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44. H. B. Curry, et al., Twenty Years of Community Medicine

(Frenchtown, NJ: Columbia Publishing Company, 1974). 45. L. B. Wescott, "Hunterdon: The Rise and Fall of a Medical

Camelot," New England Journal of Medicine 300 (April

26, 1979), pp. 952-956. 46. A. S. Relman, "The New Medical-Industrial Complex,"

New England Journal of Medicine 303 (October 23, 1980),

pp. 963-970. 47. J. K. Iglehart, "Health Policy Report: Health Care and

American Business," New England Journal of Medicine 306 (January 14, 1982), pp. 120-124.

48. R. Pear, "Hospital Industry Proposed Fixed Payments for

Medicare Patients." New York Times, April 20, 1982. 49. A. R. Somers, “The Case for Negotiated Rates," Hospitals

(February 1, 1978), pp. 49-52. 50. "Coalition Seeks to Curb Rising Health Care Costs," New

York Times, January 15, 1982. 51. J. F. Fries and L. M. Crapo, Vitality and Aging: Implications

of the Rectangular Curve (San Francisco: W. H. Freeman & Co., 1981).

About the Author

Anne R. Somers, Professor of Community Medicine, University of Medicine and Dentistry of New Jersey-Rutgers Medical School, is an author, teacher, lecturer, and widely acknowledged authority on health care organization and financing. She has published numerous papers in these fields and written Hospital Regulation: The Dilemma of Public Policy and Health Care in Transition: Directions for the Future. with her equally famous husband, Herman Somers, she coauthored two books in the fields of financing and hospital organization: Medicare and the Hospitals, Doctors. Patients and Health Insurance and Health and Health Care: Policies in Perspective. More recently Mrs. Somers has also published articles on disease prevention and health promotion. Mrs. Somers is a member of the Institute of Medicine, serves on a number of editorial boards, and is an honorary member of the American College of Hospital Administrators.

About Government Research Corporation

The Government Research Corporation (GRC) is a private professional organization established in 1969 to provide independent analysis, forecasting and counsel on government, politics and public policy issues.

GRC provides direct and specific public policy research and analysis to clients to assist them in making decisions that appropriately reflect government developments in Washington.

GRC publishes the National Journal, a weekly publication providing in-depth coverage of Washington policy making, which has twice won the National Magazine Award, for Specializeu Journalism in 1979 and for Reporting in 1981. GRC also publishes Opinion Outlook, a twice monthly report on the latest public opinion survey relating to government, the economy, business, labor, foreign affairs and domestic social trends.

GRC also sponsors seminars and conferences on a wide variety of public policy issues. Since 1976. GRC's annual Leadership Conference on Health Policy has provided a foruin for policy makers to meet and debate health issues with participants from labor, business, the professions, academia and state and local governments.

Mr. RINALDO. Thank you very much for a very well-thought-out presentation.

Ms. Goldschmidt.

STATEMENT OF FAITH GOLDSCHMIDT Ms. GOLDSCHMIDT. Mr. Chairman, members of the committee, I am Faith Goldschmidt, a health economics research specialist, of the New Jersey State Department of Health's DRG project.

New Jersey acute-care general hospitals instituted the diagnosis related group (DRG] system as a means of hospital reimbursement for all patients, all payers in 1980.

Our hospitals were phased in over a 3-year period and all had implemented DRG's as of December 1, 1982.

We feel that the DRG system has the following benefits:

One, it is a clinically based system. The allocation of resources is equitable and based on a specific product, a DRG. Each hospital is reimbursed according to the complexity and volume of the cases it treats, not according to a fixed rate per day.

Two, hospitals and physicians are encouraged to use resources in an efficient manner by focusing on the DRG as the product plus the use of payment incentives for efficiencies and disincentives for inefficiencies. The DRG system provides valuable information for the hospital's management to communicate with its medical staff.

The physician is the resource consumer, because he or she admits the patient, orders all services and discharges the patient. Using a variety of reports, hospital management can and does work with physicians to more effectively and efficiently manage their patients. Three, in New Jersey, there is equity across all payers. Therefore, the massive cost shifting that occurs elsewhere in the country to cover discounts and uncompensated care does not occur in New Jersey. Four, uncompensated care, which primarily includes indigent care, is one of the hospital's financial elements.

By including uncompensated care as an element of cost, well managed inner-city hospitals can concentrate on effectively providing quality medical care to all patients regardless of social or economic status.

