HOSPITAL COST CONTAINMENT ACT, 1977

WEDNESDAY, JULY 6, 1977

U.S. SENATE,

SUBCOMMITTEE ON HEALTH AND SCIENTIFIC RESEARCH

OF THE COMMITTEE ON HUMAN RESOURCES,

Bangor, Maine.

The subcommittee met, pursuant to notice, at 12 o'clock noon, in the city council chambers, city hall, Bangor, Maine, Senator William D. Hathaway presiding pro tempore.

Present: Senator Hathaway.

Senator HATHAWAY. The Subcommittee on Health and Scientific Research will come to order.

OPENING STATEMENT OF SENATOR HATHAWAY

Senator HATHAWAY. I would like to welcome you to this hearing on health cost containment held by the Senate Subcommittee on Health and Scientific Research of which I am a member. The committee, as you probably know, is chaired by Senator Kennedy of Massachusetts. We hope to gather testimony on President Carter's Health Cost Containment Act, which I introduced along with Senator Kennedy.

It has become clear that Congress must make an attempt to control health care inflation, which has driven hospital costs and other medical costs sharply upward in the past few years.

By way of illustrating how much those costs have gone up, let me say that 20 years ago health care cost about 5 percent of our gross national product. Today, that same health care eats up more than 81⁄2 percent of our GNP. While not as visible as our energy crisis, this health cost crisis is in many ways just as serious and just as dangerous to our society's financial well-being.

Just as the energy cost increases can cause our standard of living to decline, so can ever increasing health care costs cause us to neglect other areas of human need.

Nearly 12 cents of every Federal dollar now goes to pay for health care, and 9 of that 12 cents goes to pay for the cost of hospital care. Hospital costs eat up 40 percent of the Nation's health care budget. And those costs have been going up at a rate faster than the cost of living for the past 20 years.

Now, in 1965 an average hospital stay cost less than $300. Now that same average stay costs more than $1,300, and Americans now find themselves working more than 1 month out of every year just to pay for their health care needs. Private health insurance premiums

have risen 15 to 29 percent, and the end of the spiral is no where in sight. In fact, the spiral doesn't even appear to be slowing down. The cost of a hospital stay in 1976 increased an amazing 15 percent—a figure 21⁄2 times as great as the increase in the Consumer Price Index and higher even than the increases in the cost of food and energy. I agreed to cosponsor President Carter's Health Cost Containment Act because I strongly agree with its overall goals. The administration claims that it will save about $2 billion in 1978 and as much as $5.5 billion by 1980.

The savings will come about through limiting inpatient reimbursements of acute care hospitals, discouraging unnecessary hospitalization, and through other areas of cost containment. While I believe in the goals of the legislation, I also agree with those of my colleagues who feel that we should move only with great caution in this area.

But whatever we decide to do, we must find ways to encourage hospitals to operate more efficiently. We must look at rising costs not only in hospitals, but eventually also in nursing homes and intermediate care facilities. We must make sure that cost controls do not lead to a decline in patient care. We must make sure that costs beyond the control of hospitals, such as energy costs, are taken into account.

We need also to be concerned about problems of access and quality in rural areas. In a fundamental sense, the health manpower shortages, lack of transportation and rural poverty impact on the goal of this legislation. The way health care is financed and delivered depends on many factors, and Federal policy must address hospital cost containment with the broader questions of access, cost, equity, and quality in

view.

These questions, and a good number of others, will have to be answered as we study the President's proposal. And these are some of the questions we hope will be addressed at the hearings here today.

I might add that at the time the President asked me, or the secretary really of HEW, asked me to cosponsor the bill, I declined to do so because I knew that it would have a severe impact on the rural hospitals. I didn't think that some of the provisions were very realistic, and it was only after considerable pressure that was borne upon me that I agreed to cosponsor it; and as many of you probably know, my statement in the Congressional Record at the time of the cosponsorship was akin to that of Paul Rogers, the chairman of a similar committee in the House, expressing a great deal-a great many caveats about the bill and introducing it for the sole purpose of getting hearings on it and finding out just exactly where we could contain costs. The hearings are today, I think, extremely important because up to this time we have had very little testimony with respect to the impact. on rural hospitals. The subcommittee will be going into a markup of the bill, which means amending the original legislation, the original bill as submitted, sometime next week; and then it will go from there to the full committee and be on the floor, I presume, before the first of August. I think the President would like to see some bill enacted as a matter of fact before the first of August. I want to reiterate that these hearings are extremely important because it will give me the necessary background to make the case for rural hospitals when we go into markof this bill sometime next week.

