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physicians control the demand for health services. Yet, physicians seldom think about the cost of the care they engender.

After the first contact with the physician, which is initiated by the patient, the doctor establishes the patient's course of treatment. The doctor advises the patient when he or she should come back for a follow-up office visit-next week, in 10 days or next month. The doctor orders the lab tests and X-rays. If the doctor deems it advisable, he or she hospitalizes the patient and decides when the patient can be discharged. The doctor writes the prescription, usually for costly trade name drugs, and gives instructions to interns, residents and nurses. Another unique aspect of medical care is that the training of a physician emphasizes that any medical expense is justified. Thus, marginal improvements in the quality of care, even if achieved at substantial cost, can always be supported.

S. 1470

Considering the magnitude of the problem, S. 1470 is a step in the right ́direction but it is our view that it does not go far enought. The bill's principal thrust is in two directions: Section 2 would establish a single prospective reimbursement system for hospitals; and Section 10 would attempt to induce physicians to accept usual and customary fees under Medicare.

There are numerous other provisions, but we propose to limit our comments to the following sections:

Section 4. Federal participation in hospital capital expenditures.
Section 12. Hospital-associated physicians.

Section 14. Payments on behalf of deceased individuals.

Section 22. Medicaid certification and approval of skilled nursing and intermediate care facilities.

Sec. 30. Establishment of Health Care Financing Administration.

Sec. 33. Repeal of Section 1867.

Sec. 44. Disclosure of aggregate payments to physicians.

Sec. 46. Rate of return on net equity for for-profit hospitals.

S. 1470 is a very complex bill which would essentially rely on detailed regulation. Its implementation would require a large number of investigators and enforcers. Unless sufficient funds were provided to police the providers there would, undoubtedly, be widespread evasion of its provisions.


The major thrust of the bill would be to establish an incentive reimbursement method rewarding hospitals whose routine operating costs are less than average and penalizing hospitals whose routine operating costs are more than 20 percent above average. While some high cost hospitals would have to become more efficient, or be phased out, the upward trend of average hospital costs would continue because the organization of hospital services would not be altered and the growth in utilization of new services and technology would continue unabated.

To be effective, a prospective hospital reimbursement scheme must deal with three elements: (1) intensity of care, (2) utilization and (3) routine operating costs. By focusing on only one of the above elements, such as routine operating costs, every hospital can too easily increase its revenues by expanding the other two elements.

The recent staff report of the Council on Wage and Price Stability, "The Rapid Rise of Hospital Costs" shows that the intensity of care has been the primary cause of hospital cost inflation.

A study sponsored by the National Planning Association, "Technological Diffusion in the Hospital Sector" shows that intensive care units (ICUs) in hospitals were relatively rare in 1958 when nine percent of all community hospitals reported them. By 1974 virtually all hospitals with 200 or more beds reported having ICUs, 85 percent of those with 100-199 beds had them and 40 percent of those with fewer than 100 beds had them. We would suggest that the great majority of ICUs in hospitals with less than 200 beds are an unnecessary expense if they are within one hour of a medical center or large hospital by motor or air ambulance.

The study reported similar problems with respect to therapeutic radiation equipment and open heart surgery units. Not covered in the study is the proliferation of CAT (computerized axial tomography) scanners. No doubt the

CAT scanners are a useful diagnostic tool but must every hospital have one? Once purchased at a cost of $300,000-$500,000 they will have to be amortized.

It is important to recognize that new technology and new equipment is invariably purchased without evaluation as to their effectiveness. One study in Britain found that survival rates for heart attack victims were at least as good for patients cared for at home as for those who received intensive care.

Yet, we find very little in S. 1470 which addresses the problem of proliferation of medical technology which is never evaluated in terms of life saving potential nor cost effectiveness. In fact, S. 1470 would invite escalation of these costs.

In the first place, the bill relies on the health planning legislation to control capital expenditures. This legislation has been in effect for ten years now, and there is not a shed of evidence that planning has been able to control capital expenditures for new technology. With the passage of Public Law 93-641, Congress has given planning agencies now powers. Hopefully, these new powers will curtail such capital expenditures. However, we are skeptical. In the first place a minimum representation of providers on Health Systems Agencies Planning Bodies must be from 33 to 49 percent. Their pocketbooks are directly affected by planning decisions. but the pocketbooks of consumers are only indirectly and remotely affected by such decisions. At any given meeting, therefore, the majority of those in attendance will likely be providers.

