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No two people are alike. Hospitals are nothing but aggregates of the interaction of many individuals (including those who shaped the institution in prior years) and to classify hospitals is even more impossible than classifying individuals.

Even if, after spending millions of dollars, some sufficiently sophisticated classification system were developed, moreover, it would be outmoded the next day, for institutions are and should be perpetually changing. They cannot and should not—be fast-frozen. Classification, in short, is impossible for living things.

The safety valve in Section 2 by which the payment rate would be readjusted for any hospital which the Secretary determined provided “substantially greater intensity of care” is not workable. Experience has shown that the Secretary is reluctant to make such determinations (which result in additional Federal payments) and that even if he does, they are made years after the event. In any event, how does the Secretary determine what is substantially greater intensity of care? There are, moreover, a vast number of variables among hospitals in addition to intensity that affect cost. Every hospital is different from every other. The unusual is commonplace.

The effort by S. 1470 to squeeze every hospital into categories is, if I may mention two legends, akin to the endeavors of King Canute and Procrustes combined. Diversity should be welcomed and promoted. It is a threat only to those who wish to exert centralized Governmental control, S. 1470, therefore, is inconsistent with the directions in which NCCH and others believe structural reform and the best and most efficient health care system lie.

b. Although bureaucracy in this field should be reduced, s. 1470 would add

yet another layer of bureaucratic control NCCH does not believe the structural reform of the health care delivery system is advanced by a system under which the Federal Government would set reimbursement for all hospitals on the basis of arbitrary percentages of artificially created categories of hospitals. There is no reason to believe that a hospital which exceeds the average cost of the hospitals in the category in which the Secretary has placed it is by virtue of that statistic alone inefficient. That hospital may provide additional (or different) services. A vibrant, innovative health care system is not promoted where the Government sets reimbursement on a totally arbitrary basis and reserves for itself the right to set some other arbitrary rate when it so chooses.

In addition, S. 1470 would, as discussed above, increase the complexity of an already overwhelmingly complex system and require a new army of accountants, economists, statisticians, bureaucrats, lawyers, and the like. This growth of the bureaucracy is harmful by itself. It calcities the entire system. The more complex the reimbursement system, the more innovation and risk-taking are discouraged. Management must focus on working within a complex set of rules; Government must strive to assert the primacy of its rules and protect their efficacy. The more entrenched such a system is, the more difficult it becomes to reverse the trend and develop a health care system that can function without the daily and minute control of the Governmental dead hand.

c. Managerial innovation and excellence is cssential to the future strength

of this field, but s. 1.470 impedes hospitals' efforts to exert managerial

control An essential component of any structural reform must be enhancement of a hospital's ability to manage its own "business.” Hospitals are the only institution I know of that have virtually no control over their “sales force" (primarily physicians), little control over their “production department” (physicians, and even a hospital's own employees), and no direct connection with their "customers" (patients). Until hospitals can determine what patients they serve, what services are provided, and when, it will be possible for them to introduce financial considerations into the provision of health care or to control their own expenditures. To increase the efficiency of the system, to widen access, and to introduce financial incentives, hospitals will have to develop different and more meaningful ties with their patients and be more directly responsible for the provision of health care.

In his speech before the Hospital Association of Pennsylvania last October, Senator Talmadge recognized that hospitals do not have the legal authority or the power to make the decisions that largely determine the cost of care because the medical staff decides admissions and length of stay, what tests are performed, and so on. Senator Talmadge continued by saying that we “cannot continue to accept that reality as an excuse forever."

We agree with Senator Talmadge as to hospitals' inability to make those deci. sions, but we believe that the reality cannot be ignored or brushed aside. Ways must be found to change this reality so that hospitals can control costs. This is a prime element of the reforms needed in the health care delivery system. But S. 1470 does nothing to increase hospitals' ability to control their own costs; the Bill actually impedes efforts by hospitals to work out more effective relationships with their physicians.

