PAGENO="0001" MEDICAID AND MEDICARE AMENDMENTS * HEARINGS BEFORE THE SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE HOUSE OF REPRESENTATIVES NINETY-SIXTH CONGRESS FIRST SESSION ON H.R. 4000 (And All Similar Bills) BILLS TO AMEND THE SOCIAL SECURITY ACT WITH RESPECT TO HEALTH PROGRAMS AUTHORIZED UNDER IT, AND FOR OTHER PURPOSES OCTOBER 16, 19, 22 AND 23, 1979 Serial No. 96-91 0,1 Printed for the use of the Committee on Interstate and Foreign Commerce U.S. GOVERNMENT PRINTING OFFICE ~6-O71 0 WASHINGTON: 1980 PAGENO="0002" COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE HARLEY 0. STAGGERS, West Virginia, Chairman JOHN D. DINGELL, Michigan LIONEL VAN DEERLIN, California JOHN M. MURPHY, New York DAVID E. SA~ERFIELD III, Virginia BOB ECKHARDT, Texas RICHARDSON PREYER, North Carolina JAMES H. SCHEUER, New York RICHARD L. OrFINGER, New York HENRY A. WAXMAN, California TIMOTHY E. WIRTH, Colorado PHILIP R. SHARP, Indiana JAMES J. FLORIO, New Jersey ANTHONY TOBY MOFFEVF, Connecticut JIM SANTINI, Nevada ANDREW MAGUIRE, New Jersey MARTY RUSSO, Illinois EDWARD J. MARKEY, Massachusetts THOMAS A. LUKEN, Ohio DOUG WALGREN, Pennsylvania ALBERT GORE, JR., Tennessee BARBARA A. MIKULSKI, Maryland RONALD M. MOTFL, Ohio PHIL GRAMM, Texas AL SWIFF, Washington MICKEY LELAND, Texas RICHARD C. SHELBY, Alabama KENNETH J. PAINTER, Acting Chief Clerk and Staff Director ELEANOR A. DINKIN5, First Assistant Clerk KAREN NELSON, Professional Staff FRANCES L. DEPEYSTER, Staff Associate (Minority) SUBCOMMIrFEE ON HEALTH AND THE ENVIRONMENT HENRY A. WAXMAN, California, Chairman DAVID SATTERFIELD III, Virginia TIM LEE CARTER, Kentucky RICHARDSON PREYER, North Carolina SAMUEL L. DEVINE, 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 SAMUEL L. DEVINE, Ohio JAMES T. BROYHILL, North Carolina TIM LEE CARTER, Kentucky CLARENCE J. BROWN, Ohio JAMES M. COLLINS, Texas NORMAN F. LENT, New York EDWARD R. MADIGAN, Illinois CARLOS J. MOORHEAD, California MATFHEW J. RINALDO, New Jersey DAVE STOCKMAN, Michigan MARC L. MARKS, Penns:'lvania TOM CORCORAN, Illinois GARY A. LEE, New York TOM LOEFFLER, Texas WILLIAM E. DANNEMEYER, California (II) PAGENO="0003" CONTENTS Hearings held on- Page October 16, 1979. 1 October 19, 1979 . 353 October 22, 1979 525 October 23, 1979 831 Text of- HR. 211 140 H.R. 1821 127 HR. 2159 90 HR. 2426 120 HR. 2445 122 H.R. 3531 136 H.R. 3854 129 H.R. 4000 2 H.R. 4106 15 HR. 4444 143 H.R. 4475 159 H.R. 4894 31 H.R. 5458 195 H.R. 5544 85 Report of- Health, Education, and Welfare Department: H.R. 4106 197 H.R. 4444 200 H.R. 4475 204 Office of Management and Budget, Executive Office of the President: H.R. 4000 196 H.R. 4106 198 H.R. 4444 199 H.R. 4475 213 Statement of- Ackerman, Frederick W., M.D., chairman, council on legislation, American Medical Association 619 Akerley, Mary, director, national affairs, National Society for Autistic Children 849 Anderson, Greg, M.D., president, Physician National Housestaff Associ- ation 525, 563 Blehart, Bruce, legislative department, American Medical Association 619 Boren, Hon. David L., a U.S. Senator from the State of Oklahoma 845 Brandt, Edward N., Jr., M.D., on behalf of Association of American Medical Colleges 525 Brennan, Donald, treasurer, Group Health Association of America 353 Brodhead, William M., a Representative in Congress from the State of Michigan 268 Cain, Harry P., II, Ph. D., executive director, American Health Planning Association 822 Chavkin, David F., managing attorney, National Health Law Program 676 Coelho, Tony, a Representative in Congress from the State of California.... 897 Cooper, John A. D., M.D., Ph. D., president, Association .of American Medical Colleges 525 Corrada, Hon. Baltasar, resident commissioner, Puerto Rico 467 Doherty, James, executive director, Group Health Association of America 353 Epstein, Janet, M.S.N., C.N.M., Maternity Center Associates 496, 512 Erickson, Marilyn, president, National Association for Hospital Develop- ment 1112 (III) PAGENO="0004" IV Statement of-Continued Page Evans, Hon. Melvin H., delegate, Virgin Islands . 467, 493 Fenninger, Leonard, M.D., group vice president of medical education, American Medical Association 525 Follingstad, Marianne, research associate, National Citizens' Coalition for Nursing Home Reform 390, 443 Fox, Peter, Director, Office of Policy Analysis, Health Care Financing Administration, Public Health Service, Department of Health, Educa- tion, and Welfare 214 Gehrig, Leo J., M.D., senior vice president, American Hospital Associ- ation 581, 583 Goodale, Fairfield, M.D., on behalf of American Medical Association 525, 561 Grupenhoff, John, M.D., Washington representative, National Association for Hospital Development 1112 Hilder, Elizabeth, Bureau of Consumer Protection, Federal Trade Commis- sion 276 Holleran, Connie, R.N., deputy executive director, American Nurses' Asso- ciation 496 Hollowell, Jean, member, board of directors, National Society for Autistic Children 849, 859 Hutchens, Tyra T., M.D., president, College of American Pathologists 861 Iglehart, John K., vice president, Kaiser Foundation Health Plan, Inc... 353, 370 Jacoby, Merritt W., vice president, Blue Cross and Blue Shield Associations 901 Kauffman, Nick, director, Washington office, American Society for Medical Technology 1109 Keller, Candace, legislative representative, Group Health Association of America 353 Kilbreth, Beth, Nurse Midwifery Consumer 496, 514 Lane, Jim, Kaiser Foundation Health Plan, Inc 353 Lane, Laurence F., director for public policy, American Association of Homes for the Aging 390, 423 Latanich, Terry, Bureau of Consumer Protection, Federal Trade Commis- sion 276 Lawton, Steve, counsel, American Society for Medical Technology 1109 McCarthy, Eugene G., M.D., M.P.H., Cornell University Medical College ... 1046 McMahon, John A., president, American Hospital Association 581 MacDonald, Jack, executive vice president, National Council of Health Care Services 390 Markey, Hon. Edward J., a Representative in Congress from the State of Massachusetts 831 Merrill, Jeffrey, Director, Office of Legislation and Policy, Health Care Financing Administration, Public Health Service, Department of Health, Education, and Welfare 214 Nickelson, Daniel, Director, Office of Program Development and Coordina- tion, Health Standards and Quality Bureau, Health Care Financing Administration, Public Health Service, Department of Health, Educa- tion, and Welfare 1046, 1095 Peterson, Harry N., director, legislative department, American Medical Association 525, 619 Pontius, Edwin E., M.D., chairman, council on government relations, College of American Pathologists 861 Price, Glenda, president, American Society for Medical Technology 1109 Rivera-Dueno, Jaimo, M.D., Secretary of Health of Puerto Rico 467 Schaeffer, Leonard D., Administrator, Health Care Financing Administra- tion, Public Health Service, Department of Health, Education, and Welfare 214 Schaner, Kenneth, counsel, National Council of Community Hospi- tals 1025, 1112 Schenken, Jerald R., M.D., chairman, legislative and regulatory activities committee, College of American Pathologists 861 Shearer, Gall, Coordinator of Insurance Task Force, Office of Policy Planning, Federal Trade Commission 276 Sigelman, Daniel W., staff associate, Public Citizen Health Research Group 704 Smith, Helen, M.D., Director, Health Standards and Policies Bureau, Health Care Financing Administration, Public Health Service, Depart- ment of Health, Education, and Welfare 214 Steinhardt, Bruce J., Director, Office of Demonstrations and Evaluations, Health Care Financing Administration, Public Health Service, Depart- ment of Health, Education, and Welfare 1046, 1079 PAGENO="0005" V Statement of-Continued Page Sullivan, James F., special assistant to the executive director for member services, National Retired Teachers Association, and also American Association of Retired Persons 329 Tom, Sally, C.N.M., M.S., member, American College of Nurse- Midwives 496, 507 Verville, Richard, LL.B., counsel, National Easter Seal Society for Crippled Children and Adults, and also on behalf of American Coalition of Citizens With Disabilities, American Congress of Rehabilitation Medicine, Epilep- sy Foundation of America, National Association for Retarded Citizens, National Association of Private Residential Facilities for the Mentally Retarded, National Association of State Mental Retardation Program Directors, National Society for Autistic Children, United Cerebral Palsy Association, Inc 849 Vladeck, David C., counsel, Public Citizen Health Research Group 704 Wirth, Hon. Timothy E., a Representative in Congress from the State of Colorado 837 Wolfe, Sidney M., M.D., director, Public Citizen Health Research Group ... 