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vided in S. 1470. However, hospital budgets would have to be negotiated across-the-board and not just for patients covered by medicare and medicaid. Otherwise, costs could too readily be passed on to private patients whose premiums are paid by negotiated health benefit packages, group insurance, and individual health insurance policies.

The bill treats physicians very gently. Physicians would be induced to accept assignments by a possible $2 per encounter increase in their income from medicare patients if they agreed to become participating physicians.

This simply will not work because nonparticipating physicians in the medicare program make more than $2 extra per encounter from their over-65 patients.

The AFL-CIO strongly recommends a negotiated fee schedule for physicians. Such a fee schedule should be applied across-the-board and not just for medicare patients. In addition, physicians should be free to elect payment by capitation. It is quite possible that some physicians would prefer this method of reimbursement since it provides improved continuity of care for the patient and almost complete elimination of paperwork for the physician.

We strongly favor the provision in the bill which relieves HMO's of restrictions on reimbursement for expenses related to capital expenditures where the HMO can demonstrate that it can provide health services effectively and economically.

The AFL-CIO supports provisions of the bill which would place limits on cost reimbursement by medicare and medicaid to hospitalbased physicians who have percentage or lease arrangements with the hospital. Radiologists, pathologists, and anesthesiologists have made excessive profits from such arrangements.

Additional recommendations with respect to detailed provisions of S. 1470 will be found in our complete statement.

In conclusion, we believe the most effective way in which to achieve control over escalating health care costs is to budget health expenditures for hospital and physician services along the lines of the health security bill.

For the interim period, we favor the approach of S. 1391, the administration's hospital cost containment provisions with, however, some important reservations with regard to wage control features which we have set forth in our attached statement. We are strongly convinced that Congress should not now enact a long-term program which might have to be dismantled when a national health insurance program is developed. Therefore, we urge that only a temporary cost containment bill be reported out to be effective until Congress has an opportunity to review the national health insurance proposal to be submitted to Congress by the administration early next year.

That completes the summary of my statement, Mr. Chairman. The details on many of these points, and others, are continued in the full statement and we have also attached to our statement a copy of a summary of a statement that we submitted to another committee with respect to the administration's proposal, the Hospital Costs Containment Act of 1977, S. 1391.

Senator TALMADGE. Thank you, Mr. Seidman. All of that will be inserted in the record.

I congratulate you on a very thoughtful statement. The subcommittee has given consideration to broadening the hospital reimbursement provision to extend beyond medicare and medicaid as you recommend. Mr. Seidman, if the Congress does, in fact, enact a national health insurance bill, are you saying that the Federal Government should without limit whatever wage amounts employees can negotiate with hospitals?


Mr. SEIDMAN. We are saying two things, Mr. Chairman. In the first place, we are saying that there is no evidence whatsoever that wage increases in the hospital industry have played any significant role in the escalation, the tremendous escalation in hospital costs which has occurred, not just within the past few years, but over a long period of time.

I have a report of the Council on Wage and Price Stability which was prepared by Prof. Martin Feldstein of Harvard University. I might say, Mr. Chairman, that Professor Feldstein and we disagree on many points. He is not particularly a friend of organized labor. But in this report he makes it quite clear that the responsibility for the rise in hospital costs does not rest at all with increased wages. He says, "Although hospital wage rates have risen more rapidly than wages in other parts of the economy"-and there he happens to be wrong; we have a table in our testimony that shows that this is not true, nevertheless, this is what he says: "These relatively greater wage increases are responsible for only a small part of the overall increase in the cost of hospital care.

"Had earnings of hospital workers risen no faster than the average for all private, nonfarm production workers, the annual rate of increase in daily hospital costs would have been only about 1 percentage point lower." Which makes it quite clear, therefore, that even with his assumption, which is wrong, that hospital costs have risen faster than other wages-this may be true in percentage terms, but not in absolute terms.

The rise in hospital wages has had no appreciable impact on the rise in hospital costs.

Now, in addition to that, we see no evidence whatsover that there is going to be any tremendous increase in hospital costs in either negotiated situations where collective bargaining between unions and management prevails or in other situations.

Therefore, we can see no reason for singling out this one sector of the economy with imposition of wage controls on relatively low-wage earners in this industry. We are opposed to wage controls in the economy. I believe most of the Members of Congress and the administration are, as well, and we see no reason for imposing it in this industry. Senator TALMADGE. Is there any test of reasonableness that you can think of?

