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Some of it is tremendous. In Houston, Tex., which has a very well-planned hospital system, the most modern hospital bed in a private room is $85 a day.

In Miami, Fl., which abounds with excess hospital beds, old hospitals, the rates are more than twice that. They are running at about $180 to $190 a day for a private room. There is a tremendous amount of waste in this system that does not do anything except increase the taxes on the American taxpayer and increase the bills on the poor people who have to buy their own health insurance.

Senator DOLE. That is probably correct, but if you describe some of the hospitals as fat, what adjective do you use to describe HCFA? Is that lean?

Secretary CALIFANO. I think HCFA will be the Jack Sprat of Government organizations by the time we get it off the ground.

Senator DOLE. You are going to have a 9-percent cap on supergrades?

Secretary CALIFANO. Actually, Senator Dole, there are 28 supergrades available to move into HCFA. We are only moving 22 in for sure. Another five may go to the regions.

At most, they would be the same.

Senator DOLE. Thirteen existed before. Nine percent of that would be two.

Secretary CALIFANO. Thirteen supergrades existed in the medicare and medicaid bureaus and quality control bureaus. There are an additional set of 15 supergrades that come from the central office of SRS and elsewhere. We are moving the grades in. We are not moving the people in. Not all of the people are qualified for these jobs. It is very important to get qualified people.

Senator DOLE. Who is writing the job descriptions for these?

Secretary CALIFANO. Someone other than me, after the job description that I wrote for my own chef. I have retired from that business.

Senator DoLE. I just read the job description for the No. 3 man. You probably could use

him somewhere. What about Mr. Ruff? What brings him to the Department? His great work last year!

Secretary CALIFANO. In trying to determine what qualities we needed for the Inspector General and Deputy Inspector General, reviewing the hearings that this subcommittee held and that the Fountain subcommittee held in the House, we need two kinds of skills. One, we need, if you will, a Comptroller General kind of skill, someone sophisticated in efficiency, economy, government—and I asked Tom Morse to be the Inspector General. He had 5 years in the Pentagon in these areas and 5 years in the Office of the Comptroller General in developing efficiency systems, efficiencies, and economies.

Also, he studied the delivery of human service care services at Brookings for a couple of years, where he reorganized the Florida government. That was one set of skills.

It also seemed to me that directed at the fraud problem we needed the legal skills, we needed some criminal investigative skills and some prosecutorial skills. I went after and am delighted that I was able to attract Mr. Ruff to be the Deputy Inspector General and bring in that set of skills.

I think the combined sets of skills are what I believe are needed in our office and from our review of the legislative hearings.

Senator DOLE. What are his skills?

Secretary CALIFANO, I think his skills in a technical sense are his proficiency as a lawyer.

Senator Dole. He embarrassed President Ford last year and myself. Beyond that, does he have any skill?

Secretary CALIFANO. He has skill as a criminal lawyer, as a professor at Georgetown University, as a prosecutor. I am not familiar with your personal relationship with Mr. Ruff. My best judgment of him is he is first class for that job.

Senator Dole. He will be coming to this committee for confirmation?

Secretary CALIFANO. This committee or Human Resources, I do not know. I am sure you can have him any time you want him.

Senator DOLE. I just raise that question, it seems so many of the people in the prosecutor's office are winding up in the administration. I did not know they were a bit partisan. I assume they are not hired on that basis.

Secretary CaliFANO. Let me say, Senator, he was not hired on that basis. I have no idea what his politics are.

Senator DOLE. He is a Democrat.
Secretary CALIFANO. I am glad to know that.
Senator Dole. I wouldn't want you to go 4 years without knowing.

Secretary CALIFANO. Senator, you should be a Democrat. You have a great sense of humor.

Senator DOLE. I want to protect minority rights. I will stay where

I am.

I just have one other question. I may have some more later. In one area that you address, there may be good reason for it, you allow payment for wage increases to nonsupervisory employees without limit. You touch on that in your statement. Maybe it is necessary. I do not know. You explain that it is because some are in the lower pay category.

Has that been studied and surveyed and justified?
Secretary CALIFANO. Yes.

