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PREPARED STATEMENT OF DONALD S. BOND

VITAE OF THE WITNESS

My name is Donald S. Bond. I reside at 456 Snowden Lane, Princeton, New Jersey 08540. I am President of the Princeton Chapter No. 459 of the American Association of Retired Persons.

I am a physicist and have specialized in electronics and telecommunications for 54 years. During the last nine years I have been a telecommunications consultant with particular emphasis on applications to health care delivery and education for people who live in sparsely settled areas. This has included direct planning of satellite communications in cooperation with the Alaska Area Native Health Service (of the U.S. Public Health Service) in the Alaska bush and with the Royal Flying Doctor Service in the Outback of Australia. I have traveled extensively in these isolated areas.

I have made similar but briefer studies in Northwest Territories of Canada and in Micronesia (The Trust Territory of the Pacific Islands).

AREAS OF MY TESTIMONY

My discussion is directed to Medicare and some of the problems it faces in providing affordable health care for senior citizens and in avoiding exorbitant financial burdens on the taxpayer. In particular the topics I shall address are:

(a) The prospective payment (DRG) plan proposed for reimbursement to hospitals under Medicare A Health Insurance (HI);

(b) Proposed changes in co-payment, or cost-sharing of hospital charges for patient hospital care and against catastrophic costs incurred in long-term illnesses; and

(c) Reduction of the costs of medical malpractice insurance and malpractice awards affecting both physicians and hospitals.

I shall not attempt to discuss Medicare funding by the Federal Government. Rather, the remarks will be directed to cost containment in hospital operations and to costs to senior citizens.

These views are those of the Legislative Task Force of the Board of Directors of the Princeton Chapter of the AARP. The opinions are independent of any that may be put forth by the National Headquarters of the American Association of Retired Persons.

THE PROSPECTIVE PAYMENT PLAN FOR MEDICARE REIMBURSEMENT TO HOSPITALS MAY

PROVE HIGHLY SUCCESSFUL IN LIMITING HOSPITAL COSTS IF A NUMBER OF CONDITIONS ARE PROPERLY MET

As the Committee is well aware, the prospective reimbursement plan proposed by the Department of Health and Human Services offers a tangible incentive to hospital administrations to exercise diligence and imagination in restraining the exorbitant growth in the costs of hospital care of patients. The nationwide costs rose over 18 percent during the last year.

The scheme has been tested by several states. Of these, the experience in New Jersey has been the most extensive and informative. Based on the results in New Jersey and our own judgment, we call attention to the following necessary features for an acceptable and workable method.

THE PROSPECTIVE REIMBURSEMENT SYSTEM MUST APPLY TO ALL CLASSES OF PATIENTS

AND PAYERS

The proposed legislation would provide for prospective reimbursement for Medicare patients only. The result would be a shift of cost overruns to non-Medicare patients and their payers and would thus be unfair to younger patients and those outside Medicare hospital coverage. There would be little incentive to hospital administrations to achieve more efficient cost control.

We do not believe that a Medicare-only prospective payment system will help hospitals cope with the major problem of the cost of indigent patients.

THE INTRODUCTION OF PROSPECTIVE REIMBURSEMENT SHOULD INCLUDE SAFEGUARDS TO

PREVENT THE SHIFTING OF EXCESS COSTS TO ELDERLY PATIENTS

Present schedules of costs to be borne by Medicare patients include first-day deductions and sharing of costs for longer hospital stays. We consider these cost-shar

Schweiker, R. S., Report to Congress: Hospital Prospective Payment for Medicare, U.S. De partment of Health and Human Services (December 1982).

ing arrangements already a major burden to be carried by patients, either directly or through other insurance carried. The introduction of prospective reimbursement should not be permitted to make this burden even heavier for senior citizens.

IF PROSPECTIVE REIMBURSEMENT IS ADOPTED, IT SHOULD BE MADE MANDATORY FOR ALL

ACUTE-CARE HOSPITALS

The experience in New Jersey has demonstrated that a program that was initially optional rapidly gained Statewide acceptance and is now in force in all acute care hospitals in the State.

It may be found that under Federal law the proposed system cannot be made mandatory for non-Medicare cases without appropriate State legislation. Such cooperation by the states is of great importance.

Furthermore, considerable flexibility in diagnosis-related group (DRG) rates must be permitted to take into account differences in local costs. Alaska “market-basket” hospital costs are inherently much higher than in any of the Lower-48 states.

