which is "usual, customary and reasonable." The private payors make up the difference and thus attract the most physicians. More importantly, we feel Congress must soon address the major issue of medical manpower: over abundance and the perverse impact supply has on demand in the medical care marketplace. Recommendations, comments and questions

1. The revenue controls must be designed to avoid an increase in utilization to compensate for the reduced per diem revenue.

2. Apply the controls to all care, not just in-patient. We, too, favor incentives to increase the use of out-patient care. But, such incentives must be accompanied by controls which preclude shifting expense allocations from in-patient to out-patient categories. That type of shift would defeat the overall cost containment objective and, inflate and distort the cost of out-patient care.

3. We recommend the retention of the Health Insurance Benefits Advisory Committee (HIBAC).

4. We endorse the concept of bonus payments for those institutions whose routine operating costs fall below the group average. However, we seriously question whether it is good policy to fully reimburse a hospital when its actual costs exceed "target rates" by as much as 20%. This overrun percentage is too high to compel management to eliminate wasteful procedures.

5. On the issue of closing hospitals, three major problems need more consideration:

A. How is the value to be determined for proprietary hospitals for which the investments were made for reasons very different than those in the NotFor-Profit class?

B. How does the "buy-out" concept apply to older, fully paid for institutions? C. Does the "buy-out" concept apply to projects now underway but not yet in their construction phase? We believe it should.

And a word of caution: new facilities, if well designed, can be cost savers and should not automaticlly be viewed negatively.

6. We recommend that a careful review be established covering the reporting requirements of all health programs such as Planning, HMO, PSRO, State rate review, Medicaid, Medicare, etc. The more the government becomes involved, the more necessary such a review becomes.

7. Nursing homes, hospital leased space, ambulatory care and surgi-centers should all be included in the legislation.

8. While we agree with the objective of encouraging physicians to accept assignment, we question whether the $1.003 incentive is an adequate inducement. We are also very concerned that the bulk-billing provision appears to be an open-ended invitation to fraud. As written, the bill may cause assignment rates to drop.

9. Section 11, (E) would establish Statewide prevailing charge levels. It is not clear how that would adequately reflect the wide variations between, for example, Chicago and the rest of Illinois.

10. Why should 75% of the current pre-state error rate be acceptable? At least, the bill should provide a phased-in reduction which in three years would bring the rate down to 25%. If left as is, 75% will quickly become the new minimum. Further, it does not seem reasonable to demand the same degree and speed of improvement in all of the states. The worst States should be given the most stringent requirements.

11. Considering the recent HEW study which showed that some $532 million could be saved by hospitals through energy conservation techniques, it would be appropriate for S. 1470 to explicitly encourage capital expenditures for this purpose.

12. Malpractice expenses should not be excluded from operating costs. First, the major malpractice costs result from so-called “defense medicine": otherwise unnecessary tests and diagnostic procedures. It is impossible for a government program to determine, for every hospital procedure, what was or was not "necessary". Second, if excluded, the hospital loses the economic incentive to help keep their costs under control.

13. Ancillary service costs should not be excluded. For many hospitals, these costs comprise a very significant percentage of daily revenues; a percentage sure to increase rapidly if excluded from the reimbursement controls.

14. All reporting which have a bearing on hospitals' certification-of-need should be directed to go the Secretary of HEW through the local Health Systems Agency.

CONCLUSION

For the many elements of S. 1470 to be implemented, it will be necessary to have, in place, an effective health planning system. Currently, the HSAs are not sufficiently funded or staffed to do all that is required. Nor, in our view, is P.L. 93-641 strong enough. The following suggestions are steps we feel would need to be taken to provide a planning process of sufficient magnitude and strength to support the objectives of S. 1470.

1. A recertification process, coupled with strong public disclosure requirements. 2. Decertification and reassignment of function is needed.

3. The certificate-of-need procedure should include all medical and health facilities (home health, ambulatory care, corporate extended care clinics, leased space, site and facilities acquisition, and all government beds and facilities). 4. Large capital expenditures for equipment should also be subject to certification, no matter where that equipment is to be located.

5. For the planning process to work, a major effort must be directed at establishing scientifically valid and publicly accepted measures of health and medical outcomes, cost-benefit relationships and medical-hospital standards of risk and efficiency.

6. Credit should be given, during the certification process, for those applications which contain a commitment to nutrition, immunization, hypertension treatment and other health education and life-style improvement objectives. 7. The mandatory consumer majority should be retained. But doing so involves a commitment to the time and resources necessary to help educate those who have had little or no prior contact with the health system.

8. The national health policy formulation, called for by P.L. 93-641, must get underway with full participation by all sectors.

9. A process of medical technology assessment must be established.' Its product should be made available to all health planners and its process made an ongoing part of medical education. This must be designed to control access to the marketplace without inhibiting innovation and investment in research.

With the preceding suggestions and comments, we hope we have made a small contribution to the objective we all share: reduced medical care cost escalation without sacrificing quality care or access to needed services.

APPENDIX B

HEALTH CARE EXPENDITURES AND THEIR CONTROL-BY THE HEALTH STAFF, EDUCATION AND PUBLIC WELFARE DIVISION, CONGRESSIONAL RESEARCH SERVICE, LIBRARY OF CONGRESS

HEALTH CARE EXPENDITURES AND THEIR CONTROL

ABSTRACT

This paper examines the issue of rising health care expenditures, an issue of current concern as Congress examines proposals to control hospital costs, proposals to improve the administration and control the escalating costs of the Medicare and Medicaid programs, and national health insurance proposals. Four major aspects of this issue are described in this paper; the fifth section deals with questions for analyzing any health expenditure control proposal:

I. This section includes various data on rising health expenditures including national health expenditures, personal health care expenditures, sources of payment for health care, and measures of price and cost increases for health care.

II. The reasons why health care expenditures are an issue are explored, such as their impact on public expenditures, industry expenditures, and expenditures by the consumer through direct payments, insurance premiums, taxes, foregone wage increases, and an increased cost of living.

III. The many factors contributing to rising health care expenditures are examined, such as increased health resources, third-party coverage, and reimbursement methods.

IV. Many of the attempts, proposals, and theories to control rising health care expenditures are described, such as the Economic Stabilization Program, health facility planning, and efforts to limit reimbursements to providers.

V. Several questions which should be asked when examining a proposal to control health expenditures are given.