Our basic justification-we looked at the problem and there are several kinds of problems. One is to try to get lower paid workers to stick for longer periods on the job. Second, to try and get them a little better trained. Some of those workers desire to do that. A lot of them are handling patients. A lot of them provide part of the comfort that can be very important to a hospital patient.

We also looked at the economic impact and, over the last 6 years, those wages have risen on an average of 7.2 percent a year.

We found that there may be several situations, particularly the first time a hospital recognizes those workers, either as an organized body for the first time, or the first time a hospital deals with those workers where there might be a need for a significant wage increase. We did not want to hurt them.

We also noted that on the average, hospital workers are 15 percent below nonagricultural workers in terms of pay in our economy. We thought this exception was justified.

Senator DOLE. I do not quarrel with that.

They are also organized. Is there any more justification for that exemption than, say, any increase in drug costs or fuel costs or other necessary costs that may or may not be in the control of the hospital? Secretary CALIFANO. We thought there was, for the special reasons I noted. As far as fuel costs are concerned, I would make two points

Senator DOLE. I think you indicated they could save up to 20 percent.

Secretary CALIFANO. There are two points. Our studies indicate that within a year or so hospitals can be saving about half a billion dollars a year if they were just more efficient.

Second, the energy cost piece of this will eventually have to be related to the energy legislation that is working its way through the Congress, in which there is provision to ease this problem to some degree with respect to hospitals.

As far as the other costs, we really thought that this 9-percent cap would make the hospital administrators a little tougher negotiators on a lot of things.

Senator DOLE. I certainly understand your dedication to try to do something about it. We commend that.

I think, as you point out, if you carry out your program you might save $1.9 billion or something in that area, more billions that that over the years.

I am hopeful that, at the same time we are talking about hospital costs, we are talking about administrative costs and the costs to the taxpayer because of HEW or Agriculture or whatever it is. That is the other half of the coin.

Secretary CALIFANO. I agree 100 percent. I really devote a lot of time to try to trim administrative costs in HEW, not just in this area, but in other areas as well, to try to get a systematic procurement policy in place, just to try to get the Department better managed. I am not saying that it can be done overnight.

There are a whole host of problems, but we are trying to do it as fast as we can. Also, not unrelated, I might say, to the personnel issues here, is the fact that there are almost 16,000 employees involved in the whole reorganization. There are a host of rights they have under laws passed by the Congress, and the Civil Service Commission provides some inħibition on the flexibility that you or I might, in any particular case, wish to recognize.

When you see it all-as I said, I am delighted to have Mr. Staats and his people look at it, and they may even have better ideas than they had previously suggested, or that we have had. I am delighted to get it rolling. I think we can use all of the help available in getting better management.

Senator DOLE. Thank you.
Senator TALMADGE. Senator Danforth?

Senator DANFORTH. Mr. Secretary, let me see if I can summarize your position.

You view the 9-percent lid as a temporary stopgap method until some perinanent cost containment program is in place?

Secretary CALIFANO. That is correct, Senator.

Senator DANFORTH. The permanent cost containment program may turn out to be the kind of program that Senator Talmadge has offered, or it may turn out to be something different. Your view is rather than having Congress push forward and pass this particular bill, you

would rather keep your options open and see what will be developed over the next 9 months?

Secretary CALIFANO. I would rather state that a little differently. There are some elements of Senator Talmadge's legislation that we think are good and we would like to see move promptly, such as the elements I mentioned related to radiologists, anesthesiologists, and the very adept manner in which he is attempting to provide incentives to convert excess hospital beds to nursing home beds or other health facilities where they can be used for that purpose.

Also, we like the idea of prospective reimbursement very much. Our concern about prospective reimbursement is how fast we can develop the kinds of sophisticated data that we want that is necessary for that.

I am not, here, saying “stop” on the Talmadge bill, roll our bill through and we will all look at it a year or two from now. We would like to make technical suggestions on this legislation because there are a lot of aspects of it that are good.

