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Secretary CALIFANO. By size, as I said, the smaller hospitals, with fewer than 4,000 admissions, 28.3 percent are below 9 percent. Of the large, those with 4,000 or more admissions, 14.7 percent are below 9 percent.

Senator DOLE. Will you yield?
Senator TALMADGE. Yes.

Senator DOLE. Are these the same hospitals each year, or is it a changing list ?

Secretary CALIFANO. I cannot answer that. I do not think it changes very much. A lot of hospitals have driven the cost down. I can get you more detailed data on that, Senator Dole.

Senator DOLE. If it is a changing list, the list would not be very meaningful.

Secretary CALIFAXO. I do not think it is.

Senator TALMADGE. Following on Senator Dole's question, are these the same hospitals with a percent below 9 percent? In other words, how many have kept their increase below 9 percent for 3 consecutive years?

Secretary CALIFANO. I will have to submit that for the record. Some hospitals are doing that.

[The following was subsequently supplied for the record :) The Department recently completed a study which determined the number and types of hospitals experiencing annual increases in total operating expenses of less than nine percent for the period 1974–75, the most recent period for which complete data are available from the American Hospital Association. The findings were as follows:

18.2 percent of hospitals experiences increases in total operating expenses less than 9 percent;

25.4 percent had increases in total operating expenses per adjusted (for outpatient visit volume) admission less than 9 percent; and

19.7 percent showed increases less than 9 percent in total operating expenses per adjusted patient day. Although many hospitals had cost increases below 9 percent, most hospitals did not. Groups of hospitals with the following characteristics had a less than average proportion of hospitals realizing cost increases below 9 percent for all three cost measures :

Hospitals with nonprofit, nongovernment type of control;
Hospitals with a northeastern location;
Hospitals with a metropolitan location; and

Hospitals with more than 4,800 admissions. A similar study for the periods 1973–74 and 1972–73 is currently underway in the Department. As soon as the results are available they will be made available to the committee.

Secretary CALIFANO. I would also note that there are States that have rate commissions that your bill recognizes and which the President's bill recognizes, in which hospital costs, hospital rate increases, or hospital revenue increases, are held below 9 percent. Massachusetts is one, Maryland is another, Connecticut is now putting such a system in place., Rhode Island, some other States.

Senator TALMADGE. You will submit that for the record ?
Secretary CALIFANO. Yes.
[The following was subsequently supplied for the record :]



Prospective reimbursement encompasses those mechanisms of payment to health care providers which establish the rate the provider will be reimbursed prior to the period over which the rate is to be applied. Traditionally, most health insurers, including Medicare pay hospitals and other providers retrospectively on the basis of their reasonable and allowable costs. While this policy guarantees coverage for almost all hospital expenditures, it provides little economic incentive to the hospital to moderate costs. Proponents of prospective reimbursement believe that the rewards and penalties built into such systems wll motivate providers to allocate resources more efficiently without compromising the quality of their services. Evaluations of nonfederally funded systems

When the Social Security Amendments of 1972 were enacted, several State and local prospective reimbursement systems were operating without Federal involvement. Consequently, the Division of Health Insurance Studies decided to conduct indepth analyses of several of these existing systems in order to determine where and how experimental resources should be concentrated. These analyses have attempted to determine the impact of prospective reimbursement on hospital administration, cost behavior, and quality of care through comparisons with matched control groups of hospitals and/or before and after time periods.

The seven operating systems selected for empirical study were those in western Pennsylvania, upstate New York, downstate New York, New Jersey, Rhode Island, Indiana, and Michigan. These systems had a variety of sponsors including Blue Cross plans, State governments, and hospital associations and employed one of five prospective payment methodologies-budget review, budget reviews by exception, formulas, negotiation, or some combination thereof. The evaluation of these systems will soon be available from the National Technical Information Service. At present, all but the Indiana and Michigan evaluations have been completed.

In general, the evidence from the analyses suggests that the prospective reimbursement programs have been moderately successful in lessening the pace of hospital cost inflation. Thse findings are significant in that they represent the first careful documentation in the United States that prospective reimbursement has a downward effect on hospital costs. Based on these results, seven elements have been identified which appear to be essential to an efficient prospective ratesetting program. These elements are as follows:

(1) All hospitals within a given system should submit accounting and reporting data based on uniform systems.

(2) Health planning and ratesetting should be closely coordinated.

(3) Prospective ratesetting systems should focus on total hospital expenditures including utilization factors.

