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Fifth, hospitals have not carefully examined their use of energy. A recent HEW study found that hospitals could reduce energy costs by up to 20 percent in the first year by reducing high water temperature, recycling air, improving insulation, monitoring heating plant efficiency, and cutting use of nonessential equipment during peak hours. These measures would have saved $332 million if in place last year and could save nearly one-half billion dollars by 1980.

The Administration proposal would give hospitals an economic incentive to institute energy-saving measures-most of which can be achieved without major capital expenditures.

Sixth, use of expensive and often unnecessary therapies has increased rapidly in recent years. For example, individual hospitals report that as many as 25 to 30 percent of patients receive inhalation therapy services. Estimated costs are $500 million annually. Yet there is limited professional evidence to support the widespread use of such procedures.

The Administration proposal would encourage hospital administrators to work with their medical staffs to eliminate unnecessary services and tests. Allowable revenues from these services and tests would remain in the base. Since the limit is on increases in total revenues, hospitals would be permitted greater than 9 percent increases on other services to the extent that these tests are curtailed. Finally, hospital costs would be cut substantially by not admitting patients several days before treatment, as is often done now. Pre-admission diagnostic tests should be conducted on an outpatient basis. Friday and Saturday admissions should be eliminated if laboratory and operating facilities are closed on weekends.

The Administration proposal would give hospitals an incentive to reduce lengths of hospital stays. Any reduction in stays results in an automatic increase in the allowable revenue increase on a per diem basis. Again, these changed economic incentives should strengthen our existing utilization review programs.

[A brief recess was taken.]

Senator TALMADGE, The subcommittee will come to order.

The next witness is Hon. David Hollister, Representative of the State of Michigan, on behalf of the National Conference of State Legislatures.

Mr. Hollister, we are delighted to have you with us. We have many witnesses and the Senate is in session. If you desire to do so, you may insert your statement in full in the record and summarize it.


Mr. HOLLISTER. It will be a pleasure, Senator. I will respectfully do that.

I will try to highlight the aspects of my testimony. One aspect relates to what States are doing now in cost containment areas, specifically where we as State legislators agree with provisions of the Senate bill we are considering this morning.

Another aspect involves some suggested changes, or things to keep in mind for the record.

My background, Senator, is as a second-term legislator in the Michigan House, where I have chaired the mental health committee. The speaker has appointed me to his special committee on welfare reform and his committee to investigate welfare fraud.

I am also representing the National Conference of State Legislatures.

States are very much concerned with the runaway health care costs. A decade ago, the medicaid bill was $1.6 billion a year. It is projected

for next year, 1978, to be $18 billion. That has had a devastating impact on State budgets across this country.

The States' response has been multiple. One response has been to reduce the scope of services available to citizens, the second response is to reduce the number of individuals who are able to be served. Another response is to increase patient cost-sharing requirements.

Another response is to eliminate the service coverage, a response that Michigan has recently enacted. The States are groping for ways to contain costs, and they are experimenting.

In 1970, New Jersey developed a computer data system which became the model for the HEW medicaid management system and using that, it has saved $27 million.

Eleven States have now incorporated the medicaid management information system. Twenty other States are moving in that direction. Connecticut created a commission on hospital and health care with decisionmaking authority over capital expenditures, annual operating budget reviewing rights, and analyzing costs.

Six other States are operating with mandatory ratesetting systems. California issued a medicaid card outlining the services available to an individual. Any services beyond that must be approved by a team of doctors.

In Michigan, we have initiated several cost-saving procedures. Michigan was hard hit by the automobile recession. As you know, we are heavily dependent on the automobile industry. We had a high unemployment rate and increased welfare costs-costs which increased health care costs and put a real crimp into our budget.

We just simply reduced payments to providers by 11 percent. We discounted their bills. We eliminated physical therapy in nursing homes. We put a 14-day limitation on inpatient psychiatric care. We eliminated dental, vision and hearing services for people over 21.

Those were drastic steps that we have had to take in the past to try to contain the costs. For this year, we are moving to a couple of other provisions. One, a prepayment review of hospital invoices for patients staying more than the 75th percentile of hospital stays. We initiated programs through legislation, recovering costs on third party liability, making Medicaid a payee of last resort, not first resort.