Secondly, the ancillary service costs would continue to be uncontrolled so that medical technologists required for the operation of new equipment would be exempt from the prospective reimbursement provisions of S. 1470.

Third, section 2(aa) (4) (F) states: "If a hospital satisfactorily demonstrates to the Secretary that, in the aggregate, its patients require a substantially greater intensity of care than is generally provided by the other hospitals in the same category, resulting in unusually greater routine operating costs, then the adjusted per diem payment rate shall not apply to that portion of the hospital's routine operating costs attributed to the greater intensiy of care required."

What patients require with respect to intensity of care is a medical decision and there is a community of interest between the medical staff and the hospital administrator with respect to increasing the intensity of care.

Fourth, the incentive reimbursement provisions of the bill specifically exclude "direct personnel and supply costs of hospital education and training programs" as well as the "costs of interns, residents and non-administrative physicians." Thus, there is an incentive for every hospital to institute, if it doesn't have one, an educational and training program.

It is our conclusion that S. 1470 would accelerate the trend to more and more intensive care-the primary cause for hospital cost inflation.

S. 1470 does not have any provision that would stop hospitals from increasing utilization, the second most important factor in controlling hospital costs. As we understand the bill, the Secretary would be required to establish a classification system for short-term general hospitals based on the number of beds in the hospital.

The "routine operating costs" of all the hospitals in each category would be averaged. This average cost would become the hospital's per diem payment rate for "routine operating costs" for services to patients covered by Medicare and Medicaid. After the per diem payment rate had been thus established, therefore, any increases in hospital utilization would result in lower costs and a larger surplus which would have to be shared with the government. This would be a built-in incentive for hospitals to increase utilization for Medicare and Medicaid patients. Thus utilization, the second largest factor responsible for rising hospital costs, would be encouraged.

Moreover, hospital administrators are not going to lock favorably upon returning one-half of any savings back to the government. They would have, on the contrary, an incentive to increase the intensity of care by, for example, purchasing a CAT scanner or some other expensive equipment. Hospital administrators are in no position to resist the demands of the medical staff because their customers are doctors, not patients. The transfer of the affiliation of even one doctor to another hospital would result in a substantial loss in hospital


While S. 1470 does little to control the most inflationary elements of hospital costs, it would control the wages of hospital workers. It is the position of the AFL-CIO that the wages of nonsupervisory employees must be determined by free collective bargaining where such employees are organized.

The incentive reimbursement system applies only to routine operating costs such as the cost of supplies and food which are only marginally controllable by the hospital. The controllable items of routine operating costs, the wages of nurses, the wages of clerks and stenographers, the wages of janitors and engineers in the maintenance department, would be controlled by the bill. The costs of capital, costs of education and training, physician costs, energy costs, fuel costs, malpractice insurance expense and ancillary service costs (not defined) would continue to be reimbursed on a cost-plus basis under Medicare and Medicaid. In fairness, routine operating costs would include the salaries of management and supervisory personnel. However, we consider it highly unlikely that management would cut their salaries or even hold them constant. In our judgment, S. 1470 is not a cost containment bill. Rather, it is a wage control bill. No wonder the hospitals favor S. 1470 over the Administration's Bill, S. 1391.

Hospital wages still lag behind the average wages for all private nonsupervisory employees and even behind the average wages for service employees. In 1976, the average hourly earnings of nonsupervisory employees in all nonfarm employment amounted to $4.87. For service employees, it was $4.36 and for hospital workers only $4.18. Assuming a full work-year of 2080 hours, the annual earnings of the average hospital worker would come to $8694, substantially below the level of an austerity budget of $10,041 for a family of four in an urban community. From 1968 to 1976 the wages of hospital employees increased by only $1.87 while those of employees in service jobs increased by $1.93 and of all nonsupervisory employees in private industry by $2.02 even though it was during this period that hospital employees gained coverage under the Fair Labor Standards Act and for the first time large numbers of them were benefited by collective bargaining negotiations. (See Appendix A for the average hourly earnings for all private employment, all service employment and hospital employment from 1968 to 1976).

Collective bargaining settlements in the hospital industry have been modest. In 1975, the median bargained wage increase amounted to 7.7 percent. In that year, the cost-of-living rose 9.1 percent. Even organized hospitals were unable to keep up with the cost-of-living. In 1976, the average negotiated wage increase amounted to 6.4 percent while the cost-of-living increased 5.8 percent which still meant a drop in real wages over the two-year period.

