bring into focus the weaknesses and problems (as well as the strengths) of health care delivery in this country. In doing so, however, it has exacted a high price both in terms of the cost to the taxpayer and in terms of additional problems in the health care system generated by the program itself.

What impact the Medicare program would have on health care institutions and health care costs was little understood by the Federal Government before the program started. Millions of people were suddenly thrust into a system which was not structured to accommodate them. There was an increased demand for services, but limited supplies of medical manpower and facilities to meet the demand. Hospitals were also faced with increasing their patient service capabilities, especially since they were now providing services previously given by individual physicians. The result was the rapid escalation of hospital costs. In the first three years of both Medicare and Medicaid, hospital costs rose by 59 per cent; doctors' fees jumped 29 per cent.

While this sharp increase in hospital costs can be partly attributed to the general inflationary spiral affecting the country, we would also point out that Medicare went into operation at a time when hospitals were faced with compliance under the Federal minimum wage laws for all their employees. Hospitals, which for years had paid their workers less than most other workers, were faced with the enormous cost of "catching up." That these pay increases multiplied costs rapidly is due to the fact that nearly 70 percent of the total costs of hospitals' operation are for salaries and wages alone.

We would also like to point out that the Medicare program has had a significant impact on the administrative costs of a hospital, particularly in the financial department, causing health care costs to increase. These increases are due to such things as (1) the division of the Medicare program into Parts A and B, making it necessary for the hospital to send out separate billings; and (2) the requirement that hospitals maintain, by hand, Medicare program statistics for year-end cost allocations, because the computerized output from the Social Security Administration (SSA) is unacceptable and because SSA will not authorize funds to local intermediaries to program this data on their computers.

In addition, outpatient claim processing continues to be a massive bookkeeping problem caused by the deductibles and co-insurance feature, by considerable delays in the receipt of Explanation of Benefit forms, confusion on the part of the patient as to what he is responsible for, and resulting payment delays under the Medicaid program.

A moment ago, we referred to the lack of understanding on the part of the Government with respect to the impact of Medicare. We would couple with this, the almost total lack of fiscal planning to properly implement the program and meet all the objectives called for by the legislation. At the time the Medicare legislation was being prepared, actuarial and fiscal cost estimates made by Government officials and Congress were considered much too low by the voluntary health care system, which was called upon to carry out the services called for in the health program. Hospitals, at that time, had urged that cost projections be re-worked and increased, but this was not done. As a result, the costs of the Medicare program have repeatedly exceeded the original Federal estimates.

As with certain administrative aspects already cited, this financial embarrassment has contributed to serious problems in the closely related Medicaid program. Because of large cost overruns in Rhode Island's Medicaid program, State officials decided in October of 1969, to pay hospitals only 90 percent of their costs for services rendered to Medicaid patients. Faced with the threat of a court suit by the member hospitals of our Association, the State reverted back to the full reimbursement policy. But this did not permanently solve the problem-to which we shall refer later again in discussing prospective reimbursement.

Section 232 of H.R. 1, the Social Security Amendments for 1971, would permit each state to determine "reasonable costs" under the Medicaid and Maternal and Child Health Programs. The states would no longer be required to reimburse hospitals under those programs on the same basis as under Medicare.

We believe that H.R. 1 should contain a precise definition of "reasonable costs" and that the determination of "reasonable costs" should be uniform among the Medicare, Medicaid and Maternal and Child Health Programs. It is only with the precise, agreed-upon definition of "reasonable costs" that we believe progress will be made toward an effective and efficient reimbursement formula.

Since hospitals generally are not in a position to absorb any unreimbursed costs, any underpayment for Medicaid beneficiaries tends to be passed on to other patients, such as self-pay patients and Blue Cross patients.

The passage of the Medicare and Medicaid programs underscored the fundamental weaknesses in health care financing. The programs assumed the burden for the payment of health care bills of a large segment of the population, but explicitly renounced any obligation to share in the meeting of the total needs of our health care system, except as that system met the needs of the program beneficiaries.

Out of a deep concern for the need of greater financial stability within the voluntary health care system, the American Hospital Association, of which our Hospital Association is an associated member, issued a set of guidelines by which the financial shortcomings which have plagued hospitals for a long time, could be overcome.

