Thus, by finding the return on total investment for service industries comparable to the nursing home industry, and by knowing the asset turnover of the industry, it is possible to determine the profit margin that should be allowed. A survey by Standard and Poor's of its 425 industrials indicates that the average pre-tax profit margin from 1967 to 1973 was 15.5%. When this is broken down into four major service industries (Air Transport, Hospital Supply, Radio and TV, and Trucking), the average profit margin becomes 13.9%. The profit margin, however, is only part of the return on investment received by these industries. The pre-tax profit margin between service industries is not comparable due to the amount of leverage (or debt) that exists in these industries and the differences in asset turnover. In order to compensate for the leverage between industries, the proper profit margin should be: Profit Before Interest and Taxes (On Income) Sales The pre-tax and pre-interest profit margin for the four service industries is 15.1%. Once the proper margin is defined, the differences in asset turnover can be taken into consideration. The average asset turnover for the service industries noted above from 1964 to 1973 was 1.30. Therefore, the average return on investment before interest and income tax for these industries is calculated to be 19.6%. This is computed from the DuPont ROI Method as follows: ROI = Asset Turnover x Profit Margin (Pre-Interest & Pre-Tax) = 1.3 x .151 = .196 (or 19.6%) The numbers used are the average asset in the service industry turnover and the average profit margin. Because the health care industry is both labor and capital intensive, it is reasonable to consider both the capital costs and a profit opportunity on service for the industry. Given the average long-run capital costs in the industry are around 9.5% (the present average borrowing rate for mortgage money), and that the asset turnover in the industry will be approximately 90% (based on a study of multi-facility nursing home firms), with the adoption of this program, a pre-tax profit margin of 11.2% on revenues (12.47% on costs) would allow this industry to receive a return on investment roughly equivalent to that received by other service industries (including those whose rates are controlled). This conclusion is developed from the following analysis. If the average return on total investment for all service industries is 19.6%, then an opportunity for similar returns in long-term industry is justified. Thus, when applying the DuPont ROI Method, the ending return should be 19.6% The formula for health care industry consists of several factors besides asset turnover. The facility receives a pre-tax and preinterest profit margin from two sources. The first source is from the interest portion of the capital payment and the second is from the profit margin on services. If the asset turnover is 9 and the interest rate is .095, then the interest part of the capital payment in relation to sales is .095/.900 or 1056. For example, under the above circumstances a facility with $1,000,000 in total assets would have sales of $900,000. The capital payment at 9.5% would be $95,000 (.095 x $1,000,000). This represents a pre-tax and pre-interest profit margin of 1056 ($95,000/ $9000,000). The remaining profit margin on services, when added to the interest portion of the capital payment and multiplied by the asset turnover, should equal the desired 19.6% return. Thus, with a .9 asset turnover, and the .1056 margin from the interest payment, a It should be noted that the total pre-tax and preinterest profit margin for nursing centers, as outlined in this paper, is 21.76% (10.56% from the capital payment and 11.2% from the service). While the profit margin is greater than the 15.1% from other service industries, it is entirely justified because of the lower asset turnover in the nursing home industry, 1.30 for the former as opposed 90 for the latter. Historically, firms with low asset turnovers have generally had higher profit margins and the higher profit margins are needed to equalize the return on total investments. With this profit opportunity on revenues, the industry will have an opportunity to earn a fair, but not excessive, return. C. Administration The administration of the payment methodology must be the responsibility of the same agency who is also accountable for determining the acceptable levels of service. This will greatly facilitate the expeditious determining of the rate. 1. Rate Determination Process All rates are to be established on a prospective basis according to standard guidelines developed in accordance with the preceding "Cost and Profit" components. Facilities would, therefore, be grouped by their socio-economic areas, their size, and the services they provide. Standard costs can be developed within each of these groups to represent what the amount should be for each component, with the exception of the cost of capital. The data necessary to accomplish this objective can be obtained through three forms: 1) a cost statement; 2) a budget for the period of the rate; and 3) a report on the assessment of patient needs. Each facility would then be paid this prospective standard rate based on a predetermined occupancy level (see page 5). The payment allowed for the cost of capital of each facility can then be added to arrive at a total routine per-patient per-day rate. Ancillary services would be subject to standard costing and would be charged on a per unit of service as consumed by the individual patient. For example, a given modality of physical therapy might be determined to have a standard cost of $5.50 to which a permissible profit opportunity percentage would be added. This specific service would then have a price of $6.19 (the 6.19 is a result of the cost + profit or $5.50 + profit (12.61 x 5.50) or 69. The gross margin will be .69, or 11.2% of the unit of service price. 