TABLE 1.-COMPARISON OF RISK IN THE IOH INDUSTRY WITH RISK IN 24 OTHER CONSUMER PRODUCT AND SERV TABLE 2.-ICF ESTIMATES OF APPROPRIATE ROE's FOR INVESTOR-OWNED HOSPITALS, 1969-75 1 Sales-weighted average of 10 major hospital management companies. Source: Tables 3 and 4 in ch. II. Mr. BROMBERG. That study finds that the aftertax return on equity in comparable industries was 11 to 16 percent. The law has been interpreted to make our return on equity a pretax return. Under present law, we would only get 5 percent after taxes. As the bill is written, under section 46, that would be increased to 7 percent after tax. We think the study will document the need for higher return. I would like to make a comment on the administrative reforms of the bill. On page 22 of our testimony, in addition to the concerns that the chairman and others have expressed we have another one, and that is, that the quality of care may be subordinated to budgetary problems. unless this new Health Care Financing Administration is either placed under the Assistant Secretary for Health or under a new Under Secretary for Health. We do not think it is really possible to separate quality and cost issues. We are afraid that having one agency concerned with costs: separated from the top position in the Department of HEW that those issues will not be properly addressed. Finally, at the end of our testimony, starting at page 25, we make the following conclusions. This bill is a result of a great deal of wellthought-out labor on the part of the subcommittee chairman, the mem- bers, and the committee staff. On its own, it may be considered to be a bill with a great deal of merit; compared to arbitrary cost control schemes, it is particularly commendable. The impact of this bill, S. 1470, on reducing the rate of inflation in cost reimbursement under medicare and medicaid should automatically impact non-Government program costs. Charges to private patients, for example, should rise less sharply because actual costs will be moderated and will be rising at a much slower pace as a result of your bill. For this reason, together with our opposition to any Government price controls over one industry, we urge you to limit application of your bill to medicare and medicaid. We will be very much willing to work with the staff to see how the bill can be applied to ancillaries. We would like to see the concept limited first to medicare and medicaid and with respect to other patients to make sure that there is no shifting of costs. We would recommend use of a general jawboning policy particularly emphasizing public disclosure, rate review, and public finance. It seems to us that there is not enough disclosure in the hospital field. Not only do consumers not pay at the time they get the service, they make payments, but do not pay at the time they get it, but also they are not aware of what the competitive charges are. It seems that the first step to stimulate the competition would be disclosure. Second, the threat of adverse publicity, for example, from findings of local insurers or the President's Council on Wage-Price Stability in the cases of unjustifiably high rate increases, the threat of adverse publicity in itself would create a problem which most hospitals would attempt to hold down climate increases. A national guideline for hospital price increases could be established, with review of such increases by the President's Council, utilizing publicity. We commend the committee for taking the lead in changing the medicare and medicaid programs, and thank you for this opportunity to present our views. Senator TALMADGE. Thank you, Mr. Bromberg, for your constructive testimony. Do you have any questions, Senator Dole? Senator DOLE. Just briefly. It is an excellent statement. I asked the previous witness why does not the free market operate in the medical care arena and I just noted that you were sort of nodding your head. I could not get that in the record. I thought I would ask you the same question. Mr. BROMBERG. Let me take a shot at it, Senator. I think, Senator, it has not worked because nobody has let it work. I think this bill, S. 1470, is the first effort I have really seen in the Congress to inject competition. I think competition can play a role. I agree that hospitals are not like automobile companies, but there are certain analogies. We do not, for example, say that there should be a 9-percent limit on automobiles or food or housing, although people spend almost as much on food and housing as they do on health. We do say if you want to buy a Cadillac instead of a Chevrolet you have that right. We are not going to take that away from you and say that all cars should be no higher in quality than Chevrolet, but because the patient does not have that choice under the administration bill-it would just put a flat cap on that-that eliminates competition. By classifying hospitals by size and looking at the average costs, that is the classic way of stimulating competition: by rewarding efficiency. Until we have more public disclosure, until we have more patient cost sharing, we cannot have true competition in that sense. Senator DOLE. That