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We are delighted to have you back before our committee as a witness. You may insert your full statement into the record and summarize it.

STATEMENT OF BRUCE D. THEVENOT, ADMINISTRATOR, GOVERN

MENT SERVICES DIVISION, AMERICAN HEALTH CARE ASSOCIATION

Mr. THEVENOT. My statement is brief this morning. I will confine my comments principally to those which relate directly or indirectly to long-term care providers.

As you know, the American Health Care Association is the Nation's largest organization representing nursing homes. Presently, Mr. Chairman, we have some 7,500 members in the association which represent about half of the industry nationwide. That includes about 600,000 beds at the present time.

As I said, in view of our lengthy testimony on S. 3205 last year, I shall make my comments brief today.

I should first like, however, to commend the chairman of this subcommittee for his willingness to incorporate a number of constructive suggestions made during last year's hearings. As a result, a good bill has been made better. It seems to me that Š. 1470 is on target in its overall approach and concept, and is well thought out in its particulars. This legislation should be enacted as soon as possible.

While the reimbursement reforms proposed in section 2 would not initially apply to long-term care facilities, AHCA would like to indicate its support of the important principles upon which these reforms are based. Section 2 is a large step in the direction of rational pricing of institutional health services. This step, and succeeding steps, must be taken now if long-range price stability is to became a reality in the health care sector. By contrast, the President's proposed cost containment plan, though well meaning, is simplistic, inequitable and potentially disruptive.

I would like to point out to the subcommittee that reimbursement systems similar in concept to the methodology proposed in section 2 have been and are being put into effect for nursing homes by a number of State medicaid programs under the requirement of section 249 of the 1972 amendments that skilled nursing and intermediate care facilities be paid on a reasonable cost-related basis. Currently by our count, some 29 States have in place some form of prospective rate setting for nursing homes which includes incentives designed to reward efficient performance.

In this respect, reform of payment methods for nursing homes are somewhat farther advanced than for hospitals, owing to the earlier legislative mandate and the relatively smaller degree of complexity involved.

Therefore, while we strongly support the approach suggested in section 2, we believe that any future consideration to apply this particular system to long-term care facilities should take into account the status of the implementation of section 249.

I would like to comment on two additional sections of the bill that are quite similar in approach. Section 3 would authorize payments to

promote the closing or conversion of underutilized facilities; section 20 would make changes in current law designed to facilitate the conversion of excess hospital capacity to long-term care services. I am aware, Mr. Chairman, that there has been considerable discussion recently of the feasibility of simultaneously solving the problems of too many hospital beds and too few nursing home beds by placing the excess hospital beds into service as long-term care beds.

AHCA believes this assumption has practically no validity in the case of truly long-term patients, and only limited potential in the case of posthospital convalescent patients.

We are therefore pleased to see that S. 1470 takes a cautious and measured approach to the conversion of excess hospital capacity. In general, it is our expectation that closure or "mothballing" will be the most practical solution in the majority of instances, and we support the provisions in section 3 for financial assistance to hospitals to discontinue underutilized operations.

Section 20 permits, under limited circumstances, certain rural hospitals to provide long-term-care services. AHCA supports the requirement in this section for a certificate of need, and the limitation of per diem payments for routine services to the prevailing rates for freestanding facilities in the State.

We would like to suggest again a modification, this time to section 4, in that provision relating to Federal participation in disapproved hospital capital expenditures. A number of provider organizations, including ours, raised the point in testimony last year suggesting that section 1122 be further amended to make it clear that prior approval is not required of simple changes of ownership—that is, where there are no additional beds or equipment and no change of service.

It was our understanding that this suggestion conforms with the original intent of the Finance Committee.

Senator TALMADGE. I think that is a good suggestion, and we will probably agree to that.

Mr. THEVENOT. Thank you, Mr. Chairman.

Section 21 relates directly to reimbursement of skilled and intermediate care facilities. It would make the statute clear with regard to the flexibility given to the States to include as a part of its payments to nursing homes reasonable amounts for profit and it specifies the methods by which these amounts can be earned.

Recent HEW policy limits these allowances to an amount figured on the invested equity of the proprietary owner and permits no earnings allowance whaterer for nonproprietary facilities. This policy is unduly restrictive, and effectively prevents the establishment of incentive based payment systems by removing the incentive feature. Therefore, section 21 is crucial to assure that States are able to establish cost-effective payment methods while attracting necessary capital investment in nursing homes.

