We can give a policymaking power, which is our function, and they administer those laws, which make them securities in part, and they can prosecute, and act as judge, jury, and executioner, and they don't run for office and they can't be removed except for high crimes and misdemeanors.

That is the danger we are all against, and I only thank the chairman again for these oversight hearings, and I would hope that when we get at the Secretary this afternoon we can get responsible answers from him.

Thank you, Mr. Chairman.

Mr. ROSTENKOWSKI. Thank you, gentlemen. If there are no further questions, we appreciate your testimony. Thank you for taking the time out.

Mr. PETERSON. I would like the opportunity to submit for the record some additional material, including a letter referred to in our formal statement.

Mr. ROSTENKOWSKI. If there is no objection, it will be made part of the record.

[The letter follows:]

AMERICAN MEDICAL ASSOCIATION, Chicago, Ill., May 19, 1975. Re proposed rules publication in the Federal Register, April 17, 1975. Hospital costs-reporting periods beginning on/or after July 1, 1975.

Mr. JAMES B. CARDWELL,

Commissioner, Social Security Administration, Department of Health, Education, and Welfare, Baltimore, Md.

DEAR COMMISSIONER CARDWELL: On April 17, 1975, proposed rules were published in the Federal Register relating to a revised schedule of limits on hospital inpatient general routine service costs in the Medicare program implementing Section 1861 (v) (1) of the Social Security Act, and relates to the determination of costs found to be "unnecessary in the efficient delivery of needed health services." This section authorizes the establishment of limits on the indirect overall incurred costs or incurred costs of specific items or services or groups of items or services to be recognized as reasonable "based on estimates of the costs necessary in the efficient delivery of needed health services to individuals covered by the Medicare

program.

one

When this provision, Section 223 of P.L. 92-603, was considered by the Senate Finance Committee, the Committee noted in its Report that costs vary fro institution to another as a result of differences of size, in the nature and scope of services provided, the type of patient treated, the location of the institution, and various other factors. It further noted that "costs can vary from one institution to another as a result of variations in efficiency of operating or the provision of amenities in plush surroundings." According to the Committee Report, the intention was to withhold government financing of those costs flowing from "marked inefficiency in operation or conditions of excessive services."

It becomes necessary, once again, to state our objections to the implementation of Section 223 in the manner proposed. It is incumbent upon us to point out again what we believe to be an erroneous interpretation of the intent of Congress in enacting Section 223. We urge that you abandon these artificial and arbitrary parameters and guidelines for allegedly determining the efficient delivery of health services to inpatients under medicare.

The reimbursement levels set forth in the proposed rules are not related to efficiency or to the medical necessity of services provided. Arbitrary cost ceilings set on the basis of the location of the institution and the number of beds within the institution, as an indication of efficiency or necessity of services, are not valid. We must object to the proposed rules as being arbitrary in nature and inconsistent with the intent of Section 223. It is apparent from the Committee Report that Section 223 was enacted to permit the Secretary to exclude from Medicare reimbursement any portion of incurred costs "found to be unnecessary in the efficient delivery of health services." The Report called for the recognition of variations in costs resulting from such factors as size, patient mix, scope of services

and other economic factors. Limitation on reimbursement, however, is to be directed toward those services substantially in excess of, or more expensive than, that generally considered necessary or toward costs flowing from inefficiency. Congress intended that the Secretary identify unnecessarily high costs that cannot be justified by the provider as reasonable and to disallow reimbursement of such costs on a prospective basis.

Fixing a ceiling limitation on reimbursement by bed size and location for all hospitals does not establish the existence, or lack, of efficiency. This simplistic approach provides no assurance that inefficiency will be corrected or that efficient operations will be rewarded. The proposed system simply applies pressure to reduce per diem costs to a set dollar amount without regard to how such reductions may be attained, and appear to be predicated upon ease of administration rather than the elimination of unnecessary costs flowing from inefficient operation. The principle that the size and location of institutions are the chief determinants of service costs is fallacious. It should also be noted that the principle of creating ceilings for payments without specific consideration of factors affecting individual institutions will lead to the reduction of the range of services available from a given provider and will significantly alter the quality of patient care.

