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In addition to the preceding recommendations NCSL offers the following suggestions for enhancing the quality and effectiveness of the administration and management of the medicaid program:

Performance standards should be viewed as an essential management or information device by which an ongoing assessment of the effectiveness and efficiency of a state's medicaid program can be made and by which areas of deficiency can be identified and corrected. Standards should not be used as a vehicle for the application of fiscal penalties.

With respect to the application of fiscal sanctions, efforts should be made to distinguish between willful intent not to comply and management inefficiencies. Where the latter is the problem, technical assistance should be the initial remedy with a specified time limit established for compliance.

The application of penalties should be only a measure of last resort. When program deficiencies are identified, a corrective action plan should be formulated by the state and technical assistance should be extended by DHEW to help implement the plan. Only when further review indicates non-compliance should a penalty be imposed.

Penalties should be levied on a flexible basis, in accordance with the degree of non-compliance.

Positive incentives, e.g., higher matching ratios, should exist to encourage worthwhile programs.

One of the serious deficiencies in medicaid management is the lack of comprehensive and comparable program information. DHEW should work with the states to establish a common set of data describing each state medicaid program, including information on reimbursement.

DHEW should have the authority to reimburse states up to 90 percent for administrative costs. In return for the increased match, states must fulfill certain performance criteria in the administration of the program. HEW would negotiate with each state on the conditions and standards that must be met in order to receive the higher match.

The development of MMIS within every state should be a major priority of DHEW. The matching ratios for development and operation of MMIS should be reconsidered in view of the disproportionate burden the costs have on predominantly low income states.

Staff to implement findings from the MMIS systems should be paid on a 75/25 percent matching basis.

The medicaid technical assistance role of the DHEW should be strengthened and upgraded and added emphasis should be placed on training federal staff on-site within the states.

DHEW-in cooperation with the major state and local public interest organizations-should foster inter-state technical assistance and resource exchanges for the improvement of medicaid management and administration.

In conclusion, Mr. Chairman, we suggest that while S. 1470 contains numerous worthwhile features that deserve widespread support, the bill should not be represented as the exclusive answer to controlling health care costs. Medicaid and medicare account for only one third of the total health care dollars spent nationally; therefore, the regulation of medicaid and medicare cannot control costs throughout the entire health care sector. Even if the bill's provisions succeed in holding medicaid and medicare hospital costs in line, there are too few safeguards to prohibit the reallocation of those costs to other third parties. Furthermore, we feel that action must begin right away on comprehensive health care cost containment. A delay until 1981 is likely to mean that hospital costs will have increased another 45 percent before we start to deal with them.

We believe that the development of a national health policy offers the most effective means of containing costs throughout the health care sector in the long run. Such a policy at a minimum would link decisions on provider reimbursement to effective health planning authorities. It would correct the present imbalance in the health care system between the emphasis on treatment of illness and the deemphasis on promotion of health. A national health policy can begin to grapple with some of the difficult public policy. Issues being forced on society by the proliferation of expensive, sophisticated technologies, such as, what kinds of health services shall be provided and where shall our limited resources be concentrated ?

Last year in your introductory remarks on S. 3205 you indicated, Mr. Chairman, that the kinds of administrative and payment changes advocated in the bill “are absolutely necessary prior to any expansion of the federal role in providing more health insurance to more people”. You went on to suggest that absent these changes, “any expansion would be an open invitation to fiscal disaster'.

While, of course, our presence here today is not to debate the merits or demerits of the various national health insurance proposals pending before Congress, we do anticipate that that debate may be forthcoming fairly soon and when the time comes, state and local governments will be anxious to make a contribution to a consensus as to the kind of health care system America ought to have.

In preparation for that possibility, state and local organizations have been working together over the past year to learn how their constituents fell about certain key issues in the national health insurance discussion, as well as to de lineate what roles and authorities state and local governments ought to exercise under any new health care system. For the record, I would like to submit some attachments which describe in detail our concerns in this area, as well as some of the tentative recommendations we have developed.

Thank you once again for this opportunity to meet with you.

Senator TALMADGE. The next witness is Dr. Robert P. Whalen, commissioner of health, New York State, on behalf of the Association of State and Territorial Health Officials.

Dr. Whalen, we welcome you to the committee. You may submit your entire statement for the record, and summarize it.

