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audit what hospitals do, make them justify on a case-by-case basis on payments received?

Secretary CALIFANO. The difficulty is in finding a way between throwing money away because you are inefficient and you are not carefully enough monitoring what the taxpayer's money is being spent on, and trying to develop a system where we can delegate the fiscal responsibility, and say to somebody, "you are the expert here." This dilemma runs through every program we have got.

We have to find ways, very candidly, over the long haul, over lots of programs, to effectively audit on a sample basis, the way the IRS does, and get out of the business of sitting over everybody's shoulders with a green eyeshade trying to figure out whether when he added two and two and got five he was defrauding us or just made a mistake.

Senator DANFORTH. Your concept is, instead of the present system of paying a number of dollars for, say, an appendectomy, we would be in the business of paying a hospital a number of dollars for caring for people who need to be cared for?

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Secretary CALIFANO. We would, in a sense. This would be selfenforcing in the sense that the third party payors would also restrict their payments to this point. There are provisions in the administration's bill, where we would make public, for example through the health systems agencies, the cost of hospital services or stays in hospitals-putting a little sunshine in where there was darkness, putting in a little of the free enterprise system.

There is at this time an utter lack of competition. I realize we are not selling shoes or automobiles, but the fact is, another aspect of the current reimbursement mechanism, Senator, is that the person who is getting the service is not paying for the service. In 90 percent of the cases, the patient does not pick the service. The doctor tells him what service he needs or his mother needs or his child needs and he does not pick where he is going to get it. The doctor says, go to this hospital; that is the hospital that I am associated with. I would like you to go here.

So there is no incentive of any kind, as there are in other aspects of American life, to be efficient. Within that context, the patient, the purchaser, really does not have any incentive. Either his employer is picking up the tab for his health insurance, or he does not notice it when he pays each month, or medicare or medicaid is picking up that tab.

We had hoped

Senator DANFORTH. The worst kind of disincentive to economy is to tell the hospital, we do not care what you do. We are going to pay


Secretary CALIFANO. Right.

Senator DANFORTH. We are presently in the business, are we not, of financing capital construction and financing the acquisition of equipment.

Secretary CALIFANO. Yes, we are, Senator.

Senator DANFORTH. By reimbursing for interest paid and depreciation.

Secretary CALIFANO. We do that, and also we build some hospitals. We also finance them. We also, through HUD, provide guarantees. Senator TALMADGE. May I interrupt briefly?


There is a record vote in the Senate. How long do you intend to interrogate?

Senator DANFORTH. One minute.

Senator TALMADGE. Senator Dole?

Senator DOLE. I have one question.

Senator TALMADGE. May I make this suggestion, then?

I will ask Senator Dole to preside; I will go vote. Senator Danforth can complete his interrogation of the Secretary, you complete yours. I will return immediately from the Senator floor and we will continue the hearings.

Is that agreeable?

Thank you very much, Mr. Secretary. If you will excuse me at this point.

Senator DANFORTH. Mr. Secretary, do you think we should continue to be in the business of paying for building and equipment?

Secretary CALIFANO. In very limited circumstances. I do not think by and large we should be in the business of increasing hospital beds. That makes no sense at all, because we are paying for it. We just keep paying for all those idle beds.

I do think there may be situations in which there might be two or three old hospitals which can be renovated. The VA, for example, out on the west coast is building, but they are combining a couple of hospitals, actually reducing the number of beds and hopefully putting in a more efficient facility.

We have, in our bill, a $2.5 million capital expenditure cap. I hope that will provide some incentive to hold this down. I think that it is rare that we should be in the business of building any more hospital beds.

Senator DANFORTH. The alternative to the cap, of course, is to say, we do not care what you do. We are not going to pay you for it.

Secretary CALIFANO. There is enough local money out there. What we would have to do is say, not only are we not going to pay you for it, but if you go to that hospital you are not going to get medicare and medicaid payments.

I think we could end up with an overly complicated system if we get into the business that where there is a new wing of the hospital, we would ask how much does that wing add to the cost?

That is the problem.

Senator DOLE. Mr. Secretary, maybe you can supply an answer to this question. It is regarding the need for physician practice in low shortage areas found in section 11.

There was a section in S. 3205 last year, at that time HEW was not prepared to respond to that. If there are any comments or suggestions on that provision, I think it would be helpful to have it for the record. I do not think you have responded to it.

