abuse of the authority granted to the Defendants, in that they deny to institutional providers of health services, including the Plaintiff, the relief made available to other institutions with a history of operating losses, and that such regulations to this extent must be struck down. 3. Issue a declaratory judgment that the Plaintiff may and must use its lengthof-stay adjustment in computing actual budget data to determine the results of past operations and to project the results of future operations for purposes of the Economic Stabilization Program. 4. Award to the Plaintiff the sum of One Million One Hundred Thousand Dollars ($1,100,000,000), being the amount of the net operating loss suffered by the Plaintiff during its fiscal year ended June 30, 1973. 5. Grant such other and further relief as it shall determine to be fitting atl proper. FRANCIS D. MURNAGHAN, Jr., Attorneys for Plaintiff. STATEMENT OF AMERICAN HOSPITAL ASSOCIATION AMERICAN HOSPITAL ASSOCIATION, Hon. CHARLES MCC. MATHIAS, Jr., DEAR SENATOR MATHIAS. The American Hospital Association would like t commend you for holding hearings on the very crucial subject of the Econoni. Stabilization Program and its impact on various segments of the economy. The Economic Stabilization Program has worked tremendous hardship on the hospital field. The regulations are complex, they have been far more restrictive than those applied to the rest of the economy, and they have been subject to fre quent change and retroactive application. The grave problems hospitals and other health care institutions faced in Phase 2 were compounded in Phase 3, when they were kept under mandatory controls while having to purchase goods aLd services necessary to patient care that were removed from controls and rapidly escalated in price. Moreover, preliminary indications as to the substance of Phase 4 regulations, which are about to be promulgated for the health care industry will present additional serious problems which cannot be controlled by hospital and will impair their ability to deliver quality health care to patients. When the Economic Stabilization Program was initiated, the American Ho pital Association pledged its full cooperation to help achieve a reduction in the rate of inflation. As a matter of fact, the Association has worked closely with the economic stabilization agencies and we have endeavored to keep our members fully informed in order that they could meet the objectives of the program. The results of our efforts to stabilize hospital prices have been substantial. It gives us considerable satisfaction that hospital price increases have taken the steepest decline in their history. Of equal significance is the fact that hospital prices have increased far less than prices in the economy as a whole. This has been accomplished at a cost of great frustration, and serious financial problems have developed in hospitals which must be faced. These problems result from such crucial issues as: Cost of Living Counci regulations frequently being applied retroactively; "stabilization" regulations prohibiting health care institutional providers from raising prices to offset otherwise allowable cost increases in goods and services which they must purchase. criteria allowing exceptions only in cases of negative cash flow; inconsistenc between wage regulations and price regulations resulting in costly confusion and inequity; and regulations preventing institutions from recovering allowable costs without securing individual exceptions through a confusing and time consumirz process, to mention just a few. Attached is a summary of some existing problems faced by the health care industry under the Economic Stabilization Program, including recommendations of our Association aimed at rectifying these situations. In addition, I would like to reiterate our request to present detailed testimony on Economic Stabilization Program problems and issues when your subcommittee olds further hearings on this matter. Sincerely, Enclosure. JOHN ALEXANDER MCMAHON. President. SUMMARY OF EXISTING PROBLEMS UNDER PHASES II AND III (American Hospital Association, September, 1973) I. PROFIT MARGIN LIMITATION The profit margin limitation prohibits a hospital from increasing its base period profit or decreasing its base period loss. As a result, if a hospital's average loss for a prior two year period had been $200,000, and in the current year it reduced its loss to $100,000 on approximately the same amount of business, the hospital would be in violation under the program. This limitation provision causes further inequity in that it requires that the percentage of loss be maintained. A hospital therefore which is increasing its volume of activity must lose a larger amount of dollars to maintain the same loss ratio, or else be in violation. This inequitable rule is being challenged in the courts by several California hospitals and the California Hospital Association. Recommendation: That current regulations should be amended to permit a hospital to reduce its loss to at least a break even