Summary of testimony presented on the President's hospital cost containment proposal, H.R. 2626

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Title:
Summary of testimony presented on the President's hospital cost containment proposal, H.R. 2626
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viii, 52 p. : ; 24 cm.
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English
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United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce
United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Health and the Environment
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Hospitals -- Cost control -- Law and legislation -- United States   ( lcsh )
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prepared for the use of the Committee on Interstate and Foreign Commerce, House of Representatives, and its Subcommittee on Health and the Environment, Ninety-sixth Congress, first session.
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CIS Microfiche Accession Numbers: CIS 79 H502-37
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At head of title: 96th Congress, 1st session. Committee print. Committee print 96-IFC 22.
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July 1979.
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Reuse of record except for individual research requires license from LexisNexis Academic & Library Solutions.

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96th Congress COMMITTEE PRINT COMMITTEE 1st Session 1 .PRINT 96-IFC 22






SUMMARY OF TESTIMONY PRESENTED ON
THE PRESIDENT'S HOSPITAL COST CONTAINMENT PROPOSAL-H.R. 2626




PREPARED FOR THE USE OF THE

COMMITTEE ON INTERSTATE AND
FOREIGN COMMERCE
HOUSE OF REPRESENTATIVES

AND ITS

SUBCOMMITTEE ON
HEALTH AND THE ENVIRONMENT
NINETY-SIXTH CONGRESS
FIRST SESSION




AUGi: 197c'




JULY 1979 '




U.S. GOVERNMENT PRINTING OFFICE 48-708 0 WASHINGTON : 1979











COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
HARLEY 0. STAGGERS, West Virginia, Chairman
JOHN D. DINGELL, Michigan JAMES T. BROYHILL, North Carolina
LIONEL VAN DEERLIN, California SAMUEL L. DEVINE, Ohio JOHN M. MURPHY, New York TIM LEE CARTER, Kentucky
DAVID E. SATTERFIELD III, Virginia CLARENCE J. BROWN, Ohio BOB ECKHARDT, Texas JAMES M. COLLINS, Texas
RICHARDSON PREYER, North Carolina NORMAN F. LENT, New York JAMES H. SCHEUER, New York EDWARD R. MADIGAN, Illinois
RICHARD L. OTTINGER, New York CARLOS J. MOORHEAD, California
HENRY A. WAXMAN, California MATTHEW J. RINALDO, New Jersey
TIMOTHY E. WIRTH, Colorado DAVE STOCKMAN, Michigan
PHILIP R. SHARP, Indiana MARC L. MARKS, Pennsylvania
JAMES J. FLORIO, New Jersey TOM CORCORAN, Illinois
ANTHONY TOBY MOFFETT, Connecticut GARY A. LEE, New York JIM SANTINI, Nevada TOM LOEFFLER, Texas
ANDREW MAGUIRE, New Jersey WILLIAM E. DANNEMEYER, California
MARTY RUSSO, Illinois
EDWARD J. MARKEY, Massachusetts THOMAS A. LUKEN, Ohio
DOUG WALGREN, Pennsylvania ALBERT GORE, JR., Tennessee BARBARA A. MIKULSKI, Maryland RONALD M. MOTTL, Ohio
PHIL GRAMM, Texas
AL SWIFT, Washington
MICKEY LELAND, Texas
RICHARD C. SHELBY, Alabama
W. E. WILLIAMSON, Chief Clerk and Staff Director KENNETH J. PAINTER, Fir8t A88i8tant Clerk KAREN NELSON, Profrssonail Staff ROBERT HENLEY LAMB, Associate Minority Coun8el



SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT
HENRY A. WAXMAN, California, Chairman DAVID E. SATTERFIELD III, Virginia TIM LEE CARTER. Kentucky RICHARDSON PREYER, North Carolina SAMUEL L. DEVIND, Ohio ANDREW MAGUIRE, New Jersey DAVE STOCKMAN, Michigan
THOMAS A. LUKEN, Ohio WILLIAM E. DANNEMEYER, California
DOUG WALGREN, Pennsylvania GARY A. LEE, New York
BARBARA A. MIKULSKI, Maryland JAMES T. BROYHILL, North Carolina
PHIL GRAMM., Texas (Ex Officio)
MICKEY LELAND, Texas
RICHARD C. SHELBY, Alabama JOHN M. MURPHY, New York HARLEY 0. STAGGERS, West Virginia
(Ex Officio)
ELLIOT A. SEGAL, Staff Director

(II)









INTRODUCTION


This introduction was prepared by the staff and is designed to assist the Subcommittee in its consideration of H.R. 2626, the Hospital Cost Containment Act of 1979.
The document summarizes testimony received during the hearings held by the Subcommittee on March 12 (ioint hearings with the Subcommittee on Health of the Ways and Means Committee); April 2, 9, 30; and May 21. It should be noted that in highlighting testimony, it was necessary to prepare only a capsule summary of each presentation to keep this document to a manageable size and to omit statements submitted for the printed hearing record except
where indicated.
The staff would like to acknowledge the assistance of Kay Cavalier, Janet Kline, Richard Price, Jennifer O'Sullivan, Alan Spielman, and Susan Campbell of the Congressional Research Service, Library of Congress, in the preparation of this document.
(III)


















Digitized by the Internet Archive

in 2013













http://archive.org/details/su mtestimo00u nit










Administration Witnesses

March 12, 1979

Hon. Joseph A. Califano, Jr., Secretary, Department of Health, Education, and Welfare ... 1 Alfred E. Kahn, Chairman, Council.on Wage and
Price Stability 3

May 21, 1979

Dr. Karen Davis, Deputy Assistant Secretary for
Planning and Evaluation/Health, Department of
Health, Education, and Welfare ........ *0*009000 5


Public Witnesses

April 9, 1979

Hon. Robert N. Giamo, Chairman, House Committee
on the Budget ...... 8
Hon. Leon Panetta, Chairman, Task Force on Legislative Savings, House Committee on the Budget .... 9 American Hospital Association, John A. McMahon .... 9 Federation of American Hospitals, Michael D.
Bromberg 11
American Protestant Hospital Association,
Donald I. Gent .... 12 Blue Cross Association and Blue Shield Association, Lawrence C. Morris 12
Health Insurance Association of America, Alliance
of American Insurers, American Insurance Association, Life Insurers Conference, and American
Council of Life Insurance., Morton D. Miller .... 13 American Medical Association, Robert B. Hunter,
M.D., and William C. Felch, M.D. 14
Hon. Olympia J. Snowe, a Representative in Congress from the State of Maine .................. 15
Service Employees International Union, AFL-CIO and
District 1199, National Union of Hospital and Healthcare Employees, RWDSU, AFL-CIO, Gerald
Shea and Henry Nicholas .... 15

(V)






V1


Public Witnesses: 4/9/79 (continued)

American Federation of State, County, and
Municipal Employees, AFL-CIO, Anthony P.
Carnevale ...................................... 16
National Retired Teachers Association and
American Association of Retired Persons ........ 16 Chamber of Commerce of the United States,
R.L. Adams ..................................... 17
American Public Health Association ................ 17
Technicon Corporation, Edwin C. Whitehead ......... 17


April 30, 1979

National Conference of State Legislatures,
Joseph Czerwinski ............................... 18
Massachusetts Hospital Association, David M.
Kinzer .......................................... 19
Texas Hospital Association, 0. Ray Hurst .......... 21


May 21, 1979

Clark C. Havighurst ............................... 21
Dr. Walter McClure ................................ 23
Stuart H. Altman .................................. 24
Congressional Budget Office, Alice M. Rivlin ...... 25 Hon. Claude Pepper, Chairman, House Select
Committee on Aging and Subcommittee on
Long-Term Care ................................. 27
AFL-CIO, Bert Seidman ............................. 27
Association of American Medical Colleges,
Robert Heyssler, M.D. 28
University of Michigan Hospital, Ann Arbor,
Michigan, C. Edward Schwartz ................... 30
University of Michigan Hospital, Ann Arbor,
Michigan, Carolyne K. Davis .................... 30





Vil


State Programs

April 2, 1979

Maryland

Maryland Health Services Cost Review Commission,
Dr. Harold A. Cohen and Dr. John S. Cook ....... 32
Sinai Hospital, Baltimore, Spencer Foreman, M.D. 35
Frederick Memorial Hospital, Frederick, Maryland,
Wallace M. Dow ................................. 36
Health Care Financing Administration, Department
of Health, Education, and Welfare, Clifton A.
Gaus ........................................... 37
Blue Cross of Maryland, Inc., Thomas H. Sherlock 38
Maryland General Hospital, Baltimore, Donald H.
Dembo, M.D. 38
George Tyler ...................................... 39
Baltimore City Professisonal Standards Review
Organization, Dale Schumacher, M.D ............ 39


April 30, 1979

New York

New York State Office of Health Systems Management, Richard A. Berman ........................ 41
Hospital Association of New York, George B.
Allen .......................................... 44
Albany Medical Center Hospital, Albany, New York, Dr. Thomas L. Hawkins ................ 45
Schuyler Hospital, Montour Falls, New York,
John J. McDonald ............................... 46
Health Insurance Association of America, Thomas O'Hare .................................. 46
Doujalas R. Brown .................................. 47
Steven R. Eastaugh ................................ 48





viii



State Programs: 4/30/79 (continued)

New Jersey

New Jersey State Department of Health, Bruce C.
Viadeck ... .*... . . .. . . .......** * ** ***** 49
The Valley Hospital, Ridgewood, New Jersey,
John E. Peterson and Richard D. Keenan ......... 51
Morristown Memorial Hospital, Morristown,
New Jersey, Donald A. Bradley and James H.
Carroll ... .. ..... ............... **0****0*** 51
Prudential Insurance Company of America,









SUMMARY OF TESTIMONY PRESENTED AT PUBLIC HEARINGS ON THE PRESIDENT'S HOSPITAL COST CONTAINMENT PROPOSAL H.R. 2626


Administration Witnesses March 12, 1979

Hon. Joseph A. Califano, Jr., Secretary of Health, Education, and Welfare
1. Stated that enactment of hospital cost containment legislation can contribute to curbing inflation in the economy, lightening the burden on Federal, State, and local taxpayers, reducing the increasing cost of health insurance premiums to employers and workers, and lowering the direct cost of hospital care for the aged, poor, unemployed, and uninsured.
2. Presented data on rising hospital costs.
3. Cited the impact of rising costs on the average individual, the uninsured., the elderly, employers, the Federal budget, and State and local governments.
4. Listed reasons for hospital cost inflation -Ninety percent of hospital bills paid by
third parties; neither the consumer nor provider feels the impact.
Payments are primarily on a "cost-plus"
basis.
Most decisions made by provider; physicians
control 70% of health care decisions.
5. Cited areas of potential cost savings: eliminating excess beds, excess CT scanners, unnecessary x-rays, routine admission diagnostic tests for nonsurgical patients, energy waste, and unnecessary weekend admissions; replacing inefficient supply purchasing practices; and decreasing nationwide average length of stay to West Coast average.
6. Listed reasons why purely voluntary efforts cannot contain hospital inflation -Industry goals for 1978 and 1979 bear no
relationship to underlying factors affecting
hospital costs.





