it is possibly true that costs relating to these factors, on the average, tend to increase with the size of the hospital. However, there are so many exceptions to this, generalization that to categorize, for example, medical specialty and teaching hospitals with community and other hospitals, is highly questionable. If this proposed rationale were to prevail, the result would obviously impose a significant economic hardhsip on hospitals providing quality care, improved treatment of complex illnesses, the advancement of medical practice, and the continuance of medical education. As a result, consideration should be given to all these factors including, but not limited to, a three-tier educational classification: (1) medical school hospitals, (2) other teaching hospitals, and (3) nonteaching hospitals.

Teaching institutions have had a long tradition of providing clinical training for undergraduate and graduate physicians in a broad range of medical skills. They provide clinical training for nursing and allied medical students. They operate their own schools of nursing. In addition, they are recognized as tertirary care institutions and regional centers of care. Such institutions, as a result of both the comprehensive and sophisticated level of services and the support of teaching activity, incur costs dramatically different from those of nonteaching institutions of similar size.

These distinctions may be illustrated from data developed by the American Association of Medical Colleges comparing the components of the per diem routine service costs of five hospitals located in New York City and in the same limitation group of the Schedule (SMSA Group I). As the table below clearly demonstrates. hospital costs do not vary significantly in proportion to bed size.

The dietary-raw food costs show only an 11 percent difference between the highest and lowest cost hospital, and housekeeping costs vary by only a 37 percent difference between high and low costs.

By contrast, components of hospitals' other routine service costs vary considerably, simply because different hospitals have different levels of involvement in various functions. These variations, using the three factors of interns and residents, supervising physicians, and school of nursing, are indicated as follows:

The cost of interns and residents varies 133 percent between the highest and lowest cost hospital, while the costs associated with supervising physicians varies by 565 percent. The differences in cost are not due to inefficiencies but rather to differences in the functions and activities. A most notable difference in the table relates to nursing school costs. Montefiore and New York University Hospitals have no school of nursing and thus incur no such cost, while Beth Israel, Mount Sinai, and St. Vincent's Hospitals incur such costs which vary due to their degree of involvement in such activity.

Exaggerated results based on per capital income

The regulations do not set forth the precise methodology used in developing the schedule of limits on hospital inpatient general routine service cost. However, the factors used have led to exaggerated results. This is best illustrated in the SMSA Groups I, II, and III for hospitals of 685 beds and above. The regulations provide for a limit of $170 in Group I, $120 in Group II, and $80 in Group III, differences of $50 and $40 respectively. Large differences also prevail in all size providers in Groups I and II. Although it is possible that these differences are the natural

result of a well-conceived basis for groupings, this is highly unlikely. For example, the costs in a large teaching hospital in Philadelphia or Pittsburgh (Group II hospitals) would probably parallel similar institutions in Los Angeles, San Francisco, Chicago, Boston, or Cleveland, all of which are in Group I. In any event, differences of $50 or $40 per diem are obviously unjustified.

These comparisons strongly indicate that the economic environment, measured by per capital income, is not a rational basis for groupings. Since the limits should be related to reasonable hospital costs, apparently a presumption has been made that costs fluctuate in direct proportion to per capital income. The dollar amounts of the proposed limits conclusively prove that this is not the case. To further illustrate the irrational results, Los Angeles, San Francisco, Chicago, and New York, widely known as very high cost areas, are grouped with such cities as Hartford, Wilmington, Rockford, Ann Arbor, Trenton, and Richmond.

Another area in which the group data disprove the logic of the per capita income basis is in the groupings for nonurban areas where the limits for Group I are lower than those for Group II for all bed size categories. Per capital income, if it were a valid indication of relative cost levels, would lead to descending costs from Group I through Group V, but this is not the case as shown in the following table taken from the regulations:

If bed size accounts for other factors such as scope of services and patient mix, one must then wonder why all the facilities in Groups II and IV would have the same or very close ceilings despite the differences in bed size. The same situation prevails with respect to SMSA Groups III and IV where the bed size ranges from less than 100 to over 685. It is inconceivable that these limitations should remain the same while factors such as scope of services, patient mix, and educational programs vary dramatically.