704 Won Pat, Hon. Antonio B., Delegate, Guam 467, 494 Wulsin, Lucien, staff attorney, National Health Law Program 676, 678 Additional materials submitted for the record by- American College of Nurse-Midwives, attachment to Ms. Tom's prepared statement, excerpt from Federal Register, Vol. 44, No. 198, October 11, 1979 511 American Hospital Association, attachment to prepared statement, adden- dum to statement-distinct-part reimbursement, amendments to H.R. 4000 611 American Medical Assoication, comments of 624 Association of American Medical Colleges: Attachments to Dr. Brandt's prepared statement: Appendix A-part B payments for services of supervising physi- cians in a teaching setting 540 Appendix B-questions and answers relating to implementation of intermediary letter No. 372 548 Letter, dated November 5, 1979, from John Cooper to Chairman Waxman re comments on four additional areas by proposed medi- care/medicaid amendments 577 Blue Cross and Blue Shield Associations: Attachments to Mr. Jacoby's prepared statement: Attachment I-Medicare complementary coverage 917 Attachment IT-To make improvements in the medicare and medicaid programs 929 Attachment ITT-Medicare: reimbursement for HMO's 955 Attachment TV-Mandatory second opinion for elective surgery in the Federal Employee Program 959 Attachment V-H.R. 40000 a bill to amend the Social Security Act 974 Attachment VT-Reimbursement of Physicians in Teaching Hospi- tals 984 Attachment VII-S. 505 Medicare-Medicaid Administrative and Reimbursement Reform Act of 1979 991 Second surgical opinion program 1024 College of American Pathologists, attachments to Mr. Hutchens prepared statement: Appendix A-Justification for further study of reimbursement meth- ods 892 Appendix B-Recommendations on the voluntary effort on Hospital Cost Containment 894 Corrada, Hon. Baltasar, Resident Commissioner, Puerto Rico, attachment to prepared statement, request for the removal of the ceiling to Puerto Rico under title XTX of the Social Security Act 475 Federal Trade Commission, attachments to Ms. Shearer's prepared state- ment: Design Stu4y for an impact evaluation of medicare supplement insur- ance regulation 325 Testimony of Elizabeth Hanford Dole: June 29, 1978 296 November 28, 1979 312 Group Health Association of America, attachment to Mr. Brennan's pre- pared statement: Article from New England Journal of Medicine, June 15, 1978, "How Do Health Maintenance Organizations Achieve Their `Savings'?" .... 362 Letter, dated November 30, 1979, from Donald Brennan to Chairman Waxman and Ms. Mikulski re answer to Ms. Mikulski's questions, with attached diagram 376 PAGENO="0006" VI Additional materials submitted for the record by-Continued Page Health and the Environment Subcommittee, Interstate and Foreign Com- merce Committee, article, New York Times, "Midwives: Acceptance Is Growing Nationwide" 519 Health, Education, and Welfare Department, attachments to Mr. Schaeffer's prepared statement: HEW positions on HR. 4000 240 HEW positions on major medicaid and part B medicare provisions, HR. 934 246 National Council of Health Care Services, attachments to Mr. MacDonald's prepared statement: Letter, dated October 15, 1979, from Mr. Van Cleve to Mr. Claude Pepper re potential effects of a proposed amendment to medicaid's Nursing Home Reimbursement Requirements (HRD-80-1) 413 Letter, dated October 23, 1979, from Jack MacDonald to Chairman Waxman re answer to Dr. Carter's questions regarding hospital swing beds 461 Summary statement 405 National Easter Seal Society for Crippled Children and Adults, attachment to Mr. Verville's prepared statement, total monthly income as a function of monthly earned income for various categories of SSI recipients April 1979 (assuming no other type of income) 858 National Retired Teachers Association, attachment to Mr. Sullivan's pre- pared statement, summary statement 346 Public Citizen Health Research Group, attachments to Dr. Wolfe's and Mr. Sigelman's prepared statement: Letter, dated Sept. 30, 1977 from Ted Bogue to Dr. Burka re Freedom of Information Act request 718 Memorandum and 13 affidavits dealing with the Freedom of Informa- tion Act 720 Wirth, Timothy E., a Representative in Congress from the State of Colora- do, correspondence of letters between Mr. Wirth and former Representa- tive Rogers, and Senators Talmadge and Haskell re Congressional intent in passing section 20 of Public Law 95-142 839 Statements submitted for the record by- American Association of Foundations for Medical Care 1124 American Association of Professional Standards Review Organizations 1125 American Chiropractic Association 1137 American Clinical Laboratory Association 1146 American College of Physicians 1172 American College of Surgeons 1175 American Health Care Association 1128 American Society of Internal Medicine 1159 California, State of, Department of Health Services 1196 Electronic Data Systems Corp 1187 Health Insurance Association of America 1179 ORGANIZATIONS REPRESENTED AT HEARINGS American Association of Homes for the Aging, Laurence F. Lane, director for public policy. American Association of Retired Persons, see National Retired Teachers Association. American Coalition of Citizens With Disabilities, see National Easter Seal Society for Crippled Children and Adults. American College of Nurse-Midwives, Sally Tom, C.N.M., MS., member. American Congress of Rehabilitation Medicine, see National Easter Seal Society for Crippled Children and Adults. American Health Planning Association, Harry P. Cain II, Ph. D., executive director. American Hospital Association: Gehrig, Leo J., M.D., senior vice president. McMahon, John A., president. American Medical Association: Ackerman, Frederick W., M.D., chairman, council on legislation. Blehart, Bruce, legislative department. Fenninger, Leonard, M.D.. group vice president of medical education. Goodale, Fairfield, M.D. Peterson, Harry, director, legislative department. PAGENO="0007" VII American Nurses' Association, Connie Holleran, deputy executive director. American Society for Medical Technology: Kauffman, Nick, director, Washington office. Lawton, Steve, counsel. Price, Glenda, president. Association of American Medical Colleges: Brandt, Edward N., Jr., M.D. Copper, John A. D., M.D., Ph. D., president. Blue Cross and Blue Shield Associations, Merritt W. Jacoby, vice president. College of American Pathologists: Hutchens, Tyra T., M.D., president. Pontius, Edwin E., M.D., chairman, council on government relations. Schenken, Jerald R., M.D., chairman, legislative and regulatory activities committee. Epilepsy Foundation of America, see National Easter Seal Society for Crippled Children and Adults. Federal Trade Commission: Hilder, Elizabeth, Bureau of Consumer Protection. Latanich, Terry, Bureau of Consumer Protection. Shearer, Gail, Coordinator of Insurance Task Force, Office of Policy Planning. Group Health Association of America: Brennan, Donald, treasurer. Doherty, James, executive director. Keller, Candace, legislative representative. Health, Education, and Welfare Department: Fox, Peter, Director, Office of Policy Analysis, Health Care Financing Adminis- tration, Public Health Service. Merrill, Jeffrey, Director, Office of Legislation and Policy, Health Care Financing Administration, Public Health Service. Nickelson, Daniel, Director, Office of Program Development and Coordination, Health Standards and Quality Bureau, Health Care Financing Administration, Public Health Service. Schaeffer, Leonard D., Administrator, Health Care Financing Administration, Public Health Service. Smith, Helen, M.D., Director, Health Standards and Policies Bureau, Health Care Financing Administration, Public Health Service. Steinhardt, Bruce J., Director, Office of Demonstrations and Evaluations, Health Care Financing Administration, Public Health Service. Kaiser Foundation Health Plan, Inc.: Iglehart, John K., vice president. Lane, Jim. Maternity Center Associates, Janet Epstein, M.S.N., C.N.M. National Association for Hospital Development: Erickson, Marilyn, president. Grupenhoff, John, M.D., Washington representative. Schaner, Kenneth, counsel. National Association