made. . . under the various titles of the Social Security Act". Specifically, this amendment provides for the designation of professional standards review organizations with such organizations qualified in order of preference, as

(a) a non-profit professional society

(b) such other public non-profit, private or other agency or organization which the Secretary determines has the professional competence and is otherwise suitable.

The objectives of this proposed amendment and the creation of professional standards review organizations as the primary mechanism of control fails to take into account the importance of the interdependence of existing organizations and their peer review activities operating in the health care delivery system today. The notable example is the institutional provider of care. In the hospital setting there are defined functions of professional and clinical review by the medical staff all serving the objectives of effective and efficient delivery of health services. These include provision for :

Executive Committee-whose functions among others include coordination of activities and general policies of the various departments. Implementation of approval policies of the medical staff.

Credentials Committee with responsibility to review applications for appointment to the medical staff with recommendations of privileges to be granted to each medical staff member.

Joint Conference Committee to serve as liaison among the medical staff, governing body and administrator to provide channel for medico-administrative advice.

Medical Records Committee to review quality of patient care provided in the hospital by supervision of the maintenance of medical records at the required standard of completeness.

Medical Audit and Tissue Committees review and evaluate the quality of medical care provided all categories of patients on the basis of documented evidence.

Utilization Review Committee review hospital admissions with respect to the need for admission, length of stay, discharge practices and evaluation of the services ordered and provided with particular emphasis on the appropriateness of use of the facility and its services.

Infections Committee review inadvertent hospital infection potentials and cases and promotion of preventatives and corrective programs.

Pharmacy and Therapeutics Committee who carry out surveillance of pharmacy and therapeutic policies and practices to assure optimum utilization with the minimum potential for hazard.

These committees have a responsibility to report their findings and recommendations to the Executive Committee of the Medical Staff. The Executive Committee of the Medical Staff carries out these functions under the direction of the Medical Staff by-laws of the institution which reflect the approved structure for the Board of Trustees of the institution to fulfill their corporate responsibility to the community.

Against the activities of these organizations in influencing the effectiveness and efficiency of delivery of health care services there is a wide range of activities carried on by financing agencies, such as Blue Cross, both in our role in the private market and also as an Intermediary under the Medicare and Medicaid programs. In this regard our objectives are to influence patterns of care by careful claim review against defined levels of benefits. The broad range of benefits and the depth of definition of each benefit provides the framework for claim review. Some benefits are clearly defined and easily administered, others are not as easily defined and the pattern of care reflected in claim information can represent overlaps and gaps in the patterns of medical practice. The experience under the Medicare program in reviewing the benefit definitions of the extended care facilities clearly demonstrate that care may be medically necessary, but not a covered benefit under the program.

The claim review carried on by financing agencies are supported by professional standards and professional review, either by salaried physicians; the services of institutional utilization review committees or under agreement with county medical societies.

To remove beneficiaries of the various titles of the Social Security Act from the peer review activities of institutional providers or financing agencies and turn them over to a new untested organization would seriously diminish the effectiveness achieved through these review programs serving both public and private beneficiaries and subscribers.

47-530-70-pt. 229

Further, physician services and the resulting costs are not simply professional judgments. The sum total of these decisions become questions of public policy and the need is for affirmative and accountable public and managerial action rather than a narrowing of the decision-making to professional societies.

It is important to have professional judgment and more physician concern with issues and we by no means deny the importance of this. Indeed, we need to find more ways of getting physicians involved in hospital management and the broader aspects of health administration. It is essential, therefore, that we encourage greater involvement of the professional in standard setting.

There are many aspects of this amendment which can support existing patterns of review. These include:

(1) the development of regional standards of care;

(2) substitution of a more workable system of recertification;

(3) use of the standards of care as a screening device; and

(4) the development of experiments where organized delivery systems can offer their services on an underwritten basis.

We would urge that the amendment be modified so that the function of professional standards review organizations be directed at the establishment of standards and norms to be used by institutional providers in their review activities as well as financing agencies in their claim review activities. The professional standards review organization should also be available on an appropriate agreement basis to substitute for the gaps existing in review in such areas as home and office care, or, extended care and home health services. The amendment already recognizes the difficulties in developing capability of such organizations where there is no existing expertise, staff, systems or data gathering techniques, among others. It should also be understood that the development of professional standards, acceptable to the medical profession, will be slow and expected results would be limited to the establismment of ranges around which those administering review functions would operate.