48-708 0 79 2






2


Despite hospital industry's voluntary efforts
in 1978, hospital inflation continued to rise at a higher rate than any other sector of the
economy.
Moderation in hospital inflation during late
1977 and early 1978 can be largely credited to the prospect of mandatory Federal controls and
the relative success of nine State mandatory
control programs.
7. Presented "Hospital Cost Containment Act of 1979" (H.R. 2626).
(a) Estimated savings in health system -- $53.4
billion in FY80-84; estimated savings in hospital expenditures in FY84 $19.3 billion.
(b) Summarized H.R. 2626 -Contains two basic parts -- the national
voluntary limit for the rate of increase in
hospital costs in 1979 and standby mandatory controls which would be applied to individual
hospitals beginning in 1980.
Provides that the national voluntary limit
(estimated at 9.7% in 1979) would consist of the sum of: a market basket inflation allowance for the goods and services that hospitals purchase (estimated at 7.9%), an allowance for
population growth of .8% and a 1% intensity allowance. One-third of the nation's 6,000
community hospitals were able to operate at or
below a 9.7% rate of increase in 1977.
Specifies those hospitals (estimated at onehalf of the total) which would be exempt from
mandatory controls if the national voluntary
limit were not met in 1979: all hospitals located in a State which met the State's voluntary limit; hospitals located in a State with a
mandatory cost containment program meeting
specified requirements; all individual hospitals meeting their individual voluntary limits; and all small non-metropolitan hospitals (under
4,000 admissions), new hospitals (less than 3
years old), and HMO hospitals (with 75% of patients enrolled in qualified HMO's).
Specifies that each hospital subject to a
mandatory limit would be given an allowable rate of increase in total inpatient revenues




3


per admission which would include a basic limit with adjustments for exceptional circumstances.
Provides that the basic limit includes an inflation adjustment to reflect the hospital's market basket (with a pass-through for nonsupervisory wage increases) plus an efficiency/
inefficiency allowance (based on a comparison of routine costs per day for comparable hospitals).
Provides that adjustments and exceptions to
the basic limit would be made to reflect increased admissions, base year adjustments, and
exceptions for unusual circumstances.
Requires cost payers to limit interim payments to mandatory limits.
Requires hospitals to collect no more than
mandatory limit from charge payers and requires hospitals to place any excess in an escrow account; failure to comply would result in tax of
150% on excess revenues.
8. Noted changes from last year's Administration
bill: inclusion of a voluntary trigger period, recognition of actual market basket inflation in computation of voluntary limit, built in allowance for efficiency/inefficiency, application of mandatory limits based in part on experience of individual hospitals, and recognition of various exemptions proposed by Members.

Alfred E. Kahn, Chairman, Council on Wage and Price
Stability
1. Presented data on hospital cost increases.
2. Noted that rapid increases are felt throughout the economy -- in taxes, health insurance costs, and wages.
3. Specified how HEW estimates H.R. 2626 would alter these trends.
4. Justified imposition of mandatory controls in
this sector of the economy --'
Hospital cost increases over past few years
have been extraordinary.
Inflationary pressures are built into the
system with few incentives for hospitals to
hold down costs.
Reasonableness of charges and services cannot






4


be left to competitive marketplace.
5. Cited effectiveness of existing state cost control programs.
6. Stated that most of the tools necessary to make
mandatory program work are already in place; new enormous bureaucracy not contemplated.
7. Stated administrative cost (estimated at $10
million annually by HEW) would be fraction of savings,
8. Noted other actions to hold down medical care
costs including development of 'Voluntary standards for physicians' fees and health insurance and urging state and local governments to make special efforts in the health field.






5


May 21 1979

Dr. Karen Davis, Deputy Assistant Secretary for Planning
and Evaluation/HealE, Department of Health, E-ducation, and Welfare
1. Quoted President's State of the Union Message which emphasized this is the year to act on cost containment.
2. Stated no other legislative proposal before Congress can contribute so significantly to -Curb inflation in the economy;
Lighten the burden on Federal, State, and local taxpayers (Federal FY80-84 savings could be
as much as $22 billionS including $19 billion
in Social Security trust funds; State and local
FY80-84 savings could be as much as $6 billion);
Reduce increasing cost to employers and workers of health insurance premiums (employers
could save as much as $14.4 billion and individuals $4.7 billion in FY80-84) ; and
Assist the aged, poor, unemployed, and uninsured in paying their hospital bills (individual out-of-pocket expenses could be as
much as $5.6 billion lower in FY 80-84).
3. Stated that eliminating unnecessary Federal spending is of extraordinary significance -Reductions which would decrease Medicare
trust fund expenditures, might provide means of
reducing slated social security tax increases;
Reductions might reduce Federal deficit; or
Reductions, especially future year savings,
are critical if we are to afford national health
insurance.
4. Cited statistics and impact of hospital cost inflation -Rate of hospital cost inflation was more than
two times CPI increase between 1974-1978 (In
this period,, CPI all items rose 30.6, hospital
room rate 64.4. total expenses per stay 70.5,
and total expense 78).
CPI understates total inflationary impact on
consumer and employer.
Higher prices lead to higher wages through
cost-of-living escalators which in turn lead
to higher prices,




6


In 1978, hospital costs rose at an estimated
12.8% and room rates at 12.4% while total CPI
increased 9%.
Data for early 1979 indicate that the rate of
increase in hospital costs has ceased to decelerate and may be turning upward.
5. Noted any moderation in inflation can be credited to factors beyond purely voluntary efforts -Prospect of mandatory controls triggered industry attempt to avert such controls.
Much of moderation attributable to relative
success of State mandatory programs.
6. Cited contrast in inflation rates in nine States with mandatory programs versus other states.
In States with controls, inflation averaged
12% and in other States 15.8%.
Preliminary data indicate total costs increased 9.9% in States with controls in 1978,
significantly lower than in other States.
7. Stated standby mandatory controls are vitally important since they provide needed incentive to make hospitals voluntarily eliminate waste and reduce costs, and they guarantee savings if responsible voluntary goals are not met.
8. Summarized major features of H.R. 2626.
9. Noted responsiveness of H.R. 2626 to major criticisms levied against previous administration bill -Includes voluntary trigger period.
Takes into account actual market basket inflation in determining voluntary limit.
Encourages State cost containment programs
and broadens provisions for State exemptions;
Establishes a commission including hospital
representation to oversee implementation of the
program.
Adopts various exemptions proposed by Members
last year.
10. Listed other health measures being submitted by Administration -Legislation to change current methods of reimbursing HMO's under Medicare, to encourage
HMO's to enroll the aged, and to encourage
beneficiaries to seek this method of care; and




7


Legislation to move toward competitive bidding in the use of fiscal intermediaries under
Medicare.
11. Noted Administration exploring ways to promote competition, and stated such activities are complimentary to, not a substitute for, cost containment.






8


Public Witnesses
April 9, 1979

Robert N. Giaimo, Chairman, House Committee on the
Budget (written statement only)
1. Supported H.R. 2626.
2. Cited Congressional efforts to achieve fiscal solvency.
3. Noted that one of most intractable problems is unrelenting inflation in medical care prices and accompanying rapid increase in Federal spending for health care.
4. Stated that medical care inflation means increases in individual health insurance premiums and out-of-pocket expenses, inflated costs for production of goods and services, further burden on State and local taxes, and adverse impact on the elderly and disabled.
5. Indicated that impact is greatest on Federal budget; noted that Federal health programs weighted
heavily toward institutionalized care where medical prices have risen fastest.
6. Cited fiscal implications of H.R. 2626 -Federal savings of $1.4 $1.7 billion in
FY80; $22 billion cumulatively by FY84.
State and local government savings of $6
billion during FY80-84.
Private sector savings of $47 billion over
five years.
7. Noted other implications -Savings could provide means of reducing social security tax increases or be applied to
improving benefits.
Could not consider any national health plan
in its absence.
Could have positive effect on overall inflation rate.
8. Cited CBO report which noted recent reductions in hospital cost increases but concluded that voluntary effort not sufficient to reduce increases to the
1979 goal of 11.6%.
9. Stated that H.R. 2626 is fair and reasonable; mandatory controls are targeted on those 50% of the
hospitals which are out of line with reasonable cost increases.






9


Hon. Leon Panetta, Chairman, Task Force on Legislative
Savings, House Commirttee on the Bu
1. Supported H.R. 2626.
2. Indicated thatPresident's Budget includes $6.5
billion savings through legislation and improved administration and stated without these savings the deficit could not be held down to the projected amount.
3. Observed that budget control is shifting from
appropriations committees to committees that legislate entitlement programs (76% of FY80 outlays will bypass discretionary appropriations process).
4. Noted that hospital cost containment is single largest item in President's list of legislative savings.
5. Stated proposal is reasonable approach to difficult problem.