point without being in violation, and there should be a waiver of violation in closed fiscal years against institutions whose only violation was to reduce its percentage of loss. II. UNREALIZED REVENUE VIOLATION The staff of the Economic Stabilization Program and in many cases offices of the Internal Revenue Service have maintained that a hospital must have an amount of allowable costs to support a price increase in excess of the amount of revenue the hospital will realize from the price increase. This position has never been contained in any issued regulations of the Phase II and III programs. Under this concept a hospital that has experienced a 6 per cent increase in allowable costs, but has failed to implement a price increase on the first day of its fiscal year, cannot recover the full amount of its allowable costs through its revenues. It is forced to absorb as a loss that portion of its allowable costs which were incurred during the period when it had not raised its prices. Thus a hospital which did not raise its prices until the midpoint of its fiscal year is only permitted to recover 50 per cent of its otherwise allowable costs. Conversely a hospital that raised its price at mid year to cover the full amount of its allowable costs would be in violation under this concept. This concept is being challenged by a law suit instituted by several Connecticut hospitals and the Connecticut Hospital Association. Recommendation: That instructions be issued which clearly provide that only realized revenues (revenues received) had to or will have to be cost justified. III. EXCEPTION CRITERIA The program regulations provide that exception may only be granted in the case of "serious hardship" or "gross inequity". Definitions of these two terms have never been published and the criteria for granting exceptions has been a “negative cash flow" concept as developed by the staff of the Office of Exceptions Review. To date, the components of negative cash flow determination have never been officially published and as a result hospitals have no basis for evaluating their potentials or qualifications for an exception. The large extent to which denials of exceptions have been made probably indicates the limited definition employed by the staff in rendering its decisions. The current policy of granting exceptions solely on the basis of negative cash flow has very serious economic implications for the health care industry. This criteria, if maintained for a period of time, will ultimately require confiscation of the assets entrusted to a health provider by the community. This entire problem is another one of the items being challenged in the California suit. Recommendation: That, first, the components of the "negative cash flow" concept be published. Also that definitions be developed for the terms "serious hardship" and "cross inequity", and equitable and realistic criteria be developed to evaluate justifiable hardships and inequities. IV. WAGE REGULATIONS VS. PRICE REGULATIONS One of the most inconsistent policies of the program is that case where an exception has been granted by a pay board authorizing a hospital to exceed the 5.5 per cent limitation on wages, but where the pay exception is then not accepted on the price side as an allowable cost over the 5.5 per cent cost limitation. As recently as July 2, 1973, the Health Industry Wage and Salary Committee has again raised serious objection to this inconsistency and inequity with John Dunlop, chairman of the Cost of Living Council. Recommendation: That regulations be issued to establish that any exception granted by the Health Industry Wage and Salary Committee must be recognized on the price side as an allowable exception in determining allowable costs and allowable increased revenue. In addition, apparent violation stemming from an exception granted by the Health Industry Wage and Salary Committee should be waived. V. "LOW WAGE" ALLOWANCE The Low Wage provisions of the act permit a hospital to exceed the 5.5 per cent wage limitation where the excess is related to increases to employees earning less than $3.50 per hour. While this is described as an allowable cost excess, the benefits of this pass through provision are negated by a further provision that this allowable excess cost cannot be used as justification for exceeding the 6 per cent limit on increased revenues. This inequity is being challenged in the Connecticut suit on the basis that it is contrary to the intent of the law. In addition, a group of Massachusetts hospitals and the Massachusetts Hospital Association is challenging this item through formal Requests for Ruling from the Internal Revenue Service. Recommendation: Since the wording of the act provides that the payment of wage increases to low-wage employees “shall not be limited in any manner", that regulations be retroactively implemented which allow this item as a true pass through into revenue. VI. CAPITAL FINANCING The effect of the Economic Stabilization Program on the capital financing in the hospital industry was the subject