Mr. ROSTENKOWSKI. Dr. Cooper, you have listed several legislative changes in your testimony that you are working on. When can this committee expect the Department to send those changes up to us?

Dr. COOPER. The 1-year waiver authority for the 24-hour nursing requirements for rural hospital proposal (as opposed to the 5-year extension) is the one which I think we expect to submit in about 2 weeks at the most-hopefully, within a week or 10 days. The others have been submitted.

Mr. ROSTENKOWSKI. Are there any further questions?

Thank you, Doctor. Thank you Mr. Tierney. You have been most helpful.

Dr. Leo Gehrig.

STATEMENT OF LEO J. GEHRIG, M.D., SENIOR VICE PRESIDENT, AMERICAN HOSPITAL ASSOCIATION, ACCOMPANIED BY ALLEN J. MANZANO, VICE PRESIDENT, AHA, AND IRWIN WOLKSTEIN, ASSOCIATE DIRECTOR, AHA, WASHINGTON OFFICE

Dr. GEIRIG. Thank you, Mr. Chairman.

Mr. ROSTENKOWSKI. Welcome, Doctor. If you will identify yourself and your association you can go right into your testimony.

Dr. GEHRIG. Thank you, Mr. Chairman. I am Leo J. Gehrig, senior vice president of the American Hospital Association, representing more than 7,000 member institutions, including most of the hospitals in the country.

With me today are Mr. Allen J. Manzano, vice president of the association; Mr. Irwin Wolkstein, associate director of the association's Washington office. We appreciate this opportunity to present the views of the association on the specified medicare issues under discussion.

Hospitals and other institutional providers supply the services that comprise over three-fourths of the benefits of the medicare program. Furthermore, the greater part of medicare benefits covering physicians' services is provided in the Nation's hospitals.

It is now just over 10 years since medicare was enacted, and therefore it is fitting that the program be assessed on the basis of this decade of experience. Because most of the benefits provided for medicare beneficiaries are provided in hospitals, it is very important to the success of medicare that the impact on hospitals of any program changes be carefully considered in this reassessment. This impact is very significant because medicare patients receive some one-third of all hospital services.

Furthermore, medicare's policies are often embodied in medicaid. and other programs, and the total effect is widespread. Finally, with the vast experience that hospitals have obtained under the program. their recommendation for change in medicare deserve special attention.

You have asked that we confine our testimony to the 14 issues you have set forth. We are limiting our comments accordingly and have further limited them to matters on which we, as an association, have special knowledge. The first subject we shall discuss is that of institutional reimbursement.

MEDICARE REIMBURSEMENT

You ask that we consider whether basic changes should now be made institutional reimbursement. We answer in the affirmative. Our association has considered carefully the question of such changes, and we are here today to propose to you a significant modification of the present retrospective reasonable cost reimbursement system in the medicare program.

Our proposal would establish a dual system for payment of hospital services under medicare. The two elements of the proposal are (1) a State administered option for the determination of institutional reimbursement based upon prospective payment methodologies, and (2) a modification of the present retrospective federal system which would utilize classification screens to identify institutions required to justify their costs and take corrective action where such justification is lacking.

STATE ALTERNATIVE

The State alternative should be governed by a set of principles that takes into account what we know and what is unknow about prospective payment methods. These principles are as follows:

1. The system should not mandate any single approach to prospective payment since no single system appears to have any clear advantage over all others, and continued experimentation with alternatives, is, therefore, appropriate.

2. State prospective payment systems must reflect State and local community decisions on services to be financed and the capacity to fund them.

3. The system should apply to all payers in the State, including medicare and medicaid, among others, in order to assure that no program is subsidized or is required to subsidize another.

4. Federal participation in a State payment system should be in accordance with regulations established by the Secretary of Health, Education, and Welfare. Where the Secretary does not approve such a State system, the State should have the right to administrative and judicial review of the Secretary's decision.

5. In the implementation of a State prospective payment system, there should be provisions for careful phasing in of the new system in order to assure that there is no disruption in the orderly and timely flow of funds to providers of service.

6. The State prospective payment system should be required to meet the full financial requirements of health care institutions, including provisions for needed patient care and approved educational and research programs; the development of required capital needs, consistent with community planning decisions; and sufficient operating margin to cover unforeseen contingencies.

7. Capital expenditures must be approved by the planning controls provided for in Public Law 93-641 in order to be recognized in the prospective payment determination. The rate review program should not develop any procedures which would, in effect, establish a duplicative planning activity, but should recognize, in the payment system, decisions made by the planning agency.

8. Classification systems utilized in the process of determining the reasonableness of payment rates should serve as screening mechanisms rather than be used to establish payment limitations.

9. The State system should contain provisions for administrative and judicial review of disputed determinations.

10. In the appellate process, the affected institutiton should have full access to records and data used by the State system in reaching its determination.

PLAN FOR ADOPTION NOW

We now want to describe for you the system that we believe should be used in Federal reimbursement programs in States which have not developed an acceptable prospective system of institutionail reimbursement.

Basically, it calls for the use of classification screens which would replace the "cost containment" provisions of Public Law 92-603 and the entire catalog of detailed cost review factors applied under the reasonable cost reimbursement concept.

Our proposal for classification screens is designed to more efficiently narrow down the number of institutions subject to individual scrutiny and, therefore, to make certain that Federal cost containment efforts are applied in the most productive manner.

In essence, the institutions not singled out by the classification system would be presumed to be providing services to medicare beneficiaries at a reasonable cost. Those institutions identified by the classification system for detailed cost review would not automatically be presumed to be inefficient; however, they would be required to justify their higher cost operation.

