mately $26,000 per bed. By 1973 the cost per bed had doubled. It is estimated that, even with fiscal restraint and restrictions on expansion, expenditures throughout the U.S. for the construction of health facilities will be $5 billion annually by 1980. Substantial investments are required for health care facilities in order to comply with federal design and construction standards. The accelerated pace of medical technology has induced investment in the latest, most sophisticated equipment which may soon be out-of-date. Health care facilities constructed forty and fifty years ago anticipate large capital investments to replace the existing physical plant. All of these influence the need for capital investments. Inasmuch as third party reimbursement is the major source of payment for inpatient services and third parties generally base reimbursement formulas on cost, the common effect of increased costs is increased revenues (within limits). If prices of health services are to be contained, given the unique nature of the market, then increases in costs must be contained. The area of health costs most subject to control is capital expenditures.

Even with control over costs of health services, total expenditures may continue to increase if utilization of health services increases. Again, the unique nature of the market keeps the demand for health services from being affected significantly by price. It is unlikely that consumers, who do not bear the actual burden of the costs of services which they receive, or physicians, who have major influence over the use of health services, will reduce utilization of health services in response to higher prices. In the absence of educational programs which encourage patients and physicians to refrain from unnecessary use of health services, expenditures therefore probably will continue to increase.

Until the utilization of health services can be changed the burden of containing health care costs will fall on restraining increases in price. That effort, in turn, will focus on holding capital expenditures in check. Restraint of capital expenditures depends on two judgments: need and economic consequences.

As mentioned above, the determination of need has been a major area of interest in health planning. The economic consequences of capital expenditures have not been as carefully considered as they might be. It has been common to pay careful attention to the internal financial feasibility of a capital expenditure by sponsoring institutions without considering the implications of the capital expenditure on other elements of the local health care system.

3

The sustained demand for capital funds in the health sector has led to the reconsideration of allocation of scarce capital funds in the economy as a whole, as well as, within the health sector. Furthermore, the decline in the availability of capital funds for the health system from philanthropic and public sources has forced sponsors of health care services into competition with other uses of capital funds. In the marketplace, health care facilities have had certain advantages stemming from third-party reimbursement policies. On the other hand, Medicare, Medicaid, and Blue Cross, as major purchasers of health services (approximately 60 percent of revenues), have limited the ability of health care facilities to change rate structures and, thus, to raise capital funds through operations. Finally, the effect on the balance sheet of acquiring large amounts of capital funds in the marketplace is compounded by long-term debt financing. As capital costs are increased by growing dependence on debt financing, concern over the allocation of resources to the health system grows as well. In the past, demonstration by a health care facility of its ability to raise the required capital funds was considered by regional health planning organizations to be adequate evidence that a capital expenditure was justified, if all other nonfinancial criteria were met. The nature of third-party reimbursement, which does not contain incentives for hospitals to economize, has tended to support the demonstration of financial feasibility without regard to the optimal allocation of resources in the health system. Furthermore, in the health system the internal decisions of an organization such as a hospital can have significant implications

2 W. Thomas Berriman, William J. Essick. Jr. and Peter Bentivegna, "Capital Projects for Health Care Facilities" (Germantown, Maryland: Aspen Systems Corporation, 1976), p. 3. 3 Lawrence Craven Pettit. Jr., The Capital Expenditure Process in Hospitals (unpublished dissertation), University of Virginia, Roanoke, Virginia, Pg. 1.8.

Ben Joseph Tuchi Variables Influencing Hospital Costs in Seven Western Pennsylvania Hospitals (unpublished dissertation), Saint Louis University, St. Louis, Missouri, 1970, pg. 206.

for neighboring institutions. These spillover costs and benefits make the health services market one in which individual organizations cannot act autonomously without jeopardizing the optimum functioning of the health system. Since there can be few strictly internal decisions, it becomes essential that the effects of internal decisions on the health care system be identified and that those internal decisions be evaluated in terms of their intended outcomes and their effects on the health system as a whole. Therefore, more attention is being accorded to the impact of capital investments on the health system and on the community, thus stimulating an examination of measures of his impact.

