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Today, the major national Blue Shield accounts and many

of the plans offered at the local level have adopted the UCR method of setting allowable fees. Unlike the older plans with income limits, the Blue Shield UCR plans require participating physicians to accept Blue Shield allowable fees as full payment regardless of the patient's income level.

a. Medicare Payment Policies. The physician reimbursement provisions of the Medicare program were modeled after existing UCR plans. A succession of administrative policies and legislative changes have been adopted since the original 1965 legislation to limit increases in the amounts allowed as reasonable charges for Medicare reimbursement. Two of these policies mandated by the Social Security Amendments of 1972 provide that:


The customary charge recognized for a particular physician for a given service is to be updated each year and is to be based on the actual charges made by that physician during the preceding calendar year. This creates as much as an 18-month delay in recognizing increases in the physician's customary charge.

--The prevailing charge limit for a particular service in an area is updated each year and is set at the 75th percentile of customary charges made by physicians in that area for similar services during the preceding calendar year.

The increasing restrictiveness of the Medicare allowable fee policies was seen as necessary in view of the large increases in physicians' fees that have taken place since the program began. First, by limiting allowable fees, Medicare program costs are reduced. Limits on Medicare allowable charges also serve to dampen fee increases by holding the physician to the allowable charges and by strengthening beneficiary pressures on physicians to keep their fees within covered limits.

b. Medicaid Payment Policies. The original Medicaid legislation enacted in 1965 did not place any limit on the physician fees which the States could reimburse. The States, however, did set limits of their own, typically less than usual, customary, and prevailing charges.

The Social Security Amendments of 1967 required that State Medicaid plans must assure that "payments are not in excess of reasonable charges consistent with efficiency, economy, and quality of care." In 1971, Federal regulations were issued providing that payments to physicians and other practitioners could not exceed the "prevailing charge" recognized under Medicare. This regulation was embodied in law by the Social Security Amendments of 1972.

Some State Medicaid programs pay physicians the same amounts as are allowed under Medicare. Most, however, base their payments on fee levels that prevailed during an earlier period than the

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Medicare base period or set the limit on physicians' payments in relation to a lower percentile than Medicare. In some cases, the State makes further reductions in the amounts payable in order to bring program costs within budgetary restraints set by the State.


Physician Reimbursement Studies. Research data on the economic aspects of physician practice are very limited at this time. To correct this deficiency a number of studies have been undertaken to study the effects of alternative reimbursement methods. This research will utilize data collected by insurance carriers, medical organizations, consumer groups, consultants, and others to investigate and clarify the issues associated with payment for physicians' services.

C. Health Facility Planning

A number of efforts to plan for increases in health facilities, services, and equipment have been undertaken, with one goal being to limit unnecessary, costly surpluses in health resources. Descriptions of these efforts follow.

1. Hill-Burton Program. The earliest Federal effort on behalf of health planning was incorporated as part of the Hill-Burton program enacted in 1946. Primarily designed to provide funds for construction and modernization of health facilities, the program also stipulated that each State conduct a survey of its need for various health facilities and develop an individual State plan to meet these needs. However, various evaluations of the program (now largely replaced by the National Health Planning and Resources Development Act of 1974) have revealed that it was hardly a victory for health planning. Geographic location of hospitals built under Hill-Burton often bore no detectable relationship to those areas where health levels were worst. Critics charged that the program may have actually contributed to the current problem of excess bed capacity, particularly in rural areas where population has dwindled since facilities were constructed. Perhaps most importantly for health planners, the Hill-Burton formula for projecting need for facilities was based on current hospital utilization rates, thus not accounting for trends and prospective changes toward more efficient and appropriate utilization of hospital beds.

2. RMP's and CHP's. During the 1960's, the government embarked upon a series of programs to support and integrate health planning activities at the regional, State, and local levels, including the regional, or areawide, voluntary health facilities planning agencies (1964), the Regional Medical Programs (1965), and the Comprehensive Health Planning Program (1966). Despite their many contributions, these programs were hampered by austere financing, overlap and duplication of responsibilities, and absence of a sufficient mandate for implementation of their plans. Health planners were concerned over lack of Federal guidance as to national health priorities and goals. Planning agencies were in turn accused of paying insufficient attention to cost containment as it related to capital development and expansion.

3. P.L. 93-641. Concerned over the fragmentation and mixed success of earlier planning efforts, Congress moved in 1974 to combine and integrate these programs through enactment of the National Health Planning and Resources Development Act (P.L. 93-641). The Act provides for the creation of a nationwide network of about 200 local Health Systems Agencies (HSA's) and the designation in each State of a State Health Planning and Development Agency assisted by a Statewide Health Coordinating Council. Among the responsibilities of the new HSA's are the development and implementation of plans for needed health services and facilities in their respective health service areas, allocation of grants for development of needed resources, and approval of each proposed use of Federal health funds in their area. State agencies are to prepare State health plans and administer certificate-of-need programs whereby proposed construction of health facilities must be approved as satisfying a community need.

The primary missions of the new planning agencies include (1) coordination among the diverse elements in the health care delivery system; (2) development of necessary health resources while preventing costly surpluses; (3) improvements in the distribution, efficiency, continuity, and quality of health care services; and (4) restraint over cost increases for health services. The last goal--cost containment -is viewed by many as perhaps the most crucial and most difficult to attain. For example, a report by the Institute of Medicine states:

"This will require the making of difficult and poten-
tially unpopular cost-benefit judgements. Such judg-
ments, if they are to be constructive, will have to
confront the realities of limited resources--to weigh
the cost part of the equation in the balance with
such benefits as quality and access. This involves
the making of choices which, in many cases, will hurt
some important interests in the community."

