We would also urge the committee to seriously consider legislative approval of H. R. 7000, which would force the continuation of the payment and which I understand now has more than 165 cosponsors in the House of Representatives.

The second regulation we would address briefly is the regulation under 223 which reduces from the 90th to the 80th percentile the ceiling on reasonable cost reimbursement. We would like to emphasize one point under that.

Investor-owned hospitals have been particularly active in providing private risk capital to construct new hospitals including facilities needed as total replacement for antiquated institutions. The regulations implementing section 223 ignore the fact that construction costs have soared to record highs year after year.

The classification system applies the same dollar ceiling to a facility built with 1975 dollars as one built in 1930. The differences in capital costs and debt-equity ratios are fundamental to the justification of total operating costs. Any legitimate system should take this into consideration by establishing separate groupings for new facilities and by providing a 2-year exemption period recognizing the high startup costs for newly built institutions.

The lower percentile imposed under 223 will reduce reimbursement. to more than the "relatively quite small number of new institutions" envisioned in the House committee report accompanying that law. The fact that the medicare program is unwilling to share in the full cost of delivering such care is in itself inflationary.

Those costs not reimbursed by medicare must be passed on to nonmedicare patients to keep an institution on a sound economic footing. Unfortunately the increase in regulations continues to push up charges to nonmedicare patients and this trend can only be reversed when the medicare program begins to pay its fair share of the total financial requirements of all participating hospitals.

We urge the subcommittee to recommend that these regulations be withdrawn until a more sophisticated classification system with a realistic ceiling on reimbursement can be designed.

The final regulation on utilization review is to be effective on July 1 and as hospitals try to achieve compliance with regulations, several obstacles stand in the way. Investor-owned facilities face an inflexible administrative definition of financial interest which prevents physicians with even a minimal or remote hospital stock ownership from serving on utilization review committees.

In many areas of the country, particularly the rural southwest and southeast, the only hospitals serving a county may be investor owned and all physicians involved with staff privileges may own a percentage of the stock in that facility. In such cases who is to perform the review? The cost would be exorbitantly high if physicians were imported from other communities to conduct the review, a cost not yet estimated since HEW has not filed a cost impact statement on these regulations.

Senators Bellmon and Bartlett and Congressmen English and Jones from Oklahoma have sponsored legislation to exempt small rural hospitals as defined in those bills from the regulations. We support that legislation and urge the committee to recommend that the Department adopt a more flexible definition of "financial interest" to exclude insignificant stock ownership.

Physician willingness to cooperate with the regulations is the key to compliance and yet the rules have been drafted in such a way that only the hospital and the community face the penalty of loss of medicare certification. The current policy of HEW is that no alternative means of compliance such as use of another hospital's U.R. committee is available to a facility, which could comply but for the unwillingness of staff physicians.

We find it difficult to comprehend the validity of a regulation which causes loss of medicare certification to a hospital solely because of medical staff refusal to perform functions, while at the same time imposing no sanction on the physician. Such a regulation can destroy an institution's effectiveness by destroying its relationship with physicians and at the same time deprive the community and patients of needed services.

Some staff physicians have indicated to us that they would purchase a single share of stock in a hospital company in order to intentionally disqualify themselves from performing utilization review. Administrators understandably feel the regulations are driving a wedge between hospital administrative personnel and physicians by not providing an alternative means of compliance or a waiver authority until the PSRO or other means is available in the community.

In conclusion, we have made the point that while we appreciate the opportunity to comment on three specific, selected, rather complex regulations, we feel the more important broader issue is the entire reimbursement system under medicare. That system bases reimbursement on a reasonable accounting cost basis to hospitals.

Once this is done, our facilities must look to non-medicare patients to pay higher charges in order to average out reimbursement at a level which equals the total financial requirements or true economic cost of the hospital. This includes a margin for working capital and to establish a sound equity base. No facility, nonprofit or forprofit, can operate effectively without an adequate surplus.

Our recommendations on the regulations have been ones for temporary equity and relief, but only by changing the broader policy of cost reimbursement can we prevent future inequity among those who pay for health services. That reform, we believe, should be mandated by Congress as soon as possible and we pledge our efforts to help develop such a system.

Thank you, Mr. Chairman.

[The prepared statement follows:]

STATEMENT OF MICHAEL D. BROmberg, DirectoOR, NATIONAL OFFICES

FEDERATION OF AMERICAN HOSPITALS

On behalf of the members of the Federation of American Hospitals, I would like to thank the Subcommittee for this opportunity to present the views of our association on selected issues in Medicare program policy. The fact that the Subcommittee has taken the time for these public oversight hearings is encouraging to us at a time when an increasing number of controversial regulations are being proposed by the Administration in an effort to reduce federal expenditures.

The Federation of American Hospitals is the national association of investorowned hospitals, an industry with more then 1,050 hospitals 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.

