In order to properly serve such a community, the hospital has been compelled to provide a comprehensive range of services, including every major medical specialty, advanced diagnostic, educational, and surgical techniques, and full-time physicians and staff whose only practice is emergency medicine. The initial phases of a major expansion program are substantially complete. The hospital is classified under HEW's reimbursement schedule in Non-SMSA State Group III-Bed Size Category "170 and above." As a result, it is to receive prospective reimbursement for inpatient general routine services of $79 per diem for its cost reporting period beginning after July 1, 1975. Hospitals in urban areas of Florida, such as Miami, West Palm Beach-Boca Raton, Fort LauderdaleHollywood, Sarasota, Jacksonville, Lakeland-Winter Haven, Orlando, Tampa-St. Petersburg, Daytona Beach, Fort Myers, Gainesville, Melbourne-Titusville-Cocoa, and Pensacola, will receive substantially more in per diem reimbursement despite the fact that their bed size and range of services may be identical to or less sophisticated than those offered by Naples Community Hospital. The only distinguishing characteristic which HEW has used to separate Naples from these other areas is the device known as the Standard Metropolita Statistical Area (SMSA). HEW's methodology assumes that income levels in SMSA areas are higher than in non-SMSA areas, and that, since ". . . income levels tend to reflect wages and costs of construction, goods and services," (40 Fed. Reg. 17191, April 17, 1975), hospital costs, and, therefore, per diem cost reimbursement levels, should be lower in non-SMSA areas. While this may be true in a very general sense, problems arise in the application of the general assumption to the particular situation of many hospitals, including that of Naples Community Hospital. For example, in order to provide the Naples area with the full range of services which it requires, the hospital must attract qualified physicians, nurses, and other staff personnel currently located in other areas of the state or nation. Salaries and benefits competitive with those in urban areas must be offered in order to recruit such personnel, since they are usually unwilling to relocate unless substantially compensated. Labor costs constitute approximately 58% of routine inpatient service costs and there is, thus, no real difference in this cost factor between Naples Community Hospital and other Florida hospitals of comparable size and range of service. The growing unionization movement will, no doubt, further increase labor costs. Likewise, the hospital must purchase supplies and equipment which are paid for out of the daily routine service charge or cost. These supplies and equipment items are purchased from firms which charge the same price to all. The non-SMSA hospital gets no price break merely because HEW assumes that it should have lower costs. What is needed to remedy this unfair disparity in reimbursement levels between SMSA area hospitals and non-SMSA area hospitals possessing SMSA hospital characteristics is a more sophisticated classification system that would set reimbursement levels based on an analysis of, not just bed size and location, but also the nature and scope of service provided, type of patients treated, and various other factors as originally mandated by Congress in its consideration of § 223 of P.L. 92-603. Naples Community Hospital fully endorses the opinion of the American Hospital Association that HEW has deviated from this Congressional intent by emphasizing selected factors and ignoring other pertinent considerations. Moreover, the factors HEW has chosen to emphasize, i.e., location and bed size, have by no means been shown to be more closely correlated to actual costs than the other factors such, as type and nature of services and patient mix. The University of Washington has proposed to HEW that the factors listed below should be analyzed in order to best carry out the intent of Congress: Per Capita Income by County, Population by County, Admissions, Bed Size, Bed Type, Accreditation, Control, Location, Services and Facilities, Outpatient Volume (as ratio total), Medicare Volume, Percentage of Urban Population, Females 1544, MD's per 1,000 population, Resident and Intern Programs, Nursing Education. While not all of these factors may correlate sufficiently with in-patient general routine service costs, HEW, at least, has the duty to evaluate their usefulness as cost indicators before rejecting them in favor of a less detailed, more inequitable system. HEW believes that any inequities in its system can be remedied through resort to the exception process. HEW's regulations 20 C.F.R. 405.460(f)(2) (39 Fed. Reg. 20165, June 6, 1974], state the following: Exception of cost of atypical services.