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But I think that there has been interest and support outside of our membership for the idea that perhaps this is the time to stop the 'growth" machinery look at the entire concept.

Senator DOLE. I am not critical. I think it is probably good.
Mr. HORTY. You are questioning its political practicalities.
Senator DOLE. I am trying to count your votes.

Mr. HORTY. Maybe now is the correct time to look at the situation. Maybe we do not have any more time, and maybe it is time to look at total reform.

Senator DOLE. I think you have raised a good idea. Certainly you have made a good statement. You have supported your point of view. I do not know who else supports it. I am just trying to find out. Mr. HORTY. Most ideas start out with very little support.

Senator DOLE. I learned that.

Thank you.

Senator TALMADGE. Thank you very much, gentlemen, for your testimony.

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[The prepared statement of Mr. Horty follows:]




1. The National Council of Community Hospitals ("NCCH") welcomes S. 1470 as a constructive effort to face some of the major problems of Medicare-Medicaid reimbursement and as a stimulus to a national debate on how hospitals should be reimbursed under those programs.

2. NCCH, however, opposes enactment of S. 1470 at this time. The most pressing problem is the need to restrain increases in the costs of health care. This should be done immediately. The Administration's bill (S. 1391), however, is inequitable and unconscionably complex. It would add yet another layer of regulatory control. It could well be self-perpetuating and become the control system of the future. This would be chaotic and destructive of the health care delivery system. S. 1470 does not provide immediate cost containment and even in the long run does not attack the fundamental causes for cost increases. NCCH has proposed a program that would effectively attack increases in health care costs immediately and would do so without a complex program or cumbersome bureacracy. NCCH has proposed that there be a freeze for 24 months on any increases in hospitals' labor intensity and a freeze for 24 months on new capital expenditures related to providing health care.

3. NCCH's proposal would be temporary. It would also force consideration by the American public of long-range structural reforms in the health care delivery system. S. 1470 represents one possible avenue of reform, but NCCH believes it does not address the structural changes that are necessary. NCCH believes that long-range reform will go far beyond adjustments to the reasonable cost reimbursement system, upon which S. 1470 focuses.

4. S. 1470 is inconsistent with the fundamental changes NCCH and others believe are necessary in at least three respects:

(a) S. 1470 is premised on the classification and homogenization of hospitals, while true reform should be built on and encourage diversity. (b) S. 1470 would add another layer of bureaucracy and Governmental regulation, but fundamental reform should entail the introduction into the health care delivery system of financial incentives, competition, and other measures in place of Governmental regulation (other than quality assurance).

(c) S. 1470 would encourage hospital-based physicians not to enter into arrangements with hospitals but to bill their patients on a fee for service basis. Long range reform will require various arrangements by which physicians are tied more closely to the institution rather than being encouraged to be independent of it. But S. 1470 will remove from hospitals what little leverage they have to negotiate such arrangements with physicians.


My name is John F. Horty. I am President of the National Council of Community Hospitals, an organization composed of not-for-profit, community hospitals located in 21 States throughout the United States. Our members include some of the best known hospitals in the country. They represent a variety of sizes and types; all are dedicated to providing quality patient care to their communities with the maximum of efficiency. All are deeply dissatisfied with the organization of the current health care delivery system and with the government regulation of it, and all are committed to developing and implementing fundamental reforms of that system. I greatly appreciate, therefore, the opportunity to present the views of NCCH on S. 1470.

NCCH submitted a statement on S. 3205 to this Committee during the last Congress. In that statement, we commended Senator Talmadge and the other sponsors of the Bill for facing some of the most vexatious problems that have arisen in the administration of Medicare and Medicaid programs. We urged that S. 3205 play an important role in provoking a national debate on how hospitals should be reimbursed for the care they provide the beneficiaries of Federal health programs.

We renew those thoughts this year. The sponsors of S. 1470 and their staffs are to be congratulated for tackling some of the hard issues of reimbursement and doing so in a spirit of cooperation with and concern for the health care community-providers and patients alike. However, while we support some of the technical innovations of the bill, we must oppose its enactment at this time. We do not believe this is the proper time to consider S. 1470. We are concerned that concentration of S. 1470 will distract attention from the problems that need immediate action, and may dissipate efforts to develop truly fundamental reforms in the health care delivery system.

