the reason for the current hospitalization; and receive more medications. All of this care requires additional nursing time and the cost of this additional care is not reflected in the normal cost reimbursement process.

The Administration has now taken action to eliminate this justified differential. It is clear that this action is simply another cost-cutting measure and does not in any way reflect new studies of nursing time. The failure of medicare to reimburse for the special cost of care to the aged does not make the cost vanish; it still exists and to meet this cost, hospitals will have to allocate it to the other users of hospital services. Moreover, as my full statement points out, the arguments offered by the Department for eliminating the nursing differential are fallacious.

The subcommittee may be interested to know that on June 9, 1975, the American Hospital Association, the American Protestant Hospital Association, the Catholic Hospital Association, and the Federation of American Hospitals filed a lawsuit in the U.S. District Court for the District of Columbia seeking a declaration that the regulations eliminating the differential are unlawful and seeking preliminary and permanent injunctive relief which would bar HEW from enforcing these unlawful regulations.

Another important current issue relates to the Department's action in implementing section 223 of Public Law 92-603, "Limitation on Coverage of Costs Under Medicare." In establishing section 223, Congress authorized the Secretary of Health, Education, and Welfare to establish limits on inpatient costs within groups of similar hospitals. In implementing this section, however, the Social Security Administration has taken a very simplistic approach. The system utilizes three basic elements-bed capacity per capita income, and metropolitan or nonmetropolitan designation, ignoring range and complexity of service, teaching costs, and patient mix. As later presentations will point out, the HEW elements just do not adequately identify groups of comparable hospitals.

According to SSA's own estimate, 753 hospitals will fall outside these new limitations. While an exception process is provided, our experience during the past year indicates the process is slow and only infrequently recognizes legitimate costs above the limits. And these costs don't disappear, Mr. Chairman, because they reflect valid costs for greater levels of service and particularly for the education of young people for health careers. They must either be absorbed by a reduction in service or be passed on to the other patients, thus increasing their expenditures for hospital care.

Mr. Chairman and members of the subcommittee, I would now like to address the serious problems which have been associated with the implementation of the new utilization review regulations. Our purpose today is to indicate to you the extreme administrative difficulties we have experienced in the implementation of these new utilization review regulations and the unrealistic demands on hospitals which have been made by HEW.

I shall leave aside the situation which has resulted from the temporary injunction recently obtained against the implementation of these regulations by the American Medical Asosciation.

The American Hospital Association has long advocated a voluntary program of effective utilization review and medical audit to be conducted as an institutional responsibility of the hospital medical staff.

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The development, demonstration, and promotion of the quality assurance program for medical care in hospitals demonstrates the association's commitment in this regard. However, we also know that the state of the art is in its early stages and that implementation of a mandated nationwide program is likely, even at its best, to create major problems.

Regrettably, the development of utilization review regulations and the methods for their implementation have been chaotic. Theregulations have been characterized by unrealistic time demands that HEW has imposed on itself and failed to meet: Deadlines for hospitals which are impossible to satisfy; confurion in interpretation of policy; failure to take into account known special problems such as those of small rural hospitals and the definition of financial interest of physicians; requirements for duplicative review systems; and indecision on how this program will be financed.

Our full statement provides some more specific examples of problems we have faced while trying to assist hospitals in this implementation process, and we are convinced that the motivation for and the crash nature of the program is a desire for budget savings, not proper attention to the health care needs of program beneficiaries. In conclusion, Mr. Chairman, I have highlighted some of the serious problems that hospitals face as a result of the arbitrary and inappropriate actions which the Department of Health, Education, and Welfare has taken in the issuance of regulations relating to medicare program implementation.

We urge that you and your committee support us in our view that:

One: The current nursing cost differential be retained until adequate studies are performed, preferably by an independent agency to determine what adjustments, if any, are appropriate;

Two: No regulation on limitation on coverage of hospital costs be promulgated until an adequate classification system for hospitals is devised;

Three: Any regulations promulgated to implement limitations on prevailing charge increases for physicians include an adequate description of the methodology of such controls so that they may be reviewed and analyzed prior to implementation; and,

Four: The UR regulations issued on November 5, 1974, be withdrawn and not reinstituted until basic issues in this area are resolved and adequate guidelines and time for implementation are provided.

