Therefore, I see no reason why there should be any ceiling on wage increases in this industry, when we all agree that this is not the route to go for in the economy as a whole and there is no reason why these workers should be singled out for that kind of discrimination.

Senator TALMADGE. You seem to support limits on hospital revenues and controls on payments for doctors, and at the same time urge a blank check for any or all wage increases in nonsupervisory hospital employees.

Mr. SEIDMAN. Mr. Chairman, we might have a more difficult position to uphold if, in fact, the increase in hospital wages had been largely responsible for the tremendous escalation of hospital costs. But this is not true at all. There is no reason to think that it would be.

We do think that there should be controls on those elements of hospital costs which have been responsible for the inflation in cost as well as other sectors of the health care economy that have been responsible. We see no evidence whatsoever that these workers, low-paid workers, have been responsible for this escalation. We see no reason why a ceiling should be placed on them when nobody that I know of is proposing to do anything similar in any other industry.

Senator TALMADGE. We were told yesterday by a witness that the wage levels of hospital employees have not risen significantly in the past and thus has not contributed significantly to the rise in hospital costs. You said substantially the same thing today.

What percentage have salaries risen generally for health care workers say in the last 5 or 6 years?

Mr. SEIDMAN. We have a table attached to our testimony, appendix A, which gives average hourly wages for nonsupervisory employees in hospitals. The latest year is 1976: $4.18 as compared with $4.36 for all service workers and $4.87 for total private employees.

You can see how much lower hospital wages are on the average. With respect to your question, 5 years earlier, 1971, when they were $2.96-I cannot do the figures in my head, Mr. Chairman. We have some figures, however, in our table which do not deal specifically with the questions that you ask but they give you some idea of what has been happening. We think it is probable that wages have been rising somewhat higher in hospitals which have been organized by unions than in nonunion hospitals. We think that is the way it should be; that is why workers join unions. But even organized hospitals have been unable to keep up with the cost of living.

In 1975, the median negotiated wage increase amounted to 7.7 percent while the cost of living increased by 9.1 percent, and in 1976 the average negotiated increase amounted to 6.4 percent while the cost of living increased 5.8 percent.

If you take the 2-year period, 1975-76, there was a drop in real wages for hospital workers over that period.

Senator TALMADGE. I believe it was two compared with seven.
Mr. SEIDMAN. Yes.

Senator TALMADGE. Fifty to sixty percent, is that about right? Mr. SEIDMAN. No. That would be about 40 percent. It is 2.96 to 4.18. Senator TALMADGE. Is one of the problems that some hospitals have too many employees?

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Mr. SEIDMAN. They may have too many employees in one sense; that is, that they have too many beds to begin with and they have patients who are in hospitals unnecessarily when they should be getting ambulatory care. Therefore, they may have too many employees because they have too many beds and patients in hospitals that should not be in hospitals.

This is a question of management and does not relate to the workers in any way.

Senator TALMADGE. Senator Dole?

Senator DOLE. I am sorry I missed the testimony; I was attending a breakfast for Kansas. I apologize.

Senator TALMADGE. Thank you very much, Mr. Seidman, for a very interesting statement.

[The prepared statement of Mr. Seidman follows:]

STATEMENT OF BERT SEIDMAN, DIRECTOR, Department OF SOCIAL SECURITY, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

The AFL-CIO appreciates the opportunity to appear before this subcommittee today to present our views with respect to S. 1470, the Medicare-Medicaid Administrative and Reimbursement Reform Act introduced by the distinguished Chairman of this subcommittee.

The time is ripe for Congress to take action to control the unconscionable escalation in medical care costs. President Carter's health message to Congress estimated that medical care costs will be $160 billion in 1977 and will amount to close to nine percent of the Gross National Product. Compare this to Canada which has a social insurance health program which provides for its entire population comprehensive benefits without any deductibles for only seven percent of its GNP. Canada's costs are lower because they have a single social insurance program rather than the fragmented private insurance we have in the United States.

