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Senator TALMADGE. Thank you, Dr. Whalen. We appreciate your contribution.

[The prepared statement of Dr. Whalen follows:]



The Association of State and Territorial Health Officials supports efforts to reform the administrative and reimbursement mechanisms in the Medicare and Medicaid programs. In particular, states need relief from the so-called "reasonable cost" provisions of the Medicaid program.

A principal recommendation of the Association is that states with effective programs of hospital cost control be encouraged to continue these efforts by exempting them from the reimbursement provisions of this bill.

The Association endorses the concept of rewarding hospitals with lower than average costs and penalizing those with higher than average costs.

Experience at the state level suggests that excepting ancillary costs from the reimbursement formula may weaken the effectiveness of cost control measures. The concept of a conversion allowance is endorsed, as is the provision that would allow hospitals to convert some beds to nursing home level, with reduced reimbursement.

The Association believes cost control efforts at the federal level must be coordinated with activities of state health planning agencies.

Mister Chairman, Members of the Subcommittee, I am Dr. Robert P. Whalen, Commissioner of the New York State Department of Health, and I am here to testify on behalf of the Association of State and Territorial Health Officials, commonly referred to as ASTHO.

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 long-term 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 governmental payor 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 upwards 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 approach 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 consultation 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 ever-rising 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 program 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 from 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 costs.

This bill would allow hospitals to receive full reimbursement for costs up to twenty 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 a 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 hospitalbased 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 whateve level they might be currently operating. In some states, this would be development of a strong capital expenditures control system, while in others it would be a coordinated and complex system of rate-setting, 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, governments' 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 wan 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, new facilities, without a necessary 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. Our next and final witness today is Mr. Anthony Mott, executive director, Finger Lakes Health Systems Agency, chairman, Legislative Committee, American Association for Comprehensive Health Planning.

Mr. Mott, we welcome you to the committee. We will insert your full statement in the record and you can summarize, if you will.

Mr. MOTT. If we could make one departure, I would like Mrs. Jacqueline Hansen, board chairman of the HSA in Kansas City, to make a presentation.

Senator TALMADGE. We would be delighted.

Senator DOLE. Since Mrs. Hansen is a Kansan, we would be very pleased to have her appear as a witness this morning.


Ms. HANSEN. Mr. Chairman and members of the committee, my name is Jacqueline Hansen. I am delighted to have this opportunity to appear today on behalf of the Association of Comprehensive Health Planning to testify on Senate bill 1470.

AACHP is organized to foster and encourage health planning across the country at the State and local levels. It represents the interests of those involved in health planning and resources development at the State and local levels: consumers, providers, governmental bodies, and professional health planners.

Organizational membership includes health systems agencies, State health planning and development agencies, and a broad cross-section of business, industry, labor, and universities, as well as several hundred individual members.

I am sure that the members of this committee know the litany of health care costs only too well. National health expenditures tripled between 1965 and 1975. In fiscal year 1976, the annual expenditure for health totalled $139.3 billion up 14 percent over the $122.2 billion spent in fiscal year 1975. This rate of increase was approximately twice the CPI for the same period.

The largest expenditure category was hospital care, representing nearly 40 percent of the total at $55.4 billion. This was a $7 billion

14.5 percent increase over fiscal year 1975. Physicians' services, nearly one-half as large as hospital expenditures, were estimated at $26.4 billion, an increase of 15 percent over 1975 expenditures.

Continued increases of this magnitude jeopardize the availability of reasonably priced quality medical care for all Americans and delay any serious consideration of a national health insurance program. Any effective program designed to limit the increases in medical care costs must control both the development and the reimbursement of health care facilities and services. AACHP believes that building on the existing certificate of need and rate setting authorities contained in Public Law 93-641, and on the integrity of the Federal, State and regional functions and relationships established under that legislation is the best way of achieving these goals. We believe that S. 1470 takes this approach and for that reason we endorse the fundamental principles embodied in the bill.