Although armed with broader mandates and stronger sanctions than in the past, health planners may still face serious obstacles in a system where the public good is only vaguely defined and where the interests of private owners, business, and professional organizations have frequently predominated over the need for economy and public accountability.

Significantly, the revised planning law provides that States must enact and administer certificate-of-need (CON) programs, to be applied to all proposed new institutional health services, in order to remain eligible for Federal funding under the Planning Act, the Community Mental Health Centers Act, and the Comprehensive Alcohol Abuse and Alcoholism Prevention, Treatment, and Rehabilitation Act. State CON programs must contain appropriate sanctions, e.g. denial or revocation of licensure, or civil or criminal penalties, which will preclude development of any such services for which CON approval has not been received.

Although more than half the States already have CON laws in effect, few have been in operation for three years or more. Furthermore,

various studies on existing CON programs have questioned their overall effectiveness in reducing the total dollar volume of investment in capital plant of health facilities. Reports have indicated that CON has appeared to influence the composition of investment by retarding expansion in bed supplies, but concurrently increasing investment in new services and equipment. Hospitals have often anticipated CON legislation by increasing investment in the period immediately preceding enactment.

CON programs now in effect have few, if any, controls to force institutions that are already in existence to reduce, close, or convert unneeded beds or services. Some States, however, have instituted the practice of denying CON approval for any new service or replacement of equipment sought by an existing facility unless it voluntarily reduces idle bed capacity, retires an underutilized service such as obstetrics, or takes other action viewed by the planning agency as desirable for reasons of economy or efficiency. As a result, CON programs have been criticized on grounds that they (1) allow for continued operation of many old or inefficient facilities, but limit entry into the market of new providers, and (2) exert unfair leverage on established institutions wishing to upgrade services or modernize existing plant, but apply no sanctions to nonapplicant hospitals operating uneconomic or ineffective services. Many planners fear that the absence of "decertification" or "recertification" authority over existing facilities will handicap any attempt to redistribute health resources on a more equitable and cost-effective basis.

4. Section 1122 of the Social Security Act. Prior to the enactment of P.L. 93-641, the Federal Government had given its formal approval of the CON concept in the 1972 Social Security Amendments. The amendments adopted a new Section 1122 of the Social Security Act providing certain limitations on Federal participation in capital expenditures under the Medicare, Medicaid, and Maternal and Child Health programs. The Secretary of HEW was authorized to withhold reimbursement for depreciation, interest on borrowed funds and a return on equity capital in connection with capital expenditures that had been made in spite of a finding that they were inconsistent with State or local health facility planning requirements. The provision applied only where the expenditure (1) exceeded $100,000, (2) changed the bed capacity of the facility, or (3) substantially changed the services provided by the facility.

At the present time, 40 States have chosen to participate in the Section 1122 program. Generally speaking, those States which already had CON programs have proved to be the ones most willing to participate. The program has also been attractive to States facing serious cost crises. Participation in Section 1122 has offered the States an opportunity to offset some of the costs of their existing CON programs or to place some kind of cap on their spiraling institutional costs. some instances where State legislatures have been resistant to CON legislative proposals, governors have been able to use the 1122 authority to accomplish similar ends.


By 1975, all States but West Virginia had either a certifi

cate-of-need law or a Section 1122 agreement with HEW, or both. In addition, some commercial lenders and governmental loan programs have recently instituted the practice of requiring an "1122 approval" before agreeing to help finance a particular project.

Several evaluations of the Section 1122 program have disputed its overall effectiveness in controlling total dollar investment in hospital capital plant. One study revealed that 75 percent of the sampled States had approved hospital bed supply in excess of 105 percent of their published Hill-Burton need projections five years hence. Other findings showed that, regardless of the type of controls in place, States approved more than 93 percent of all projects submitted and 90 percent of the dollar expenditures proposed. Proposals to purchase equipment or add new services were almost always approved, whereas new construction or expansion proposals had a comparatively lower approval rate. Those States which were most consistently effective in controlling hospital beds and assets had either a State rate review program or Blue Cross prospective payment system in place for hospitals. By placing institutions at risk with respect to future revenues, rate control programs apparently forced such institutions to more carefully weigh the economic and financial feasibility of capital projects.

D. Utilization Controls

One method of controlling health expenditures is to control the utilization of health services. Some methods to accomplish this follow.

1. Utilization Review, Professional Standards Review Organizations. During the last several decades, numerous studies have shown that there are substantial differences in the use of health services among similar populations based on differences in the way health care services are organized and paid for, differences in the availability of health resources, and differences in purchasing power. Studies have shown, for example, that persons enrolled in health maintenance organizations were hospitalized less often and had considerably less surgery performed than did otherwise similar groups of persons in the same area. Rates of surgery for such procedures as tonsillectomies may vary among areas in the same State. Such findings suggest an overuse of hospitals and surgery, and have stimulated interest in eliminating unnecessary uses of health services and in finding alternatives to institutionalization of patients.

The area of greatest concern is hospitalization, which is the single most expensive form of health care, with roughly 40 percent of our total health expenditures going for hospitals. There is a general concensus that (a) there is sufficient excessive health services utilization to justify action, (b) that the providers of health services have a major role in determining consumer demand for health services, and (c) physicians and hospitals, but particularly the former, should play the major role in reviewing the performance of their peers. The

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