The average cost per day of a hospital stay has been increasing at a rate of about double the rate of increase of the Consumer Price Index. According to the Council on Wage and Price Stability, the average per day of a hospital confinement was $191 in September 1976. This represents an 18.4 percent increase over the same month in the previous year.

The impact of these escalating costs on the federal budget is substantial. In fiscal year 1976, 42 percent of health expenditures came from public funds. Federal, state and local government payments for health care totaled $58.8 billion. Total federal payments for health care, including Veterans Administration and Department of Defense hospitals, construction and research, came to $39.9 billion. State and local government outlays for health were $19.0 billion and tax subsidies for health purposes amounted, conservatively, to $5.6 billion. The combination of direct and indirect federal, state and local government payments to the health industry makes this one of the most heavily supported industries in the country. The total annual subsidy to this industry amounts to $64.4 billion.

It is disturbing that in the ten years that have elapsed since Medicare and Medicaid were implemented, Congress has yet to take effective action to control health care costs. The AFL-CIO, therefore, congratulates you, Mr. Chairman, on your initiative in introducing S. 1470.

COMPREHENSIVE NATIONAL HEALTH INSURANCE

It is our opinion that there is no way to control these escalating costs until Congress enacts a comprehensive national health insurance program such as the Health Security Bill (S. 3) which channels all funds through a single government agency with the power to review hospital budgets and negotiate with them as to the amount of their total reimbursement. The give and take of such negotiations is far more flexible and effective than regulations. Similarly, medical societies should have the opportunity to negotiate fee schedules with the responsible government agency and doctors should be required to accept

negotiated fees in full payment for services rendered. Doctors could participate or not participate in the program, but nonparticipating physicians would have to confine their practices to the few wealthy patients who could afford to pay their excessive fees.

Briefly this is how the Health Security Bill (S. 3) would work. The Health Security Bill would establish a national health expenditures budget comprised of Social Security taxes earmarked for health matched by federal general revenues. The only way in which providers could increase their revenue faster than incomes of the population as a whole would be to come before the Senate Finance Committee and the House Ways and Means Committee and justify an increase in taxes. Thus, Congress would decide what percentage of the gross national product should be allocated for health care.

As it is now, the government, Blue Cross and insurance companies are simply issuing blank checks for the providers virtually to fill in as they please.

The budgeting of health expenditures as provided by Health Security would not alter the present ownership of hospitals or the private practice of medicine. The delivery of health services would remain in the private sector.

The national budget for health expenditures would be a set amount in any given year. This national budget would be allocated to health regions and in turn to health services areas. The allocation would be based primarily, on two factors:

Expenditures for the prior year adjusted for inflation and productivity;
The need for health services.

For example, for physician services over-doctored health service areas would receive a somewhat lower budget, on a per capita basis, than under-doctored areas, clearly an incentive for better geographical distribution of physicians. Similar considerations would apply to facilities.

Because of built-in cost controls in a budgeting system, detailed regulation is not needed to conrtol costs. Essentially, providers would have far more freedom to experiment and innovate under a budgetary system than under a regulatory system. Moreover, the budget approach provides incentives for physicians to become involved in better organizational arrangements for the delivery of care.

In a budgeted system of cost control, due weight would be given to historical costs. That is, due weight would be given to the prevailing pattern of hospital and institutional charges. Due weight would also be given to current fees for physicians and other provider services. However, allocations for institutional and practitioner services would be adjusted to take into account the need of patients for medical care.

This is the approach of the Health Security Bill (S. 3).

It should be emphasized that these decisions with respect to the allocation of funds for health services would not be made unilaterally by the Federal government. The Health Security bill provides for the allocation of money in conformity with state and local planning. The Health Systems Agencies (HSAs), the State Health Planning and Development Agencies (SHPDAs) and the state advisory councils and the Statewide Health Coordinating Councils (SHCCs) have been organized under the National Health Planning and Resources Development Act of 1974. This law provides for consumer, governmental and provider participation in the planning process. Thus, decisions with respect to resource allocation would not be dictated by the federal government as is so often alleged by the opponents of Health Security.

