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ies of these programs and our ability to meet the cost savings goals that we are setting.

Further, with the creation of HCFA and the other elements of the reorganization, I am trying to save about $1.8 billion between now and 1981, then $2 billion a year beginning in 1981, as a result of our reorganization, and I am pressed very hard to keep it on track and get in place the kinds of things that we need in place to meet these savings goals.

I would be delighted to have Mr. Staats and his people. One of the first things I did after I became Secretary of HEW was to ask the Comptroller General to come over with his top people to examine HEW, and I spent hours with him and found out all of the problems that they felt were there, all the changes they thought could be made. They are an extraordinarily able group of people. They were very helpful to me then; perhaps they can be very helpful again in this and other areas.

Senator DOLE. Thirty days more would not disrupt your program. Secretary CALIFANO. No, I think we will have to go forward with the program. The thing is just on track, like a PERC system, the Navy system, where you set up points moving to something very large and complex. We are moving.

There are 15,700 people who are being changed as a result of this reorganization. It is a very complex organization. It will be completed within the next 10 days, 10 or 15 days. I think that it would be very wrong to delay that, but I would be delighted to welcome the Comptroller General-there is nothing that will, in any way, inhibit the Comptroller General's study or inhibit us in acting on any of his recommendations that are helpful.

Indeed, I think you will find that many of the suggestions that the Comptroller General and his people made to me in the meetings I had with them shortly after I became Secretary are indeed being incorporated in the reorganization of HCFA and the reorganization of other elements of the departments of HEW.

I share the subcommittee's concern. I share the concern of every committee in the Congress that looks at HEW that this Department needs to be better managed. I have devoted a substantial amount of time to relatively obscure management questions. For example, I discovered that there was no procurement system in HEW. We had a system in which we gave out $7 billion a year in grants and contracts and had no procurement, no true procurement system, nothing comparable to NASA, for example. We had no certified contracting officers.

I put into place 3 weeks ago, after weeks of work, the first procurement system for training those officers, a system for establishing a cadre of trained people, a system, I hope, that will increase competitive bidding on our contracts and grants and displace some of the solesource procurement.

The Department has several management problems. I am trying to address them.

The investigations undertaken by the committees of the Congress, including this committee and the Senate Human Resources Committee over the past several years, have provided ample suggestions and identification of many of these problems. I am trying to move as fast as I can on them.

I want this Department to be a model of efficiency in this Government. I intend to exert every energy I have in that direction.

Mr. Chairman, I will make two other comments, and I will then insert the rest of my statement in the record. These are larger matters of concern. One is a provision in the bill not directed at the reimbursement area, the provision for the secrecy of the payments made to doctors which would prohibit the Secretary of HEW from making available to the public and the press under the Freedom of Information Act or otherwise, the amounts of money paid to individual doctors by medicare. We strenuously object to that provision. We believe that sunshine is the greatest disinfectant for health care.

Senator TALMADGE. Would you yield at that point?
Secretary CALIFANO. Yes.

Senator TALMADGE. Would you guarantee the accuracy of the report? We inserted that provision in the bill because there has been inaccurate information.

Secretary CALIFANO. We have taken steps. I deeply regret the list that went out. It was not in many respects an accurate list. I expressed that regret directly to Dr. Samson of the AMA. We have taken steps to improve that.

At this time, in addition to an examination of our whole computer system, and of the computer systems of our payors, we are setting in motion a system of sampling payments made to individual doctors throughout the year, and before we release a list in the future we will be checking with the people who are being paid.

Senator TALMADGE. If you can guarantee the accuracy, I would have no objection to deleting that provision in the bill.

Secretary CALIFANO. Thank you, Mr. Chairman. It is important that the American people know who is getting their tax money.

The other point, Mr. Chairman, relates to the provision in the bill that would permit profitmaking hospitals to increase their profits. Presently, profitmaking hospitals under legislation are permitted a profit rate of 1.5 times the long term Treasury bill rate. The long term rate on Treasury bills is now 7 percent. They are permitted a profit rate of 10.5 percent. Your legislation would permit them to increase their profit rate by 33 percent to two times the long term rate, permitting them profits of 14 percent.