is the point I wanted to make. Only 10 percent of the costs now are paid by the patient, is that correct? Mr. BROMBERG. Yes; that is correct. Third party payers not only pay them, but the patient never even knows about it. Although he pays the premium, he pays that premium at the beginning of the month. He does not pay it when he sees the doctor or goes to the hospital. That is another problem, paying at the time that the service is received. We realize that there are people who cannot afford it, that to the medicaid patient, the first dollar coverage may be catastrophic. To the vast number of other Americans, that is not true. It does not have to be applied that way. Senator DOLE. I do not know how the insurance companies work. Maybe I can find out. It seems like they should be exercising a costconscious discipline when they decide what rates to pay and what premiums to charge. Maybe they do, but it must not be very tough. Mr. SAMSEL. They should be considering what benefits should be offered to the public as well-what benefits, possibly that the beneficiary should be paying the first dollar. Senator DOLE. One way to bring about efficiency, when I start paying more, I take a closer look at it. Mr. BROMBERG. When you have cost reimbursement, we will pay you whatever you spend. There is no way you can stimulate competition or efficiency. The more you spend, the more you get. The other point I would like to make, you asked the question of a prior witness as to whether there were any fat hospitals in their association. Under the administration bill, the fat hospitals would get fatter. The problem is even more compounded. Senator DOLE. I suggested it would be the survival of the fattest. I guess that would fit the administration's program. Finally, there has been a consensus or a feeling among those who testified that perhaps the bill introduced by the chairman and others should be expanded to cover all payors. You do not feel that this would be satisfactory, or workable, or necessary? Mr. SAMSEL. I do not feel it should be extended at this time. The extension to other fields, such as the third party payors, direct payment, robs the management again of his essential management techniques at arriving at the appropriate price levels he should be charging for services. We do not believe that the outside bureaucratic influences can really come to the appropriate price levels. They should be charged for an individual hospital. We are talking about very complex organizations. Many things have to be taken into account. We are utilizing very good management techniques to arrive at those various areas that are necessary to address in setting rates. We do not believe that they can be ascertained from outside the hospital itself. I do not think Government establishing the price level is only a temporary measure and it really takes away from the manager his abilty to be efficient in the long run. Mr. BROMBERG. Taking it across the board would, in effect, do to the hospitals what the Health Security Act does to the whole health system. It places in the hands of the Federal Government total control over an industry, in this case, part of an industry, hospitals. think it is that objection to price controls, as well as the fact that until we see how it works under medicare and medicaid, we would be making a dramatic jump, that leads us to that conclusion. Mr. SAMSEL. You would be greatly surprised what incentives would do for the efficient management of hospitals. Senator DOLE. I am certain they are significant. Are the investorowned operations costs less? Mr. BROMBERG. Last year we paid $50 million in property taxes and $150 million in income taxes, so we are a taxpaying industry as well. We like to think our rates are very competitive. One other point-it came up yesterday, and I would like to address it briefly. Secretary Califano has made several comments over the past 2 weeks about one example of the fact that hospitals could cut is the $1 billion in profits that exist. I would like to point out for the record, as I have to him in a letter last night, $1 billion surplus from 7,000 hospitals, 6,000 of which are nonprofit, $1 billion surplus on $55 billion in revenues is less than a 2-percent margin which I think is not only low, but dangerously low. Our particular industry is a for-profit industry. We had $250 million profits on $5 billion in revenue, or 5 percent. When compared to any other sector or any other industry, any other sector of the health field, certainly when compared to hospital supply companies, that is dramatically low. If the quality of just existing plant and services is to be maintained, I think a 2-percent reserve should not be used as an example of where costs need to be cut. It shows a misunderstanding, I think. Senator DOLE. Thank you. Senator TALMADGE. Thank you very much, gentlemen, for your very constructive and very helpful testimony. [The prepared statement of Mr. Bromberg follows:] STATEMENT OF MICHAEL D. BROMRERG, DIRECTOR, NATIONAL OFFICES, AND ROBERT J. SAMSEL, PRESIDENT, FEDERATION OF AMERICAN HOSPITALS On behalf of the members of the Federation of American