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In fact, the simplest thing to do might be to just incorporate all the medicare and medicaid activities into the Bureau of Health Insurance and then rename that agency the Health Care Financing Administration. I believe we have a representative range of witnesses this week.

It is my hope that these hearings will provide the basis for timely congressional action on necessary changes in the way Government conducts medicare and medicaid. As I have stated repeatedly, none of the provisions in S. 1470 are locked in concrete. Hopefully, constructive changes and improvements will be a product of these hearings.

Senator Dole, do you have a statement that you wish to make? Senator DOLE. Thank you, Mr. Chairman. I have a brief statement.

I am pleased to join with you and other members of the subcommittee, when they appear, to hear comments on S. 1470. I can only echo much of what you have said, Mr. Chairman, regarding the rapid rise in health care expenditures, particularly the Federal share of these expenditures. I, like you, Mr. Chairman, feel that the hearings held last year on your similar proposal provided us with many constructive suggestions. The result we have before us today is this bill.

As ranking Republican member of this subcommittee, I am particularly interested in seeing that meaningful improvements are made in the medicare and medicaid programs.

We are familiar with the figures which show that total health care spending comprised 4.5 percent of the GNP in 1950, while today it amounts to approximately 8.6 percent. Projected fiscal year 1978 spending for medicare and medicaid programs alone account for $47.5 billion. But the significance stretches beyond those expenditures.

The average American citizen is also required to spend increasing out-of-pocket costs for health care either directly or indirectly through insurance premiums and taxes. We must recognize that the delivery system itself is not completely responsible for generating those inflationary pressures. Rising labor and supply costs, the need to constantly upgrade equipment and physical facilities, skyrocketing malpractice premiums, and compliance with proliferation of new regulations have all contributed.

In my view, the proposal we are discussing today addresses many of these problems realistically. As a Senator from the State of Kansas, many sections of which are less densely populated, I understand the importance of provisions that consider the differences in hospital needs because of their differing location, size, and patient mix.

Section 11 which provides incentives for physician practice in lowfee shortage areas is of special importance to States such as my own, where physicians are badly needed, but where recruitment is difficult.

Mr. Chairman, I join you in welcoming the witnesses who are with us today and those we will hear from in the next 3 days. I believe that there is a consensus among the members of the committee that no provision of this legislation is written in concrete. We look forward to hearing suggestions and possibilities for improvement.

I will be particularly interested in hearing Mr. Califano's remarks regarding the proposed organization of the new health care financing

administration. I share Senator Talmadge's concern that as proposed, the new administration would not only not reduce the bureaucracy but would add to what has already become the catastrophic illness of our multifaceted, poorly functioning governmental structure.

For example, it has come to my attention that in the Kansas City HEW regional office, the social rehabilitation service has 76 employees. Of these, only 14 have responsibility for medicaid. Under the new reorganization plans, 36 of the 76 employees are being sent to the health care financing administration. So above the 14 medicaid employees, 22 additional social rehabilitation service personnel are being superimposed. The balance—40—will go to the Office of Human Development and the Social Security Administration.

Mr. Chairman, I am convinced after hearing your remarks and after having heard of the instance I mentioned, that the issue of the present reorganization plans should be considered carefully by our subcommittee. It is quite clear that there are serious problems with the proposed reorganization of the health care financing administration.

I would respectfully suggest that the subcommittee request the Comptroller General to evaluate the entire situation and report back to us within 30 days. I think he should find out whether this new agency is developing more as a bureaucratic Frankenstein than as a means of doing a better job with fewer people.

The Comptroller General should be supplied with all of our committee files dealing with the development of HCFA. He should be asked to consult with the Civil Service Commission apart from reviewing the matter with any Health, Education, and Welfare people he thinks knowledgeable.

It would also be helpful if the Secretary would agree to hold off with further implementation of the HCFA until we have all had a chance to review the report of the Comptroller General.

Mr. Chairman, that concludes my remarks, but I would hope that there would be some immediate action taken in reference to the suggestion, certainly, of the Comptroller General. I am pleased to be working with you on this. We just successfully completed a farm bill. Maybe we can have some luck on the health legislation.

Senator TALMADGE. Without objection, that recommendation will be adopted.

[The following is the formal request of the subcommittee to the Comptroller General:]

U. S. SENATE, COMMITTEE ON FINANCE,

Washington, D.C., June 14, 1977. Hon. ELMER B. STAATS, Comptroller General of the United States, General Accounting Office, Washington, D.C.