The most pressing and immediate need is to restrain increases in the costs of health care. S. 1470 is not an immediately effective cost containment measure. Beyond cost containment, there is wide-spread agreement that structural changes in the health care delivery system must be instituted. S. 1470 provokes debate on the form these reforms should take, but does not envision the fundamental standard changes NCCH believes are necessary and may, I am afraid, only make the task of structural reform more difficult.

The Administration has proposed a cost containment bill and promised a report on fundamental reforms by March 1, 1978. NCCH opposes S. 1391. That bill is inequitable and inordinately complex. It would, in addition, launch a bureaucracy and introduce a mind set that would, we fear, exert considerable pressure to continue the cost containment program beyond the "temporary" duration assumed by the Administration. It might well shelve indefinitely consideration of S. 1470 and other long-range reform measures. Perpetuation of the Administration's cost containment program would be chaotic, and destroy hospitals' financial viability. Even worse, S. 1391 is inconsistent with long-range reforms, and is an obstacle to developing structural changes. It impedes the likelihood that S. 1470 or any other reform measure will be enacted.

NCCH recognizes and endorses the need for immediate cost control measures; at the same time, we believe structural reform is so important it should not be subordinated to a cost containment program that could well become a permanent control system. Nor should cost containment impose another layer of complex, unworkable, and ill-advised regulations on hospitals. NCCH has, therefore, proposed a truly temporary and simple cost containment program that would save approximately the same amount of money as the Administration claims for its program, and would not impede development of true structural reform. At the same time, NCCH's proposal would place hospital boards, management, and medical staff leadership in charge of cost containment and would not replace community management with Governmental bureaucracy. NCCH has suggested that for twenty-four months there be:

1. A freeze on hospitals' labor intensity-the number of FTE's per patient day would be maintained at the current level.

2. A freeze on new capital expenditures by all providers (including physicians).

This freeze would be simple to administer, and it would be effective, resulting in savings in health care expenditure of at least $1,600,000,000 in the first year By the terms of the statute we propose and by the practical realities of such a

stringent moratorium, the freeze would be temporary. At the same time, the freeze would force the American public ot consider what kind of health care delivery system it wishes to implement when the freeze expires. The freeze would give state and local planning agencies the time necessary to develop the various health plans required by the Planning Act.

It is ironic that hospitals should suggest a freeze, but this is an indication of how absurd the current system is and how great is hospitals' need to be given the tools to maintain and contain costs and how strongly held in their belief that fundamental changes in the health care delivery system must be made changes which will be considered and instituted only if there is strong impetus to do so. We have received gratifying support from hospitals and other concerned groups for our proposal. We commend it to your attention. We believe NCCH's proposal warrants your approval, and that it is not inconsistent with the careful consideration of S. 1470 as part of long-range reform.

Our criticisms of S. 1470, set out below, are therefore meant to be constructive and to be considered along with other proposals for reforming the health care delivery system during the 24 months' life of our proposed freeze. Thus, while we cannot endorse S. 1470 in its present form, we believe that your purposes and ours are fundamentally the same. The philosophical difference is that S. 1470 is an effort to reform the existing reimbursement system. We believe it is time to stop, take stock, and evaluate the possibilities of truly radical reform, of developing a new system, rather than reforming the present system. Consideration of S. 3205 last year helped develop NCCH's realization that fundamental reforms are needed. I hope we can persuade you of the need for reforms that go beyond what S. 1470 envisions.

1. S. 1470 is not an effective cost containment measure

S. 1470 is not an immediate cost containment measure. The reimbursement changes proposed by Section 2 of the Bill apparently would not be effective (according to the terms of subsection (d)) until fiscal year 1981-and given the awesome administrative burdens the Bill would entail, we do not believe they could be implemented any more rapidly. The cost of health care is rising too rapidly and is too important a problem to defer cost containment measures for three more years.

More importantly, however, it is difficult to perceive how S. 1470 will be a strong cost-containment measure, whenever it is implemented. The Bill assumes that the cost problem arises from some high-cost and therefore presumptively inefficient hospitals. It is our belief, however, that the real problem is the basic system under which hospitals are forced to operate-which the Bill does, as I discuss below, nothing to rectify.