Secretary CALIFANO. I will provide it for the record.

I would note generally, Senator, that I realize you have been, and are, a proponent for increasing physician services in rural areas. We agree with you. We recognize that need. The President has proposed legislation which would bring within the gambit of medicare payments physician extenders and nurses.

Basically, we have increased, and hopefully will soon have in place and ready to go, our National Health Service Corps and our financial

aid for medical students to try to encourage more and more of them to go into rural areas.

It is important to do this, and we will look at this issue and respond constructively.

Senator DOLE. Now, throughout your statement you describe the lack of necessary methodology for comparison of hospitals and hospital costs. If that is the case, how long do you think that it will take to develop the necessary expertise?

Hospitals are very concerned. It is not 9 percent a year, sort of a ratcheting effect, as I underestand it, a very complicated formula that may be less than 9 percent in the second year.

I guess the second part of that question would be, do you intend, with your so-called short interim controls, to apply them indefinitely until you are satisfied that you have the expertise?

Secretary CALIFANO. We would like it to apply until we have in place a more sophisticated and permanent system. I think that we should be working and we are, I hope, working on getting the kinds of information, such as wage area rates, or some simple but fair system of determining what bed mixes there are in particular hospitals, or some fair way of figuring out what are teaching hospitals. There are between 1,100 and 2,000 teaching hospitals in this country. Some teach one course. Some are full-blown medical school-related hospitals like Harvard, Johns Hopkins, or Georgetown.

There are also questions of accounting systems, questions on things like that.

Ours is a transitional proposal. I think we can do better with a more permanent system.

The whole thing is not unrelated to what kind of a system of national health insurance over what period of time this Nation ultimately decides to adopt.

Senator DOLE. Do you have any notion at this time as to how long it will take?

Secretary CALIFANO. To get some of the information here, Senator Talmadge indicated that there was a feeling that the wage area rates, for example, could be in place by 1981. I will be happy to submit our best estimate on that for this committee for the record.

[The following was subsequently supplied for the record:]

It is anticipated that adequate data to classify hospitals in a desirable manner will be available as follows:

1. area wage data: 1 year.

2. teaching hospital/medical center hospital: 1 year.

3. bedmix/casemix: 2-4 years.

4. Uniform accounting system implementation : 2 years.

The effort of implementing a classification system includes not only resolving any data availability problems but also determining how the data should be employed in reimbursing hospitals. Research is continuing in each of the areas above.

An area wage index may be developed from each of several sources, sevral labor categories, and several levels of aggregation. A report presenting the alternatives will be prepared by September 1, 1977. The teaching hospital definition most commonly used in HCFA research has been any short-term general community hospital with (1) a ratio of interns and residents per bed greater than or equal to 0.10 and (2) a major medical school affiliation listed in the Medicare Provider of Services File. Regional Offices of SSA should be able to certify hospitals as medical center hospitals under this definition. No more than 400 hos

pitals are estimated to be designated medical center hospitals under this definition. The acceptability of this definition has yet to be tested.

The bedmix/casemix measures will take 2 years to develop due to the current lack of experience in defining hospital casemix. Developing a reliable casemix index which measures the degree to which hospitals care for severely ill, resource-intensive patients will require advancing the state of the art. Three projects are being initiated in HCFA to test the validity and feasibility of using Medicare casemix information to infer generally the casemix difficulty of the entire hospital patient load. The relation between the best casemix measure (s) and hospital care costs will then be examined. A data collection system whereby every hospital classified must reveal the number of discharges and patient days by discharge diagnosis plus additional patient information such as average age by diagnosis number or surgical procedure performed, etc., may be considered. A uniform accounting system has been developed by HCFA and could be published in the Federal Register, after responses from interested parties and subsequent revision, six months from a "go ahead" date. This system will solve many problems associated with hospitals having different accounting systems if implemented throughout every hospital.

Senator DOLE. I do not want to belabor the Comptroller General's point. I do not intend to imply any criticism of what you have been able to do with the reorganization, but I think that it would be helpful, and we will pursue the Comptroller General route, just as a matter of being totally objective and thorough, but if he should make recommendations, I want to get back to the question, can we expect some action on those?

