that would give us several years more of national experimentation so when the national health is implemented, we would know more about prospective ratesetting.

One other point. I would agree with Mr. Lewine. I think his problems would be cured if the industry and the Government worked together in designing such systems and I think what he is worried about is if they are arbitrarily issued by HEW?

Mr. ROSTENKOWSKI. How do you feel about that?

Mr. MCMAHON. I agree. I think we could devote excellent time to improvement of some of the present reimbursement system and that would begin to get us experience on which to build. As Mr. Bromberg indicated in his testimony, we had hoped for more action in the innovative area, the use of prospective reimbursement systems and incentives. But we would be ready to sit down and discuss with the subcommittee and with other interested people-I say this across the field-to look at ways in which the reimbursement system can be improved and made more equitable.

Mr. ROSTENKOWSKI. Do you think HEW has not done enough with the process?

Mr. BROMBERG. HEW issues every year an annual report to the Congress on how it is implementing this committee's directive to experiment. This year it is a very thick record and it is very interesting and it is very informative. The problem with it is that 99 percent of it talks about experiments being done by Blue Cross, hospital associations, volunteer groups, and very, very little of it says medicare patients are covered, medicare participates.

Quite a few say we are studying it, we are looking at it. Those laws have been on the books for a number of years and we are extremely disappointed that there is very little to show for it and we have to admit the field may be partially at fault for not submitting experiments, although a few have been. But what we are looking for is leadership. Why can't HEW, if they are able to publish a classification system and say we will not pay above the 90 or 80 percentile, why don't they say they will pay the 75th percentile nationally across the board? Why can't they publish model programs? But that leadership has been missing.

Mr. ROSTENKOWSKI. Would anyone else care to make an observation?

HEW also promised to conduct studies that would indicate whether the 8.5-percent differential should be modified. What might these studies have shown if they had been conducted as promised?

Mr. MCMAHON. On pages 4 and 5 of my long statement, Mr. Chairman, we made reference to two of them. There is an HEW-funded study in California that indicated that it was-the differential was about 28 percent. The Commission on Administration Services for Hospitals also took a look at it and found that that was 17 percent; that is, 17 percent more care per average medicare beneficiary than the patient load as a whole.

Our earliest studies that I also made reference to indicated that the range of nursing differential back when it was a matter for discussion in the late 1960's was in the same area, 20 percent to 35 percent depending upon the study. So they would have indicated very clearly that the nursing differential at 8.5 percent is undoubtedly understated nursing time. That is the nursing time for patients.

Mr. ROSTENKOWSKI. Well, I want to thank the panel. You have been most informative. I am sure that based on the testimony that we have received from you, this committee will spend some long working hours trying to solve the problems.

Thank you very much.

Mr. MCMAHON. Thank you, Mr. Chairman.

Mr. ROSTENKOWSKI. Welcome to the committee.

If you would identify yourself and proceed with your statement.

STATEMENT OF EVERETT A. JOHNSON, PH. D., CHAIRMAN, COUNCIL OF COMMUNITY HOSPITALS, ACCOMPANIED BY SISTER MYRA JAMES, MEMBER, BOARD OF DIRECTORS, AND JOHN HOFF, COUNSEL

Mr. JOHNSON. I am Everett Johnson. I am administrator of the Methodist Hospital in Gary, and I am chairman of the Council of Community Hospitals.

With me are Sister Myra James, administrator of Penrose Hospital, Colorado Springs, and director of the Council of Community Hospitals, and John Hoff, our attorney.

We have prepared detailed testimony on the regulations that you are reviewing today. In the interest of time and with the chairman's permission, we request that the statement be included in the record and that I be permitted to summarize.

Mr. ROSTENKOWSKI. Without objection your entire statement will be printed in the record.

You may continue.

Mr. JOHNSON. We greatly appreciate your invitation to have us appear. You are serving a great purpose in undertaking a review of three programs which HEW has recently instituted in order to save Federal funds. They are vivid examples of the erroneous assumptions under which HEW is operating.

The three regulations are merely the tip of the iceberg. There are numerous other actions just like these. No one regulation by itself is catastrophic but their total effect could well destroy community hospitals' ability to provide quality care.

I would like to emphasize that community hospitals are a very diverse lot. We deliver most of the hospital care provided in this country.

