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prudent approach would be to permit some additional flexibility with which to construct the system. Therefore, the Association recommends that s. 1470 siate that hospitals "be classified by type and size” with specific guidance in the Committee Report, rather than stipulate the specific bed categories and types of hospitals prior to the availability of adequate data for examining the effects of such classification variables.

It is further recommended that a "National Technical Advisory Board" be appointed to recommend and evaluate alternative classification systems of size and type, review program progress, monitor program implementation, examine problems encountered and make recommendations regarding appropriate silutions for problems identified. The advisory board to be established should include representatives from the Legislative and Executive Branches of Government, as well as knowledgeable individuals from the private sector. In addition to its technical expertise, this advisory board would provide public visibility for the decisions implementing these amendments. The Association's experience with the implementation of the payment limitations of Section 223 of I'.L. 92403 leads it to strongly recommend such as advisory board.

S. 1470 provides for the creation of a separate group of hospitals which are the “primary affiliates of accredited medical schools." It is difficult to evaluate the implications of creating such a group because of the absence of daia. Efforts to gain data and experience with a separate group are hampered by the inability of the current Medicare reporting process to identify and extract the elements to be excluded from the proposed scheme. Thus, there is uncertainty as to the relative merits of a separate group for teaching hospitals.

More importantly, the present legislation would restrict the "primary affiliates of accredited medical schools” to a single hospital per medical school. This is a gross injustice to many teaching hospitals. Limiting each medical school to one and only one "primary affiliate" is arbitrary and does not recognize the complexity or the reality of medical education in this nation.

In this situation, the Association strongly recommends that the Subcommittee delete the present provision establishing a category for the "primary affiliates of accredited medical schools.” First, no one knows how routine operating costs in teaching hospitals will compare with routine operating costs in non-teaching hospitals. Secondly, the principal source of atypical costs in major teaching hospitals results from the scope and intensity of service provided and the diagnostic mix of patients treated, not from the presence of an educational relationship with a medical school. Third, if a separate 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” which presently exist.

In the absence of adequate data and operational experience to evaluate the proposed classification scheme and to avoid arbitrarily limiting the "primary affiliates of accredited medical schools” to one hospital per school, the Association believes that the combination of a flexible classification system and an adequate phase-in period are essential elements of the program's chances for success. Thus, the Association strongly recommends that the Secretary of the Department of Health, Education and Welfare be directed to examine the implications for reimbursement of alternative definitions of the term “teaching/tertiary care hospitals." Instead of prescribing a pre-defined grouping for teaching hospitals, it is proposed that the Secretary be required to determine, in consultation with the appropriate knowledgeable health organizations, a definition which most accurately reflects the impacts of case mix, intensity of care, and health science education on the costs of teaching hospitals. In performing these consultations, the Secretary should be required to distribute and share the data upon which alternative definitions are to be evaluated. This is a good example of an issue which would be brought before the proposed Technical Advisory Board.

Determining routine operating costs In the past, the Association has not specifically advocated a cross classification approach to cost limitations. Rather, if a cross-classification approach is to be used, the Association has recommended the exclusion of specific components of routine operating costs which will help ensure that variations in the remaining costs are not due to the nature of the product produced or to characteristics of the production process. Therefore, the Association believes that the exclusion of capital and related costs; direct personnel and supply costs of hospital education and training programs; costs of interns, residents, and non-administrative physicians; energy costs associated with heating or cooling the hospital plant; and malpractice insurance expense is a step in the proper direction.

This present list of excluded costs includes several significant items which make cost comparisons between hospitals difficult either because they are not uniformly present in all hospitals (e.g., stipends for residents), because they are uncontrollable by the institution (e.g., utility rates), or because there is substantial regional variation (e.g., malpractice premiums). However, because today's controllable cost may become tomorrow's uncontrollable cost, flexible legislation including, but not limited to, the costs excluded in S. 1470 is recommended. If conditions change this would permit any appropriate additions to the list of excluded costs without new legislation.