-Where the actual cost of items or services furnished by a provider exceeds the applicable limit by reason of the provision of items or services that are atypical in nature and scope as compared to the services generally provided by institutions similarly classified and appropriate reason exists for the provision of such items or services, the limits may be adjusted upward to reflect any added costs flowing from the delivery of such items or services. Such adjustments may only be made where the provider demonstrates: (i) The provision of the atypical items or services were by reason of the special needs of the patients treated and necessary in the efficient delivery of needed health care, or (ii) the added costs flow from approved educational activities (as described in § 405.421) to the extent such costs are atypical (although reasonable) for providers in the comparison group. In addition, such adjustments may be made only to the extent that such justified costs are separately identified by the provider and can be verified by the intermediary. The experience of Naples Community Hospital and many other hospitals in applying for exceptions from price and profit margin restrictions of the Price Commission and Cost of Living Council in cases of "serious hardship or gross inequity" leads to the conclusion that this process will be frustrating, timeconsuming, expensive, and practically worthless. No doubt, intermediaries will be overwhelmed by such exception applications, judging by the number of hospitals who have already commented adversely on the inequities of the reimbursement limits. A hospital which has made every effort to implement effective cost control and management devices in order to incur only reasonable costs may nevertheless, be forced to demonstrate that its costs are "atypical" of its class. Since the reimbursement levels are prospective, but the exceptions process is retroactive (because an exception cannot be approved until the hospital's actual costs have exceeded the applicable limits and then only to the extent that such justified costs are separately identified by the hospital and verified by the intermediary), a hospital is likely to experience a substantial cash flow problem while it receives interim reimbursement below the final adjusted reimbursement it seeks. Experience with price controls showed that the exceptions process was of little value since a very low percentage of hospitals ever received the relief to which equitable considerations entitled them. Cases often took 12-18 months to process. Unfortunately, we are forced to conclude that the same may occur with reimbursement exceptions, given the arbitrary and vague burden imposed on each hospital to show that its costs are "atypical." How can a hospital show that its costs are atypical if it is given no guidance as to what is typical of hospitals in its group. All that an aggrieved hospital can discover is that its cost reimbursement is still insufficient to cover the costs which it has made every effort to contain. Moreover, an exception will not be granted, according to HEW, until a review of the reasonableness of all components of routine costs is conducted in order to ascertain whether one or more of these components is unusually large and therefore, should be reduced in order to bring overall costs into line and negate the need for an exception. The effort required to conduct such an analysis and the wide discretion given to the analyst by such an approach means that hospitals will be hard pressed to obtain exceptions even when clearly warranted by the facts. Failure to obtain an exception will require a hospital to either raise its private charges or cut back its services. The former action may conflict with the legal requirement that, "... the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter 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. . ." [42 U.S.C. 1395x (v)(1) A] The latter action is an unacceptable disservice to the community. HEW has included in its regulations a provision which, presumably, would exempt from the cost reimbursement limits "sole community providers," whereby those hospitals located in isolated areas or providing services unavailable elsewhere in the area would be subject to a different type of cost reimbursement determination (20 C.F.R. 405.460 (f) (4), 39 Fed. Reg. 20166, June 6, 1974). While this provision might be of some benefit to hospitals such as Naples Community Hospital if standards for its implementation were devised, the benefit would immediately be lost and the inequitable cost reimbursement schedule reimposed as soon as a new facility in the same or an adjoining community was constructed or a pre-existing facility began offering comparable services. CONCLUSION Naples Community Hospital believes that the cost reimbursement schedule for inpatient general routine services as promulgated by HEW unfairly discriminates against those hospitals which do not possess the assumed general characteristics of the class in which they have been placed. The reduction of the standard for determining the cost reimbursement level for each particular class from the 90th percentile to the 80th percentile further decreases the possibility that hospitals with comparable cost structures will be included in the computation of cost reimbursement rates. Moreover, the exception process is an unfair burden to place upon hospitals already faced with the inordinate administrative_task of complying with the multitude of local, state, and federal regulations. Congress must act now to compel HEW to remedy the inequities created by its cost reimbursement categories for inpatient general routine services. Respectfully submitted. AKIN, GUMP, STRAUSS, HAUER & FELD, By LAURENCE HOFFMAN, By WARREN E. CONNELLY (For the Naples Community Hospital). STATEMENT OF THE NATIONAL ASSOCIATION OF BLUE SHIELD PLANS Mr. Chairman, the National Association of Blue Shield Plans consists of 71 locally-based, not-for-profit, medical care prepayment Plans that provide health insurance for over 73 million private subscribers. Thirty-two of these Plans also serve as carriers for nearly 13 million enrolled in the Medicare Part B program. (A list is attached.) We appreciate this opportunity to present our views concerning proposed