John Alexander McMahon, President, American Hospital
Association
1. Stated that cost containment goals should be achievable through concerted and intense effort, be consistent with both budgetary control and maintenance of quality health care services, and flexible in application.
2. Outlined factors contributing to projected 14%
increase in hospital expenditures in 1979 -Increases in costs of goods and services
hospitals purchased (9.1%);
Increases resulting from larger and older
population (1.1%); and
Increases resulting from technological improvements and extension of services (3.8%).
3. Noted achievement of Voluntary Effort (VE) goal of 11.6% will be difficult, but industry committed to it.
4. Described Voluntary Effort and noted rate of
increase was 12.8% in 1978 compared to 15.6% in 1977.
5. Described recent improvements in management, systems, and utilization of facilities and services.
6. Opposed H.R. 2626 -Bill unnecessary, conceptually flawed, and
would lead to disruption in delivery of health
care.
Reference to "voluntary" is misleading.






48-708 0 79 3






10


Standby wage/price controls have been rejected as inflationary and would be just as
harmful in hospital industry.
Application of single national formula could
not adequately recognize varying circumstances.
Implementation would be costly and impose
burdensome record keeping and reporting requirements.
7. Listed specific objections to the following sections
Section 2
Hospitals unable to manage since they would
not know in advance the precise limit to be im-posed;
Intensity allowance inadequate;
Impact of increase in elderly population not
dealt with; and
"Wage pass-through" excludes fringe benefits,
shift differentials, and overtime.
Section 3 -Mandatory cap effective retroactively; and
No procedure for considering justifiable or
trivial variations.
Section 4 -Grants wide nonspecific authority to Secretary; and
Does not require hospitals to be treated equitably.
Section 6 -Application of mandatory limit by class of
purchaser basis would be costly, inequitable,
and would undermine hospital solvency.
Section 7 -Does not include allowance for cost increases
attributable to needed improvements or advancements in delivery of care.
Penalty/bonus provision vague, offers greater
potential for penalty than bonus, and delegates
excessive authority to Secretary.
Description of possible exceptions too vague
to permit evaluation; and
Adjustments to be made by Secretary are entirely punitive.
Section 10
Assumes changes in admissions practices are






11


solely related to reimbursement considerations;
and
Lacks due process safeguards.

Michael D. Bromberg, Executive Director, Federation of
American Hospitals
1. Opposed H.R. 2626.
2. Stated the bill would result in rationing and assign hospitals the job without any standards being set.
3. Described the success of the Voluntary Effort and stated mandatory controls would undermine the effort.
4. Attributed the above average growth in expenditures to a 7% increase in volume.
5. Opposed standby mandatory controls for the following reasons -Controls on a single industry are unfair.
Standby controls will cause anticipatory
price increases.
Controls which exempt wages are actually
controls on medical practice.
They will mean an increased bureaucracy.
Hospital industry was the only major industry which voluntarily reduced its inflation
rate in 1978.
Controls would undermine successful voluntary effort.
Legislation contains no positive incentives.
Controls would do little to restrain general
inflation.
Limits would block lifesaving technology and
postpone modernization projects.
Threat of future Congressional action adequate, but standby controls counter-productive.
6. Noted both the cost-push inflationary pressures and demand-pull pressure on the hospital industry with the emphasis on making the best and latest services
available to elderly and poor.
7. Favored approach of S. 505 as major step in
making Medicare and Medicaid more efficient.
8. Recommended that where ceilings on reimbursement are imposed, hospitals should be able to charge the patient the difference between the ceiling and actual charges.






12


9. Listed other omissions in H.R. 2626 including: sunset provision, administrative appeals procedure for challenging Secretary's data or decisions, adjustments for unique circumstances, recognition of increased intensity, recognition for insolvency, guidelines for development of numerical ceilings, and coverage of Federal hospitals.

Donald I. Gent, Chairman-elect, Board of Trustees,
American Protestant Hospital Association
1. Stated APRA is fully supportive of goals to reduce inflationary pressures on the total economy.
2. Cited church's contribution to development of nation's health care system and noted important role
of philanthropic giving.
3. Stated voluntary effort best solution to rising costs.
4. Opposed H.R. 2626 -Mandatory controls applied retroactively;
Requires costly and cumbersome bureaucratic
machine; and
Would curtail quality of services.
5. Enumerated responsibilities delegated to the Secretary and stated these represented unprecedented powers.

Lawrence C. Morris, Senior Vice President, Blue Cross
Association and Blue Shield Association
1. Described Associations and their development of cost containment programs including activities in utilization review and determination of medical necessity; benefits changes covering pre-admission testing, home health care, and increased coverage of outpatient delivery; and involvement with alternative delivery systems.
2. Described the success of the Voluntary Effort and opposed actions to weaken these efforts such as
the automatic trigger.
3. Stated it is not possible to draw conclusions
concerning the relative effectiveness of the VE program compared with state programs from the DHEW analysis.
4. Suggested that Government has two roles which could be advanced legislatively -- as a purchaser of health care (through approach embodied in S. 505, with modifications) and extension of regulatory role






13


(through establishment of a commission, as recommended in H.R. 2626, with greater judgmental and evaluative responsibilities).
5. Suggested administrative changes including involvement of Federal hospital officials in VE effort, and encouragement of reimbursement experiments under Medicare and Medicaid.
6. Stated it is inappropriate to mandate controls at this time.
7. Offered general observations on H.R. 2626 -Unrealistic goals are demoralizing and encourage attempts to circumvent.
Uncontrolled labor pass-throughs could hamper
control of hospital costs.
Aging of population not taken into account.
Reward system based on peer groupings could
reward wrong hospitals.
Exceptions and appeals not adequately provided for.
Proposal biased in favor of States with some
kind of rate-setting authority.
Penalties are inequitable.

Morton D. Miller, Vice-Chairman of the Board ofDirectors, Equitable Life Assurance Society on behalf
of Health Insurance Association of America, Alliance of American Insurers, American Insurance
Association, Life Insurers Conference, and American Council of Life Insurance
1. Outlined areas companies have worked in to see insurance dollars are spent in manner consistent with delivery of quality health care at an affordable price: ambulatory care, pre-admission testing, second-opinions, alternatives to hospital care, and claims cost control programs.
2. Cited deficiencies in Section 2 of S. 505 -Encourages hospitals to recoup losses from
Medicare and Medicaid from private patients.
Bases controls on per them costs.
3. Generally favored H.R. 2626 with the following recommendations -Extend mandatory phase to all hospital revenues.






14


Avoid freezing into place the current differential in reimbursement level between government
cost payers and private cost and charge payers.
Require exempted State programs to meet Federal guidelines which provide for -Governance of program under direction of
either full-time Commissi on appointed by
Governor or state rate setting agency directed by full time Commissioner;
Methodology for prospective budget review
and rate approval encompassing revenues from
all payers and capital expenditures, applying to all institutions, and assuring reasonableness and equity;
Coordination of budget review and rate approval with health planning, certificate of
need determination and utilization review;
Budgeting techniques designed to encourage
management efficiency; and
Assurance that quality of care not adversely affected.
Favor National Commission and expand responsibilites to include -Development of uniform and equitable system
for classifying reimbursement rates; and
Validation and concurrence with the appropriateness of voluntary and mandatory revenue
limits promulgated by Secretary.

Robert B. Hunter, M.D., Chairman, Board of Trustees,
and William C. Felch, M. D., Chairman of Council
on Legislation, American Medical Association
1. Opposed H.R. 2626.
2. Opposed singling out a single section of the economy (2% of the CPI) for mandatory controls.
3. Noted proposal goes against Administration's
preference for voluntary guidelines and cited adverse experience with previous mandatory controls.
4. Supported voluntary initiatives and noted AMA's
actions encouraging physicians to restrain fee increases and joining in the Voluntary Effort.
5. Listed specific objections to H.R. 2626
"Voluntary" limit not voluntary.
Increases in market basket could raise limit
close to voluntary effort.






15


Voluntary limit fails to account properly for
needs of the elderly and improvements in health
care technology and treatment.
6. Opposed concept of reducing hospitals to an average; felt they should compete for excellence.
7. Questioned Administration's cost-savings estimates.
8. Stated voluntary effort is an ongoing viable
program with proven effectiveness which more than met its goal in 1978.

Hon. Olympia J. Snowe, U.S. House of Representatives
1. Described Maine's "Health Facilities Information Disclosure Act" -Hospital control plan apples to all hospitals
whose fiscal years begin July 1, 1979 or later.
All 50 hospitals required to submit their
budgets 90 days in advance of their fiscal year either to State Health Facilities Cost
Review Board or the independent, non-governmental Voluntary Budget Review Organization
(VBRO).
VBRO chosen by 44 hospitals and State Cost
Review Board contemplating using VBRO.
2. Objected to fact that HEW does not recognize
Maine as having a State system.
3. Recommended exempting all States which have a plan which mandates participation and effectively meets other criteria in the law.

Gerald Shea, Staff Director, Local 880 Hospital Workers Union, Service Employees International Union, AFL-CIO, and Henry Nicholas, President, District
1199C, National Union of Hospital and Health Care
Employees, RWDSU, AFL-CIO
1. Described health care system as a non-system
with no incentives to control costs and no competition.
2. Favored national prospective budgetary process as part of a national health care system and supported
Health Care for All Americans Act.
3. Favored H.R. 2626 as an interim measure.
4. Preferred H.R. 2626 to S. 505.
5. Discussed low wages of health care employees and noted non-supervisory wages had little effect on
hospital inflation.






16


6. Supported treatment of non-supervisory wages in H.R. 2626.
7. Provided an appendix containing wage data for
hospital employees .