PROGRAM ADMINISTRATION

The Congressional oversight function usually concentrates on how laws are administered, but in this case we urge you to first examine who is setting policy. The regulations under discussion today were first proposed in HEW budget documents and we believe the policies were determined not because of health considerations but solely on the basis of budgetary problems and fiscal recommendations. The budgetary problems of the Administration should not be solved by distorting the intent of Congress that hospitals receive reimbursement equal to their reasonable costs. Each year the Administration issues a series of new regulations designed solely to reduce hospital reimbursement by redefining what constitutes reasonable costs-and each year hospitals are forced to make up the reduced reimbursement by increasing charges to non-Medicare patients. This happens without the knowledge of the general public and it happens even though Medicare law states clearly that, "The necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this title will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs ***” (Title XVIII, Sec. 1861 (v) (1) (A).)

The Office of Management and Budget should not be allowed to determine policies which change the administration of a health benefits program by reducing those payments to which hospitals are entitled under the law. The selected regulations which are the subject of these oversight hearings are clear examples of what happens when a program with open ended benefits is administered under a limited trust fund. The regulations are drafted with primary emphasis on reducing expenditures rather than fulfilling the stated objectives of delivering the benefits legislated and paying for those benefits in a fair and equitable manner.

COST REIMBURSEMENT

Before commenting on specific regulations it is important to examine the reimbursement system which has produced the confrontation between hospitals and government. The retrospective cost reimbursement concept has proved to be inflationary because as noted in the House Committee Report 92-931 accompanying P.L. 92-603: "there is little incentive to contain costs or to produce the services in the most efficient and effective manner." (Page 80.)

The Federation of American Hospitals has long favored increased experimentation with prospective payments for hospital services based on negotiated rates or target rates established by a formula. We were supportive of this Committee's efforts to move in that direction by directing the Secretary of HEW to "develop and carry out experiments and demonstration projects designed to determine the relative advantages and disadvantages of various alternative methods of making payment on a prospective basis to hospitals, skilled nursing facilities, and other providers of service ***" (Section 222, P. L. 92–603.)

The experimentation called for by Congress in 1972 has been minimal. Our disappointment in the relatively small number of prospective payment pilot programs under the Medicare program leads us to urge the Committee to consider new legislation in this area in order to provide incentives for efficiency, sound management and long range cost containment while phasing out or substantially reducing the cost reimbursement approach.

Department of 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 rates for non-Medicare patients. As we have emphasized in our prior appearances before this Committee, we believe the vast majority of states lack the expertise to regulate hospital rates and that such a total public utility mechanism would protect inefficiency, create an enormous new bureaucracy in 50 states, stifle competition and innovation, and significantly increase administrative costs.

Hospitals and health insurance carriers should be encouraged to develop prospective payment methods at the local level under guidelines established by the Medicare program. Until the Medicare program recognizes its responsibility to pay its fair share of the total financial requirements of hospitals, the confrontation between health care providers and government payors will become even more serious.

Hospitals and hospital associations will be forced to seek judicial relief unless Congress acts to force the Department of HEW to meet the rising costs of delivering health care instead of devising regulations designed to avoid paying those costs. Although it is not specifically on the agenda for these hearings, we are convinced that the trend toward increased numbers of regulations to reduce costs will continue until cost reimbursement is phased out and prospective payment methods are established. Section 222 of P.L. 92-603 represented a sound legislative initiative that has been effectively stifled by bureaucratic foot-dragging.

We urge the Subcommittee to expand its oversight and legislative activities in this area of HEW experimental programs on prospective payments for institutional health services.

TERMINATION OF THE INPATIENT ROUTINE NURSING SALARY COST DIFFERENTIAL

On May 23rd, the Department of HEW published final regulations terminating the 82% allowance under Medicare reimbursement. That nursing cost differential was recognized by the Title XVIII program after studies and discussions with hospital representatives convinced the Social Security Administration in 1969 that hospitals provide more nursing care to older patients and incur greater costs in caring for patients age 65 and older than for patients under age 65.

Now the Department of HEW has terminated the nursing differential without even the pretense of justifying such action by a new study. Three reasons are cited by HEW in terminating the nursing differential:

First, HEW argues that P.L. 92-603 expanded the scope of Medicare coverage to a significant number of beneficiaries below age 65, primarily the disabled, thus supposedly spreading the cost of care around. We see no relevance in this reason, however, because current cost reimbursement forms already exclude this class of patient from determination of the nursing cost differential.

Second, HEW states that there is greater utilization of special care units by program beneficiaries. This is not a valid reason for elimination of the nursing differential for the very same reason, namely that the reimbursement forms exclude patients in special care units from computation of the differential.

Finally, HEW argues that special care unit costs are segregated, recognizing higher utilization of those units by program beneficiaries. This point does not take into consideration the basic fact that it still takes more time to care for a patient over age 65 in a general routine hospital bed than it does to care for a non-Medicare patient in the same type of bed.