I refer, of course, to Section 12, which effectively precludes any arrangement (other than a salaried employee relationship) between a hospital and any physician for the physician to perform medical services at the hospital. We understand and share the current disquietude over the amounts of money some physicians receive. But even if it is wise as a matter of public policy for the Government to be in the position of imposing compensation limitations on one small segment of society, Section 12 is not an effective mechanism for doing so. Putting hospital-associated physicians on a fee-for-service basis is no guarantee that the total amount of their compensation will be any less than it was under the hospital arrangement. It is likely to be more, and it certainly will be more difficult for anyone to know what the physician's total compensation is. Except to the extent ignorance of the outcome can be masked as a solution, then, Section 12 is unlikely to be effective.

At the same time, and of more importance for long-range reform, Section 12 will destroy hospitals' efforts to tie physicians more closely to the institution. By its terms, Section 12(c) would limit the physician's compensation under any arrangement to the amount he would receive if he had been on a salary. I imagine it may be rather difficult to calculate what a physician would have received if he had been on salary.

But the provision would have far more harmful results than merely enhancing the complexity of the system. As applied by the bureaucracy, the provision certainly will limit physicians' compensation to less than what they will receive under fee-for-service. This, plus the “ethical” arguments that will be raised in favor of fee-for-service will effectively prevent any “arrangement” between community hospitals and their physicians. Hospital associated physicians would be given an overwhelming incentive to refuse any arrangement with the hospital and go to fee-for-service.

As a consequence, most of the ties that these arrangements generate between a hospital and their physicians would be broken. It is an elemental fact that a person who is paid by the hospital feels more loyalty to the institution and is more willing to cooperate with hospital management in cost and quality control than is one who receives no funds from the hospital, but only uses it as a workplace. Furthermore, arrangements between hospitals and physicians give the hospitals leverage to obtain better service. To ensure around-the-clock coverage by a radiology group, for instance, a hospital may offer the group a contract. The existence of a contract gives the hospital a vehicle for enforcing quality, for ensuring that the contracting physicians mesh their operations with other hospital services, for obtaining administrative and educational services from them, et cetera. If hospitals are prevented from entering into such arrange ments with physicians, they will be deprived of their main bargaining counter. How will the community hospital provide radiology around the clock, 24 hours a day, if it has nothing to give the radiologist in exchange for his agreement to provide such services? A physician on fee for service will tend to work at the hours when there is the most amount of potential “business." Section 12, therefore, will impede hospitals' efforts to provide quality care in the short term, and it will set back efforts to tighten the relationship between hospitals and physicians and thus discourage long-range reform efforts.

I recognize that Section 12(c) was spurred by a suspicion of percentage contracts. But the effect is overkill. The Bill is not limited to those arrangements. And even if it were, NCCH would oppose the provision. Percentage contracts are abused by some physicians. But that does not justify prohibiting the arrange ment. The fault is not in percentage contracts themselves. Such contracts are in many instances an effective and fair way for the hospital to obtain specialty services. A hospital should be left free to use whatever arrangement it deems best. To the extent there are "abuses” of percentage contracts, they are a result

of poor negotiating or of the hospital's lack of bargaining power. In such a market, the physician will be able to collect comparably high compensation no matter what arrangement (including fee-for-service) is used. The problem can best be faced by changing the market pressures, and the hospital's leverage, not by futilely trying to reverse the consequences of those pressures and reducing the hospital's leverage.

An increasing number of physicians are being produced. It is possible that within four or five years, the market will swing into a more realistic balance. Hospitals will then be able to negotiate more advantageous arrangements with physicians who wish to use their facilities. But Section 12 would prevent them from doing so (except to the extent they are able to obtain salaried physicians). Section 12 leaves no room for the hospitals to develop innovative arrangements with doctors in the broad area between fee-for-service on one extreme and physician employees on the other. Structural reform of the system requires the development of such arrangements, but Section 12 would deter that effort.

CONCLUSION

For these reasons, NCCH must respectfully oppose S. 1470 at this time. We urge consideration of our proposal for a short-term freeze, designed to contain cost increases immediately and to force a wide-ranging consideration of what kind of health care delivery system the American people desire. The ideas developed in S. 1470 could play an important part in formulating structural reform, although, as my testimony has indicated, NCCH believes the health care delivery system needs changes that go beyond those proposed by S. 1470.

I appreciate the opportunity to appear before you today.