regulations published in the Federal Register of April 14, 1975 regarding prevailing charge increases under the Medicare program. The Medicare program's method of reimbursement for physicians' services had some success with a national assignment rate around 75 to 80%. Recently though, there has been a steady erosion so that by 1974 the assignment rate had dropped to 53%. One major reason for this downward trend is that Medicare's present formula for reimbursement is based on physician's charges made during calendar year 1973 at the 75th percentile of the prevailing charge for a given procedure performed in the local community, thus resulting in a lower level of compensation. When the physician chooses not to accept Medicare assignment, he is free to bill the patient his full charge. The patient must then complete and file his own claim and is reimbursed according to the Medicare formula desribed above. The end result has a negative impact upon both the beneficiary who is responsible for higher out of pocket expenses and the government, which must pay the higher administrative costs due to longer processing time of unassigned claims. It is about these two areas that Blue Shield is concerned, as follows. As we understand the proposal, the adjusted prevailing levels from fiscal year 1973 will be used as the base year. This level is so far out of step with economic reality as to provide, in our opinion, a substantial disservice to beneficiaries and physicians rendering services pursuant to the program. Since much of the situation is a legislative matter, we urge that expressions of Congressional intent and administrative interpretation through regulations be as liberal as possible for the benefit of beneficiaries under the program. A level higher than the "adjusted" FY '73 level is justified by economic changes. If the base year is to be calendar year 1971 charges, many serious problems will be present. Such data reflect the restraints of the wage-price controls in effect during 1971, and, if recognized, would in effect continue the impact of that program far differently than on any other sector of the economy. In addition, it is not clear how the proposed implementation would relate to the current (Fiscal 1975) prevailing fee level. A cutback certainly would create problems. We urge the use of calendar year 1973 charges as the base year for the economic index. Many of the problems would be reduced in the interest of the beneficiary and the economic index approach would be off to a better start. One problem that would interfere with implementation of the index as proposed is the availability of calendar year 1971 charge information. Some carriers either do not have this information or it is not readily available. Retrieving or reconstructing this information would be expensive and extremely time consuming. Many carriers have made improvements in their claims processing systems since CY 1971 (change in procedure code terminology, recognition of specialties, etc.) that compound the problem of reconstructing charge data. With respect to the economic index formula itself, we urge that additional time be taken to delineate with more detail the precise components of the formula to be used to derive the two major elements outlined in the regulation. We are most concerned that the formula in measuring the cost of doing business would not directly measure physician office expenses. We feel that a specialized overall index more closely related to physicians' cost of doing business should be developed. In addition, we urge that an additional paragraph be included to provide a means whereby present known events could be recognized as part of the formula. For example, historical cost, whether using calendar year 1971 or 1973 data, clearly does not reflect the current rise in professional liability premiums or other special circumstances that may affect a particular locality or localities. We believe the proposal as outlined will have a negative impact upon beneficiaries, and carriers' administrative costs and processing times. The carriers will encounter substantial increases in administrative costs. The carriers with their own data processing systems will need to develop modifications in their current systems to accommodate the index. The assignment rate will drop dramatically in response to limits on prevailing charges. That decrease in assignment will increase processing costs. The requests for informal claims reviews will increase in proportion to the decrease in assignment rate. Those costs associated with professional relations activities will increase to accommodate the need for indepth explanations of the applicability of the index to prevailing charges. The demand for additional beneficiary services will increase as beneficiaries question the carrier's decision to pay less of the total bill than they did in the years past. In summary, while we are aware that the statute under which Medicare operates requires limitation of the prevailing fee screen, we are quite concerned that both reimbursement inequities and higher administrative costs to the program will result if the regulations are adopted as proposed. BLUE SHIELD PLANS WHICH ARE MEDICARE PART B CARRIERS Alabama.-Blue Cross-Blue Shield of Alabama, 930 South 20th Street, Birmingham, Alabama 35298, (205) 328-8111. Arkansas. Arkansas Blue Cross-Blue Shield, Inc., 601 Gaines Street, Little Rock, Arkansas 72203, (501) 378-2200. California.-Blue Shield of California, Two North Point, San Francisco, California 94133, (415) 445-5000. Colorado.