Anthony P. Carnevale, Director of Legislation, American Federation of State, County and Municipal
Employees, AFL-CIO
1. Supported H.R. 2626.
2. Indicated that hospital cost inflation has cut
into paychecks of non-supervisory employees .
3. Stated H.R. 2626 fair to hospitals.
4. Supported H.R. 2626 provisions for non-supervisory wages.
5. Cited low wage history of non-supervisory employees.
6. Recommended amending Section 10 to allow individuals the right to make formal complaints to Secretary and initiate civil damage suits.
7. Stated it is imperative to link cost containment directly to national health insurance.
8. Provided an appendix containing wage data for non-supervisory workers.

National Retired Teachers Association and American
Association of Retired Persons
1. Outlined concerns with costs, quality of care
and access particularly for the elderly.
2. Noted factors contributing to increased costs:absence of competition, focus on acute care, physicianinduced demand, and preponderance of third-party payments.
3. Favored stand-by controls.
4. Objected to argument that a mandatory control program would curtail needed services to the elderly and the poor, and stated that it should force inefficient hospitals to become more cost conscious and
better managed.
5. Stated that mandatory controls using broad
rather than detailed controls can work as evidenced by existing programs.
6. Viewed cost containment as interim approach
prior to implementation of national health insurance,






17


R.L. Adams, Member, Special Committee on National
Health Care Needs, Chamber of.Commerce of the
United States
1. Presented data on health care costs and stated business was largest private purchaser.
2. Opposed H.R. 2626 -Treats symptoms rather than causes.
Exempts Federal hospitals.
Passes through non-supervisory wages which
represent one-third to two-thirds of costs; and
Doesn't recognize that government regulation
accounts for a sizeable part of inflation.
3. Generally favored H.R. 1070 ("Medicare/Medicaid Reimbursement and Administrative Reform Act") -Recommended expansion to encourage both public
and private third party payers to develop prospective rate setting arrangements.
Recommended extension to ancillary and other
services.
Favored capital expenditures controls.
Recommended incentives for other cost-saving
innovations.
Favored Medicaid assets test provision.
4. Recommended continuing emphasis on PSRO's and more stringent Medicare and Medicaid claims review.
5. Discussed Chamber's nationwide community-based Health/Action program for businesses, and included attachments describing the program.

American Public Health Association
1. Supported H.R. 2626.
2. Discussed aspects of H.R. 2626 which are particularly important for program's effectiveness: stand-by mandatory controls, coverage of all payers, coverage of all costs, encouragement of state mandatory programs,
and anti-dumping provisions.
3. Urged commitment to increased resources for preventive health services.

Edwin C. Whitehead, Chairman of the Board, Technicon
Corporation
1. Noted government programs provide little incentive for efficiency.
2. Noted efforts to introduce market incentives as in S. 505 would be helpful.




48-708 0 79 4






18


3. Stated that caps on capital investment would arbitrarily limit ability of industry to invest in prod uc t ivity-improv ing resources.
4. Cited evidence of cost effectiveness of health apiital investment particularly in automation.
5. Recommended the following for cost containment
legislation -Modify reimbursement provisions of government
programs to provide market-like incentives that reward efficient producers and penalize inefficient ones.
Do not add capital investment limits, but encourage providers to improve productivity
through reimbursement methods that penalize inefficiency.
Link planning system closely to reimbursement
system.
Include in reimbursement system provisions to
ease financing of cost reducing automation.
Use reimbursement system to enforce passing
through to patients the benefits of improved
productivity.


April 30, 1979

Representative Joseph Czerwinski, Wisconsin, on behalf
of the National Conference of State Legislators
1. Stated that the recent unacceptable growth in Medicaid expenditures is one of the most troublesome problems facing all levels of government, particularly
State governments with limited funds.
2. Noted that the National Conference on State Legislatures endorsed last year a policy calling for the establishment of reasonable guidelines or performance
standards for the hospital sector, to be backed up with a mandatory compliance system if the voluntary system program does not work.
3. Stated that H.R. 2626 contains such provisions
and that its voluntary performance standards provide reasonable goals which hospitals should be able to-meet.
4. Noted impact of mandatory State programs.
States with such programs had a 12% increase in 1977 over 1976, compared to 14.8% in the other 41 States;






19


preliminary 1978 estimates show a 9.9% increase compared with a nationwide average of 12.8%.
5. Recommended flexibility and experimentation and stated that States which are operating effective programs consistent with minimum guidelines should be free to administer their own programs.
6. Recommended changes in H.R. 2626 to further encourage the development of State programs -New programs should not be held to a standard
stricter than that required for ongoing State programs and should be given a grace period to
achieve this goal.
Funds should be provided for development of
new State programs,
State programs should be permitted to determine rates of payment for the Medicare program.
7. Raised the following concerns with HR.. 2626 -Term "nonmetropolitan" hospital requires clarification.
PSRO's should come under the direct supervision of the States.
Federal government should develop guidelines
which prescribe uniform reporting by rate review commissions.
State programs should be required to specify
the timing of rate requests, review all rates,
and establish compulsory rate reporting for
exempted hospitals.
A percentage increase should be allowed for
hospitals which substantially change or decrease the services they provide.
Penalty tax should be refunded to third party
payers or individuals who produce that revenue.
Grouping or categories of hospitals should be
based on factors other than size and location
and should include factors such as education
activities and intensity and sophistication of
care provided.

David M. Kinzer, President, Massachusetts Hospital
Association
1. Explained opposition to hospital cost containment legislation on the basis of Massachusetts' experience with a mandatory program --






20


for hospitals while other reductions in the
State program for patients on general relief have produced another shortfall of $20 to $25
million.
Hospitals have had to defer needed equipment
replacement and capital improvements.
Hospitals are less competitive in the labor
market as the result of cost controls.
Hospitals have had to dip into endowments,
Videotape Busy
reserves, and depreciation funds to make ends
meet.
2. Stated that when you control one segment of the
a diminution of quality of service.
3. Noted that determining, on a national basis, exceptions to a cost cap will result in an administrative nightmare.
4. Suggested that exempting hospitals with 4,000
or fewer admissions will provide incentives for smaller hospitals to grow and to offer services that are wastefully competitive with those of speciality tertiary care hospitals.
5. Stated that the wage "pass-through" for nonsupervisory employees will be perceived as a signal to increase their demands.
6. Suggested that when controls prevent a hospital from providing or expanding a service, physicians will provide that service in their offices or in a clinic arrangement, and recommended controls be applied to all parts of the system, including the income of physicians.
T. Stated that careful coordination should be
given to more traditional instruments for controlling expenditures, e.g., positive incentives for consumers and providers to use resources prudently and economically, reform of the reimbursement system to reward efficiency, and more effective alternative sources of
care,, such as HMOs.





21


0. Ray Hurst, C.A.E., President, Texas Hospital Association
1. Indicated general weaknesses and objections to H.R. 2626 -Bases for mandatory and voluntary limits are
different.
Is designed to further expand governmental controls over the hospital industry and would create a huge, unwieldy bureaucracy and encourage similar expansion of State government.
Population standards fail to include provision
for large increases in population occurring in
certain areas of the country.
Creates several caps, i.e., one for each third
party payer.
Mandatory limit would limit rate of increase,
per admission, from 7.5% to 7.7% per year.
Hospitals will not know what increases they
will be allowed until several months after the
end of their accounting periods.
2. Stated that regardless of the method (voluntary or mandatory) used to contain costs, each will require rationing of care or an increase in per person productivity and each of these will require the elimination of jobs.
3. Noted that under H.R. 2626, hospitals that have high costs will be allowed a much larger (dollar) increase in their costs.


May 21, 1979

Clark C. Havighurst, Professor of Law, Duke
University
1. Noted factors in bill that carry political appeal -Responds to need to "do something."
Hospital cost problem identified with inflation as a whole.
Promises immediate tangible payoff.
Unlikely that immediate side effects could
approach promised reduction's in outlays.
Possibly of long-term side effects can be
discounted since it is presented as stop-gas
measure.





22


Represents modification of measure that came
close to passage last year and purports to accommodate many of industry's earlier objectives.
2. Opposed H.R. 2626 and recommended less simplistic solution.
3. Outlined false assumptions underlying H.R. 2626
Embodies and perpetuates assumption that, basically, Federal health policy is sound. Government's basic acceptance of fee-for-service medicine and cost-reimbursement are at the heart of
current dilemma.
Proceeds on and reaffirms assumption that Federal government bears nearly entire responsibility for controlling health care costs.
Passage would cause a relaxation in concern
about costs.
4. Listed bill's arbitrary features -Present revenues per admission as basis for
mandatory controls;
Measurements of efficiency and classification
of hospitals; and
The voluntary cap.
5. Noted efforts and suggestions to stimulate
price competition among hospitals and in the health care industries as a whole: negotiation by health plans to obtain favorable hospital rates; charging higher premiums to patients who choose higher-priced hospitals; rating groups of physicians and hospitals separately for insurance purposes; and active antitrust enforcement in the medical field to prohibit
practices forestalling competition.
6. Enumerated procompetitive initiatives Congress could take -Examine tax law's exclusion of employer-paid
insurance premiums from taxable income.
Examine planning law to determine if it is
compatible with change; and amend law to charge
HSA's and State agencies with responsibility to
promote competition.
Eliminate Medicare's bias toward fee-forservice reimbursement.
Focus on competitive health plans which could
be favored or included in Federal programs.
Examine, with advice from HEW and FTC, openpanel HMO's receiving support and competitive






23


advantages under HMO plans.
Lnprove and extend to other programs "multiple choice" principle currently in FEHBA.
Expand FTC's jurisdiction over nonprofit corporations in health industry.
Examine McCarran-Ferguson Act in terms of
whether it shelters anticompetitive behavior.
Increase States' use of prudent purchaser
strategies under Medicaid, workmen's compensation and other state health programs,
7. Submitted proposed amendment to H.R. 2626.
a) Proposal would permit hospitals in calculating their revenues per admission for purposes of applying the cap, to exclude the revenues (and associated admissions) earned under
a linegotiated-charge contract" with an organized health plan.
b) Enumerated benefits of proposal -Provides a market test for increases
beyond the statutory limits.
Corrects certain inequities in the bill.
Provides a stimulus for hospitals to
market their services under fixed price
contracts with bulk purchasers.
Pushes traditional insurers into modifying their premiums or benefits to make cost differentials between hospitals visible to patients.