We are the hospitals who care for your constituents day in and day out.

Let me state briefly some of the destructive aspects of HEW's policies that in one way or another lie behind the three regulations under review today.

One, HEW simply does not understand that physicians are not agents of the hospital. HEW seeks to control physician conduct by placing sanctions on hospitals.

One example is the utilization review regulations. Notwithstanding the fact that physicians, not hospitals, determine whether a patient is to be discharged, the sanction for noncompliance is placed on the hospital.

It is not reimbursed for services it provides during what is de termined to be an unnecessary stay.

Perhaps an even more onerous example of HEW's failure to take account of the hospitals' inability to control physician behavior is its proposed MAC program. This is discussed in our written testimony. This proposal would limit hospital reimbursement in certain instances to the cost of a generic drug even though the physician prescribed a brand name drug and required the hospital to supply the more expensive brand drug.

No sanction would be imposed on the physician for insisting on the brand drug. Thus there is no incentive for physician compliance and at the same time the hospital bears the financial loss of the doctor's failure to do what HEW wishes the doctor to do.

There is no doubt that HEW is operating on the basis of this erroneous assumption about the physician hospital relationship.

We have been astonished in conversations with officials at HEW on several occasions to hear them state quite innocently their belief that hospitals can control physicians as if they were employees.

We emphasize this point because it is basic and important. HEW must be made to understand it.

Two, hospitals must be assured of a fair payment system that cannot be changed at the unilateral whim of an agency concerned about the size of the Federal deficit.

HEW appears to be reducing hospital payments simply to save Federal funds without any consideration of the effect that this will have on health care.

In effect it is refusing to pay the full reasonable cost of federally mandated programs.

The elimination of the 8% percent medicare nursing differential is a prime example. This was done without the benefit of studies or hearings. Dollars that hospitals have depended upon will be taken

away.

Hospitals will therefore be forced to raise their charges to private patients to make up the difference.

HEW has not admitted to the American public that what it is doing is shifting costs rather than saving costs.

The American public does not realize that what they may save as taxpayers they will pay as patients. In sum, Government will pay less, private patients will pay more, and HEW will have accomplished nothing except to further erode the confidence of the health care community that HEW is willing to carry out Congress' mandate.

Three, HEW is nibbling away at hospitals. They reduce reimbursement a little here and a little there, so that the public and Congress may not realize that HEW is cutting back on Federal health priorities set by Congress.

In so many instances this is being done without the prior development and publication of data to support the action and without the political process being engaged.

Four, HEW totally fails to recognize the immense diversity of American communities and their hospitals. In classifying hospitals in the regulation setting routine charge limitations at the 80th percentile, it does not take into account even the simple difference of whether the hospital is located in an inner-city area where greater costs are incurred or in a small town.

We realize that we will be criticized by HEW this afternoon for raising rates, but hospitals are the victims of inflation and unconllable costs and not the cause of them.

Although HEW recognized this in a 1974 report to this committee, it has not acted accordingly.

It has reduced reimbursement while hospital costs are increasing. One recent example of inflated costs: It is not uncommon for hospitals' malpractice insurance to be increased as much as 600 percent in 1 year.

Hospitals must also raise charges to recoup the losses that result from HEW's failure to pay the full cost of treating medicare and medicaid patients. We believe this committee will recognize that it is far easier to unilaterally cut expenditures and claim credit for doing so than it is to undertake the balancing and judgmental functions that represent the true nature of Government.

To avoid future HEW actions like those under review today, we suggest two alternative procedural changes that the committee might wish to consider.

One: The committee might consider requiring that major HEW regulations be submitted to the committee prior to their promulgation so that the committee can, if it chooses, review them. The committee would be under no obligation to take any action one way or the other. It could, if it chooses, review the proposed promulgation for consistency with congressional intent. I understand from counsel that there are more than 30 statutory provisions now in effect that provide for prior congressional review on an agency's actions.

Two: HEW should be required to hold evidentiary administrative hearings before promulgating any regulations affecting hospital reimbursement. In this way, HEW might be made to understand, for instance, that hospitals cannot control physicians.

Thank you for giving me this opportunity to testify. I would like, if the chairman will permit, to ask Sister Myra James to give one concrete example of how HEW actions are injuring hospitals.

STATEMENT OF SISTER MYRA JAMES

Sister MYRA JAMES. Thank you.

