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In viewing these results, it should be cautioned that many findings did not pass rigorous statistical significance tests. Even where statistics were significant, the 1- to 3-precent magnitude of savings attributable to prospective reimbursement would not suffice to bring hospital cost increases in line with inflation in other sectors of the economy. Nevertheless such savings compounded over time offer a substantial benefit to the economy. Federally supported research experimentation

Between 1972 and January 1977 the Social Security Administration implemented five prospective reimbursement demonstrations involving waivers of Medicare reimbursement principles for short-term acute hospitals. Concurrently, over 20 other studies, developmental projects, and evaluative projects have been initiated. The focus of these activities has been on the hospital, for it is the hospital sector of the health care delivery system which has experienced the most precipitious increase in costs. Since the expiration of the Economic Stabiliization Act in April 1974, the hospital service charge component of the Consumer Price Index (CPI) has risen at an annual rate of approximately 13.4 percent, as compared with the 7.5 percent increase in the overall CPI. Medicare's outlay for hospitals has risen commensurately.

In the past 2 years, DHIS's prospective reimbursement research and experimented efforts have expanded rapidly and entered a “second generation." Six new projects have resulted from a request for proposals (RFP's) issued in September 1975 soliciting offers to develop or implement prospective ratesetting systems. Two of these new contracts are operational: Washington State Hospital Commission and Blue Cross of Western Pennsylvania. The other four, to develop and/or refine prospective ratesetting systems, were awarded to the Massachusetts Rate Setting Commission, the New Jersey State Department of Health, the Blue Cross Association of New York and the Connecticut Commission on Hospitals and Health Care. SSA has also recently signed a two-phased contract with the Maryland Health services Cost Review Commission. These second generation ratesetting activities have incorporated and built upon experience gained from previous research. Each of these new programs is based on mandatory provider participation. The programs will be carefully monitored and analyzed to determine how hospitals would have behaved in the absence of specific prospective reimbursement models and to determine if broader mandatory statewide programs, including all payers, are more effective than earlier "first generation" systems in containing health care costs. Because the procedures used to set rates are perhaps the most transferrable features of ratesetting programs, these analyses will focus on comparison of alternative ratesetting methodologies.

The relationship of the ratesetting authority to other State agencies will also be studied to assess the internal structure of alternate ratesetting agencies. Some of these new programs may ultimately qualify for grants under section 1526 of Public Law 93-641. Under this authority, DHIS will examine the impact of ratesetting models which co-locate the ratesetting and health planning authorities.

In addition to these new ratesetting activities, DHIS will continue to monitor and evaluate a number of ongoing projects, including prospective reimbursement systems operating in Rhode Island, South Carolina, and Western Pennsylvania, and evaluate a number of ongoing projects, including prospective reimbursement at Yale University. The results of these reimbursement activities should provide the necessary empirical evidence upon which to base sound policy decisions concerning the financing, organization, and management of a cost-effective hospital and health care system.

Senator TALMADGE. In your testimony, on page 7, you state, “We do not have local wage-base data for most localities.” I agree with you that this is an important variable in comparing hospitals.

Are you aware that during the drafting of this section we were advised by the Office of Research and Statistics of Social Security that such wage level indicators could be developed prior to the bill's effective date?

Secretary CALIFANO. I indicated that it would take a couple of years to respond to that, they are indicating by fiscal 1981. That's my ex

perience—in fact, we talked about this just yesterday. We believe such data should be developed. We believe some other data should be developed as well. I think you are absolutely on the right track.

Senator TALMADGE. They gave us information last year that that data could be provided prior to the effective date. In your statement, you say that the Department will submit comments on the various sections of S. 1470 during the next several months. As

you know, most of the provisions of S. 1470 were contained in a similar form in S. 3205.

Last July, your department promised to provide us with comments on the various sections of the bill. I understand that, in fact, comments were drafted, but never submitted.

In view of the fact that essentially the same agency people who were operating medicare and medicaid are still running the programs and in view of the failure of it to submit promised comments last year, I expected that we will be marking up the bill during the next few months, rather than waiting around indefinitely.

Once, again, for HEW's possible reaction, do you think you could expedite those comments for us?

Secretary CALIFANO. You bet I will expedite them.

If I may make two other comments, first, we will expedite the submission of our comments. A lot of people are the same. But after the election, there is a different attitude in terms of hospital costs at the top of HEW today than there was in the past.