for Retarded Citizens, see National Easter Seal Society for Crippled Children and Adults. National Association of Private Residential Facilities for the Mentally Retarded, see National Easter Seal Society for Crippled Children and Adults. National Association of State Mental Retardation Program Directors, see National Easter Seal Society for Crippled Children and Adults. National Citizens' Coalition for Nursing Home Reform, Marianne Follingstad, re- search associate. National Council of Community Hospitals, Kenneth I. Shaner, counsel. National Council of Health Care Services, Jack MacDonald, executive vice president. National Easter Seal Society for Crippled Children and Adults, Richard Verville, LL.B., counsel. National Health Law Program: Chavkin, David F., managing attorney. Wulsin, Lucien, staff attorney. National Retired Teachers Association, James F. Sullivan, special assistant to the executive director for member services. National Society for Autistic Children: Akerley, Mary, director, national affairs. Hollowell, Jean, member, board of directors. PAGENO="0008" vifi Physician National House Staff Association, Greg Anderson, M.D., president. Public Citizen Health Research Group: Sigelman, Daniel W., staff associate. Viadeck, David C., counsel. Wolfe, Sidney M., MD., director. United Cerebral Palsy Associations, Inc., see National Easter Seal Society for Crippled Children and Adults. PAGENO="0009" MEDICAID AND MEDICARE AMENDMENTS TUESDAY, OCTOBER 16, 1979 - HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The subcommittee met, pursuant to notice, at 1:30 p.m. in room 2123 Rayburn House Office Building, Hon. David E. Satterfield presiding (Hon. Henry A. Waxman, chairman). Mr. SATTERFIELD. The subcommittee will come to order. The chairman of the subcommittee is tied up on the floor, and I have been asked to read the statement that he would have read had he been here at this particular moment. Today the subcommittee is beginning 4 days of hearings on a number of legislative proposals designed to address various prob- lems in the medicaid and medicare programs. We have before us proposals made by the administration to change the way medicare reimburses HMO's. We have before us proposals by our colleagues on the Ways and Means Health Sub- committee, as well as our colleagues on the Aging Committee, to set standards for insurance policies sold to supplement medicare. We have before us a series of proposals recommended by the Senate Finance Committee which the House Budget Committee has urged us to examine closely in order to increase savings under medicare and medicaid and thereby reduce the deficit. We have before us a number of legislative proposals designed by members of this subcommittee to address specific medicaid and medicare issues which concern them greatly. All of these proposals have significant implications-for recipi- ents of care, for providers of services, for administrators of the programs, and for Federal and State budgets. I know the subcom- mittee will want to consider each of them carefully. Without objection the text of H.R. 4000, H.R. 4106, H.R. 4894, H.R. 5544, H.R. 2159, H.R. 2426, H.R. 2445, H.R. 1821, H.R. 3854, H.R. 3531, H.R. 211, H.R. 4444, H.R. 4475, and H.R. 5458, and also agency reports on H.R. 4000, H.R. 4106, H.R. 4444, and H.R. 4475 will be placed at this point in the record. [Testimony resumes on p. 214.] [The bills and agency reports referred to follow:] (1) PAGENO="0010" 2 [H.R. 4000, introduced by Mr. Rangel (for himself, Mr. Corman, Mr. Vanik, and Mr. Ford of Tennessee) on May 8, 1979, Cosponsored on June 29, 1979, by: Mr. RQstenkowski, and Mr. Brodhead.] A BILL To amend tjie Social Security Act with respect to health programs authorized under it, and for other purposes. 1 Be it enacted by the Senate and House of Representa- 2 lives of the United States of America in Congress a8sembled, 3 EXPANDED MEMBERSHIP OF PROFESSIONAL STANDARDS 4 REVIEW ORGANIZATIONS 5 SECTION 1. Section 1152(b)(1)(A) of the Social Security 6 Act is amended- 7 (1) by inserting "and, if the organization so elects, 8 of other health care practitioners engaged in the prac- 9 tice of their professions in such area who hold inde- 10 pendent hospital admitting privileges," after the 11 comma in clause (ii); and 12 (2) by inserting "(except as otherwise provided 13 under section 1155(c))" after "does not" in clause (vi). 14 REGISTERED NURSE AND DENTIST MEMBERSHIP ON 15 STATEWIDE COUNCIL ADVISORY GROUP 16 SEC. 2. Section 1162(e)(1) of the Social Security Act is 17 amended by inserting "(including at least one registered pro- PAGENO="0011" 3. 2 1 fessional nurse and at least one doctor of dental surgery or of 2 dental medicine)" after "representatives". 3 NONPHYSICIAN MEMBERSHIP ON NATIONAL 4 PROFESSIONAL STANDARDS REVIEW COUNCIL 5 SEC. 3. (a) Section 1 163(a)(1) of the Social Security Act 6 is amended by inserting "one doctor of dental surgery or of 7 dental medicine, one registered professional nurse, and one 8 other health practitioner (other than a physician as defined in 9 section 1861(r)(1))," after "physicians,". 10 (b) Section 1 163(a)(2) of such Act is amended by strik- 11 ing out "four members" and inserting "five members" in lieu 12 thereof. 13 (c) Section 1163(a)(3) of such Act is amended by insert- 14 ing "physician" after "the". *15 (d) Section 1163(b) of such Act is amended by striking 16 out "Members" and inserting in lieu thereof "Physician 17 members". 18 (e) Section 1173 of such Act is amended by striking out 19 "(except sections 1155(c) and 1163)" and inserting in lieu 20 thereof "(except section 1155(c))". 21 ADVISORY COMMITTEE TO THE NATIONAL PROFESSIONAL 22 STANDARDS REVIEW COUNCIL 23 SEC. 4. Section 1163 of the Social Security Act is 24 amended by adding at the end thereof the following new sub- 25 section: PAGENO="0012" 4 3 "(f)(1) The Council shall be advised and assisted in car- 2 rying out its functions by an advisory committee (of not less 3 than seven nor more than flfteen members) which shall be 4 made up of representatives of health care practitioners (other 5 than physicians) for whose services payment may be made 6 cm whole or in part) under any program established by or 7 pursuant to this Act. 8 "(2) The Secretary shall by regulations provide the 9 manner in which members of such advisory committee shall 10 be selected and the terms of service. 11 "(3) The expenses reasonably and necessarily incurred, 12 as determined by the Secretary, by such committee in carry- 13 ing out its functions shall be considered to be expenses neces- 14 sarily incurred by the National Professional Standards 15 Review Council.". 16 HOSPITAL PROVIDERS OF LONG-TERM CARE SERVICES 17 ("SWING-BEDS") 18 SEC. 5. (a)(1) Title XVIIT of the Social Security Act is 19 amended by adding the following new section at the end 20 thereof: 21 "HOSPITAL PROVIDERS OF EXTENDED CARE SERVICES 22 "SEc. 1882. (a)(1) Any hospital (other than a hospital 23 which has in effect a waiver of the requirement imposed by PAGENO="0013" 5 4 1 section 1861(e)(5)) which has an agreement under section 2 1866 may (subject to subsection (b)) enter into an agreement 3 with the Secretary under which its inpatient hospital facilities 4 may be used for the furnishing of services of the type which, 5 if furnished by a skilled nursing facility, would constitute 6 post-hospital extended care services. 7 "(2)(A) Notwithstanding any other provision of this title, 8 payment to any hospital for services furnished under an 9 agreement entered into under this section shall be based upon 10 the reasonable cost of the services as determined under sub- 11 paragraph (B). 12 "(B)(i) The reasonable cost of the services consists of 13 the reasonable cost of routine services (determined under 14 clause (ii)) and the reasonable cost of ancillary services (de- 15 termined under clause (iii)). 16 "(ii) The reasonable cost of routine services furnished 17 during any calendar year by a hospital under an agreement 18 under this section is equal to the product of (I) the number of 19 patient days during the year for which the services were fur- 20 nished, and (II) the average reasonable cost per patient-day, 21 such average reasonable cost per patient-day being the aver- 22 age rate per patient-day paid for routine services during the 23 previous calendar year under title XIX to skilled nursing 24 facilities located in the State in which the hospital is located PAGENO="0014" 6 5 1 and which have agreements entered into under section 2 1902(a)(28). 