STATEMENT OF DR. ROBERT P. WHALEN, COMMISSIONER OF HEALTH, NEW YORK STATE, ON BEHALF OF THE ASSOCIATION OF STATE AND TERRITORIAL HEALTH OFFICIALS

Dr. WHALEN. Thank you, Senator.

As the chief framer of this legislation, Mr. Chairman, you are to be congratulated for your foresight and perception. The ever-increasing costs of medicaid and medicare have indeed become an intolerable burden for Federal and State governments and for the Nation's taxpayers. We at the State level need relief from our burden and we need it now.

We note with interest and approval your recent comments that this bill does not compete with President Carter's Cost Containment Act, but instead, complements that legislation. We endorse the concept of adopting immediate interim restraints on health care costs while Iongterm solutions are worked out.

At or near the top of every State's priority list is relief from the current provisions of so-called reasonable costs in paying for hospital and long-term care. This misnamed and misguided policy has provided the Nation's health care industry with carte blanche to pass through to the govermental payer whatever costs the industry chooses to charge for its services. As a consequence, many States and local communities have reached the limits of their fiscal resources, even for such socially beneficial programs as medicaid.

When hospital rooms cost upward of $300 a day, as they do in some metropolitan areas of our Nation, and when medicaid must reimburse some hospitals $70 to $80 a day for a single visit to a clinic or an emergency room, as was true earlier this year in New York City, I say to you that hospital costs are anything but reasonable.

Thus, our association strongly supports efforts to reform the administrative and reimbursement mechanisms in the medicare and medicaid programs. The bill before you represents a thoughtful ap

proach to this urgently needed reform, and is a signal improvement over kindred legislation offered last year.

We wish to offer the following comments concerning the bill and some of its provisions.

Our principal concern is with the level of consultative and administrative control that this legislation would accord to the States, which together with localities, are legally responsible for the operation of the medicaid program and are expected to fund half of its costs.

Many States, New York among them, have been working for years to refine and implement effective programs aimed at controlling everrising hospital expenditures, and to do so without denying vital health services to those people who need them. These State programs represent a pluralism that should be encouraged to continue and progress.

This would not only give the Federal Government a benchmark against which to measure its programs of hospital cost containment, it would also permit these States to serve as laboratories for the development of innovative cost control procedures. We strongly recommend that States with existing and effective programs of hospital cost control be exempted form the hospital reimbursement provisions of this bill and that this waiver be granted without prejudice.

We endorse the concept of rewarding hospitals whose routine costs are below the average of their groups, and penalizing hospitals whose costs exceed the group's average.

But the classification of hospitals into groups differentiated only by bed capacity seems inflexible and unwieldy. More sensitive criteria may be needed to account for geographical differences, different sponsorship and variabilities in level of care that is provided. In New York State, for example, the character of the hospital industry in New York City is far different from that in rural areas upstate.

When New York State first sought to control hospital costs in 1970, we began by examining certain routine costs of inpatient care, as this bill does. Many years later and wiser, we have become more sophisticated in our efforts to contain hospital costs. We found that, when certain cost components are left out of a reimbursement formula, these costs often become artificially inflated in an effort to counteract restraints contained in the formula. Thus, when we placed stringent controls on reimbursement for inpatient care, we found that the average length of stay began to increase and that charges for outpatient and ancillary services shot upward at a precipitous rate.

Accordingly, we found it necessary to broaden our cost containment efforts to include ancillary costs, to set standards for average length of stay, and to place a ceiling on reimbursement for clinic and emergency room services.

I offer this experience as proof that cost control legislation, if it is to be effective, must cover ancillary as well as routine care.

This bill would allow hospitals to receive full reimbursement for costs up to 20 percent higher than the average of their peer group. In our view, this is far more permissive than the limit already set by some States. In New York State, for example, medicaid and Blue Cross reimbursement is limited to the average of the group. Those hospitals exceeding the average are penalized.

The concept of conversion allowance is, we believe, an ingenious answer to the problem of unneeded, underutilized hospital facilities. We believe such a provision would overcome the opposition many States have experienced when they have tried to close or consolidate unnecessary hospitals and hospital services.

Such efforts, however, should be closely linked to health planning at the State level, and should involve both health systems agencies and State health facilities planning agencies. Through this interface, the States would be in a position to identify those institutions and services that are redundant to need.

