Representative COHEN. The States' experience, per se, could be that the 40 States actually opposed, or had allowed proprietaries to operate, you would still oppose HEW coming in and mandating their allowance or disallowance, based on State experience?

Representative KоCH. Maybe I misunderstood you. What I am saying is that if HEW did nothing at this moment, then the States can either have the proprietaries or not. That is their privilege at this time.

Now, HEW will make a disposition. It has said you must have proprietaries included. I say that prior to my accepting that, HEW will have to establish legitimate regulations on its survey in the field. If it decided that proprietaries are doing a good job, and, in fact, State legislatures are simply prohibiting them or admitting them, based on considerations other than delivery of service, then the 50 percent contribution that the Federal Government is making should overwhelm that State's particular desires.

Representative COHEN. The fact in this, the factor in your mind is a study undertaken by HEW, rather than the experience of the State legislatures?

Representative KоCH. Subject to this caveat: If the Federal Government study shows the proprietaries are in order and ought to be included, and orders the States to consider that, I am in accord.

If the Federal Government orders the States to employ proprietaries, notwithstanding studies indicating that in a particular State the proprietaries are not doing a good job, I would be opposed to that.

FEDERAL VERSUS STATE GOVERNMENT

Representative COHEN. Before the Federal Government overrides the State government, there must be a clear and compelling case why our judgment, as such, from the Federal point, must be superimposed?

Representative KoсH. Correct.

Representative COHEN. One final point I would ask you. Do the nonprofit nursing homes also operate under medicaid standards as opposed to medicare?

Representative KOCH. I really cannot tell you whether the voluntaries avoid licensing under medicare. I could check that out. I would suspect that it is more prevalent in the proprietary area.

Representative COHEN. Is it something prevalent in the proprietaries that they go toward one rather than the other because of the profit, or do the nonprofit homes also try to come under the medicaid?

Representative KocH. It is not simply a question of profit. It is also a question of regulations relating to how they can conduct their home. As I said, I do not know at this moment, but I shall ascertain whether the practice of not having coverage under medicare also applies to the voluntary home.

Representative COHEN. Thank you.

Senator Moss. Mrs. Lloyd.

Representative LLOYD. Thank you very much, Mr. Chairman.

I want to thank you, Congressman Koch. We appreciate your effort and what you have done in this area. I agree with you; I think that the States should have some role in making this decision.

The medicaid program certainly has standards that are lower than for medicare.

Representative KосH. Medicaid are lower than for medicare.

Representative LLOYD. Yes; that is right. Is this due to a lack of State funding?

Representative KOCH. I do not think so. Title XVIII covers medicare. Title XIX covers medicaid and empowers each of the States. to promulgate its own regulations. It was a compromise that came into being when medicaid was initiated in 1966.

MINIMUM FEDERAL STANDARDS?

I think it was proper at that time. I think it is wrong today. I honestly believe that State legislatures are subject to more operator pressures than we are, and we are subject to a lot. I think that they are less able to resist the special interests that are present, and, therefore, we should not allow the standards to be set by the States. We should have a minimum Federal standard.

I would change titles XVIII and XIX so as to set identical standards for the care, medicare or medicaid, whether it is nursing home or home health care.

Representative LLOYD. Do you think there is a failure of service in areas where incomes are lower?

Representative KOCH. You mean by virtue of the States partici

pating?

Representative LLOYD. Yes.

Representative KOCH. I really do not have the facts to respond to that. I just have not made an analysis of the States to make a competent judgment.

Representative LLOYD. Thank you very much.

Representative COHEN. I would like to follow the line of questioning where you indicated the State legislatures are more susceptible to special interest pressure. If that is the case, how do you explain that you have 40 States who have banned the use of proprietaries in the home health care area?

Representative KоCH. That is in just that one area. I am making a general statement: that, in my judgment, State legislatures are less able to resist the special pressures and special interests. I am not suggesting corruption. I am just talking of what is normal.

Representative COHEN. Thank you.

Senator Moss. Thank you very much, especially for that last opinion. I enjoyed that.

We do appreciate your coming, and I again commend you for all your good work on behalf of the elderly.

[Representative Koch's prepared statement follows:]

PREPARED STATEMENT BY REPRESENTATIVE EDWARD I. KOCH Chairman Moss, Chairman Pepper, members of the subcommittees, I am most appreciative of your invitation to appear before you at this joint hearing called in response to the proposed amendments to the regulations governing home health services under the medicaid program. You are to be commended for your attention to the need for alternatives to institutional health care of our elderly and our disabled, and for your aggressive oversight of Federal medicaid policies.

As the prime sponsor of the National Home Health Care Act of 1975, as amended, H.R. 9829, which would expand home health care benefits under

medicaid and medicare, I am pleased the proposed HEW regulations include the expansion of home health services under the medicaid program. It is gratifying to know the administration shares our conviction that a national commitment is long overdue to guarantee quality, a cost-effective home health care for those who need it.