HEALTH SECURITY LEAST COSTLY OF ALL NHI PROPOSALS

The escalating federal expenditures for health services should bring into perspective the cost of the Health Security Program. Health Security has been the object of a propaganda attack that it costs too much. The fact is that Health Security over the long haul would be the least expensive of all national health insurance proposals. With Health Security, the national health expenditures budget could be held at or below the present 8.6 percent of the Gross National Product. It should be noted that this year Canada enacted a law which will relate federal payments to the provinces for health services to a constant percentage of the Canadian GNP. Canada has put the providers of care on notice that Canada will pay seven percent of its GNP for health care and

no more.

There is no question that the health industry can absorb virtually unlimited amounts of money. One unique aspect of medical care is the degree to which

physicians control the demand for health services. Yet, physicians seldom think about the cost of the care they engender.

After the first contact with the physician, which is initiated by the patient, the doctor establishes the patient's course of treatment. The doctor advises the patient when he or she should come back for a follow-up office visit-next week, in 10 days or next month. The doctor orders the lab tests and X-rays. If the doctor deems it advisable, he or she hospitalizes the patient and decides when the patient can be discharged. The doctor writes the prescription, usually for costly trade name drugs, and gives instructions to interns, residents and nurses.

Another unique aspect of medical care is that the training of a physician emphasizes that any medical expense is justified. Thus, marginal improvements in the quality of care, even if achieved at substantial cost, can always be supported.

S. 1470

Considering the magnitude of the problem, S. 1470 is a step in the right direction but it is our view that it does not go far enought. The bill's principal thrust is in two directions: Section 2 would establish a single prospective reimbursement system for hospitals; and Section 10 would attempt to induce physicians to accept usual and customary fees under Medicare.

There are numerous other provisions, but we propose to limit our comments to the following sections:

Section 4. Federal participation in hospital capital expenditures.
Section 12. Hospital-associated physicians.

Section 14. Payments on behalf of deceased individuals.

Section 22. Medicaid certification and approval of skilled nursing and intermediate care facilities.

Sec. 30. Establishment of Health Care Financing Administration.

Sec. 33. Repeal of Section 1867.

Sec. 44. Disclosure of aggregate payments to physicians.

Sec. 46. Rate of return on net equity for for-profit hospitals.

S. 1470 is a very complex bill which would essentially rely on detailed regulation. Its implementation would require a large number of investigators and enforcers. Unless sufficient funds were provided to police the providers there would, undoubtedly, be widespread evasion of its provisions.

HOSPITAL REIMBURSEMENT

The major thrust of the bill would be to establish an incentive reimbursement method rewarding hospitals whose routine operating costs are less than average and penalizing hospitals whose routine operating costs are more than 20 percent above average. While some high cost hospitals would have to become more efficient, or be phased out, the upward trend of average hospital costs would continue because the organization of hospital services would not be altered and the growth in utilization of new services and technology would continue unabated.

To be effective, a prospective hospital reimbursement scheme must deal with three elements: (1) intensity of care, (2) utilization and (3) routine operating costs. By focusing on only one of the above elements, such as routine operating costs, every hospital can too easily increase its revenues by expanding the other two elements.

The recent staff report of the Council on Wage and Price Stability, "The Rapid Rise of Hospital Costs" shows that the intensity of care has been the primary cause of hospital cost inflation.

A study sponsored by the National Planning Association, "Technological Diffusion in the Hospital Sector" shows that intensive care units (ICUs) in hospitals were relatively rare in 1958 when nine percent of all community hospitals reported them. By 1974 virtually all hospitals with 200 or more beds reported having ICUs, 85 percent of those with 100-199 beds had them and 40 percent of those with fewer than 100 beds had them. We would suggest that the great majority of ICUs in hospitals with less than 200 beds are an unnecessary expense if they are within one hour of a medical center or large hospital by motor or air ambulance.

