It is not unlikely that physicians will often neglect to make the required certification even where-as in Medicaid-a standardized procedure (such as a stamp) could be used. Where the additional, particularized information called for by the proposed Medicare regulations is required, the chance that the certification will be neglected is greatly increased.

The proposed regulations do not specify when the certification must be given. If it must be entered before the prescription is filled, patient treatment could be substantially delayed before the doctor is located and he is able to come to the hospital to make his certification. However, if the certification can be supplied later, hospitals will accept an oral certification by the physician and fill the prescription. The regulations should provide, therefore, that the certification could be given at any time, even during an audit. This would at least ensure that hospital reimbursement is not denied when the hospital provides a trade-name drug on physician's oral certification so long as a later written certification is obtained. 7. A provision should be added to the proposed regulations guaranteeing that hospitals which fill prescriptions in reliance on a certification are not affected by any subsequent disallowance of that certification.

The proposed regulations apparently contemplate that a hospital will not fill a trade-name prescription to which a MAC limitation is applicable unless it has received the required certification. The preceding comment points out that hospitals must be able to fill prescriptions on the basis of a physician's assurancegiven either by across-the-board authorization or in particular cases-that a certification will occur. Yet after a certification has been issued, HEW or a fiscal intermediary may determine that it was improper or insufficient. Since the hospital would long since have filled the prescription and incurred its cost, the regulations must provide that the hospital's reimbursement will not be retroactively decreased because any certification is disallowed.

8. The regulations should require adjudicatory hearings before a certification could be disallowed and ensure hospital participation.

If certifications are to be reviewed and disallowed, an adjudicatory procedure that will ensure fairness must be established. The proposed regulations provide

none.

Moreover, unless the preceding comment is adopted (or the regulations are modified as suggested in Comment 3), the adjudicatory procedure must include hospital participation. The physician involved would have no direct financial interest in the outcome of a review of his certification. Only the hospital would. It must thus be permitted to participate in the defense of the prescriber's action. 9. The regulations should affirm the hospital's right to take appropriate disciplinary action against any physician who by his prescription practices causes hospital reimbursement for drugs to be less than the hospital's cost.

As has been mentioned frequently in these Comments, the proposed regulations place hospitals at the financial mercy of the physicians. If a physician insists on prescribing trade-name drugs despite a MAC limitation, or if a physician's certifications are disallowed, the hospital would bear the loss.3 The only remedy a hospital has is to take disciplinary action against the physician, where warranted. The hospital's right to take such a step for such reasons is not clear under existing law. Yet, if the proposed regulations should go into effect in their current form, some method of enforcing compliance would be a necessary protection for hospitals. Ordinarily hospitals would not seck authority to take action against a physician for an action which the physician might feel, and quite rightly, is in the best interest of his patient's care. But if HEW intends to penalize hospitals for not enforcing rules then they must have the power to enforce.

If HEW truly wishes to promote its policy of encouraging generic-drug prescriptions and at the same time limit hospitals' potential loss from the acts of physician prescribers, it should include in the regulations a provision specifically authorizing a hospital to take appropriate disciplinary action against a physician who writes more than a specified, but limited, number of prescriptions which result in the hospital recovering less than its cost of filling the prescriptions by virtue of the operation of the proposed regulations.

10. The regulations must include specific standards to control the determinations to be made by the Pharmaceutical Reimbursement Board.

The list of drugs subject to MAC limitations, and the levels of those limitations, would be determined by the Pharmaceutical Reimbursement Board. These decisions are of critical importance to the health care system. But the proposed Regulations set no standards to control the determinations of the Board. They

Unless, of course, the regulations had been revised in the ways suggested above.

thus leave to the unguided deliberations of the Board such major questions as the following:

a. In comparing different costs of a drug, how are variations in quality-control procedures among manufacturers to be evaluated? The Board presumably will consider the costs only of drugs manufactured by houses that comply with the requirements of the Food, Drug and Cosmetics Act. But some manufacturers may engage in quality-control programs that are more stringent than the minimums required by law, and such efforts may increase the cost of their product. A physician may prefer that manufacturer's product for that reason. The Board should not be permitted to set MAC limitations below the prices of the manufacturer with the most stringent qualify controls.

b. Costs of drugs are affected by the manner in which they are packaged. Unit-dose drugs may ultimately lower costs by reducing waste, and they may improve the quality of care. But because of the additional packaging cost, they may be more expensive to purchase. As presently drafted, the regulations contain no recognition of this problem, (although as discussed below in Comment 14, the proposed Medicaid regulations acknowledge the effect unit-doses have on the cost of dispensing), and the Board might set MAC limitations below the prices of unit-dose versions of the drug. The regulations should be amended to provide that significant physicial variations for reasonable purposes, (such as unit-dose packaging) between drugs shall preclude them from being considered multiplesource drugs.

