a bureaucratic Frankenstein than as a means of doing a better job with fewer people.

The Comptroller General should be supplied with all of our committee files dealing with the development of HCFA. He should be asked to consult with the Civil Service Commission apart from reviewing the matter with any Health, Education, and Welfare people he thinks knowledgeable.

It would also be helpful if the Secretary would agree to hold off with further implementation of the HCFA until we have all had a chance to review the report of the Comptroller General.

Mr. Chairman, that concludes my remarks, but I would hope that there would be some immediate action taken in reference to the suggestion, certainly, of the Comptroller General. I am pleased to be working with you on this. We just successfully completed a farm bill. Maybe we can have some luck on the health legislation.

Senator TALMADGE. Without objection, that recommendation will be adopted.

[The following is the formal request of the subcommittee to the Comptroller General:]

U. S. SENATE, COMMITTEE ON FINANCE,

Washington, D.C., June 14, 1979. Hon. ELMER B. STAATS, Comptroller General of the United States, General Accounting Office, Washington, D.C.

DEAR MR. STAATS : On June 7, 1977, during hearings before this Subcommittee, the Subcommittee, on formal motion, agreed to request your Office to review the development and organization of the Health Care Financing Administration in the Department of Health, Education, and Welfare. Subsequently, members of our respective staffs have been in consultation on this request.

As you know, the concept of bringing the Medicare and Medicaid programs, health standards activities, and the Professional Standards Review Organization program under one organization was included in my bill S. 3205 introduced in the last session.

Because of my concern that this organization has been attributed to a concept closely identified with myself, on May 5, 1977, I wrote to Secretary Califano expressing my dissatisfaction with respect to the new reorganization. Specifically, my concerns dealt with—(1) the apparent proliferation of new superagencies, (2) the fragmentation of authority and responsibility through the submergence of the principal operating bureaus (Medicare, Medicaid, and Health Standards and Quality), and (3) the proliferation and possible overlapping of staff activities reporting directly to the Administrator.

By letter dated June 2, 1977, the Secretary responded to my concerns. However, in the judgment of the Subcommittee, this response was not satisfactory. In fact, detailed information received by the Subcommittee on Health subsequent to my May 5 letter has served to reinforce the concerns expressed in that letter.

Therefore, I am requesting the General Accounting Office to make an immediate review of this new organization with emphasis on the following issues :

A. PROLIFERATION OF SUPERGRADES

were

1. How many supergrades

authorized in the operating agencies consolidated ?

2. Immediately prior to the HEW reorganization, how many supergrade positions were authorized in the Social and Rehabilitation Service? Of these, how many were vacant? With the reorganization on March 8, 1977, the Service was disbanded and its functions were distributed to the new Health Care Financing Administration, the Office of Human Development, and the Social Security Administration. In these organizations (i.e., HFCA, OHD, and SSA) how many supergrade positions were designated and how many supergrade employees were assigned ?

3. We understand that supergrade-level job classifications are subject to approval by the Civil Service Commission. What is the status of the approval process—both within CSC and OMB—for the supergrade positions being proposed for the Health Care Financing Administration;

4. What has been the result of prior reviews by the Civil Service Commission of the grade structure of the Social and Rehabilitation Service as it pertained to supergrades as well as Grades GS-14's and 15's;

5. Of the supergrades being proposed, how many would be assigned to a staff function as opposed to a line or operation function and does the General Accounting Office believe that the mix would be appropriate?

B. FRAGMENTATION OF AUTHORITY AND RESPONSIBILITY

1. Obtain the views of key officials of the operating bureaus as to their role in the new organization and as to whether they view operating effectiveness and policymaking enhanced or diminished.

In connection with any interviews, it would be appreciated, where requested by the individual concerned, that confidentiality as to his identity be observed.

2. Over the years a basic problem at HEW has been the timely promulgation of regulations pertaining to the health programs. If possible, please provide a flow chart showing how proposed regulations dealing with (a) reimbursement, and (b) Professional Standards Review, would be developed through the hierarchy of the new Health Care Financing Administration.

3. Historically, the heads of the operation bureaus for Medicare and Medicaid have been authorized to submit program related instructions to intermediaries, to carriers, and to the States. Will this authority remain or will it be diluted under the new organization? Specifically, what will be the authority of the Bureau operating heads with respect to developing and signing correspondence to members of Congress and the public, and what will be their authority and responsibility in issuing instructions to contractors and State agencies?

4. To what extent will staff offices (such as the Associate Administrator for Policy, Planning and Research) be involved in the flow of official communications between the Bureau heads and the Administrator or Deputy Administrator?

C. PROLIFERATION AND POSSIBLE OVERLAPPING OF STAFF ACTIVITIES

1. Identify any evidence of duplication or overlapping from the functional statements of the various offices and Bureaus, and divisions of the Health Care Financing Administration.

2. Does the General Accounting Office see any opportunities to combine or consolidate any of the offices or divisions of the new organization ?

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