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The difficulty is, in many institutions, they are undergoing changes, changes in services, changes in patient mix, changes in the services that they provide for the community or changes in the community itself. It is that attempt to use a single yardstick that leads me to say that the bill is unworkable in concept.

I have also said that it was administratively impossible. You start off a year under the administration's proposal, and you are given a target, but that target is subject to change during the year. It is subject to change if the number of admissions change, and also because it says that we assume the same patients will come in next year as last year. This makes it impossible to adjust as circumstances change.

You do not know, Senator Dole, until well into the second year whether you have met the compliance requirements of the first year, because it does not do away with retrospective cost reimbursement. You are given a target and then you have to go through the accounting for the year and into the second year, make your calculations to find out whether you did meet the targets of the first year.

Nobody can budget under those circumstances. It would make the management of the institution absolutely impossible.

On top of that, you have the imposition of a class of purchaser concept, medicare, medicaid, the Blues, the commercial carrier are given some targets to meet with no recognition of the fact that their subscriber or insured or beneficiary mix might change.

For that reason, with the supervision of the third parties coupled with the managerial problems that make this the absolutely worst mish-mash we have ever experienced. It even goes beyond the so-called phase 4 of the economic stabilization program. That we found very difficult because it, again, was based on the assumption that a hospital operates in similar fashion from year to year, and that just is not the


We think that the only way to deal with the problem of the rate of increase in hospital costs is to understand first, why they increase; second, what the differences are from institution to institution. That, then, will enable you to say, as the bill that is the subject of this hearing does, let us begin by focusing in on the high cost of what seem to be high-cost institutions and make our savings in those areas first, giving notice, and target through an appropriate classifications scheme. If there are further aspects of these problems the committee would like to examine or the kind of example that I have tried to sketch. out of what happens over the course of a couple of years or to see why we say that the institution would be unmanageable and the third-party relationships impossible, we would be glad to submit that.

As far as the reorganization, of course, we have seen this only from the outside. I was aware of the testimony of yesterday. I have been aware of some of the reorganization plans and the criticism laid against it.

We have been so worried about other aspects of the administration's activity that we have not tracked that as closely as we might have. Senator DOLE. You know, there was some comment yesterday-I guess "fat" is an easier word to understand than "obese." Do you have any fat hospitals in your association?

Mr. MCMAHON. Mr. Dole, it would be impossible to answer that in the negative. I am sure that there are areas where savings are possible. I am sure that there are savings in the areas, each of us know. But to say that all institutions are similarly obese or fat or inefficient is to say that they all similarly efficient or slimmed down.

It is just inappropriate, inaccurate, and does not contribute to the solution. The reason I mention those trustees, along with the professional administrators, and now, fortunately, the medical staffs, I have seen more concern on the part of medical staffs in recent years than ever before. They are becoming acquainted with their hospitals' budgets, with their hospitals' financial problems, because they are absolutely dependent upon the hospital for the care of their sickest patients.

We have seen more concerned administrators and concerned medical staffs working together to see how increases in costs can be contained.

Unfortunately, for too many people involved, particularly the physicians this is a new exercise, because the total concern used to be, let us have everything available in case something goes wrong. Now we are beginning to see that that probably imposes-not probably, but it does impose too large a bill on the public, on the Government, on the third parties, generally.

We are beginning now to look at ways in which some of those standby activities can be eliminated, but once again, it is dependent upon judgment, dependent upon people to make appropriate decisions.

Senator DOLE. My point was, do you have any control, if you see an area where costs are perhaps excessive, and where there may be some ways to reduce them?-What can you do as an association if you find such a hospital?

Mr. MCMAHON. We have no control, but we certainly have been pointing out illustration after illustration in our publications and bulletins, in our cost containment manual, the manual for cost containment committee, pointing out areas where we know some institutional savings have been made, and suggested that those areas be looked at, whether they be staffing patterns or the use of service contracts as opposed to employed labor, and so on.

Our responsibility, as we see it, is to provide information to the management of institutions as to areas that they might find further savings.

Senator DOLE. Not only provide information on what they may receive, but also what they may be able to do without?


This is the reason why we have spent a lot of time in the planning area in urging more care before capital expenditures are made and in the sharing of services, and we have seen it is a result of those encouragement efforts, seeing substantial progress made in all of those


Senator DOLE. You talk about State review programs, not necessarily mandated by law. I guess the obvious question is, how can we insure compliance if the rate control program is only voluntary?

Mr. MCMAHON. Again, I imagine, Senator, because of the peculiar nature of the hospital field, the programs have been extremely workable. Quite often, it is the old business of leading a horse to water.

When you have the hospitals in the State working together, it tends to bring others into line. There has been, for a number of years in Indiana, a voluntary program that has been quite workable. What we have suggested is, let's take a look at it. We have a lot to learn about State rate review programs and we think the broader the delegation-we do not think if the Federal Government would delegate, whether a mandatory program, mandated by law, or a voluntary program, that you are going to find much difference in the ultimate payment by medicare and medicaid over what would otherwise be the case. We think the evaluation that can take place, because they are doing things in different ways, might have a very beneficial effect of showing what kind of approaches seem to work the best, not that we would say that a voluntary program over a long period of time would be appropriate, but some of the voluntary programs are using different mechanisms to control rates of increases in cost and in charges.

We think it would be worth looking at them, too. It is a question, even in the voluntary program, of the peer pressure itself, not unlike this committee's longtime interest and involvement in professional standards of review organizations on the political side, the same kind of peer review on administrative costs.

We are convinced that would have a very strong and beneficial effect.