3 "(iii) The reasonable cost of ancillary services shall be 4 determined in the same manner as the reasonable cost of an- 5 cillary services provided for inpatient hospital services. 6 "(b) The Secretary may not enter into an agreement 7 under this section with any hospital unless- 8 "(1) for a period (of not less than twelve months) 9 specified by the Secretary which period immediately 10 precedes the date the agreement is entered into, the 11 hospital has had an average daily occupancy rate of 12 less than 60 percent, and 13 "(2) the hospital has been granted a certificate of 14 need for the provision of long-term care services from 15 the State~ health planning and development agency 16-. (designated under section' 1521 of the Public Health 17 - Service Act) for the State -in which the hospital is in- 1.8 cated. . 19 "(c) An agreement with a hospital under this section 20 shall, except as otherwise provided under regulations of the 21 Secretary, be of the same duration and subject to termination 22 on the same conditions as are agreements with skilled nurs- 23 ing facilities under section 1866 (unless the hospital fails to 24 satisfy the requirements specified in subsection (b)) and shall, 25 where not inconsistent with any provision of this section, PAGENO="0015" 7 6 1 impose the same duties, responsibilities, conditions, and limi- 2 tations, as those imposed under such agreements entered into 3 under section 1866; except that no such agreement with any 4 hospital shall be in effect for any period during which the 5 hospital does not have in effect an agreement under section 6 1866, or where there is in effect for the hospital a waiver of 7 the requirement imposed by section 1861(e)(5). A hospital 8 whose agreement under this section has been terminated 9 shall not be eligible to undertake a new agreement until a 10 two-year period has elapsed from the termination date. 11 "(d) Any agreement with a hospital under this section 12 shall provide that payment for services will be made only for 13 services for which payment would be made as post-hospital 14 extended care services if those services had been furnished by `15 a skilled nursing facility under an agreement entered into 16 under section 1866; and any individual who is furnished serv- 17 ices, for which payment may be made under an agreement 18 under this section, shall, for purposes of this title (other than 19 this section), be deemed to have received post-hospital ex- 20 tended care services in like manner and to the same extent as 21 if the services furnished to him had been post-hospital ex- 22 tended care services furnished by a skilled nursing facility 23 under an agreement under section 1866. 24. "(e) During a period for which a hospital has in effect an 25 agreement under this section, in order to allocate routine PAGENO="0016" 8 7 I costs between hospital and long-term care services for pur- 2 poses of determining payment for inpatient hospital services, 3 the total reimbursement received for routine services from all 4 classes of long-term care patients (including title XVIII, title 5 XIX, and private pay patients) shall be subtracted from the 6 hospital's total routine costs before calculations are made to 7 determine title XVIII reimbursement for routine hospital 8 services. 9 "(f) With respect to a hospital furnishing (under an 10 agreement in effect under this section) of services of the type 11 which, if furnished by a skilled nursing facility, would consti- 12 tute post-hospital extended care services- 13 "(1) the hospital shall be required to meet all the 14 requirements of this Act that a skilled nursing facility 15 would be required to meet with respect. to the furnish- 16 ing of such services, and 17 "(2). the provisions of such services shall be treat- 18 ed and subject to the same requirements of this Act as 19 post-hospital extended care services furnished by a 20 skified nursing facility under this title, 21 except such requirements of section 1861(j) and such other 22 requirements as the Secretary determines to be inappropriate 23 in the case of these services being furnished by a hospital 24 under this section.". PAGENO="0017" 9 8 1 (2) Within three years after the date of the enactment of 2 this Act, the Secretary shall submit to the Congress a report 3 evaluating the program established by the amendment made 4 by paragraph (1) of this subsection and shall include in such 5 report an analysis of- 6 (A) the extent and effect of the agreements under 7 the program on availability and effective and economi- 8 cal provision of long-term care services, and 9 (B) whether the program should be continued. 10 (b) Title XIX of the Social Security Act is amended by 11 adding after section 1912 the following new section: 12 "HOSPITAL PROVIDERS OF SKILLED NURSING AND 13 INTERMEDIATE CARE SERVICES 14 "SEc. 1913. (a) Notwithstanding any other provision of 15 this title, payment may be made, in accordance with this see- 16 tion, under a State plan approved under this title for skilled 17 nursing facility services and intermediate care facility serv- 18 ices furnished by a hospital which has in effect an agreement 19 under section 1882. 20 "(bXl) Payment to any such hospital, for any skilled 21 nursing or intermediate care facility services furnished, shall 22 be at a rate equal to the average rate per patient-day paid for 23 routine services during the previous calendar year under this 24 title to skilled nursing and intermediate care facilities located 25 in the State in which the hospital is located. The reasonable 56-071 0 - 80 - 2 PAGENO="0018" 10 9 1 : cost of' an~il1ary servicei shall be determined in the* same 2 `manner as the reasonable cOst of ancillary services provided 3 for inpatient hospital services. * "(2) With respect to any period for which a hospital has 1 5 an agreement under section 1882, in order to allocate routine -6. costs between hospital and long-term care services, the total 7 reimbursement for routine services received `from'ail :classes 8; of `lông-term care patients (including title `XVffl, title XIX, 9 `and private pay patients) shall be subtracted from the hospi- 10" tal `total routine costs before calculations are made to deter- `11 mine title XIX reimbursement for routine hospital services.". 12 (c) The amendments made by this section become effec~ 13 tive on the date on which final regulations, promulgated by 14 the Secretary to implement the amendments, are first issued; 15 and those regulations shall be Issued not later than the first 16 day of `the sixth calendar month following the month in which 17 this Act is enacted. 18 COORDINATED AUDITS UNDER THE SOCIAL SECURITY ACT 19 SEC. 6. (a)' Title XI of the Social Security Act is 20 amended `by. inserting after section 1126 the following new ~21' section: .. `.* `..`. ` ..."`~* "COORDINATED AUDITS 23 .~`:.: "SEC. 1127. Han entity, provi4es services reimbursable 24 on a cost-related basis im'der~title Vor XIX, as well as serv- 25 `ices reimbursable on. such a basis under title XVIII, the See- PAGENO="0019" 11 10 1 retary shall require, as a condition for payment to any State 2 under title V or XIX with respect to administrative costs 3 incurred in the performance of audits of the books, accounts, 4 and records of that entity, that these audits be coordinated 5 through common audit procedures with audits performed with 6 respect to the entity for purposes of title XVIII. The Secre- 7 tary shall specify by regulation such methods as he finds fea- 8 sible and equitable for the apportionment of the cost of co- 9 ordinated audits between the program, established under title .10 V or XIX and the program established under title XVIII. 11 Where the Secretary finds that a State has declined to par- 12 ticipate in such a common audit with respect to title V or 13 XIX,, he shall reduce the payments otherwise due such State .14 under such titleby s~ amount which he estimates. to be the 15 amount that would have been apportioned to the State under 16 the title (for the expenses of the State incurred in the 17 common audit) if it had participated in the common audit.". 