Mr. SEIDMAN. The test of reasonableness is the test that occurs in collective bargaining. Management has every incentive, particularly where there are any controls on cost, to hold down wages. They always do. The workers in this industry are not so well-organized that they can exact out of line wage increases and I have no reason to think that they will.

Therefore, I see no reason why there should be any ceiling on wage increases in this industry, when we all agree that this is not the route to go for in the economy as a whole and there is no reason why these workers should be singled out for that kind of discrimination.

Senator TALMADGE. You seem to support limits on hospital revenues and controls on payments for doctors, and at the same time urge a blank check for any or all wage increases in nonsupervisory hospital employees.

Mr. SEIDMAN. Mr. Chairman, we might have a more difficult position to uphold if, in fact, the increase in hospital wages had been largely responsible for the tremendous escalation of hospital costs. But this is not true at all. There is no reason to think that it would be. We do think that there should be controls on those elements of hospital costs which have been responsible for the inflation in cost as well as other sectors of the health care economy that have been responsible. We see no evidence whatsoever that these workers, low-paid workers, have been responsible for this escalation. We see no reason why a ceiling should be placed on them when nobody that I know of is proposing to do anything similar in any other industry.

Senator TALMADGE. We were told yesterday by a witness that the wage levels of hospital employees have not risen significantly in the past and thus has not contributed significantly to the rise in hospital costs. You said substantially the same thing today.

What percentage have salaries risen generally for health care workers say in the last 5 or 6 years?

Mr. SEIDMAN. We have a table attached to our testimony, appendix A, which gives average hourly wages for nonsupervisory employees in hospitals. The latest year is 1976: $4.18 as compared with $4.36 for all service workers and $4.87 for total private employees.

You can see how much lower hospital wages are on the average. With respect to your question, 5 years earlier, 1971, when they were $2.96-I cannot do the figures in my head, Mr. Chairman. We have some figures, however, in our table which do not deal specifically with the questions that you ask but they give you some idea of what has been happening. We think it is probable that wages have been rising somewhat higher in hospitals which have been organized by unions than in nonunion hospitals. We think that is the way it should be; that is why workers join unions. But even organized hospitals have been unable to keep up with the cost of living.

In 1975, the median negotiated wage increase amounted to 7.7 percent while the cost of living increased by 9.1 percent, and in 1976 the average negotiated increase amounted to 6.4 percent while the cost of living increased 5.8 percent.

If you take the 2-year period, 1975-76, there was a drop in real wages for hospital workers over that period.

Senator TALMADGE. I believe it was two compared with seven.

Senator TALMADGE. Fifty to sixty percent, is that about right?
Mr. SEIDMAN. No. That would be about 40 percent. It is 2.96 to 4.18.
Senator TALMADGE. Is one of the problems that some hospitals have
too many employees?

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Mr. SEIDMAN. They may have too many employees in one sense; that is, that they have too many beds to begin with and they have patients who are in hospitals unnecessarily when they should be getting ambulatory care. Therefore, they may have too many employees because they have too many beds and patients in hospitals that should not be in hospitals.

This is a question of management and does not relate to the workers in any way.

Senator TALMADGE. Senator Dole?

Senator DOLE. I am sorry I missed the testimony; I was attending a breakfast for Kansas. I apologize.

Senator TALMADGE. Thank you very much, Mr. Seidman, for a very interesting statement.

[The prepared statement of Mr. Seidman follows:]

STATEMENT OF BERT SEIDMAN, DIRECTOR, DEPARTMENT OF SOCIAL SECURITY, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS The AFL-CIO appreciates the opportunity to appear before this subcommittee today to present our views with respect to S. 1470, the Medicare-Medicaid Administrative and Reimbursement Reform Act introduced by the distinguished Chairman of this subcommittee.

The time is ripe for Congress to take action to control the unconscionable escalation in medical care costs. President Carter's health message to Congress estimated that medical care costs will be $160 billion in 1977 and will amount to close to nine percent of the Gross National Product. Compare this to Canada which has a social insurance health program which provides for its entire population comprehensive benefits without any deductibles for only seven percent of its GNP. Canada's costs are lower because they have a single social insurance program rather than the fragmented private insurance we have in the United States.

The average cost per day of a hospital stay has been increasing at a rate of about double the rate of increase of the Consumer Price Index. According to the Council on Wage and Price Stability, the average per day of a hospital confinement was $191 in September 1976. This represents an 18.4 percent increase over the same month in the previous year.