matter of a special study group sponsored by the American Hospital Association. The study group included representatives of the hospital industry, and financial representatives familiar with the hospital capital fund operations from the American Institute of Certified Public Accountants, major hospital bond underwriters and bond counsel. VII. USE OF PER DIEM COST AS A PRICE The current interpretation of the Cost of Living Council is to consider the effective per diem reimbursement rate for a fiscal year as a price to a cost reimbursement purchaser of care. Such a use of the pier diem cost reimbursement as a price is an arbitrary and untrue indicator of true price increases for the following reasons: The per diem is not intended to be a price, nor is it the basis for reimbursement. It is used merely as an approximate measure for interim advances to providers. Reimbursement is made by such purchasers on the basis of total cost, not per diem cost. Using the pier dem as a price completely ignores the fact that the per diem cost represents the average cost of a fluctuating and generally increasing quantity (or intensity) of services rendered to patients. Since the input of services reflected in the per diem cost is changing and increasing, it is inequitable to consider the increase in the pier diem cost as an increase in the price for a single service. The average per diem cost of this year's product is not comparable to the average per diem cost of last year's product. Recommendation: That existing contractual relationships be followed in defining the price of services rendered. If the application of this implied definition results in a violation, corrective action to attain compliance should be applied to all purchasers prospectively. VIII. PRICE/VOLUME/INTENSITY The price control program has used aggregate annual revenues as its basic measurement criteria rather than the individual prices of individual services. Changes in aggregate annual revenue of one period compared to another are obviously affected by more than just price changes. The type of products sold in one period compared to another is a factor and the quantity of the products sold is the other factor. Properly identifying each of these three specific factors is critical in the program's aggregate annual revenues approach since the inappropriate identification of any one of these three items can bring about an inequitable and improper measurement. Since the programs' objective is to control price increases only, then the exact amount of increased revenues due to price changes must be accurately identified. The improper separation and recognition of these three distinct factors of revenue change is included in the issues of the Connecticut suit. IX. UNRECOVERABLE ALLOWABLE COSTS Present regulations limit the amount that a hospital can increase its revenue through price changes to 6 per cent of the prior year's revenues even though the hospital has a greater amount of allowable cost increases in compliance with all cost limitations. Under existing regulations a hospital with $1,000,000 of prior year costs is entitled to a $60,000 allowable cost increase (6 per cent increase). If this hospital's prior year revenues only amounted to $900,000, its allowable price increases could not exceed $54,000 (6 per cent of $900,000) even though allowable costs were $60,000. Recommendation: That a hospital be permitted to recover without an exception the full amount of its allowable cost increases through revenues even though the recovery of such allowable costs causes the 6 per cent limit on revenue increases to be exceeded. X. NONRECOGNITION OF PREEXISTING AGREEMENTS Many hospitals in the period prior to Phase I August 15, 1971, of the Economic Stabilization Program had agreed by negotiation contract or officially announced policy of instituting wage and salary increases or instituting price increases to cover new services or facilities that were completed or in the process of completion when price and other decisions were made. The effect of Phase I, Phase II and subsequent regulations issued under Phase III was to deny the hospital the ability to recover cost commitments in these areas where decisions had been made based upon circumstances not subject to the controls subsequently imposed. Recommendation: Permit those hospitals that can prove prior commitments in these areas to use the cost increases which they incurred as cost justification for price increases and to rescind existing orders to these hospitals to refund and rollback prices based upon the disallowance of these costs by administering agencies of the program. XI. COST JUSTIFICATION OF FINAL SETTLEMENT AMOUNTS It is the opinion of personnel in various IRS offices around the country that income which is received as the result of final settlement from cost based third party payors after hospital audit by these agencies is additional income to the hospital in the year received and as a result is additional income in that year and must be cost justified. Hospitals contend that this