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Our first witness, we have eight witnesses today. I understand we have to be out of this room by 3 o'clock. We should have plenty of

time. Our first witness for the panel, Mike Samuels, Ph. D., Bureau of Community Health Services, HEW, and Isadore "Sam" Seeman, Planning and Evaluation, from HEW.

Gentlemen, it is nice to have you here.

STATEMENT OF ISADORE "SAM" SEEMAN, PLANNING AND EVALUATION, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE

Mr. SEEMAN. Senator Hathaway, we appreciate the chance to be here and have an interchange with you on this program. I would like to take a few minutes, if I might, and summarize the administration's position in presenting the bill. Some of what I will say will underscore what you have indicated, because those of us in the administration who are looking at hospital cost increases and health care increases identify the same problems as you have. We think there clearly is a problem that is a concern to all who have responsibility to help pay for health care. Consumers are concerned about it. Policy makers at the State level are concerned because of the medicaid program. Policymakers at the Federal level are concerned because of the impact on the Federal budget for purchasing hospital and health care. When looked at from the point of view of the consumer as you, yourself, cited, private health insurance premiums have been going up 15 to 20 percent a year. That obviously has a very major impact on all who purchase health insurance and that is most of the American people.

One clear illustration of the impact of increasing costs is the impact on the purchase of health care by Federal employees. The Blue Cross premiums for Federal employees last year rose 33 peecent. The payments by the Federal Government itself when we buy care for the aged through medicare and for the poor through medicaid have been increasing at very rapid rates. Medicare and medicaid expenditures in 1975 totaled $32 million. That represented-that plus what the States put in for medicaid represented 25 percent of all national health expenditures. And as you cited, it constituted 11 percent of the total Federal budget for all purposes. Medicare and medicaid expenditures and State and local payments for hospital care are increasing about $4 billion a year. That money, as you pointed out, is also needed for other important health purposes and social welfare purposes. It drains those needs to continue to pay these increases for hospital care.

From whatever short or long view one takes, one recognizes that the increases for hospital care have been very unusual, not comparable to any other sector of the economy. If you look at the period from 1965 through 1971, the general Consumer Price Index went up 4.1 percent while hospital expenditures went up 13 percent. If you take a more recent period, 1974 to 1975, general Consumer Price Index went up 10.6 percent while hospital expenditures went up 17.6 percent. So clearly there is a problem that is of concern to all who pay for hospital and health care.

The administration felt that it was a special concern that needed special attention; and, therefore, proposed the remedies that are set forth in the Hospital Cost Containment Act. And if I might, I would like to just summarize those provisions very briefly. As we all know, what is proposed is the ceiling on the increase in the rate of payment and not on the levels themselves. This ceiling would apply to acute care hospitals. The limit would be set by a formula that takes into

account the general consumer price index so that it does, in fact, recognize that hospitals have to pay more for the things they buy; and the base factor in the formula is the GNP deflator, which represents the average consumer price index change. In addition, we recognize that there are special factors that are driving hospital costs up. Factors generally referred to as "intensity factors," and that also is built into the formula. So there are two components that for the year 1978 would work out arithmetically to constitute a 9-percent increase 6 of it being represented by the general GNP and 3 by the intensity factors, and that formula would apply in future years, so that again both general increases and intensity increases are taken into account in the formula.

The limit would apply to each class of payors-Blue Cross, Blue Shield, medicare, medicaid, private purchasers, commercial insurance. Each class of payor would be guided by the limits that are applicable. Recognizing that these limits can't be applied uniformly and arbitrarily, there are some adjustments that are permitted, adjustments for patient load. And those adjustments are general adjustments but are recognition that there is a particular problem with small hospitals so that there is a different factor in the bill. Hospitals whose annual admissions are less than 4,000 a year, are given a little more generous treatment recognizing that since they are small hospitals they would have to expect wider ranges of admission changes.

