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physicians will be receiving an estimated $13,000 per year in reimbursement from Medicare in fiscal year 1978. Therefore, the incurred cost of this program for fiscal year 1978 is $5 million.

Section 11 (Statewide prevailing charge limit to locally prevailing charges). By denying the automatic, yearly adjustment to any prevailing charge level which is more than 143 times the statewide prevailing, a savings of approximately 1.6 percent of current physician expenditues would be achieved.

This estimate is based on an analysis of the 1977 prevailing charge levels and the 50th precentile levels in a sample of high frequency procedures for five states. Based on estimated current law physician expenditures of 5158 in fiscal 1978 the provision would save $80 million.

SECTION 12 (REIMBURSEMENT FOR PATIENT R. & D.) The change in the reimbursement procedure for inpatient radiology and pathology will affect only those physicians billing Medicare directly. Non-participating physicians will be reimbused at 80 percent rather than 100 percent. An estimated $200 million is projected for fiscal year 1978 for a total R. & P. expenditures paid directly. Assuming a 50 percent assignment rate for hospital based physicians there will be a savings of $5 million in 3 months of fiscal year 1978 that the provision would be effective, and $25 million in the full fiscal year 1979.

Summary of provisions and cost estimates for SMI 1. Administrative cost-savings allowance (section 10)--$1 per eligible patient would be payable to a participating physician, which would cover all services billed for a patient included in a multiple billing listing. Effective July 1, 1977.

Cost Fiscal year:

(millions) 1978

$110 1979

130 1980

150 1981

165 1982

180 2. New physicians in scarcity areas (section 11)-New physicians in localities with low fee levels would be permitted to establish their customary charges at the 75th percentile rather than the 50th. Effective upon enactment. Fiscal year:

(millions) 1978

$5 1979

5 1980 1981

1982 3. Statewide prevailing limit to locality prevailing fees (section 11)-The statewide prevailing fee would be the 50th percentile for all customary charges in the state. If any prevailing charge in a locality is more than 1/3 higher than the statewide prevailing, the locality prevailing would not be automatically increased each year. Effective upon enactment.

Savings Fiscal year:

(millions) 1978

$80 1979

95 1980

110 1981

120 1982

130 4. Reimbursement limit for inpatient R. & P. (section 12)-Reimbursement for inpatient radiology and pathology will be 100 percent only for participating physicians (i.e., those agreeing to accept assignment). Nonparticipating physicians will be reimbursed at 80 percent. Effective July 1, 1978.

Sarings Fiscal year:

(millions) 1978

$20 1979

25 1980

30 1981

30 1982

35

Cost

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5. Liberalized coverage of ambulance services (section 41)-Currently, ambulance service to a hospital outside a patient's locality is covered if the hospital is the nearest institution with appropriate equipment, personnel, and with the capability to provide necessary services. However, ambulance service to a more distant hospital solely for the services of a physician in a specific speciality does not make the hospital the nearest with appropriate facilities.

The proposal includes ambulance service to a hospital for the services of qualified medical personnel. Effectve first calendar month beginning after date of enactment. Cost-no more than $2 million.

Secretary CALIFANO. For these reasons, Mr. Chairman, I share your views that the President's proposed Hospital Cost Containment Act of 1977 is complementary to s. 1470. The administration's cost containment proposal is a transitional program, designed to restrain the intolerable current rate of increase in hospital costs and to gain the time necessary to work out some of the difficulties that we see in the present version of section 2's hospital reimbursement reforms.

As you know, the President's bill limits increases in total hospital inpatient revenues to an annual rate of about 9 percent, beginning in October 1977. The program would cover the inpatient revenues of about 6,000 acute care and speciality hospitals, but exclude long-term, chronic care and new hospitals.

The basic limit would be set by a formula reflecting general price trends in the economy with an increment for increases in services. Each cost-based third party payor would apply the limits in interim and final payments, and would monitor hospitals for compliance with respect to its own subscribers.

Under present estimates, the savings resulting from implementation of the Hospital Cost Containment Act would be approximately $1.9 billion in fiscal year 1978—including $657 million in medicare and Federal medicaid and $879 million in private funds. By fiscal year 1980, net savings would nearly triple to over $5.5 billion, including $2 billion in medicare and Federal medicaid and $2.6 billion in private funds.