The study reported similar problems with respect to therapeutic radiation equipment and open heart surgery units. Not covered in the study is the proliferation of CAT (computerized axial tomography) scanners. No doubt the

CAT scanners are a useful diagnostic tool but must every hospital have one? Once purchased at a cost of $300,000-$500,000 they will have to be amortized.

It is important to recognize that new technology and new equipment is invariably purchased without evaluation as to their effectiveness. One study in Britain found that survival rates for heart attack victims were at least as good for patients cared for at home as for those who received intensive care.

Yet, we find very little in S. 1470 which addresses the problem of proliferation of medical technology which is never evaluated in terms of life saving potential nor cost effectiveness. In fact, S. 1470 would invite escalation of these costs.

In the first place, the bill relies on the health planning legislation to control capital expenditures. This legislation has been in effect for ten years now, and there is not a shed of evidence that planning has been able to control capital expenditures for new technology. With the passage of Public Law 93-641, Congress has given planning agencies now powers. Hopefully, these new powers will curtail such capital expenditures. However, we are skeptical. In the first place a minimum representation of providers on Health Systems Agencies Planning Bodies must be from 33 to 49 percent. Their pocketbooks are directly affected by planning decisions. but the pocketbooks of consumers are only indirectly and remotely affected by such decisions. At any given meeting, therefore, the majority of those in attendance will likely be providers.

Secondly, the ancillary service costs would continue to be uncontrolled so that medical technologists required for the operation of new equipment would be exempt from the prospective reimbursement provisions of S. 1470.

Third, section 2(aa)(4)(F) states: "If a hospital satisfactorily demonstrates to the Secretary that, in the aggregate, its patients require a substantially greater intensity of care than is generally provided by the other hospitals in the same category, resulting in unusually greater routine operating costs, then the adjusted per diem payment rate shall not apply to that portion of the hospital's routine operating costs attributed to the greater intensiy of care required.”

What patients require with respect to intensity of care is a medical decision and there is a community of interest between the medical staff and the hospital administrator with respect to increasing the intensity of care.

Fourth, the incentive reimbursement provisions of the bill specifically exclude "direct personnel and supply costs of hospital education and training programs" as well as the "costs of interns, residents and non-administrative physicians." Thus, there is an incentive for every hospital to institute, if it doesn't have one, an educational and training program.

It is our conclusion that S. 1470 would accelerate the trend to more and more intensive care-the primary cause for hospital cost inflation.

S. 1470 does not have any provision that would stop hospitals from increasing utilization, the second most important factor in controlling hospital costs. As we understand the bill, the Secretary would be required to establish a classification system for short-term general hospitals based on the number of beds in the hospital.

The "routine operating costs" of all the hospitals in each category would be averaged. This average cost would become the hospital's per diem payment rate for "routine operating costs" for services to patients covered by Medicare and Medicaid. After the per diem payment rate had been thus established, therefore, any increases in hospital utilization would result in lower costs and a larger surplus which would have to be shared with the government. This would be a built-in incentive for hospitals to increase utilization for Medicare and Medicaid patients. Thus utilization, the second largest factor responsible for rising hospital costs, would be encouraged.

Moreover, hospital administrators are not going to lock favorably upon returning one-half of any savings back to the government. They would have, on the contrary, an incentive to increase the intensity of care by, for example, purchasing a CAT scanner or some other expensive equipment. Hospital administrators are in no position to resist the demands of the medical staff because their customers are doctors, not patients. The transfer of the affiliation of even one doctor to another hospital would result in a substantial loss in hospital

revenues.

While S. 1470 does little to control the most inflationary elements of hospital costs, it would control the wages of hospital workers. It is the position of the AFL-CIO that the wages of nonsupervisory employees must be determined by free collective bargaining where such employees are organized.