Dr. Walter McClure, Vice President and Director of
Policy Studies, Inte
1. Stated passage would be strategic mistake and stated disagreement is with means not objectives.
2. Questioned whether Congress wished to turn
nation's hospital system into a massive Federal public utility.
3. Noted temporary regulation is unlikely to work.
4. Stated precipitous regulation seems premature at a time when there is a growing opportunity to move equally rapidly toward market-oriented approaches.
5. Observed that if Congress intends to move the
system into a public utility the proposed bill is not a
particularly good one.






24


6. Urged Congress to pursue instead reformed private market approach including -Visible leadership in spelling out necessity
and elements of a restructured private health
market approach;
Supportive educational actions by HEW;
Legislation encouraging employers to make
available a multiple choice of insurance plans
on "fair market basis;"
Legislation installing similar multiple
choice in Medicare and Medicaid,
Amended tax law providing incentives for
adequate and efficient coverage;
Short term Federal assistance to providers to
start health care plans and appeals to others to
initiate such plans with private financing; and
Elimination of unnecessary legal and regulatory barriers to sound plans and fair competition.

Stuart H. Altman, Dean, Florence Heller Graduate
School, Brandeis University
1. Noted that rising costs is most serious problem confronting health system today, and stated failure to adequately deal with problem will not only affect Government's capacity to address other health problems but will undermine country's capacity to address other
important human service problems.
2. Emphasized that if controls are introduced, all must understand they are permanent.
3. Supported health care cost controls -We are spending more now than is justified.
Unless controls are imposed now, we reduce
the likelihood of national health insurance.
Alternative delivery systems only provide
services to 5% of population; we cannot ignore
rest of system.
4. Outlined components of reimbursement system
which would be workable and helpful in reducing growth rate in spending -Establish a national reimbursement control
program for major components of health care
system, including hospitals, nursing homes, ambulatory care centers, comprehensive prepaid






25


programs, and individual physicians;
Place limits on revenues from all payers with
legitimate difference in reimbursement from third party payers reflected in differential
payment rates;
Build flexibility into system to encourage
further development and innovation;
Provide an additional few years to PSRO and
planning efforts to determine the extent of
their success;
Encourages States to operate alternative reimbursement limitation programs subject only
to broad Federal guidelines;
Establish health care reimbursement boards
under the direction of the governor, even in
States which do not choose to operate their own
system;
Base Federal control program for hospitals on
a revenue control formula which recognizes differences among provider units.
Limit controls to hospital rates of increase
initially; and
Limit Federal involvement to establishing
framework of reimbursement control system, operating programs in States which do not have
their own program, monitoring progress of vaious State plans, granting permission or withdrawing approval for operation of State programs, and conducting a study so as to adjust
system where appropriate.

Alice M. Rivlin, Congressional Budget Office
1. Outlined effects of H.R. 2626 on hospital revenues and inflation -Would slow growth of revenues over next five
years from projected annual rate of 13.6% to
11.4%.
Would lead to total savings of $31.7 billion
from 1980-1984 and Federal Medicare and Medicaid
savings of $13.4 billion.
Would increase savings over time from $1.4
billion total the first year ($0.6 billion Federal outlays) to $12.0 billion in 1984 (or 11%
of what total revenues would be under current
policies).





26


Would exempt 70% of community hospitals and
56% of hospital expenditures in first year decreasing to one-half of community hospitals and
one-third of expenditures by 1984.
Would reduce overall inflation thereby reducing cumulative CPI increase through FY 81 by 0.1 percentage point and total cumulative increase through FY 84 by 0.4 percentage point.
2. Outlined effects on other criteria -Probably would not lower average quality from
1978 level.
Would provide significant incentives for hospitals to cut waste and improve efficiency.
Would not in general cause hospitals to limit
access to care but could encourage hospitals to
deny care to high-cost patients.
Effect on access dependent on how revenues adjusted for additional admissions.
Would minimize Federal intervention and red
tape.
Would result in uneven treatment for many
similar hospitals principally because it is extremely sensitive to year-to-year fluctuations
in hospital expenditures.
3. Listed possible modifications which would alter some of effects on quality growth and enhance fairness,
but noted these would reduce savings -Raising revenue caps would allow for increase
in intensity; raising cap one percentage point
reduces 1980-1984 savings from $31.7 billion to
about $26.5 billion.
Lengthening voluntary guideline period and
base period to two years; reduces FY 80 savings to near zero and overall 5 year savings by $3-5
billion.
Using same criteria, i.e., revenues per admission for both voluntary guidelines and mandatory caps, leads to no significant effect on
savings.
4. Discussed major alternatives to H.R. 2626 -a) Voluntary approach -- Costs lowered by
VE efforts about 1.5%; however, such efforts unlikely to be long-term solution to rising
costs.




27


b) Increasing competitiveness in hospital
sector through such means as reducing use of third-party payment and substituting prepayment for fee-for-service modes of competition; however potential impact of competition so far
in future and so uncertain it is not now a
viable alternative.
5. Noted adoption of regulatory approach need not preclude setting in motion forces that might increase competition; sunset provision might prompt assessment of the state of competition in advance of any renewal.

Claude Pepper, Chairman, House Select Committee on
Aging and Subcommittee on Long-Term Care
1. Supported H.R. 2626 and emphasized importance
of legislation for the elderly.
2. Noted that unbridled hospital costs punish the elderly by making it less likely that Medicare will pay for other crucial services and increasing out-ofpocket expenses for hospital care.
3. Favored bill's exemption for HMO's and recommended favorable consideration of his HMO bill.
4. Reiterated support for Kennedy-Waxman Health
Care for all Americans Act.
5. Believed cost containment important first step.

Bert Seidman, Director, Department of Social Security,
American Federation of Labor and Congress of Industrial Organi nations
1. Cited statistics on rising health costs.
2. Stated there is no way to control escalating
costs until enactment of comprehensive national health insurance such as Health Care for All Americans Act.
3. Stated that an effective prospective hospital reimbursement system must deal with intensity of care (primary cause of inflation), utilization (second cause), and routine operating costs (least significant cause).
4. Noted that labor costs for non-supervisory employees are minor factors in hospital cost increases and cited statistics on wages for this group.
5. Supported H.R. 2626 and changes made by Ways and Means Health Subcommittee strengthening antidumping provisions,








6. Recommended that the National Commission be
composed of one-third management, one-third labor and one-third public representatives.
7. Stated consideration should be given to cost
controls on all institutional providers and recommended negotiated fee schedules or capitation payments for physicians.

Robert Heyssler, M.D., Executive Vice President and
Director, Association of American Medical Colleges
1. Appreciated concern with rising hospital costs and expenditures and the problems these trends have created.
2. En=erated reasons for cost increases: inflation in goods and services hospitals purchase; imposition of government-mandated programs; introduction and changing mix of services and technologies; population's utilization patterns; and hospital's increasing complexity and coordination needs .
3. Stated cost containment program must be designed in recognition of hospital's limited ability to influence or control many of these components.
4. Noted other unclear and inconsistent policies
facing hospitals -Practitioners are encouraged to maximize use,
while threat of malpractice encourages more
consultations and ancillary services.
Regionalization focuses expensive services in
a few hospitals while payment programs seek to
apply uniform payment levels.
Planning regulations require capital expenditure review in hospitals but not physicians'
offices.
Free and below cost care mandated for public
programs while others pressure hospitals to
prevent charges from exceeding costs for paying patients.
Certification and licensure sought for paraprofessional and technical personnel while
hospitals encouraged to use fewer and flexible
personnel.
Ambulatory and preventive care emphasized;
though outpatient clinics lose money and funds
are more readily available for catastrophic
care.






29


Utilization controls sought while patients
seek to remain through recovery and chronic
patients await long-term care beds.
Optimum care standards sought while high
costs opposed.
Collective bargaining agreements incorporate
expanded benefits while premium increases are
approved.
5. Stated that to contain costs in desirable manner, public and private programs must include efforts to moderate increases in factors underlying costs, unify and clarify societal expectations of hospitals, and design payment systems which provide incentives to limit operating expenditures.
6. Stated H.R. 2626 is not a step in right direction -Provides the Secretary with too much discretion.
Necessitates a complex administrative structure.
Controls necessitate vast amounts of data
which must be gathered, analyzed and applied in
a timely manner which HEW has had difficulty
doing in the past.
Allows only a 1% factor for service improvements.
Includes a modified wage-pass through for
nonsupervisory employees which will increase
demand for significant increases.
Undermines allegedly voluntary program by
linking mandatory program to it.
7. Outlined components of an effective strategy that would moderate costs -Expand and support utilization and planning
controls;
Permit Medicare to pay State-determined hospital rates where State rate/budget systems
meet necessary Federal standards;
Ensure that new legislation is supportive of
cost containment goals;
Enact prospective reimbursement limitations
such as those derived from cross-classification
scheme; and
Permit Voluntary Effort to demonstrate its
continued effectiveness.






30


C. Edward Schwartz, University f Michigan Hospita
1. Stated that solutions must be avoided that in the long run add more costs than they reduce.
2. Noted implementation of other Federal programs in hospital has often increased costs and required more time to implement than has been allowed. Recommended that Federal government should directly reimburse hospitals for full costs of mandated program.
3. Recommended that VE be incorporated in bill and recognized as an acceptable alternative to mandatory controls.
4. Recommended that comparative grouping of hospitals specifically consider their size, scope of service, level of care, and involvement in teaching and research.
5. Noted bill would arbitrarily reduce expenditures by over one million dollars.
6. Stated most serious impact of H.R. 2626 would be on capital financing -Does not make any operating expense allowance
for interest and depreciation increases.
Would prohibitobsolete facility replacement
and, in effect, create a second health planning
system which could override existing planning
agencies' decisions.
7. Recommended exempting capital financing costs from cost limitation where a hospital has received a certificate-of-need for the project.