Thank you Mr. Chairman for this opportunity to present these viewpoints for Blue Cross.

Senator ANDERSON. Have you any questions?

Senator BENNETT. I have three questions.

Are you aware that the president of the Blue Cross Association, Mr. McNerney, has publically and privately acknowledged hospital

overutilization?

Mr. TRESNOWSKI. Yes, sir, I am, sir.

Senator BENNETT. For example, the Health Insurance Benefits Advisory Council minutes report Mr. McNerney as replying in the affirmative to the contention that "where bed space is available patients are admitted to hospitals for rest rather than medical care.'

Mr. TRESNOWSKI. That is correct, Senator Bennett. Mr. McNerney did a rather extensive study in the State of Michigan on hospital and medical economics where through some scientific approaches he was able to identify substantial overuse as well as substantial underuse. Senator BENNETT. In your statement you describe an elaborate structure of hospital review committees. Form is one thing. Substance is another.

Can you please provide for the record specific evidence of widespread effectiveness of those internal hospital review committees in each of the 70-plus Blue Cross plan areas?

Mr. TRESNOWSKI. The existing peer review mechanisms in institutional providers and financing agencies represent the state of the art as far as approaches to improve the effectiveness and efficiency of care. One of the provisions of the law, section 1862 (a) (1), calls for disallowance of care which is unreasonable and unnecessary. The major difficulty in the administration of that provision is that we do not have adequate standards of what constitutes medical necessity, and

if institutions are working in the absence of some standards for institutional procedures, they cannot effectively do their job. Neither can the financing agencies, so we do not have evidence, good evidence, that institutional providers or financial agencies, including ours, have done an effective job in this area. That is why we recommend to you that the professional standards review organization take on as its primary function the establishment of a regional or other basis standards of what constitutes medically necessary and unreasonable and unnecessary services.

Senator BENNETT. I think that is implicit in the amendment. It has to be done on a regional basis.

Mr. TRESNOWSKI. I agree.

Senator BENNETT. To have any particular and necessary effect. Dr. Angelides, appearing before the Senate Judiciary Committee in April, said among other things:

To minimize misutilization of the hospital requires a great deal of work and changes in current practices, but it is worthwhile when you consider that 30-35 percent of the patients in acute short-term general hospitals do not need to be in this type of costly facility.

This is a very large sum of money which can be used to provide more health services in the community. Do you have any comment on that estimate of Dr. Angelides?

Mr. TRESNOWSKI. No, I have heard his estimates. And I have also heard other estimates that range as high as 60 to 65 percent, Senator Bennett.

Again, one really never knows what the effectiveness or use of a hospital is until there are established criteria of what constitutes effective use. In the Michigan study that Mr. McNerney did, he identified 18 diagnoses and put together panels of physicians to establish criteria for effective use of the hospital over these 18 diagnoses. Now you have the standards, now you have the criteria against which you measure and you can then specifically know whether the use is proper

or not.

Senator BENNETT. I think implicit in this bill is the development of similar standards on a regional basis.

Again, I agree with you, if you don't have standards and norms or some kind of basis for measurement, you can't operate this systemMr. TRESNOWSKI. That's right.

Senator BENNETT (continuing). Effectively under any circumstances. Mr. TRESNOWSKI. And all we are asking is that the primary function of this professional standard review organization be the establishment of some standards but not substitute for existing peer review mechanisms. Rather than substitute for these existing mechanisms, we ought to have a variety of approaches to control the cost and use of quality care.

Senator BENNETT. That's right. It is my understanding where these local and existing mechanisms are effective, we will expect the new peer review organization to include them or work with them or base their studies on them. But they have the primary responsibility. If we are having ineffective utilization from 30 to 60 percent, then there is a wide open field for careful restudy from a new point of view of this whole question of hospital overutilization. I have nothing further.

Senator ANDERSON. Thank you very much.

(The following communication was subsequently received by the committee :)

Hon. RUSSELL LONG,

BLUE CROSS ASSOCIATION, Chicago, Ill., September 25, 1970.

Chairman, Senate Finance Committee, New Senate Office Building,

Washington, D.C.