There are two other sections of the bill that I am prepared to comment on now so that

you understand our view. Regarding section 12, in which you would fold in the radiologists, anesthesiologists, pathologists and others, we believe they should be folded in under any kind of legislation in this area. As you know, Mr. Chairman, from other conversations that you and I have had, we feel strongly that they should be folded in, they should be covered. The day of getting a percentage of the gross, like Robert Redford, or big movie stars, has got to end for the anesthesiologists and radiologists and pathologists of this country.

We may have some technical amendments and ways in which we think we can deal with some of the inherent conflict-of-interest problems.

Senator TALMADGE. We would appreciate that. Secretary Califano, I might say, incidentally, here, that all three of those professions have now agreed to accept a fee for service rather than a percentage of the gross receipts as has been customary.

Secretary CALIFANO. That is terrific.

The other thing that we have already been trying to move on to the extent we can administratively, and which we think is another way in which you have shown foresight, is found in section 20, in the conversion of hospital beds to nursing home beds in rural areas where those beds are clearly excess. We think that is important. We may have some suggestions for extending an enlarging on that concept.

This may be one way to use excess hospital beds in this country. There are 240,000 empty beds, 100,000 of which local agencies have determined to be excess. It is costing the citizens of this country $1 to $2

billion a year.

Senator TALMADGE. I could not agree more, Mr. Secretary:

One of my primary objectives in proposing the creation of the HCFA is to fix accountability, particularly in quality assurance activity. Even though a whole new layer of bureaucracy is being proposed in the new organization to deal with this matter, I am informed that approximately 22 medicare-medicaid related positions are being retained in the Public Health Service to review and sign off on the work of the Associate Administrator of Quality and Standards of the Health Care Financing Administration.

Further, while the PSRO program is being administered by the Health Care Financing Administration, PSRO policy, and the national PSRO Counsel, is to remain in the Public Health Service. Mr. Secretary, can you explain how you can fix accountability and responsibility when you have policy in one agency and operations in another?

Secretary CALIFANO. I do not think I have quite made that separation, Mr. Chairman. What seemed to me important, when I announced this reorganization in February, was to retain an element of quality control within the office of the Assistant Secretary for Health. We do that for two reasons. One, that office itself has programs over which it has control that need quality control, such as HMO's, community health centers, what have you. Some people must be kept there to watch them.

Second, it seemed to me that the broad health professional, medical doctor input was important to have on a continuing basis in the Health Care Financing Administration.

I want to make certain that the Assistant Secretary for Health, which I am trying to build and strengthen as an office, would be capable of providing the kind of advice that he would need to provide on the medical doctor's side to HCFA. That is why I left the organization that way.

Senator TALMADGE. The Bureau of Quality Assurance has its own doctor.

Secretary CALIFANO. I know that, Mr. Chairman.

One of the things that I think this part of the reorganization does which I think you are after, too, is the fact that we have pieces in health, pieces in SRS, and we have pieces in the Social Security Administration.

Senator TALMADGE. Scattered all over the lot.
Secretary CALIFAXO. That is right.

We now pretty much have all the health pieces in health, and pretty much all the financing pieces in the Health Care Financing Administration.

I think the bridge—this sort of dotted line-organizational bridge between the Office of the Assistant Secretary for Health and HCFA, is important; at least for the time being we should have the capability in the Office of the Assistant Secretary for Health, with the medical doctors.

The medical doctors of this country and the health professionals in a very real sense look to that Office. They look to the individuals in that Office as the place to which they best and most effectively relate professionally. I wanted to make sure, at least for the time being, that that capability is there.

Senator TALMADGE. It seems to the committee, Mr. Secretary, that the split still continues with the reorganizational plan rather than with the accountability of one staff and one spot. Rather than getting into a controversy with you at this time, we will wait for the report of the Comptroller General and look at it further.

Senator Dole?
Senator DOLE. Thank you, Mr. Chairman.

I understand that in answer to my suggestion that the Comptroller General take a look at the reorganization, that you have no objection to that, though you would rather not hold off implementation.

Is that because it might disrupt your long-range program?

