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is unconscionable since investigations by the Subcommittee on Long-Term Care of the Special Committee on Aging of the Senate have revealed deplorable and exploitive conditions in the for-profit nursing home industry. We oppose this provision.

In conclusion, Mr. Chairman, we believe the cost control provisions of Health Security-that is, a budgeting system for institutional services-would be the most effective way by which the escalation of hospital costs could be contained. Admittedly, such a control would best be carried out if all payments for health services were channelled through a single agency of government such as in Health Security.

In order for such a program to work, it is quite clear, in our opinion, that the budget review must encompass the hospital's total budget and not just that part of the institution's budget that would apply to Medicare and Medicaid beneficiaries. Caps on part of the hospital budget for federal and state beneficiaries would leave health care institutions free to raise charges to private patients. This merely shifts costs but does not contain them. The premium cost to collectively bargained health plans would increase, along with all other premiums, to cover any shortage of payments for Medicare and Medicaid beneficiaries.

For physicians, we would support negotiated fee schedules which should be accepted by doctors as full payment for services rendered. These fee schedules would also have to be applied across-the-board. Capitation payments should be an alternative method of reimbursement for those practitioners who elect this method of payment.

We hope the Health Subcommittee of the Senate Finance Committee will give consideration to our views and that only a temporary cost containment program along the lines of the Administration's proposal but embodying the changes we have suggested should be enacted until such time as the Administration has the opportunity to introduce a national health insurance bill next year.

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On behalf of the AFL-CIO we wish to express our appreciation for the opportunity to testify before the Subcommittee on Health on the Hospital Cost Containment Act of 1977 (S. 1391).

S. 1391 establishes a Federal program of hospital cost containment which is designed to place a ceiling on future increases in hospital costs. The average cost of a hospital stay has been increasing at about double the rate of the increase of the Consumer Price Index. Clearly, something must be done to contain the escalation in hospital costs.

The Administration's bill has some strengths and some weaknesses. One strength is its provisions to place a ceiling on total hospital revenues. This comprehensive approach would contain not only hospital charges but also ex

cessive utilization of hospital beds and extravagant use of personnel and capital resources, some of which is of marginal value in diagnosing and curing disease. However, a ceiling on hospital revenues can only be a short-term solution to the hospital cost escalation problem. As time goes on, any attempt to regulate a single industry to the exclusion of others tends to build up distortions and stresses with respect to the allocation of human and capital resources. The high cost inefficient hospital would receive the same nine percent increase in revenues as the low cost efficient hospital. Inefficiency would, therefore, be rewarded and efficiency would be penalized. Also, even if hospital costs are contained, S. 1391 does nothing about the escalation of doctor fees or the increasing costs of drugs, nursing home care and home health services. Voluntary hospitals will inevitably attempt to transfer their expensive patients on to the public hospitals in order to contain their costs.

We see no reason why big-city public general hospitals should be covered under the bill. Such hospitals are already under stringent municipal and county budget controls. In fact, these hospitals are underfunded.

A much more effective way in which to control hospital costs would be to phase-in the principles of the Health Security Bill (S. 3) introduced by the distinguished Chairman of this Subcommittee. Under this approach, the Health Security Board would be empowered to negotiate hospital budgets on a hospitalby-hospital basis. Such an approach would provide flexibility, equity and maximum adaptation to local circumstances.

The wages of nonsupervisory employees lag behind the wages of such employees in private industry generally and in the service industry. For this reason, the wages of hospital employees should be established through free collective bargaining and not be restrained by the hospital cost containment program. In recent years, the average wages of nonsupervisory employees in hospitals have risen less than nine percent annually and, therefore, pose no threat to the nine percent increase in hospital revenues which would be allowed by the bill.

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 expenses 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, since wage increases of nonsupervisory employees have no bearing on the runaway inflation in hospital costs, we strongly urge the exclusion of the wages of nonsupervisory employees from the hospital's base accounting year for purposes of determining the allowable increase.