DEAR MR. STAATS : On June 7, 1977, during hearings before this Subcommittee, the Subcommittee, on formal motion, agreed to request your Office to review the development and organization of the Health Care Financing Administration in the Department of Health, Education, and Welfare. Subsequently, members of our respective staffs have been in consultation on this request.

As you know, the concept of bringing the Medicare and Medicaid programs, health standards activities, and the Professional Standards Review Organization program under one organization was included in my bill S. 3205 introduced in the last session.

Because of my concern that this organization has been attributed to a concept closely identified with myself, on May 5, 1977, I wrote to Secretary Califano expressing my dissatisfaction with respect to the new reorganization. Specifically, my concerns dealt with-(1) the apparent proliferation of new superagencies, (2) the fragmentation of authority and responsibility through the submergence of the principal operating bureaus (Medicare, Medicaid, and Health Standards and Quality), and (3) the proliferation and possible overlapping of staff activities reporting directly to the Administrator.

By letter dated June 2, 1977, the Secretary responded to my concerns. However, in the judgment of the Subcommittee, this response was not satisfactory. In fact, detailed information received by the Subcommittee on Health subsequent to my May 5 letter has served to reinforce the concerns expressed in that letter.

Therefore, I am requesting the General Accounting Office to make an immediate review of this new organization with emphasis on the following issues :

A. PROLIFERATION OF SUPERGRADES

1. How many supergrades were authorized in the operating agencies consolidated ?

2. Immediately prior to the HEW reorganization, how many supergrade positions were authorized in the Social and Rehabilitation Service? Of these, how many were vacant? With the reorganization on March 8, 1977, the Service was disbanded and its functions were distributed to the new Health Care Financing Administration, the Office of Human Development, and the Social Security Administration. In these organizations (i.e., HFCA, OHD, and SSA) how many supergrade positions were designated and how many supergrade employees were assigned?

3. We understand that supergrade-level job classifications are subject to approval by the Civil Service Commission. What is the status of the approval process—both within CSC and OMB—for the supergrade positions being proposed for the Health Care Financing Administration ;

4. What has been the result of prior reviews by the Civil Service Commission of the grade structure of the Social and Rehabilitation Service as it pertained to supergrades as well as Grades GS-14's and 15's;

5. Of the supergrades being proposed, how many would be assigned to a staff function as opposed to a line or operation function and does the General Accounting Office believe that the mix would be appropriate?

B. FRAGMENTATION OF AUTHORITY AND RESPONSIBILITY 1. Obtain the views of key officials of the operating bureaus as to their role in the new organization and as to whether they view operating effectiveness and policymaking enhanced or diminished.

In connection with any interviews, it would be appreciated, where requested by the individual concerned, that confidentiality as to his identity be observed.

2. Over the years a basic problem at HEW has been the timely promulgation of regulations pertaining to the health programs. If possible, please provide a flow chart showing how proposed regulations dealing with (a) reimbursement, and (b) Professional Standards Review, would be developed through the hierarchy of the new Health Care Financing Administration.

3. Historically, the heads of the operation bureaus for Medicare and Medicaid have been authorized to submit program related instructions to intermediaries, to carriers, and to the States. Will this authority remain or will it be diluted under the new organization? Specifically, what will be the authority of the Bureau operating heads with respect to developing and signing correspondence to members of Congress and the public, and what will be their authority and responsibility in issuing instructions to contractors and State agencies?

4. To what extent will staff offices (such as the Associate Administrator for Policy, Planning and Research) be involved in the flow of official communications between the Bureau heads and the Administrator or Deputy Administrator?

C. PROLIFERATION AND POSSIBLE OVERLAPPING OF STAFF ACTIVITIES 1. Identify any evidence of duplication or overlapping from the functional statements of the various offices and Bureaus, and divisions of the Health Care Financing Administration.

2. Does the General Accounting Office see any opportunities to combine or consolidate any of the offices or divisions of the new organization?

3. Is there any evidence that the structure was designed to accommodate grades and personnel rather than to serve to enhance functional efficiency in timely policymaking and operations?

4. Is there any evidence of duplication or overlapping of stated functions between the Bureaus' offices and divisions of the Health Care Financing Administration and the similar organizational elements of other organizations within HEW? For example, what functions of the Associate Administrator for Policy Planning and Research in the Health Care Financing Administration are duplicated or overlap among the functions of the Office of the Actuary in the Social Security Administration, and the National Center for Health Statistics and the National Center for Health Resources Research in the Public Health Service?

