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Mr. Chairman and distinguished members of this subcommittee, I am Kenneth T. Wessner, President and Chief Executive Officer of ServiceMaster Industries Inc.; and I am pleased to testify before you today with respect to S. 1470, the "Medicare-Medicaid Administrative and Reimbursement Reform Act". Having spent some time earlier this year with the distinbuished senior Senator from Georgia, I am pleased that he has introduced the legislative package before us today with such an outstanding list of co-sponsors from among his colleagues, and with considerable support from various sectors of the health care field. The support which he has garnered is not only a tribute to the Chairman's prestige, but also reflects admirably on the substantive provisions and concepts embodied in the proposed legislation.


At the outset of my remarks and prior to any discussion of S. 1470 or the Administration's bill, I would like to make some comments about ServiceMaster and tell you why we are here today. This year marks our company's 30th anniversary as a corporation. During this period of time, ServiceMaster has become the nation's leading supplier of contract housekeeping, laundry and plant operations and maintenance management services to hospitals. Currently, 577 hospitals located in various parts of the country are being served with one or more of our services. Because we are paid by the respective hospitals to provide better services at lower costs than they can otherwise obtain, we have considerable experience with cost containment techniques and we share the Chairman's goals and those of the Administration in seeking to bring hospital costs within reasonable limits.

Approximately 92 percent of our company's net operating revenues are contributed by our Hospital Service Divisions. These Divisions furnish specialized managerial skills, equipment, and cleaning and maintenance chemicals for hospital housekeeping, laundry and maintenance. Generally speaking, the hospitals in question enter into individual contracts with ServiceMaster for a two-year period with provisions for yearly renewals and with a variety of services being offered from which the individual hospitals may select some or all. Most of the hospitals receive housekeeping management services, while approximately 22 percent receive laundry management services and approximately 20 percent are being served by our plant operations and maintenance management programs. In addition, ServiceMaster has two new programs involving clinical equipment maintenance and materials management which are now operative in several hospitals in various parts of the country. While the health care field is demanding increased services, higher degrees of care and the implementation of cost containment techniques, ServiceMaster is meeting these needs and is providing a clean, safe environment for more hospital patients each year.

During the past decade, health care expenditures increased from $42 billion to an estimated $142 billion, while hospital expenditures alone rose from $14 billion to an estimated $57 billion. As this nation's hospital bill has risen, hospital administrators have turned increasingly to ServiceMaster and others to solve cost prolems which have been eroding valuable administrative time and hospital resources alike. In the fields of housekeeping, plant operations and maintenance, clinical equipment maintenance, laundry and linen, and materials management, ServiceMaster has built an enviable record and reputation. At the same time, the people at ServiceMaster have become an integral part of each hospital's team by providing services programmed specifically for the hospital's needs. In this process, we have not looked upon hospitals merely as buildings to be cleaned, but rather as special kinds of institutions to be served where the ultimate customer is the patient.


When one thinks of housekeeping services today, it is not fair or accurate to think only in terms of clean appearances. It is the thorough cleaning and maintenance of a highly sanitary environment by each of our employees-whether the environment consists of an operating room or the patient's room-that contributes ultimately to helping patients get well. The daily services undertaken

by ServiceMaster are performed principally by hospital employees themselves who are trained and supervised by managers employed by ServiceMaster. For example, in a typical situation, ServiceMaster's resident coordinating manager oversees the complete training, direction and motivation of all housekeeping personnel, plus regular quality assurance inspections with hospital administration personnel. As a result, our company seeks to instill a new sense of teamwork in hospital activities, and a sense of caring and working together to provide a better hospital environment.

Plant operations and maintenance

With respect to the plant operations and maintenance functions undertaken by ServiceMaster, these are vitally important because everyone involved in the health care delivery system of a hospital depends upon uninterrupted services provided by the physical plant, 24 hours a day, year after year. There can be no equipment breakdowns or other failures of this nature if essential and often urgent patient needs are to be met. Within this context, our services encompass the entire environmental system: the heating plant, water requirements, electrical and emergency power and lighting distribution, oxygen supply and distribution, suction, incineration, and all building and grounds equipment. Just last year, ServiceMaster instituted a new progarm of computerized preventive maintenance which we anticipate will contribute greatly to the goals under discussion.

Clinical equipment maintenance

ServiceMaster's Clinical Equipment Maintenance Program is an integral part of Plant Operations and Maintenance, and includes managing preventive and corrective maintenance of diagnostic and therapeutic equipment, from monitoring equipment in intensive care units, operating rooms and recovery rooms, to laboratory analysis equipment. Indeed, ServiceMaster's professional management services insure maximum operating efficiency and safety for both patients and the equipment operators.

Laundry and linen

The laundry and linen distribution department of a hospital is another timeconsuming, but highly important function. It involves everything from patient linen to surgical gowns; and it is in this area that ServiceMaster has been applying a new level of professionalism. The ServiceMaster program includes the collection of all soiled linens, the latest laundering techniques, and the distribution of laundered linens back to the patient and operating rooms and other areas of linen inventory. While these services may not seem to be particularly important at first blush, if you or a member of your family has spent any time in a hospital recently, you will remember how important clean linens were with respect to your attitudes and outlook during the recovery process.