A factor of considerable influence on the size of capital expenditures is the physical design of a health care facility. While design is closely related to the functions of the facility and is affected by federal requirements, relatively small changes in design can have significant impact on construction costs. Therefore, to evaluate the impact of a capital expenditure adequately the regional health planning agency needs guidelines for physical design which will enable staff to consider whether the physical design of a facility results in a capital expenditure which may be excessive. Such guidelines or physical standards would serve as a tool for staff in evaluating the information provided on capital expenditure projects to determine if more information or additional justification for the project should be requested. Physical standards would not be used as the only criteria for making decisions on approval or disapproval of projects.

MEASURING THE IMPACT

Techniques for measuring the impact of capital investments and for determining the optimal allocation of resources in the health system are not new. Traditional approaches such as cost-benefit analysis and cost-effectiveness analysis have been applied widely in models for choosing among alternative public uses of funds. While their application to decisions regarding the health system is more recent, efforts have been directed toward refining these techniques.

Several problems are posed in applying cost-benefit and cost-effectiveness analysis to problem-solving in the health system. First, all the costs and benefits of a particular option must be measured. Since this must include spillover benefits and costs not directly attributable to the expenditure," problems of measurement arise. Second, there are difficult problems in units which can be measured.* Third, all the costs and benefits must be converted into dollars. This raises questions, such as how one can “attach a dollar value to the benefit of improved health." Thus, the application of cost-benefit analysis and cost-effectiveness analysis presently has limited reliability.

In the absence of a reliable application of these traditional techniques, an alternative technique is needed by the regional health planning agency. Furthermore, until the agency can determine how extensive the capital funds market is for this region, there are questions which need to be resolved regarding the impact of one institution's investment on the plans of other agencies. If the capital funds market is substantially limited to this region, then investments in Greene and Fayette counties, for example, have an impact on investments in Pittsburgh and vice versa. Also, the degree to which the health facilities in this region compete for capital funds with other firms in this region must be determined. Since a regional plan could not identify priorities for the allocation of resources so specifically that every capital investment need in the system could be ranked according to its impact on the community, a technique is needed which can be applied to capital investments on a case-by-case basis. The objectives of such a technique would be: 1. to consider all capital investment projects with potential community impact; 2. to identify those projects which will have a possible unacceptable impact on the community; 3. to perform these functions as simply as possible.

The technique proposed to meet those objectives is a triggering mechanism which would be used by staff of the HSA in advising sponsors on the development

5 Roland J. Knobel and Beaufort B. Longest. Jr., "Problems Associated with the CostBenefit Analysis Technique in Voluntary Hospitals", Hospital Administration. XIX (Winter. 1974), pp. 43-44.

Rashi Fein, "Medical History and Medical Care" Oxford University Press: London, 1971, pg. 198-202.

George Walter Torrance, "A Generalized Cost-Effectiveness Model for the Evaluation of Health Programs," (unpublished dissertation). State University of New York, Buffalo, New York, 1971, p. 6.

of projects and in preliminary evaluation of projects in the review process. It would be used as an instrument strictly for determining whether a project might have potentially unacceptable community impact and would not be used as criteria for approving or disapproving a project. If a project is determined to have potentially unacceptable community impact, additional financial information or justification for the capital investment would be requested from the sponsor of the project. This evaluation would occur in a preliminary form at the staff level. Results of the evaluation would be provided to appropriate components of the agency involved in reviewing the capital investment project. The technique is limited in that it only addresses debt retirement. It is not a guarantee that the project is sound. However, the Committee recognizes that this is a beginning in the consideration of the impact of capital investments.

TRIGGERING MECHANISM

After a preliminary review of the internal consistency and completeness of financial information for a capital investment project, projects for which the total costs, as specified in the information requirements, are $500,000 or more would be subject to the triggering mechanism. Six financial indicators would be applied in this mechanism. If the standards for three or more indicators are not met, then the project would be identified as having possibly unacceptable community impact and additional information or justification would be required. In applying this mechanism, the agency should be cognizant of the influence of changes in the interest rate on the financial indicators. With a significant decrease in the rate of interest, virtually all projects could meet the indicators. Therefore, the agency should monitor the prevailing interest rate closely. With a decrease in the interest rate, the agency may find it necessary to revise the norms set for each indicator. Furthermore, any capital investment project which uses an interest rate below the prevailing rate should be requested to explain the lower rate. The current prevailing rate is approximately 8 percent.