Our current bill, S. 1470, proposes reforms of the administrative and reimbursement procedures for Medicare and Medicaid, including a provision for the legislative establishment of a Health Care Financing Administration. Therefore, it is requested that you or your representatives be prepared to provide the results of their review no later than July 18, 1977, for the Subcommittee's consideration in connection with S. 1470. We realize that many of the issues pertaining to the HEW reorganization involve judgments; nevertheless, because of your staff's extensive experience in auditing the administration of the health programs involved, their views would be of obvious value to the Subcommittee. In this connection, we noted that, in his testimony of June 7, Secretary Califano also welcomed this study of the HEW reorganization which includes the establishment of the Health Care Financing Administration.

Quite simply, the basic questions are: Does this organizational structure enhance or impair effective and timely coordinated policy making and operations? Are duplicative or parallel functions and jobs consolidated or eliminated at central and regional levels ? With every good wish, I am Sincerely,

HERMAN E. TALMADGE, Chairman, Subcommittee on Health.

Senator TALMADGE. Do you have a statement, Senator Danforth? Senator DANFORTH. No, thank you, Mr. Chairman.

Senator TALMADGE. The subcommittee is indeed honored to have the distinguished Secretary of HEW this morning.

Mr. Secretary, you may proceed in any manner that you see fit.

.

STATEMENT OF HON. JOSEPH A. CALIFANO, JR., SECRETARY,

DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE Secretary CALIFANO. Thank you, Mr. Chairman.

It is always a pleasure to see you and Senator Dole and Senator Danforth. I would like, Mr. Chairman, to submit my entire statement for the record. I will read some excerpts of it.

I appreciate the opportunity to appear before this distinguished Subcommittee on Health to discuss S. 1470, the proposed MedicareMedicaid Administrative and Reimbursement Reform Act.

I would like to make some general comments on S. 1470. Then perhaps I will direct some comments to the remarks of the chairman and Senator Dole.

Last session, the Finance Committee, through this subcommittee, again provided leadership in identifying serious problems and devising needed reforms in the Nation's health care system.

In less than 6 months in office, we in the new administration have moved to support or to implement the most urgent of those reforms.

First, in the 94th Congress, you introduced legislation to remedy serious problems created by fraud and abuse in the medicare and medicaid programs. You recognized that fiscal integrity and sound management practices must characterize these programs if they are to enjoy the trust and confidence of the American people.

This year, the fraud and abuse legislation has been introduced separately in both houses of Congress, with strong endorsements from the President and from me. That legislation should soon pass the House and we look forward to the opportunity to urge its passage in the Senate.

Second, your health care reform legislation in the 94th Congress proposed establishment of an Inspector General for Health within the Department of Health, Education, and Welfare. That proposalexpanded so that the jurisdiction of the Inspector General includes all programs of HEW—became law last year, and we have acted quickly to implement it.

The new Inspector General, Tom Morris, and the new Deputy Inspector General, Charles Ruff, are men of superb qualifications who have been moving swiftly to organize their office and to begin the vital work of reducing fraud and abuse in HEW's programs, especially in the Department's health programs.

Third, you have proposed, both last session and in the present Medicare Medicaid Administrative and Reimbursement Reform Act, that the health care financing functions of the Department be consolidated into a single administrative structure.

President Carter endorsed this concept early in the presidential campaign. As you know, less than 60 days after assuming office, I effected this much needed reorganization through administrative action. As I noted at the time of the reorganization, we are deeply indebted to the work of this subcommittee and to the illuminating hearings that you held last year on the problems of health care financing

We have high expectations for this element of the Department's reorganization. The Health Care Financing Administration should significantly improve the effectiveness, efficiency and responsiveness of medicare and medicaid by coordinating the policies and practices of the two programs and by eliminating, or reducing, unnecessary and costly duplication in their operations.

By joining these programs under one administrative structure, we should also realize important economies through reduction of fraud, abuse and leakage. I have with me Mr. Robert Derzon, one of this Nation's outstanding hospital administrators, with tremendous experience in New York City and in San Francisco, who was sworn in as the head of the Health Care Financing Agency last week. I am delighted that Mr. Derzon agreed to disrupt his family and personal life. He has been in San Francisco a relatively short time.

We searched long and hard for someone for this task. He is unquestionably the finest person in this country to do it. He did a spectacular job in New York City and in New York State, and he will, in my judgment, vindicate all the glowing reports that we received when we checked him out around the country, as he takes over this agency and puts it into motion.

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