We believe, as I pointed out in the fat list, that hospitals in this country make ample profit. All hospitals in this country made $438 million in profits in 1970. In 1976, their profits were over $1 billion.

We think by letting hospitals get even more profits, we would contribute to inflation. We really would be adding, as I said in another connection, even more sweets and deserts, pies, candy, and cream puffs, to the very obese hospital system that we have now in our Nation.

Mr. Chairman, I appreciate the opportunity to express these views. Let me underline one thing: the concept of prospective reimbursement is a critical concept for the future. You have identified that early. Many of the things that I have tried to do, both administratively and in terms of legislation that has been recommended, have come out of the work that you have done over the last several years.

I think that you, Mr. Chairman, and Senator Kennedy and your subcommittees, have made significant contributions to whatever we have been able to get done in these first few months and what we are trying to do in the future.

I think that I and the American citizens and those interested in the health care system should be deeply grateful to both of you and both of your subcommittees.

Senator TALMADGE. Thank you very much, Mr. Secretary, for a very fine statement.

On the profit of hospitals, I believe you have overstated the situation a little. We have limited a 15-percent return on equity, which we thought was rather reasonable. We think we have the same constraints on for profit hospitals that we did earlier.

If you have any recommendations to perfect it, we will be delighted to have them.

I would also like to say at this point that I invited Senator Kennedy, chairman of the Subcommittee on Health of the Committee on Human Resources, to sit with us this morning. Unfortunately, he was unable to be present.

Mr. Secretary, S. 1470 contains a subsection establishing a procedure for developing and utilizing relative value schedules in determining the reasonableness of physicians fees. I believe proper safeguards have been included to adequately protect the public interest.

Do you have any views on this section of the bill?

Secretary CALIFANO. Mr. Chairman, we think that eventually the health care system and the Government will have to deal with physician's fees. Early this year, President Carter and I considered a recommendation that had been made to us with relation to physician's fees. We rejected it, because we felt that we did not know enough about it.

I guess my answer to your question is that we believe something has to be done about physician's fees. I am not 100 percent certain that the precise way that it is done in this bill is the best way to do it, and I think we can provide a more sophisticated response to that question if we just have a little more time.

Senator TALMADGE. Would you send us a recommendation specifically on that particular proposition?

Secretary CALIFANO. I will, Mr. Chairman.

Senator TALMADGE. And on value schedules?

Secretary CALIFANO. Yes, sir.

Senator TALMADGE. On page 12 of your statement, you say that onefifth of all hospitals now keep their costs increases below 9 percent, voluntarily.

First, are these hospitals generally smaller or large institutions?

Secretary CALIFANO. 22.2 percent have their costs down below 9 percent; 28.3 percent of small hospitals-those with fewer than 4,000 admissions-keep their costs below 9 percent; 14.7 percent of the large hospitals-those with 4,000 or more admissions-keep their costs below 9 percent.

Of the Government hospitals, 26.3 percent are below 9 percent. Of the nonprofit hospitals, 19.4 percent are below 9 percent. Of investorowned hospitals, 25.1 percent are below 9 percent.

Examples by region: in New England, 20.8 percent of the hospitals. In the South Atlantic, 18.7 percent are below 9 percent. In the Pacific area, 21.9 percent are below 9 percent.

Senator TALMADGE. How about by size?

Secretary CALIFANO. By size, as I said, the smaller hospitals, with fewer than 4,000 admissions, 28.3 percent are below 9 percent. Of the large, those with 4,000 or more admissions, 14.7 percent are below 9 percent.

Senator DOLE. Will you yield?

Senator TALMADGE. Yes.

Senator DOLE. Are these the same hospitals each year, or is it a changing list?

Secretary CALIFANO. I cannot answer that. I do not think it changes very much. A lot of hospitals have driven the cost down. I can get you more detailed data on that, Senator Dole.

Senator DOLE. If it is a changing list, the list would not be very meaningful.

Secretary CALIFANO. I do not think it is.

Senator TALMADGE. Following on Senator Dole's question, are these the same hospitals with a percent below 9 percent? In other words, how many have kept their increase below 9 percent for 3 consecutive years?

Secretary CALIFANO. I will have to submit that for the record. Some hospitals are doing that.

