The CHAIRMAN. Well, these things are obvious. The Food and Drug Administration has the duty and the responsibility of seeing that all these drugs meet Federal standards, and they have failed to do their duty-in fact, they have, I assume, violated the law-if they permit these drugs to be marketed that do not meet Federal standards. In other words, is it not correct to say that this Government, under the Food and Drug Administration, has the responsibility of seeing to it that these drug manufacturers should not be permitted to put a product on the market that does not meet Federal standards?

Mr. VENEMAN. That is correct. That is the purpose. It is a regulatory body for that particular purpose.

The CHAIRMAN. Now, if those Federal standards are not adequate, we should raise those standards and make them hew to a higher quality of production. But so far as I know, they do have a higher standard and I find that even the larger concerns and the best known, that claim to be the best in the field, themselves complain about too much inspection, not too little. So that job has to be done, anyway.

Now, when someone comes in, if you have Squibb claiming that his product is better than Pfizer or legally claiming that his product is better than either of the other two, logically should not the burden be on him to prove it and should he not have to carry that burden at his own expense if he wants to say that you ought to buy my product rather than the other fellow's?

Mr. VENEMAN. That seems to be the logical approach to take, Mr. Chairman. I think the program we are presently carrying out is a review for efficacy of some 2,900 drugs. That is being done by the National Academy of Sciences-National Research Council. I think that when this review is completed, we would be in a better position as a department to make a recommendation that would carry out the concepts in your measure.

The CHAIRMAN. The Federal Trade Commission is not going to let you advertise that your aspirin is better than the other fellow's. As Bayer says, there is none better. I am sure that that is true. I am also sure it would be true if they said there is none worse. It is all aspirin. But they have to be in a position to prove that statement. They are not in a position to prove that statement. So they go as far as they think they can, which is to say there is none better. The other fellow has the right to say the same thing, I would assume.

So it would not be fair to assess against the cost of this amendment which I have suggested and the Senate has passed on previous occasions, the expense of what the Food and Drug Administration is already doing or the expense that a manufacturer would have to undergo himself if he wants to require that his product be purchased to the exclusion of all others. If he wants to do that, he ought to bear the burden of providing that his is better. I think you agree with that.

Mr. VENEMAN. I would say it would be a combination. I think the Food and Drug Administration has the responsibility to test for efficacy and the other things that are necessary as part of their responsibility. But I think additional testing in the direction that you are suggesting could very well be the responsibility of the industry. The CHAIRMAN. Thank you.

DEPARTMENTAL REPORT ON WORK INCENTIVE PROGRAM

Now, I would like to call your attention to the fact that section 440 of the Social Security Act requires that your Department and the Department of Labor submit a report on the 1967 work incentive program to Congress by July 1, 1970. To date, we have received neither your report nor that of the Department of Labor. Naturally, these reports will be important in the committee's consideration of your welfare proposals next week. Will you be so kind as to contact the Secretary of Labor and see that he and you work together to get this report to us so we will have it next week?

Mr. VENEMAN. I will, Senator. I saw a letter or a memo come across my desk the other day suggesting that we did in fact have this in draft form and asking for an extension until August 1. Now, whether that came to your committee or not, I do not know. But we anticipate having a report by August 1. We regret the 30-day delay and I will contact the Department of Labor.

The CHAIRMAN. We do not have it and we want it, because we think that is fundamental to doing the job that the law or at least the Senate assigns to us.*

Mr. VENEMAN. That is correct.

The CHAIRMAN. We think that training and employment is one of the most relevant features of the family assistance plan and the proposed amendments to it. We need an effective program to put people to work and that it be more effective than it has been in the last year or two.

TAX LOOPHOLE FOR KICKBACKS

Now, I have noticed that there is an inadvertent loophole, according to the Medical World News, in the tax law that I did not intend and I do not know of anybody else who intended it. We wrote a provision to say that a person could not deduct as a necessary business expense his expenses or fines assessed upon him as a result of violating the antitrust laws.

The amendment went beyond that to say that if he had been subject to a criminal conviction, he could not deduct the expenses of bribes and kickbacks and corruption of that sort. It has come to my attention that by virtue of the manner in which that was drafted, someone is in a position to deduct some kind of referral fee and fee splitting or even kickbacks by doctors that he could not have deducted under prior law. I do not know whether it has come to your attention or not. Are you aware of it?

Mr. VENEMAN. It has not come to my attention Mr. Chairman. The CHAIRMAN. I will just make the article available to you. (The article referred to follows:)

[From the Medical World News, June 26, 1970]

AN INADVERTENT LOOPHOLE FOR KICKBACKS

Federal tax code now allows MDs to deduct such payments-irrespective of their state's law.