Mr. Chairman, we appreciate the opportunity presented by this oversight hearing. You will now hear additional comments from others on our panel. And when we finish, we hope you will have gained an understanding of the problems, a picture of the fiscally dominated decisionmaking process of HEW, and a recognition that proper operation of the medicare program will require greater oversight by the Congress and more detailed legislative direction of Federal agencies to assure compliance with congressional intent.

Thank you very much.

[The prepared statement follows:]

STATEMENT OF THE AMERICAN HOSPITAL ASSOCIATION

Mr. Chairman, I am John Alexander McMahon, President, American Hospital Association. Our Association represents some 7,000 member institutions and 21,000 personal members.

In addition to the American Hospital Association, five other hospital associal tions the Catholic Hospital Association, the American Protestant HospitaAssociation, the Federation of American Hospitals, the American Osteopathic Hospital Association, and the Association of American Medical Colleges-have been invited by the Subcommittee Chairman to submit statements and participate in today's oversight hearings on a number of major regulatory issues relating to the Medicare and Medicaid programs. As representatives of hospitals and other institutional health care providers, the groups participating here today share common concerns regarding the proposed elimination of the inpatient routine nursing salary differential, the proposed changes to regulations related to Sections 223 and 224 of P.L. 92-603, and implementation problems related to the new utilization review regulations.

My statement will provide a broad overview of each of these issues and will be supplemented by individual statements from each of the five other organizations. Preliminary estimates indicate that during fiscal 1974, some 35 percent of hospitals' total patient days of service were attributable to Medicare patients. Hospitals, therefore, are deeply involved in government health programs; so when changes in regulations are proposed or implemented regarding Medicare and Medicaid, they have direct impact on the provision of health care services by hospitals and other health care institutions. Today we face a number of such significant changes, and are pleased to have been invited by the Subcommittee to state our views on these matters and how they will affect hospitals, other institutional health care providers, and the millions of patients served by them.

INPATIENT ROUTINE NURSING SALARY COST DIFFERENTIAL

I would like first to discuss the recently published notice of termination of the inpatient nursing differential under Medicare. This action on the part of the Office of Management and Budget (OMB) and the Department of Health, Education, and Welfare (HEW) will be effective for Medicare patients cared for by institutions during fiscal years beginning July 1, 1975.

Before I comment on this action, I would like to review briefly for the Subcommittee the background of the existing allowance for differences in nursing time needs of Medicare patients compared to those of other patients. At the time Medicare was enacted, Congress recognized that the program required a definition of the method by which institutions and other health care providers would be paid for the care rendered to beneficiaries. In the enabling legislation, Congress established that inpatient care would be fully reimbursed on the basis of reasonable costs. Congress further recognized that it would be unfair to obligate other purchasers of care in hospitals to pay for any part of the cost of care for Medicare patients through inadequacies in the reimbursement for care of these patients. The legislation, therefore, states that "the cost in respect to individuals covered by the Medicare insurance programs will not be borne by individuals not so covered." These two concepts were clearly enunciated in the law.

The Social Security Administration (SSA) in implementing the law had to define what it considered to be reasonable cost. In the process it became obvious that patients over 65 required more personal care and assistance than did the general patient population. It was also clear that existing systems did not accurately reflect a number of cost elements including additional service requirements of aged patients. From the very first the Medicare program recognized that the accurate reflection of the costs of care for aged people required that a factor be added to the basic cost of care. Therefore, in 1966, at the beginning of the program, a 2 percent factor was added to the basic cost figures in the Medicare reimbursement formula.