The following information might be of interest also: One, the DRG construction. The 467 DRG's used in New Jersey were constructed by Yale University and the National Steering Committee. There was a great deal of clinical input into these new DRG's, and they are meaningful both in a medical and a financial sense. New Jersey also uses seven categories to describe patients atypical in length of stay or resource consumption. The patients are called outliers and they are billed charges. Two, data requirements. There must be extensive computer capability for the hospital, the fiscal intermediary and for those who set the rates. There must also be the ability to check and correct DRG assignment and claims, and generate and interpret reports.

Three, implementation. Based upon New Jersey's experience the phasing in of the hospitals over a 3-year period was very important. It is not until a system is actually in place and being used, that many of the problems will be discovered.

Four, education. There is great need for education about the system at all levels, regulators, payers, hospitals, physicians, and patients.

Five, independent monitoring. There also is need for an independent monitoring system to insure that quality of care does not deteriorate because of the incentives to reduce expenditures. The department has seen no hard evidence in New Jersey that the DRG system has had any negative impact on the quality of care, and we can discuss that later if you would like.

Six, new technology. New technology and procedures are addressed in New Jersey by the Rate Setting Commission, either by a specific clinical appeal process or by the certificate of need system. Periodically, rebasing the system also will help incorporate advances in medical practice. Therefore, such advances are not stifled.

Seven, flexibility. Allowance should be made for States to have the flexibility to implement their own systems, provided such systems will meet the Federal objectives of cost containment. Of particular importance is to allow these States that are inclined to incorporate all payers to minimize cost shifting to do so.

In New Jersey we have found that management of the DRG system by the local State government allows rapid response in identification of problems, gathering of information, identification of solutions and implementation of solutions. Rapid resolution of problems encourages cooperation and leads to a better system.

In conclusion, we feel that the DRG system has been successful in containing health care costs in New Jersey. Former Secretary Schweiker's report shows that, in 1981, New Jersey was lower in percentage increase in cost per capita and in cost per adjusted admission than both the national average and the other regulated States. Now that all New Jersey acute-care general hospitals are

PREPARED STATEMENT OF CHARLES PIERCE, DEPUTY COMMISSIONER, NEW JERSEY DEPARTMENT OF HEALTH, SUBMITTED FOR THE RECORD BY FAITH GOLDSCHMIDT

You and your colleagues on this committee are faced

with an enormous task, one on which the future well-being

of literally millions of Americans will depend.

In this

age of dwindling health resources, it is imperative that

health care services be provided in the most efficient

and effective manner possible.

But cost containment efforts,

if undertaken in haste and without adequate foresight, can

substantially impair the ability of many of our sickest

and most truly needy citizens to receive vitally necessary

health services, and substantially damage, if not destroy,

many of our most valued social institutions, such as urban

hospitals, medical school teaching hospitals, and certainly public hospitals, as well as some rural hospitals that

serve many of the poor.

Since there is a need to reduce the costs of health

programs, you can do so either by reducing services or

by reducing the payment for each unit of service.

We are beginning to learn in New Jersey, as has been

previously demonstrated in Maryland, that well-conceived

state programs to regulate hospital costs can effect con

siderable savings.

Such programs are being implemented without

serious restrictions on the availability of service or the

financial viability of the providers of care, and indeed can

even do much to improve the financial status of well-managed institutions which serve a disproportionately large number of

poor citizens.

The evidence on controlling the rate of increases

in prices in the hospital sector in those states with mandatory

cost containment programs is clear and encouraging.

(See

Attachment A).

New Jersey is one of those states with a mandatory cost

containment program in place.

A budget review per diem

system (Standard Hospital and Rate Evaluation) went into

effect in 1975.

At the outset we believed that to

contain hospital costs, it was necessary to reach the true resource consumer, the physician. Thus, the system had to

be clincial in nature and take into account the differences

in hospital case-mix.

In 1976 work began

on developing a

prospective payment system based on Diagnosis Related Groups

(DRGs).

In 1980, twenty-six of New Jersey's acute care general

hospitals implemented the DRG system.

In 1981, thirty-five

more implemented and by December 1 1982, all 99 acute care

general hospitals in New Jersey had implemented DRGs.

The heart of the New Jersey system is the ability of

the Department of Health to actually calculate the cost

of treating patients for a specific illness and treatment. The patient's bills, medical discharge abstracts and the

hospital cost reports are used to calculate a direct patient

care portion of the rate for each DRG.

The direct patient

care portion (which are those services such as nursing and

ancillary services and medical supplies) is adjusted by factors

for labor market area, urban-rural setting and teaching status.

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