The impact of these escalating costs on the federal budget is substantial. In fiscal year 1976, 42 percent of health expenditures came from public funds. Federal, state and local government payments for health care totaled $58.8 billion. Total federal payments for health care, including Veterans Administration and Department of Defense hospitals, construction and research, came to $39.9 billion. State and local government outlays for health were $19.0 billion and tax subsidies for health purposes amounted, conservatively, to $5.6 billion. The combination of direct and indirect federal, state and local government payments to the health industry makes this one of the most heavily supported industries in the country. The total annual subsidy to this industry amounts to $64.4 billion.

It is disturbing that in the ten years that have elapsed since Medicare and Medicaid were implemented, Congress has yet to take effective action to control health care costs. The AFL-CIO, therefore, congratulates you, Mr. Chairman, on your initiative in introducing S. 1470.


It is our opinion that there is no way to control these escalating costs until Congress enacts a comprehensive national health insurance program such as the Health Security Bill (S. 3) which channels all funds through a single government agency with the power to review hospital budgets and negotiate with them as to the amount of their total reimbursement. The give and take of such negotiations is far more flexible and effective than regulations. Similarly, medical societies should have the opportunity to negotiate fee schedules with the responsible government agency and doctors should be required to accept

negotiated fees in full payment for services rendered. Doctors could participate or not participate in the program, but nonparticipating physicians would have to confine their practices to the few wealthy patients who could afford to pay their excessive fees.

Briefly this is how the Health Security Bill (S. 3) would work. The Health Security Bill would establish a national health expenditures budget comprised of Social Security taxes earmarked for health matched by federal general revenues. The only way in which providers could increase their revenue faster than incomes of the population as a whole would be to come before the Senate Finance Committee and the House Ways and Means Committee and justify an increase in taxes. Thus, Congress would decide what percentage of the gross national product should be allocated for health care.

As it is now, the government, Blue Cross and insurance companies are simply issuing blank checks for the providers virtually to fill in as they please.

The budgeting of health expenditures as provided by Health Security would not alter the present ownership of hospitals or the private practice of medicine. The delivery of health services would remain in the private sector.

The national budget for health expenditures would be a set amount in any given year. This national budget would be allocated to health regions and in turn to health services areas. The allocation would be based primarily, on two factors:

Expenditures for the prior year adjusted for inflation and productivity;
The need for health services.

For example, for physician services over-doctored health service areas would receive a somewhat lower budget, on a per capita basis, than under-doctored areas, clearly an incentive for better geographical distribution of physicians. Similar considerations would apply to facilities.

Because of built-in cost controls in a budgeting system, detailed regulation is not needed to conrtol costs. Essentially, providers would have far more freedom to experiment and innovate under a budgetary system than under a regulatory system. Moreover, the budget approach provides incentives for physicians to become involved in better organizational arrangements for the delivery of care. In a budgeted system of cost control, due weight would be given to historical costs. That is, due weight would be given to the prevailing pattern of hospital and institutional charges. Due weight would also be given to current fees for physicians and other provider services. However, allocations for institutional and practitioner services would be adjusted to take into account the need of patients for medical care.

This is the approach of the Health Security Bill (S. 3).

It should be emphasized that these decisions with respect to the allocation of funds for health services would not be made unilaterally by the Federal government. The Health Security bill provides for the allocation of money in conformity with state and local planning. The Health Systems Agencies (HSAs), the State Health Planning and Development Agencies (SHPDAs) and the state advisory councils and the Statewide Health Coordinating Councils (SHCCs) have been organized under the National Health Planning and Resources Develop ment Act of 1974. This law provides for consumer, governmental and provider participation in the planning process. Thus, decisions with respect to resource allocation would not be dictated by the federal government as is so often alleged by the opponents of Health Security.


The escalating federal expenditures for health services should bring into perspective the cost of the Health Security Program. Health Security has been the object of a propaganda attack that it costs too much. The fact is that Health Security over the long haul would be the least expensive of all national health insurance proposals. With Health Security, the national health expenditures budget could be held at or below the present 8.6 percent of the Gross National Product. It should be noted that this year Canada enacted a law which will relate federal payments to the provinces for health services to a constant percentage of the Canadian GNP. Canada has put the providers of care on notice that Canada will pay seven percent of its GNP for health care and

no more.

There is no question that the health industry can absorb virtually unlimited amounts of money. One unique aspect of medical care is the degree to which

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