PROSPECTIVE REIMBURSEMENT WILL INTRODUCE SEVERAL NEW COMPLICATIONS It will tend to slow the adoption of new medical techniques if they involve additional costs that are not in the DRG schedule.

Revisions to the cost schedules can be excessively delayed by the Federal administrative machinery so that hospitals are unfairly deprived of any prompt upward adjustments, and the introduction of new medical techniques will be sadly delayed.

A possible disadvantage of prospective payments may be that older patients will not be as welcome. Clearly a given medical procedure for an 85-year-old person is more costly than the same procedure for a 55- or a 65-year-old. A hospital will bene fit more from the lower-risk patient.

THE EXPERIENCE OF NEW JERSEY SHOULD BE EXAMINED CAREFULLY AS A GUIDE TO A

FEDERAL PROGRAM OF PROSPECTIVE PAYMENTS

As we noted previously, New Jersey has the only DRG prospective system in the U.S. that is both all-payer and all-hospital. However, when it started in 1980 on a voluntary basis, there were only 26 hospitals involved, whereas now all 96 acute care institutions participate. Thus a comparison of DRG operation with non-DRG operation was possible for a few years, and the change-over costs also known.

An independent evaluation of the New Jersey experience is almost complete. It was made by the Health Research and Educational Trust of New Jersey, located in Princeton, New Jersey. Their reports, some of which are already available, will be the best present source of data on actual results.?.

This New Jersey study convinces us that with the proper safeguards and all-payer nation-wide prospective reimbursement system to hospitals will help control rising hospital costs and perhaps even reduce these expenses to all patients, not to Medicare patients only.

WE APPLAUD THE EFFORTS TO PREVENT CATASTROPHIC COSTS TO PATIENTS WITH LONG

ILLNESSES

There can be no question that long hospital confinements can be financially devastating to Medicare patients without adequate private insurance protection.

The plan put forward recently by Health and Human Services to reduce the patient's share of the cost of hospitalization beyond 150 days is a major step to avert catastrophic loss of the life-time savings of the patient and his family on one medical disaster.

Two major consequences of the HHS proposal should be considered.

COST SHARING BY THE PATIENT FOR SHORTER TERM HOSPITAL STAYS WILL BE EXCESSIVELY

INCREASED

In an example given by HHS for "low cost” hospitalization, a hospital confinement of 15 days would increase the patient's share by nearly $400 and for a total of 60 days the increased cost would be nearly $1200. În each case the Day-1 charge would remain at the present $350.

2 The following summary report has been made available to us: May, J.J., and J. Wasserman, Some Preliminary Results from the New Jersey DRG Evaluation, Health Research and Educational Trust of New Jersey (December 1982).

The burden of such an increase will fall most heavily on low-income participants whose principal income is from Social Security and who cannot afford supplementary insurance coverage.

Other sources of revenue from Medicare Part A must be sought to prevent the present patient's share of the cost from continuing to rise excessively.

RESTRAINTS MUST BE PROVIDED TO PREVENT EXCESSIVE RELIANCE ON LONG-TERM FREE

HOSPITALIZATION While we have stressed the social necessity of avoiding catastrophic costs of longtime hospitalization in acute care and certain other facilities, means should be included in regulations on Medicare to prevent abuse of the system where long-term hospital confinement is not absolutely necessary. Perhaps the fairest way is by continued cost sharing by the patient, his family, or third party payer. The amount of this further sharing (beyond Day 150) should be a very modest percentage of DRG hospital costs. While we do not favor it in general, a means test of the patient's (but not the family's) resources might be included, but bearing in mind that the patient must not be reduced to the poverty level by a single protracted illness.

We do not favor Medicare schedules by which initial deductible amounts of payments are determined solely on a calendar year basis when applied to medical expenses for a given condition that extends into a second calendar year.

Thus we favor legislation to protect against catastrophic costs of illness but only with safeguards to prevent excessive increases in Medicare financing costs.

COMPLACENCY HAS DEVELOPED ABOUT THE INEVITABILITY OF TREMENDOUS INCREASES IN

MEDICAL COSTS

The views of the health care professionals—in and out of Government—as seen by the public are that the rate of increase of hospital costs and indeed of all medical costs cannot be controlled. It is similar to the general view on inflation until recently.

