unnecessary costs which will ultimately have to be paid by the purchaser of health services.

The recent action of the Administration not only altered the classification system but also altered the reimbursement ceilings. The initial formula established by the Social Security Administration set the ceilings on inpatient routine care at the 90th percentile of the cost of routine care among hospitals within a defined grouping, plus 10 percent of the median hospitals' costs. The grouping process is essentially arbitrary and its relationship to the cost of efficient performance is very imprecise. Nevertheless, the Administration has now chosen to compound this arbitrariness by reducing the basic limitations to the 80th percentile plus 10 percent of the median, subjecting a very much larger number of hopsitals to the limits, increasing the size of the potential penalty, and overloading the cumbersome and inadequate appeals process.

Reduction in the ceilings has been rationalized on the basis that the revised classification system provides for more accurate and equitable comparisons and resulting identification of inefficient providers. Our analysis, however, indicates that this conclusion is just not so. First, a rational classification system requires a relatively homogeneous population within each subgroup-i.e., categories of providers being compared should be similar with respect to their basic characteristics. Our statistical study of the data from 1974 and 1975 shows that the revised 1975 schedule would have less homogeneity than the present schedule. In addition, aberrant, inconsistent and inexplicable variations occur when the revised system is applied. The variations from state to state in the number of hospitals affected by the revised ceilings are so great as to make the results most suspect.

We have examined the data showing the effect of the application of this new system to hospitals and the results are totally unrealistic. It is illogical to accept, as this system would have us assume, that levels of efficiency differ so much that over half of all hospitals in the state of Washington and over one-third of the hospitals in California and Maryland would exceed the proposed limits, while in North Dakota only 1.8 percent of the hospitals would be affected, and in Illinois, Nebraska and Arkansas less than 3.5 percent of the hospitals would be subject to denial of a portion of their reimbursement. It is illogical also that over 40 percent of the teaching hospitals of this country should be affected and arbitrarily penalized by these ceilings. We do not think these results are rational or indicative of an improved methodology, yet the Department is proceeding without apparent concern for these problems.

The result is simply to place more hospitals outside the limitations and not to insure that the system will more accurately identify hospitals in which costs are unreasonable. It is also clear that this action is not motivated by promised improvements in the classification system, but was undertaken simply to produce budget savings. These savings will not derive from cutting unnecessary costs but will result in further subsidy to the Medicare program by other users of health care facilities and other third-party payment programs.

Congress recognized from the first that under Section 223 it had imposed upon the Social Security Administration a task requiring considerable sophistication and caution. However, the American Hospital Association is convinced that the Department officials have chosen to utilize this carefully enunciated program of cost limitation as a vehicle for budgetary manipulation without regard to its deleterious impact upon the ability of many hospitals to render needed care to Medicare and other beneficiaries.

LIMITATIONS ON PREVAILING CHARGE LEVELS

I would next like to comment briefly upon the regulations implementing limitations on prevailing charge increases for physician's services and other services tied to economic indices under Section 224 of Public Law 92-603. While not directly affecting hospital reimbursement, these regulations do potentially affect the relationship of hospitals with their institutionally-based physician personnel. The proposed regulations are clearly insufficient in that they do not describe the method to be used in determining the elements of these indices and their appropriate values. Therefore, the methodology will not be subject to scrutiny and analysis as it should be.

This unilateral arbitrariness is precisely the problem with the general approach to program economic controls adopted by the Social Security Administration in carrying out its responsibilities. It clearly suggests that the Social Security Administration continues to utilize law to suit its own concerns and not to reflect in a careful and publicly acknowledged way a commitment to honor legitimate costs in the delivery of health care.

UTILIZATION REVIEW REGULATIONS

Finally, I will address the serious problems which have been associated with the implementation of the new utilization review regulations. Implementation at the time of the preparation of this testimony is in doubt because of the preliminary injunction issued by the Federal District Court in Illinois, and I shall not discuss this aspect here. 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.

The American Hospital Association has always advocated a voluntary program of effective utilization review and medical audit to be conducted as an institutional responsibility of the hospital medical staff. The development, demonstration, and promotion of the Quality Assurance Program for Medical Care in Hospitals (QAP) 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. The regulations 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; confusion 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. The following are some more specific examples of problems we have faced while trying to assist hospitals in this implementation

process.

1. Implementation and Timetables

Final utilization review regulations were published on November 29, 1974, and called for implementation on February 1, 1975. Health care providers were allowed only two months to develop and complete highly complex medical care review systems-insufficient time, as AHA and other organizations immediately noted. Subsequently, the Department decided to allow a "phase-in" of the system, establishing April 1 as the first deadline. But even this was not realistic, and finally on March 25, one week before the initial phase-in date, HEW announced that the effective date of the regulations would be officially delayed until July 1. Even with this revised date, HEW has been unable to meet its commitment to provide adequate guidelines and instructions. Nevertheless, hospitals and health care professionals have been placed under extreme pressure to comply with unrealistic timetables that HEW itself cannot manage to meet.