Senator TALMADGE. The next witness is Dr. Charles E. Phillips, president, American Protestant Hospital Association. I understand he is not present. His statement will be inserted in the record.

[The prepared statement of Dr. Phillips follows:] STATEMENT OF CHARLES D. PHILLIPS (Ev.D.), PRESIDENT, AMERICAN PROTESTANT

HOSPITAL ASSOCIATION Mr. Chairman, I am Charles D. Phillips, President of the American Protestant Hospital Association, representing some 300 hospitals, homes for the aging and other health care agencies throughout the country, as well as some 2,000 personal members who are engaged in the delivery of health care services. The Association membership is dedicated to providing quality health care to patients within a Christian reference and to ensuring the strength and viability of our voluntary, pluralistic health care delivery system. With me is Michael S. Cassedy, the Director of our Government Affairs Department.

We greatly appreciate the opportunity to present the position of APHA on S. 1470. Mr. Chairman, let me say at the outset that the members of APHA appreciate your concern about the rising costs of the Medicare and Medicaid programs to the taxpayers of this nation. We are grateful for your commitment to the development of reforms which will prevent the cutting and slashing of payments to hospitals and physicians indiscriminately and inequitably and the imposing of arbitrary controls and indiscriminate limits on payments to hospitals such as the Administration's proposed ceiling on hospital cost increases.

We are concerned, however, that the reforms which are proposed as solutions to the problem of escalating costs of hospital services under Medicare and Medicaid be based on an awareness of the factors which are responsible for such increases, and that the reforms address those factors rather than taking a simplistic approach of limiting reimbursement. We believe that this bill demonstrates your awareness of the enormity of the problems faced both by the federal government and the health care institutions of this nation and that it is a step in the direction of addressing needed reform.

Mr. Chairman, we will comment on only certain sections of this bill which we feel are of more crucial significance to our members. SEC. 2. Criteria for determining reasonable cost of hospital services

APHA is confused over the intent of the provision whereby the Secretary shall establish an “accounting and uniform functional reporting system” to determine hospital operating and capital costs. If this means a uniform accounting system will be mandated for all hospitals, then we must oppose it as an infringement upon management prerogative. However, if the intent is for the Secretary to devise a uniform cost reporting system in order to facilitate cost comparisons between like hospitals, then we support the proposal.

The APHA is also concerned with the proposal for the classification of institutions for the purposes of reimbursement on a comparative basis. We can understand the attractiveness of such a methodology to the federal government. However, we feel that great difficulty will be experienced in the technical aspects of devising such a methodology for classifying institutions for purposes of reimbursement. The fact that S. 1470 deletes from the comparison procedure for routine per diem hospital costs some of the elements over which an institution has little or no control is a vast improvement over section 223 of Public Law 92-603.

We suggest that the classification system be devised with full consultation from the field of health care and government agencies. We therefore recommend that this committee bring together a group of technical experts who have been involved in Medicare-Medicaid reimbursement matters over the years. Representatives should include persons from associations of providers, Social Security Administration, health care institutions, congressional staff, Blue Cross Association, and etc. These experts would discuss in depth the basis for the classification system and the appropriateness and the validity of the components now included in this bill. We believe that the formation of such a panel of experts would be in keeping with the spirit of openmindedness expressed by the chairman when you introduced the bill and that it would prove to be of substantial assistance in forming a workable and equitable method of classification.

APHA is on record as supporting a reimbursement system which includes prospective reimbursement administered on a state level under federal guidelines. We are pleased to see the inclusion of a state administered rate review option for the determination of institutional reimbursement that could be based upon prospective payment methodology if a state so chooses. APHA feels that state level rate review on a prospective basis is more likely to assure that the variables among institutions, which are often very local, are taken into account and that the full financial requirements of the institutions are provided. SEC. 3. Payments to promote closing and conversion of underutilized facilities

We support the demonstration project proposed in Section 3 by which federal financial support would be provided institutions which apply for such support on the basis that their operations would be made more efficient or cost-effective by the closing or conversion of underutilized beds and that they would also become eligible for positive incentives under the provisions of section 2. Sec. 12. Hospital-Associated physicians

We recognize that the problem which this section attempts to address is not a new one for hospitals or the government. We express grave concern, however, over the proposal that the federal government involve itself with such specificity in determining the types of contractual arrangements between hospitals and physicians. We recognize that cases of unreasonable compensation can be documented, but believe that to enact legislation prohibiting a specific type of contract removes decision making from its proper authority-management and the governing boards—and places it in Washington. Financial incentives for efficient hospital administration contained in other sections of this bill will effect the desired result by encouraging the administrators to find areas in which savings might be made, including this area of contractual arrangements with physicians if an individual administrator so chooses.