From July 1, 1969, onward, however, in the Department's quest for cost savings, HEW proposed that this 2 percent factor be eliminated entirely. Then, after the injustice was pointed out and recognized, the 2 percent factor was replaced in part by an allowance for the difference in nursing needs between Medicare patients and others. While the 2 percent was computed on the basis of the institutions' total Medicare costs, the nursing cost differential of 81⁄2 percent was computed only on routine nursing salary costs; this, in effect, reduced the addition to costs reflecting the increased care to the aged from the original 2 percent to a 1 percent level. The new differential, as noted, was applied only to routine patient care and not applied to Medicare patients who were being treated in special care facilities, such as coronary care and intensive care units.

In undertaking this action, the allowance of 81⁄2 percent on routine nursing salaries was based upon studies which showed that aged patients on the average receive routine nursing care that is more costly because it is more extensive and

because it requires more time. The major study, conducted by the American Hospital Association in 1966, involved a work sampling in 154 medical and surgical units in 55 hospitals throughout the country. In addition, a study was conducted by the Commission for Administrative Services in Hospitals, a nonprofit management engineering organization in Los Angeles, involving time and motion studies for selected routine nursing procedures in 18 Southern California hospitals; and a similar study by the Massachusetts Hospital Association conducted in 1968 involved 19 hospitals. And there were other, similar studies-all documenting the additional requirements of care for aged patients.

What factors contribute to these additional requirements? The studies show that many aged patients required assistance in eating; are either incontinent or require help for use of bed pans or bedside commodes; suffer more often the types of impairments such as fractures or paralysis that demand a great deal of socalled routine care; are confused, disoriented or depressed and as a result are unable to help themselves; have hearing or sight problems; suffer from more secondary medical conditions which have to be treated along with the reason for the current hospitaliaztion; and receive more medications. All of this care requires additional nursing time, and the cost of this additional care is not reflected in the cost reimbursement process unless special allowance is made for it.

The Administration has not taken action to eliminate this justified differential. It is clear that this action is simply another cost cutting measure and does not in any way reflect new studies of nursing time. The Social Security Administration, in adopting the present differential, provided by regulation that "further studies will be conducted periodically to determine that amount of the inpatient routine nursing salary cost differential and how such a differential should be applied in the future." This regulation has clearly been violated in the present action.

The American Hospital Association has offered the Social Security Administration its assistance in again reviewing the situation and determining the current requirement for special services for the aged and the appropriate impact of such a requirement upon the determination of reasonable cost. In the meantime, additional data are being accumulated which reaffirm the continued validity of the nursing differential concept. Preliminary results of an HEW-financed West Coast study now in progress suggest that elderly patients in the average require 17.5 percent more nursing time than patients under 65. A current study by the Commission for Administrative Studies in Hospitals shows that aged Medicare beneficiaries require 28 percent more nursing care than the under-65 patient population. These, and additional studies by individual hospitals, not only reaffirm the concept that aged patients require additional routine services and thereby are more costly to care for, but also shown that the reimbursement process must allow for such additional costs.

Eliminating the differential in question will mean passing the extra cost on to other hospital patients and third-party payers. The failure of Medicare to reimburse for the special cost of care to the aged does not make the cost vanish; it still exists, and to meet this cost, hospitals will have to allocate it to the other users of hospital services. In effect, what the elimination of the factor will do is indirectly tax other users of hospital services who pay for their care. While this may show up as an advantage in the Administration budget, it will show up as additional cost in the bills sent to private patients and in the premiums of health

insurers.

The Social Security Administration has given rather simplistic arguments in support of its action. The first reason given is that there has been an expansion of special care units and that more Medicare patients are being treated in such units. Therefore, SSA reasons that the special nursing needs of Medicare patients are being met through the intensive nature of care rendered in special units. This argument is fallacious. First of all, Medicare does not pay the differential for care rendered in special care units, although there is every reason to believe that aged patients in special care units require more care than other patients in such units. Second, many hospitals, particularly rural institutions, in which a considerable number of our aged citizens are treated, do not have special care units. Third, most patients are not in special care units, and the many complicating health problems of the aged continue to require more personal care than do the health problems of younger patients.