Carolyne K. Davis, Vice President for Academic Affairs,
University of Michigan
1. Stated that 45% of cost increases attributable to what H.R. 2626 defines as service intensity.
2. Stated that implementation would result in loss of one million dollars required by hospital to fund new programs and program improvements -Would prevent implementation of various patient education programs as well as employment
of additional new staff required to develop and
expand Home Health Nursing Program.
Would impose a virtual freeze on a higher
skill mix mandated by nature of patient mix and
encouraged by planning process.
Would result in freeze on number of employees
which can be funded thus leaving understaffed
hospitals unable to fill vacancies,






31


Would seriously impede research and education
activities.
Would mean that publically-owned teaching
hospitals would no longer be able to perform
responsibilities as referral centers for acutely
ill patients.
Would preclude debt financing of a project to
replace facilities no longer meeting life
safety code, licensure and accreditation standards.
3. Opposed H.R. 2626.
4. Recommended the following if mandatory constraints are imposed -Amount selected for service intensity should
be supported by logic and selected by a process involving both policy guidelines from
Congress and broad input from a variety of constituencies including the planning system.
Level of reimbursement for a hospital should
be constrained by cost increases of comparable hospitals with "teaching and research" specifically employed as characteristics for identifying comparable institutions.






32


State Programs
April 2, 1979

Maryland

Dr. Harold A. Cohen, Executive Director, Maryland
Health Services Cost Review Commission
1. Presented background on Maryland Health Services Cost Review Commission -Created by legislature in 1971, set first
hospital rate in February 1975, and had set
rates for every hospital in State by June 1977.
Initially used a base budget review, examining uniform cost reports to determine those parts of a hospital where cost per unit of
service was above the 80th percentile.
Although unit rate method proved helpful for
establishing an equitable base, it was relatively unimportant and not cost-effective due
to volume increases.
2. Stressed the following points about the present
system
Is intended to maintain the solvency of the
hospital if it lives within the approved budget.
All payers pay hospitals on basis of commission-approved rates.
Cost definition recognizes certain elements
Medicare does not, such as charity care, working
capital costs, and offsets created by nonpatient revenue.
Initial definition of volume failed to take
into account the difference between variable and fixed costs; subsequent adjustments gave
hospitals only that percentage of increased
revenue actually needed to provide additional
services.
Commission's efforts at cost containment have
been undermined by decisions of State's separate health planning authority to expand unneeded health facilities.
3. Described innovations under the Guaranteed Inpatient Revenue (GIR) system used for all large hospitals:





33


A hospital's inpatient revenues are determined by the case-mix adjusted number of admissions. The hospital is not at risk for the case mix itself, nor for the number of
admissions, but is at risk for length of stay
in treating patients identical to those treated
the previous year.
Has been very important in getting hospitals
to act as if there were a limited amount of resources to treat patients.
Approved amount is based on the amount in the
previous year, plus an inflation factor, plus
allowance of I percent for new programs.
Every hospital under the GIR has been able to
treat its patients within that constraint with
relative ease.
System reflects sense that if an institution
can out-perform the standards of reasonableness, it should be entitled to make a profit; and hospitals in Maryland have generally been making
profits.
4. Summarized cost experience in 1978:
Hospitals on the GIR had an increase in costs
per admission of 6.25 percent, while hospitals throughout Maryland experienced an overall 7.9
percent increase.
Constraints over total revenues have not been
quite as successful. While costs went up 7.9 percent per admission, admissions rose by 1.5
percent for a total expenditure increase of 9.4
percent. If two recently opened hospitals are included, total expenditures in the State increased by another 1.1 percent for an overall
10.5 percent increase in revenues.
A significant factor has been a 14 percent increase in Maryland hospital beds since 1974.
Over the last 4 years, Maryland has achieved
an increase in costs about 16 percent below the
national average.
In 1978 only 11 of Maryland's 50 hospitals
had losses and 4 of them were government-owned
hospitals which routinely have losses.
It costs about $10,000 a hospital to regulate
the system (not including any costs to the hospital), far below the cost associated with reg-






34


elation through health planning or PSROs. Commission uses about one staff person for every
ten hospitals for regulation purposes.
5. Opposes the following with regard to Federal cost containment legislation -Wage pass-through: absence of pass through
in Maryland program has not resulted in excessive cost savings at the expense of non-supervisory personnel; collective bargaining does
not work under system where one side knows it
gets to keep whatever it gets and the other
side knows it gets to pass through whatever it
gives away.
Uniform percentage increases across the board
for all hospitals; a wide range in rate of increases allowed hospitals in Maryland.
Including percentage increase in State's population in each hospital's percentage, as only
certain areas are increasing in population.
6. Recommended the following for Federal legislation
Include incentives for physicians to evaluate
manner in which they practice medicine; there
is clear incentive to hospitalize when an
hour's worth of physician office time is about
half as profitable as an hour's worth of physician time in the hospital.
Require uniform reporting system, such as
SHUR developed by HCFA.
Apply cap to all patient revenue not just inpatient, so there is no incentive to shift accounting costs from inpatient to outpatient.
Require health planners to consider financial
reasonableness, rather than feasibility, since
under a cost-based reimbursement system, everything planners approve is automatically financially feasible.
Place a cap on amount of capital expenditures
which can be approved within an area, and then the planning agency can be allowed to set priorities within that allocation. New hospitals
not only result in increased construction and
operating costs but also hav4 serious impact on
hospital labor market through competition among
hospitals for staff.





35


John S. Cook, Chief, Institutional Analysis, Health
Services Cost Review Commission, Baltimore,
Maryland
1. Pointed to two reasons for excessive increases in hospital costs excessive wage increases (a factor in the east coast States and California) and patterns of medical practice (referring to too many admissions, days of care, and tests.)
2. Noted that Maryland's system is designed to
limit rate of increase in salaries, wages, and benefits while giving management a reasonable opportunity to increase levels beyond those specified in guidelines.
3. Stated that there is clearly an excessive number of services provided in hospitals due to reimbursement system.
4. Expressed concern that cost containment problem is insoluble unless attention paid to reimbursement
system and medical practice issues.

Spencer Foreman, M.D., Executive Vice President, Sinai
Hospital, Baltimore, Maryland
1. Approved of management incentives in Maryland system allowing a properly managed institution to retain cost savings for program development.
2. St ated that Medicare, Medicaid, and proposed
cost containment legislation promote cost maximization rather than cost containment.
3. Recommended that hospitals at least initially be compared cost center by cost center.
4. Stated that proposed legislation would basically freeze all hospitals in place and provide inefficient hospitals with no incentives for efficiency.
5. Noted advantage of Maryland's publically accountable system independent of both providers and payers.
6. Compared unresponsive Medicare bureaucracy to
favorable access of hospitals to court system in Maryland for resolving disputes.
7. Described experience of Sinai Hospital under Maryland's guaranteed inpatient revenue sytem (GIR):
Prior to GIR, hospital had experienced an average annual increase in x-rays per admission of
8.5 percent; even the 7 most common diagnostic procedures increased 10.6 percent per year per





36


admission; even greater rates of increase for
pathological procedures were reported.
Malpractice issue was not a factor, but some
concern given to the mere availability of tests
as a contributory factor.
Jawboning between hospital administrators and
medical staff apparently succeeded in reducing
incidence of tests -- for year ending 2/28/79 total diagnostic tests per admission dropped
11.5 percent, with a 10.8 percent decrease in
rate for 7 most common procedures.
8. Noted that voluntary donations to hospital have not changed as a result of the commission system and that philanthropic amounts are considered in calculating annual rates.
9. Pointed out that impact of planning agency decisions prior to P.L. 93-641 is now being felt and that earlier decisions were predicated on demography of 1960s.
10. Opposed non-supervisory wage pass-through in Federal legislation as rendering system ineffective and creating supervisory/non-supervisory inversion (increases unionization of hospital workers and permits non-supervisory wages to increase out of proportion to inflation).

Wallace M. Dow, President, Frederick Memorial Hospital,
Frederick, Maryland
1. Expressed following concerns about Maryland system:
Presents greater management burden for rural
hospitals.
Applies different inflation rate for urban as
opposed to rural hospitals and is geared toward
hospitals with minor fluctuations in volume.
Fails to adequately address volume changes in
high growth areas.
Fails to recognize uneven distribution of
professional personnel and difficulty in attracting such personnel to rural areas with lower
income potential.
Assumes hospitals can control utilization,
whereas it is physicians who are responsible.
Discriminates against hospitals which start
out efficient.






37


2. Opposed creation of 50 separate commissions and preferred uniform system at national level.

Clifton A. Gaus, Director, Office of Policy Planning
and Research, Health Care Financing Administration, DHEW
1. Described HCFA's activities, related to alternative reimbursement systems.*
Over the past six years, HEW has expended
over $25 million in support of alternative
reimbursement systems.
There are currently 27 prospective reimbursementl or budget and rate review, systems in the U.S. Only nine mandate statewide compliance; HEW support has been provided in each
of the nine except Wisconsin.
Medicare has granted section 222 waivers and
has agreed to pay prospectively established
rates in six instances and similar Medicaid waivers are provided in five of the nine projects.
Approaches include formula rate setting (New
York), prospective budget review (Washington,
Connecticut), public utility models (Maryland),
diagnostic specific payment methods (New Jersey), limit or target rate approaches
(Georgia) and areawide budgeting or maxicaps (Rhode Island, BCA project in Rochester area).
Evaluations of earlier programs showed small
savings relative to total increases in costs
(generally about one to three percent). More
recent estimates for the nine mandated State programs show those States last year with a
9.9 percent increase in expenditures as opposed
to the national average of about 13.3 percent.
2. Commented favorably on the Maryland program -Maryland is the only State in which both Medicare and Medicaid pay rates set by a commission on a statewide basis. All Medicare principles for reimbursement are waived and the
amount paid to hospitals for Medicare and Medicaid patients is completely determined by commission reimbursement principles.
For all hospitals in the State (except two
new ones in the D.C. area), total expenditures
increased 11.8 percent in 1977, 10.5 percent in









1978, and 9.4 percent in 1979. HCFA's savings
as a result of the commission's activities
have been about $16 million a year.
Commission has strong legislative mandate,
backed by a favorable political environment
and support from the hospital association and
the major hospitals in the State.
Commission's history has been marked by a
stormy relationship with planning agencies
which have approved new construction projects which in the Commission's view jeopardize cost
containment.
Net income of Maryland hospitals reportedly
doubled from 1976 to 1977 and operating profits
went from a $500,000 deficit to a $5.7 million
profit.
3. Noted the following concerning H.R. 2626 -Has State option for its own rate-setting
system;
Flexibility important at the State level;
and
Uniform reporting is crucial to cost containment .