We do not believe the Bill would effectively save significant amounts of money, for a number of reasons.

First, of course, the Bill applies only to routine operating costs, which account for approximately 50% of a hospital's total costs.

I will discuss later the inappropriateness of attempting to classify hospitals and the irrelevance of pegging reimbursement to the average cost. But even setting those difficulties aside, the mechanism proposed by Section 2 would do little to prevent even routine operating costs from rising. The Bill does not address the fact that the average is a floating average and that it will inevitably float higher because system pressure, not inefficiencies of individual hospitals, cause higher costs. The Bill does not discourage hospitals—regardless of utilization and "profitability" factors--from purchasing expensive new equipment, which can increase routine operating costs. Experience to date has shown that planning cannot be counted upon to stop this expensive proliferation. Nor does the Bill prevent doctors from ordering additional tests or providing new services which may require longer stays and increase routine operating costs. Third, the Bill might encourage some hospitals to raise their costs. Hospitals at the average cost will be encouraged to raise their costs to take advantage of the 120% range offered by the Bill. Those below the average will be encouraged to rise to the average (and from there to 120% of the average). The Bill offers the so-called incentive of permitting hospitals whose routine operating costs are below the average to retain a percentage of that differential. But we can foresee hospitals who would prefer to retain 100% of the differential, rather than a percentage of it, and will offer a sufficient number of improved services so that operating costs rise to the average. By doing so, the hospitals would have the

benefit of the entire amount of the differential between their prior cost and the average cost of the class. They might find these improved services preferable to keeping only part of the differential, which would pay for only a smaller amount of new service.

Fourth, because the proposed system is tied to average routine operating costs per patient day, the Bill introduces incentives to lengthen stays and to increase admissions-factors which can only increase the total health care cost, although lowering it on a unit basis.

Finally, the Bill entails tremendously complex calculations for each hospital and for the Government. The Bill would require determination of the classifications, determination of index rates for the "area" in which each hospital is located, and determination of the increase in the cost of each hospital's mix of goods and services. These calculations cannot be taken out of a reference book. The Bill would require resolution of a number of additional questions: e.g., did the hospital "manipulate" its patient mix or flow; does it provide less than the "normal" range of patient services; do its patients require "a substantially greater intensity of care"; what portion of its routine operating costs are "attributable to the greater intensity"; etc. These are no simple questions. They will have to be resolved by the thousands. Doing so will be expensive.

In addition, the Bill introduces uncontrollable uncertainties, which can only further complicate the problems hospital management must deal with. How, for instance, can a hospital whose fiscal year begins in January budget when it will not be informed of HEW's calculation of its adjusted per diem payment rate until April 1? These complexities can only increase hospital costs and the costs of Medicare-Medicaid administration.

2. S. 1470 does not embody structural reforms

In introducing S. 1470, the Chairman of this Subcommittee referred to the Bill as a long-term solution to the cost containment problem. NCCH is pleased that the Chairman recognizes the need for long-range reform. But we must respectfully note that S. 1470 does not present fundamental long-range reform. S. 1470 makes highly complex adjustments in the present reasonable cost reimbursement system, but it does not change the basic system.

As my statement last year on S. 3205 discussed, there is widespread dissatisfaction, on the part of both the Government and the hospitals, with the reasonable cost reimbursement system. The reasonable cost system contains a number of inherent difficulties:

"Reasonable cost" represents the ultimate in conflict of interest. It permits HEW to determine what is reasonable cost for the services it is purchasing. Not surprisingly, we have observed in the past few years numerous occasions on which HEW has restricted what is "reasonable," not because a service was unreasonable or unnecessary or because the cost of the service actually was unreasonable as a financial matter, but only because the Government sought ways to reduce Federal expenditures for health care. The Government has transformed a system that was intended and designed to prevent hospitals from overcharging the Government into a mechanism for underreimbursing them.

Reasonable cost entails a vast army of Federally employed and Federally activated accountants whose sole mandate is to save the Federal dollar without consideration of the effect on the provision or quality of care. Reasonable cost requires expensive and time-consuming audit of the thousands of participating hospitals.

Reasonable cost makes no allowance for the fact that even not-for-profit hospitals need a "profit" to provide them with working capital and discretionary funds. Reasonable cost subjects hospitals to a process of review and second-guessing years after the services have been performed, and after the reimbursement has been approved and paid by the Government itself.