In our previous letter, dated May 17, 1974, we stated: "Moreover, such ceilings could readily be reduced unilaterally, again without respect to the relative efficiency of the institution subject to the regulations." This prediction is now being fulfilled in the current proposal. Has the Department now made a determination with payment set at the 80th percentile (rather than the 90th, as under the earlier regulations) that all inefficiency has been removed? Or will there still be further arbitrary cuts in program reimbursement under the guise of achieving efficiency under Section 223. It would seem that the Department has adopted the unique theory that a reduction in program reimbursement automatically removes inefficiency and services unnecessary in the efficient delivery of needed health care. In our view this assumption is fallacious.

The imposition of arbitrary ceilings on hospital revenues affects the quality of service available to Medicare patients. Under the proposed system, some hospitals may be forced to treat Medicare beneficiaries at a loss, which could reduce the ability of the hospital to retain needed employees and maintain the level of capital expenditures necessary to provide quality service. An arbitrary application could lead to inefficiency in the long run operation of health care facilities. This could be contrary to the expressed intent of section 223. Moreover, Medicare patients might have to pay a substantial additional payment which was not originally contemplated under Title XVIII. Hospitals which are unable to collect copayments from Medicare beneficiaries would be forced to distribute the loss throughout the balance of the inpatient population.

We urge that this proposed schedule of limits on hospital inpatient general routine service costs under Medicare be withdrawn and the regulations under which this proposed schedule of limits was developed be suspended, pending the development of a regulatory format which is consistent with the intent of the Congress.

Sincerely,

JAMES H. SAMMONS, M.D.

Mr. ROSTENKOWSKI. Thank you very much.

The Chair would like to recognize one of the members. I might add that like Mr. Crane, she was influential in instituting these hearings. Mrs. Keys was quite concerned with the regulations and the effect they will have on hospitals. It was at her insistence and cooperation that we moved in this area.

So for 5 minutes the Chair will recognize Mrs. Keys.

STATEMENT OF HON. MARTHA KEYS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS

Mrs. KEYS. Thank you very much, Mr. Chairman.

I merely would like to submit to my colleagues prepared testimony which I am certainly not going to read in its entirety now, but just share with you some of the things that I have learned and discussed meetings with Kansas hospital administrators, meetings with the

Kansas recipients of medicare who are going to be seriously affected by the forced implementation of these particular utilization review requirements.

Certainly we all know the problems of rising health care costs, and we know that since 1950 our health costs have multiplied ninefold. I think the amendments for the social security laws in 1972 did attempt to deal with this problem. However, HEW, in implementing these admendments, drew up regulations which seem to work well in large medical centers, but do not work at all in small rural hospitals. I happen to have the occasion of being in one of the large city hospitals at Evansville, Ill., the first of this week, and spoke with a doctor on the staff of that hospital who is involved in an administrative committee. We discussed the effectiveness of utilization review and the HEW regulations and the way that the regulations are working in that hospital even though they have not been fully implemented yet. I learned that the regulations are effective in trying to do something about containing health costs in large urban hospitals. The problem is in the case of small hospitals, where you have staff of a small number of physicians. I would like you to note that in Kansas, in my State, 105 of the 152 hospitals have medical staffs of seven or less.

Now, the concurrent review requirement is just absolutely impossible to be effective in these areas without increasing the cost a great deal and really militating against the quality health care the patient needs. Small hospitals have three alternatives. First, they can stop admitting medicare and medicaid patients, and that certainly would reduce if not eliminate, the availability of health care to most of my constituents. Second, they can hire additional personnel provide utilization review concurrently; that is, at the time the patient is admitted. This, of course, would mean higher bills for all patients. Third, they can close down altogether.

Obviously we can't close one-third of our hospitals.

