7) If a hospital-based HMO is allowed to develop its own hospital in an area where there are excess hospital beds, the cost to the total

community will be lower in the long run than if the HMO is not allowed to expand. (See Exhibit I.)

We strongly support the exclusion of HMO hospitals from certificate of need requirements, but the Committee may feel differently; if so, we suggest the following guidelines in making decisions concerning HMOS and certificate of need programs:

1) HMO facilities, and equipment should not be covered unless fee-for-service facilities and equipment are covered, To do otherwise

is discriminatory.

2) States should not be permitted to include any HMO facilities and equipment which are excluded from Federal certificate of need requireOtherwise, because many states have already included HMOs,

ments.

elimination of the federal requirement may have no effect.

3) The public interest in fostering development of effective

organized health care delivery systems requires that projects for HMO facilities and equipment should be judged on the needs of existing and reasonably anticipated new members of the HMO, not on the needs of the community in general. This is especially important for the modernization and replacement of existing HMO hospitals and other facilities. An HMO should not be denied approval to maintain or modernize its hospitals and other facilities simply because there are excess hospital facilities in the area. To do so, would result in disruption of existing

services to HMO members and fragmentation of effective health delivery

systems.

4) If HMO hospitals are covered, an HMO should be allowed to build its own hospital unless the State Agency determines that hospital services are available to HMO members in a cost-effective manner

which is consistent with the basic method of operation of the HMO. In making such a determination, the State Agency should be required to find that:

(a) The services are available in one hospital;

(b) The services are available on a long-term contractual basis commensurate with other long-term committments of the HMO or five years, whichever is longer;

(c) Qualified physicians associated with the HMO will be granted full staff privileges at the hospital; and

(d) The services are available in a manner which is economically and clinically feasible for the HMO.

Anything less than this in the Act will leave HMOs at the mercy

of regulation writers and the interpretations and biases of HSAs and State Agencies and will continue the discriminatory aspects of P. L. 93-641. We recommend two additional changes. First, HSAs and State Agencies should be required to prepare specific plans for HMO development and expansion. Each health system plan and state health plan should contain an HMO element which describes existing HMOs, their membership, facilities and services and their plans for expansion. It should be the goal of each HSA and State Agency to develop enough HMO

capacity so that all persons in the area will have the option to

voluntarily join an HMO.

Otherwise the objectives of the HMO Act

of 1973 can be subverted.

Second, $1513(e) should be amended so that HSAs are limited

to review and comment authority over grants, contracts, loans and loan guarantees under the HMO Act, rather than review and approval authority. The implementation of the HMO Act has a high national priority. HSAS should not be permitted to thwart this priority by disapproving HMO development or expansion projects which HEW determines are in the national interest.

These changes P. L. 93-641 are essential to development of new HMOs and rapid expansion of existing HMOs. This is a stated goal of Congress and the Administration.

It should not be frustrated

by a planning act which is designed to impose rationality upon the fee

for-service delivery system.

HMOS already plan rationally because

they have internal incentives to do so.

Sound public policy requires that regulatory systems be carefully designed to address specific problems. They should not be applied to organizations which are not creating the problem or in a manner which inhibits organizations which have great potential to assist in solving the problem.

Therefore, we conclude that the soundest approach is to exclude HMOs and their facilities and equipment from certificate of

need programs and not permit states to cover them.

This is especially the case where competition from HMOS and other health plans ensures that individual HMOs maintain close control over their expenditures. The possible exceptions would be where HMO com

petition does not exist or where external subsidies offset the effect of such expenditures on premiums. However, in general, there is little evidence that there is anything to be saved by implementing controls over HMO outpatient facility construction and equipment purchases, especially in light of the cost of implementing these controls and the risk of limiting the long-term useful effects of HMO competiton.

c. HMO Hospital Construction. We found that several large HMOS have sought to build or purchase their own hospitals when their enrollments reached high levels. Hospital ownership appears to produce significant savings over the continued use of non-HMO facilities and allows HMOs to improve the quality of inpatient care to their members. In addition, hospital ownership ensures that beds are available when needed, that HMO physicians can obtain staff privileges and that HMOS do not indirectly subsidize other health plans. In order to evaluate the desirability of HMO construction of hospitals, we estimate the impact of HMO hospital construction on community costs. We assumed that an HMO's acquisition of its own hospital produced net savings from all sources of 10 percent in average HMO costs. Although there is little evidence on the actual savings available from HMO hospital ownership alone, HMO administrators indicate that a ten percent savings seems attainable. This savings is consistent with the HMO cost comparisons cited in Chapter III. Using this assumption and our HMO cost model, we examined the annual community costs (savings) per