Following a rather complicated calculation, S. 1470 establishes the ceiling for routine service payments at 120 percent of each classification group's average. As we have stated earlier, the present Medicare reporting system does not permit identification of costs to be excluded in computing routine service costs. Therefore, no one knows what the actual distribution of hospital costs by group will look like. The Association believes that a 120 percent ceiling should not be established by statute without knowledge of these distributions. It is recommended that the bill provide some flexibility in determining the ceiling and that the Committee Report clearly state Congressional intent as guidance for Executive Branch action.

The procedure for calculating the reimbursement limitation includes an adjustment for changes in general wage levels in the hospital's geographic area. Because many medical centers must recruit personnel outside of their immediate areas, the AAMC recommends that S. 1470 be amended to add that wage rates may be used as the basis for an exception to a routine operating payment limitation where a hospital can demonstrate that it had to pay atypical wage rates to recruit personnel.

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 conditions. Recognition of these facts in the legislation should help to ensure the economic integrity of tertiary/referral centers.

Experience gained since the development and initial operation of Section 223 of the 1972 Medicare amendments has demonstrated the urgent need for a viable and timely exception and appeal process. Such an effective and equitable process has not functioned under the present Section 223 cost limitations. Therefore, the Association recommends this legislation include provisions for an exception and appeal process which 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 in each circumstance, widely disseminated and easily accessible to all interested parties; and (4) that the exceptions process permit the use of “per-admission cost" determinations recognizing that compressing the length of stay often results in an increase in the hospital's routine per diem operating costs but no change or reduction in the per-admission costs.

State rate control authority Where the Secretary of HEW and a state enter into an appropriate contract, the bill permits a mandatory state reimbursement system to be used to determine payment limitations. The Federal Government is the source of funds for the Medicare program and shares in the funding of Medicaid ; however, apart from an aggregate payment cap, S. 1470 provides no Federal payment or operational standards for the state agencies. On the issue of state rate setting agencies, the AAMC's position is that state rate systems are acceptable where they meet the following conditions: (1) the system is based on the full financial requirements of hospitals; (2) the system is based on an adequately financed, politically independent agency headed by a small number of full-time, well-compensated commissioners appointed for relatively long staggered terms of office and staffed by competent professionals; (3) the agency's operations include clearly defined formal procedures, adopted after public hearings, for systematic review of rate or budget applications and with provisions for routine changes to be made with minimal procedure and expense; and (4) the agency provides due process, including the right to judicial appeal for the applicant as well as for others affected by the decisions, and specific protections against undue delays in action.

Summary Assuring Medicare beneficiaries needed health care services, encouraging efficiency in the provision of health care and paying the full and fair costs of health care providers should be the guiding principles of any reimbursement system. The compatibility of the goals can be maintained under a system which accounts for the many legitimate service and case-mix differences found between hospitals. When this is done, illegitimate costs arising from inefficiency or extravagance, can be isolated. However, if care is not taken to identify the costs of inefficiency, legitimate reimbursement may be threatened and consequently the hospital's ability to provide needed health services will be reduced.

In this regard, one has to be impressed with the thought and effort that went into the provider reimbursement portion of this bill. One is also impressed with the real complexity of implementing the proposal on a national scale. While the Association finds the proposal, with suggested amendments, worthy of support, the Association recommends that we move forward cautiously and under the review and supervision of the recommended Technical Advisory Board. Physician payment

Defining "physicians' servicesUnder present Medicare law, “the term physicians' services' means professional services performed by physicians, including surgery, consultation, and home, office and institutional calls ..." Section 22 proposes to extend the definition to state : "the term 'physicians' services' means professional services performed by physicians, including surgery, consultation, and home, office, and institutional calls ... except that such term does not include any service that a physician may perform as an educator, an executive, or a researcher; or any patient care service unless such service (a) is personally performed by or personally directed by a physician for the benefit of such patient and (b) is of such a nature that its performance by a physician is customary and appropriate.”