However, request for such exclusion should not be optional with the hospitals as is provided in Section 124 of S. 1391. This section purports to exempt nonsupervisory personnel wage increases from the hospital revenue limit. Instead, it provides an incentive for hospitals to continue to increase expenditures in those areas which have been most responsible for health care inflation. This loophole is provided by the optional nature of the recalculation of revenue limits as stated in Section 124. In short, if hospitals request a modification of their revenues to eliminate the effects of nonsupervisory wages, then nonlabor costs can only rise by the permissible limit (e.g., nine percent). If, on the other hand, a hospital does not request such a modification, then it is possible for nonlabor costs to rise by as much as 14 percent by shifting the burden of the program onto the shoulders of low-wage workers by not granting such workers any increases.

The example that is contained in our full statement illustrates the problem. The solution to this flaw in the legislation is to require the Secretary to modify for all hospitals the inpatient hospital revenue limit to assure exclusion from the base of any wage increases of nonsupervisory employees.

This can readily be accomplished by dropping the language at the beginning of Section 124 (a) which states:

"At the request of any hospital which is subject ot the provisions of this title and which provides the data necessary for the required calculation." A major problem with the bill is that it initially allows a minimum of six states to opt out of the federal hospital cost containmest program and operate

their own program as long as such states meet the Federal criteria. However, the provisions in the Federal law which are designed to provide for free collective bargaining are not included as one of the requisites for such state administration. In addition, other states could opt out of the Federal program in future years thereby emasculating uniform and effective administration.

The AFL-CIO strongly favors a Federal program with uniform standards and uniform administration. If, however, states are allowed to administer their own program, one criterion that should be required of the states would be that they adopt the Federal standard which would exclude nonsupervisory wages from the cost containment formula. This is implied in President Carter's health message but it is not specifically included in the bill.

Highly objectionable to the AFL-CIO is the provision in the bill which provides that the Secretary of the Department of Health, Education and Welfare would have the authority to review but one aspect of the program-the provisions relating to wages-and subsequently be able to modify or eliminate the exclusion of nonsupervisory wages. It is the position of the AFL-CIO that the Secretary should report to the Congress as to how the entire program is working within eighteen months so that Congress can take whatever action it deems appropriate. S. 1391 cannot be more than a temporary program since the regulation of a single industry involves many complexities and potentially serious distortions. The entire program, therefore, should be reviewed by March 31, 1979. The disclosure requirements of the bill are completely inadequate. As stated by AFL-CIO President George Meany, "for too long, hospitals have operated under a veil of secrecy despite the fact that tax dollars are a major source of hospital income. Taxpayers have a right to know how these funds are expended." Public disclosure of each hospital's total receipts, expenses, assets and liabilities should be required. Hospitals should disclose the salaries of all highly paid employees including their fringe benefits. Detailed conflict-of-interest statements should be required of highly paid administrators and hospital trustees. In particular, the total receipts of a hospital's pathology and radiology departments should be dis closed. If anesthesiologists, pathologists and radiologists bill separately for their services, all such physicians should disclose their gross and net incomes. Additional information that the public should know would be hospital charges and whether the hospital has a preadmission certification program, whether the hospital requires a second opinion for elective surgery and whether the hospital shares services with other hospitals to avoid duplication of services.

Voluntary nonprofit and for-profit hospitals should not be allowed to transfer their expensive and nonpaying patients onto the public hospitals. The provisions of S. 1391 intended to deal with this problem need to be strengthened.

The AFL-CIO favors the proposed limitation on hospital capital expenditures but would suggest prepaid group practice plans to be given a priority for such capital expenditures as HMO hospitals reduce the total need for hospital beds.

In conclusion, Mr. Chairman, we approve the basic thrust of this bill which would establish a ceiling on hospital cost increases but the burden of cost containment must not be borne by low-paid hospital employees. We strongly urge that the improvements we have suggested be incorporated into the final bill that is reported out and passed by the Senate.

Senator TALMADGE. All too often we do not give enough recognition to those outstanding Federal employees who do a really good job. The health staff of the Education and Public Welfare Division of the Congressional Research Service typifies what good public service should. be. The health staff has just produced an outstanding document entitled "Health Care Expenditures and their Controls." In one place, we can find virtually all of the information necessary to evaluate the present health care picture in the country. I commend the publication to all those interested in health care and its financing.

I ask, without objection, that the document be made a part of the record at this point.*

See app. B, p. 588.

The next witness is Dr. Raymond T. Holden, chairman of the Board of Trustees of the American Medical Association; accompanied by, Edgar T. Beddingfield, Jr., chairman, council on legislation.

