Mr. PREYER. Thank you very much for a very informative presentation.

Let me ask you one question of sort of general interest not too directly related to what you are doing.

Mr. Lane mentioned there was no need to control the growth of HMO's. I was visiting an HMO in Winston Salem, the Reynolds industry. They don't call it an HMO, but that is what it really is. That indicated that that was the first corporate HMO since the Kaiser plan. Is that right? Has there only been one corporate foundation?

Mr. LANE. I believe that is correct. Our organization was sponsored by the Kaiser industry when it first started. It is much broader than that now. It covers 3.3 million people. There is a substantial increased interest among the corporate community in fostering the development of health maintenance organizations. The Ford Motor Co. is examining the possibility and a number of other large corporate organizations are and I think there will be increased interest.

One of the basic problems, when corporate managers start looking at the issie, is all the Government controls they have to go through to get established. That is something they have to look at carefully. Most of them are very amazed to find out what you have to go through to start and get approved for HMO in terms of Government approval. Mr. PREYER. That is a very impressive operation they have. I hope your plan and that one will interest a lot of other corporations.

Just one question. You recommend that States be prohibited from including HMO's under their certificate-of-need laws. How many States have those laws that include them now?

Mr. LANE. I don't know that. I am sorry. I only know of the States in which we operate. We operate in six, two due and two are considering it. California will be considering it. It is my understanding a number of States in the East do.

Mr. PREYER. Those laws would allow an HMO to build a hospital even if the HSA found excess beds exist in that community; is that right?

Mr. LANE. The existing laws?

Mr. PREYER. If you exempt it or if States were prohibited from including HMO's under their certificate-of-need laws, that would allow an HMO to build a hospital even if HSA found there were excess beds?

Mr. LANE. Yes, sir. I would like to address your attention to exhibit 1 [see p. 1029] of our testimony, one of the basic arguments for not allowing HMO's to build when there are excess beds in the community is that it increases the cost to the community. The study portion of which is presented in exhibit 1 was done for HEW by ICF, Inc. It is a careful study of whether that is true. They found it is not true. Even where there is excess bed capacity in a community, the introduction of a cost effective HMO and the building of its own hospital will result in a total reduction of community cost. I think that is a very significant point.

Mr. PREYER. I can see your point, however as to how it will restrict innovative plans it does make a liar out of some of our statistics where we just say "X" number of beds in excess means "X" dollars of extra cost. It does not necessarily mean that apparently.

Mr. LANE. Yes, sir. I would like to give an example. The State medical facility plan guidelines which came out the middle of last year set as one of the highest priorities 80 percent occupancy. The country is running about 75 percent now or somewhat below that. If your major objective is to have the hospitals running at 80 percent occupancy, there are only two ways to accomplish that; that is close some beds in hospitals, secondly, have more people getting hospital

care.

The problem is that it is unlikely, despite what may be in this bill at the present time, that hospitals will be closed by Government fiat in the near future, closing for other reasons but not Government fiat. If your objective is to keep occupancy higher and HMO proposes to build or expand and one of the characteristics of HMO is they have low utilization, utilize substantially less, they will fight that that objective of high occupancy because they will drive occupany down. That is an important objective to drive occupancy down, not up.

I don't believe the planners understand that. Low occupancy is not bad. In California the hospitals run at 60 percent occupancy on the average, yet their days per use are 300 or less days of hospital care per thousand persons, more than 300 less than the national average. It is not evil to have low occupancy. It is important to have it until the beds come into balance. Our institutions don't run at high occupancy either but are cost effective.

Mr. PREYER. I didn't mean to cut you off, Mr. Walgren. We do have a vote.

Mr. WALGREN. Maybe a couple of minutes.

First, it is my understanding that you would not need a certificateof-need for any outpatient facilities developed by HMO; is that correct?

Mr. LANE. Under this proposal, that is correct.

Mr. WALGREN. What are the difficulties of using presently existing hospital facilities by a developing HMO, are those mainly political problems of access?