An obscure change in the Internal Revenue Code, enacted as part of the Tax Reform Act of 1969, has the effect of actually encouraging medical fee splitting,

The report was received by the committee and printed as part of the committee print entitled "Reports on the Work Incentive Program", dated August 3, 1970.

MWN has discovered. Congressional tax authorities and medicolegal experts were startled and dismayed to learn of this effect, probably none more so than the chief sponsor of the change, Sen. Russell B. Long (D-La.).

As the federal tax code now stands, specialists are allowed to deduct as business expenses kickbacks paid to referring doctors under circumstances where the deduction formerly would have been denied. Thus, a high-bracket specialist, who formerly would have had to make such a payment entirely out of after-tax dollars, can now do it with money that otherwise would have gone largely to the government.

Under the old law, a Treasury Department ruling permitted the deduction of such payments "provided they are normal, usual, and customary in the profession and community; are appropriate and helpful in obtaining business; and do not frustrate sharply defined national or state policies evidenced by a declaration proscribing particular types of conduct."

This meant that such deductions were always disallowed in the 16 states that prohibit fee splitting under all circumstances and that consider the practice grounds for revoking a physician's license. As listed by Edwin J. Holman, the lawyer who heads the AMA's Department of Medical Ethics, those states are Alabama, Arizona, California, Colorado, Georgia, Michigan, Minnesota, Nebraska, New Mexico, New York, Ohio, Oregon, South Dakota, Virginia, Washington, and Wisconsin. In addition, Hawaii, Iowa, Louisiana, Oklahoma, and West Virginia prohibit the practice under some conditions. In these five and the 39 remaining states, deductibility depended on whether a specialist's payments met the standards of the Treasury rule.

But under the amended law, Section 162 (c) (2) of the Internal Revenue Code now provides that a kickback must be allowed unless the taxpayer is successfully prosecuted in a criminal proceeding. Only if he is convicted, pleads guilty, or pleads nolo contendere may the deduction be disallowed, and in that case any related payments must also be disallowed. Asked if this change will encourage fee splitting, Holman answers, "Yes, and you may quote me."

The tax amendment originated with Senator Long, who persuaded first the Senate, and then-in conference-the House, to write it into last year's law. It is one of a package of four amendments aimed at criminal violators of the antitrust laws. (The others bar deductions for fines paid, for bribes to public officials, and for two thirds of treble damages paid.) The thought that the clause might give a green light to medical fee splitting never crossed the Senator's mind, his aides say.

The clause applies elsewhere, too. For example, a supplier who kicks back to a purchasing agent may now deduct the amount of the payment in his federal tax form, even if his act is illegal under his state's own law.

The Internal Revenue Service exchanges tax information with 30 states and the District of Columbia by computer tape and with 14 others by less sophisticated means. Nevertheless, the possibility that this information will be used by state authorities to prosecute anyone for making illegal kickbacks appears remote. Under the law, states are supposed to use the information only for purposes of tax collection, and IRS officials say they know of no instance in which a state has prosecuted on the basis of federal tax data.

Senator Long himself was away from the capital when MWN raised this issue, but aides on the Senate Finance Committee, which he heads, expressed certainty that he would look into the situation with great interest upon his return. The ranking minority member, Sen. John J. Williams (R-Del.) expressed surprise when told of the loophole, and promised to pursue the matter. The concern of these legislators is more than academic; fee splitting presumably raises medical care costs, and the finance committee has been seeking ways to hold down the expense.

The change in the tax law has nullified one tactic that might have discouraged fee splitting, a practice long held unethical by the AMA and other medical organizations. A simple change in the Medicare or Medicaid regulations to prohibit fee splitting under those programs might have met the old Treasury Department test as being a "sharply defined national policy" and could thus have ended the deductibility of all medical kickbacks in all states. That possibility no longer exists.

The CHAIRMAN. I will just ask you if you would support the addition of a provision to the Social Security Act making fraud, kick

backs, bribes, or any activities of that sort with respect to medicare and medicaid programs a felony punishable by fine and imprisonment? Of course, this would be in addition to the other penalties in the civilian criminal code, and this new penalty provision would have to appear in every new medicaid and medicare claims form.

Mr. VENEMAN. If you would make that available, Senator, I think we could work out an amendment on that.