is an adjustment of prior years' activities and should only be applied to the year in which much additional income arose. In addition, Medicare intermediaries who were two or three years behind in their audits found it now beneficial to conduct multiple audits and produce multiple settlements during ESP years which in effect negated what price increases were implemented during an ESP year. Recommendation: That final settlement amounts received by a hospital be not considered as additional income to be cost justified in the year in which received but only to be considered an adjustment of prior years' activity from which the amount originated and that the Profit Margin calculation on the S-52 be the only figure affected by such recognition. XII. DISCRIMINATION ASPECT OF 2.7 PER CENT RULING One of the last official proposals made by the old Price Commission to the Cost of Living Council was to combine the 2.5 per cent non-wage expense cap and the 1.7 per cent New Technology cap into one overall percentage for non-wage expenses. This proposal in effect created a non-wage expense cap of 2.7 per cent of the prior year's expenses or 6.75 per cent of the prior year's non-wage expenses for an individual hospital. The proposal was made in recognition of the total inadequacy of the 2.5 per cent non-wage expense factor originally promulgated by the Cost of Living Council on December 29, 1971. The change in the regulations was effective for fiscal years beginning January 1, 1973, or thereafter. The effect of this implementation date created separate standards for hospitals with calendar fiscal years, who now could use 6.75 per cent of non-wage expenses as justification for price increases, as opposed to hospitals whose fiscal years beginning July 1, 1972, or October 1, 1972, who were still subject to the inequitable 2.5 per cent non-wage internal cost cap for price increase purposes. Recommendation: That the Cost of Living Council amend its order to permit the application of the new 2.7 per cent cap to fiscal years in progress on January 1, 1973. SEPTEMBER 5, 1973. STATEMENT OF THE AMERICAN NURSING HOME ASSOCIATION1 The American Nursing Home Association (“ANHA") is a nonprofit organization which represents approximately 7,000 nursing homes throughout the United States with more than 500,000 patient beds. It is the nation's largest nursing home organization, with a membership that consists of proprietary and nonproprietary homes, single homes, and multi-facility operations. ANHA is dedicated to the development and maintenance of high standards of professional care and administration in all licensed heath care facilities, and to the promotion of the enactment of laws and regulations in furtherance of this objective. Today, there is a crisis in the nursing home industry-a crisis which has been precipitated by the manner in which the Economic Stabilization Program is being applied to the nursing home industry. Substantially all ANHA members participate in either, or both, the Medicare and Medicaid programs established by the Congress under Titles XVIII and XIX of the Social Security Act to provide medical care for the aged, blind. disabled, and medically needy. Under these programs, nursing homes provide convalescent or inpatient care to persons not requiring hospital care, but needing certain medical care and services that cannot be provided in their homes or in custodial facilities. In fiscal year 1974, Medicare will help to meet the medical costs of 11.6 million aged and disabled Americans. Medicaid will help to pay for medical care provided to 27 million low income people in the country. Of the total revenues received by the nursing home industry, 75% are from public sources, such as the Medicare and Medicaid programs, which are received in the form of cost reimbursement. Funds for the programs are appropriated by Federal and state governments. Title XVIII provides that payments to nursing homes for services covered by the Medicare program and related to the patient's care are to be the reasonable cost for such services. The Federal government's commitment to pay the home the cost incurred for nursing services is contained in a written agreement with the Secretary of HEW. Under Title XIX, the exact amount of the Medicaid payment to a home is established by the state, subject to a ceiling which provides that the state cannot pay more for medical care and services than the reasonable cost reimbursement for comparable services under Medicare. Agreements exist between the homes and the individual states under which a state agrees to pay the home for skilled nursing services in accordance with the method contained in the state Medicaid plan, and the home agrees to accept this payment in full for the care of the patient. Within this statutory framework is created a highly complex system of cost controls. The amount of reimbursement for services under these programs is controlled by Federal and state legislative and budgetary bodies, by the rules 1 Court cases involving nursing homes are printed on p. 376. |