(4) Prospective ratesetting systems should cover all payers.

(5) Hospital participation in prospective ratesetting systems should be mandatory.

(6) Statistical screens should be established to determine what hospital costs are reasonable.

(7) An appeals or exceptions process should be created to allow hospitals the opportunity to rectify what they believe to have been an inappropriate decision.

Results of the statistical measurements of cost savings achieved by the prospective reimbursement systems analyzed are summarized in table 1.


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New Jersey
New York (upstate)
New York (downstate).
Rhode Island
Western Pennsylvania ?.

1969-73 Detailed budget review.... Voluntary.....
1970-74 Formula

Mandatory... 1968-74 do

do. 1972 Negotiated budgets Voluntary 1970-74 Formula and budget review. do.

4 3.7

3.1 2.6

1 Excludes evaluations of the systems operating in Michigan and Indiana which are still in progress. Final reports are due by the end of 1977.

3 Two-percent savings per year on total costs.

In viewing these results, it should be cautioned that many findings did not pass rigorous statistical significance tests. Even where statistics were significant, the 1- to 3-precent magnitude of savings attributable to prospective reimbursement would not suffice to bring hospital cost increases in line with inflation in other sectors of the economy. Nevertheless such savings compounded over time offer a substantial benefit to the economy. Federally supported research experimentation

Between 1972 and January 1977 the Social Security Administration implemented five prospective reimbursement demonstrations involving waivers of Medicare reimbursement principles for short-term acute hospitals. Concurrently, over 20 other studies, developmental projects, and evaluative projects have been initiated. The focus of these activities has been on the hospital, for it is the hospital sector of the health care delivery system which has experienced the most precipitious increase in costs. Since the expiration of the Economic Stabiliization Act in April 1974, the hospital service charge component of the Consumer Price Index (CPI) has risen at an annual rate of approximately 13.4 percent, as compared with the 7.5 percent increase in the overall CPI. Medicare's outlay for hospitals has risen commensurately.

In the past 2 years, DHIS's prospective reimbursement research and experimented efforts have expanded rapidly and entered a “second generation.” Six new projects have resulted from a request for proposals (RFP's) issued in September 1975 soliciting offers to develop or implement prospective ratesetting systems. Two of these new contracts are operational: Washington State Hospital Commission and Blue Cross of Western Pennsylvania. The other four, to develop and/or refine prospective ratesetting systems, were awarded to the Massachusetts Rate Setting Commission, the New Jersey State Department of Health, the Blue Cross Association of New York and the Connecticut Commission on Hospitals and Health Care. SSA has also recently signed a two-phased contract with the Maryland Health services Cost Review Commission. These second generation ratesetting activities have incorporated and built upon experience gained from previous research. Each of these new programs is based on mandatory provider participation. The programs will be carefully monitored and analyzed to determine how hospitals would have behaved in the absence of specific prospective reimbursement models and to determine if broader mandatory statewide pro grams, including all payers, are more effective than earlier "first generation" systems in containing health care costs. Because the procedures used to set rates are perhaps the most transferrable features of ratesetting programs, these analyses will focus on comparison of alternative ratesetting methodologies.

The relationship of the ratesetting authority to other State agencies will also be studied to assess the internal structure of alternate ratesetting agencies. Some of these new programs may ultimately qualify for grants under section 1526 of Public Law 93–641. Under this authority, DHIS will examine the impact of ratesetting models which co-locate the ratesetting and health planning authorities.

In addition to these new ratesetting activities, DHIS will continue to monitor and evaluate a number of ongoing projects, including prospective reimbursement systems operating in Rhode Island, South Carolina, and Western Pennsylvania, and evaluate a number of ongoing projects, including prospective reimbursement at Yale University. The results of these reimbursement activities should provide the necessary empirical evidence upon which to base sound policy decisions concerning the financing, organization, and management of a cost-effective hospital and health care system.

Senator TALMADGE. In your testimony, on page 7, you state, “We do not have local wage-base data for most localities.” I agree with you that this is an important variable in comparing hospitals

. Are you aware that during the drafting of this section we were advised by the Office of Research and Statistics of Social Security that such wage level indicators could be developed prior to the bill's effective date?

Secretary CALIFANO. I indicated that it would take a couple of years to respond to that, they are indicating by fiscal 1981. That's my ex

perience-in fact, we talked about this just yesterday. We believe such data should be developed. We believe some other data should be developed as well. I think you are absolutely on the right track.