The second reason SSA offers for elimination of the differential is the expansion of Medicare coverage to include persons under 65 who are disabled and certain patients suffering from renal disease. This argument also is fallacious. First, it is irrelevant inasmuch as Medicare does not pay a differential for these patients who constitute less than 9 percent of all Medicare beneficiaries. And, second, this

added group of patients with renal disease or who are disabled comprises one of the most seriously ill segments of the population and may deserve a nursing differential not now provided for it.

The third and final reason advanced by SSA was that the 1972 changes in Medicare cost apportionment requirements somehow eliminate the need for the nursing salary cost differential. To the contrary, the 1972 changes in cost apportionment-which require separate calculation of routine care unit costs and special care unit costs-assure that the nursing care cost differential is paid for only routine nursing care of aged beneficiaries. This refinement in reimbursement is no reason for the elimination of the differential.

In summary, the data from studies of nursing care needs of the elderly and the well-known characteristics of this population group demonstrate that they require more nursing care than other patients. The only arguments offered by the Department for eliminating the nursing differential are fallacious and are based purely on budgetary considerations which would force the inequitable transfer of these costs to non-Medicare patients. While we have made these points to the Department, our arguments have been to no avail. The strongly adverse action resulting from the elimination of the allowance is nevertheless being taken against hospitals and the other patients they serve.

The Subcommittee may be interested to know that on June 9, 1975, the American Hospital Association, the American Protestant Hospital Association, the Catholic Hospital Association, and the Federation of American Hospitals filed a law suit in the U.S. District Court for the Distric of Columbia seeking a declaration that the regulations eliminating the differential are unlawful and preliminary and permanent injunctive relief which would bar HEW from enforcing these unlawful regulations.

LIMITATION ON COVERAGE OF COSTS UNDER MEDICARE

Another important current issue relates to the Department's action in implementing Section 223 of Public Law 92-603, Limitation on Coverage of Costs Under Medicare. In establishing Section 223, Congress authorized the Secretary of Health, Education, and Welfare to establish limits on inpatient costs within groups of similar hospitals. The groupings of the hospitals were to allow for differences which could result from hospital size, the nature and scope of services provided, the types of patients treated, the location of the institutions, and other factors affecting the efficient delivery of needed health services. It was expected that the limits would apply to a relatively small number of institutions with extraordinary expenses. Section 223 did not, however, eliminate the requirements 1) that Medicare pay reasonable cost or that 2) the cost of care for Medicare patients be borne by the program rather than by other patients. The American Hospital Association recognizes that the establishment of this grouping system is a difficult task since the variations between institutions are considerable and the comparative cost of services must be considered carefully before any conclusion of inefficiency or unjustified costs are reached.

In implementing this section, the Social Security Administration has utilized a most simplistic approach in the classification of institutions and thus in the determination of what limits of reimbursable cost are reasonable. Many major factors affecting costs are not reflected in the classification system. The system utilizes three basic elements-bed capacity, per capita income, and metropolitan or non-metropolitan designation. These elements in no way define with precision classes of hospitals which permit appropriate economic comparison and are satisfactory for establishing limits on reimbursement.

As proposed initially, the limits were used to identify only very unusual cases, and an appeal and exceptions process was to be applied to the many important factors that could only be taken into account as exceptions.

The initial system needed a full trial before its adequacy could be appraised and its defects corrected. Yet, before any of this could be done, the system has been revised and the limitations made so much more severe as to place some 753 hospitals, according to the Social Security Administration's own estimates, outside the limitations and thus arbitrarily penalize them. While these hospitals may appeal for an exception to the Social Security Administration, our experience with the exceptions process shows that decisions are interminably slow, and that reasonable appeals are decided only infrequently in favor of hospitals. Furthermore, the penalty of inadequate reimbursement falls upon such institutions immediately, and relief, if it is granted, can only come many months after the hospitals have experienced serious financial problems and have been forced to go to a highcost money market for operating funds. The net effect will be to generate new and