Wide range of bed size classifications

Another area of concern is the bed size classifications which have been reduced in number from seven under the prior regulations to four for SMSA areas and three for non-SMSA areas under the new regulations. While some reduction may have been warranted, to group those hospitals slightly over 100 beds with those slightly under 405 beds is quite extreme. The amounts of the limits in certain of the classifications in the schedule supports this concern. For example, there are disproportionate differences between the first two bed size categories in SMSA Group II and non-SMSA Groups I and III. Also, several groups have a lower limit than does the next smaller bed size classification. We recommend that a restudy of the bed size classifications be undertaken immediately by the Department of Health, Education, and Welfare.

Inadequacy of exception procedure

The regulations state that a hospital may apply for an exception if it can demonstrate that its cost exceed the applicable limit by reason of educational activities or by the special needs of the patients treated. This provision is quite dangerous because it gives the impression that it is a satisfactory mechanism for correcting any and all inequities in the basic groupings. Recognition of differing cost structures must be an inherent part of the grouping system. The exception process, as set forth in the regulations, is inadequate for the following reasons: Section 234 of P.L. 92-603 requires providers, as a condition of participation in the Medicare program, to have a three-year plan for capital expenditures and a one-year operating budget. It is extremely difficult for an institution to plan its fiscal activities if it is in doubt as to the limitation on its reimbursable costs. If the exception procedures are retrospective, then the hospital stands in severe jeopardy until such time as the exception is approved, or the hospital may be forced to severely curtail its programs and services.

Intermediaries apply the specified limits in setting interim payment rates (subject to year-end audit adjustment) creating at best a cash shortage hardship until a lengthy exception process has been completed.

An even more severe hardship results where a provider, after obtaining local planning board approval of a capital improvement program, seeks to issue revenue bonds but cannot satisfy the requirements of the underwriters who insist upon assurance that the full reasonable costs of operation will be covered by third-party purchasers. An appropriate procedure for prospective approval of capital programs is essential to permit better long-range financial planning by hospitals.

The regulations entitle a provider to obtain adjustment of its classification on the basis of evidence that the classification is at variance with the criteria specified. This provision cannot be relied upon for relief for two reasons. First, the classification system has been improperly structured. Secondly, since the regulations do not provide a full explanation of the system, the provider is at a loss to develop meaningful variance criteria.

The regulations permit an adjustment upwards to reflect any added costs by reason of services that are atypical in nature and scope as compared with services generally provided by institutions similarly classified. To furnish evidence that any one provider is atypical would be virtually impossible because the institutions similarly classified and their services are not identified.

NURSING COST DIFFERENTIAL

In summary, we believe that:

The termination of the nursing cost differential would be contrary to the Medicare law and regulations which state that non-Medicare patients should not be required to pay the costs of serving Medicare patients.

The reasons cited for terminating the differential, the changes in the Medicare law and the increased use of special care units, are not substantiated as bases for its termination.

Termination contrary to law and regulations

Because the original Medicare reimbursement formula did not recognize any difference in the degree of nursing care required by beneficiaries as opposed to other patients, research studies were performed. These studies showed that patients 65 and over need significantly more nursing service than other patients. Therefore, beginning July 1969 hospitals were allowed an 81⁄2 percent adjustment in nursing care costs. Now, because of alleged changes in conditions, this adjustment has been terminated. Consequently, reimbursement under Medicare will be substantially reduced with the result that other patients, either through thirdparty payment or private means, will be expected to make up the difference through increased charges.

Administrative changes of this kind escalate the charges to patients other than those covered by Medicare. This is contrary to the Medicare regulations which provide (Section 405.402): "The share of the total institutional cost that is borne by the program is related to the care furnished beneficiaries so that no part of their cost would need to be borne by other patients." The impact of such charges to other patients can be substantial. They are estimated to range from $20,000 annually for a 308-bed hospital in Lexington, Kentucky to more than $100,000 for a 1,040-bed institution in Wilmington, Delaware.