Secretary CALIFANO. I will act upon any good recommendation that he makes.

Senator DOLE. I do not always agree with the Comptroller General, either.

Secretary CALIFANO. Obviously I have to reserve the right and the responsibility to look at them carefully in the context. From my vantagepoint, people can disagree about how best to put an organization together, but as I said, I have found Mr. Staats and his people in this area and other areas related to HEW to be very good. They provided a lot of helpful suggestions to me the first few weeks I was in office. I would expect to work closely with him, and I would be happy to have him look at this or any other part of the reorganization. They provide a very important service indeed. They are my model for what I would like to see my Inspector General's office be. I would like to see that be the internal control for HEW.

Senator DOLE. I think they do do, for the most part, an excellent job.

Senator Talmadge touched on another matter that physicians are concerned about. You referred in your statement to developing controls on the costs of physicians' service. I think you may have addressed that indirectly in response to one of Senator Talmadge's questions.

Could you share with us any specific, or even general ideas that you have along these lines?

Secretary CALIFANO. We really do not have any specific ideas. As I said, there was a proposal suggested earlier in the year to the President and to me. We rejected the proposal at that time because we did not think we knew enough about it to make a fair judgment as far as doctors were concerned.

I think the only fair thing for me to say is that we just do not know yet how to deal with the problem.

Senator DOLE. I understand, Mr. Secretary, that Senator Talmadge has no further questions and I have no further questions.

We deeply appreciate your apperance. You may be excused. I will go over and vote.

We will stand in recess until Senator Talmadge returns. I look forward to seeing you again.

Secretary CALIFANO. I am sure that you will, Senator.

[The prepared statement of Secretary Califano follows:]


Mr. Chairman, I appreciate the opportunity to appear before this distinguished Subcommittee on Health to discuss S. 1470, the proposed Medicare-Medicaid Administrative and Reimbursement Reform Act.

By introducing this legislation, you continue the Finance Committee's tradition as thoughtful critic and powerful force for reform in this nation's health care system.

Your Committee's concern with development of a comprehensive health care policy for all Americans-especially for those who are poor, or aged or disableddates to the 1930's and the original maternal and child health program.

Since then, you have been instrumental in health care innovation and policymaking with such measures as vendor payment programs supporting medical assistance to the poor and aged in the 1950's and early 1960's; the development and expansion of Medicare and Medicaid; and the design of other landmark health programs including Professional Standards Review Organizations.

Last session, the Finance Committee, through this Subcommittee, again provided leadership in identifying serious problems and devising needed reforms in the nation's health care system.

In less than six months in office, we in the new Administration have moved to support or to implement the most urgent of those reforms.

First, in the 94th Congress, you introduced legislation to remedy serious problems created by fraud and abuse in the Medicare and Medicaid programs. You recognized that fiscal integrity and sound management practices must characterize these programs if they are to enjoy the trust and cinfidence of the American people.

This year the fraud and abuse legislation has been introduced separately in both Houses of Congress, with strong endorsements from the President and from me. That legislation should soon pass the House and we look forward to the opportunity to urge its passage in the Senate.

Second, your health care reform legislation in the 94th Congress proposed establishment of an Inspector General for Health within the Department of Health, Education, and Welfare. That proposal-expanded so that the jurisdiction of the Inspector General includes all programs of HEW-became law last year, and we have acted quickly to implement it. The new Inspector General, Tom Morris, and Charles Ruff are men of superb qualifications who have been moving swiftly to organize this office and to begin the vital work of reducing fraud and abuse in HEW's programs, especially in the Department's health programs.

Third, you have proposed, both last session and in the present MedicareMedicaid Administrative and Reimbursement Reform Act, that the health care financing functions of the Department be consolidated into a single administrative structure.

President Carter endorsed this concept early in the presidential campaign. As you know, less than sixty days after assuming office, I effected this much needed reorganization through administrative action. As I noted at the time of the reorganization, we are deeply indebted to the work of this Subcommittee, and to the illuminating hearings that you held last year on the problems of health care financing.

We have high expectations for this element of the Department's reorganization. The Health Care Financing Administration should significantly improve the effectiveness, efficiency and responsiveness of Medicare and Medicaid by coordinating the policy and practices of the two programs and by eliminating, or reducing, unnecessary and costly duplication in their operations. By joining

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