DEAR SENATOR LONG: The Blue Cross Association Senior Vice President, Bernard R. Tresnowski, testified before your Committee on September 17, 1970 with respect to H.R. 17550. However, it was not until September 21, 1970 when the Honorable Meade Whitaker, Tax Legislative Counsel of the Treasury Department, testified before the Committee that we were aware of the substance of the Treasury Department's recommendations on information reporting of payments by third parties to providers of health care. We, therefore, appreciate the opportunity to offer this additional statement concerning the Treasury's recommendations which would require a broad extension of information reporting by carriers and other organizations, including Blue Cross Plans, which make health care benefit payments.

The vast bulk of payments by Blue Cross Plans are made directly to hospitals and related institutions pursuant to contracts between the Plan, its subscribers, and member hospitals. A small balance of Blue Cross payments are made directly to the subscriber-patient. The Treasury Department has cited no alleged evasions with respect to hospitals and related institutions, whether they be tax exempt or non-exempt, and does not appear to be concerned with payments to other than doctors. We do not believe that a reasonable need for hospital payment information exists. Until now, under IRS regulations, no report of payments to incorporated institutions has been required. Indeed, even the Treasury Department's current proposals would exclude payment to tax exempt organizations.

The Treasury Department's new recommendations, while not entirely clear, seem to indicate that for both assigned and unassigned payments, carriers are to report the amount of provider charges and the extent of reimbursement by carrier payments. In view of co-insurance and deductible provisions of health care contracts and provisions which exclude payment for specified health services, such reporting would likely yield information to the Internal Revenue Service of dubious accuracy and value. Further, since there is no assurance that the reimbursed patient paid the provider, the information reported might well be misleading.

While the cost of implementing Treasury's new recommendations has not been fully estimated, if only one facet of the recommendations is considered, the high cost is apparent. Where a patient submits bills for health care, the carrier is seemingly not required to report payments to the patient but to determine the identity of each provider and his charges and to report those over specified amounts and aggregate such charges. The amount of paperwork would be enormous. The report of the Task Force on which a Blue Cross representative served discusses these and other important aspects of information reporting in detail.

Each of the 74 Blue Cross Plans operating in the United States is non-profit and tax exempt under Section 501(C)(4) of the IRC of 1954. Increased costs incurred by reason of complex reporting requirements can only result in increased rates for all Blue Cross subscribers. We urge that this burden be not increased by onerous requirements which might well produce information of doubtful utility.

We stand ready to assist in the formulation of necessary, reasonable and well-considered reporting requirements. Respectfully submitted.

GEORGE HEITLER,

Vice President, Legal Counsel, and Corporate Secretary. Senator ANDERSON. The meeting will adjourn now and meet at 10 o'clock Monday morning.

(Whereupon, at 12:55 p.m., the committee was adjourned until 10 a.m., Monday, September 21, 1970.)

SOCIAL SECURITY AMENDMENTS OF 1970

MONDAY, SEPTEMBER 21, 1970

U.S. SENATE, COMMITTEE ON FINANCE, Washington, D.C.

The committee met, pursuant to recess, at 10:20 a.m., in room 2221, New Senate Office Building, Senator Russell B. Long (chairman) presiding.

Present: Senators Long, Anderson, Williams of Delaware, Curtis, and Jordan of Idaho.

The CHAIRMAN. The hearing will come to order.

On July 1, 1969, the Committee on Finance took testimony with respect to the nonapplication of the statutory requirements that payors of amounts of more than $600 per year must report those amounts to the Internal Revenue Service, together with the identification of the payee.

This general rule applies to all situations where the payments involved are made in the court of a trade or business. The committee was shocked to learn that even the Department of Health, Education, and Welfare, which administers massive medicare and medicaid programs, were not furnishing the tax collector with information regarding large payments made to providers of health services under those programs.

As a result of our concerns, the committee added a provision to the Tax Reform Act of 1969 calling for information reports by insurance companies and governmental agencies making health care payments aggregating more than $600 per year. At the same time, the committee made available to the Internal Revenue Service information it had collected with respect to persons receiving more than $25,000 under these programs in 1968.

The committee amendment was deleted from the Tax Reform Act in the conference with the House. One reason for its deletion was the fact that the Internal Revenue Service had, subsequent to the action taken in the Committee on Finance, issued a ruling announcing a change in its policy.

Under the new policy, direct payments-those made directly to the provider of health care services by insurance company pursuant to an assignment by the insured patient-were required to be reported to the Internal Revenue Service in the future. The ruling did not deal with payments made by the company to the insured patient. This morning, the committee will hear spokesmen from the Treasury Department with further respect to this reporting matter. I am advised that for several months the Internal Revenue Service has