18 (b)(1) Section 1902(a) of the Social Security Act is 19 amended- 20 (A) by striking out "and" at the end of paragraph 21 . (39); 22. (B) by striking out the period at the end of para- 23 graph (40) and inserting in lieu thereof "; and"; and 24 (C) by inserting after paragraph (40) the following 25 . new paragraph: PAGENO="0020" 12 11 1 "(41) provide (A) that the records of any entity 2 participating in the plan and providing services reim- 3 bursable on a cost-related basis will be audited as the 4 Secretary determines to be necessary to insure that proper payments are made under the plan, (B) that 6 - such audits, for such entities also providing services under part A of title XVIII, will be coordinated and 8 conducted jointly (to such extent and in such manner 9 as the Secretary shall prescribe) with audits conducted 10 for purposes of such part, and (0) for payment of the 11 proportion of costs of each such common audit of such 12 an entity equal to the proportion of total program 13 benefit payments to the entity (by all third-party 14 payers participating in the common audit for th~ period 15 being audited) which are payments under this title.". 16 (2) The amendments made by paragraph (1) shall apply 17 to medical assistance provided, under a State plan approved 18 under title XIX Of the Social Security Act, on and after the 19 first day of the first calendar quarter beginning more than 30 20 days after the date of enactmeiit of this Act. 21 (c)(1) Section 505(a) of the Social Security Act is 22 a~ded-~-~ 23~ (A)by striking out "and" -at the end `of paragraph 24 ` - (14);' PAGENO="0021" 13 12 1 (B) by striking out the period at the end of para- 2 graph (15) and inserting in lieu thereof "; and"; and 3 (0) by inserting after paragraph (15) the following 4 new paragraph: 5 "(16) provides (A) that the records of any entity 6 participating in the plan and providing services reim- 7 bursable on a cost-related basis will be audited as the 8 Secretary determines to be necessary to insure that 9 proper payments are made under the plan, (B) that 10 under part A of title XVTIII, will be coordinated and 11 conducted jointly (to such extent and in such manner 12 as the Secretary shall prescribe) with audits conducted 13 for purposes of such part, and (0) for payment of the 14 proportion of costs of each such common audit of such 15 - an entity equal to:~the proportion of- -total program 16 -- --bexinflt- -payments to- the -entity -(by all third-party 17 :`- --payers $ eipating~iiHhe common audit-for~the period 18 being* audited) which are payments under this title,", 19 (2) The amendments made by paragraph (1) shall apply 20 to services provided, under a State plan approved under title 21 V of the Social Security Act, on and after the first day of the 22 first calendar quarter beginning more than 30 days after the 23 date of enactment of this Act. 24 - (d) The Secretary shall report to the Congress, not later 25 than March 31, 1980, on actions the Secretary has taken (1) PAGENO="0022" 14 13 I to coordinate the conduct of institutional audits and inspec- 2 tions which are required under the programs funded under 3 title V, XVIII, or XIX of the Social Security Act, and (2) to 4 coordinate such audits and inspections with those conducted 5 by other cost payers, and he shall include in such report rec- 6 ommendations for such legislation as he deems appropriate to 7 assure the maximum feasible coordination of such institution- 8 al audits and inspections. 9 EFFECTIVE DATE FOE P81W AMENDMENTS 10 SEC. 7. The amendments made by sections 1, 2, 3, and 11 4 shall be effective 180 days after the date of enactment of 12 this Act. PAGENO="0023" 15 I 96TH CONGRESS 1ST SESSION * * To amend title XI of the Social Security Act to authorize civil monetary penalties for certain fraudulent activities in the Medicare and Medicaid programs, and for other purposes. IN THE HOUSE OF REPRESENTATIVES M~r 15, 1979 Mr. WAXMAN (for himself, Mr. RANGEL, Mr. ECKHAEDT, and Mr. GIBBONS) introduced the following bifi; which was referred jointly to the Committees on Ways and Means and Interstate and Foreign Commerce A BILL To amend title XI of the Social Security Act to authorize civil monetary penalties for certain fraudulent activities in the Medicare and Medicaid programs, and for other purposes. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress aisembled, 3 SHORT TITLE; REFERENCE TO ACT 4 SECTION 1. (a) This Act may be cited as the "Medicare 5 and Medicaid Fraud and Abuse Amendments of 1979". 6 (b) Whenever in this Act an amendment or repeal is 7 expressed in terms of an amendment to, or repeal of, a sec- PAGENO="0024" 16 2 1 tion or other provision, the reference shall be considered to 2 be made to a section or other provision of the Social Security 3 Act. 4 TITLE I-CIVIL MONETARY PENALTIES FOR 5 MEDICARE AND MEDICAID FRAUD 6 CIVIL MONETAEY PENALTIES FOR MEDICARE AND 7 MEDICAID FRAUD 8 SEC. 101. (a) Section 1107 of the Act is amended by 9 adding at the end thereof the following new subsection: 10 "(c)(1) `Whoever presents or causes to be presented to 11 an officer, employee, or agent of the United States, or of any 12 department or agency thereof, or of any State agency, a 13 claim, (as defined in paragraph (1 1XB)) that the Secretary 14 determines is for a medical or other item or service- 15 "(A) that he knows or has reason to know was 16 not, provided as claimed, or 17 "(B) that was provided in violation of Federal or 18 State law or regulation, or 19 "(C) that was provided in violation of an agree- 20 ment between such person and the United States or a 21 State agency, 22 shall be subject, in addition to any other penalties that may 23 be prescribed by law, to a civil penalty of not more than 24 $2,000 for each such item or service. In addition, such a 25 person shall be subject to an assessment of not more than PAGENO="0025" 17 3 1 twice the amount claimed for each such item or service in 2 lieu of damages sustained by the United States or a State 3 agency because of such claim. 4 "(2) The Secretary shall not make a determination ad- 5 verse to any person under paragraph (1) until such person 6 has been given written notice and an opportunity for a hear- 7 ing on the record at which he is entitled to be represented by 8 counsel, to present witnesses, and to cross-examine witnesses 9 against him. 10 "(3) In determining the amount of any penalty assessed 11 pursuant to paragraph (1) of this subsection, the Secretary 12 shall take into account (A) the nature of the claims and the 13 circumstances under which they were presented, (B) the .14 degree of culpability, history of prior offenses, and financial 15 condition of the person presenting the claims, and (0) such 16 other matters as justice may require. 17 "(4) Any person adversely affected by a determination 18 of the Secretary under this subsection may obtain a review of 19 such determination in the United States court of appeals for 20 the circuit in which the person resides, or in which the claim 21 was presented, by fifing in such court within sixty days fol- 22 lowing notification to the person of the Secretary's final de- 23 termination a written petition praying that the determination 24 be modified or set aside. A copy of the petition shall be forth- 25 with transmitted by the clerk of the court to the Secretary, PAGENO="0026" 18 4 1 and thereupon the Secretary shall file in the Court the record 2 in the proceeding as provided in section 2112 of title 28, 3 United States Code. Upon such filing, the court shall have 4 jurisdiction of the proceeding and of the question determined 5 therein, and shall have the power to make and enter upon the 6 pleadings, testimony, and proceedings set forth in such record 7 a decree affirming, modifying, remanding for further consid- 8 eration, or setting aside, in whole or in part, the determina- 9 tion of the Secretary and enforcing the same to the extent 10 that such order is affirmed or modified. No objection that has 11 not been urged before the Secretary shall be considered by 12 the court, unless the failure or neglect to urge such objection 13 shall be excused because of extraordinary circumstances. The 14 findings of the Secretary with respect to questions of fact, if 15 supported by substantial evidence on the record considered as 16 a whole, shall be conclusive. If any party shall apply to the 17 court for leave to adduce additional evidence and shall show 18 to the satisfaction of the court that such additional evidence 19 is material and that there were reasonable grounds for the 20 failure to adduce such evidence in the hearing before the See- 21 retary, the court may order such additional evidence to be 22 taken before the Secretary and to be made a part of the 23 record. The Secretary may modify his findings as to the facts, 24 or make new findings, by reason of additional evidence so 25 taken and filed, and he shall file such modified or new find- PAGENO="0027" 19 5 1 ings, which findings with respect to questions of fact, if sup- 2 ported by substantial evidence on the record considered as a 3 whole, shall be conclusive, and his recommendations, if any, 4 for the modification or setting aside of his original order. 