Secretary CALIFANO. I think that is right, Senator. We have been implementing it step by step for an extended period of time. There are 15,700 people and $58 billion in programs involved, and it will all be completed in 10 days to 2 weeks. I just think we cannot do that. That will not inhibit acting on any recommendations that the Comptroller General has. As I indicated to you, one of the first things I did was sit down with the Comptroller GeneralSenator DOLE. You sat down with him. Did he make

any

recommendations?

Secretary CALIFANO. I did it about 3 months ago, shortly after I became Secretary. He had suggestions in this and other areas and I think

you will find, to a very large extent, that we have acted on many of the ideas that the Comptroller General has given us. Some of them are legislative ideas which we are still studying. Some of them are longer-range ideas.

Senator DOLE. Are these in writing so that they can be made available to the committee?

Secretary CALIFANO. No, I think he left me with books and material that I am sure you can get from him or me. I would be delighted to ferret them out of our records.

There may have been some comments about individual people and their capabilities which I would rather not submit, if you do not mind. All the substantive material about programs and problems and changes covered the whole area of HEW, covered civil rights, covered all facets of the Department, including this facet of it.

Senator DOLE. I understand the subcommittee will make that request of the Comptroller General and hopefully we will have it in 30 days. If he recommends changes, it is my understanding that you are willing to adjust to those changes.

Secretary CALIFANO. I would be happy to look at them.
Senator DOLE. Maybe we can look at them together.
Secretary CALIFANO. Yes, Senator.

Senator DOLE. I want to correct something here. You indicated since the election there has been a new feeling at the top. I think both Nixon and Ford also sought to contain hospital costs with a cap, and we rejected that, too. The only difference is that you have raised your cap to 9 percent. Theirs was 6.7 or 7 percent. They did not do much better than you are going to do, and I think, based on the lack of enthusiasm for your bill, could it be presumed that you might be willing to go along with something like Senator Talmadge's bill?

Secretary CALIFANO. I do not think, Senator, that we can sit and wait without putting some cap on hospital costs. I think that we are in a situation where we have an industry that is immune from all of the traditional incentives of our system.

I think that we have to have the 9-percent cap. If we do not, between now and 1981, we will spend an additional $18.8 billion, cumulatively, as Senator Kennedy has pointed out. I think it is imperative to have that cap. My own judgment is that the only alternative is to have some kind of additional taxes on the American people. I do not think that makes sense.

As I have said repeatedly, there is plenty of fat in hospitals. We identify it in the appendix here: $5 billion of fat, out of which we are only seeking $1.9 billion in the first year.

Senator Dole. Senator Talmadge, of course, does not agree. He sees some savings before 1981 in the Talmadge bill. I think perhaps we can reserve judgment on that.

It seems to me, even if the cap were enacted, you are not separating the efficient from the inefficient operations. You talk about fat hospitals, it seems to be the survival of the fattest. They are going to get the increase, just as the efficient hospitals are going to get the increase. That is the reason for some of the resistance in addition to the argument, how can you guarantee that the hospital costs are going to remain at 9 percent. Do you have that worked out?

Secretary CALIFANO. Let me deal specifically with respect to hospitals that are now increasing at more than 9 percent—and a lot of them are way over 15 percent. We are dealing with some very obese hospitals. We will bring them down to 9 percent, so we would hold them down.

Secondly, with respect to hospitals that are below 9 percent now, they have incentive to become more efficient. The hospital that we do not catch is the hospital that today is charging, say, $300 or $100 for a room and should be charging only $250 for a room. We do not catch that $150.

We think that hospital should be knocked down to $250, but we do not know enough about the bed mix of hospitals, about area wage rates, about a whole host of other things, to do that.

If you are interested in getting after that hospital as well, we are delighted to agree with any legislative proposal that you have to knock that hospital down, but the other hospitals we catch. Senator Talmadge's bill would begin to deal with that hospital with his prospective reimbursement formula in terms of averaging out the classifications of hospitals.

We realize that. We want to get the data we need to do that as fast

as we can.

The concern that we have on the other side with respect to the prospective reimbursement system is it does not do anything to stop the hospitals from continuing going up in their mean averages by 15 percent a year. So neither bill is a perfect world. It is not a simple problem.

We are trying to do our best to deal with this problem. We think that we have gotten as much of it as we can, and at the same time be eminently fair to the hospitals. We are letting their revenues increase by one and a half times the rate of inflation, and we think that is a fairly generous amount, especially with all the waste and inefficiency and excess capacity that there is.

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