The AFL-CIO unions with substantial membership in the hospital industry are the Service Employees International Union and the American Federation of State, County and Municipal Employees. These unions will be testifying in more detail with respect to wages in the hospital industry and with respect to their collective bargaining contracts.

The recent staff report of the Council on Wage and Price Stability, "The Rapid Rise of Hospital Costs," clearly shows that hospital wages have only been a minor factor in escalating hospital costs. Total labor costs were the source of only about one-tenth of the annual increase in average costs per patient per day. According to the American Hospital Association, payroll expenses have steadily declined as a proportion of total hospital expense from 66 percent in 1962 to 51 percent in the last quarter of 1976. But AHA payroll data includes salaries of supervisory employees. The percent of hospital expenses represented by nonsupervisory employees is only 35 percent.

Thus, wage increases of nonsupervisory employees have almost no bearing on the runaway inflation in hospital costs.

The principal cause of hospital cost inflation is not wages but the control doctors exercise over the manpower and capital resources of the hospital. This control in voluntary hospitals is exercised without any accountability to either the hospital or to the public. The result is dual administration, poor planning, duplication of expensive and seldom used equipment and the purchase of new equipment the effectiveness of which is seldom evaluated.

Therefore, we find particularly objectionable Section 2(b) (aa) (3) (E) of the bill which, in effect, would establish a system of wage control. It would limit wages and salary increases for hospital employees, but not for.doctors, in areas where wages and salaries are generally low. Paradoxically, in highly organized areas where wages were already at more adequate levels but where wages in some hospitals lagged behind the average, some hospital wages would be allowed to rise to the average wage level provided the hospitals were not in the high cost bracket. But high cost hospitals, at or close to, the 120 percent ceiling would not be able to raise the wages and salaries of their employees even if they were below the average in a given area. Where hospital wages are higher than the

average wage level, such as might happen in small communities where the only organized employees are hospital workers, the wages of hospitals would have to be lowered to the average wage after October, 1979. We find this is completely unacceptable and clearly inconsistent with the principles of free collective bargaining.

There are other difficulties. The average general wage levels are simply not available throughout the country. Nor are the average wage levels of hospital employees. The gathering of such information would run into millions of dollars. Moreover, even if it were possible to gather this data it would not be useful. It would be like trying to compare oranges and apples. The mix of skills in hospital employment is very different from the mix of skill in the general community.

Another weakness of the bill is that the reimbursement method would apply only to Medicare and Medicaid payments.

In our opinion the approach to hospital cost containment of the Administration's Bill, S. 1391, is far superior to that of S. 1470. S. 1391 establishes a ceiling on each hospital's total revenue. The result would be that each hospital would have to address itself to all three elements that cause hospital cost inflation, namely: (1) intensity of care, (2) utilization and (3) efficiency of operation. Although the cost constraints would be more effective each hospital would have more flexibility than under S. 1470. To hold to the estimated "cap" of an allowable nine percent increase in total revenues, a hospital could, for example, close down a seldom used open heart surgery unit, eliminate its intensive care unit, sell its seldom used high voltage radiation therapy unit or defer purchase of a CAT scanner provided, of course, such units and scanners were available in the community. The hospital could bring pressure to bear on its medical staff to reduce unnecessary utilization or increase the efficiency of its operation or even resist wage increases for their underpaid employees. All these options and more would be available to the hospital.

The Administration Bill, moreover, would only require a small staff to enforce its provisions. S. 1470, on the other hand, would require an army of investigators and volumes of regulations.

We do recognize that S. 1391 can only be a short-term solution to escalating hospital costs. The high cost inefficient hospital can increase revenues by nine percent-the same percentage increase that is allowed an efficient low-cost hospital. In short, inefficiency is rewarded and efficiency penalized. But all that is required is a short-term program. Our main objection to the Administration Bill is that it also attempts to control wages. (See Appendix B for the summary of our statement on S. 1391 before the Senate Resources Committee).

The Carter Administration plans to introduce a national health insurance bill by March 31, 1978. Whatever program the Administration proposes, it will have to deal with escalating medical care costs. We think the most effective and flexible cost containment measure would be a negotiated budget on a hospital by hospital basis. In any event, we are strongly convinced that Congress should not enact a long-term program which might have to be dismantled when the thrust of the Administration's national health insurance program becomes clear.