2. Effective Period of Rate Mr. ROSTENKOWSKI. Dr. Frank Rogers? [No response.] Mr. ROSTENKOWSKI. At this time we will go into a panel discussion. Would the following witnesses come forward and take seats at the witness table: Donald Trautman, Florence Moore, Margaret Ahern, Irene Buckley, and also Annie Galbraith and Robert Cholette. Mr. Trautman? PANEL NO. 1 ON HOME HEALTH CARE CONSISTING OF DONALD D. TRAUTMAN, CHAIRMAN, LEGISLATIVE COMMITTEE, NATIONAL ASSOCIATION OF HOME HEALTH AGENCIES; FLORENCE M. MOORE, EXECUTIVE DIRECTOR, NATIONAL COUNCIL FOR HOMEMAKERHOME HEALTH AIDE SERVICES; MARGARET AHERN, NATIONAL LEAGUE FOR NURSING, ON BEHALF OF COUNCIL OF HOME HEALTH AGENCIES AND COMMUNITY HEALTH SERVICES; IRENE G. BUCKLEY, EXECUTIVE DIRECTOR, AND MARY OVERTON, ASSISTANT EXECUTIVE DIRECTOR, NATIONAL CANCER FOUNDATION; ANNIE GALBRAITH, PRESIDENT-ELECT, AMERICAN DIETETIC ASSOCIATION, ACCOMPANIED BY ISABELLE HOLLAHAN AND JEANNE KRUHM; AND ROBERT CHOLETTE, NATIONAL EASTER SEAL SOCIETY FOR CRIPPLED CHILDREN AND ADULTS Mr. TRAUTMAN. Thank you, Mr. Chairman. Mr. Chairman and members of the committee, I will not follow the format in my written statement. I ask that it be submitted for the record and will attempt to briefly summarize. Mr. ROSTENKOWSKI. Without objection, all your statements will be inserted in the record in full. Mr. TRAUTMAN. I am chairman of the National Association of Home Health Agencies. We believe a number of changes would be desirable in the medicare home health benefit. Due to budget limitations and the very narrow focus of the hearings we are seeking changes that basically will improve administration and the addition of some very low-cost provisions. Our recommended changes are limited to those items which we feel should be of highest priority and will hopefully generate some immediate cost savings. They are categorized in four categories, Mr. Chairman. Under the administrative improvements these would be the areas that do not add cost. One of the problems that home health agencies are faced with is that under the name of expanding home health we are seeing HEW tend to reduce utilization of home health services. This is done in two forms. One is by liberalizing the access to inpatient services without corresponding regulations and also by placing limitations on home health services, which is in conflict with the current procedures which we must follow in our daily office routines. We are seeking full support from the committee to take whatever actions are necessary to assure that the Secretary of HEW will issue regulations that will: (1) Encourage the use of home health services to prevent and reduce the incidents of hospital readmissions; (2) pro vide maximum allowable range rather than minimum level of home health services; (3) adopt a policy which will define a home assessment visit as a medicare chargeable visit rather than an administrative overhead expense when requested by the patient's physician. We are probably more burdened proportionately to the dollar with paperwork than any other provider. We estimate that in 1971 Home Health Agency's staff had to process over 15 million pieces of paper to be reimbursed for medicare services. We believe the time has come to provide incentives to reduce paperwork. Some of these could be purchase of durable medical equoipment when it is known that the patient will need the equipment longer than 9 months. Another would be to modify the recertification of agencies on a performance basis rather than annually. This could be on a scale of 1 to 3 years based on the findings at the time and the survey. We also feel that fiscal intermediates should develop one step carbon file forms. We also feel that discharges or change status reports should be used or submitted by the agencies instead of monthly claim reports. Therefore, we recommend that the committee direct the Bureau of Health Insurance to proceed with such cost-saving paperreducing programs immediately and direct that there be an excessive paperwork differential which will be included as an allowable medicare expense. Another regulatory problem is section 228. In our view the regulations that were issued by the Secretary will discourage prompt transfer of patients from hospitals to home health services, add unnecessary administrative cost to the program and confuse the coverage of home health services for both the physician, the consumer, and other referrers of services. We have some recommended language that we have submitted in our statement to correct this. Under the benefit changes you have some bills before you by various Members of Congress, including Representatives Koch, Corman, Fraser, Steelman, and others, which will propose some changes which we believe could be incorporated into lowcost provision changes. We recommend that the following be considered by the committee: (1) Definition of home health aid should be broadened to identify an individual who renders a broader range of services addressed to the health and health-related needs; (2) Add inhalation therapy as a service covered under medicare; (3) Permit drugs and biologicals which cannot be self-administered, and laboratory tests to be included as covered home health services. Under the corrections that are needed in reimbursement policies. we are not as fortunate as the institutional providers on the 8.5 percent differential. We received the original 2 percent allowance, but somehow BHI made one of those unintended changes that never was corrected. If the committee feels that the 8.5 percent is something that should be continued, we feel that home health agencies should be permitted an 8.5 percent nursing differential allowance since we are under the same reimbursement system. On another problem with reimbursement problem, that is the words skilled and skilled nursing. This really has been a barrier to providing needed services for monitoring and surveillance of a patient in his home because it has been limited primarily to rehabilitative potential, so we are not really seeing the full use of this service. |