We propose careful examination of the special circumstances of individually reviewed institutions before any penalty is imposed. Presumption of inefficiency cannot be based on hospital classifications review alone.

The emphasis in our system would be upon the individually reviewed hospital's justification of its operations. Because the hospital would not automatically be denied reimbursement upon being identified by the system, the pressure to develop a perfect classification scheme would be dissipated.

In its essentials, this proposal would select high cost hospitals for further scrutiny, provide guidelines to assist in evaluating the reasonableness of their costs, provide time for correction of the problems, and penalize the institution if changes deemed necessary were not implemented.

The AHA proposes that the classification scheme be designed to isolate no more than 10 percent of the institutional providers during any review period. Individual reviews of these institutions would then be conducted. If an institution's cost level could not be justified, the institution would be granted a reasonable time to implement corrective

action.

If the hospital failed to take the recommended action, the medicare. program's recourse would be a disallowance of reimbursement for that portion of its costs deemed to be excessive. Disputes between the pro

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gram and the provider would be referred to the Provider Reimbursement Review Board and ultimately to judicial review where required.

We feel confident that this dual system is practical and would lead to improved incentives for efficiency and greater equity in rates charged to various parties who pay for care. Further, the amounts paid to institutional providers would be adequate to support the type of health system that should be available to social security beneficiaries and other members of the community.

PROBLEMS IN PRESENT REIMBURSEMENT: INPATIENT NURSING

DIFFERENTIAL

Mr. Chairman, you will recall that in our June 12 testimony before this subcommittee the association called attention to what we considered unwarranted, arbitrary, and illegal elimination of the 82 percent inpatient nursing differential under medicare.

The Department of HEW had announced through publication in the May 23 Federal Register that it was intending to terminate this reimbursement factor for hospitals. On June 9 the association filed suit in the U.S. District Court for the District of Columbia challenging this termination.

We presented extensive evidence to this subcommittee and to the court that such action by HEW was inconsistent with two basic provisions of the medicare statute and in violation of one regulation issued by HEW on the specific issue under debate.

On August 1, 1975, the U.S. district court in Washington upheld our position by issuing a summary judgment against HEW which ordered that the nursing salary differential be reinstated.

In the interim between AIA's initiation of legal action and the favorable decision by Judge George L. Hart, considerable support was generated in both Houses of Congress for legislative action to restore the nursing salary differential.

And to all members of the subcommittee who provided us with the June 12 forum during which we were able to clearly express the facts surrounding this issue, we again express our appreciation.

As a result of the summary judgment mentioned, from which no appeal has been filed to date, this issue appears to be mooted. Therefore, we do not recommend any legislative action on the matter at this time. We will, however, keep the committee informed of any further developments in this case.

LIMITATIONS ON INPATIENT HOSPITAL COSTS

Another issue addressed during your previous hearings in June involves revision of regulations to implement section 223 of Public Law 92-603. In this section, Congress authorized the Secretary of Health, Education, and Welfare to establish limits on inpatient costs within groups of similar hospitals.

The groupings of the hospitals were to allow for differences in hospital size, the nature and scope of services provided, the types of patients treated, the location of the institutions, and other factors affecting the efficient delivery of needed health services.

In implementing this section, the Social Security Administration utilized a most simplistic approach in the classification of institutions

and, thus, in the determination of what limits on reimbursable costs. are considered reasonable. While in the second year of application, the regulations for section 223 were revised in a statistical juggling of data. no basic improvements were made.

The classification system continues to ignore two of the most critical factors affecting a hospital's costs-the nature and scope of services provided and the types of patients treated.

This year's action by the administration first changed the classifications of hospitals and, second, altered reimbursement ceilings. The initial formula established by the Social Security Administration set the ceiling on inpatient routine care at the 90th percentile of the cost of routine care among hospitals within a defined grouping, plus 10 percent of the median hospitals' costs.

The grouping process is essentially arbitrary and its relationship to the cost of the efficient performance is very imprecise. Nevertheless, the administration has chosen to compound this arbitrariness by reducing the cost limits to the 80th percentile, plus 10 percent of the median.

This action subjected a very large number of hospitals to the limits, increased the size of the potential penalty, and overloaded the cumbersome and inadequate appeals process.

In our previous testimony we noted the results of this arbitrariness, namely that:

Over one-half of all hospitals in the State of Washington and over one-third of the hospitals in California and Maryland exceed the proposed limits, while in North Dakota only 1.8 percent of the hospitals are affected and in Illinois, Nebraska, and Arkansas less than 3.5 percent are subject to denial of a portion of their reimbursement;

Over 40 percent of the teaching hospitals of this country are being arbitrarily penalized by the ceilings;

Hospitals previously judged as being efficient by the initial classification system are now being judged as inefficient by the revised system and that, vice versa, originally determined "inefficient" facilities are now being judged as efficient; and

If a particular hospital had been built less than one-half mile from its present site, it would not be threatened by a potential $1.8 million loss of medicare reimbursement brought on by these regulations.

The American Hospital Association believes that these illogical results confirm the arbitrary and unfair nature of the administration's approach in implementing this section of the law. The issue is currently on appeal before the courts, and we continue to believe that the courts will recognize the invalidity of the approach.

As things now stand, an arbitrary application of this regulation, based upon a grossly inadequate comparison or classification of hospitals, seriously affects appropriate reimbursement to hospitals. Such arbitrary application of a rule should not be permitted, nor should inequitable payment reductions by indirect means be permitted.

For example, a recent action by HEW with regard to periodic interim payments delayed the date of these payments. However, the delay of a payment has the same effect as a reduction of the payment, inasmuch as maintaining cash flow between payments entails a cost. While legislative action to correct inequities such as these would be helpful, we would remind the committee that our primary recom