5 Upon the filing of the record with it, the jurisdiction of the 6 court shall be exclusive and its judgment and decree shall be 7 final, except that the same shall be subject to review by the 8 Supreme Court of the United States, as provided in section 9 1254 of title 28, United States Code. 10 "(5) Civil penalties and assessments imposed under this 11 subsection may be compromised by the Secretary and may be 12 recovered in a civil action in the name of the United States 13 brought in the United States district court for the district 14 where the claim was presented, or where the claimant re- 15 sides, as determined by the Secretary. Amounts recovered 16 shall be paid to the Secretary, nnd disposed of as follows: (A) 17 a portion of amounts recovered arising out of a claim under 18 title XIX shall be paid to the State agency, as provided 19 under paragraph (7); (B) such portion of amounts recovered 20 as is determined to have been paid out of the trust funds 21 under sections 1817 and 1841 shall be repaid to such trust 22 funds; and (C) the remainder shall be deposited as miscella- 23 neous receipts of the Treasury of the United States. The 24 amount of such penalty, when finally determined, or the 25 amount agreed upon in compromise, may be deducted from PAGENO="0028" 20 6 1 any sum then or later owing by the United States or a State 2 agency to the person against whom the penalty has been 3 assessed. 4 "(6) A determination by the Secretary to assess a penal- 5 ty under paragraph (1) of this subsection shall be final upon 6 the expiration of the 60-day period referred to in paragraph 7 (4) unless the person against whom the penalty has been as- 8 sessed fries an appeal as provided in that paragraph. Matters 9 that were raised or that could have been raised in a hearing 10 before the Secretary or in an appeal pursuant to paragraph 11 (4) may not be raised as a defense to a civil action by the 12 United States to collect a penalty or damages assessed under 13 this subseôtion. 14 "(7) In the case of such a penalty or damages recovered 15 by the United States arising out of a claim filed under title 1.6 XIX of this Act, the State agency shall be reimbursed an 17 amount bearing the same ratio to the sum recovered as the 18 amount paid by the State agency for such claim bears to the 19 total payment for such claim. 20 "(8)(A) The Secretary may enter into an agreement 21 with any person against whom a penalty has been assessed 22 under this subsection whereby such person will consent not 23 to claim payment under title XVIII or a State plan under 24 title XIX for any item or service provided for a period of time 25 not to exceed two years. PAGENO="0029" 21 7 1 "(B) The Secretary may refuse to make any further 2 payment under title XVIIT of this Act, or order a State 3 agency to deny any further payment under title XIX of this 4 Act, to any person with respect to whom a final determina- 5 tion has been made to assess a penalty under this subsection, 6 for any item or service rendered during a period ~of not more 7 than two years from the date upon which such determination 8 became final. If the Secretary intends to exercise the authori- 9 ty in this subparagraph, he shall give written notice thereof 10 to such person and to the single State agency (referred to in 11 section 1902(a)(5)) of each State which he has reason to be- 12 lieve does or may use the services of such person in providing 13 medical assistance under title XIX of the Act, and shall give 14 to such person an opportunity for a hearing on the record :at 15 which he is entitled to be represented by counsel, to present 16 witnesses, and to cross-examine witnesses against him. 17 "(9) Whenever a final determination to impose a penalty 18 is made by the Secretary under this subsection, he shall 19 notify the appropriate State or local medical agency or orga- 20 nization, an appropriate Professional Standards Review Or- 21 ganization, and the cognizant State or local licensing agency 22 or organization (including the agency specified in section 23 1864(a) and 1902(a)(33)) that such a penalty has been im- 24 posed and the reasons therefor. PAGENO="0030" 22 8 1 "(10) The Secretary shall initiate a proceeding under 2. this subsection only as authorized by the Attorney General 3 pursuant to procedures agreed upon by them. 4 "(11) For the purposes of this subsection- 5 "(A) the term `State agency' means the agency 6 . established or designated pursuant to section 1902(a)(5) 7 . of this Act to administer or supervise the adininistra- 8 tion of the State plan under title XIX of this Act; 9 "(B) the term `claim' means a claim submitted by 10 (i) a provider of services or other person, agency, or 11 organization that furnishes services under titie XVIII 12 of this Act, or (ii) a person, agency, or organization 13 that provides mediôal assistance under title XIX of this 14 Act against the United States or a State agency for 15 payment for health care services under title XVIII or 16 XIX of this Act; 17 . "(C) the term `item or service' means (i) a partic- 18 ular item, device, medical supply, or service claimed to 19 have been provided to a patient and listed in an item- 20 ized claim for payment, or (ii) in the case of a claim 21 based on annual costs, . any entry in the annual cost 22 report, books of account or other documents supporting 23 such claim. 24 "(1)) the term `agency of the United States' in- 25 cludes any contractor acting as a fiscal intermediary, PAGENO="0031" 23 9 1 carrier, or fiscal agent or any other claims processing 2 agent for a health insurance or medical services pro- 3 gram under title XVIII or XIX of this Act." 4 (b) The heading of section 1107 of the Act is amended 5 to read "PENALTIES". 6 (c) Section 1903 of the Act is amended by adding at the 7 end thereof the following new subsection: 8 "(r)(1) Notwithstanding the preceding provisions of this 9 section, no payment shall be made to a State (except as pro- 10 vided under this subsection) with respect to expenditures in- 11 curved by it for services provided by any person during any 12 period that an order for denial of payment (as authorized by 13 section 1107(c)(8)(B)) is effective with respect to such person. 14 "(2) Any order for denial of payment issued with respect 15 to any person under section 1 107(c)(8)(B) of the Act shall 16 become effective, in the case of any State plan approved 17 under this title, on the 60th day after the date on which the 18 Secretary gives notice of such order to the State agency ad- 19 ministering or supervising the administration of the plan. Any 20 such order. shall cease to be effective not later than two years 21 from the date upon which the determination to assess a pen- 22 alty under section 1107 of the Act became final. Upon the 23 determination of the Secretary that any such order shall 24 cease to be effective, he shall forthwith notify each State PAGENO="0032" 24 10 1 agency to which he has theretofore submitted notice under 2 section 1107(c)(8)(B) with respect to such person. 3 "(3) Whenever any order which has been issued by the 4 Secretary under section 1107(c)(8)(B) ceases to be effective, 5 any payment to which any State would (except for the pre- 6 ceding provisions of this subsection) have been entitled under 7 this section on account of services provided by such person 8 shall be made to such State for the month in which V such 9 order ceases to be effective." 