Finally, we are initiating the generic drug law in Michigan.

Even with these savings, 1 our of every 4 new dollars will go to the medicaid budget in the State of Michigan.

With that background, we applaud you and the committee for Senate bill 3205 of last year and Senate bill 1470 of this year. We also thank Mr. Constantine for his openness and sincerity and willingness to listen to the suggestions that the State legislatures have had in the past, and which have been incorporated into the changes which you highlighted in your statement earlier.

Our position has been developed through our human resource committee, with representatives from all the State legislatures and the health and welfare committees. In addition the State Federal Assembly of the NCSL has unanimously endorsed the concept of your bill and the highlights of my testimony this morning.

Specifically, we enthusiastically support certain provisions of the Senate bill. First, the exception of states with effective rate-setting

systems from the bill's hospital reimbursement provisions, we think, makes good sense.

In your opening statement this morning you indicated a willingness to expand your bill and widen its context to include more than just medicaid and medicare. We feel this ought to be done. We believe that the legislation ought to apply to Blue Cross, Blue Shield, and other private payees.

Another point to keep in mind is that cost containment is still an art, not a science and flexibility and experimentation should be encouraged. To designate one approach is too rigid and could be inequitable and doomed to failure.

All States should be required to meet Federal minimum standards with incentives for doing better, and I think your bill moves in that direction. We should require a good data base collection from the Department of Health, Education, and Welfare, working with State and local agencies in developing evaluation techniques.

We enthusiastically support the provision for technical assistance to the States for improving management administration and operation of the program.

We enthusiastically support the requirement that regulations pertaining to this act be issued in 13 months.

In developing those regulations, we have some things that we think ought to be kept in mind. One, that HEW should consult with State and local officials and the results, as they are developed, should be issued in advance, with a clear explanation of purpose and objectives. We also like the President's recommendation that the Secretary read the provisions and understand them himself.

We feel, in developing HEW regulations, that State variations should be allowed. We think, Senator, in mandating requirements, priorities should be established.

Although we want to comply with regulations all the way, sometimes that is not possible.

We think reasonable deadlines ought to be established and agreed upon by State and local officials and we specifically feel that there should be an update of present requirements and simplification of present medicaid regulations.

We applaud and enthusiastically support the provision which dictates that information concerning the inefficiencies of the program be made available not only to the Governor, but shared with the legislative leadership and the appropriate legislative committees.

We are always the last to know. Like the poor husband, he finds out last when things have gone astray, and we in the State legislature are also frequently the last to find out about a program that has failed. We applaud the effort to include legislative leadership and committee leadership in this effort.

This is unprecedented in Federal legislation and welcomed by the state legislators with enthusiasm.

We also endorse the provisions for strengthening medicaid administration. We do have a few concerns that I would like to share with you, and then answer any questions that you might have.

Our major concern is that performance standards are dependent upon the MMIS program being in place and not all States have that

in place and we need to think about phasing that in. There is also a question of paying for that MMIS program, and whether or not the present matching ratio ought to be increased.

We have a concern that the medicaid requirements are very detailed and specific. We question whether they should be locked into statutory language.

We have a concern that some States already meet or exceed performance standards while others are just beginning. How do we bring those others up without holding the ones that have moved ahead behind. And moving the other States up is going to be a considerable cost to States which have not done this job.

How do we meet their needs?

We are concerned about the 75th percentile quality control rate as being rigid and arbitrary.

We specifically would like to share our concern with you about the fiscal penalty, and feel that incentives ought to be built in and not necessarily limitations.

We think that there ought to be periodic corrective action plans and then, and only if the States refuse or are unable to meet the action plans, then apply the penalty. Do not apply the penalty immediately.

Performance standards should be a vehicle for ongoing assessment, not a vehicle for fiscal penalties. We should distinguish between willful intent not to comply, which should have penalties, and inefficiency, which should have technical assistance. This, the bill ought to recognize. There should be positive incentives of higher matching ratios to encourage good programs. Again, we feel that HEW should develop the data; HEW should be able to reimburse up to 90 percent of the administrative costs of programs that are doing a good job and meeting the high standards that we all look forward to. And we think MMIS should be a top priority in every State and should be reimbursed on a 75 to 25 percent basis.