It is estimated that almost 50 of the hospitals in my district would find it nearly impossible to meet the concurrent review requirement. In speaking and working with some of the Kansas hospital administrators I have come to believe that the best alternative would not be abolition of the regulations. I certainly don't want to suggest that. I think we need attempt to contain health care costs in every way possible, but I would plead for flexibility for small hospitals. Retrospective review, rather than concurrent review, could be usedwould be an effective way of providing this flexibility. It certainly can't prevent the unnecessary admission to a hospital right there, but it could provide the kind of review that would prevent future unnecessary admissions.

I would hope that the Department would review this, and I hope there are other alternatives that could be examined in light of the flexibility that could be given to the small hospitals.

Really, I want to strongly urge that we must pursue the problem of cost containment and cost controls, and I don't want to do anything to weaken our attempt to get at that problem. But I feel very strongly, as a number of other representatives in this House, who are going to be testifying before you in a few minutes feel, that with regard to small rural hospitals, there has to be a flexibility in some kind of review of admissions. Concurrent admissions review will not work.

It will provide higher health care costs and will certainly provide less effective health care to the patient, and I think those are two goals and objectives that none of us are interested in achieving.

Mr. Chairman, I appreciate your letting me make a few remarks and especially at this time. I have a commitment on the floor. I just wanted to strongly express my concern in this area, and I am so grateful that we are taking this matter up.

Mr. ROSTENKOWSKI. Thank you, Mrs. Keys. Without objection, Mrs. Keys' statement will be inserted in the record in its entirety. [The prepared statement follows:]

STATEMENT OF HON. MARTHA KEYS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS

Mr. Chairman. I think it is very important that our Subcommittee examine closely the Medicare policies proposed by the Department of Health, Education and Welfare. It is our responsibility to ensure that the intent of Congress is in fact being carried out by the executive branch of government.

My constituents and I share the grave concern that legislative intent sometimes becomes obfuscated when departmental guidelines are promulgated to implement the laws of the land. I think an example of this is found in the case of utilization review.

Over the course of the past several years, health care costs have risen substantially. The cost of health care is literally approaching the limit that society can afford. For some people, it has already passed that point. In 1974, $104.2 billion was spent by both the public and private sector on health care. This translates into an annual cost of $485 for every man, woman and child in the United States. In 1974, health care expenditures amounted to 7.7 percent of our gross national product. And this does not tell the whole story. Between 1973 and 1974, health care costs increased by 10.6 percent, and they are still on the rise. Last April, the Labor Department announced that for the previous month, there was a flat one percent increase in medical care services, against a 0.4 percent increase in the overall index for all goods and services. In six years, the national health bill has nearly doubled; in 14 years, more than quadrupled; and in the 24 years since 1950, increased by almost nine-fold.

Also, it is important to note that disbursements from the Federal Hospital Insurance Trust Fund for Medicare have jumped from $2.6 billion in 1967 to $8 billion in 1974, with a projected $10.5 billion in expenditures for Fiscal Year 1975 and $11.7 billion for Fiscal Year 1976.

These statistics clearly point to the fact that we must come to grips with the rising cost of health care. Congress, in enacting the Social Security Amendments of 1972 (P.L. 92-603), took steps to do exactly this.

The legislative intent of one section of this law was to reduce health care costs through a system of PSROs and utilization review plans. Utilization and peer review can be effective tools for controlling the cost spiral. However, the regulations which HEW adopted to implement this section of the law may very well add to health care costs. Certainly, this is true in the case of small rural hospitals in Kansas and elsewhere.

A substantial number of Kansas citizens depend on small rural hospitals for the delivery of health care. Of the 152 hospitals in Kansas, approximately half have fewer than 50 beds. Only nine hospitals in the state have more than 200 beds. Furthermore, 105 of the 152 hsopitals have medical staffs of seven or less. The HEW utilization review regulations require these hospitals to meet the same standard which is applied to big city medical centers.