Hospitals, we would like to thank the Committee for this opportunity to present our views on proposed reforms of the Medicare and Medicaid programs. I am Michael D. Bromberg, Director. National Offices of the Federation. Accompanying me is Robert J. Samsel, President of our organization and Vice President of American Medical International, Inc., one of the world's largest hospital management companies. The Federation of American Hospitals is the national association of investorowned hospitals, an industry with 1,050 hospitals in the United States and over 111,000 beds. In addition, our member hospital management companies now manage under contract over 165 additional hospitals, including teaching institutions, public, religious and other community non-profit hospitals. As tax paying institutions, investor-owned hospitals have been particularly interested in modern professional management of our nation's health facilities. S. 1470 recognizes the need to amend the Medicare and Medicaid programs in order to provide economic incentives for effective and efficient management -systems in participating hospitals. We commend the Subcommittee Chairman for his leadership in proposing these meaningful incentives. RISING COSTS When Medicare and Medicaid were first enacted eleven years ago, and until quite recently, Congress perceived its role to be one of increasing and assuring access for the elderly and the disadvantaged to quality health care. That public policy decision triggered the demand-pull inflation which is a major reason for these hearings. Since government has become the largest single purchaser of health care, the marketplace has become increasingly artificial as government control over both the supply and demand intensifies. The hospital industry has been hit with severe inflationary pressures for the past ten years and in particular, following the expiration of the Economic Stabilization Program in early 1974. Those major pressures included catch-up wages in a labor intensive industry; escalation of prices for the goods and services purchased by hospitals, particularly in food, fuel and malpractice insurance; a rapidly changing medical technology in which new diagnostic and therapeutic techniques and expensive new equipment are centered in the hospital; inflated material costs for hospital modernization and expansion programs; the increased costs of borrowing capital; increased costs of compliance with government regulations; and the Medicare-Medicaid retrospective cost reimbursement formula which provides no incentives for efficient management and fails to meet its fair share of the total financial requirements of hospitals, forcing institutions to shift additional costs to private patients. This combination of demand-pull and costpush inflation has created a hospital industry with an annual inflation rate well above the overall consumer price index. HEW has identified three major causes for soaring inflation in the hospital sector of the health industry: unrestrained demand, lack of competition among facilities, and the current system of cost reimbursement. However, instead of addressing those underlying causes of inflation, the Administration has opted for an arbitrary ceiling on revenues and capital. In its haste to solve within a few months a budgetary problem which has been snowballing for twelve years, the Administration has developed a scheme which exacerbates all that is wrong with the health care payment system. There are other crucial issues which the Administration plan impinges upon. It is a conflict of interest for government, as the major purchaser of health services, to unilaterally determine the price that it will pay for those services. Further more, the scheme, as proposed, fails to acknowledge a number of unalterable factors which in large part predetermine hospital costs, and therefore, charges. For example, hospitals have no legal authority to control such physician directed (and revenue determining) factors as length of stay, number of services, and the frequency of admissions. Nor do we seek such control, because it must be left to the physician (under direction from peer and utilization review boards) to make such decisions. However, an arbitrary cap on revenues ignores physician, not hospital, authority in this area. The revenue cap also fails to recognize that minus a cap on the cost of supplies and services, hospitals would be forced to absorb such costs, to the detriment of the quality of care delivered. A ceiling on revenues is price controls on a single industry. It amounts to nothing more than a more stringent version of the Phase IV hospital price control program rejected by a prior Congress for sound economic, social, and medical reasons which remain valid today. S. 1470 In contrast with the Administration proposal, the Medicare-Medicaid Reimbursement Reform bill re-introduced by Senator Talmadge, represents a major step forward in making those programs more cost efficient. It is an innovative, imaginative plan reflecting an examination of both cause and effect as a necessary adjunct to proposed solutions. The measure correctly presupposes |