Thomas H. Sherlock, President, Blue Cross of Maryland,
Inc.
1 Expressed strong support for commission and high sense of commitment to cost containment.
2. Admitted that Blue Cross was initially concerned that large volume of its members' dollars would be allocated through rate-setting system for care of
non-members.
3. Noted that in 1978 the organization experienced a drop in cases covered and in services paid, and was therefore able to refund $30 million to subscribers.

Donald H. Dembo, M.D., Head, Division of Cardiovascular Medicine, Maryland General Hospital, Baltimore, Maryland
1. Expressed concern about impact of regulation on
quality of care and hospital's ability to attract competent hospital-based physicians.
2. Noted influence of spouse on physician location,
3. Preferred local regulation, as more responsive
to individual needs of institutions.





39


4. Admitted that existence of commission has
pushed physicians into self-policing and active interphysician jawboning.
5. Stated that routine laboratory testing is not
justifiable and adds to costs unnecessarily.
6. Opposed either a cap or a rationing of care
under Federal legislation, but felt rationing inevitable under a cap.
7. Expressed concern that a cap applied uniformly across all hospitals would handicap certain institutions which have demonstrated expertise in a specialized area.

George Tyler, Attorney
1. Noted that intense power struggle has surrounded decisions over which entity has last word on hospital capital expenditures. Once the guaranteed inpatient revenue sytem is set aside, the only option is caps on revenues which present hard questions dealing with cost-benefit analysis and quality of care.
2. Pointed to error rate in PSRO data collection system and problems with standardized nomenclature
which result in compromised data.

Dale Schumacher, M.D., Director, Program Evaluation,
Baltimore City Professional Standards Review
Organization
1. Noted that quality of medical care can be measured through:
Structural variables describing staffing patterns, facilities, equipment, etc.;
Process data relating to specific services
provided specific patients for specific conditions; and
Outcome variables looking at the health status of patients after interaction with the
health system.
2. Pointed to existing systems for monitoring
quality, such as JCAH quality assurance systems, hospital bylaws, and the PSRO program.
3. Noted that PSRO has recently developed case mix adjustments, allowing quality comparisons among hospitals and providing statewide data to monitor changes in length of stay, cost per case, and death rates.






4"


4. Stated that Baltimore hospitals have conducted over 200 medical care evaluations during the last two years and have not found a single episode of poor quality care resulting from cost containment activities.
5. Presented data for myocardial infarction showing enormous range in cost per case, length of stay, and death rates.





41


April 30, 1979

New York

Richard A. Berman, Director, New York State Office of
Health Systems Management
1. Presented background information on the functions of the Office of Health Systems Management
Review certificate of need requests;
Monitor and regulate delivery of health services; and
Set reimbursement rates and policies under
several third-party payment programs.
2. Presented background information on the hospital industry in New York -8% of all hospital beds in the nation.
10% of all hospital workers nationwide.
11% of total national expenditures for hospital care.
14% of all teaching hospitals nationwide.
4.4 hospital beds per 1000 population (compared to 4.5 per 1000 nationwide).
Bed capacity distribution:
75% voluntary (vs. 70% national average); 8% proprietary (vs. 8% national average);
and
17% Public (vs. 22% national average).
Excluding New York City data, average hospital size is 189 beds (vs. 180 national average), average per them cost in 1977 was $161
(vs. $174 national average), average length of stay in 1977 was 8.9 days (vs. 7.6 days national average).
3. Described New York State's Hospital Cost Containment Program -Recognition by the Carey Administration in
1975 of the need for health care cost containment.
Development in 1976 and 1977 of statutory and
regulatory cost containment measures with basic
strategy of minimizing adverse impact on patients, paying only for care efficiently delivered, and emphasizing the elimination of unnecessary services.





42


Development of system of hospital rate-setting for Medicaid, Blue Cross, Worker's Compensation, and no-fault insurance programs.
Rate setting involves -Grouping comparable hospitals and establishing reimbursement ceilings at average
of routine and ancillary costs for each
group.
In 1977, methodology refined to incorporate differences in length of stay between
individual hospitals and group average.
Establishment of process for the appeal
of reimbursement rates.
Development of case-mix methodology
(using Yale-developed Diagnostic Related
Groups) for use in evaluating appeals.
Case-mix methodology showed only small
fraction of high costs of hospitals filing appeals were due to case-mix variations.
Development of schedule of minimum required occupancies (with exemption for hospitals in isolated rural areas).
In 1978, approval by State legislature of
measure authorizing regulation of all hospital charges.
Measures to reduce inappropriate utilization involve -In 1976, establishment by State legislature of specific medical necessity criteria
for inpatient hospital services.
Compliance with medical necessity criteria determined for Medicaid purposes by "onsite" review.
"on-site" review program limited after
State reached agreement with PSRO's.
Major features of State/PSRO review agreement include: disallowance of "weekend admissions;" continued stay review after 3
days; preadmission review for 11 elective surgical procedures identified by the National Professional Standards Review Council; second opinions for certain procedures
and practitioners; intent to develop list






43


of surgical procedures that are to be performed on an outpatient basis; and limitation of pre-operative stays to one day.
Measures to eliminate excess hospital beds
involve -Establishment by State legislature in
1976 of authority to decertify unnecessary
hospital beds. (This authority has not
been used.)
Application, in the rate-setting process,
of penalties for inefficiency.
Strict enforcement of code requirements.
Rigorous review of certificate of need
requests.
4. Described impact of cost containment: total
bed supply reduced by 10%; Medicaid hospital expenditures increased by only 5.3% annually; and hospital
costs in New York increased by only 8.4% annually from 1975-1977 (vs. 14.2% nationally).
5. Stated facts and principles concerning the financial position of hospitals in New York -Deficits as a percentage of total expenditures have declined.
A major source of deficits is the patient not
covered by Medicaid or other insurance programs.
Inefficiency should not be subsidized.
6. Commented on the cost of regulation -In the study by the Hospital Association of
New York State (HANYS), two-thirds of the "costs
of regulation" were due to mandated activities that probably would be performed by the hospitals without regulation.
Most State regulations reflect effort to ensure compliance with generally accepted medical
standards.
Hospital activities that "exist only because
regulatory bodies exist" account for only 3.3%
of hospital costs, according to HANYS study.
Many efforts now underway by the State to
streamline regulatory process.
7. Commented on the impact of cost containment on the poor -Fewer than half the hospitals that have closed
were in low-income areas; many of these were replaced; few, if any, of the closings resulted






44


in any real loss of service.
Cost containment has enabled State to finance
additional health care programs for the poor.
8. Generally favored H.R. 2626 with the following
recommendations -Strengthen and clarify exemption for States
with mandatory cost containment programs; emphasize performance of program rather than compliance with procedural requirements; withdraw
exemption only after several years of bad performance; specify criteria for withdrawal of
exemption.
Avoid requiring participation of Medicare in
a State's program as a prerequisite for exemption.
Include authority to control outpatient revenues,
Protect underpaid workers but do not recognize excessive wage increases.
9. Stated that New York's cost containment program
is a model for the nation.

George B. Allen, President, Hospital Association of
New York State
1. Presented background data on factors, other than the State's hospital cost containment program, that have contributed to the low rate of increase in
hospital costs in New York -Reasonable labor settlements;
A lower inflation rate in New York than in
the nation;
Active participation of New York hospitals
in the industry's Voluntary Effort; and
Closure of 34 hospitals during the last 4
years.
2. Stated that the New York Program has had the
following effects
In 1977, four out of five hospitals in the
State incurred losses totalling $173 million
and 155 hospitals were required under HillBurton regulations to provide $39 million in
free care while incurring a debt of $127 million.
From 1973-1977, hospin ls used $454 million
of assets to underwrite operating deficits*






45


3. Commented on government bureaucracy and cost of regulation
A 1975 study identified 164 agencies involved
in hospital regulation.
A 1976 study identified $1.1 billion spent by
hospitals in New York to comply with regulations.
HEW Secretary Califano's estimate that regulation is responsible for only 8% of a hospital's
budget would mean increased costs of $560 million annually in New York.
4. Cited recent New York State efforts to moderate the adverse impact of its cost containment program -1977 regulations providing emergency financial
aid to hospitals facing bankruptcy;
State law enacted in 1978 establishing a legislative Council on Health Care Financing;
Recent State activities encouraging experimentation in health care financing; and
Recent proposal by the Governor and action by
State legislature in measure providing additional
funds for hospitals facing bankruptcy.
5. Preferred a Maryland-type budget review approach
over current New York system.

Dr. Thomas L. Hawkins, Jr., President, Albany Medical
Center Hospital
1. Stated that the New York program is inflexible and that it has caused many inequalities among hospitals.
2. Cited lack of allowance for increased intensity of service in State rate-setting methodology.
3. Stated that "break-even" reimbursement rates
under the New York program and inflation have led to increased use of equity leasing and other kinds of longterm indebtedness.
4. Provided details on thq impact of the State program on the Albany Medical Center Hospital.
5. Described the experimental program that the hospital entered into with Blue Cross of Northeastern New York.
6. Stated that the experimental program has enabled the hospital to plan with greater certainty and has reduced its need for increased working capital.
7. Supported some form of cost control which would





46


incorporate complete budget review every three or four years, realistic rate formulas, and periodic reimbursements.