As presently stated, the amendment could be interpreted to mean that a faculty physician performing or directing personal medical services in the presence of a student is not eligible for a fee for his professional medical services because the physician will be defined as an educator whose services are to be payed on a cost basis. The AAMC is opposed to this interpretation and, therefore is opposed to the present wording of the amendment. Where a faculty physician is simultaneously performing or directing patient care and educational functions, the Association believes that the physician should be eligible either for professional service payment on a fee-for-service basis or for educator compensation on a cost basis. Therefore, the AAMC recommends amending S. 1170 to explicitly permit “physicians' service" compensation for a physician who is simultaneously functioning as an educator and personally performing or directly identifiable patient care services.

Anesthesiology services Anesthesiologists in the Association's Council of Academic Societies are concerned that the definition proposed in S. 1470 for anesthesiology services could be so narrowly interpreted as to preclude payment for physicians' services traditionally performed by anesthesiologists. Therefore, the AAMC supports amending Section 12(a) (2) of S. 1470 to read as follows : “In the case of anesthesiology services, where anesthesia is administered to facilitate surgery, obstetric delivery or special examinations, a procedure..."

Pathology services The AAMC is concerned about the proposed pathology provisions of S. 1470. The proposed provisions would tend to alter and restrict professional activities and services in clinical pathology. By emphasizing fee-for-service payment for surgical pathology services and hemato-pathology services, the bill would favor these two areas over other important areas of clinical pathology where distinct and medically important services are rendered.

Laboratory Medicine (Clinical Pathology) has become an important specialty of medicine within recent years both in teaching centers and in the community at large. Clinical pathologists provide a variety of services vital to medical care including the following: assurance of quality of laboratory procedures and results; guidance in the use of the laboratory, in the appropriateness of laboratory requests and in the interpretation of results; and interfacing between patient care physicians and the laboratory by providing two-way communication in the form of ad hoc consultation to clinicians on a wide variety of laboratory information and feed-back to the laboratory concerning specific clinical needs and problems. In addition to these vital functions, the clinical pathologist provides a broad variety of direct formal consultative functions in hematology, coagulation, microbiology, immunology, blood banking, and clinical chemistry (for example, bone marrow and peripheral blood examinations and reports in hematology).

Clinical pathologists have final medical and legal responsibility for all laboratory reports and verify their reliability. In this capacity, they also take responsibility for analytical validity and for the appropriateness of the methodological approach to the precise clinical needs, and they see to it that appropriate reference values are provided and are continuously reviewed and up-dated.

While the AAMC does not have a compensation alternative which would recog. nize the concerns of pathologists and of the government, it is concerned about payment mechanisms which could possibly discourage the involvement of pathologists and inhibit the development of the discipline.

Percentage fee compensation Where the hospital's allowable costs include “the charges of physicians or other persons which are related to the income or receipts of a hospital or any subdivision thereof," S. 1470 proposes that such charges would only be recognized as allowable costs to the extent that they do not exceed “... an amount equal to the salary which would reasonably have been for such services .". This provision is the focus of two concerns. First, some specialists have traditionally been paid on a basis that is related to either hospital or departmental income or receipts. While not opposed to limiting the open-ended character of some of the compensation arrangements, the Association is concerned that the proposal may inhibit the development of some clinically necessary disciplines by placing them at a disadvantage with others.

Secondly, while the objective of limiting Medicare recognition of charges based on percentage arrangements is clear in principle it is clouded with ambiguities in practical application. The bill includes no indication of the basis on which “. an amount equal to the salary which would have reasonably been paid ..." is to be determined. Certainly the Association realizes and appreciates the desire of the Congress to permit those developing regulations to have some flexibility in implementing this amendment; however, in recruiting and negotiating with the medical staff, the hospital chief executive officer and/or medical school dean must be able to determine the amount of compensation that Medicare and Medicaid will recognize. Therefore, the Association requests that the Subcommittee either modify the proposed amendment to incorporate some specific guidelines for regulations or so specify its intent in hearings and Congressional Reports that those preparing the regulations have a clear and consistent direction for determining a reasonable salary for physicians in employment situations.