In its Statement on the Financial Requirements of Health Care Institutions and Services, the American Hospital Association (AHA) declared that, collectively, all purchasers of health care, particularly all major third-party purchasers, have an obligation to recognize and share in all the financial requirements and needs of institutions providing that care. The AHA Statement on Financial Requirements identified these financial requirements of health care institutions as all the current operating needs related to patient care and all those related to capital needs. (The entire list of these financial requirements and their components are found in appendix A).

The provision of health care today has become the nation's third largest industry. More than $20 billion a year is spent on hospital care alone. We would strongly agree with the American Hospital Association that the financing of health care institutions must be carried out on a business-like basis.

Most industries in our economy rely on operating revenues to finance the production of their products or services and the means of producing them. The financing of the health care system, however, has been chronically insufficient to do this. Some institutions have been financed largely through community philanthropy, others have been dependent on government appropriations or grants, and only a few have been able to rely solely on operating revenues as an adequate source of funds.

The AHA Statement on Financial Requirements takes into account the following as necessary to the proper method of financing health care institutions: (1) The institution's responsibility to the community; (2) the need for systematic financing of all their operating and capital needs; (3) a rationale for proper planning of facilities and services with due regard for regional variations; (4) incentives for economy and efficiency in the delivery of high quality health care; and (5) the necessity for the maintenance of equity and the protection of the interests of both provider and purchaser.

The entire financing rationale proposed by the American Hospital Association recognizes the differences between the institutional health care system and the rest of the economy. In the free market, industry can alter either price or quality in order to insure that current revenues are adequate to meet operating and capital needs. Health care institutions do not have these options. If the quality of health services is to be maintained, the prices established through bargaining between individual providers and large groups of purchasers must provide revenue sufficient to finance these services.

The institutional health care system differs from the rest of the private sector in its philosophy toward the treatment of patients who are unable or unwilling to pay. Other members of the private sector maintain their right not to sell their products to someone who cannot afford it or is unwilling to pay for it. Community hospitals, because of their public responsibility, do not take such action. The right to receive service regardless of the ability to pay is extended to the entire community, and consequently, the entire community has an obligation to share in these costs.

Because of the significant problem in financing patient care operations created by these nonpaying patients, by the necessity to maintain standby services, and by the research and educational responsibilities of health care institutions, the limited capital payments that are currently included in contractual reimbursement schemes, often must be diverted toward meeting operating needs. Thus, the health care system has had increasing difficulty in maintaining the expanding its capital facilities to keep pace with population growth, community needs, technological advancements and the like.

The Statement on Financial Requirements corrects both operating and capital deficiencies by obligating all purchasers of care to share equally in meeting all the operating and capital needs. However, the statement recognizes that it can

not ask this of all purchasers without the institution's full participation in the community's health planning mechanisms and recognition of its role in the delivery of comprehensive health care to the community.

Although a basic implication of the AHA Statement on Financial Requirements is expansion of the Federal Government's role in financing the care of the aged and indigent through the Medicare and Medicaid programs, the aggregate effect of such a rational systematic financing approach is unlikely to significantly increase total Federal payments, because this systematic approach will result in a more equitable determination of payments by all purchasers and a more effective distribution of payments among all providers.

Finally, as regards the Statement on Financial Requirements, we would point out that the American Hospital Association seeks a payment system which recognizes a planned approach to the financing of health care priced through rates which are prospectively determined between providers and purchasers. The incentives inherent in the prospective setting of prices are well-known in our economy. Therefore, methods of payment based on prospectively determined rates present real opportunities for improvement in meeting the objectives of public accountability, predictability and managerial effectiveness as well as the other objectives contained in the Statement on Financial Requirements. (Policy statement of American Hospital Association regarding implementation of its Statement on Financial Requirements contained in Appendix B.)

We are very encouraged to see that Section 222 of HR 1 would authorize the Secretary of Health, Education and Welfare to experiment with methods of reimbursement designed to increase efficiency and economy. Additionally, it calls for experimentation with methods of payment to providers of health care on a prospectively determined basis. The Hospital Association of Rhode Island and its member hospitals wholeheartedly endorse the concept of prospective rating and we would strongly encourage the Federal Government to continue experimentation in this method of reimbursement.