Thus, Mr. Chairman, as you stated on May 5, 1977, when introducing s. 1470, the Medicare Medicaid Administrative and Reimbursement Reform Act “represents a long-term basic structural answer to the problem of rising hospital costs, whereas the administration is calling for a short-term interim cap on revenues to be in place only until a long-term solution can be established."

We recognize that our proposal is only a short-range measure, but it is no less necessary for being short-term and can serve the critical function of simply, quickly and effectively curbing the intolerable rise in hospital costs.

While I will not attempt to describe the administration's cost containment proposal in any great detail at this time, Mr. Chairman, I would like to take this opportunity to respond to several specific questions and concerns you expressed about the administration proposal in your statement introducing S. 1470.

You expressed concern that the administration proposal might establish a floor rather than a ceiling. Initially, when we were devising the proposal, I was worried about that, but I do not believe that hospitals will increase their revenues to the 9-percent allowable limit under our program. Experience with the economic stabilization program indicates that a substantial fraction of hospitals kept costs and revenues within the limits imposed and did not automatically increase them to the maximum extent allowable.

Similarly, approximately one-fifth of all hospitals now voluntarily keep their cost increases below 9 percent annually even though they are not required by law to do so. Moreover under our plan, we have included provisions which would reward those hospitals coming in below the limit in any given year.

Mr. Chairman, you also indicated some concern that our exceptions are excessively generous.

We believe that we have restricted exceptions to only those conditions genuinely meriting some flexibility. There are only two basic grounds for exceptions-major changes in patient loads more than a 15-percent increase in admissions—and major changes in new capital facilities or equipment.

In both cases local health systems agencies would have to approve exceptions. The hospital would also have to demonstrate that it had current assets less than approximately twice its current liabilities, and therefore was in need of additional revenue to make those major changes.

We also permit an optional adjustment for increases in wages of nonsupervisory employees. Wages have not been the driving force in hospital costs increases. Historic trends in hourly increases have been 7.2 percent for hospital nonsupervisory workers for the past 6 years. Even assuming that these wages should increase at a rate of 9.5 percent, the allowable revenue limit would be increased by less than a percentage point. This provision is important to protect low-wage hospital workers from any adverse impact of cost constraints and to recognize that their average wages today still are 15 percent below the wage for the average wage for nonagricultural workers in our economy.

You also expressed some reservations about our program's differential impact on efficient and inefficient hospitals.

We do not believe our program penalizes efficient hospitals. Efficient low-cost hospitals should not need increases greater than 9 percent. It is true, however, that our program does not eliminate all of the waste and inefficiency in the system. As I indicated earlier, one of the major technical deterrents to doing so is the lack of an adequate classification system for distinguishing efficient and inefficient hospitals. But our plan would penalize those inefficient hospitals whose costs are currently rising at a greater rate than 9 percent and put us in much better position to ferret out remaining inefficiency in a long-term solution along the lines you have proposed.

Furthermore, the administration proposal does build in a number of rewards for hospitals which choose to become more efficient.

Hospitals that close unnecessary facilities or eliminate duplicative equipment would have revenues for these services retained in the base

if the HSA approved discontinuance of these services. Thus, the hospital would be permitted a greater than 9-percent increase on remaining services.

Hospitals that work with their medical staffs to eliminate unnecessary tests, admissions, or days of stay would be permitted higher allowable revenue per unit of service—since our limit is on total revenue increases.

Mr. Chairman, you also indicated some concern about starting with a transitional cost containment program and then moving to a longer term system. As noted, we feel strongly that the problem of rising costs is of such disastrous proportions that we simply cannot wait for a perfect solution before acting. It is important, however, to provide for an orderly evolution. We have designed our transitional program so that it will be compatible with a number of more fundamental structural reforms of reimbursement methods, including the types of incentives for improved efficiency contained in your bill.

Finally, I would like to respond to one other query about the administration's program-namely, that any slowing of the rate of increase in hospital costs can only be achieved by lowering the quality of patient care.

That is absolute nonsense.

