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geographic area before being considered for nationwide application. We feel that all interested parties would benefit from such a procedure.

Another provision addresses hospital costs by encouraging the vol untary elimination of underutilized beds and the closing of facilities or parts thereof. We think this approach in the bill can be beneficial and we support this. We do raise a question as to whether the supporting funds should be taken from patient care funds. This is one of the questions which need to be determined, and the fact that a new program has uncertainties emphasizes the advantages to be gained by initiating the program on a limited or experimental basis, as is the

case here.

Mr. Chairman, we also have recognized the problem of increasing health costs and are seeking solutions. I wish I could tell you now that we have the answers, but we do not. The problems are complex as you know, and we do not believe anybody has complete answers. In an attempt to find solutions, however, we have established our national commission on the costs of medical care. That commission is broadly based and draws its membership from leadership of all sectors: Economics, government, labor, insurance, business, and the public. That commission, which has been meeting since early last year, has been charged with the responsibility to provide the AMA's Board of Trustees with a final report by January 1978, to contain:

One, a description of the health care delivery system;

Two, identification of the factors underlying the rising costs of medical care;

Three, a review and evaluation of existing research of the causes of medical care cost inflation;

Four, an evaluation of the impact of pending or future health care programs on the health care delivery system and medical care costs; Five, recommendations on policies that will contribute to containment of medical expenditures while providing quality medical care to the public; and

Six, recommendations and direction for future research programs. We note, also, that many State medical societies have expressed their concern about rising costs. Some are participating in the formation of local cost commissions.

Now, Mr. Chairman, Dr. Beddingfield will continue with our presentation.

Dr. BEDDINGFIELD. Mr. Chairman, among the changes proposed in S. 1470, there are several applying to physician reimbursement that we believe could have a detrimental effect on the availability and quality of care under these programs.

The first relates to the creation of a special class of practitioners, designated "participating physicians," and we note the beneficial change made in this provision from the earlier provision in S. 3205. Nevertheless, "participating physicians" would still be those who agreed to accept all medicare reimbursement for their services on the basis of assignments. Inducements, such as simplified claims procedures and an "administrative cost savings allowance" of $1 per patient, would be offered to encourage physicians to become "participating physicians."

This proposal is designed to increase the assignment rate by physicians, yet it does not reach the issue of why assignments are not widely accepted. The major deterrent to assignments is the insufficient reimbursement rate under medicare and this proposal does not correct this problem.

Increasing the acceptance of assignments can only be achieved by raising the level of reimbursement to reflect accurately the costs of the service provided. By perpetuating arbitrarily low reimbursement, physician acceptance of assignment in the medicare program will be discouraged. This can only lead to a reduction in the availability of

care to the intended beneficiaries.

If simplified billing procedures can be made available, and we think they can be even without legislation, they should be introduced into the program now and be available to all physicians. It is disheartening to think that administrative aids might be available but are not used. Mr. Chairman, section 10 should be deleted.

Our second area of concern relates to the proposed criteria for determining medicare reasonable charges for physicians' services. Under section 11 of S. 1470, the Secretary would determine statewide prevailing charge levels for each State, based on 50 percent of the charges made for similar services in the State. Prevailing charge levels in a locality would continue to be subject to an economic index, but any increase in the prevailing charge level could not exceed the statewide prevailing charge by more than one-third.

The real effect of this change would be a further restriction on reimbursement levels in the State achieved primarily through a reduction in the already limited increases which would otherwise be allowed under the medicare economic index. We believe that this stifling of proper fee recognition for all physicians would be detrimental to maintaining a proper level of care under the program. This limitation could further aggravate the shifting to program beneficiaries and to private patients of those expenses which should be reimbursed by medicare. Section 11 should not be adopted.

S. 1470 also limits certain physician/hospital arrangements in a manner which we believe would also be detrimental to quality patient care. Those provisions in sections 12 and 40 should not be adopted.

