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currently has mechanisms available to coordinate project reviews in SMSAS crossing state lines, we recommend deletion of this provision.

Hospital-associated physicians/use of approved relative value schedule

While we are concerned that the degree of intervention in hospital-physician agreements suggested in Sections 12 and 40 of your proposal may unduly affect hospital management flexibility and the availability of needed professional services, we note that S. 1470 includes the use of relative value schedules under Section 15. It is our understanding that such schedules would provide a basis on which to determine reasonable reimbursement for the professional services of hospital-associated physicians. We also understand that the staff of the Committee is continuing to develop recommendations related to important features included in this provision. We are hopeful that these efforts will result in a satisfactory solution to this very difficult problem.

Hospital providers of long-term care services

Section 20 of the bill provides incentives for the use of underutilized acute hospital beds for needed skilled nursing services. While we strongly support this section of your bill, we do believe that the conditions imposed on hospital participation are unduly restrictive. By limiting this provision to hospitals with 50 beds or less, and with an occupancy rate of 60 percent or less, we anticipate that some facilities in communities with a serious shortage of skilled nursing beds will be ineligible to utilize their capacity efficiently through this "mixed use" of their beds.

We recommend that the benefits of this proposed change in current law be available to hospitals with up to 100 beds with an average occupancy level of not more than 75 percent.

Establishment of health care financing administration

As you have stated, the Administration, through Executive Order, has created a Health Care Financing Administration (HCFA), combining in a single entity the Bureau of Health Insurance, the Medical Services Administration, the Bureau of Quality Assurance, and the Office of Long-Term Care and related research and statistics units under the direction of an administrator. We concur with your intent in Section 30 to ensure that the objecives of your provisions are carried out in the new HCFA. However, we are still concerned that the HCFA, which is intended to provide an organization through which greater coordination of policy and program administration can be achieved, cannot of itself resolve the problems of coordination of overall federal health policies. As we stated last year, we urge even greater coordination of federal health programs and recommend that a new position of Under Secretary of Health be established. This would permit the Assistant Secretary for Health and the Administrator of the HCFA to report to an Under Secretary for Health, and in this way, coordinate the many HEW health programs.

State Medicaid administration

Section 31 of the bill would establish specific performance criteria with respect to state administration of Medicaid. Requirements related to the timely determination of eligibility, prompt payment of claims, quality control and eligibility determinations, and effective claims review could result in better state administration. We strongly support such measures to improve Medicaid administration. However, this proposal establishes a 45-day period for state eligibility determinations. The time frame in S. 3205 was 30 days. We would recommend that the 45-day period be changed back to a 30-day period, because we believe this to be an adequate time for states to meet this requirement.

Regulations of the Secretary

Under Section 32 of the bill, a minimum of 60 days would be provided to comment on proposed HEW regulations under this provision. The American Hospital Association has always been concerned that appropriate time be provided for comment on program regulations, and we strongly support this provision. Termination of HIBAC

Section 33 would terminate the Health Insurance Benefits Advisory Council (HIBAC). We believe that the use of expert, nongovernmental advisors through HIBAC has contributed significantly in the development and implementation of federal programs, and consider it important that the major health care programs

of Medicare and Medicaid be provided the advice and assistance of such an advisory group, particularly during a period of significant legislative and program changes. HIBAC served an important and useful role in the earlier development and implementation of Medicare. As a result of the changes in the responsibility of this advisory council in 1972, the evolution of the program, and the extent to which its advice has been sought and utilized in recent years, the role of the council has decreased. Nevertheless, such an advisory council should be available not only for its potential contributions during the reform of Medicare and Medicaid, but also for the development and implementation of any major revisions in Social Security health-related legislation. Therefore, we strongly recommend that either HIBAC be continued with increased responsibility for its advisory role or, if it is discontinued, that a new health insurance policy advisory council be formed, with more adequate authority and responsibility for advice to the Secretary about these programs.

Procedures for determining reasonable cost and reasonable charge

Last year, Section 40 of S. 3205 would have vested with the Secretary of HEW authority to determine in advance the reasonableness of all hospital contracts greater than $10,000 annually. Its deletion from S. 1470 is an appropriate and administratively realistic change.

However, Section 40 of the proposal would still eliminate, as an element of reasonable cost, those costs derived from a percentage or fraction arrangement. As we have stated before, this requirement interferes unnecessarily with hospital management prerogatives. There are situations in which the use of this method of calculating payments for services is an equitable and justifiable arrangement. Present law provides the Secretary with the authority to deny payment for costs when they are excessive. Sections 12 and 15 of the bill appear to deal with a reimbursement method for hospital-associated physicians and, therefore, the provisions of this section may no longer be needed.