Mr. Chairman, your subcommittee has contributed significantly to our understanding that more is not always better in the health care system. Unnecessary medication, hospitalization, testing, and surgery can be positively harmful to health and can constitute poor health care policy. Our program provides a strong economic incentive for hospitals to work with professional standards review organizations to curtail this unnecessary utilization. Unlike the current cost reimbursement system, our program would reward the hospital which chooses to reduce the length of patient stay or reduce unnecessary admissions.

Mr. Chairman, one of the most important points related to the care, to the impact of our program on hospital care, is the fact that some hospitals in this country have become so obese that they are literally endangering the lives of the patients that they serve.

Both title I and title II of our plan would provide strong incentives for hospitals to reduce unnecessary specialized facilities. For example, studies have shown that to maintain minimum standards of quality, a cardiac center should perform four to six cardiac operations weekly. Over 80 percent of all hospitals performing cardiac surgical procedures do not meet this requirement. In fact, an independent study of a Massachusetts hospital, where 49 percent of open-heart surgery patients died during the period 1968–1975—an unusually high death rate--concluded that an inadequate number of open-heart operations at the hospital, and the resultant inexperience of the cardiovascular team, contributed to the poor results.

The administration's proposal can help eliminate underutilized cardiac care facilities, promote regionalization, and thus improve patient care.

Another area where substantial cost savings would be achieved with an actual improvement in quality of patient care in inhalation therapy. Mr. Chairman, your staff has alerted the Nation to alarming improper professional practices in this area. One study indicates that approximately $500 million could be saved by eliminating those inhalation therapy procedures which are of dubious benefit.

In sum, with the help of this subcommittee, we have identified over $5 billion in savings that can be achieved without harming patient care. A "fat list” of those wasteful or unnecessary items which could be trimmed back without affecting quality of care is appended to my statement.

For these, and for other reasons that I will hopefully detail before this subcommittee when it considers the Hospital Cost Containment Act of 1977, we believe that the administration's proposal is a necessary precursor to the major, structural hospital reimbursement reforms set forth in S. 1470.

Mr. Chairman, I will submit the rest of my statement for the record. I can either comment on some of the points that you made in your opening statement if you would like me to, or refer to one or two other items in your legislation that we think we should deal with directly, and also comments on Senator Dole's statement.

Senator TALMADGE. That would be fine.

Secretary CALIFANO. As far as the Health Care Financing Agency is concerned, I wrote you a letter on June 2, which I am not sure you have yet received. I would like simply to make a couple of points from that letter.

One, the number of supergrades moving throughout the Department to the Health Care Financing Agency, those available to move into that Agency, is 28. We intend to use only 22 of those supergrades, and possibly an additional 5 in the regions.

If we do not need the five supergrades in the region, there will actually be a reduction.

The programs that HCFA will deal with involve $10 billion in Federal Funds and $10 billion in State funds—$10 million beneficiaries, sensitive beneficiaries—the old and the poor--and 4,200 employees. I think that is a remarkably small number of supergrades to deal with an organization of that size.

As you well know, there are many organizations in this Government with a much larger number of supergrades. One example, in an area with which you are familiar, is the Foreign Agricultural Service, which has 20 supergrades, 751 employees and a $13 million budget. It has, in effect, one supergrade for every $2 million. We have less than one for every $2 billion.

I think we need talent at the top of this Government. I have spent a large part of my time since I became Secretary trying to recruit that talent, and we need the grades to get that talent.

Also, as you know, the supergrades have to be justified independently with the Civil Service Commission and they will be submitted there.

I think we are doing as well as we can in that arena. I think it is a very modest request. I was surprised when ultimately we were able to hold to that number of supergrades, compared to the rest of the Government. I would be happy to compare that agency with any number of agencies in the Government.

Secondly, as far as the comment of Senator Dole regarding having the Comptroller General look at HCFA is concerned, I would be happy to have the Comptroller General do anything in HEW. I am trying to build the Inspector General's Office into our own Comptroller General, if you will. You will remember that from my confirmation testimony, and I am moving in that direction.

The organization of HCFA has moved along. I do not think there is any reason to stop the reorganization, pending that examination. It would have a very serious and deleterious effect on the beneficiar

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