We are delighted to have you gentlemen. You may insert your statement in the record in full and summarize in 10 minutes, if you will.



Dr. HOLDEN. Mr. Chairman, Senator Dole, we are pleased to present to this subcommittee the views of the American Medical Association on the important legislation, S. 1470, before you.

We have reviewed S. 1470 extensively and we commend the sponsors of this legislation for its broad coverage of a variety of issues in the medicare and medicaid programs. While we find that there are some provisions that we do not support, there are many others which we believe would be beneficial and for which we urge your favorable consideration.

One of the initial issues addressed in the bill relates to hospital costs. The intent of the hospital cost provisions is to provide a mechanism for controlling rising hospital costs. In any approach to this problem, it is important that solutions are not imposed that will adversely affect the quality of care available to beneficiaries of the Federal programs. As a matter of fact, it is important to note that attempts to curtail costs in those programs do in fact have a direct and substantial spillover effect upon all patients.

It is important that any cost containment measures be equitable for institutions, for patients and for third party payers while at the same time not compromising essential and desirable services and allowing for continued advances in hospital services incorporating the latest in technological developments.

One approach, Mr. Chairman, that of the administration, would impose an arbitrary ceiling or "cap" on total hospital revenues. We have opposed this approach because we feel it lacks appropriate flexibility, provides disincentives for efficiency and in fact would reward inefficiency. Most importantly that proposal would impact unfavorably most directly upon the continued provision of quality care.

On the other hand, S. 1470 contains provisions which attempt to meet the hospital cost problem in a more positive and equitable manner. Mr. Chairman, notwithstanding our belief that S. 1470 is a more realistic program, we also believe that adoption of the program in the manner presently proposed could have uncertain and perhaps even undesirable effects. Risks of any single new program imposed nationally are not warranted at this time especially when there are other potential alternatives which merit similar consideration. Experiments with various reimbursement methods have not been fully implemented and evaluated.

We would recommend that the cost containment incentive program of S. 1470 be the subject of experiment and demonstration in a limited

geographic area before being considered for nationwide application. We feel that all interested parties would benefit from such a procedure.

Another provision addresses hospital costs by encouraging the voluntary elimination of underutilized beds and the closing of facilities or parts thereof. We think this approach in the bill can be beneficial and we support this. We do raise a question as to whether the supporting funds should be taken from patient care funds. This is one of the questions which need to be determined, and the fact that a new program has uncertainties emphasizes the advantages to be gained by initiating the program on a limited or experimental basis, as is the case here.

Mr. Chairman, we also have recognized the problem of increasing health costs and are seeking solutions. I wish I could tell you now that we have the answers, but we do not. The problems are complex as you know, and we do not believe anybody has complete answers. In an attempt to find solutions, however, we have established our national commission on the costs of medical care. That commission is broadly based and draws its membership from leadership of all sectors: Economics, government, labor, insurance, business, and the public. That commission, which has been meeting since early last year, has been charged with the responsibility to provide the AMA's Board of Trustees with a final report by January 1978, to contain:

One, a description of the health care delivery system;

Two, identification of the factors underlying the rising costs of medical care;

Three, a review and evaluation of existing research of the causes of medical care cost inflation;

Four, an evaluation of the impact of pending or future health care programs on the health care delivery system and medical care costs; Five, recommendations on policies that will contribute to containment of medical expenditures while providing quality medical care to the public; and

Six, recommendations and direction for future research programs. We note, also, that many State medical societies have expressed their concern about rising costs. Some are participating in the formation of local cost commissions.

Now, Mr. Chairman, Dr. Beddingfield will continue with our presentation.

Dr. BEDDINGFIELD. Mr. Chairman, among the changes proposed in S. 1470, there are several applying to physician reimbursement that we believe could have a detrimental effect on the availability and quality of care under these programs.

The first relates to the creation of a special class of practitioners, designated "participating physicians," and we note the beneficial change made in this provision from the earlier provision in S. 3205. Nevertheless, "participating physicians" would still be those who agreed to accept all medicare reimbursement for their services on the basis of assignments. Inducements, such as simplified claims procedures and an "administrative cost savings allowance" of $1 per patient, would be offered to encourage physicians to become "participating physicians.'

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