The Department had agreed to provide all hospitals with guidelines for implementing the new regulations, including a model UR plan by February 1, in time to assist them in complying with the new regulations. However, these basic tools for assistance did not reach the hospitals until March and then turned out to be inadequate. Now we are told that it will be at least four more months until revised guidelines are available.

In addition, the new regulations require that review activities be carried out in keeping with norms, criteria and standards which are to be developed by each medical staff, according to guidelines to be issued by the Secretary of HEW. Hospitals were subsequently advised by the Secretary that criteria sets being developed for the PSRO program should be used as guidelines for hospital UR activities. But once again we are told that these criteria sets will not be mailed to hospitals until June 20. Hospitals may not even receive the HEW recommended criteria sets before July 1, yet they are to be using criteria on that date. These are but some of the agonizing circumstances which have made efforts to assist in the implementation of this program a nightmare.

2. Costs and Reimbursement

The new utilization review regulations mandate additional staff activities and technical support that will add to hospital costs. Skilled staff, such as utilization review coordinators and health data analysts, will have to be hired or specially trained to provide the nonphysician expertise required in concurrent review activities. Special forms will have to be designed to capture the information required for the concurrent review system. Management systems will be necessary to assure that all review activities occur within the short time limits allowed. All such activities will cost money and could cause hospitals to exceed the ceilings

established under Section 223 of P.L. 92-603. Here we see the inconsistency of two federal initiatives: one set of regulations requires that hospitals incur added costs to comply with the new utilization control efforts and another set of regulations would limit the reimbursement to the hospital for instituting these additional UR activities. Hospitals are caught in the middle.

The Department of Health, Education and Welfare is attempting to develop uniform reimbursement policies for the PSRO program and hospital activities related to the utilization review regulations. These uniform federal policies have yet to be released. In order to be in compliance on July 1, hospitals must settle on the arrangements to implement their systems now. If and when the federal policies are released, some hospitals may find that their payment agreements with physicians will exceed the federal guidelines. In addition, there is still the basic policy issue to be answered by HEW regarding reimbursement to hospitals for physician UR activities. Existing Bureau of Health Insurance policies will not reimburse the hospital for physician utilization review activities unless the hospital's review system includes all patients, not just Medicare beneficiaries. Hospitals need to know if this policy will be continued or altered.

3. Relationship to State Review Programs

The new regulations allow a state Title XIX (Medicaid) utilization control system to be recognized as superior to the system defined under federal utilization review regulations and accordingly, allow federal requirements to be waived on that basis. In such cases states would be allowed to continue their own review systems for Title XIX patients while the hospitals would also have to comply with the UR regulations for Medicare patients. Some states have applied for waivers for their systems, but no decisions have been issued by HEW. Until the Secretary renders those decisions, hospitals in the states which have applied for waivers must comply with both the existing state system of utilization control for Title XIX and proceed to implement the new regulations as part of the conditions of participation for both Medicare and Medicaid. As a result, when waiver decisions are finally made, hospitals in some states will have to live with two mandated review programs operating simultaneously in the same institutions. 4. Relationship to Conditional PSROS

A similar problem exists with respect to the role and authority of the conditional PSRO in relation to the new UR regulations. PSRO provisions of P.L. 92-603 refer to the waiving of all other review requirements once a PSRO has demonstrated its capability for timely and effective review. HEW officials, however, have stated that once a conditional PSRO is merely established, all other review requirements, including the utilization review regulations, shall be waived. The Department however, has not issued written directives to settle this confusion. At stake is whether hospitals must prepare to respond to two systems PSRO and UR—or just the PSRO system.

5. Problem of Small Hospitals

Small and rural hospitals face serious problems in complying with the new utilization review regulations. It is understandable that in a typical setting, UR regulations prohibit physicians from reviewing their own cases, but in the small hospital and rural setting this provision would result in physician manpower shortages for UR activities. One solution for small hospitals with this problem is to establish a shared hospital utilization review program, but regrettably such a program is not fully reimbursable. Moreover, under Title XIX, state agencies have been given little leeway to recognize special problems facing small hospitals in isolated areas. This is an important point since over half of the hospitals in 10 of our Northwestern states have fewer than 50 beds and 7 or fewer physicians. Unless the impasse is solved, many patients may be denied needed access to care because small hospitals are unable to comply with these utilization review requirements. We are told that HEW is developing alternatives to assist small hospitals, but answers again have not been forthcoming.