11. The proposed regulations should relieve hospitals from liability for defective drugs they might unknowingly purchase in an effort to comply with the MAC limitations.

If the system proposed by the Department is effective and the physicians cooperate with it, it greatly increases hospitals' participation in the decision as to what drug a particular patient will be administered. If a hospital is permitted by the physicians to fill trade-name prescriptions with generic drugs, or if the physicians should (as is unlikely) prescribe by public name, the hospital (through its pharmacy and a P & T committee of the medical staff) would have to decide from which manufacturer it will purchase the generic drug. As mentioned above, even if the drugs are theoretically equivalent, manufacturers are not.

At the present time, physicians decide what manufacturer to use when they prescribe a trade-name drug. The proposed HEW policy, however, contemplates that the hospital will be making this decision-largely influenced by considerations of cost. And it is possible that the manufacturer it chooses on this basis could have produced a defective batch.

Moreover, where (as in the proposed Medicaid regulations) the hospital can retain 25 percent of the differential between the acquisition cost of the drug and the MAC limitation, there would be an added incentive to purchase the lowest possible priced drug. This could only increase the chance that the hospital might purchase a defective batch.

By requiring hospitals to purchase on the basis of cost and by forcing them to play a larger role in selecting a particular drug manufacturer, the proposed regulations would greatly increase hospitals' and physicians' exposure to damage actions for defective medication. Hospitals are willing to assume the responsibilities for actions under their control. But the proposed regulations would subject them to liability for conditions they cannot control-the quality of purchased medicine. The regulations, therefore, should include a provision by which Medicare and Medicaid will hold hospitals and the prescribing physician harmless for any damages resulting from purchase of defective drugs (so long as the hospital and physician did not know and should not have known of the defect.)

12. The proposed regulations should be amended to afford hospitals sufficient administrative remedies.

The proposed regulations do not provide sufficient administrative remedies for hospitals that wish to challenge decisions that relate to reimbursement determinations.

The proposed Medicare regulations contain a provision for provider appeals (under the provisions of Subpart R) that is insufficient, and the Medicaid regulations contain no such provision at all.

The proposed Medicare regulations stipulate that a provider may not appeal the inclusion of a multiple-source drug on the MAC listing or the MAC level itself. The Department presumably contemplates that such objections be made to

Although beyond the scope of these Comments, it should be noted that Subpart R itself is deficient in several respects.

the Board under the procedure set forth in the proposed new Part 19. But a hospital cannot be expected to challenge a determination of the Board at that time. It it asked its physicians whether they would accept the equivalency findings of the Board with respect to a particular drug, and a few did not, should the hospital be required to challenge the determination then, before it knew whether those few dissenters would not ultimately acquiesce? Would not the hospital be well advised to avoid incurring the expense of a challenge until it was absolutely necessary? In addition, even if all the physicians should agree with the Board's determination, a physician could subsequently change his mind, or a new physician who did not agree and insisted on prescribing a trade-name drug despite the MAC listing might be added to the medical staff. The hospital should not be barred from challenging a Board determination that becomes relevant to it because of changed circumstances.

Accordingly, we recommend that § 405.433 (d) of the proposed Medicare regulations be amended by deleting the proviso. To ensure, however, that a hospital which does invoke the administrative appeal process before the Board is not able to relitigate the same questions in an appeal from a reimbursement denial, we suggest replacing the existing exception with a provision that a provider may not appeal any question which it raised before the Board pursuant to proposed $19.5 and § 19.6. Also, we urge that the Medicaid regulations require the states to provide an appeal process like that provided for Medicare reimbursements. 13. The Department has not considered whether the proposed regulations would result in significant savings.