There is a strong emphasis in the bill on attempting to make it administratively simple-requiring no new forms, no new audits, no new procedures, utilizing the medicare intermediaries. There is also an exceptions procedure. If there are major changes in the patient load or major increases in the capacity or type of service, the hospital could apply for an exception. The health systems agency would review and comment on them. The State health planning and development agency would make a recommendation, and HEW would then act on them. If no action is taken within 90 days, it is assumed that the exception is approved.

There is an important provision that recognizes the fact that in the past there have been low-wage workers in hospitals so that there is an adjustment for nonsupervisory employee wage increases. In fact, whatever increments are required on the basis of the hospital negotiations with its employees would be recognized and passed through. There is a provision that would require hospitals to maintain their charity loads so there is not any suffering on the part of the lowincome population. Where a State program exists and has existed for a sufficient period of time and is a program of the kind that meets the Federal standards, that State program could prevail instead of the Federal program where the Secretary approves and recognizes that. Finally, there is in the bill an important provision dealing with capital expenditures since we recognize that in many places there are more hospital beds than are needed, and we recognize that overbedding is a very expensive operation, so that there is a capital expenditure limit; $2.5 million will be distributed among the States according to population initially and the applications for approval of expenditures within that limit to be reviewed by the health systems and State health planning and development agencies.

The bill clearly identifies this proposal as the shortrun, transitional plan. We recognize that the problem is a longstanding one and will

require longrun consideration with some new factors to be introduced. The bill requires the Secretary of HEW to present to the Congress a proposal for a longrun system. We have not worked it out, but we have identified some of the features. There are those who would like to see a system that recognizes the differences in hospitals through some kind of classification. We think that may be a part of the longrun system, but the data are not available to permit such a plan to go into operation now. Other elements of the longrun system would probably include modification in methods of reimbursement; for example, more emphasis on prospective reimbursements, perhaps more emphasis on application arrangements for health maintenance organization's permit. There probably would be some characteristics in the longrun system that affect the delivery system. Dr. Samuels will talk about the importance of primary care and ambulatory care. We see those as important elements of a longrun plan.

We also feel strongly that in the long run more emphasis will need to be given on prevention, on informing the consumer so that he can take be care on his own health and avoid some of the situations that lead to hospital care.

This is a summary of the proposals. I would be happy, after Dr. Samuels has made his presentation, to respond to your questions. Senator HATHAWAY. Fine, thank you.

STATEMENT OF MIKE SAMUELS, PH. D., BUREAU OF COMMUNITY HEALTH SERVICES, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE

Mr. SAMUELS. The focus of our hearings today is primarily the Hospital Containment Act, but I would like to thank Senator Hathaway for giving us the opportunity to discuss some of the complementary activities sponsored by the Administration of Rural Health. I think probably the most important consideration, as Sam has identified as the more longrun one, is to talk about this particular act in the context of containing costs across the health care sector. I think a good way to visualize that is if we are talking about a health care system which in its simplest form consists of three levelsprimary care, which is the care that is normally received in a practitioner's office; secondary care, services in the community hospital; and tertiary care, the teaching hospitals and medical schools. What happens is if any one of those particular sectors breaks down, then it has an impact on cost in the other sector. Let's take a very simple example. Let's say that working around the yard or something you do a simple laceration of your hand, nothing very major, something that just requires two or three stitches. If you have access to a primary care physician, we will talk about a cost of somewhere around $10 or $15; or if that particular practice employe nurse practitioners or physician's assistants, it may be even less. However, if you don't have access to that kind of primary care and you have to go either to the secondary facility or the tertiary facility, in the emergency room, then we are talking about a cost of $45 to $60. That is a cost that either the individual bears directly or through public programs that we all bear.

If we take some specific examples in public programs. I know of a situation, not in this State, where the reimbursement under medicaid