Many States have sought permission for hospitals to convert some beds to the level of nursing home beds, with appropriately reduced reimbursement. Heretofore, Federal health policy has not permitted this. Thus, we are pleased to endorse this provision in the bill.

And we also endorse the constraints placed on reimbursement of hospital-based physicians, such as anesthesiologists and pathologists, for services not directly related to patient care.

The performance criteria, reporting requirements, and penalties specified in relation to eligibility determination, claims processing, and data retrieval are, in our opinion, unrealistic. In

summary, may I say that we States, much like the Federal Government, need to coordinate our cost control efforts with related activities in health 'planning and development. The proposed legislation could be more supportive of such efforts by closely involving the States with the administration and intent of the legislation. For example, States could be asked to submit administrative programs that would integrate cost control, planning, and policy linkages at whatever level they might be currently operating.

In some States, this would be development of a strong capital expenditure control system, while in others it would be a coordinated and complex system of ratesetting, planning, and capital expenditures controls.

This could be at least partially accomplished through a State administrative program requirement. Such a requirement would need to be supported by federally established performance criteria tied to the intentions of the act, but in keeping with the unique situation of the various States.

Inherent in my testimony is the belief that something must be done immediately

to cope with the explosive rise in State and local, as well as Federal Government, share in health care costs. But at the same time, we need a long-term approach, such as this bill, to the problem. We believe that considerable attention should be given to increasing State resources so that health care cost containment can be effectively planned, implemented, and evaluated.

I want to stress that ASTHO strongly endorses the intentions of this legislation. Our commentary is presented from the perspective of strengthening a useful and necessary proposal.

And if we may be permitted one final observation, it is that the increase in expenditures by the health care delivery system over the past decade has not demonstrably benefited the health status of the American people. We are confronted with rapidly increasing expenditures for new technology, more personnel, and new facilities, without a nec

essary relationship to improved health. In addition to capping the costs of institutional care, we must consider increasing our investment in the prevention of illness and the promotion of good health practices on the part of the populace.

Senator TALMADGE. Dr. Whalen, thank you very much for an excellent statement. You are an expert in this field. Do you think this bill, as presently drafted, will do the job?

Dr. WHÅLEN. I think, Senator, that it is a very good beginning.

I think, as you move into this field, that approaching it by a grouping of hospitals and putting a ceiling on routine costs, making payments prospectively, and putting in an incentive payment, so those who are more efficient are rewarded, is a very good approach.

I think that eventually it is going to have to move, as you indicated in the bill, to ceilings in other areas of cost. This is a little bit more difficult. Groupings are more difficult as one moves to control ancillary costs, but I would heartily endorse the general approach of the bill.

Senator TALMADGE. If you or the Association of State and Territorial Health Officials have any further recommendations that might improve the bill, we would greatly appreciate your putting them in writing and submitting them to the staff.

Senator Dole?
Senator Dole. I have just a couple of--more or less---comments.
In your statement, you indicate:

We strongly recommend that States with existing and effective programs of hospital cost control be exempted from the hospital reimbursement provision of this bill and that this waiver be granted without prejudice.

If I am correct, in the bill, if the Secretary is satisfied that a State hospital reimbursement system results in lower aggregate payments to hospitals in the State than the system established by the bill, then payments to hospitals in that State would be based on State system.

Dr. WHALEN. That satisfies our needs, Senator. I just wanted to make the point that the States heartily endorse that.

Senator Dole. Then in that same general area, you talk about classifications of hospitals in groups differentiated only by bed capacity. I think also that the bill, as drafted, takes into account geographical differences and other areas of possible difference. It does have the flexibility that you suggest.

Dr. WHALEN. It does, Senator, when you are talking in terms of routine costs. I think over time, as one moves to a consideration of imposing ceilings on ancillary costs that the grouping process becomes much more difficult. One has to deal with such items as intensity of service, patient mix, and so on.

The only point that I was trying to make was that grouping of hospitals is not as simple as it might appear at first blush, and it is quite a complex undertaking and that there ought to be some flexibility in the bill that will allow for changes in groupings and changes in the criteria.

Senator DOLE. I share that view, and I am sure the chairman does. I believe the language is in the bill, but if it lacks flexibility, we can probably add it, but I think it may be there.

Thank you very much.

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