Evidence for termination unsubstantiated

The regulations state that, since July 1969, there have been changes in the Medicare law, changes in the way services are furnished, and changes in the way in which Medicare reimburses for routine services. More specifically, the termination of the inpatient routine nursing salary cost differential is based principally upon two premises:

The Social Security amendments of 1972 expanded the scope of Medicare coverage to include a significant number of beneficiaries below age 65, that is, certain disabled beneficiaries and those with end-stage renal disease.

Since July 1969, there has been a marked increase in the number of special-care beds providing more intensive nursing care than is found in general routine care areas and a ihgher percentage of utilization of these special-care units is made by Medicare program beneficiaries.

No evidence is furnished in the regulations to the effect that such factors eliminate the need for the nursing cost differential or even that these factors would have a material effect on the amount of the nursing cost differential. On the other hand, a recent study of this question by the Stanford University Medical Center,

a 1,600-bed institution with an estimated annual nursing salary cost differential of $70,000, strongly indicates that these premises are not valid. The results of this study are set forth in the attached letter, dated May 2, 1975, from Mr. Paul B. Hofmann, Director, Stanford University Hospital and Clinics, to Mr. J. G. Cardwell, Commissioner of Social Security. Some of the factors developed in this study which refute the contention in the proposed regulations follow.

Almost all patients under age 65 who are eligible for maintenance renal dialysis under Section 2991 of Public Law 92-603 are treated on an outpatient basis and, consequently, they are not utilizing the services of an inpatient nurse.

The majority of patients who are criginally treated for end-stage renal dialysis on an inpatient basis, prior to being placed on maintenance dialysis, will have completed their inpatient stay in a hospital before the expiration of their 90-day eligibility waiting period and will not enter into the Medicare inpatient service computation on the cost report.

Regardless of whether or not the under 65 patients are eligible under the renal care provision or the disability provisions of the Medicare law, they do not presently enter into the computation of the nursing cost differential.

Experience does not support the assumption of a shift in care from routine to special for aged patients. From fiscal year 1970-71 to 1974-75, there was a shift of only three percentage points from routine care to special and intensive care units. In addition, the Medicare utilization in the special care units is currently 28.6 percent of the total patient care days as compared with a current Medicare utilization of 31.3 percent in the routine medical-surgical units.

This is not to say that the nursing cost differential should always remain at 81⁄2 percent based on a study a few years ago. It may be desirable to conduct a new study of the levels of nursing care rendered to various classes of patients to have a valid factual basis for adjusting, either upward or downward, the differential factor. However, it is reasonable to conclude that there is, in fact, a nursing cost differential which should not be terminated in its entirety.

We very much appreciate the opportunity to express our views on these regulations. If Coopers & Lybrand can furnish you with further information, please communicate with Bernard F. O'Neil, Jr. or Philip J. Taylor at the above address (215-569-2000) or with William P. McHenry, Jr. at 1800 M Street, N.W., Washington, D.C. 20036 (202-223-1700).

Very truly yours,

Enclosure.

COOPERS & LYBRAND.

Mr. J. B. CARDWELL,

STANFORD UNIVERSITY MEDICAL CENTER,
Stanford, Calif., May 2, 1975.

Commissioner of Social Security, Department of Health, Education, and Welfare,
Washington, D.C.

DEAR. MR. CARDWELL: This letter is in response to your invitation for public comments to the proposal to terminate the 81⁄2 percent inpatient routine nursing salary cost differential for Medicare patients, which was published in 40 Federal Register 14934, April 3, 1975.

Stanford University Hospital strongly objects to the total elimination of the nursing differential on the grounds that its elimination is based on erroneous assumptions which violate the original intent of Congress in enacting the Medicare program. In our view, its elimination is unlawful, as well as being inequitable to hospitals and their non-Medicare patients.