[The following was subsequently supplied for the record:]

The Department recently completed a study which determined the number and types of hospitals experiencing annual increases in total operating expenses of less than nine percent for the period 1974-75, the most recent period for which complete data are available from the American Hospital Association. The findings were as follows:

18.2 percent of hospitals experiences increases in total operating expenses less than 9 percent;

25.4 percent had increases in total operating expenses per adjusted (for outpatient visit volume) admission less than 9 percent; and

19.7 percent showed increases less than 9 percent in total operating expenses per adjusted patient day.

Although many hospitals had cost increases below 9 percent, most hospitals did not. Groups of hospitals with the following characteristics had a less than average proportion of hospitals realizing cost increases below 9 percent for all three cost measures:

Hospitals with nonprofit, nongovernment type of control;

Hospitals with a northeastern location;

Hospitals with a metropolitan location; and

Hospitals with more than 4,800 admissions.

A similar study for the periods 1973-74 and 1972-73 is currently underway in the Department. As soon as the results are available they will be made available to the committee.

Secretary CALIFANO. I would also note that there are States that have rate commissions that your bill recognizes and which the President's bill recognizes, in which hospital costs, hospital rate increases, or hospital revenue increases, are held below 9 percent. Massachusetts is one, Maryland is another, Connecticut is now putting such a system in place,, Rhode Island, some other States.

Senator TALMADGE. You will submit that for the record?
Secretary CALIFANO. Yes.

[The following was subsequently supplied for the record:]



Prospective reimbursement encompasses those mechanisms of payment to health care providers which establish the rate the provider will be reimbursed

prior to the period over which the rate is to be applied. Traditionally, most health insurers, including Medicare pay hospitals and other providers retrospectively on the basis of their reasonable and allowable costs. While this policy guarantees coverage for almost all hospital expenditures, it provides little economic incentive to the hospital to moderate costs. Proponents of prospective reimbursement believe that the rewards and penalties built into such systems wll motivate providers to allocate resources more efficiently without compromising the quality of their services.

Evaluations of nonfederally funded systems

When the Social Security Amendments of 1972 were enacted, several State and local prospective reimbursement systems were operating without Federal involvement. Consequently, the Division of Health Insurance Studies decided to conduct indepth analyses of several of these existing systems in order to determine where and how experimental resources should be concentrated. These analyses have attempted to determine the impact of prospective reimbursement on hospital administration, cost behavior, and quality of care through comparisons with matched control groups of hospitals and/or before and after time periods.

The seven operating systems selected for empirical study were those in western Pennsylvania, upstate New York, downstate New York, New Jersey, Rhode Island, Indiana, and Michigan. These systems had a variety of sponsors including Blue Cross plans, State governments, and hospital associations and employed one of five prospective payment methodologies-budget review, budget reviews by exception, formulas, negotiation, or some combination thereof. The evaluation of these systems will soon be available from the National Technical Information Service. At present, all but the Indiana and Michigan evaluations have been completed.

In general, the evidence from the analyses suggests that the prospective reimbursement programs have been moderately successful in lessening the pace of hospital cost inflation. Thse findings are significant in that they represent the first careful documentation in the United States that prospective reimbursement has a downward effect on hospital costs. Based on these results, seven elements have been identified which appear to be essential to an efficient prospective ratesetting program. These elements are as follows:

(1) All hospitals within a given system should submit accounting and reporting data based on uniform systems.

(2) Health planning and ratesetting should be closely coordinated.

(3) Prospective ratesetting systems should focus on total hospital expenditures including utilization factors.

(4) Prospective ratesetting systems should cover all payers.

(5) Hospital participation in prospective ratesetting systems should be mandatory.

(6) Statistical screens should be established to determine what hospital costs are reasonable.

(7) An appeals or excepticns process should be created to allow hospitals the opportunity to rectify what they believe to have been an inappropriate decision. Results of the statistical measurements of cost savings achieved by the prospective reimbursement systems analyzed are summarized in table 1.


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1 Excludes evaluations of the systems operating in Michigan and Indiana which are still in progress. Final reports are

due by the end of 1977.

2 Two-percent savings per year on total costs.

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