The CHAIRMAN. I would suggest that we work together on that, because we did not intend to open any loophole in the law. If we have, we would like to close it. If someone is evading taxes, I believe that that is one area where we could even get at it retroactively. Insofar as an error might have occurred, we would like to straighten that matter out. I will make this all available to you and we will have it in the course of the committee hearing.

Senator Fulbright was not here yesterday.
Would you care to question the witness?

Senator FULBRIGHT. Not at this time, Mr. Chairman.
The CHAIRMAN. Senator Williams?

Senator WILLIAMS. Senator Bennett has something.

SIX-MONTH DELAY FOR DISABILITY PAYMENTS UNDER SOCIAL SECURITY

Senator BENNETT. I have one question this morning.

Mr. Secretary, I received a letter from the Utah chapter of the American Cancer Society raising a problem that had never occurred to me previously.

Under the present law, payments for disability under social security may not be made until after 6 months have passed. This was obviously designed to make sure that the disability was long term. But here is a case where one of these surprise diagnoses, say a case of cancer is diagnosed as stomach cancer and is diagnosed as terminal. The man is now permanently disabled. If he has been paying into social security for 19 years and the question is raised by his family, who now find themselves without any source of income because he cannot work, whether certain exceptions can be made in the case of terminal diagnosis which will permit the collection of disability benefits without waiting for the 6-month period.

Mr. VENEMAN. Senator, I think he was not on social security for 19 years. He was paying into social security.

Senator BENNETT. Paying into it, that is right. He is 39 years old. Mr. VENEMAN. Mr. Ball has indicated that the Advisory Council is looking into the 6-month waiting period for disability insurance benefits. Personally, I can see some problems with modifications where it might involve terminal cancer. Just as a quick reaction-quite often. those diagnoses are not as accurate in the time

Senator BENNETT. Of course, they can never predict how long a man may survive after there has been such a diagnosis. But it raises the whole question of whether there may not be types of conditions under which the disability is of such a nature that you do not need to wait 6 months to decide whether it is total.

Mr. VENEMAN. You find the same situation, I think, in a severe injury, for example. I look to Mr. Ball to respond as to whether the

Advisory Council has come to any conclusion. How near they are, I do not know.

Mr. BALL. Senator Bennett, they have not come to any conclusion yet. They are considering a proposal similar to the one you described, but also the whole question of whether the 6 months itself may be, generally speaking, too long. Of course, if they were to recommend a reduction in the 6-month period generally that would help the sort of case you have.

There are difficult borderlines each time you make an exception depend upon the diagnosis or the particular disability, because you will find other cases that will be very similar. I would suggest that perhaps it would be desirable to await the Council's consideration of this. Perhaps the committee might even want to direct special attention to the proposal, although the Council is giving it special attention already. Mr. VENEMAN. It seems to me it would be very difficult to make an exception of a specific type of disability by cause and still have an equitable proposal. That is one of the questions we have.

Senator BENNETT. Well, if a doctor diagnoses any particular type of disability as terminal, such a diagnosis might apply to a heart condition as well as cancer. Or it might apply, though it is not so likely these days, to tuberculosis. It raises the whole question of the possibility of considering this decision that disease is terminal.

Mr. VENEMAN. I think the real issue is whether or not 6 months is too long a waiting period. I think that is the real issue, rather than the cause of disability.

Senator BENNETT. In a case like this, and I can understand the consternation of the family and of the Utah Cancer Society, every week or month you wait for the purpose of passing time is something that would represent a burden when they know the answer. That is the only question I have.

I would appreciate it if you would add this to the agenda of the Advisory Council and take a look at it from that point of view.

Mr. VENEMAN. It is on the agenda, Senator. We will advise you of whatever conclusions they may come up with with regard to the subject. The CHAIRMAN. Senator Jordan?

REDUCED FEDERAL FUNDS FOR NURSING HOME CARE

Senator JORDAN. Thank you, Mr. Chairman.

I have a question occasioned by a letter I got from the Association of Licensed Nursing Homes in my State. They urge me to vote against section 225 of H.R. 17550 because they claim the operation of that section would be financially disastrous to them. As I understand it, under the provisions of this section, one-third of the Federal funds would be withdrawn after the first 90 days of care in a skilled nursing home. They maintain that the kind of patients they have do not improve after 90 days of care, that many of them are 80 or 90 years of age and require substantial medication, and it would be disastrous if a cutback were brought about by the operation of this section on that kind of a home.

Mr. VENEMAN. Senator, this is the same section on which questions were raised yesterday, I believe, by Senator Curtis and Senator Hansen. Both the providers in these facilities and some of the Governors