CONCLUDING REMARKS

In summary, Mr. Chairman, we believe your bill includes many constructive and important reforms in the administration and reimbursement for services under the Medicare and Medicaid programs. We support them and have suggested some modifications. We appreciate the opportunity to continue to work with you and your staff and to participate in this hearing. I will be pleased to answer any questions you may have.

Senator TALMADGE. Our next witness is Mr. John A. D. Cooper, president, Association of American Medical Colleges, accompanied by David D. Thompson, M.D., director, the New York Hospital, chairman, Council of Teaching Hospitals; and James D. Bentley, assistant director, department of teaching hospitals.

We are delighted to have you.

Dr. Cooper, you may insert your statement in full in the record and summarize it in 10 minutes.

STATEMENT OF JOHN A. D. COOPER, M.D., PRESIDENT, ASSOCIATION OF AMERICAN MEDICAL COLLEGES, ACCOMPANIED BY DAVID D. THOMPSON, M.D., DIRECTOR, NEW YORK HOSPITAL, AND CHAIRMAN, COUNCIL OF TEACHING HOSPITALS, AND JAMES D. BENTLEY, PH. D., ASSISTANT DIRECTOR, DEPARTMENT OF TEACHING HOSPITALS

Dr. COOPER. Thank you very much for this opportunity to testify. With your permission, our testimony will be delivered by Dr. David Thompson who is the director of New York Hospital and chairman of our Council of Teaching Hospitals.

Dr. THOMPSON. Mr. Chairman and members of the committee, as Dr. Cooper says, I am Dr. David Thompson, chairman of the Council of Teaching Hospitals of the Association of American Medical Colleges and director of the New York Hospital. Dr. Cooper and Dr. Bentley are accompanying me this morning.

The Association of American Medical Colleges is pleased to have this opportunity to testify on the Medicare-Medicaid Administrative and Reimbursement Act, S. 1470. In addition to representing all of the Nation's medical schools and 60 academic societies, the association's Council of Teaching Hospitals includes over 400 major teaching hospitals. These hospitals: account for approximately 16 percent of the admissions, almost 19 percent of the emergency room visits, and 29 percent of the outpatient visits provided by non-Federal, shortterm hospitals; provide a comprehensive range of patient services, including the most complex tertiary services; and are responsible for a majority of the Nation's graduate medical education programs. Thus, the medicare and medicaid amendments proposed in S. 1470-concerning hospital and physician payments and program administration— are of direct interest and vital concern to the association's members.

A review of S. 1470 clearly shows that the subcommittee and its staff have given careful consideration to suggestions made by witnesses during past hearings on possible medicare and medicaid amendments. Several improvements have been made in these proposed amendments, including increased flexibility in the classification of hospitals, the addition of malpractice insurance costs to the list of expenses excluded from routine operating costs, and the establishment of provisions for relative value scales for physicians' services. For these modifications and for the staff's willingness to discuss general concepts and tentative provisions of S. 1470 the AAMC expresses its appreciation to the subcommittee and its chairman.

In the interests of brevity, I will confine my oral statement to two concerns: the legislative specificity of the bill and teaching hospital concerns for hospital classification, case mix, and exception provisions. I would request, however, that our comprehensive written statement be included in the record of this hearing.

The medicare program was established on the principle of paying individual hospitals their reasonable costs for caring for program beneficiaries. As a result of escalating program expenditures and observed variations in reasonable costs, S. 1470 has been designed to moderate and limit hospital costs by determining allowable payments based on comparing similar costs of similar hospitals.

Grouping similar hospitals to determine payment ceilings is one legitimate approach for containing the rate of increase in hospital costs. It is handicapped, however, by the absence of necessary data for computing the impact of alternative provisions and by the elementary state of the art of hospital classification. Within these constraints, the association believes the subcommittee and its staff have worked diligently to create workable legislation.

While the association is pleased that S. 1470 provides the executive branch with some increased flexibility in implementing the congressional intent, the Association of American Colleges remains concerned that some specific grouping criteria, such as bed size categories, are

initially designated in the bill. Similarly, while no one knows what the actual distribution of hospital costs by group will look like, the association is concerned that the 120-percent ceiling is established without these distributions. With these detailed provisions in the legislation, learning acquired through experience can only be incorporated by future amendments. In a proposal for a significantly revised payment program; the association believes this problem is critical and strongly recommends that the bill be modified to provide more flexibility.