We would like to point out for the record that the voluntary hospitals of Rhode Island are all presently operating under a prospective reimbursement contract with Rhode Island Blue Cross. We can point with much pride to the fact that Rhode Island was the first state-wide group of hospitals since Medicare to come under a prospective rating mechanism where rates were negotiated between the payer and provider. What is particularly significant is that the agreement between the two parties was reached voluntarily.

Although the prospective rating mechanism has been only partially in effect for this present fiscal year (ending October 1, 1971), we already have some indicators that it is having a favorable effect on costs. Based upon preliminary data recently gathered by the Hospital Association, the hospitals in Rhode Island are presently "under budget" when the actual costs are compared with budgeted costs. It appears as though significant dollars will be saved in this one fiscal year alone as a result of the partially implemented prospective mechanism.

A recent development in the prospective reimbursement picture here in Rhode Island was the passage of a bill by the Rhode Island General Assembly making the State Government, through the State budget director, a party to hospital budget negotiations between all the voluntary hospitals in the state of Rhode Island Blue Cross for the hospital fiscal year beginning October 1, 1972. In addition to making the State a party to the budget negotiations, the new Rhode Island law paves the way for the State to enter into a contractual agreement with the hospitals to determine prospective rates it would pay, as a major purchaser of health care, for Medicaid and other patients. Presumably, this would come about with the passage of HR 1 and the provisions of Section 222 cited earlier.

Medicare and Medicaid principles of reimbursement are inadequate to the extent that they do not comply with the AHA Statement on Financial Requirements, specifically in non-reimbursement of their respective share of bad debts and community free service costs and failure to recognize growth working capital needs of health care institutions.

As a way of concluding our testimony this morning, we would like to address ourselves to that which we feel is necessary for changing the present health care system to insure the proper and adequate delivery of health care to the aged and indigent, as well as to all Americans. We have discovered the hard way, through Medicare and Medicaid, that to pour additional money into the existing system

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will not solve our nation's current health care problems. What is really needed is a basic restructuring of the entire health care delivery system and a realignment of the financing mechanisms. Plans, which we feel can bring about these changes, are contained in Ameriplan, the national health care program recommended by a special committee of the American Hospital Association (AHA).

We need not point out, though, that Ameriplan is one of many national health insurance proposals to be considered by Congress during the coming year. Each of the proposals attempts to provide a minimum level of health care benefits for the entire U.S. population. Where they part company is how the needed reforms should be carried out and how they should be financed. Ameriplan offers proposals to restructure the entire system of delivering health care services, as well as a method of financing the services.

At the very outset of our testimony, we said that health care is no longer a privilege of the few who can afford it, but rather it is an inherent right of all individuals. It is upon this basic principle that the goals of Ameriplan were founded. The corollaries of this principle, as stated in the AHA health plan, declare that the dignity of the individual and better community life are functions of health care; that government must assure the preservation and maintenance of health; that health services must be delivered without regard to the ability to pay, or to race, creed, color, sex or age; and that health services must be accessible to all.

Some of the goals of Ameriplan call for long-range planning and increased national expenditures for health care. Others require little changes in the ways that health services are presently delivered. One far-reaching goal is that the delivery of health services must provide comprehensive health care, the five components of which are health maintenance, primary care, specialty care, restorative care and health-related custodial care. Another goal which reaches into the future is that the system must provide incentives to health care providers for keeping people well.

At the heart of Ameriplan are Health Care Corporations (HCC's) organized to manage and coordinate health services at the community level. The HCC would be responsible for providing the five components of care, either through its own resources, or through contracts with providers meeting approved standards. It would be approved for operation in providing services to a defined population group in a specified geographic area by a newly-formed independent agency, the State Health Commission. This commission would be answerable to a National Health Commission having the responsibility at the Federal level for establishing standards of quality and regulations for the scope of benefits and comprehensiveness of services.