Another situation which requires special attention is a multi-facility project. Such projects can spread the effects of a capital investment project over a broader base of patient days or other units of service. Thus, in the case of multi-facility projects, attention should be directed especially to the manner in which costs are allocated among the facilities.

The financial indicators and standards to be used in the triggering mechanism

are:

1. Per diem debt service as percent of inpatient per diem

The ratio of the per diem cost of debt service for inpatient services to the total per diem cost of inpatient services reflects the distribution between operating and non-operating costs associated with the delivery of inpatient services. As the ratio becomes larger, the distribution of costs between facilities' construction and delivery of health care services allocates a greater proportion of the health care dollar to construction. Maximum: 15 percent.

2. Total annual debt service as a percent of total annual operating expenses (including depreciation, interest, and amortized fces)

Similar to the indicator above, this ratio encompasses total debt service cost and total expenses. Maximum: 12 percent.

3. Dollar amount of per diem debt service

The per diem cost of debt service in dollars, as it related to inpatient services expresses the amount which the average inpatient pays per day for construction and financing. Maximum: $30.

4. Debt service coverage ratio

The ratio of the revenue available for debt service after other expenses to the annual debt service requirement is a measure of the ability of a facility to generate revenues in excess of its debt service requirements. While interpretation of the ratio is open to some subjectivity, a general rule of thumb is that it should be greater than one and, at least 1.5. Minimum: 1.6.

8 This amount is small enough to include projects for health care facilities other than hospitals and large enough to include only projects which could be anticipated to have some community impact.

5. Ratio of debt to the capital cost of the project

This ratio measures the proportion of a project which is being funded through debt. Maximum: 80 percent.

6. Ratio of amortized cost of a capital expenditure to the capital cost of the project

The sum of debt service costs over the life of the debt or the total principal, interest and fees is the amortized cost. The ratio of this cost to the capital cost of the project reflects the total effect of debt financing on the cost of a capital expenditure project. Standard: 2.8.

STATEMENT OF RONALD E. ROSENBERG, VICE PRESIDENT OF PLANNING AND DEVELOPMENT, HOMEMAKERS HOME AND HEALTH CARE SERVICES

My name is Ronald E. Rosenberg, and I am Vice President of Planning and Development for Homemakers Home and Health Care Services, a subsidiary of The Upjohn Company, Kalamazoo, Michigan. Homemakers Upjohn is the largest single home health provider in the nation, with 217 offices across the country.

In 1976, Homemakers Upjohn employed approximately 50 thousand people, part time and full time, who delivered 14 million hours of service, the bulk of it in the areas of professional nursing, nurse aide, and home health aide care.

Due to the statutory restrictions of the Medicare Law, most of the company's services are provided to, and paid for by private patients,

In 1975, Medicaid spent approximately $132 million on home health care, with New York alone accounting for almost $107 million of the total. In that same year, Medicare spent just under $200 million on Parts A and B-Home Health Care.

While these expenditures represent only a small fraction of the total Medicare and Medicaid Programs, they are increasing yearly, especially in Medicare, as the industry matures and proves its viability as a primary health care model for the chronically ill and disabled.

Homemakers Upjohn believes that if S. 1470 were to incorporate some administrative and reimbursement changes in the home health benefit, the long-range impact on the rest of the health care system would be to shift emphasis from expensive institution-where many of our nation's elderly and disabled are unnecessarily institutionalized-back to the home, a better setting and potentially a cost effective one.

We would like o discuss one of those administrative changes.

Because of the statutory restrictions of the Medicare law, most of Homemakers Upjohn's services are provided to, and paid for by private patients.

Section 1861 (0) of the Social Security Act, passed in 1965 as part of the Medicare Law, defines a home health agency as "a public agency or private organization, or a subdivision of such an agency or organization":

1. which is primarily engaged in providing skilled nursing services and other therapeutic services;

2. which has policies established by a group of professionals, including one or more doctors and one or more nurses and which has its services supervised by an RN or a doctor;

3. which maintains clinical records:

4. which is licensed pursuant to State law, if the State licenses home health agencies, or is approved by the State as meeting the standards established for such licensing;

5. which has an overall operating plan and budget; and

6. which meets such other requirements as the Secretary may establish in the interest of health and safety.