Materials management

Our Materials Management Program involves the purchasing, receipt, storage and movement of all types of materials; and the management of central supply services, perpetual item inventory systems, and the financial accounting of supplies and equipment. Each one of these responsibilities is vitally important to the successful operation of today's modern hospitals.

In 1976 alone, our Materials Management Program and the other programs described above helped provide cleaner, safer hospitals for nearly 5 million hospital patients and more than 18 million outpatients. Because of these and other statistics, ServiceMaster is justifiably proud of its growth and its contribution to this nation's health care program.


Having told you what ServiceMaster does, the next question becomes: Why are we here before you today? The simple answer is that we care-we care about the hospitals which we serve; we care about our employees who provide the services discussed above; and we care about our ultimate customers, the patients in these hospitals. We are certainly proud of what we have accomplished in the past, as well as what we are attempting to do in the future. As I stressed

earlier in these remarks, we are concerned about containing hospital costs-a goal which we have been concerned about for the past three decades. Nevertheless, we believe that there are a number of alternative approaches available to achieve this goal, some of which will advance our aims and others which will retard our efforts.

In this regard, it may be useful to lay before you today one company's experience with the issue of hospital cost containment. Late last year, our company completed a study of 188 hospitals which we serve; and we found that the provider's cost had been reduced in two-thirds of them because of our efforts. In the aggregate, the reduction amounted to approximately 7 percent. In threefourths of the hospitals studied, our average price of services rendered was less than the value of equivalent in-house managed services.

As the table below illustrates, with respect to the hospital selected, housekeeping costs declined considerably after ServiceMaster undertook its responsibilities.

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While greater efficiencies may be achieved as a result of these and similar services provided by ServiceMaster and others, there is reason to believe that much of the "fat" has already been rung out of various functions performed by hospitals in various parts of the country; and further cost-cutting efforts may serve only to reduce the quality and quantity of health care services provided to hospital patients. To put it bluntly, a high degree of efficiency has been attained at many of this nation's hospitals; and the application of certain cost containment alternatives being proposed may produce detrimental rather than beneficial effects on these institutions.


After having discussed ServiceMaster's activities in some detail, as well as specific examples of cost reductions which have been achieved, it is useful to discuss the Talmadge bill in very general and conceptual terms, as well as the Administration's proposal. At the outset of these comments, it should be noted that ServiceMaster endorses the goals embodied both in S. 1470 and the Administration bill, as they pertain to cost containment; however, we differ with the means proposed in the latter measure to achieve the desired results. In our opinion, and with all due respect to those within the Administration who drafted the "Hospital Cost Containment Act of 1977," the bill does not give adequate consideration to our national health care system, but deals principally with the issue of hospital cost increases which is only one factor contributing to this nation's rising health care bill.

Simply put, the Administration proposal seeks to eradicate the "illness" without coming to grips with those factors which produced the malady in the first place. It seems to lose sight of the fact that inflationary pressures beyond the control of individual hospitals or their administrators are contributing significantly to the very hospital cost increases which are being criticized. It is respectfully submitted that any effort to single out hospitals as the "villain" in this situation is both unrealistic and unproductive.

We must not lose sight of our national need to provide health care delivery systems which improve health standards and contribute further to the enormous strides which have been made in the field of health over recent years. As pointed out in the American Hospital Association's testimony before the Health Subcommittees of the House, health care expenditures in all Western nations have

been increasing at a rate greater than their gross national products. Since hospitals must pay higher prices for the goods and services which they use in the delivery of patient care, the cost of hospital services is adversely impacted by our inability to control inflation generally. In this regard, I respectfully refer this subcommittee's attention to the AHA's discussion of increases in the Consumer Price Index and other indices, contained in its testimony before the House subcommittees, which bears out the notion that the hospital "market basket" has been hit especially hard by inflation.

During recent years, we have also witnessed an ever growing public demand for health care services stimulated in large part by the increased elimination of economic barriers to the utilization of our health care system. While economic barriers to the use of such services have diminished—a development which in many respects may be healthy-the kinds and volumes of services used by patients are also increasing in intensity because of new technological advances and other factors which lead to inevitable cost consequences. Finally, the notion of increased regulation by the Federal Government and other regulatory bodies cannot be overlooked as a significant factor in escalating costs. While certain benefits have been produced by governmental scrutiny and regulation, there have been far too many examples of compliance with regulations being achieved without a commensurate improvement in the quality of health care provided.