Mr. SEGADELLI. For a developing HMO there is no alternative. It is because you don't have the membershsip or resources, but at a certain point it becomes possible but that becomes possible at a enrollment between a 100,000 and 125,000. That is where we are. Then you can begin to achieve many economies which you can't achieve when using someone else's hospital. It is not a question of running the hospital better but you can eliminate a lot of duplication.

Mr. WALGREN. What you are essentially doing, you are pulling patients away from the other hospitals at that point, you are competing for provision of services?

Mr. SEGADELLI. Sure.

Mr. WALGREN. The question becomes whether or not those services should be provided with existing systems or whether a new facility that can provide certain economies of scale, a new administration process

Mr. SEGADELLI. Not only economies of scale. For example, an HMO using a community hospital has to have its own medical records and have a medical record in the hospital, have its own X-rays and X-ray in the hospital, own lab tests and lab tests in the hospital, which if it

ran both it could provide in one way and it has to pay the overhead on whatever the hospital decides the hospital will have, whether the HMO thinks it is smart or not, CAT scanners, for example, or open heart surgery teams to get proliferated around the community.

I have essentially answered the question. I think there are savings in the HMO's having their own hospitals that are not only possible if they buy from other institutions and are not related to scale alone but to unnecessary duplication and overhead and things like that.

There are some other problems with using community facilities. In the first place, a bed is not necessarily a bed. All beds are not the same. They are not in the right places. You cannot use a pediatric bed for adults. Planners don't take that into consideration. Even though there are too many beds they may not be the right kind of bed.

Second, the medictal staff may be opposed. We have been trying to use hospitals in southern California. They go to vote with the medical staff, absolute opposition. In addition, there are other problems. The long-term relationship is very important. We have to build an ambulatory care facility beside the hospital to care for outpatients. Unless the hospital will enter into long-term arrangements, we can't do that. Those criteria are set forth on page 7.

Mr. WALGREN. Thank you.

Mr. PREYER. Thank you. We have to go vote now and will recess at this time until 2 o'clock this afternoon when the panel of equipment manufacturers representatives, I believe, will be the first up.

The committee stands in recess until 2 o'clock.

[Whereupon, at 12:30 p.m., the committee recessed, to reconvene at 2 p.m., the same day.]

AFTER RECESS

[The subcommittee reconvened at 2 p.m., Hon. Paul G. Rogers, presiding.]

Mr. ROGERS. The subcommittee will be in order.

Continuing our hearings on health planning and resources development, we have a distinguished panel of Governors which we welcome to the committee and I would like to ask Dr. Carter first to have a comment or introduction.

Mr. CARTER. It is my pleasure to introduce the Governor of the State of Kentucky, the Honorable Julian M. Carroll.

Thank you.

Mr. ROGERS. We are honored to have you and Governor Herschler of Wyoming. We do appreciate both of you coming here to help the subcommittee. We are anxious to work with the Governors in trying to develop a health planning system that will be effective. I think it is a most important piece of legislation and we doubly appreciate your being willing to give us your time to be of benefit in our thinking. STATEMENT OF HON. PULIAN M. CARROLL, GOVERNOR, STATE OF KENTUCKY

Governor CARROLL. Mr. Chairman, Congressman Carter, Congressman Walgren, we appreciate the opportunity of coming today. I have an airplane that leaves here at 3 o'clock and will try to immediately proceed into my testimony.

I am going to not read it because obviously it is easy for me to file it with the committee and I will try not to take longer to explain it than it would be to read it.

Mr. ROGERS. That will be a refreshing approach from some of the witnesses we hear. Your statement will be made a part of the record in full, without objection [see p. 1050].

Governor CARROLL. We think that there are some movements that can be made in this legislature that would vastly improve our ability to make it work.

In Kentucky we were fortunate enough prior to the implementation of this legislation to have an excellent planning system. We have had it in operation in Kentucky for about 15 years. We have area development districts that were implemented in our Commonwealth about 15 years ago and those districts have been involved in health planning in our State for a long time. Thus, it was easy for us just to take those districts and divide them along their geographical boundaries and set up our HSA's and just go on to work.