John J. McDonald, Administrator, Schuyler Hospital,
Montour Falls, New York
1. Described the Schuyler Hospital, which is a
small 52-bed hospital with 40 long term care beds.
2. Provided data on hospitals in New York with less than 100 beds -52 hospitals
13,000 employees
$104 million payroll
3. Stated that more than half of the hospitals in the U.S. have less than 100 beds and these hospitals
have 650,000 employees.
4. Stated that losses in hospitals under 100 beds
have grown from $2.5 million in 1973 to $5.2 million in 1977.
5. Objected to the attitudes of planners and
health department officials toward small hospitals.
6. Indicated that Federal grants have helped the
financial position of Schuyler Hospital.
7. Expressed concern over inadequate Blue Cross and Medicaid reimbursement rates, and delays in the certificate-of-need review process.
8. Suggested that third party reimbursement be
changed to resemble the Maxicap experimental program
in which the hospital participates.

Thomas O'Hare, Associate Director, Consumer and Professional Relations Divison, Health Insurance
Association of America (HIAA)
1. Stated that State-legislated prospective hospital budget approval programs offer the best potential for equitable hospital cost containment.
2. Cited essential features of effective State programs:
Independent approval authority covering all
hospitals and all sources of revenue;
Uniform definition of hospital financial requirements;
Effective coordination with certificate-ofneed process;






47


Quality assurance plan for all patients;
Flexible system of identifying hospital management efficiency on a departmental basis;
Comprehensive data base providing uniform
financial, statistical, and utilization information by payor category.
3. Supported allowing States the opportunity to establish cost containment programs.
4. Stated that the New York State program is deficient in the following areas -Hospitals have been forced to raise charges
to private patients;
Employers are denied opportunity for health
benefit cost savings from competition;
All hospitals are arbitrarily treated in like
fashion;
Incentive to increase utilization has been
created under the per them payment system; and
Hospitals have no incentive to cut costs.
5. Explained the significance of the deficiencies
of the New York State program -Charge paying patients pay rates that average
23% above Blue Cross rates; and
Eighty percent of New York State hospitals
and 27 of 28 New York City hospitals were in a
deficit position in 1978.
6. Noted that Maryland is the only State where all patients pay for hospital services on the same basis.
7. Stated that deficiencies in New York system
point out the need for Federal legislation establishing guidelines and start-up funds for State programs and requiring Medicare and Medicaid participation (with limits on program liability) in State programs. The
evaluation of the impact of such legislation could be accomplished by implementing a comprehensive hospital data base.

Douglas R. Brown, Director of Continuing Education,
Sloane Program on Health Services Administration,
Cornell University Graduate School of Business
and Public Administration
1. Observed that surveys hav-e shown that the American public wants the latest and best medical care
available and complains about the cost of health care and big government.






48


2. Stated that the nation should nurture the voluntary organization of health care services rather than stifle it and observed that none of the methods of rate regulation tried or proposed appear likely to
promote efficiency and quality.
3. Noted that a cap, such as New York's, has been arbitrary in reimbursing hospitals less than they need
in order to survive.
4. Stated that the Federal government does not
have competence to regulate 7,000 hospitals or thousands of other providers and the States seem to lack
the capability of regulating large numbers of hospitals.
5. Recommended a regional health planning and regulatory system which would combine planning, certificate of need, quality assurance as well as rate review.

Steven R. Eastaugh, Assistant Professor of Health
Economics, Sloan Program on Health Services Administration, Cornell University Graduate School
of Business and Public Administration
1. Noted that from the standpoint of health economics and as a consumer he supported H.R. 2626, but from the standpoint of a professor of hospital finance and as an economist he was disturbed by the creation
of a regulatory bureaucracy.
2. Discussed impact of extensive insurance and Hill-Burton program on health care costs.
3. Stated that H.R. 2626 embodies the Maryland regulatory approach, with its emphasis on rates of increase in cost rather than the New York approach, with its emphasis on inefficiencies in both rates of increase and baseline costs.
4. Noted that competitive market failure is the rule in medical economics.
5. Emphasized the importance of physician decisionmaking on health care costs and noted recent trend toward cost education for medical students.
6. Offered alternative cost containment strategy
involving the provision of more quality of care information to consumers.
7. Urged the rejection of any cost containment
legislation that does not include a provision for the
monitoring by consumers of quality of care.





49


New Jersey

Bruce C. Vladeck, Ph.D., Assistant Commissioner for Health Planning'and Resources Development, New
Jersey State Department of Health
1. Stated that the New Jersey experience has demonstrated that hospital costs can be contained effectively with minimal administrative costs and while maintaining quality care.
2. Presented background information on the New Jersey program -Created by legislature in 1971, began ratesetting activities under Standard Hospital Accounting and Rate Evaluation (SHARE) system in
1975, and fully applied SHARE system to 1976
rates.
3. Described the SHARE system -All hospitals required to submit uniform
annual financial reports.
Cost data are reviewed for reasonableness.
Comparable hospitals are grouped.
Screens are established for each cost center.
Out of line costs are questioned and, if not
justified, are excluded from next year's rate
calculation. I
Cost data are updated using hospital market
basket index.
Adjustments are made for approved capital expenditures, legal and administrative changes in
operations, and projected volume increases.
Rates are set on a per them basis and apply to
Blue Cross, Medicaid, and other governmental
payers.
4. Stressed the following points about the present
system -Provides hospitals the opportunity to appeal
their rates.
Includes year-end adjustments for unexpected
volume changes and factors such as increased
utility or malpractice insurance costs.
Involves continual interaction between State
agency and hospitals.
5. Stated examples of positive impact of State
agency/hospital interaction -Adoption of shared purchasing program;




50


Closing of certain inefficient units and one
facility; and
Recognition by two hospitals of need to merge.
6. Provided data on impact of system on costs -From 1977-1978, hospital costs in New Jersey
rose 9.45% (vs. 12.8% nationally).
During same period, Medicaid and Blue Cross
expenditures for hospital care rose one third
less than national average.
Since 1975, SHARE has saved New Jersey citizens between $100 and $200 million.
7. Described impact of system on the financial
position of hospitals -Well-managed hospitals not affected adversely.
Between 8 and 15 of the 108 hospitals in the
State are experiencing serious financial difficulty.
8. Attributed financial difficulty of some hospitals to large volume of uninsured patients.
9. Stated that rate-setting and planning are integrated in the State.
10. Described problems with SHARE system -Per them rates encourage longer lengths of
stay and do not distinguish between high and
low service intensity days of care.
Rates are set essentially only for Blue Cross,
and Medicaid, which encourages hospitals to increase charges to private patients.
Does not provide relief for hospitals serving
high volume of uninsured poor patients.
11. Described refinements to system enacted by legislature in 1978 -Rates to cover all payers.
Costs of providing care to medically indigent
to be recognized.
Rates to be set on cost per case basis, using
Diagnostic Related Group methodology, currently
being tested.
12. Stated that Medicare and Medicaid will be participating in the revised system, subject to a limit on program liability.
13. Supported a cost containment program applying to all hospital costs and all payers, under uniform definitions of costs, with coordination with planning authorities.







14. Emphasized the importance of hospital cost containment in the fight against inflation.

John E. Peterson,, Executive Vice President and Director-, and Richard D. Kee nan, Controller of the
Valley Hospital, Ridgewood, New Jersey
1. Stated that the SHARE system is superior to the system used by New York State, primarily because of interaction between rate analyst and hospital under SHARE.
2. Stated that the major drawback of SHARE is that it is not truly prospective, as is the New York system.
3. Expressed concern over the lengthy rate appeals process in New Jersey.
4. Cited reasons for numerous and lengthy appeals -SHARE was designed with minimal industry
input.
Rate analysts are inexperienced in hospital
operations and have too much discretion.
Rates are influenced by political pressure.
5. Listed general criticisms of SHARE -Per them rates encourage longer lengths of
stay.
Does not encourage use of outpatient care.
6. Stated that cost per case refinement will
eliminate incentive for long lengths of stay and will
alter delivery of health care in State.
7. Commented on H.R. 2626 -Opposed non-supervisory wage pass through.
Recommended against using per them approach
to measure efficiency.

Donald A. Bradley, President, and James H. Carroll,
Vice President, Finance, Morristown Memorial
Hospital, Morristown, New Jersey
1. Commented on New Jersey's program (SHAR-'.P) -Inadequate definitions of departmental cost
components have frequently resulted in meaningless comparisons.
Hospitals have difficulty determining what
services within a department are considered
reasonable.
Paying a per them does not discourage admission of patients to hospitals.






52


A hospital with a long length of stay is
paid more than one with a short length of stay.
The appeal process is lengthy; inequities, as
viewed by the hospitals, must be taken to the
courts.
The hospital has been forced to seek grant
funds to provide new services to meet community
needs.
The program has had little effect on the physician's medical management of patients when
hospitalized and the intensity of care provided.
2. Expressed concern that a mandatory ceiling on inpatient revenues applied on a nation or state-wide basis would create serious inequities when applied to 8,000 uniquely different hospitals.

Mary L. Holm, Prudential Insurance Company of America

1. Commented on New Jersey's program and what it
means for Prudential.
2. Supported H.R. 2626 -Hosptial costs have been rising at an unacceptably high rate.
Hospitals are insulated from the cost effects
of their economic decisions.
Consumers have no incentive to shop for hospital care.
Regulation is needed to instill the cost control incentives that are lacking in the industry.
Legislation that applies only to some patients
will further shift costs to other patients, particularly those privately-insured.
3. Noted that Prudential would like to see prospective budget review and rate-setting systems in all the States and observed they -Provide a reasonable check on increasing
hospital costs by reviewing all costs and by
approving necessary increases on a flexible
hospital-by-hospital basis.
Bring equity into the system of hospital
charges.
4. Recommended that stronger incentives for States to establish their own systems, together with Federal
guidelines for State programs, be added to the bill,








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