Simply stated, the Administration's bill would provide for a 9 percent cap on increases in hospital in-patient revenues, while it ignores the fact that hospitals must acquire goods and services from other segments of the economy which are uncontrolled and which may be experiencing high rates of inflation. If enacted, efficient hospitals which are already controlling costs might be required to curtail essential services and sacrifice the quality of health care to survive, while inefficient hospitals would be "rewarded" for their laxity. On the other hand, the Chairman's bill, S. 1470, provides incentives for efficient operation and penalties where institutional costs significantly exceed the average for comparable institutions. Without discussing the specific provisions embodied in these two pieces of legislation, it is our considered opinion that the Talmadge bill represents a more reasonable and realistic approach to the problems at hand, while the Administration proposal requires further study and reflection.

Because of the work that our company has done with respect to the containment of hospital costs, we would welcome the opportunity to share other examples of our efforts and of savings which can be realized realistically in the future--with this subcommittee. Again, it is an honor and a privilege to appear before you today. For the reasons set forth above, we endorse the general approach taken in S. 1470 and urge the enactment of this or similar legislation at an early date. We look forward to the opportunity of working together in the months to come with the distinguished members of this subcommittee and its able staff, and to the fashioning of refinements to the Talmadge bill which may enhance its workability and ultimate effectiveness.

Mr. Chairman, thank you again for giving us this opportunity to testify. We commend you for your leadership in the field of health care delivery systems, and we look forward to making any contributions to your legislative efforts which might advance our common goals and hasten the day when the problems before us will be issues of the past.



The Washington Business Group on Health (WBGH), comprised of 145 member companies (see Appendix) providing the health benefits for some 30,000,000 employees, retirees and dependents, appreciates this opportunity to share its views on this important legislative effort. My name is Willis B. Goldbeck and I am the Group's Director.

Health and medical case costs are of vital concern to our nations major employers. This is true not only because of the many billions of dollars spent, and the unacceptably high rate of medical cost escalation, but also because most employers are keenly aware of the terrible waste and excess which now pervades our medical care system.

In an era of limited resources, it is no longer enough to be proud that the United States has the most sophisticated medical technology, or the most skilled physicians or even the highest quality of treatment. The challenge we all face is how to retain those features which make our system the envy of the rest of the world while simultaneously controlling the cost of that system. To do this and increase access to that system for those now underserved makes the challenge almost imponderably complex.

Therefore we feel Senator Talmadge, the bill's Co-sponsors and their staff are to be commended for their willingness to accept the challenge. S. 1470 is a valuable contribution to a difficult and emctional debate.

The paramount problem

No matter what other merits S. 1470 may have, it will be totally unacceptable to the Washington Business Group on Health if its application is restricted to the Medicare and Medicaid programs.

The escalating hospital costs are not restricted to public programs in either their cause or effect. We fully appreciate the need to limit the continuing increase in the amount of Medicare/Medicaid expenditures. However, S. 1470 is a valid approach only if it does not result in increased expenditures elsewhere. We are convinced that every dollar "saved" by this bill, as presently drafted, would be convered to a dollar charged to private payors. Proof of this can be found in the surcharge now applied to private payors to compensate for the low levels of Medicare and Medicaid reimbursement. There is not one iota of evidence that hospitals would voluntarily absorb any losses induced by S. 1470, especially when it would be so easy to simply shift prices to private payors.

The Administration recognized this problem in its bill (S. 1391, The Hospital Cost Containment Act of 1977) and we would reiterate that, unless a method to prevent cost shifting is made a clear part of S. 1470, we respectfully suggest that the bill not be reported from Committee.

Positive aspects of S. 1470

There are several concepts in S. 1470 which are excellent and should be retained in any amended edition of the bill. For example:

1. We endorse the State exemption provision and would recommend that it be used to encourage an increase in State rate review programs with a prospective budget system.

2. Closing and converting hospitals are essential steps if we are serious about cost containment. And, at the local level, nothing is more controversial. You are to be commended for facing this issue and recognizing that transitional financing will be needed.

3. We endorse the uniform reporting requirement, but not uniform functional accounting. The government must make clear what information it needs to determine operating and capital costs for hospital services. This would permit hospitals to modify their accounting systems so as to meet the needs of management while generating the required reports.

In the development of uniform reporting requirements, self-insured employers should be represented.

4. In an effort to provide more realistic cost comparisons, we endorse the concept of classifying hospitals.

5. The provision in Section 41 to assure that ambulance service is directed to the most medically appropriate facility is commendable.

6. We endorse Section 42 which recognizes the value of health education and preventive care programs in the detection and treatment of respiratory diseases. This is the type of increased expenditure which can contribute to meaningful, long-term cost containment.

7. We agree that fringe benefit costs should be included in any wage base formula. This is something that S. 1391, the Administration's bill, fails to do. Fringe benefits should include Social Security taxes. However, we would note that the time has come to recognize that hospital workers are not, generally, underpaid. In fact, many are paid at levels above those of their counterparts in other industries. Therefore, we recommend that any wage pass-through be used selectively to address only those geographical and employment areas where genuine need for catch-up still exists.

8. We endorse your efforts to encourage physicians to locate in underserved areas. However, we must note that a prime disincentive to do so is the fact that Medicaid and Medicare pay on a reimbursement schedule far below that

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