Senator, in summary, the State legislatures are enthusiastic about most of your proposal. We are hamstrung with increased cost in medicaid, and we desperately want to see some kind of action. We see this as an excellent vehicle to do that, and with our limited concerns, we enthusiastically endorse the proposal before this committee.

Senator TALMADGE. Thank you very much, Mr. Hollister, for a very fine statement.

I understand the National Conference of State Legislatures has been very helpful in helping us to draft this bill. We greatly appreciate that. Virtually every State government in the United States has had great difficulty with their medicaid payments.

I know that is true in Georgia and is one of Governor Busby's principal problems. If you have any further recommendations to improve the bill, we would appreciate you submitting them in writing to the staff.

Thank you very much.

Mr. HOLLISTER. Thank you.

[The prepared statement of Mr. Hollister follows:]


My name is David C. Hollister and I am a state representative from Michigan. I have served in the Michigan state legislature for the past three years, during

which time I have been the Vice-Chairman of the House Committee on Public Health and Social Services and as Chairman of the House Committee on Mental Health.

I have also served as a member of several committees relating to social services and health care, including a special committee to rewrite Michigan's social welfare law and investigate medicaid fraud.

My office has also initiated several citizen's task forces, including a welfare reform task force and a medicaid review task force. Both these task forces have worked with the department of social services in identifying program areas in policy and service delivery as well as with legislative committees to address these problems through legislation.

Also, as a state legislator I am a member of the National Conference of State Legislatures and it is on behalf of the NCSL that I appear before you today. For your information, the NCSL is the only National organization representing the interests of the nation's 7,600 state law makers.

I am delighted, Mr. Chairman, to appear before you and the members of this committee.


I need not tell you that the unacceptable growth in Medicaid expenditures over the past few years is undoubtedly one of the most troublesome problems facing all levels of government today. You will recall that in its first year of operation a decade ago, state and local governments, along with the federal government, spent $1.6 billion on the medicaid program. Projections for fiscal year 1978 estimate the cost of the program at nearly $18 billion-an eleven fold increase that has all levels of government searching for ways to bring the expenditures back within acceptable bounds. Needless to say, such cost escalations have had a tremendous impact on state budgets. Medicaid expenditures are already assuming a disproportionate share of the limited state funds available to finance social programs for low income individuals. As you so correctly noted last year in your introduction of S. 3205, Mr. Chairman: “the choice is a simple one— either we make medicare and medicaid more efficient and economical or we reduce benefits."

While the factors contributing to the rapid expansion in the costs of providing medicaid services are easily discernible-inflation in medicaid prices and fees, expansion in the number of eligibles served, growth in the utilization per eligible person-effective and equitable methods for controlling the acceleration of costs are more elusive.

In the face of growing budgetary restraints, the most common response by the states has been to focus on reducing either the scope of services offered or the number of individuals served under the program. Other short term steps taken to reduce costs would include such actions as increasing patient cost-sharing requirements for basic and optional services and lowering the reimbursement fee levels for ambulatory services. Random examples of the above include: The elimination of adult dental services from coverage by Maryland, Florida, Georgia, New Hampshire, and Louisiana; the institution of a co-payment for eyeglasses in Virginia and Michigan, and the restriction of one physician visit per month in Alabama and Georgia.

Increasing recognition however, is being given to the contribution poor management and administration of the medicaid program makes to the problems of costs.

Waste and mismanagement is likely to continue unless the conduct of the administration is appropriately checked. This is the duty and the function of the state legislature. In addition to its policy and program development role, the responsibility of the legislature extends to the control of policy and program after the stage of formulation. The legislature must review the performance of its administrators—conducting oversight, curbing dishonesty and waste, ensuring compliance with legislative intent, and challenging bureaucrats. It must also assess the effectiveness of state policies and programs.

Currently in addressing the problem of rising medicaid costs state legislatures have basically three options: Continue to appropriate money to the program at increasing rates; cut benefits and reimbursements; or effect savings within the program itself. The later option implies getting a better handle on managing and administering the program.

As you are aware, some of the most effective and innovative measures in containing health costs have been introduced through state medicaid programs.

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