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Most of the attention so far, however, has been on curbing fraud and abuse in the program. For example, during 1970, New Jersey developed a computer system to detect patterns of fraudulent practice and abuse. The ingredients of that system were adopted by HEW in developing the Federal medicaid management information system (MMIS). New Jersey's system resulted in a $27 million saving just by prescreening claims. Additional savings were incurred through an aggressive investigation and prosecution of several nursing home operators, pharmacists and doctors.

Over the past few years-in cooperation with and encouraged by HEW-many state legislatures have sought to aid the medicaid management process by expending large amounts of state funds for the development of MMIS systems. MMIS, including the surveillance and utilization review components, is directed specifically at controlling utilization, cost effectiveness and maintenance of quality care. These systems give medicaid program directors and state legislators a state wide perspective on how the medicaid program is being used or abused. Eleven states now have a certified MMIS system; an additional 20 states are in the process of implementing MMIS this year.

States retain the authority to determine rates and methods of reimbursement. Although somewhat constrained by Federal statue and regulations, states have developed a variety of policies in this area. Through the budget process, state legislatures have dictated reimbursement policy to a certain extent. A few states have developed sophisticated reimbursement policies, each tailored to a specific provider program. Some states have experimented with regulating the medical care industry, on the assumption that controlling costs only in one part of the health care sector will only result in a "ballooning out" effect in other areas of the sector. As an example, in 1973 Connecticut created a commission on hospitals and health care, with decisionmaking authority over capital expenditures and annual operating budgets, as well as reviewing rates and anlyzing costs. As a result, in its first year of operation the CHHC reported that the percentage of increase in cost per adjusted patient day was 8.4 percent, compared to 10.9 percent nationally, Presently, six states are operating mandatory rate setting systems with several other states sponsoring a rate review mehodology of one sort or another.

Since 1970, several states have supported experiments with the delivery of services to medicaid recipients through prepayment plans. The experiences of CHHC programs in Washington, Kansas, Kentucky, Michigan, New Jersey, and the District of Columbia are worth studying.

The state of California instituted several methods to reduce overutilization. Each recipient's medical card indicates the services the recipient is entitled to. Additional services sought by the recipient beyond those mentioned on the card must be approved by a medical field office before payment can be made. Moreover, a new program implemented at the end of 1975 requires every hospital serving medicaid patients to include a team composed of a physician, a nurse and a social worker. The team, in cooperation with the attending physician, must make a determination regarding the recipient's length of hospital stay. Preliminary results indicate that the average length of hospital stay has been reduced.

The state legislature in Wisconsin established a 30 member strike force against medicaid fraud. Investigation and audits carried out by the Illinois bureau of special investigation and the Governor's task force on medicaid fraud resulted in the suspension of 60 medicaid providers. Illinois has also reduced costs by changing the formula for reimbursing pharmacists for medicaid prescriptions. In New York State, audits of the nursing home industry are expected to help return almost $70 million in overcharges to the state's treasury. Last year Minnesota began a pilot project of restricting recipients' use of physician and pharmacy services in cases where there is documented evidence or abuse or misutilization of these services.

Michigan probably has a greater degree of experience with medicaid cost containment efforts than any other state. Recent periods of high unemployment have increased the state's welfare rolls and have concurrently reduced state revenues. This combination, with that of rampant health care cost inflation, has meant that medicaid has had a devastating effect on our state's budget.

In December of 1975 the Governor issued an executive order containing a number of medicaid reductions. Because of the immediacy of the state's fiscal plight, we could not sufficiently assess the ramifications of the measures taken. Some of the programmatic changes included:

An 11 percent reduction in payment rate for many medicaid providers;
Elimination of physical therapy coverage in nursing homes;

A 14-day limitation on inpatient psychiatric services; and

A reduction of the protected income level for medicaid only recipients, and the elimination of dental, vision and hearing services for persons over 21.

Most of these measures have long since been abandoned or modified because they either were not effective cost savings devices or had a devastating impact on clients.

As the legislature considered the current fiscal year's appropriation for medicaid it became apparent that available state funds for this program were significantly lower than projected expenditures. The Governor and legislative leadership joined together in a meeting with representatives of all major provider associations to outline the dilemma and to seek their help in developing and implementing effective and appropriate cost containment measures for the medicaid program. That effort was successful and resulted in a number of positive policies such as:

Prepayment review of hospital invoices for patients staying beyond the 75 percent length of stay for that diagnosis;

Increased efforts by providers to identify and bill other third party sources;


The establishment of a generic drug policy and revisions in the adult dental and vision program.

Although these efforts were largely successful, I would like to note that the Governor's statewide budget for fiscal year 1977-78 allocates one out of every four new state dollars to medicaid. This despite inclusion of substantial savings collected as a result of the cost containment initiatives.

In summary, despite the fact that we in Michigan have made significant efforts to identify and implement appropriate cost containment measures, it is abundantly clear that these efforts in medicaid alone cannot resolve the fundamental problem at hand-one of uncontrolled health care cost escalation. The need is great, therefore, for an effort at the Federal level which can effectively encourage the application of proven cost containment measures and sound management procedures by all levels of government and by the entire medical care industry. We believe that the Talmadge bill is a major step in the direction of achieving those goals.

