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That no payments will be made under this subpara

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graph, in the case of a hospital, for October 1980 or any

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Senator TALMADGE. Many constructive changes in the present bill, S. 1470, were included as a direct result of the testimony received on S. 3205. I believe we have made a good bill better.

Another proposal now receiving active consideration in the House of Representatives, H.R. 3, might well be regarded as the offspring of S. 3205. H.R. 3 is the “antifraud and antiabuse" bill which includes among its key provisions important sections taken from S. 3205. House passage of H.R. 3 is anticipated this month.

It is my intention to move promptly in committee as soon as the House version of my antifraud and antiabuse legislation is referred to us. The need for basic reform of medicare and medicaid is urgent. The two programs will cost Federal and State taxpayers more than $47 billion in fiscal 1978—some $9 billion more than in fiscal 1977 and $15 billion more than the $32 billion cost in fiscal 1976. The increasing costs of these programs continually outstrip the rate of rise in Federal revenue.

The choice is a simple one—either we make medicare and medicaid more efficient and economical or we reduce benefits. Indeed, many States are already cutting back on their medicaid programs. But, there is an overriding need to get a handle on medicare and medicaid costs apart from the Federal, State and local budget effects.

There is no question but that the way we pay for care under our programs serves to inflate health care costs for all Americans. That situation needs correction now. There is an absolute need for Federal and State government to effectively manage the existing health care programs. It would be difficult, if not foolhardy, to extend health insurance coverage to other segments of the population until we are satisfied that we can properly manage what we now have.

This hearing, of course, is not on the subject of the administration's hospital cost containment proposal. While that bill must ultimately come before this committee, it is currently being considered by the Senate Human Resources Committee, which has jurisdiction over a part of the bill, and the Ways and Means and Interstate and Foreign Commerce Committees in the House of Representatives. At such time as the House completes action on the administration bill, or when the Human Resources Committee reports out a bill, we will of course give prompt attention to the proposal in the Finance Committee.

With respect to the hospital reimbursement provisions contained in S. 1470, support has been expressed based upon it being an equitable means of rewarding efficient hospitals and penalizing only inefficient institutions. The thrust of section 2 of S. 1470 is that the reasonableness of a given hospital's costs is to be determined by comparing those costs with similar costs in similar hospitals.

But at the hearing last year on S. 3205 and in discussion elsewhere this

year, three principal criticisms have been made of the hospital provision in both S. 3205 and the counterpart in the present bill, S. 1470. I think it is important that each of these points be addressed at the outset of this hearing.

The first argument is that section 2 of the bill applies only to the hospital care provided to medicare and medicaid patients—that it does not extend to the balance of hospital care. I indicated when introducing S. 1470 that, if a consensus developed to apply similar rewards and penalties across the board, I would not be averse to extending the provision to cover all hospitals. That is still my view and the staff of the committee has been working at my direction on possible approaches which could be considered if the decision is made to extend section 2 across the board.

The second argument is that the bill covers only adjusted routine hospital costs and does not apply to other hospital costs. The reason for this limited initial approach is simple. We did not believe that we had the expertise to make reasonable comparisons of costs other than adjusted routine at the outset of the program, but the bill specifically provides that, just as soon as that expertise becomes available, the scope would be broadened to include other hospital cost centers. In response to this particular concern, I have had the staff working and consulting to see whether the methodology in section 2 could be applied to more than just routine costs at the outset.

The staff now advises me that they believe it might be feasible to extend section 2 in such a way as to apply to something like 75 or 80 percent of hospital costs when it becomes effective. Assuming that the staff suggestion is reasonably workable and reasonably equitable, and if it includes appropriate appeals procedures to avoid unfair treatment, I would certainly be agreeable to modifying S. 1470. The staff advised me that they will have an outline for possible expansion of hospital costs initially covered by S. 1470 by the time markup on the bill begins.

The third criticism of the Talmadge bill is that its penalties and incentives would not apply until fiscal 1981 and that without something in between, hospital costs will continue to soar. I think that a careful reading of S. 1470 reveals that it will have a positive impact on hospital costs well before fiscal 1981. While, in fact, the penalties would be applied and the incentive payments made in fiscal 1981, those amounts would be based upon fiscal 1979 performance by the hospitals; that is, in the year beginning October 1, 1978.

The way it works is this—following the close of fiscal 1979, the Secretary has 6 months to gather and compare hospital cost data. By April 1, based

upon that data, he announces that, effective October 1, 1980, 6 months later, hospitals will be paid on the basis of their 1979 costs performance adjusted for the average of any inflation occurring between the end of fiscal year 1979 and the beginning of fiscal 1981.

The point here is that hospitals which are high cost or otherwise inefficient will have every incentive to moderate their operations in the year beginning October 1978, if not earlier, because that will determine whether they are penalized or rewarded in fiscal 1981. It is reasonable to assume that many hospitals will act in fiscal 1979 to moderate costs, where they can, in hope of gaining an incentive payment or avoiding penalty.

As a matter of fact, under the bill, the Secretary, in 1978, publishes advisory information showing hospitals where they would rank if the program had been in operation. The purpose of this is to give high-cost hospitals more time to adjust or moderate their operations.