In the health care field, the rise in hospital costs is now about 18.7 per cent annually. Retrospectively, over the last 10 years' time, such a rate would bring present costs to about 5.5 times their value a decade ago. And this rate has shown no signs of abating

It is evident that hospital administrations have little incentive to control costs for Medicare service. All charges are paid in full by the Government. Pressures from physicians exist for new equipment, new techniques, and more exhaustive tests for patients. Where this improves the quality of Health care it may seem well worth the price. But this engenders complacency on the part of hospitals and physicians, and adequate incentives do not exist to search for cost-saving procedures and for better administrative practices.

One source of rising costs for both hospitals and physicians is the threat of malpractice claims and awards. This involves skyrocketing malpractice insurance premiums, large out-of-court settlements of claims by or for patients, and sometimes fantastic awards by tender-hearted juries.

LEGISLATIVE AND OTHER ACTIONS ARE URGENTLY NEEDED TO CONTROL MALPRACTICE

COSTS

Let me offer a personal example of the present overwhelming cost of malpractice insurance:

My ophthalmologist for the last 30 years in Philadelphia is world-famous in the field of eye care and surgery. He will retire in June. He informed me that he cannot continue in part-time practice to help younger M.D.'s because his malpractice insurance would eat up all his income-unless he continued to work full time.

Exploratory work is needed to get at the cause of the vast increase of the malpractice threat. We do not feel competent to offer solutions with any assurance of their effectiveness.

However we do note that the problem has some similarity to that encountered in injuries in the workplace and that involved in motor-vehicle injuries. We must concede that neither existing workmen's compensation laws nor no-fault automobile injury statutes serve fully as models for the medical situation. Some possibilities include: (a) Limitations on awards (including large claims for “pain and suffering”); (b) More careful pre-trial screening by a board including medical professionals;

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(c) Satisfying judgments for malpractice awards by a reserve fund administered by Health and Human Services, thus making the U.S. Government the insuror with a vastly larger statistical group; and

(d) Self-insurance by groups of hospitals (as is now the case of five Connecticut hospitals and organized by the Yale University Medical Center).

PHYSICIANS CAN REDUCE THE RISK OF MALPRACTICE SUITS BY REESTABLISHING A GOOD

BEDSIDE MANNER

I have interviewed a trial lawyer in Connecticut who is active in the field of malpractice cases. The views are pertinent to this Committee's concern with controlling Medicare Part B costs.

The lawyer 3 described interviews with over 60 clients who were contemplating legal action for malpractice. In a surprisingly large number of cases, the client specified that the attending physician was not to be sued because he was a long-time and respected family doctor and friend. In many of the other cases Dr. Arterton persuaded the client to drop any plans for litigation because of the poor chance of recovery from the hospital involved.

The lesson to physicians is clear. Re-establish the good bedside manner of your predecessors.

In only a single case (Saint Raphael's Hospital) did a client show the same personal friendship for a hospital. In the case of this hospital, an extraordinarily good public-relations effort has brought close friendship with the community.

The conclusion is clear. The Congress and the Administration must find means of diminishing the devastating threat of malpractice claims.

3 Janet B. Arterton, Esq., a partner in the firm of Garrison, Kahn, Crane, and Silbert, located in New Haven, Conn.

SOME PRELIMINARY RESULTS FROM THE NEW JERSEY DRG EVALUATION

(By J. Joel May and Jeffrey Wasserman)

ABSTRACT

After providing a brief description of how the DRG reimbursement program operates in New Jersey, the authors present an overview of the findings from a comprehensive evaluation of the system. The discussion focuses on aspects of the system's design, the effect of DRGs on hospital operations, the economic and financial impact, and the system's political evolution. The authors conclude that, although the evaluation is still in progress, it appears that the system has led to improvements in hospital management which may ultimately imply cost savings.

BACKGROUND

Since 1980, 26 hospitals in New Jersey have been exposed

to a unique and innovative method of reimbursement aimed at re

ducing health care expenditures.

The new program, which currently

applies to all of the state's acute care general hospitals and

all classes of payers, is based on the use of Diagnosis Related

Groups (DRGs).

In essence,

a DRG is a homogeneous grouping of

patients who, in the opinion of physicians, require roughly

equivalent regimens of care and hence are believed to consume

similar amounts of hospital resources.

They are asserted to

have the property of being "medically meaningful" in that phy

sicians are able to distinguish between them on the basis of

their clinical attributes and associate particular patient

management processes with them.

Under this system, hospitals receive a prospectively

determined, DRG-specific rate for each case treated.

The precise

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