Part A compensation arrangements The apparent purpose of Section 12(c) is to eliminate Medicare and Medicaid recognition of remuneration arrangements between physicians and hospitals in which the physician's fee-based income rate in his professional medical service practice is used as a basis for computing his compensation for Part A reimbursable services. In place of such arrangements, the subsection proposes recognition of “. an amount equal to the salary which would have reasonably been paid for such services. . .” Because this provision includes the same practical ambiguities discussed under percentage fee compensation, the Association reiterates its request for a clear and consistent means for physicians in employment situations. Administrative reforms

Establishment of health care financing administration This section proposes a codification of the Federal health care financing function and a unification of administrative entities recently reorganized as the Health Care Financing Administration. The Association supports efforts toward centralization and unification of Federal health care financing. Costs incurred by hospitals which result from diffuse and conflicting administrative and reporting requirements and which add overhead to the provision of direct patient

services should be somewhat moderated by the policy of unification and administrative standardization which should accompany this reorganization.

While the reorganization of the financing functions offers the potential of significant reform in program operations, the Association believes the benefits of this reform are limited by continuing the subordination of the health function within the Department of Health, Education and Welfare. A Cabinet-level Department of Health is needed to serve as the single point of responsibility for the nation's critically important health policies and programs. If a separate Department of Health is not to be presently established, the Association recommends the establishment of an Under Secretary for Health to whom both the Assistant Secretary of Health for Health Care Financing and the Assistant Secretary for Health would report. The Under Secretary for Health would then be the Department's central individual for all health matters.

State Medicaid administration The reform of state Medicaid administration to provide more rapid payment of health care providers is strongly endorsed by the Association. Because of delays in Medicaid payments to hospitals, health care providers in many states have had to borrow funds at substantial interest rates to provide adequate cash flow. These additional interest costs add to the nation's health care expenses without contributing to the direct provision of personal health services. Decreasing the time required for Medicaid payments should contribute in at least a small way, to moderating the nation's health expenditures as well as to reducing the tension between hospitals and state governments.

Regulations of the Secretary The Association understands and shares the general Congressional concern with present procedures for proposing, evaluating, and publishing Federal regulations. The provisions of Section 32, which would establish a 60 day comment period for regulations, are a much needed reform in this area. Sixty days will allow time for a more thorough evaluation and review. Moreover, it will enable individuals and groups to collect appropriate data to illustrate and substantiate their comments and to offer constructive suggestions. To help ensure that the Subcommittee's intentions are achieved, the Association recommends that some clarification or definition be provided in the Committee Report for the term “urgent" as it applies to the regulations. The Association would also like to emphasize that this reform should not be limited to Medicare and Medicaid programs alone. This Committee and others in both the House and the Senate are urged to consider the need for this reform and others in the area of administrative procedures for the publication of rules and regulations.

Abolition of HIBAC The Health Insurance Benefits Advisory Council (HIBAC) was established in the original Medicare legislation as a mechanism for providing the government with private sector advice on the implementation and operation of the Medicare program. At least in its early days, it served this function well and helped make legislative language into a workable program. The provisions of S. 1470—especially those concerning hospital and physician payment computations—make major changes in the present program. Without advocating a continuation of HIBAC as it has operated in recent years, the AAMC strongly recommends the maintenance of an advisory board to the Secretary of HEW of providers, practitioners, and consumers from the private sector which publicly advises the Secretary of the implementataion of program changes.

Conclusion In conclusion, the Association expresses its appreciation to the Committte for this opportunity to testify on S. 1470. The Association share the Committee's objective of improving Medicare and Medicaid programs, and the Association has offered this testimony on the legislation as a sincere effort to refine and improve the proposed amendments.

Senator TALMADGE. The next witness is Michael D. Bromberg, director, national offices, Federation of American Hospitals, accompanied by Robert J. Samsel, president.

Mr. Bromberg, you may insert your statement in full in the record and summarize for 10 minutes.

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