Another area of concern relates to the redefinition of "physician's services" which would exclude those services the physician performs as an educator, an executive, or a researcher and would exclude even patient care services unless "personally performed by or personally directed by a physician" for the benefit of the patient and unless the service is of such a nature that its performance "by a physician is customary and appropriate." This new limitation would apply to all physicians' services under medicare.

We object strongly to this modification. All activities of physicians customarily recognized as part of the physicians' practice should be reimbursable as "physicians' services." A strict application of this language would have dire consequences for proper recognition of, and payment for, all services of physicians under medicare and would attempt to allow HEW to determine what the practice of medicine is. In fact, other provisions of this same section specifically and, in our

opinion, inappropriately delineate specific specialty practice for purposes of medicare. Section 12 should not be adopted.

S. 1470 would also authorize the development by HEW of a system of uniform procedural terminology and of a relative value schedule. We believe this provision is laudable in recognizing and attempting to ameliorate unfavorable restrictions upon the use of such schedules. The RVS, as a guide to recognizing reimbursement, is a beneficial tool when developed by physicians for use in a locality. Several physicians' organizations in fact have sought to develop and use a RVS but have been prevented from doing so by Federal restrictions.

While the RVS as found in S. 1470 attempts to overcome restrictions, we believe it would do so in an undesirable manner. For example, the provision would not recognize any schedule unless developed and approved by the Secretary; medical organization participation is limited; adoption of the RVS by the Secretary would require use only in Federal programs and use in nonfederal programs would be approved but only of that RVS as used in Federal programs and approved by the Secretary. Any RVS would be subject to modification by the Secretary at any time, and there is no requirement that any RVS even be developed. We believe that this provison in S. 1470 is too restrictive. It could lead to increasing difficulty of beneficiaries in obtainng quality care.

As to its provision for developing and establishing a uniform procedural terminology, we believe this too is restrictive and does not properly recognize the widespread acceptability of the system adopted by the profession-current procedural terminology (CPT). Legislation should recognize and provide for use of terminology and relative value schedules as developed by the profession.

Section 15 should be modified to reflect our comments.

A number of proposed amendments are, in our opinion, necessary and proper as changes in medicare-medicaid. Among these are the payment under part B of medicare for certain antigens prepared by an allergist; allowing a return on equity for proprietary hospitals; facilitating payment after the death of a medicare beneficiary for services furnished; and allowing a profit factor under medicaid for skilled nursing and intermediate care facilities.

We are also pleased to see changes that would allow certain rural hospitals to be reimbursed under medicare for the provision of extended care services through the use of inpatient hospital facilities. Patient absences would also be allowed from skilled nursing or intermediate care facilities-allowing flexibility in treatment of extended care patients.

Changes in medicaid administration to allow more timely payment are also salutary. Other beneficial changes relate to reimbursement for ambulance services under medicare and to permissible cost-sharing under medicaid law. We are also gratified to see that restrictions would be placed on the release of confidential financial information on physicians under medicare and medicaid programs.

Notwithstanding these needed changes, the overall thrust of S. 1470 is cost control through curtailment of reimbursement. We again remind the committee that a lowering of reimbursement levels represents

cost savings only to the Government. The actual cost of services does not change, and the difference between actual cost and reimbursed cost usually is made up by higher prices on services to nongovernment patients or in increased cost to the program beneficiary.

It is unrealistic to expect that physicians and institutions can provide services to Federal beneficiaries within the mainstream of medical care if continually reimbursed at inadequate levels.

Mr. Chairman, at this time, we would be pleased to respond to questions from the subcommittee.

Senator TALMADGE. Thank you very much, gentlemen, for a very thoughtful statement.

As you may know, we have had constructive discussions with the college of pathologists concerning alternatives to percentage arrangements. The AMA statement, on page 19, still argues for retention of the percentage arrangements by hospital-paid specialists. You are chairman of the council on legislation. It is not true that the council on legislation has twice voted in the last 3 months, both times by 8 to 1. recommending that the AMA adopt a policy opposing the percentage arrangements?