We are saying, the more delegation that there is, because we are convinced that it will not lead to excess payments, then we will all be able to see what kind of rate review mechanisms directed at individual hospitals work the best and bring about the best balance between the reduction in the rate of increase in cost, on the one hand, and an appropriate improvements in the quality of care over time on the other.

Senator DOLE. I think, finally, you talked about the need for comparing hospitals, considering variables other than size and types. I think in the bill itself, on page 4, subparagraph (iii) and subparagraph (viii) on the bottom of page 9, as well as paragraph (c) (1), you will find the language of those three references would authorize the inclusion of any justifiable variables of possible costs. Perhaps if you have any comment, you would submit it for the record.

Mr. MCMAHON. We will take a look at it. I think our concern went to the idea that we were not at all sure that that, in effect, did not mean other criteria of the same kind as size and geography.

If it does what we are talking about, then obviously-except, you know, sometimes we do have difficulty and the Congress, I am sure, is aware of it, too, of having the spirit of something carried into effect by an administration that has its own priorities.

We would always be more comfortable with some spelling out before you get to other considerations or other criteria, other criteria such as patient mix, length of stay and the things that would give us then some thing to hang our hat on as we went to encourage the people in the Department of HEW charged with the administration to take into account some of these other matters.

We will take a look at that, and offer additional comment. [At presstime no additional comments had been received.]

Senator DOLE. It just has been called to my attention it is spelled out in some detail in subparagraph (c) (1) which begins on page 10 and concludes on page 11, the top of page 11, "Costs similar in terms of size or scale of operations and prevailing wage levels."

You might just review that, and if you have any additional


Mr. MCMAHON. Our reading of that section of the bill, however, dealt with the expansion of the program-an expansion, incidentally, that we are pleased to see, because we think it carries a useful concept into other areas. We thought that was only reflecting how improvement might be made in the ancillary services. We will take a look at that.

Senator DOLE. It does affect rural areas, not just in the state of Kansas where we are pretty healthy, but in other states where it would be important and your suggestion would have merit.

Dr. GEHRIG. We would like to follow up on the point you just made as to regard to what the bill covers. I think we are a little sensitized, however, because under past legislation, in section 223, there was defined a number of areas that should be considered in that classification scheme that were ignored by the Department.

It has been a problem. Maybe we are overreacting. That has been a problem for us in the past.

Senator DOLE. Thank you.

Senator TALMADGE. Mr. McMahon, we appreciate your helpful testimony. As you know, the Georgia Hospital Association is one of the leading in the Nation in its field.

[The prepared statement of Mr. McMahon follows:]





The American Hospital Association represents more than 6,500 health care institutions, including most of the hospitals in the country, and over 24,000 personal members. In this testimony, we comment on Sections 2, 3, 4, 12, 15, 20, 30, 31, 32, 33 and 40 of S. 1470. We recognize the thoughtful and constructive approach of this bill, and we support a number of its provisions. We recommend several modifications to the bill as introduced and propose some additional provisions.


At the outset, we discuss the overall problem of rising health care costs and some of the major factors that have contributed to increases in the cost of hospital care. Further, we point out that solutions to these problems must take into account the unique characteristics of the health delivery system and provide appropriate incentives for efficient operations consistent with the needs of the American people for access to quality health care. Finally, we oppose arbitrary percentage caps on hospital payments as proposed in S. 1391.


In this section of our statement, we include a variety of governmental and private approaches aimed at conserving our health care resources, which are supported by the American Hospital Association. These approaches include some programs which are already in place, but need further development and improvement, and others which are in a formative stage, such as S. 1470. We believe they will result in more effective use of health care resources.


We review the provisions of this section and offer several specific recommendations for improvement of the methodology described therein. In addition, we suggest the inclusion of provisions recognizing the need to assist hospitals in caring for unsponsored patients.


We support the provisions of this section which encourage hospital efforts to close or convert underutilized capacity through special reimbursement incentives.


We strongly support strengthening the health planning process through the certificate-of-need process, and we recommend broadening this review process to include all sites which provides services usually rendered in a hospital. We also recommend the use of existing procedures under P.L. 93-641 for the coordination of review activities in interstate SMSAs, rather than the mechanism contained in this section.


The AHA is concerned with actions which would limit the administrative prerogatives of hospital management. We understand that in connection with these sections, efforts are continuing for developing certain definitions and relative value schedules for use in the payment of hospital-associated physicians. We are hopeful that these actions will provide a satisfactory solution to this very difficult problem.


While we support the "swing bed" provisions in this section of the bill, we recommend that the eligibility requirements for hospital participation be expanded.


The AHA supports the reorganization provisions of this section and further recommends the creation of an Under Secretary for Health with the responsibility for coordination of all HEW health activities.


We strongly support the administrative reforms in the state administration of Medicaid and the requirement for an adequate time for comment on program regulations.


We believe that the use of expert, nongovernmental advisors has contributed significantly to the development and implementation of federal health programs. We recommend that either HIBAC be continued with increased responsibilities, or that a new health insurance policy advisory council be established.

Concluding remarks.



Mr. Chairman, I am John Alexander McMahon, President of the American Hospital Association. With me today are Leo J. Gehrig, M.D., Senior Vice President, and Allen J. Manzano, Vice President of the Association. The AHA represents more than 6,500 member institutions, including most of the hospitals in thhe country, extended and long-term care institutions, mental health facilities, hospital schools of nursing and over 24,000 personal members. We appreciate the opportunity to present our views and recommendations on S. 1470, "The Medicare/Medicaid Administrative and Reimbursement Reform Act."


The AHA believes that your bill (S. 1470), Mr. Chairman, identifies and constructively addresses a number of critical issues important to the public, pro

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