8. 1470

Mr. Chairman, we at the state level realize the enormous time and energy that was devoted to the creation of this legislation. Moreover, we sincerely appreciate the willingness--and even the initiative-taken by your staff to meet with representatives of state government on the merits of this bill. Over the past year, your very able staff director, Mr. Constantine, has conferred with members of our organization on several occasions and, at each meeting, made it clear that the contributions of state officials are most highly valued by the committee. We have taken this invitation most seriously, Mr. Chairman. In preparation for this testimony we have gone through a series of steps to ensure a broad range of inputs from elected officials and program administrators at the state level. The recommendations which follow were originally submitted by the Human Resources Committee of the NCSL. That committee is comprised of chairmen and ranking members of health and welfare committees from practically every state legislature. Those recommendations were then considered by our State-Federal Assembly (SFA) and were adopted unanimously. The SFA includes over 400 state legislators, representing every state and both political parties, and has the exclusive authority to speak on behalf of the organization with respect to issues affecting State-Federal relations.

In general, Mr. Chairman, state legislators are enthusiastic about this bill. Reasonable attempts to fulfill the many objectives stated in S. 1470 deserve the attention and support of all levels of government. Those objectives specifically relate to addressing several problem areas in the medicaid and medicare programs. Those problem areas include:

The lack of uniform and efficient program management and administration;
Excessive and steadily rising costs in medicare and medicaid;
Ineffective enforcement of regulations by HEW; and

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Inefficient cost-generating reimbursement policies of hospitals, nursing homes, and to some extent, physicians.

Several provisions within S. 1470, if implemented, offer an excellent chance of resolving many of the aforementioned problems. NCSL specifically supports the following key measures:


Rising hospital costs have been a major concern to most states for a number of years, and several of the third-party payers-particularly medicaid and Blue Cross/Blue Shield-have initiated programs which aim at restraining hospital costs. However, what that experience confirms is that policies promoted by different payers acting alone can have only a limited impact on controlling hospital costs for the whole system. If the reimbursement system is to provide the lever for controlling costs, a uniform policy which applies to all hospital payers is highly desirable. The approach contained in S. 1470 constitutes a major improvement over the current hospital reimbursement structure but should extend even further to reach all payers.

The present piecemeal reimbursement structure is an inequitable and ineffective approach to hospital cost containment, as well as being a disruptive influence on hospital planning and financing. Reforms which apply to the reimbursement policies of only a single payer (e.g., medicaid) provide strong incentives for hospitals which are being squeezed by that payer's policies to either opt out of the program or to pass on the costs to other purchasers. In such circumstances costs are shifted from payers who have imposed reimbursement constraints (e.g. medicaid) to other payers who do not or cannot control their level of reimbursement (e.g., private insurers and patients without insurance). The result is that total hospital costs are not effectively controlled, privtae payers realize an inequitable fiscal burden, and those hospitals which have a high proportion of medicaid patients bear the brunt of cost containment efforts. Furthermore, hospitals may increasingly view medicaid admissions as undesirable, with the longrun result that medicaid admissions are shifted to a few hospitals. Since those hospitals would then face increasingly tighter cost constraints relative to other hospitals, the result might very well be a discernably different hospital delivery system for medicaid patients.

There is no dispute that a sensible hospital cost control system must precede the implementation of a national health insurance program. Substantial disagreement may exist, however, over what kind of cost control system will prove effective and what level of government should be responsible for administering and operating the system.

Given the fact that cost containment is still largely an art, not a science, flexibility and experimentation should be key to the eventual discovery of a system or systems that will function properly. The assumption that the solution to cost inflation in the hospital sector lies in a single approach is a faulty one and, if allowed to guide our policy, is likely to lead us into a system of extreme rigidity and inequity.

Hence, we believe, as the bill suggests, that states operating rate review programs which either meet or exceed minimum Federal guidelines should be free to continue to administer their own hospital reimbursement programs. The use of state expertise and staff would greatly augment the limited number of Federal employees who would be available to administer a nationwide program.

We wish to emphasize, however, that the criteria by which states would be permitted to operate their own hospital reimbursement systems should be minimum standards. Since the development of a sound incentive system for reimbursing hospitals is still in its infancy, states should not be put in the position of having to demonstrate "beyond a reasonable doubt" they can do a better job than the Federal Government.

The legislation should encourage further state experimentation with alternative hospital reimbursement mechanisms in order to build an information and data base necessary to examine and resolve several critical issues prior to the establishment of a national health insurance system. Strong evaluation measures should be built into the program to insure that innovations in technology and procedure are measured, preserved and made available nationwide.

Additionally, the legislation should contain incentives to states to adopt even tougher standards than federal requirements. For example, if a state operated system can manage to control hospital costs below a reasonable level, the state

should be able to retain part of those savings and devote them to such purposes as preventive services and debt retirement on unnecessary facilities.