I do think I did mention a couple of specifics, such as the profit point, and the medicare payment to doctors secrecy point which the chairman agreed with. Also, I would not want to see detailed legislation on the Health Care Financing Agency, quite frankly. When you start a new agency, you are moving 4,200 people around. It is going to take a year or two to get it on the books, to get it as lean as it ought to be.

I think at that point in time we need flexibility. We need all the watching that I am sure the subcommittee and others will give us, but we need flexibility to put that in place.

Senator DANFORTH. Let us concentrate on the reimbursement problem.

It is your view, I think you said, that this problem is the leading contributor to the increased cost in health care.

Secretary CALIFANO. Hospitals are going up faster than anything else in this arena. That is right.

Senator DANFORTH. The reimbursement problem is right at the heart of the total concern.

Secretary CALIFANO. Yes.

There are other pieces. The fact that we do it retrospectively hurts, because we are operating in a cost-plus world in which you just put in your CAT scanner and every hospital has every piece of expensive gadgetry that it wants, and we just come along and pick up the tab.

Senator DANFORTH. That is a somewhat different problem. That is a capital acquisition problem.

Secretary CALIFANO. It is a part of this, Senator. We, in effect, end up picking up the tab. Thev are depreciating that equipment, so we are also picking up overhead charges on that stuff.

Senator DANFORTH. I understand that. What I would like to focus on is the reimbursement problem, per se, rather than any limitation on capital acquisition, or way of financing capital acquisition.

It is my understanding that your view is that the method of reimbursement is very much a part of the problem.

Secretary CALIFANO. That is correct. We feel, if in the short run we can say to a hospital administrator, vou mav have 9 percent more revenues next year than this year, but that is the extent of your increase in reimbursement. You know that now, go plan your year, and we believe that that will have a tremendous impact.

We think that both the Talmadge bill, and our bill are in effect prospective, in that they both say "this is what you are going to get in the future."

Senator DANFORTH. They are very different approaches. The 9 percent is saying, here is your total revenue. The Talmadge proposal is to say, calculate your estimated revenue and, if you go 20 percent over that, we are not going to pay you the overage. If you go under that, we will give you some sort of financial incentive.

Secretary CALIFANO. In the Talmadge proposal, if you go under it by 90 percent, you get half of that. You are allowed to keep half of that.

In our proposal, if your admissions are as much as 6 percent less than they were in the prior year, you are allowed to keep all of that money. So there are incentives on that scale.

In both bills, I think ultimately in the long run, Senator, we are going to end up with all the caveats. We are going to learn a lot in the nert couple of years. We are going to end up with a system of prospective reimbursement similar to what Senator Talmadge is suggesting with some kind of a cap.

His does not pick up the cap part, just as ours does not pick up that hospitals charging $400 a day that should be only charging $250.

Senator DANFORTH. Reimbursement, whether it is prospective reimbursement then adjusted at the end of the year, or whether it is retrospective reimbursement, is still essentially payment for piecework, is it not?

Secretary CALIFANO. I guess you could characterize it that way.

Senator DANFORTH. Let me ask you a question. Is this not a part of the problem?

Maybe we should not be dealing with medical care as though it is piecework. Maybe we should be making grants to hospitals, even grants to physicians, of a lump sum. That is in essence what the 9-percent lid does. Then we can say to them, look, we are tired of all of the paperwork. We are tired of the kind of approach where the more you do the more you get paid, the kind of overutilization of health care, which apparently we have now. What we are going to do is simply give you a lump-sum payment and you are the professional, you make the decision as to what kind of service you want to render.

Secretary CALIFANO. I would say "hurray" to that. That is exactly what we are trying to do. We are saying, you will get this much money next year, Mr. Administrator; how you are going to get it is all in your ball park. What you are going to do with your board of trustees, what kind of equipment you are going to buy, whether you are going to realize savings here or there, or what have you, it is all yours to decide.

Also, in the context of paperwork, there is not a single additional piece of paper that you have to file under this system unless you want to come in for some kind of special exemption, and that would only be in a situation where you are really, essentially, over or under 15 percent.

That does make sense, at least in the context of what we tried to put together.

Senator DANFORTH. Is it politically possible, or is there going to be a continuing demand, for the Government to audit what doctors do,

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