I seriously doubt that in the relatively short time between now and October 1, 1978, that hospitals would indiscriminately allow their costs to go up. If they did so-and remembering that fiscal 1979 is the base year—those hospitals would run serious risk of having costs determined to be excessive or disallowed. I also think it important to stress

that the savings in the S. 1470 approach would derive from moderating the rise in hospital costs rather than the actual difference between the penalties and the incentive payments.

Some have engaged in a numbers game saying that my bill would only save such and such an amount. Unfortunately, their calculations are based only on simple subtraction—that is, adding up all the incentive payments and then subtracting that total from the reduction in payments to excessively high-cost hospitals. I cannot stress too much that the real savings will come from cost moderation and not penalties.

The reason is that high-cost hospitals will act to bring down their costs to levels which are fully reimbursed. Other hospitals will act to moderate their costs so as to gain incentive payments or to avoid moving into the range where a portion of their costs are not reimbursable. The effect of all of this will be to moderate the average costs of hospitals as they are recalculated each year.

This would occur as the high-cost institutions—those hospitals close to or above the penalty levels—moderated their costs thereby favorably affecting the average cost which is, after all, determined by calculating in both the higher and lower cost hospitals.

S. 3205 contained a section establishing a new agency, the Health Care Financing Administration. That agency was intended to consolidate medicare, medicaid, the Bureau of Quality Assurance, and some minor offices in order to cut redtape, eliminate overlapping and duplicative activities and personnel, and do away with the pancake layers of bureaucracy which repeatedly hampered effective and timely policymaking by the operating agencies.

I was more than pleased when Secretary Califano and President Carter announced that, under administrative authority, they were establishing the new Health Care Financing Administration. This was the first major reorganization undertaken. Unfortunately, the concept I had appears to have lost a great deal in translation.

The new Health Care Financing Administration, as proposed, appears in large part to represent nothing more than another massive bureaucratic boondoggle. A boondoggle which occurred because the dismantling of the Social and Rehabilitative Service—the welfare bureaucracy-happened simultaneously with the establishment of the Health Care Financing Administation.

The task force established to develop the structure and functions of the new Health Care Financing Administration consisted principally of people—not from medicare, medicaid or the Bureau of Quality Assurance-but rather from the defunct Social and Rehabilitation Service. In fact, the five-member so-called core staff developing the reorganization plan came directly out of the Social and Rehabilitative Service.

The people from the actual agencies consolidated-medicare, medicaid and the Bureau of Quality Assurance--those with primary understanding of the tasks to be accomplished by the new organization, were not included in this select "core" group. To no one's great surprise, what evolved was a top-heavy superstructure designed to not only assure the survival of all existing grade levels and positions, but also to provide new opportunities for supergrades as well as provide the potential for a general escalation of grades at all levels.

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Let me be quite specific. Based on information in HEW memoranda and from HÊW staff directly involved in reorganization activities, the principal concern of the task force clearly appears to lie far more with the dismemberment of SRS and not the creation of an effective and efficient Health Care Financing Administration.

There was the task force concern over how to justify all the personnel in view of President Carter's desire to streamline the Government and make it more efficient. There was concern over how to broaden the administrative structure since there was no increase in statutory responsibilities. There was no discussion, however, of efficiencies such as elimination of duplicative jobs—that could be gained by consolidation; this was just not addressed.

One of the first tasks of the reorganization task force was not to develop a structure that would reflect the benefits of true consolidation where one chief might serve in place of two; it was to justify supergrades. Under the approach taken, the mathematics of consolidation did not have one and one equalling two or less but equalling three or more. It gets worse.

Before the so-called consolidation, the Bureau of Health Insurance, the Medical Services Administration, the Bureau of Quality Assurance, the Office of Long-Term Care, and the Division of Health Insurance Studies has a total of exactly 13 supergrade employees. In fact, there was one vacancy within that total of 13.

Our latest information is that the new Health Care Financing Administration will now ask for 29 supergrades, nearly 21,2 times the current number. This is apart from the confusing and unnecessary layer upon layer of staff offices that have been part of the problem in the past and which prompted me to seek a legislative remedy.

By last count there were 21 divisions and 18 offices being proposed as part of the Health Care Financing Administration superstructure and we have not started counting the offices and divisions and branches of the operating programs, many of which are being upgraded to cash in on the bureaucratic bonanza.

And there is more—the Medical Services Administration, the agency responsible for medicaid had a total of 387 central and regional personnel. But, 568 Social and Rehabilitation Service employees are coming in on top of medicaid's 387.

Time after time we have been told by responsible and very much concerned and outraged HEW employees at all levels that the basic mission has become one of protecting grades and positions. Our files show instance upon instance where this

new agency is breeding duplication and overstaffing and not eliminating them as we in the Congress intended.

The proposed Health Care Financing Administration appears to be another good idea bogged down in the quagmire of bureaucratic self-interest. The President and the Secretary could use a little help from the Congress in dealing with these elements of the HEW bureaucracy. It may well be necessary for us to specifically legislate the organization and staffing of the new Health Care Facilities Administration. For that reason, S. 1470 includes the section statutorily establishing the new agency.

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