However, I am concerned that the accomplishment of this goal not be a pyrrhic victory for those of us who advocate it. Recent testimony before your subcommittees and State legislative committees across the country has documented a grim story of inadequate care, corruption, and fradulent practices in nursing homes. One central fact underscores these disclosures. Most abuses are directly traceable to the laxity and inadequacy of administrative procedures and policies in a system of government creation. Let us assure that a similar chapter of fraud and corruption is not written with the expansion of home health care, whether by administrative action or by legislation. Both the Congress and the administration face a similar challenge in structuring Federal legislation or administrative regulations to expand and safeguard home health care benefits. It is how to reconcile the established concept behind the medicaid program of allowing participating States broad policy latitude while enforcing Federal regulatory curbs on prevalent abuses. A delicate balance must be struck. In one respect, a State must have sufficient control over medicaid to permit the tailoring of the program to its medical needs and fiscal resources. At the same time, we must insist on sufficient uniform regulation to allow effective quality control in a program so heavily supported by Federal money. The regulations proposed by the Department of Health, Education, and Welfare are unequal to these important objectives in two major respects.

First, the proposed regulations would preempt a State's authority to determine the fitness of an individual provider to wit, a proprietary home health agency, to render the quality of care for which it will be reimbursed.

I want to make clear the basis of my opposition to mandated licensure of commercial enterprises. I do not believe profitmaking is, of itself, necessarily a bad mode in health care. Nor would I, as some would, grant the voluntary, nonprofit organizations exclusive domain over the delivery of home health care. My concern is that the proposed regulations respect that authority which properly belongs within the province of the States, consistent with the intent of the Congress. In four major legislative acts, Congress has left it to the States to determine the extent to which commercial enterprises can participate as providers in federally funded health care programs. In their respective wisdom, some 40 States have chosen not to license home health agencies or commercial health providers. I submit that neither the Congress nor the Department of HEW has any business imposing licensure of proprietary agencies on the States, who, after assessing local experience and conditions, have concluded such action is not in the public interest.

The words of Governor Hugh Carey of my State of New York, in his message vetoing legislation which would have licensed proprietary home health agencies under medicaid, bear repeating:

"Although I recognize the quality of care that existing home health agencies are providing, I consider that the implication of opening up medicaid funding to a new class of profitmaking providers have not yet been fully explored."

CONGRESS GIVES STATES RESPONSIBILITY

In recent years, the Congress has placed on the States increasing responsibility for planning and regulation of health care institutions of all types. To effectively discharge this responsibility, the States must have the authority to determine on the basis of local needs and capacities, the composition of the health care delivery system, including whether or not commercial home health agencies should be licensed for medicaid reimbursement. I urge the subcommittees to insure that this authority not be abrogated by the proposed regulation. The proposed regulations are deficient in a second respect whose ramifications are potentially more deliterious.

The medicaid program has primarily been a State responsibility with a modicum of Federal regulation. If, from the States' perspective, this is the medicaid system's principal attribute, from a Federal point of view it is the program's potential nemesis. For the simple fact is that most States have failed to develop surveillance machinery to safeguard against fiscal abuse and inadequate care. As a consequence, fraud, corruption, and malfeasance is widespread among medicaid programs today.

Given this reality, it is shocking that the proposed regulations do not contain stringent requirements for financial audits, surveillance of utilization, and inspection and enforcement of standards of care as well as the sanctions to make the potential effectiveness of these tools actual. Without them, the same uncontrollable abuses will be fostered in home health care as have scandalized nursing home care.

The proposed regulations should begin the overhaul of the regulatory process of the medicaid system. This is particularly urgent, in light of the unique problem of policing the quality and appropriate utilization of services that are not rendered in a single facility but in individual homes.

I have introduced legislation (H.R. 6494) to provide accountability and the financial incentives for good care in nursing homes. The bill's principal provisions are contained in sections 9 and 10 of my home health care legislation, H.R. 9829, and should, I believe, be included in any Federal regulations expanding home health benefits.

The administrative reforms enumerated in H.R. 6494 and H.R. 9829 are aimed at two broad areas. First, the survey and certification process through which a home health care provider is licensed and regulated. Second, a State's fiscal audit authority to determine whether the services rendered warrant reimbursement and how and when these reimbursements will be made.

Permit me to separately deal with each area.

When a health facility or program opens for business, it applies to either the medicaid or medicare programs for reimbursement, or both. Section 18 (medicare) facilities and program are subject to survey and certification by the medicare intermediary operating the program. for instance, Blue Cross, and ultimately by the HEW Office of Long-Term Care. Under section 19 (medicaid), however, the survey and certification function is handled exclusively by the State. While each program nominally follows the same rules, the control and enforcement under the medicare program has proven far superior to that under medicaid. Not surprisingly, nursing home operators guilty of abuse are almost invariably enrolled under medicaid and not medicare. My legislation aims to end this two-standard system by requiring the same audit of medicaid home health agencies and nursing homes that is now mandatory for medicare facilities and programs. The proposed regulations should include a similar proviso.