SEC. 10. Agreement by physicians to accept assignments

With respect to physician reimbursement, S. 1470 treats doctors very gently. Under the bill there would be "participating" physicians under the Medicare program. A participating physician would be one who agrees to accept assignments in full reimbursement for services to Medicare patients.

Participating physicians would be allowed to submit their claims on a simplified, multiple-listing basis rather than submitting individual claim forms. It is estimated that the simplified multiple-listing form would save $1 in administrative expense which would be passed on to the participating physician. In addition, it is claimed that the simplified multiple-listing forms would also save the participating physician another $1 in billing, collection and office paperwork costs and thereby result in an extra $2 of income for the participating physician.

While we find the $1 reduction in Medicare administrative costs creditable, the experience of the United Mine Workers of America with their simplified multiplelisting claim forms for their participating physicians indicates the doctor does not save anywhere near an additional $1 in his office costs.

But even if participating doctors could save $1 in their office expense by using simplified multiple-listing claim forms, this together with the extra $1.00 allowed

by Medicare would come to an increase in income of $2.00 per patient encounter for the participating physician. Most doctors who refuse to accept Medicare assignments charge more than $2.00 over the usual and customary fee allowed by Medicare.

As an alternative to the bill's approach, we recommend a negotiated fee schedule in the various Medicare reimbursement areas for Part B of Medicare. Physicans should then be required to accept such fee schedules in full payment for services rendered. However, to be fully effective such fee schedules should be applied across-the-board, not just to Medicare. Otherwise physicians would likely raise their fees for private patients, thereby creating three levels of care: one level for private patients, another level for Medicare patients and a bottom level for Medicaid beneficiaries.

Physicians should also be free to select payment by capitation for patients who choose to receive all of their primary care from such physicians. Physicians who elect capitation as a method of reimbursement for their services might well discover that such a payment mechanism results in better continuity of care for the patient and almost no paperwork since a separate claim for each service is unnecessary.

The experience of HMOs has shown that capitation payments reverse the incentives of physicians. Under fee-for-service, doctors make more money for treating sick patients; and the sicker the patient, the more the doctor makes. Under capitation, doctors make more money if they keep their patients well.

Capitation is the way in which medical groups are generally reimbursed in prepaid group practice plans. This is the primary reason hospital use in such plans is two to two and one-half times lower than in fee-for-service reimbursement by Blue Cross-Blue Shield and commercial insurance plans.

We strongly support Section 4(d) (B) (2) which allows the Secretary to determine that an exclusion of expenses related to any capital expenditure by a Health Maintenance Organization which has demonstrated that it can provide health services economically and that such exclusion would discourage the operation or expansion of such HMO, then such expenses related to capital expenditures would, regardless of need, be allowed.

Section 12 of S. 1470 would not recognize for Medicare and Medicaid reimbursement purposes percentage or lease arrangements for radiologists, pathologists and anesthesiologists where such arrangements resulted in higher costs than if such specialists were employees of the hospital. We support this provision in the bill which would limit these arrangements.

We also are in favor of Section 14 which would permit payment by Medicare on the basis of a non-receipted bill for care directly to the legal representative of a deceased Medicare beneficiary but suggest this problem could better be handled by requiring all physicians to accept assignments for deceased Medicare beneficiaries.

The AFL-CIO strongly supports Section 22 of the bill which would make the Secretary of HEW the final certifying officer for skilled nursing and intermediate care facilities under both Medicare and Medicaid. Present law gives the Secretary this authority with respect to skilled nursing facilities participating under Medicare only, or both Medicare and Medicaid, but not where they participate only under Medicaid. Thus, substandard nursing homes have continued in operation by accepting only Medicaid patients.

We find Section 30 which establishes a Health Care Financing Administration by law redundant since the Secretary of HEW has already begun to reorganize the Department by establishing a Health Care Financing Administration.

Section 33 of S. 1470 would terminate the Health Insurance Benefits Advisory Council (HIBAC). The AFL-CIO deplores this provision. HIBAC does provide some measure of public accountability in the administration of Medicare and Medicaid and can make a major contribution to these programs. The advisory council should be continued.

We disagree, however, with Section 44 which would prohibit the release of the names of physicians who have been paid large amounts for treating Medicare patients. Admittedly, HEW has made some serious errors in releasing such information and such errors must be corrected in the future, but the public has the right to know what physicians are exploiting the program.

Section 46 of the bill increases the rate of return on net equity of for-profit hospitals and skilled nursing homes to two times the average rate of return on Social Security investment from the present one and one-half times. We feel this

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