I am Sister Myra James, administrator of Penrose Hospital, Colorado Springs, Colo., and a member of the board of directors of the council of community hospitals.

As has been said this morning, all of these HEW regulations that have been imposed are harmful in one way or another. Bur the removal of the 8%1⁄2 percent nursing care allotments I think is a concrete example of how these regulations affect the small hospital.

I know of a hospital in Colorado with 75 beds, having a $1.9 million budget, that will lose approximately $50,000 this year. That will mean about $6 per patient-day that will have to be added to the nonmedicare patient's bill.

The hospital simply cannot reduce nursing for its medicare patients but must maintain quality of care for those patients. Contrary to HEW's erroneous assumptions that they simply don't need more nursing care, these patients need more nursing care than other patients do. Nor can we switch patients to specialized units as HEW has suggested because this would incur a substantial additional costapproximately doubling the cost of care-and really the more intensive care that older patients require can be performed through the normal routine nursing.

This small hospital is in a poor undeveloped rural area and has been able to operate only at a break-even level or below. Thus it has no reserves to fall back on and it will be forced, however reluctantly, to increase charges on nonmedicare patients, and as you know, it is against the law to make one group pay for the services of another. Therefore, we are being asked to compromise care or increase costs. This is not an isolated example but one we thought you would be interested in.

Thank you.

[The council's prepared statement follows:]

STATEMENT OF EVERETT A. JOHNSON, CHAIRMAN, COUNCIL OF COMMUNITY HOSPITALS

My name is Everett A. Johnson. I am Chairman of the Council of Community Hospitals. We greatly appreciate the opportunity to appear before this Committee today.

CCH was organized at the beginning of this year to assess major regulatory and legislative actions that affect community hospitals and to express hospitals' concerns about these matters in an independent fashion.

Community hospitals deliver most of the hospital care performed in this country. They are the hospitals who care for your constituents, day in and day out. They are a critically important element of every community, and a major topic of citizen interest and concern. Because hospitals are rooted in and serve individual communities throughout the country, no hospital is just like any other hospital. They are tremendously diversified, just as your districts are. Hospitals uniquely reflect the different needs, aspirations, and traditions of communities in a nation that rightfully prides itself on its diversity, as well as on its unity.

Because hospitals are local institutions, moreover, citizen interest is typically directed at one hospital, or at most two. As a result, even though most citizens of this country are acutely concerned about their own hospitals, there is no effective unified, national response by citizens to actions that affect hospitals generally. Instead, citizen concern is thoroughly diffused through the thousands of communities. Hospitals are truly an example of a situation where the impact of the whole is unfortunately far less than the sum of its parts.

Community hospitals are concerned that, perhaps as a result of this lack of a national posture, their grave problems are not understood by the Federal bureaucracy or even worse-are understood but are ignored. The organization of CCH was a response to hospitals' fear that the policies underlying the current actions of HEW are putting us on a path that could eventually destroy hospitals' ability to provide the quality of care to which Americans have become accustomed. These policies, whether deliberate or not, could result in a permanent change in the quality of patient care before the public and the Congress realize it has occurred.

It must be emphasized that hospitals are entirely unlike most groups who appear before you. They exist to serve the public. Anything that detracts from their ability to do so injures the public interest.

HEW is taking numerous, separate actions that are adversely affecting hospitals and their patients. No action is devastiating in itself, but the cumulative effect of all of them could be. We are grateful that this Committee is undertaking oversight hearings on three specific examples of HEW's actions. We are particularly pleased that these hearings have been initiated by a committee of the House of Representatives. Of all the institutions of the Government, you and the other members of the House are the closest to, and best represent, the concerns of this country's diverse communities and the hospitals that serve those communities. The three programs under review today are merely the tip of the iceberg. At the same time, they present vivid examples of the dangerous trends underlying HEW's actions. We believe that at least six major factors are present:

1. HEW, without Congressional approval, is cutting back on hospital reimbursement as a means of saving Federal dollars without regard to the effect these cutbacks will have on the financial viability of each community's hospital and thus ultimately on the health of American citizens. HEW has shown no signs that it is undertaking the difficult, but essential, balancing process of weighing the benefit of reduced Federal expenditures against the effect that reduction will have on patient care and on the financial viability of the institutions that provide the care.