The statute ends with the statement, "except that such term shall not include a private organization which is not a nonprofit organization . . . unless it is licensed pursuant to State Law and it meets such additional standards and requirements as may be prescribed in regulations . . .”

These, Mr. Chairman, are the conditions of participation for home health agency providers in the Medicare program, and, by practice, in the Medicaid program as well.

The intent of the law, as expressed in both the Senate Finance and House Ways & Means Committee Reports on the Social Security Amendments of 1965 was: “... that organizations providing organized home care on a profit basis

are presently nonexistent. However, the language of the bill permits covering such agencies if they come into being, are licensed, and meet the high standards set by the legislation."

Homemakers Upjohn believes that Congress intended to allow tax-paying homehealth agencies to be Medicare providers. We believe that Congress expected each State to enact licensure laws for home health agencies, just as they have done for virtually every other segment of the health industry, not to mention beauticians and barbers, in the interests of the health and safety of their residents.

But to date, only 17 states have passed home health agency licensure laws. That's 17 States in 12 years.

Other than the conditions of participation which I have just listed, the only sanctioned standards for home health agencies are those established by individual state licensure laws.

Homemakers Upjohn is providing health care in 33 states that have no licensure laws. New York, which has such a law, has chosen to license only nonprofit agencies. Yet, even in New York where we are excluded from Medicare, Homemakers Upjohn is currently being reimbursed both directly and indirectly by state agencies and by nonprofit licensed Medicare agencies under 41 separate contracts or subcontracts! We are contract providers to such agencies because the nonprofit agencies lack the necessary resources to deliver needed service in the state. They can't handle the need for home health care.

Now, I ask you Mr. Chairman, does it make sense to you that we, as a proprietary agency, can deliver service under some government programs, but not serve Medicare? Remember we are actually serving nonprofit Medicare certified agencies via subcontracts and in the other programs, where we are providing service, many of the recipients are also Medicare patients. This is a sad statement about the ineffectiveness of our programs to deliver care to people who need it.

Homemakers Upjohn proposes that the restrictive language in Section 1861 (0) be deleted for two reasons: first, the law is discriminatory; second, there is a demonstrated need for our company's services.

Tax-paying home health agencies are the only class of profit-making providers discriminated against in the Medicare law. Profit-making nursing homes are providers; profit-making hospitals are providers; doctors are providers. Why have proprietary home health agencies been singled out for this discriminatory treatment?

One of the ironic twists of this profit/nonprofit situation is that the tax monies Homemakers Upjohn pays to the government are returned back to the company in the form of subcontracts with nonprofit agencies.

The growth and success of Homemakers Upjohn in the private market is a solid indicator of the need for and acceptance of our services. Since 1969, the company has grown from 29 offices to 217. In this time, the number of patients under our care has grown steadily. Obviously a lot of people think we're doing something right; they're paying for the service out of their own pockets.

This rate of growth is also related to an increasing need and demand for the home health care. The industry will continue to grow to meet this need.

America's medical care system has had tremendous success in wiping out or controlling infectious diseases. As a result, Americans are living longer. But the medical care system has not yet learned how to deal with the disabling effects of old age and chronic disease. As a result, the nation's over-65 population is growing steadily and is expected to reach 17 percent of the population in the next 50 years.

It is apparent to health experts in Congress, in H.E.W. and in industry that the nation has no comprehensive long term care benefit structure that will answer the needs of this increasingly large elderly population.

The Congressional Budget Office catalogued this need in a long term care report in February of this year. That report states that 300,000 to 500,000 adults can be accommodated by the current supply of home health agencies and day care facilities. On the other hand, the CBO states that 1.7 to 2.7 million adults have a current potential need for home health and day care. Conservatively, more than one million adults have an unmet need for home health care.

The CBO report also estimates that long term care spending by both government and private sectors will more than double by 1980. Currently, only 10 percent of all public funds are spent on home-based services, while, to quote the

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