Ameriplan would utilize both Federal Government and private financing. All health care benefits that are tax-supported would be financed at the Federal level, and all present Federal and private sources of financing, including prepayment plans and health insurance companies would be utilized. The broader Ameriplan benefits package (see Appendix C) would make Medicare and Medicaid no longer necessary. For the first time, all the people of our country would be secure from becoming financially dependent or suffering loss of dignity as a result of illness or accident. The total benefit packages of Ameriplan, when interrelated and delivered through the Health Care Corporations, would encompass a scope of benefits never before available to any individual or group at a cost this nation could afford.

Realistically speaking, none of the health care proposals being considered will be enacted into law in pure form. It is crucial, however, that final legislation gear the necessary changes to existing resources, patterns of delivery and financial mechanisms. It is important that the Federal Government recognize its role in helping to bring about these changes in an effective manner.

We acknowledge that Senator Pell has his own national health plan before the Congress at the present time. We would like to take this opportunity to publicly applaud him for the outstanding direction and leadership he has provided in behalf of better health care delivery in the State of Rhode Island, particularly in the areas of medical education, health manpower and neighborhood health centers.

We appreciate this opportunity to appear and present the view of the hospitals of Rhode Island on the problems of Medicare and Medicaid. We stand ready to cooperate with your committee in its efforts to improve the delivery of health care to the elderly.

64-350-72-pt. 3-7

APPENDIX "A"

ELEMENTS OF FINANCIAL REQUIREMENTS

(From the American Hospital Association Statement on the Financial Requirements of Health Care Institutions and Services, February 12, 1969)

A. CURRENT OPERATING NEEDS RELATED TO PATIENT CARE

1. Direct Patient Care.-Financial resources required to provide patient care include but are not limited to salaries, wages, employee fringe benefits, services, supplies, normal maintenance, minor building modification, and applicable taxes. This includes the monetary value assigned to services provided through services of their members by religious orders and other organized religious groups.

2. Interest.—Financial resources required to pay a reasonable rate of interest on necessary funds borrowed for operating cash needs and capital needs.

3. Educational Programs.—Financial resources required to support educational programs having appropriate approval.

4. Research Programs.—Financial resources required to support research programs related to patient care, provided that such programs have appropriate approval.

5. Credit Losses.-Financial resources required by the institution for the unrecovered financial needs arising from the care of patients who fail to fully meet the obligation incurred for services received.

6. Patients Unable to Pay.-Financial resources required by the institution for the unrecovered financial needs arising from the care of patients who, because of inability to pay, are relieved wholly or in part of financial responsibility for services received.

1. Plant Capital

B. CAPITAL NEEDS

(a) Preservation and Replacement of Plant and Equipment.-The governing authority of a health care institution bears the responsibility of maintaining, utilizing, and preserving the assets of the institution entrusted to its custody. Funds must be available, therefore, to finance projects involving plant capital assets that because of deterioration and obsolescence must be replaced in the best interest of the public.

(b) Improvement and Plant.-Advances in medical science, and in the technology of delivering health care services often require expenditures for new units of equipment and facilities. Such expenditures represent a different element from expenditures for preservation and replacement of plant and equipment. Sufficient financial resources must be available for continued additional investment in the improvement of plant and equipment so that health care institutions can keep pace with changes in the health care system.

(c) Expansion.-Health care institutions are expected to meet increased demands resulting from such factors as population growth, discontinuance of other existing services, and changes in the public's concept of the delivery of health care services. In order to be in a position to respond to changing community needs, health care institutions must anticipate their future growth patterns and plan for the needed expansion of their facilities. There must be assurance that adequate resources will be available to finance such individual programs.

(d) Amortization of Plant Capital Indebtedness.-Health care institutions increasingly use borrowed funds to meet plant capital needs. Prudent fiscal management requires health care institutions to provide sufficient resources so that funds can be specifically designated for the amortization of plant capital indebtedness.

2. Operating Cash Needs

Because of fluctuations in operating needs, the amount of operating cash required to meet fiscal obligations as they come due may be subject to frequent change. Adequate cash reserves are essential to current stability so that good business practices can be followed without excessive short-term borrowing.

3. Return on Investment

Investors in for-profit health care institutions are entitled to a reasonable return on their investments.