As a result of these and other problems with the reasonable cost system of reimbursement, NCCH determined to develop a more effective and fairer method of reimbursement. It soon recognized that the reimbursement system cannot be changed without changing the structure of the delivery system.

S. 1470 does not approach those needed changes. Classifying hospitals, pegging reimbursement to certain arbitrability selected levels, and indexing costs represent fine tunings of the reasonable cost system. They do not address the problems inherent in any system of reimbursement based on reasonable costs, and they do not point the way to a new delivery system. Indeed, a larger number of functionaries, both in hospitals and the Government, would be required to administer the pro

posed system. As discussed above, the Bill introduces a host of complex calculations and determinations. The inevitable result will be additional phalanxes of accounts, economists, statisticians, systems analysts, lawyers, and associated personnel.

Nor does S. 1470 prevent the Government from continuing to cut back on what it is willing to recognize as a reasonable cost. Indeed, S. 1470 would make those unwarranted determinations applicable to all hospitals (by reducing the average). And S. 1470 would give the Government yet another tool to assert its selfinterest: reimbursement pegged at the average of a class and limited to 120% of the average could always be lowered by changing those arbitrary standards. We also note that S. 1470 would exacerbate the reasonable cost system in another way. At the present time, hospitals that are not reimbursed by MedicareMedicaid for the full and fair cost of caring for these Federal beneficiaries are forced to transfer these costs to private patients. S. 1470 (Section 2(f) (1)) would prohibit such a transfer. This can only result in impairing the financial stability of hospitals or forcing them to eliminate the services they are now providing Federal beneficiaries for which they are not fully reimbursed. We would think a more just provision would be one that required the Federal Government to pay the full cost of hospital services its beneficiaries receive.

S. 1470 does not do anything for a not-for-profit hospital's need for a "profit." The incentive payment in the Bill is not a profit. As I mentioned above, hospitals could well decide they would be in a better position by increasing their expenditures to the permitted average than by keeping a small percentage of what they can save. Also, the money made available by this provision would go to the hospital offering the least services (and whose routine operating costs, therefore, are below the average)—while the more active, more innovative hospital is deprived of discretionary funds. All hospitals need an operating margin. 3. S. 1470 will in fact impede necessary structural reforms.

NCCH believes that long-range structural reforms must contain at least the following elements: financial incentives for providers to restrain health care costs; management discretion, including the opportunity to benefit from success and the obligation to bear the burdens of failure; mechanisms that require both health care providers and patients to consider the cost as well as the benefit of any particular health service; increased control by health care institutions of the source of their "business"; increased competition among health care institutions to serve patients with better quality of care at lower cost; recognition of the benefits of diversity among health care providers; and greatly reduced Government control over the management of a health care institution except in the area of quality assurance.

I believe these principles will find widespread acceptance by the health care field, the Government, the medical profession, and patients. We believe that there is sufficient consensus as to the outlines of structural reform that we should be certain that no measures are implemented which would be inconsistent with these reforms or make their implementation more difficult. It is our confidence that reform is possible that made us propose the 24-month freeze.

S. 1470, NCCH believes, would hold back long-range reforms. There are three major premises of the Bill that we believe are inconsistent with true structural reform.

a. Hospitals should not and cannot be classified but S. 1470 would promote their arbitrary classification

A basic premise of S. 1470, I fear, is that diversity among hospitals should be discouraged, and if possible, eliminated. The Bill would force hospitals into grossly determined classifications, and set their reimbursement on the basis of the costs of other hospitals who happen to be in the same classification. This approach totally ignores the ways in which hospitals of the same "type" and "size" (the two criteria employed by Section 2) may be different.

We do not believe that it is possible to categorize hospitals. They are far too diverse to permit classification, except by a complex of matrixes that is so sophisticated that it is yet to be developed. HEW's efforts in this direction, pursuant to Section 1861 (v)(1)(A) of the Act, have been grossly simplistic and have unfairly lumped disparate hospitals together. We have no reason to believe that classifications made under Section 2 would be any different.

We doubt that classification of hospitals would work even with the most sophisticated system and we believe it is a false way of handling reimbursement.

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