Senator TALMADGE. They gave us information last year that that data could be provided prior to the effective date. In your statement, you say that the Department will submit comments on the various sections of S. 1470 during the next several months.

As you know, most of the provisions of S. 1470 were contained in a similar form in S. 3205.

Last July, your department promised to provide us with comments on the various sections of the bill. I understand that, in fact, comments were drafted, but never submitted.

In view of the fact that essentially the same agency people who were operating medicare and medicaid are still running the programs and in view of the failure of it to submit promised comments last year, I expected that we will be marking up the bill during the next few months, rather than waiting around indefinitely.

Once, again, for HEW's possible reaction, do you think you could expedite those comments for us?

Secretary CaliFANO. You bet I will expedite them.

If I may make two other comments, first, we will expedite the submission of our comments. A lot of people are the same. But after the election, there is a different attitude in terms of hospital costs at the top of HEW today than there was in the past.

There are two other sections of the bill that I am prepared to comment on now so that you understand our view.

Regarding section 12, in which you would fold in the radiologists, anesthesiologists, pathologists and others, we believe they should be folded in under any kind of legislation in this area. As you know, Mr. Chairman, from other conversations that you and I have had, we feel strongly that they should be folded in, they should be covered. The day of getting a percentage of the gross, like Robert Redford, or big movie stars, has got to end for the anesthesiologists and radiologists and pathologists of this country.

We may have some technical amendments and ways in which we think we can deal with some of the inherent conflict-of-interest problems.

Senator TALMADGE. We would appreciate that. Secretary Califano, I might say, incidentally, here, that all three of those professions have now agreed to accept a fee for service rather than a percentage of the gross receipts as has been customary.

Secretary CALIFAXO. That is terrific.

The other thing that we have already been trying to move on to the extent we can administratively, and which we think is another way in which vou have shown foresight, is found in section 20, in the conversion of hospital beds to nursing home beds in rural areas where those beds are clearly excess. We think that is important. We may have some suggestions for extending an enlarging on that concept.

This may be one way to use excess hospital beds in this country. There are 240,000 empty beds, 100,000 of which local agencies have determined to be excess. It is costing the citizens of this country $1 to $2

billion a year.

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Senator TALMADGE. I could not agree more, Mr. Secretary,

One of my primary objectives in proposing the creation of the HCFA is to fix accountability, particularly in quality assurance activity. Even though a whole new layer of bureaucracy is being proposed in the new organization to deal with this matter, I am informed that approximately 22 medicare-medicaid related positions are being retained in the Public Health Service to review and sign off on the work of the Associate Administrator of Quality and Standards of the Health Care Financing Administration,

Further, while the PSRO program is being administered by the Health Care Financing Administration, PSRO policy, and the national PSRO Counsel, is to remain in the Public Health Service. Mr. Secretary, can you explain how you can fix accountability and responsibility when you have policy in one agency and operations in another?

Secretary CALIFANO. I do not think I have quite made that separation, Mr. Chairman. What seemed to me important, when I announced this reorganization in February, was to retain an element of quality control within the office of the Assistant Secretary for Health. We do that for two reasons. One, that office itself has programs over which it has control that need quality control, such as HMO's, community health centers, what have you. Some people must be kept there to watch them.

Second, it seemed to me that the broad health professional, medical doctor input was important to have on a continuing basis in the Health Care Financing Administration.

I want to make certain that the Assistant Secretary for Health, which I am trying to build and strengthen as an office, would be capable of providing the kind of advice that he would need to provide on the medical doctor's side to HCFA. That is why I left the organization that way.

Senator TALMADGE. The Bureau of Quality Assurance has its own doctor.

Secretary CALIFANO. I know that, Mr. Chairman.

One of the things that I think this part of the reorganization does which I think you are after, too, is the fact that we have pieces in health, pieces in SRS, and we have pieces in the Social Security Administration.

Senator TALMADGE. Scattered all over the lot.
Secretary CALIFANO. That is right.

We now pretty much have all the health pieces in health, and pretty much all the financing pieces in the Health Care Financing Administration.

I think the bridge—this sort of dotted line-organizational bridge bet ween the Office of the Assistant Secretary for Health and HCFA, is important; at least for the time being we should have the capability in the Office of the Assistant Secretary for Health, with the medical doctors.

The medical doctors of this country and the health professionals in a very real sense look to that Office. They look to the individuals in that Office as the place to which they best and most effectively relate professionally. I wanted to make sure, at least for the time being, that that capability is there.

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