Section 22 would transfer the final authority to certify and approve for medicaid purposes skilled nursing and ICF's to the Secretary of HEW. I believe, Mr. Chairman, that this particular provision has been greatly improved over the comparable provision in S. 3205 by the addition of provisions for hearings and appeals with AHCĂ strongly supports.

92–202-77—14

Frankly, though, Mr. Chairman, we remain skeptical that this transfer of authority will be the secret to uniform application of health and safety standards. The unnecessary complexity, paperwork, and duplication of inspections by Federal, State, and local health, licensure and other related and unrelated authorities seem doomed to continue as long as these agencies refuse to recognize standards and surveys on a reciprocal basis.

We continue to support the provision in section 23 which would liberalize the policy toward permitting patients of nursing homes to make visits away from the facility. We believe this provision recognizes the therapeutic value of these visits away from the institution, therefore, we think it is certainly in the best interests of the patients, and we support this change without reservation.

I would like to make a final comment concerning the President's cost containment proposal at this point. Mr. Chairman, as you are aware, the President's proposal does not presently apply to long-term care facilities. I am certainly not here to allege any discrimination in that respect. We believe that there are excellent reasons to support the exclusion of nursing homes from the President's proposal.

Among the best reasons are No. 1, that the nursing homes per diem costs have risen relatively modestly. Indeed, it seems to us that the 9-percent cap would be almost completely superfluous.

Secondly, there is presently no surplus of long-term care beds nationwide, hence an overall capital expenditures limit without regard to need would be very unwise indeed at this time.

Third, it should be understood clearly that the very real problem that exists, insofar as medicaid expenditures for long-term care are concerned, is largely the result of increased utilization and not due to increases in the per diem costs or rates being paid to nursing homes.

For these reasons, AHCA would be strongly opposed to any congressional decision to broaden the President's plan to include long-term care facilities. On the contrary, we would urge greater incentives for the use of long-term care facilities, HMO's, home health care and other alternatives to hospitalization where appropriate.

I would conclude my remarks, Mr. Chairman, by thanking you again for enlisting the cooperation of the many groups that will be affected by this legislation. The results of this process are evident. It seems to us that S. 1470 is realistic, it is constructive, and it ought to be given expeditious consideration by the Senate and by the House.

Thank you.

Senator TALMADGE. Thank you, very much, Mr. Thevenot for your constructive suggestions. We also appreciate the fact that your American Health Care Association has worked closely with our staff in drafting our bill.

Do you have any questions, Senator Dole?

Senator DOLE. Is it true that we spend more for long-term care in nursing homes and medicaid than we do in hospitals?

Mr. THEVENOT. According to the most recent statistics I have seen, they are both in the neighborhood of 39 to 40 percent of the total medicaid expenditures. That is an important point, Senator Dole.

Expenditures for nursing home care tend to be located primarily in the medicaid program; somewhat more than 50 percent, I believe, of

all of the revenues derived by nursing homes are coming out of the medicaid program, so that the impact of expenditures has a disproportionate effect on that particular program.

I might point out to you that the medicare program, by contrast, is spending less money in real dollars than it was in 1969. Medicare accounts for a very marginal share of any of the expenses related to nursing homes.

Senator DOLE. The only point I make, all the focus has been, at least as I look back on it, has been on hospital costs as it relates to medicaid--maybe not on nursing homes or other long-term care facilities. The primary focus has been on hospital costs. Most of the comments and things I have read have dealt with the hospital costs rather than nursing homes, or long-term care facilities.

I can understand that there would be an impact on these as well.

Mr. THEVENOT. You are quite correct, sir. It is, however, a question of unit prices versus program expenditures.

Senator DOLE. Thank you.
Senator TALMADGE. Thank you very much for your testimony.

[The prepared statement of Mr. Thevenot follows:] STATEMENT OF BRUCE D. THEVENOT ON BEHALF OF THE AMERICAN HEALTH CARE

AssOCIATION Mr. Chairman and members of the subcommittee, I appreciate this opportunity to share with the subcommittee the views of the Nation's largest organization of long-term care facilities concerning S. 1470. In view of our lengthy testimony on S. 3205 last July, I shall confine my comments to those provisions of S. 1470 which are of direct or indirect interest to long-term care providers.