-Colorado Medical Service, Inc., 700 Broadway, Denver, Colorado 80203, (303) 831-2131. Delaware.-Blue Cross-Blue Shield of Delaware, Inc., 201 West 14th Street, Wilmington, Delaware 19899, (302) 658-6940. District of Columbia.—Medical Service of D.C., 550 12th Street SW., Washington, D. C. 20024, (202) 484-4500. Florida.-Blue Shield of Florida, Inc., 532 Riverside Avenue, P.O. Box 1798, Jacksonville, Florida 32201, (904) 791-6111. Illinois. Illinois Medical Service, 233 North Michigan Avenue, Chicago, Illinois 60601, (312) 661-4846. Indiana.-Blue Cross-Blue Shield of Indiana, 120 West Market Street, Indianapolis, Indiana 46204, (317) 263-4625. Iowa.-Blue Shield of Iowa, Liberty Building, Des Moines, Iowa 50307, (515) 283-8121. Kansas. Kansas Blue Shield, 1133 Topeka Boulevard, Box 239, Topeka, Kansas 66601, (913) 234-9592. Maryland.-Blue Shield of Maryland, Inc., 700 East Joppa Road, Baltimore, Maryland 21204, (301) 494-5040. Massachusetts.-Blue Shield of Massachusetts, Inc., 133 Federal Street, Boston, Massachusetts 02106, (617) 357-8000. Michigan.-Blue Shield of Michigan, 600 East Lafayette, Detroit, Michigan 48226, (313) 225-8521. Minnesota.-Blue Cross-Blue Shield of Minnesota, 3535 Blue Cross Road, St. Paul, Minnesota 55165, (612) 456-3595. Missouri.-Blue Shield of Kansas City, 3637 Broadway, P.O. Box 169, Kansas City, Missouri 64141, (816) 756-2400. Montana.-Montana Physicians' Service, 404 Fuller Avenue, P.O. Box 1677, Helena, Montana 59601, (406) 442-5450. New Hampshire.-New Hampshire-Vermont Physician Service, Two Pillsbury Street, Concord, New Hampshire, (603) 244-9511. New York. Blue Shield of Western New York, Inc., 298 Main Street, Buffalo, New York 14202, (716) 849-8984. New York.-Blue Cross-Blue Shield of Greater New York, 622 Third Avenue, New York, New York 10017, (212) 490-4567. New York.-Genessee Valley Medical Care, Inc., 41 Chestnut Street, Rochester, New York 14647, (716) 454-1700. North Dakota.-Blue Shield of North Dakota, 301 Eighth Street South, Fargo, North Dakota 58102, (701) 235-1191. Pennsylvania.-Pennsylvania Blue Shield, Camp Hill, Pennsylvania 17011, (717) 236-9011. Rhode Island.-Blue Shield of Rhode Island, 444 Westminster Mall, Providence, Rhode Island 02901, (401) 831-7300. South Carolina.-Blue Cross-Blue Shield of South Carolina, I-20 At Alpine Road, Columbia, South Carolina 29219, (803) 788-3860. South Dakota.-South Dakota Medical Service, Inc., 711 North Lake Avenue, Sioux Falls, South Dakota 57104, (605) 336-1976. Texas.-Group Life & Health Insurance Co., Main at North Central Expressway, Dallas, Texas 75201, (214) 741-8946. Utah.-Blue Shield of Utah, 2455 Parley's Way, P.O. Box 270, Salt Lake City, Utah 84110, (801) 487-6441. Washington.-Washington Physicians Service, 220 W. Harrison, Seattle, Washington 98119, (206) 281-3414. Wisconsin.-Wisconsin Physician Service, The Blue Shield Plans of the State Medical Society of Wisconsin, 330 East Lakeside Street, P.O. Box 1109, Madison, Wisconsin 53701, (608) 257-6781. Wisconsin.-Surgical Care, The Blue Shield Plan of the Medical Society of Milwaukee County, 756 North Milwaukee Street, Milwaukee, Wisconsin 53202, (414) 224-6099. Puerto Rico.-Seguros De Sevico De Salud De Puerto Rico, Inc., GPO Box 3628, San Juan, Puerto Rico 00C36, (809) 765-3232. NATIONAL HEALTH LAW PROGRAM, Los Angeles, Calif., June 12, 1975. JOHN M. MARTIN, Jr., DEAR MR. MARTIN: The National Health Law Program (NHeLP) submits this statement to the Subcommittee on Health to include in the record of its hearing on selected Medicare issues. NHeLP is a federally funded national legal services back-up center specializing in health problems of the poor. Its function is to provide technical assistance to legal services attorneys throughout the country whose clients face problems obtaining access to health care services. In the six years of NHELP existence its staff attorneys have worked extensively on issues involving access to medical care under the Medicare and Medicaid programs. A recently published article on Medicare for legal services attorneys "An Advocate's Guide to the Medicare Program,' is enclosed for the Committee's information. As Associate Director of NHELP I am submitting this statement on behalf of the Program itself and its clients-the several hundred legal services offices throughout the country whose clients are Medicare beneficiaries. Today I am addressing only the issue of utilization review procedures for hospital and nursing home services and will argue specifically that the November 29, 1974 Medicare Utilization Review regulations are constitutionally defective by failing to establish a beneficiary appeal mechanism to protect Medicare recipients from incorrect UR Committee decisions. Initially we must protest the structure of the June 12 hearing where the witnesses represent the medical establishment and HEW but no consumer interests. Such a format is unacceptable, and we hope the Subcommittee will permit consumer representatives to speak at all future Hearings. Because the November 1974 UR regulations have not yet become effective, we cannot evaluate their impact upon the health of poor Medicare beneficiaries on whose behalf we are speaking. Utilization review has the desirable goal of reducing unnecessary hospitalization and surgery which is recognized to be a serious health hazard, especially for older persons. On the other hand some Medicare beneficiaries will probably be denied access to needed services by the decisions of UR Committees or the decisions of institutions not to admit patients when the |