On numerous occasions states have sought technical guidance from the federal and regional offices, only to be ignored or refused because the necessary technical expertise was unavailable, given the increased number and complexity of federal statutes and regulations, as well as performance standards expected under the proposal, improved technical assistance is indispensable to the ultimate effectiveness of this legislation. We are, nevertheless, concerned that while the bill calls for increased technical assistance, no recommendation appears calling for additional federal dollars to be allocated for that purpose. Moreover, we would like to be assured that if the resources are available, they not be consumed by monitoring and enforcement functions to the detriment of needed technical assistance services.


The record of the department over the past few years in issuing timely regulations has been extremely poor. On several occasions states have been plagued with complying with requirements which become effective before final regulations are published and under which their compliance will ultimately be evaluated. One concern, however, is that the need for expedition not infringe on the need for greater clarity in the regulations. NCSL offers the following specific suggestions with respect to medicaid regulations:

Consultation with representatives of state and local governments should precede the development of medicaid regulations. The regulations should be issued well in advance of the effective dates and the purpose and objectives of the regulations should be clearly specified.

State variations should be allowed in implementing the regulations, recognizing the differences in relative wealth and poverty and other socioeconomic factors. Criteria should be developed in light of these variations. Standards by which to evaluate state compliance with regulations must be formulated, with an emphasis on outcome objectives rather than process measure or technical requirements.

In view of the fact state and local governments are confronted with several sets of regulations at the same time, DHEW should, in consultation with the units of government affected by the rules, establish some priorities among the mandated requirements.

Reasonable deadlines for compliance with regulations should be agreed upon by all levels of government affected by the regulations.

An updated and simplified compilation of Medicaid regulations is badly needed. The task should begin with the following regulations specified in order of importance:

1. Financial eligibility requirements.

2. Hospital reimbursement.

3. Nursing home standards, including quality of care.

4. Cost sharing.

5. Freedom of choice.

6. Single state agency.

7. Regulations preventing states from eliminating or restricting dual certification of ICFS and SNFs.


Mr. Chairman, it is an unfortunate reality that legislators are often among the last to know when things are going wrong with the medicaid program. The deference S. 1470 pays to the importance of the State legislative branch of government-in recognizing its accountability for the expenditure of state

funds and assuring program effectiveness-is unprecedented in federal legislation and welcomed with great enthusiasm. This provision will unquestionably strengthen the legislatures' ability to oversee the administration of their Mediaid program. Moreover, it should spur greater interest on the part of the appropriate committees to continually evaluate the performance of their own state agencies.


S. 1470 calls for specific reforms in the administration of Medicaid by establishing specific performance standards in four areas:

1. Eligibility determination;

2. Quality control;

3. Claims processing; and

4. Program reports and statistics.

While the introduction of performance standards represents an appropriate step towards improving program administration and management, NCSL feels the following specific concerns must be accommodated:

1. Since compliance with the performance standards in the four broad areas is largely dependent on the assistance of fully operating management information systems, state and local governments will need more lead time than the proposed October 1978 effective date offers. Additionally, we recommend that the federal government assume the full cost of the development and operation of these management information systems.

2. The Medicaid requirements are extremely detailed and specific. The advisability of locking such regulatory language into a statute is seriously questioned. 3. While several states already meet or exceed the performance standards in the bill, many other states will be unable to comply without a substantial increment in state expenditures.

4. The standards related to the area of quality control give us considerable difficulty. To begin with, a maximum error rate for eligibility determination set at the 75th percentile of rates reported by the states (between a specified time period) will always be an arbitrary standard. More equitable measures which recognize state capacities could be developed, rather than legislating such a rigid statistical requirement.

5. Even more troublesome is the tying of a fiscal penalty to certain tolerance levels. Given the fact that "quality control" is still an art and not a precise science-that is to say no one has the answer as to what combination of factors will guarantee a reduction in errors-we find the attachment of fiscal penalties to tolerance levels unacceptable. Instead, we would prefer to see a nationwide quality control system developed as a management tool which will allow elected officials, program managers and the public to reliably and validly know the accuracy of the eligibility system at regularly recurring intervals.

The basic principles of this nationwide quality control system should be applied not only to medical assistance but to AFDC, SSI and food stamps as well. Additional administrative standards should not be mandated by the federal government without prior consultation with states and localities and until there is clear evidence of their cost effectiveness.

We further believe that no national performance tolerance levels should be established at this time. Instead, all states should be required to develop periodic corrective action plans, acceptable to the department of health, education and welfare, geared to the individual conditions of each state and including the state's specific targets for error reduction.

Sanctions, if necessary, should be applied only through the existing compliance procedure and only in those instances where a state clearly refuses to propose an acceptable corrective action or fails to appropriately implement the actions in the agreed upon plan.

We also recommend that the publicity of quality control findings should be continued with the following modifications:

More emphasis should be placed on publicizing in each jurisdiction the record of that single jurisdiction (national publicity makes it difficult for the public to evaluate the program which operates in their own localities.)

Public recognition should be given to those jurisdictions with low error rates or which are making significant improvements.

"More emphasis should be placed on clarifying the causes of errors and the content of corrective actions plans.

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