I should like first, however, to commend the chairman of this subcommittee for his willingness to incorporate a number of constructive suggestions made during last year's hearings. As a result, a good bill has been made better. It seems to me that s. 1470 is on target in its overall approach and concept, and is well thought out in its particulars. This legislation should be enacted as soon as possible. SEC. 2. Criteria for determining reasonable cost of hospital services

While the reimbursement reforms proposed in Section 2 would not initially apply to long-term care facilities, AHCA would like to indicate its support of the important principles upon which these reforms are based. Section 2 is a large step in the direction of rational pricing of institutional health services. This step, and succeeding steps, must be taken now if long range price stability is to become a reality in the health care sector. By contrast, the President's proposed cost-containment plan, though well-meaning, is simplistic, inequitable and potentially disruptive.

I would like to point out to the Subcommittee that reimbursement systems similar in concept to the methodology proposed in Section 2 have been and are being put into effect for nursing homes by a number of State Medicaid programs under the requirement of Section 249 of the 1972 amendments that skilled nursing and intermediate care facilities be paid on a reasonable costrelated basis. Currently, by our count, some 29 states have in place some form of prospective rate setting which includes incentives designed to reward efficient performance.

In this respect, reform of payment methods for nursing homes are somewhat farther advanced than for hospitals, owing to the earlier legislative mandate and the relatively smaller degree of complexity involved.

Therefore, while we strongly support the approach suggested in Section 2, we believe that any future consideration to apply this particular system to longterm care facilities should take into account the status of the implementation of Section 249. SEC. 3. Payments to promote closing and conversion of underutilized facilities Sec. 20. Hospital providers of long-term care services

There has been considerable discussion recently of the feasibility of simultaneously solving the problems of too many hospital beds and too few nursing home beds by placing the excess hospital beds into service as long-term care beds.

AHCA believes this assumption has practically no validity in the case of truly long-term patients, and only limited potential in the case of post-hospital convalescent patients.

We are therefore pleased to see that S. 1470 takes a cautious and measured approach to the conversion of excess hospital capacity. In general, it is our expectation that closure or “mothballing" will be the most practical solution in the majority of instances, and we support the provisions in Section 3 for financial assistance to hospitals to discontinue underutilized operations.

Section 20 permits, under limited circumstances, certain rural hospitals to provide long-term care services. AHCA supports the requirement in this section for a certificate of need, and the limitation of per diem payments for routine services to the prevailing rates for free standing facilities in the state. SEC. 4. Federal participation in hospital capital expenditures

AHCA urges that these suggested modifications in Section 1122 of the Act be further amended to make clear that prior approval is not required of simple changes of ownership involving no addition of beds or equipment and no change of service. A number of provider organizations, including AHCA, raised this point in testimony on S. 3205 and understood that our suggestion conformed with the original intent of the Finance Committee when it enacted Section 1122. I therefore suggest again that S. 1470 be so amended. Sec. 21. Reimbursement rates under medicaid for skilled nursing facilities and

intermediate care facilities AHCA strongly supports this amendment to present law. Section 21 would make it clear that states may include reasonable amounts for profit as part of its payments on a reasonable cost-related basis. It further specified the manner in which these amounts can be earned. Recent HEW policy limits these payments to an amount figured on the invested equity of the proprietary owner and permits no earnings allowance whatever for non-proprietary facilities. This policy is unduly restrictive, and effectively prevents the establishment of incentive based payment systems by removing the incentive feature. Therefore Sectin 21 is crucial to assure that states are able to establish cost-effective payment methods while attracting necessary capital investment in nursing homes. SEC. 22. Medicaid Certification and Approval of Skilled Nursing Facilities and

Intermediate Care Facilities This section, which transfers to the Secretary of HEW final authority for the certification of Medicaid SNF's and ICF's, has been greatly improved over a comparable provision of S. 3205 by the addition of provisions for hea ings and appeals which AHCA strongly supports.

In all candor, however, we remain skeptical that this transfer of authority is the secret to uniform application of health and safety standards. The unnecessary complexity, paperwork, and duplication of inspections by Federal, state, and local health, licensure, and other related and unrelated authorities seem doomed to continue as long as these agencies refuse to recognize standards and surveys on a reciprocal basis. SEC. 23. Visits away from Institutions by Patients of Skilled Nursing or Inter

mediate Care Facilities AHCA continues its endorsement of this provision which recognizes the therapeutic value of visits away from an institution and provides a more flexible policy on such visits. Additional Provisions

AHCA is supportive of the administrative and other miscellaneous improvements contained in S. 1470. The only exception is Section 33, which would abolish the Health Insurance Benefits Advisory Council. AHCA supports the continuation and revitalization of HIBAC. S. 1991, H.R. 6575

Mr. Chairman, the President's cost containment proposal would not apply to long-term care facilities. We believe there are excellent reasons to support this

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