To avoid the possible consequence that flexible legislation give Executive agencies unbridled opportunity to restructure the program, the association recommends that a more flexible bill be accompanied by a clear statement of intent in the committee report and by providing in the legislation for a high level advisory group: a National Technical Advisory Board on hospital classification for developing, advising, and implementing the act. This Board should serve in an advisory capacity to the Secretary of HEW, should conduct all meetings in public sessions, and should publish all recommendations.

For approximately 2 years, the association's staff has worked with the staff of this subcommittee in an attempt to adequately define teaching/tertiary care hospitals and to examine the impact of establishing a special category for these institutions. Given the present state of the art and the lack of necessary quantitative information, our own efforts thus far have been unsuccessful: We have neither simple criteria for selecting such a group nor an evaluation of the effect of creating a category for them.

In this situation, the association strongly recommends that the subcommittee modify the present provision establishing a category for the primary affiliates of accredited medical schools. First, if such a category is to be established, the limitation of a single hospital per school is arbitrary and does not accurately recognize the number of tertiary care/teaching hospitals that presently exist. Second, the principal source of atypical costs in the major teaching hospitals results from the scope and intensity of the services provided and the diagnostic mix of the patients treated, not from the presence of an educational relationship with the medical school. Therefore, the AAMC strongly recommends modifying or deleting the provision for the primary affiliates of accredited medical schools.

If Congress determines that a special group of tertiary care/teaching hospitals is initially necessary, the Secretary should be directed to undertake the study effort to determine the category and select institutions for it based on their diagnostic mix, intensity of care provided, and involvement in health, manpower education. Moreover, it is recommended that the Secretary be required to undertake studies to determine and evaluate the extent to which tertiary care hospitals have atypical costs as a result of the diagnostic and treatment services provided; as a consequence of providing necessary services having high unit costs; as a result of educational expenditures; and as a consequence of ancillary service utilization and ancillary unit costs.

The association strongly supports the case mix provision provided in S. 1470. Tertiary care/referral hospitals serve the more severely

ill patients and referral of such patients from other hospitals tends to increase in times of adverse economic activity. Recognition of these facts in the legislation should help to insure the economic integrity of tertiary care centers.

Experience gained since the development and initial operation of section 223 of the 1972 medicare amendments shows the need for a viable and timely exception and appeal process. Such an appeal process does not function under the present section 223 provisions. The association recommends that this legislation include provisions for an exception and appeal process that provides: (1) That information describing the specific methodology and data utilized to derive exceptions be made available to all institutions; (2) that the identity of comparable hospitals located in each group be made available; (3) that the basis on which exceptions are granted be publicly disclosed, widely disseminated and easily accessible to all interested parties in each circumstance; and (4) that the exceptions process permit the use of "per-admission cost" determinations recognizing that compressing the length of stay may result in an increase in the hospital's routine. per-diem operating cost with no change or reduction in per-admission

costs.

In the interest of brevity I have only highlighted the association's response to S. 1470. As the subcommittee and staff address these issues and others, the association would be pleased to provide constructive comments and suggestions.

Thank you for permitting me to testify before you in support of the bill. I will be happy to answer any questions.

Senator TALMADGE. Thank you very much, Dr. Thompson. We know that your hospital is one of the great teaching hospitals in the Nation. We appreciate your very helpful and very constructive suggestions. Many of them, I feel sure, the committee will consider carefully.

In your statement, you expressed extensive concern over the need to assure an adequate supply of pathologists.

I am curious as to exactly how percentage arrangements enhance the practice of clinical pathology. That is, would you not agree that most doctors are motivated toward radiology, anaesthesiology and pathology for professional reasons rather than because they get a percentage of the gross receipts?

Dr. THOMPSON. Yes, sir. I think that is correct. I think most individuals select the specialty in which they are engaged on the basis of their professional interest.

I think the manner in which the payment mechanisms developed go back in tradition. The percentage arrangement is something that seemed to work for some of the hospitals. Many of the smaller hospitals found that they were unable to recruit individuals, perhaps because they did not have a full-time need for them, and they adopted this approach.

I think everyone agrees today that this is a situation that needs to be looked at. The concern on the part of these specialty groups, I think, is that they not be put in the position where it might seem that they are second-class citizens in relation to other physicians. In other words, the fee-for-service approach which is generally utilized in most specialties, is something that is important to these individuals as well. It does

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