We are concerned further that as section 12 is written, it will not accomplish the intended result of reducing hospital costs. There are those who have studied this proposal who are convinced that the aggregate costs resulting from categorizing the various services of these physicians and the mandating of a feefor-service basis of reimbursement for personal patient services will be greater than those now being experienced. Sec. 30. Establishment of Health Care Financing Administration

We are pleased to note that the President and the Secretary of HEW have adopted administratively your proposal for a Health Care Financing Administration, incorporating the old Bureau of Health Insurance, Bureau of Quality Assurance, Medical Services Administration and the Office of Long-Term Care.

However, we share your concern that the new agency, rather than collapsing overlapping positions and clarifying lines of authority, may do the opposite and establish a new bureaucratic superstructure as a haven for displaced bureaucrats. We support, therefore, your keeping this provision in the bill. In addition, we continue to recommend, as we did in testimony before you last summer, the creation of a cabinet-level Department of Health as a mechanism for the most effective coordination of the setting of national health policies and administration of federal health programs. SEC. 31. State medicaid administration

This section reflects the awareness of the Chairman of the problems besetting hospitals because of the performance of states in administering Medicaid. We support the proposal to establish specific performance criteria for state administration of Medicaid which will result in more prompt payment of claims and vastly improved administration of the program. SEC. 40. Procedures for determining reasonable cost and reasonable charges

APHA vigorously opposes this section. The Medicare law already contains adequate provisions to determine reasonable costs. Further, the proposal is a gross infringement on the management prerogative of individual institutions. SEC. 46. Rate of return on net equity for for-profit hospitals

APHA supports the principle implemented in this section—that an adequate return on investment is a reasonable expectation in business. By the same principle, we urge the Committee to amend this section to provide for an adequate operating margin on reimbursement by Medicare and Medicaid to not-for-profit institutions, since no institution can continue to operate only on the basis of costs. Determined for the various classes of nonprofit hospitals, the operating margins would reflect factors unique to these facilities such as the costs of charity care, educational programs, and generally more acute level of care provided.

SUMMARY OF RECOMMENDATIONS

Mr. Chairman, in conclusion we would like to summarize some of the recommendations that we have made here today.

Under Section 2:

1. We support a uniform functional reporting system to facilitate cost comparisons between like hospitals. However, we are opposed to a mandated uniform accounting system for all hospitals as it would be an infringement on a right of management.

2. We recommend that the Committee, in devising the classification system to determine reimbursement, consult in depth with a panel of experts drawn from association providers, hospital executives, Social Security Administration, Blue Cross and other third party payers, congressional staff and others.

Under Section 12:

3. We recommend leaving the choice of hospital-physician contractual arrangements with management. The financial incentives for efficient hospital management contained elsewhere in this bill are adequate to address the problem of unusually high payment to hospital-associated physicians.

Under Section 30:

4. We support keeping the legislative provision for the creation of the Health Care Financing Administration. We further recommend the creation of a cabinetlevel Department of Health as a mechanism for the coordination of the setting of national health policies and the administration of all federal health programs.

Under Section 40:
5. We recommend the deletion of Section 40 in its entirety.
Under Section 46:

6. We recommend the Committee amend this section to provide an adequate operating margin, since no institution can continue to operate only on the basis of costs.

Mr. Chairman, we thank you and members of this Committee for considering these views and for giving us this opportunity to appear before you. If we can answer any questions you might have now or later on any technical aspects of our recommendations, we will be happy to do so.

Senator TALMADGE. The next witness is Bruce D. Thevenot, administrator, Government Services Division, American Health Care Association.

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