6. Definition of "Financial Interest"

The utilization review regulations prohibit any person with a financial interest in a hospital from taking part in review activities. We can understand the Department's wish to avoid situations of conflict of interest in reviewing patient care. However, as presently worded, the regulations are so broad as to make it impossible for an individual with an insignificant interest-even a single share of stock in any hospital-to participate in the review program at the hospital

where ne practices. Verbal interpretations by HEW staff would preclude an individual who purchased a building bond issued by a not-for-profit hospital from participating. We have been told that a nun belonging to an order which operates an institution, and who receives food and clothing from the order, would be considered as having a financial interest and therefore ineligible to participate in the review activities. Such as interpretation obviously has reduced the financial interest prohibition to the absurd. We are told that the Department is working on a realistic definition of "financial interest." However, until this definition is released in writing, some hospitals will not know if they have the physician and professional manpower available to meet the program requirements.

Many of the problems facing hospitals in attempting to comply with these new utilization review regulations apparently are caused by the lack of coordination among the federal agencies involved. Others are due to the attempt of the Department to deal with problems in less time than was possible and to try to force hospitals to meet impossible deadlines. The only explanation we know of for the crash nature of the program was the desire for current budget saving, regardless of the consequences. However, such short-sighted actions are inappropriate for the operation of a federal benefit program and are destructive of efforts of hospitals to provide care to the beneficiaries.

SUMMARY

In conclusion, Mr. Chairman, we 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:

1. 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;

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

3. 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

4. UR regulations issued on November 29, 1974 be withdrawn and not reinstituted until basic issues in this area are resolved and adequate guidelines and time for implementation are provided.

The AHA appreciates the Committee's interest in these matters and I shall be pleased to answer any questions you may have.

STATEMENT OF MICHAEL D. BROMBERG

Mr. BROMBERG. Thank you, Mr. Chairman. I am Michael Bromberg, director of the national offices of the Federation of American Hospitals. We would like to submit our statement for the record in full.

Mr. ROSTENKOWSKI. Your statement will be inserted in the record without objection.

Mr. BROMBERG. The federation is a national association of investorowned hospitals, an industry with more than 1,050 facilities and over 100,000 hospital beds. Last year investor-owned hospitals delivered quality health care during approximately 3.5 million inpatient stays and over 10 million outpatient visits. These facilities, built with private capital, have been able to operate at competitive rates while paying approximately $115 million in income taxes and $40 million in local property taxes last year alone.

The three regulations we are discussing today are all being challenged by lawsuits, an indication that it is not the statutes we are challenging but the regulations.

The budgetary problems of this administration should not in our opinion be solved by distorting the intent of Congress that hospitals receive reimbursement equal to reasonable costs. Each year a series of new regulations designed to cut hospital reimbursement are issued and each year hospitals are forced to make up that reduced reimbursement by increasing charges to nonmedicare patients. This happens without the knowledge of the general public and it happens even though the medicare law states that the costs of delivering care to medicare patients should not be borne by individuals not covered by medicare.

Before commenting on specific regulations, it is important to first examine the reimbursement system which has produced the confrontation between hospitals and Government. The retrospective cost reimbursement of medicare has proved to be inflationary. As noted in the committee report, "There is little incentive to contain costs or to produce the services in the most efficient and effective manner."

The federation has long favored increased experiments with prospective payments based on negotiated rates or target rates established by formula. We were very supportive of this committee's efforts to move in that direction by directing the Secretary of HEW to carry out experiments on prospective rates.

The experimentation so far has been minimal. And our disappointment in the relatively small number of programs or prospective rate demonstrations under medicare leads us to urge the subcommittee and committee to consider new legislation in this area in order to provide incentive force efficiency, sound management and long-range containment while phasing out or substantially reducing the cost reimbursement approach.

HEW officials have recognized this basic need in many public statements and in prior testimony on national health insurance. However, they have failed to exercise leadership under their existing authority by carrying out the congressional directive for broad experimentation. Instead the Department seems to advocate a State role in determining prospective rates.

As we have emphasized in prior appearances before the committee, we do not believe the States should be the vehicle for setting hospital

rates.

Although it is not on the agenda specifically for these hearings, we are convinced that the trend toward increased regulation to cut costs will continue until cost reimbursement is phased out and prospective payment methods are established. Section 222 of Public Law 92-603 represented a very sound legislative initiative that has been effectively stifled by bureaucratic dragging.

We urge the subcommittee to expand its oversight and legislative activities in this area on prospective payments.

Getting to the regulations on the nursing differential, I would bolster the point made by Mr. McMahon that the regulation abolishing the differential was published without even the pretense of justifying it by a study.

Judicial relief has been sought by four hospital groups on this subject and all we can add is that in the meantime we urge the subcommittee to explore the motives for the regulation and to consider changes in the payment mechanism to prevent future confrontations between hospitals and Government.