As you know, a major contributing factor to the rate of increase in health care facility costs is capital investment. Unnecessary capital expenditures are doubly inflationary. Not only must the public bear the development, construction and financing cost of unnecessary facilities, but it must also pay the significantly increased operational cost generated by those facilities.

Thus, while efforts are undertaken to control increase in operating costs through the introduction of measures designed to encourage efficiency among health care facilities, efforts should also be made to achieve other compatible basic changes in the health care system.

Specifically, unnecessary expenses for facilities and services should be prevented, excess capacity should be diminished, unnecessary utilization of facilities should be reduced, and the public should be educated to the relationship between the proliferation of facilities and services and increases in medical care costs.

A strong systemwide planning program is necessary to address these concerns so that imbalance in the distribution and mix of services and facilities is reduced and additional medical care resources are developed according to true regional and community needs. Without such an aggressive planning program restrictions in reimbursement for operating costs will do little to affect the long-range patterns of increasing health care costs.

Another major advantage of linking reimbursement and resource development controls is that it would more effectively involve wide public participation in the national effort to contain the rise in health care costs. This is important because these efforts will ultimately require highly unpopular decisions which can best be accomplished by maximizing citizen involvement, understanding and support. This is precisely the role of our member agencies.

As we have been most directly involved in the control and appropriate placement of health resources we would like to first speak to the provisions of the bill which directly affect these activities.

We are particularly pleased that S. 1470 contains authority in section 3 for the provision of a conversion allowance for underutilized facilities and services. Such an allowance has been one of the most essential missing ingredients in existing efforts to shrink excess capacity. We do believe, however, that State and local planning agencies should

be provided with a more active role in selecting appropriate recipients of such allowances.

We also applaud the provisions contained in section 4 of the bill which would strengthen the section 1122 review process by increasing the sanctions for unauthorized capital expenditures, and by requiring that proposed capital expenditures in standard metropolitan statistical areas which encompass more than one jurisdiction receive the approval of all designated planning agencies in the area.

We do note, however, that underlying deficiencies remain in the review process under both Public Law 93-641 and section 1122. Specifically, we believe that the following additional provisions should be introduced:

One, the establishment of a national capital expenditures ceiling; while we cannot confirm the accuracy of the $2.5 billion ceiling contained in the administration's cost control proposal, our experience suggests that only a relatively low ceiling will allow us to achieve the rationality required. We believe the $2.5 billion suggested by the administration to be generous.

Two, the establishment of national supply guidelines. We accept the suggested maximum of 4 beds per 1,000 population and the 80percent occupancy factor contained in the administration's cost control proposal as general guidelines. Application of such "standards" as a ratio of 4 beds per 1,000 population, coupled with the 80-percent occupancy rate requirement, is a reasonable step in the right direction. We wish to stress, however, that both guidelines must be viewed from a national perspective. Minimum requirements should not, in fact, become the norm. The health care delivery system in more than one-fourth of the Nation already functions more efficiently than the guidelines specify. Great care must be taken to avoid laxity or retrogression in areas that are already functioning relatively efficiently.

In this connection, we would point out that the old Hill-Burton occupancy norm, which many people felt was too lax, stipulated an average occupancy factor of 85 percent.

Three, the extension of controls on capital expenditure to all facilities, including Federal Government facilities.

Four, the inclusion of all expensive equipment in the range of $150,000 and above, regardless of location. Without this inclusion, planning, service delivery, and capital expenditure computations becomes distorted.

Five, the inclusion of explicit authority for decertification and/or conversion of facilities and services to assure success.

Six, the inclusion of provisions for discontinuation of FHA loan guarantees, tax-free bonding authorities or investment credits, or any other incentives for capital formation for unapproved facilities and equipment;

Seven, the inclusion of provisions specifically requiring that project approvals be consistent with the health facilities plans, State health plans, and national guidelines described in Public Law 93-641.

We also regret that DHEW is not currently compensating our member agencies for performing section 1122 review. The effectiveness of the review process depends in part on the payment for the functions required by that process.

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