Indications are clear that judicial relief will soon be sought by several hospital organizations, including the Federation. In the meantime, we urge this Subcommittee to explore the motives for this new regulation and to consider sweeping changes in the payment mechanism to prevent similar future confrontations between the Medicare program and health providers.

LIMITS ON HOSPITAL INPATIENT GENERAL ROUTINE SERVICE COSTS REDUCTION FROM 90TH TO 80TH PERCENTILE

On May 30, 1975 final regulations were published lowering the ceiling on reasonable cost reimbursement from the 90th to the 80th percentile for hospitals in each classification. The Federation has favored experimentation with classification systems of similar institutions upon which prospective group target rates could be based. Such a system could inject competition and stimulate productivity if properly developed.

Section 223 of Public Law 92-603 calls for a classification system in order to establish ceilings on cost reimbursement. The purpose of the limits on cost reimbursement is to exclude from program costs "luxury" services or costs which exceed necessary levels of providing care in an efficient manner.

The regulations issued by HEW to implement section 223 are based on a classification system which fails to recognize several basic characteristics which distinguish hospitals. The proposed grouping of hospitals by bed size, geographic area, and general economic conditions is a crude technique which ignores such important factors as:

1. Type of institution (acute, general, psychiatric, teaching, research, etc.); 2. Patient mix (medical, surgical, etc.);

3. Age and original cost of building (debt service requirement);

4. Variations in accounting policies; and

5. Length of stay.

Investor-owned hospitals have been particularly active in providing private risk capital to construct new hospitals, including facilities needed as total replacement for antiquated institutions. The regulations implementing section 223 ignore the fact that construction costs have soared to record highs year after year. The classification system applies the same dollar ceiling to a facility built with 1975 dollars as one built in 1930. The differences in capital costs and debt-equity ratios are fundamental to justification of total operating costs. Any legitimate classification system should take these factors into consideration by establishing separate groupings for new facilities and by providing a two year exemption period recognizing the high start up costs for newly built institutions.

In addition to the need for a more refined classification system, we are concerned over the reduction in the ceiling on cost reimbursement from the 90th to the 80th percentile. This blatant attempt to cut program expenditures by lowering the ceiling on reimbursement will adversely impact a substantial number of hospitals. The lower percentile limitation will certainly reduce reimbursement to more than the "relatively quite small number of institutions" envisioned in House Report 92-931 (page 83).

Once again the only conclusion we can reach is that budgetary concerns have produced a regulation designed solely to cut expenditures without any real consideration of quality health care delivery to Medicare beneficiaries.

The fact that the Title XVIII program is unwilling to share in the full cost of delivering such care is in itself inflationary. Those costs not reimbursed by the Medicare program must be passed on to non-Medicare patients in order to keep the institution on a sound economic footing. Unfortunately the increase in Medicare regulations continues to push up hospital charges to non-Medicare patients and this inflationary trend can only be reversed when the Medicare program begins to pay its fair share of the total financial requirements of participating hospitals.

With respect to the limits on routine hospital costs, we urge the Subcommittee to recommend that HEW withdraw the regulations and develop a more sophisticated classification system with a realistic ceiling on reimbursement.

UTILIZATION REVIEW PROCEDURES

As the nation's hospitals attempt to achieve compliance with the new utilization review regulations by July 1, 1975, several obstacles stand in the way. Investor-owned institutions face an inflexible administrative definition of financial interest which prevents physicians with even a minimal or remote hospital stock ownership from serving on utilization review committees.

We are particularly concerned about that section of the regulations. In many areas of the country, particularly the rural southwest and southeast, the only hospital serving a county may be investor-owned, with all physicians having staff privileges owning a percentage of the stock in the facility. In these cases who is to perform the review? The cost of such review would be exorbitantly high if physisians were imported from other communities to conduct the review, a cost not yet estimated since the Department has not filed a cost impact statement on these regulations. In other parts of the country, including nonrural areas, physicians purchase stock in companies operating hospitals without the knowlege of the particular facility. They may purchase a small number of shares in a parent company which owns and operates several facilities. Such financial interest may only be remotely connected with the facility in which the utilization review is being conducted yet that physician is ineligible under the regulations. The fact that the financial interest in minimal, insignificant or remote is not taken under consideration since no such waiver authority is provided for under the regulations. Senators Bellmon and Bartlett and Congressman English from the State of Oklahoma have sponsored legislation to exempt small rural hospitals as defined in those bills, from the regulations. We also strongly urge the Subcommittee to recommend that the Department adopt a more flexible definition of "financial interest" to exclude insignificant stock ownership.

Physician willingness to cooperate with these regulations is the key to compliance and yet the rules have been drafted in such a way that only the hospital faces the penalty of loss of Medicare certification.

The current policy of the Department is that no alternative means of compliance (such as use of another hospital's U.R. committee) is available to a hospital which could comply with the regulations but for unwillingness of staff physicians.