The first fallacious premise is that a significant increase in the number of Medicare beneficiaries below age 65, such as disabled and chronic renal disease patients, has resulted in a more appropriate average routine service per diem rate, thus the differential is not needed. In actual fact, this is not the situation at Stanford, and it is our belief that Stanford is not unique in this regard.

Almost all patients under 65 who are eligible for maintenance renal dialysis under section 2991 of Public Law 92-603 are treated on an outpatient basis and, consequently, they are not utilizing the services of an inpatient nurse. In addition, the majority of patients who are originally treated for end-stage renal disease on an inpatient basis, prior to being placed on maintenance dialysis, will have com

pleted their inpatient stay in a hospital before the expiration of their 90-day eligibility waiting period under section 2991 and will not enter into the Medicare inpatient service computation on the cost report. The remaining under 65 beneficiaries eligible under the renal care provision are either transplant patients or patients who are inpatients on other medical or surgical services who have encountered acute renal failure. The transplant patients do indeed require a greater amount of nursing care, regardless of age, than do other types of patients; thus the differential for these patients is completely justified so as not to shift their extra nursing costs to other patients. As to the patients who encounter acute renal failure, they are not eligible for Medicare benefits under 2991.

Regardless of whether or not the under 65 patients are eligible under the renal care provision or the disability'provisions of the Medicare law, they do not presently enter into the computation of the nursing cost differential because the intermediaries eliminate the under 65 patient days from the total Medicare patient days when computing the amount of nursing salary cost differential in the cost report. For Stanford's cost report ending June 30, 1974, Medicare routine service inpatient days totaled 53,498, which included 3,716 patient days for under 56 patients or only 6.94 percent of the total days. However, when computing the amount of the nursing differential, these 3,716 days were eliminated from the total days. Therefore, it is clear that reliance upon the assumption that a significant increase in the number of beneficiaries below age 65 has lessened the need for the nursing differential, is erroneous.

Another false premise assumes that there has been a substantial shift in the treatment of the aged from routine care areas to special care and intensive care units. Moreover, because Medicare separately calculates reimbursement for these special areas, it is inappropriately concluded that the need for the differential in the routine area has disappeared. Our experience at Stanford does not support the assumption of the shift in care from routine to special for aged patients.

During 1974-75, 94 percent of the Medicare patient days were in the medical/ surgical routine care units, with the balance of only 6 percent occurring in the special and intensive care units. In fiscal year 1970-71, the first year the nursing differential was applicable, approximately 97 percent of the total Medicare patient days were in medical/surgical routine care units, while the remaining 3 percent were in special units. This shift of 3 percentage points from routine care to special intensive care units is relatively insignificant, and by no means is it a "substantial shift," as stated in the Federal Register.

In addition, the Medicare utilization in the special care units at Stanford is currently 28.6 percent of the total patient care days in those special units, as compared with a current Medicare utilization of 31.3 percent in the routine medical/surgical units. These statistics invalidate the assumption stated in the introductory text to the proposed regulations that: "A higher percentage of utilization by health insurance program beneficiaries of the special-care units than of general routine-care areas reflects to a significant extent that the nursing care that brought about recognition of the routine nursing differential is now being given in special-care units."

Based upon these facts, continuation of the nursing differential is essential to fulfill Congress' intent that Medicare program costs not be borne by other patients and their third-party payers. Aged patients still generally require greater amounts of routine nursing care than do patients under sixty-five. Elimination of the differential would inevitably shift those Medicare costs to non-Medicare paitents. Instead of removing the differential, the Social Security Administration should conduct a study of the levels of nursing care rendered to various classes of patients nationally in order to have a valid factual basis for adjusting (versus eliminating) the current 8% percent factor. As an alternative, SSA should issue criteria and guidelines in the form of regulations which would allow intermediaries to review and evaluate hospitals individually; as a consequence, a proper percentage factor could be determined periodically for the nursing differential for each hospital. I urgently request that you give serious consideration to these comments and not adopt the proposed regulations. Please feel free to contact me if you need additional information regarding our position in this matter.

Sincerely,

PAUL B. HOFMANN,

Director.