The Department estimates that the proposed policy could reduce the cost of multiple-source drugs by 22-36 percent, for a total prescription drug saving of 5-8 percent. The basis of this estimate is unclear. However, even if valid, it is not clear that the net savings, after entering into the calculation the costs that would be added by the proposal, would be significant.

As described above, the proposal would require hospitals to verify each tradename prescription to ascertain whether the physician would accept a generic drug or whether he neglected to give the required certification. This will impose substantially additional administrative burdens and probably require employment of additional personnel.

In addition, a substantial amount of time will be necessary to determine from what company and at what price multiple-source drugs should be purchased. This, too, will impose the requirement of hiring additional personnel.5

Moreover, the proposed regulation would seem to require that each patient's bill contain an itemized list of each drug administered. Even hospitals which operate computerized billing systems, which itemize all services rendered, would find it prohibitively expensive to add the computer capability necessary to itemize drugs administered. Indeed, in some instances hospitals have examined, before they converted to a computerized billing system, the added cost of itemizing the drug component of the billing, and determined that it was too expensive.

Finally, the proposed regulations would entail increased administration costs. The FDA would have to make bioequivalency findings; the Pharmaceutical Reimbursement Board would have to make MAC determinations; and fiscal intermediaries would have increased audit expenses.

It should be noted that the greater the cost-savings the Department believes will be realized by the proposal, the greater will be the additional costs incurred by hospitals. Savings are possible only where, as discussed, present formulary systems are not sufficiently effective. When they are not effective it is because of physician resistance. Yet that physician resistance will require the hospitals to incur the additional costs described above to attempt to persuade the prescriber to accept a generic drug (Comment 5).

Moreover, even where physicians currently are contributing to the effective operation of a formulary system, the proposal would increase costs-for instance, to provide itemized billing and for increased administrative and audit functionswithout yielding any savings.

Thus, the additional costs may well offset any savings that would actually result, particularly where physician resistance makes it unlikely that the program will result in substantially increased generic-drug prescriptions.

The possibility of the proposed regulations imposing burdensome administrative requirements like those described in the text is recognized in the explanation of the proposed Medicare regulations, 39 Fed. Reg. 3219. While, of course, hospital pharmacies maintain records of each patient's prescriptions, with rare exceptions these are maintained in non-computerized form. To transfer that information to each patient's bill requires substantial additional manpower and computer capability.

It is significant to note that the Secretary is aware of the fact that the proposed policy may not effect significant savings. In his explanation of the proposed new 45 C.F.R. Part 19, he reveals that the Department "will conduct appropriate studies of the economic aspects and cost effectiveness of the proposed policies.' (39 Fed. Reg. 40303, emphasis added.) Such a study is essential and should have been conducted in depth before issuance of the proposed regulations, with the results made available for comment.

Indeed, the promulgation of the Medicaid and Medicare proposed regulations on November 27, 1974, and January 20, 1975, may have violated the terms of Executive Order 11821, 39 Fed. Reg. 41501. That Order (signed on November 27, 1974) and the implementing OMB Circular No. A-107, provide that major proposals for regulations shall not be promulgated without a certification that the cost aspects have already been considered and that the agency promulgating the proposed regulations has determined they will not be inflationary. Neither the Medicare nor Medicaid proposal contains any such statement-despite the fact that the Secretary has revealed his own uncertainty as to whether the proposed system will not in fact raise the costs of hospital care.

14. The Medicare and Medicaid proposed regulations contain several unexplained inconsistencies that seem to serve no policy purpose but which would only increase administrative confusion.

There are a number of instances in which the Medicare and Medicaid.proposals vary. These apparently are not based on any policy differences, but result from inevitable administrative factors. The provisions should be homogenized both to avoid unnecessary administrative confusion and to improve the program substantively. Some of these have already been noted in the comments above:

8);

(a) Medicare provides for administrative appeal; Medicaid does not (Comment

(b) Medicaid requires the physician only to certify that a prescribed tradename drug is medically indicated; Medicare apparently requires, in addition, an explanation of the justification (Comment 6).