Dr. BEDDINGFIELD. That statement is not totally accurate. Let me amplify it, if I may; in general, it is an accurate statement.

I think you have to consider the structure of the American Medical Association and the development of its policies. The governing body that sets policies for the AMA is a house of delegates, where the doctor members are elected democratically from the various States on the basis of physician representation. That body convenes at least twice a year to determine the association policy.

The interim governing authority is the board of trustees, chaired by Dr. Holden. There is a system of committees in the AMA, one of which is the council on legislation, which I do chair.

The council on legislation acts in an advisory capacity to the board of trustees and to the house of delegates. Any action that we take does not become association policy until it is favorably acted upon by the board of trustees or house of delegates. In fact, I am reminded very much of the similarity between this great deliberative body here. I understand occasionally recommendations come from the committees of the Senate that are changed somewhat when they get before the entire deliberative body.

The council on legislation has made a continuing study on the issues raised in the medicare and medicaid programs; certainly percentage contracts are one of them. We have made recommendations to the board.

We have appeared before the board. We have discussed this with legal counsel.

We believe that the thrust of this is not so much the structure of payment-whether it is a contract, a percentage contract, a fee for service type thing, the type of revision suggested in your previous bill-what is important is the bottom line, and we have reason to believe now that there are many hospitals, many physicians, many hospital boards of trustees who are perfectly happy with the existing contracts. We do not believe that anybody ought to profit exorbitantly, unnecessarily, off of any type of percentage arrangement.

It is the results that count, not the form that enables you to arrive at those results.

The matter is under continuing study. As a matter of fact, our board of trustees has recently taken some firm action which will be submitted to our ultimate governing body, the house of delegates, later this month in San Francisco which speaks to this issue.

Senator TALMADGE, Your council has recommended against it?

Dr. BEDDINGFIELD. We have submitted recommendations. We have discussed this with the board. It has been sent back to the council. It is under continuing study.

Senator TALMADGE. My question is for Dr. Holden. I recognize that the cost of medical practice increased significantly in the past few years. Are doctors' incomes before taxes declining as a result?

Dr. HOLDEN. Off the top of my head, Mr. Chairman, I would have to say I do not believe so.

Senator TALMADGE. Could you submit a more complete answer for the record?

Dr. HOLDEN. I could not give you a dollar and cents figure on that. Senator TALMADGE. Do you have any information?

Dr. HOLDEN. If you wish we can submit a written answer.

you can

Senator TALMADGE. I would be delighted. What I would like for you information to do, if you can, is submit to this committee any provide as to changes in physicians' pretax income by specialty, urban or rural location, time in practice, over, say the last 5 or 10 years. Dr. HOLDEN. We will be glad to see that this information is given to the committee.

[The following was subsequently received for the record:]

Chicago, Ill., July 6, 1977.

Hon. HERMAN E. TALMADGE, Chairman, Subcommittee on Health, Committee on Finance, U.S. Senate, Washington, D.C.

DEAR SENATOR TALMADGE: Enclosed please find a series of tables showing physicians' net income after expenses from 1970-1974, the latest years for which our figures have been compiled. This information is collected by the AMA's Center for Health Services Research and Development through periodic surveys of physicians.

Net income from medical practice depends on various factors, fees being only one of these. Besides the fees charged by physicians, net income depends upon the quantity of services provided and the expenses incurred in delivering the services. Increases in fees or the quantity of services provided do not, in themselves, ensure that physicians will realize higher net incomes if the costs of conducting medical practice rise more rapidly than either fees or quantity of services provided, or both.

Variations in net income and expenses among specialties and geographical regions cannot be explained on the basis of simple generalizations. The nature of medical practice, control of expenses, regional wage and price levels, and a number of independent factors undoubtedly help to explain the relative levels of expense incurred in the conduct of medical practice. Similarly, the demand for varying services and additional independent factors must be considered in any explanation of net income variations. The data presented here should demonstrate the diversities inherent in any profile of physicians' net income and expenses.


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