I ask the committee to take special note of the fact that 105 of the 152 hospitals in my state-more than two-thirds-have medical staffs of seven or less. Many of these are private facilities owned by physicians. The HEW regulations require concurrent review of hospital admissions-review within 24 hours of admissionfor all hospitals, regardless of size. HEW further requires that the review must be performed by medical personnel who are not involved in the case and who have no financial interest in any hospital. It is easy to see the problem for a small hospital.

Moreover, to be done properly, utilization review should be accompanied by discharge planning whereby a nurse or social worker helps see that patients receive appropriate care after leaving the hospital. Many large hospitals, let alone small hospitals, lack such planning departments.

Thus, the HEW regulations leave small rural hospitals with three alternatives, none of which, I believe, is acceptable.

1. They can stop admitting Medicare and Medicaid patients. This would mean that two-thirds of the hospitals in Kansas would be closed to such patients.

2. They can hire additional personnel to do utilization review work exclusively. Inasmuch as personnel costs are the most expensive part of hospital budgets, this course would mean higher bills for patients.

3. They can close down altogether. The Kansas Hospital Association estimates that of the 152 hospitals in the state, 35 would have serious difficulty in meeting the UR regulations and 15 could not meet them at all.

I believe that we are indeed fortunate that implementation of the HEW guidelines may be prevented from going into effect July 1 by the recently issued court order in Chicago.

It is my fervent hope that HEW will substantially modify the utilization review regulations to address the special needs of rural hospitals. My plea is for flexibility, not complete abolition of the regulations.

I recommend the following: First, hospitals with small staffs in small, rural communities should have the option of substituting retrospective review for the concurrent review of admissions which is required by HEW. While retroactive review obviously cannot deal with an unnecessary admission right then and there, it can prevent future unnecessary admissions. A higher degree of review can be achieved through the PSRO, peer review mechanism. In Topeka, the Kansas Medical Society has established the Kansas Foundation for Medical Care. This group has received PSRO planning grants and has an application pending within HEW for conditional status as the PSRO for the State of Kansas. Under P.L. 92-603, a PSRO would have the final say on utilization review, regardless of whether a hospital meets the HEW regulation requirements.

I would hope that the Department would also give consideration to permitting a "utilization review shared service" arrangement under which hospitals with 50 beds or less could share utilization review personnel. Of course, such an arrangement could only work if the 24-hour review requirement is changed.

Second, the Department needs to clarify its intent and objectives regarding utilization review and its relationship to PSROs. The UR regulations strike me as being far too stringent if HEW intends to follow through on its previously stated goal of shifting the burden of Medicare and Medicaid review to peer review organizations. HEW must make clear whether it prefers internal or external review and then coordinate the UR and PSRO regulations accordingly. Third, it is my hope that in the future, HEW might do a better job of coordinating the regulations governing Medicare and Medicaid. The differences in language between review regulations for both programs reflects the fact that the rules were written by two different staffs, and the two could not agree. If we wish to promote more efficiency among hospitals, it would behoove the Department to do something about its own efficiency.

To sum up my remarks on utilization review, I would say that in pursuit of costs controls, HEW, under the present regulations, will be adding to the operating costs of small rural hospitals. The 24-hour review policy is not realistic for these hospitals. In order to comply, time could very well be taken away from the patient to proceed with paperwork. The result-worse care and higher costs. Revisions in the Department's utilization review regulations are needed before being implemented.

Mr. ROSTENKOWSKI. Mr. Woolley, would you identify yourself please?

STATEMENT OF FRANK K. WOOLLEY, EXECUTIVE DIRECTOR, ASSOCIATION OF AMERICAN PHYSICIANS & SURGEONS

Mr. WOOLLEY. I am Frank K. Woolley, executive director of the Association of American Physicians & Surgeons, with headquarters in Oak Brook, Ill. We represent doctors throughout the country who are engaged in the care of patients.

We represent that point of view, solely. We do not represent salaried doctors in government, or in labor unions, or insurance companies. We represent only doctors who take care of patients, and reflect their point of view.