But even this improved oversight is not fully adequate if the incentives for abuse are to be eliminated. Regulators of medicaid reimbursed health programs and facilities across the Nation are hampered by serious limitations on their power. My bill would eliminate these limitations and I would urge that the following two provisions be incorporated into any Federal regulations concerning home health care.

Currently, when a State medicaid agency chooses to cut off reimbursements to a health facility or program, which has violated its agreement to provide quality, cost-effective care, the state agency may not terminate payments until the process of judicial review is completed. My bills would vest State medicaid agencies with the power now enjoyed by Federal medicare officials to suspend reimbursement payments pending court review.

AUTHORITY RESTS WITH STATE

In addition, medicaid State administrators now have no choice but to close a facility or program entirely or leave it open upon a determination that care has been inadequately provided or not provided at all. The key to effective enforcement is the utilization of appropriate sanctions short of decertification. My bills would equip the medicaid administrator with two other remedies: the authority to bar new patients, thereby putting gradual financial pressure in a home health care program and, the authority to order that certain services in which a program's performance has been particularly deficient be transfered to a hospital or another home health care program. The task of insuring that home health care program are of uniformly high quality cannot be satisfied unless Federal regulations vest such authority in medicaid administrators.

Now permit me to turn to the second area in need of administrative reforms: the fiscal audit procedures of medicaid.

Under medicaid this area of responsibility falls within the province of the States. This power includes both the right to determine the method of reimburse

ment computation and the power to decide whether the services delivered warrant reimbursement.

To date, the States have used their ratesetting power to develop one of two systems: fixed cost rate programs in which reimbursement is offered at a preset rate up to total reimbursement ceiling per patient or, as New York State has done, a cost-plus formula in which all costs are reimbursed except for those specifically disallowed by a post audit. The problems with the New York cost-plus system have received ample publicity in recent months, but the fact is that neither system offers the kind of fiscal control essential to cost effective delivery of services. States using a per diem flat rate leave themselves open to lower quality care and usually set unreasonably low payment levels. States like New York that pay on the basis of costs don't ask whether the costs incurred were reasonable, only whether they were incurred. In failing to ask the former question, they leave themselves open to massive overcharges.

The legislation I have introduced would steer a middle ground between the overly rigid fixed cost and overly flexible cost-plus mechanisms. It requires medicaid home health agencies and nursing homes to utilize cost-related, prudent buyer methods of purchase, so as to reflect reasonable costs. After certification of the cost basis by the State agency, the Secretary of HEW has the power to revise future reimbursement if necessary to reflect reasonable costs. By recommending that the proposed Federal regulations include a similar provision, you will insure that the States ask not merely what did it cost, but what should it have cost.

A number of other limitations in the regulatory procedures of the medicaid program would be remedied by my legislation and I would urge the subcommittees to recommend that Federal regulations contain similar measures. The control of the medicaid post audit is difficult to exercise due to the frequent absence of attachable equity by the nursing home operator. Hence, my bill would require a nursing home operator to post a bond. Federal regulations should require the same of home health agencies. This will avoid the increasingly common situation in which medicaid audits a home and finds it owes money. but when medicaid trys to collect, the operators close down and leave the bill unpaid. Through such a requirement in the proposed regulations, States will be certain to recoup reimbursement that cannot be justified by the services provided.

A second limitation exists in the definition of the requisite arm's-length relationship between a service provider and facility or program operator. Many States place no restrictions in this area. In the case of the States that do, usually only persons who are related to one another or who have mutual interests in a common nursing home or health program are barred from buying or selling to one another through "sweetheart deals." My bill would prohibit reimbursement for transactions between persons engaged in a third business, no matter what the field. It will also require disclosure by nursing home or home health agency owners or operators of any interest in businesses providing goods or services to nursing homes or home health agencies.

The legislation also mandates disclosure, for all medicaid and medicare nursing homes and home health agencies, of any persons with ownership interest in a home or agency, or in the land or building housing the home or agency.

In short, Chairman Moss and Chairman Pepper, reform of the administrative and regulatory processes of State medicaid programs is long overdue. The proposed regulations were not intended to begin this task. But at the very least, the expansion of home health care benefits through administrative regulations must coincide with the implementation of the basic reforms I have outlined. Without these safeguards, the incentives for abuse implicit in most State medicaid programs will not be eradicated once and for all.

Senator Moss. We would appreciate it if our first panel for today comes up.

Dr. Amitai Etzioni, professor of sociology, Columbia University, and director for the Center for Policy Research. Dr. George Warner, M.D., special assistant to the commissioner of the New York State Health Department, Albany, N.Y. Mr. Gerald A. Hawes, audit manager, office of the auditor general, Sacramento, Calif.