There are other variations which particularly should be noted:

(c) Medicaid recognizes that the dispensing fee may be affected by a unit-dose system (§ 250.30(b)(2) (i) (b)). Medicare contains no such explicit recognition. (d) Medicaid uses the concept of "actual acquisition cost", Medicare that of "actual cost" and the amount which would be paid by the "prudent and costconscious provider.” 7

(e) Medicare ensures that a new or amended MAC determination would not be applied retroactively (§ 405.433(b)(ii)); Medicaid contains no such provision, which, of course, is essential.

15. The circumstances under which the 25 percent retention would be available are unclear.

The introduction to the promulgation of the proposed 45 C.F.R. Part 19 indicates that the 25 percent incentive payment is available in all "non-institutional settings" (39 Fed. Reg. 40303). The actual terms of the proposed Part 19, however, provide that the 25 percent retention would be available if the drug is provided "on an outpatient basis" (§ 19.3(b)), regardless of whether or not in an institutional setting and regardless of whether the patient is under Medicare or Medicaid. But the Medicare proposal contains no such provision, and the Medicaid one seems to provide the payment for all providers-whether institutional or not, and whether out-patient or not. The proposed applicability of the retention, therefore, is unclear.

The Council of Community Hospitals strongly urges HEW to take these comments into account prior to the promulgation of regulations. We are prepared to assist you in every possible way in appropriately amending the regulations. Respectfully submitted.

JOHN F. HORTY,

President.

Mr. ROSTENKOWSKI. Thank you very much, Doctor, and Sister. Dr. Livingstone, Dr. Beddingfield, Dr. Taylor, Dr. McDevitt.

"It is debatable how this difference-and the fact that the 25 percent incentive retention is available only for Medicaid patients-is consistent with 45 C.F.R. § 250.30 (b) (1) (i).

54-804-75- -10

A PANEL OF PHYSICIAN ORGANIZATION WITNESSES CONSISTING OF ERNEST T. LIVINGSTONE, M.D., CHAIRMAN, EDGAR T. BEDDINGFIELD, JR., M.D., VICE CHAIRMAN, AND HARRY PETERSON, SECRETARY, COUNCIL ON LEGISLATION, AMERICAN MEDICAL ASSOCIATION; JOHN C. TAYLOR, D.O., CHAIRMAN, COUNCIL ON FEDERAL HEALTH PROGRAMS; AND FRANK J. McDEVITT, D.O., CHAIRMAN, COMMITTEE ON MEDICAL ECONOMICS, AMERICAN OSTEOPATHIC ASSOCIATION

Mr. ROSTENKOWSKI. Welcome, gentleman, to the committee. I am looking forward to your testimony.

Dr. Livingstone, you may begin.

Before addressing yourself to the committee, would you identify yourself, please.

- STATEMENT OF ERNEST T. LIVINGSTONE, M.D.

Dr. LIVINGSTONE. I am Ernest T. Livingstone, of Portland, Oreg., and with me is Dr. Edgar Beddingfield, of Wilson, N.C., Also with us is Mr. Harry Peterson, a member of the AMA staff and secretary of our council on legislation.

Our colleagues, Dr. Taylor and Dr. McDevitt, I assume will introduce themselves during their presentation.

The American Medical Association is pleased to have this opportunity to participate in these hearings which are designed to review actions of the Social Security Administration and HEW in administering certain authority under the medicare law.

I would ask that our full statement be submitted.

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

Dr. LIVINGSTONE. Prior to presenting our specific comments on these regulations we call your attention to a general feeling of futility concerning action felt by the public as a whole, but especially by groups subject to, and particularly affected by, Federal regulation.

We are able to identify clearly among our own professional associates, as well as having had similar experiences ourselves, an attitude often of exasperation, consternation, and indignation directed toward the bureaucratic administration of Government programs.

The role of the executive branch is an integral and vital part of our system of government. After the Congress has considered and passed bills, the necessary administration of legislation, often affecting the affairs of millions of persons, is entrusted to the various agencies and bureaus of the executive. I say "entrusted" because it becomes their duty to interpret and execute faithfully the legislation and to carry out the intent of the Congress.

Generally, this requires the issuance of administrative regulations the "grout" which, expanding upon specific directives in the legislation, fills in gaps in its substantive provisions.

It is during this filling in process that serious problems, as recognized by many of the groups regulated, arise. With increasing frequency the filling in by administrative regulation expands upon or subverts the very intent of Congress, the congressionally perceived reasons for enacting the enabling statute. Thus, the regulations, having