We still do have some problems, though. In one particular instance we have three counties in the north side of Kentucky that I can't get the government of Ohio to let me have to put into my system. I did get the Governors of other States that have our counties to agree so we could operate as an entity. Because of the law and the other Governors, I have three counties under control of the Ohio legislature and we have to report six Ohioans on my State Board to oversee this statewide program. We believe that would then give them a disproportionate share of the oversight of this operation. Surely we don't think the committee ever intended that.

I am an old legislator myself, spent 10 years in the Kentucky Assembly, and beg forgiveness for my mistakes. I am essentially suggesting it is the kind of thing you could not anticipate would happen, but those are things that have happened to us.

Mr. ROGERS. Have you suggested language in your testimony? Governor CARROLL. Not as such, Mr. Chairman, but we would be happy to do it.

Mr. ROGERS. Thank you.

Governor CARROLL. The Governors Association has, I am advised. That takes care of that particular problem.

Additionally, while at this time we are having no problem at all in getting along with the people involved in our two HSA's-we have two in Kentucky-nor do we anticipate any problem with our overall State coordination council, but we do seriously think that it has the great potential for fragmentation and disorientation because there is little or no involvement by State government, who after all, in our judgment, has the overall responsibility for implementing our health planning program in the State.

We have county health departments. We have regional health departments that we designate in some of our counties that have the capacity to reach into other counties that don't have our comprehensive care centers, which is one of the best examples of how not to set up something in Kentucky. We are now working on the problem of how to take those health care centers and make them work since we are losing Federal funding for them. We have that problem in the

current session of the general assembly. They are essentially independent bodies and essentially have just gotten reimbursement of Federal dollars through our State agency and we have had little ability to make them implement statewide policy programs, and so that is what we are fearful we are headed for with our current operation of the HSA's if we don't make some of the slight changes we are suggesting.

I guess one of the most important things for me to suggest to you in my testimony is that I do not believe that I can go to my general assembly and ask for appropriation of dollars, at present about $130 million a year in Kentucky, and then be able to implement our health planning programs in Kentucky without some authority to be a participant in the total policymaking function.

At the moment with the bill as we presently read it, the Governor is totally separated from the decisionmaking implementing State health planning policy, and we seriously think that the Governor ought to participate in that planning operation.

Mr. Chairman, I could cover some other elements, but they are covered in my testimony. I would prefer to use my remaining time to try to answer some questions for you and the members of the committee.

I thank you.

[Governor Carroll's prepared testimony follows:]

STATEMENT OF Gov. JULIAN M. CARROLL, Governor, STATE OF KENTUCKY CHAIRMAN ROGERS, GOVERNOR HERSCHLER, I am delighted at the opportunity to be here to discuss with you some of our concerns about the National Health Planning and Resources Development Act of 1974 [Public Law 93-641]. We recognize that the intent of this legislation is to upgrade nationwide our health planning effort, and to enact in each State certificate-of-need legislation. These are essential prerequisites for improving the overall level of health care in this country.

There are, however, problems with 93-641 which Congress was obviously not able to anticipate at the time the legislation was enacted. One of our major overall concerns is that the legislation did not recognize differences between the States in problems and needs, or the State's previous efforts in health planning. Two of the major benefits of this legislation-comprehensive health planning and improved funding levels for planning-already were in effect in Kentucky in 1974.

Kentucky is divided into 15 standard districts, and all regional planning groups-such as Manpower, Aging, Criminal Justice, and Health-plan for the same geographic area. Our State agencies also are structured to offer services by district.

This system was in place in 1974, and each of our 15 districts was served by professional health planning staff.

As for funding, Kentucky in 1974 was supplementing the planning money available from HEW with funds from the Appalachian Regional Commission and a significant amount of State funds. In fact, the level of funding for our 15 health planning districts in 1974 was only $100,000 less than the funding for our health systems agencies during their first year of operation.

So Kentucky began implementing Public Law 93-641 from a position of strength. After some experience with its workings, we have found some problems which I would like to discuss today:

We feel that 93-641 circumvents the authority and expertise of State government, by setting up a direct relationship between the Federal Government and health systems agencies. It is inappropriate for private, nonprofit, selfperpetuating boards like the health systems agencies to have the kind of au