10 TITLE il-OTRER PROVISIONS V 11 REQUIREMENTS FOR STATE MEDICAID FRAUD CONTROL 12 UNITS 13 SEc. .201. Section 1903(q)(1)(C) of the Act is amended 14 by inserting immediately after "State Attorney General" the 15 following: "or another department of State government 16 which possesses V statewide authority to prosecute individuals 17 for criminal violations". V 18 ANNUAL CALCULATION OF LIMITATION ON PAYMENTS FOR 19 STATE MEDICAID FRAU]) CONTROL UNITS 20 SEC. 202. Section 1903(b)(3) of the Act is amended- 21. . (1) by deleting "quarter" both places it appears 22 and inserting instead "fiscal year"; and 23 (2) in clause (A), by deleting "$125,000" and in- 24 serting instead "$500,000". PAGENO="0033" 25 11 1 EXCLUSION OF CERTAIN HEALTH CARE PROFESSIONALS 2 CONVICTED OF MEDICARE- OR MEDICAID-RELATED CRIMES 3 SEC. 203. (a) Title XI of the Act is amended by adding 4 after section 1126 the following new section: 5 "EXCLUSION OF CERTAIN HEALTH CARE PROFESSIONALS 6 CONVICTED OF MEDICARE- OR MEDiCAID-RELATED CRIMES 7 "SEC. 1127. Whenever the Secretary determines that a 8 physician or other health care professional has been convict- 9 ed (on or after October 25, 1977, or within such period prior 10 to that date as the Secretary shall specify in regulations) of a 11 criminal offense related to such individual's participation in 12 the programs under title XVIII or title XIX, the Secretary 13 shall do the following:. 14 "(1) He shall bar from participation in the pro- 15 gram under title XVIII, for such period as he may 16 deem appropriate, each such individual otherwise eligi- 17 ble to participate in such-program. 18 "(2)(A) He shall promptly notify each appropriate 19 State agency administering or supervising the adminis- 20 tration of a State plan approved under title XIX, of 21 the fact and circumstances of such determination, and 22 (except as provided in paragraph (B)) require each such 23 agency to bar such individual from participation in 24 - such program for such. period as he shall specify, which 25 in the case of an individual specified in paragraph (1) 56-071 0 - 80 - 3 PAGENO="0034" 26 12 1 shall be the period established pursuant to paragraph 2 (1). 3 "(B) He may waive the requirement under para- 4 graph (A) to bar an individual from participation in a 5 State plan program under title XIX, where he receives 6 and approves a request for such a waiver with respect 7 to that individual from the State agency administering 8 or supervising the administration of such plan." 9 "(3) He shall promptly notify the appropriatç 10 State or local agency or authority having responsibility 11 for the licensing or certification of such individual of 12 the fact and circumstances of such determination, re- 13 quest that appropriate investigations be made and 14 sanctions invoked in accordance with applicable State 15 law and policy, and request that such State or local 16 agency or authority keep the Secretary and the Tnspec- 17 tor General fully and currently informed with respect 18 to any actions taken in response to such request." 19 (b) Section 1862(e) of the Act is amended to read as 20 follows: 21 "(e) No payment may be made under this title with re- 22 spect to any item or service furnished by a physician or other 23 health care professional during the period when he is barred 24 pursuant to section 1127 from participation in the program 25 under this title." PAGENO="0035" 27 13 1 (c) Section 1902(a)(39) of the Act is amended to read as 2 follows: 3 "(39) provide that the State agency shall bar any 4 specified health care professional from participation in 5 the program under the State plan for the period sped- 6 fled by the Secretary, when required by him to do so 7 pursuant to section 1127, and provide that no payment 8 may be made under the plan with respect to any item 9 or service furnished by such individual during such 10 period; and". 11 (d) Section 1902(g) of the Act is repealed. 12 AMENDMENTS TO REQUIREMENTS CONCERNING 13 REPORTING OF FINANCIAL INTEREST 14 SEc. 204. (a) Section 1124(a)(3)(A)(ii) of the Act is 15 amended to read as follows: 16 "(ii) is the owner of a whole or part interest in 17 any mortgage, deed of trust, note, or other obligation 18 secured (in whole or in part) by the entity or any of 19 the property or assets thereof, which whole or part in- 20 terest is equal to $25,000 or 5 per centum of the total 21 property and assets of the entity; or". 22 (b) Section 1902(a)(35) of the Act is amended to read al 23 follows: PAGENO="0036" 28 14 1 "(35) provide that any entity (as defined in section 2 1124(a)(2)) receiving payments under such plan complies 3 with the requirements of section 1124;". 4 WITHHOLDING OF FEDERAL SHARE OF PAYMENTS TO 5 MEDICAID PROVIDERS TO RECOVER MEDICARE OVER- 6 PAYMENTS 7 SEC. 205. (a) Subparagraphs (D) and (E) of section 8 1902(a)(13) are amended by inserting "(except where the 9 State agency is subject to an order under section 1913)" hn- 10 mediately after "payment" each time it appears. 11 (b) Section 1903(a)(1) is amended by striking out "(g) 12 and (h)" immediately after "subject to subsections" and in- 13 serting instead "(g), (Ii), and (j)". 14 (c) Section 1903(j) is amended to read as follows: 15 "(j) Notwithstanding the preceding provisions of this 16 section, the amount determined under section (a)(1) for any 17 State for any quarter shall be adjusted in accordance with 18 section 1913." 19 (d) Title XIX is amended by adding at the end the fol- 20 lowing new section: 21 "WITBIIOLDING OF FEDERAL SHARE OF PAYMENTS FOR 22 CERTAIN MEDICARE PROVIDERS 23 "SEC. 1913. (a) The Secretary may adjust, in accord- 24 ance with this section, the Federal matching payment to a PAGENO="0037" 29 15 1 State with respect to expenditures for medical assistance fur- 2 nished in any quarter by- 3 "(1) an institution (A) which (i) previously had in 4 effect an agreement with the Secretary under section 5 1866, and (ii) does not have such an agreement in 6 effect during such quarter; and (B) from which the See- 7 retary has been unable to recover overpayments made 8 under title XVIII; and 9 "(2) any person (A) who (i) has previously accept- 10 ed payment on the basis of assignment under section 11 1842(b)(3)(B)(ii), and (ii) during the annual period im- 12 mediately preceding such quarter submitted no claims 13 for payment under title XVIII, or submitted claims for 14 payment under title XVIII which aggregated less than 15 the amount of overpayments made to him, and (B) 16 from whom the Secretary has been unable to recover 17 overpayments received in violation of section 18 1842(b)(3)(B)(ii). 19 "(b) The Secretary may (subject to the remaining provi- 20 sions of this section) reduce payment to a State under this 21 title for any quarter by an amount equal to the lesser of the 22 Federal matching share of payments to any provider specified 23 in subsection (a), or the total overpayments to such provider 24 under title XVIII, and may require the State to reduce its 25 payment to such provider by such amount. PAGENO="0038" 30 16 1 "(c) The Secretary shall not make any adjustment in the 2 payment to a State, nor require any adjustment in the pay- 3 ment to a provider of services, pursuant to subsection (b) 4 until after he has provided adequate notice (which shall be 5 not less than 60 days) to the State agency and the provider 6 of services. * 7 "(d) The Secretary shall by regulation provide proce- 8 dares for implementation of this section, which procedures 9 shall (1) determine the amount of the Federal payment to 10 which the provider would otherwise be entitled under this 11 section which shall be treated as a setoff against overpay- 12 ments under title XVIII, and (2) assure the restoration to the 13 provider of amounts withheld under this section which are 14 ultimately determined to be in excess of overpayments under 15 title XVIII and to which the provider would otherwise be 16 entitled under this title. 17 "(e) The Secretary shall restore to the trust funds estab- 18 lished under sections 1817 and 1841, as appropriate, 19 amounts recovered under this section as setoffs against over- 20 payments under title XVIII. 21 "(f) Notwithstanding any other provision of this title, a 22 provider shall not be entitled to recover from any State any 23 amount in payment for medical care and services under this 24 title which is withheld by the State agency pursuant to an 25 order by the Secretary under subsection (b)." PAGENO="0039" 31 I 96TH CONGRESS 1ST SESsIoN * * To amend the Public Health Service Act to revise and strengthen the program under that Act for national standards for and liöensing of clinical laborato- ries, to amend the Social Security Act to' require laboratories providing services financed under titles XVIII and XIX of such Act to meet the requirements of such program and for other purposes IN THE HOUSE OF REPRESENTATIVES Juiv 20 1979 Mr. WAXMAN (for himself~ Mr. CAnTER, Mr. PREYER, Mr. MAOTJIRE, and Mr. WALOREN) introduced the following bill; which was referred jointly to the Committees on Ways and Means and Interstate and Foreign Commerce A BILL To amend the Public Health Service Act to revise and strength- en the program under that Act for national standards. for and licensing of. clinical laboratories, to amend the Social Security Act to require laboratories proyiding services fi- nanced under titles XVIII and XIX of such Act to- meet the requirements of such program, and for other purposes. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, PAGENO="0040" 32 2 SHORT TITLE; TABLE OF CONTENTS 2 SECTION 1. This Act may l~e cited as the "Clinical Lah- 3 oratory Improvement Act of 1979". Sec. 1. Short title; table of contents. Sec. 2. FIndings. TITLE I-PUBLIC HEALTH SERVICE ACT AMENDMENTS AND CLINICAL LABORATORY STUDIES Sec. 101. Amendments to the Public Health Service Act. "PART H-Cz~nncAL LaBoaaToarss "Sec. 370. Definitions. "Sec. 371. National standards. "Sec. 372. Application of national standards. "Sec. 373. Licenses. "Sec. 374. Primary enforcement responsibility. "Sec. 375. ProhIbited acts. "Sec. 376. Enforcement. "Sec. 377. Agreements and assistance. "Sec. 378. Annual report. "Sec. 379. Uniform administration. Sec. 102. Study respecting requirements for laboratories and laboratory personneL Sec. 103. Study and report on practitioners' office laboratories. Sec. 104. Study and report on highly specialized clinical laboratories. Sec. 105. Study of clinical laboratory services. TITLE U-SOCIAL SECURITY ACT AMENDMENTS AND STUDY AND REPORT Sec. 201. Amendments to title XI of the Social Security Act. Sec. 202. Amendments to title XVIII of the Social Security Act. Sec. 203. Amendments to title XIX of the Social Security Act. Sec. 204. Study of financial arrangements made by hospitals for clinical laboratory services. Sec. 205. Report on billing for laboratory services. 4 FINDINGS 5 SEC. 2. The Congress finds that- 6 (1) clinical laboratory testing is a vital element of 7 health care throughout the Nation; 8 (2) health care in this Nation will only be effective 9 and of high quality if procedures used for testing by PAGENO="0041" 33 3 1 clinical laboratories assure accurate and reliable re 2 suIts; 3 (3) it is essential to the public interest that the 4 health and welfare of consumers of health care be pro- 5 tected by requiring that all clinical laboratories comply 6 with uniform standards to assure accurate and reliable 7 testing; 8 (4) testing in clinical laboratories which do not 9 comply with such standards can be performed at less 10 expense and thus such laboratories are able to compete 11 unfairly with the clinical laboratories which do comply 12 with such standards; 13 (5) requiring compliance with standards to assure 14 accurate and reliable testing by clinical laboratories 15 which operate in interstate commerce without provision 16 for requiring compliance with such standards by other 17 clinical laboratories will discriminate against and de- 18 press interstate commerce and adversely burden, ob- 19 struct, and affect such commerce; 20 (6) all clinical laboratory testing is either in inter- 21 state commerce or substantially affects such commerce; 22 and 23 (7) consequently, regulation by the Secretary in 24 cooperation with the States as contemplated by the PAGENO="0042" 34 4 1 amendments made by title I of this Act is appropriate 2 to effectively regulate interstate commerce. 3 TITLE I-PUBLIC I[EALTH SERVICE ACT A~[END- 4 ~[ENTS AND CLINICAL LABORATORY STUD- 5 .IES 6 AMENDMENTS TO THE PUBLIC HEALTH SERVICE ACT 7 SEC. 101. (a) Part H of title ifi of the Public Health 8. Service Act is amended to read as follows: 9 "PART H-CLINICAL LABORATORIES 10 "DEFINITIONS 11 "SEC. 370. For purposes of this part- 12 "(1)(A) Except as provided in subparagraph (B), 13 the terms `laboratory' and `clinical laboratory' mean a 14 facility (or any identifiable part of a facility)- 15 "(A) for the biological, microbiological, sero- 16. logical, chemical, immunohematological, radioim- 17 munological, hematological, biophysical, cytologi- 18 cal, pathological, or other examination of materi- 19 als derived from the human body for the purpose 20 of providing information for the diagnosis, preven- 21 tion, or treatment of any disease or impairment .22 of, or the assessment of the health of, humans, or 23 . "(B) for the collection, processing, or trans- 24 . mission of such materials for such purposes. PAGENO="0043" 35 5 1 "(B) The terms `laboratory' or `clinical laboratory' 2 do not include a facility (or identifiable part of a fadili- 3 ty) exclusively engaged in (i) the collection, banking, 4 processing, or transmission of human whole blood or 5 its components or other tissues, (ii) transfusion serv- 6 ices, (iii) plasmapherecis, (iv) compatibility testing, or 7 (v) any combination of such activities. 8 "(2) The term `interstate commerce' means (A) 9 trade, traffic, commerce, transportation, transmission, 10 or communication between any State and any place 11 outside of such State, or (B) within the District of 12 Columbia. 13 "NATIONAL STANDABDS 14 "SEc. 371. (a) Within two hundred and ten days of the 15 date of the enactment of the Clinical Laboratory Improve- 16 ment Act of 1979, the Secretary, after providing reasonable 17 opportunity for consultation with representative public and 18 private professional entities, shall publish proposed national 19 standards for clinicallaboratories. Within one year after such 20 date of enactment, the Secretary shall promulgate such 21 standards with such modifications as the Secretary deems ap- 22 propriate, and such standards shall take effect upon their pro- 23 mulgation. Standards under this subsection may be amended 24 by the Secretary. PAGENO="0044" 36 6 1 "(b)(1) National standards promulgated under subsection 2 (a) for clinical laboratories shall be designed to assure con- 3 sistent performance by clinical laboratories of accurate and 4 reliable laboratory tests and other procedures and services 5 (hereinafter in this part collectively referred to as `services') 6 and shall- 7 "(A) require clinical laboratories subject to the 8 standards to maintain appropriate quality control 9 programs, 10 "(B) require such laboratories to maintain such 11 records, equipment, and facifities as may be necessary 12 for the proper and effective operation of such 13 laboratories, 14 "(0) require satisfactory performance by such lab- 15 oratories on periodic proficiency tests developed in ac- 16 cordance with subsection (d), 17 "(1)) prescribe qualifications for directors and su- 18 pervisory personnel of, and technologists employed in, 19 such laboratories (which qualifications shall (i) not be 20 limited solely to education requirements, (ii) include ap- 21 propriate combinations of education, training, experi- 22 ence, and examination requirements, and ~ffi) be 23 designed to insure the continued competence of such 24 personnel), PAGENO="0045" 37 7 1 "(E) require such laboratories to provide assur- 2 ances satisfactory to the Secretary that- 3 "(i) directors, supervisory personnel, and 4 technologists will meet applicable requirements 5 prescribed under subparagraph (I)), and 6 "(ii) all technologists and technicians will, 7 where appropriate, perform their duties under su- 8 pervision and will perform only those duties for 9 which they are qualified, as determined in accord- 10 ance with subparagraph (D), and 11 "(F) include such other requirements as the Sec- 12 retary determines necessary to assure consistent per- 13 formance by such laboratories of accurate and reliable 14 services. 15 "(2) For purposes of paragraph (1)- 16 "(A) the term `technologist' means an individual 17 employed in a laboratory who in performing services in 18 such laboratory is required to exercise independent 19 judgment, and - 20 "(B) the term `technician' means a person em- 21 ployed in a laboratory who is not required to exercise 22 independent judgment in the technician's employment 23 by the laboratory. 24 "(c) The national standards promulgated under subsec- 25 tion (a) may vary on the basis of the type of services per- PAGENO="0046" 38 8 1 formed by such 1abor~tories or the purposes for which such 2 services are performed. 3 "(d) Within one year of the date of the enactment of the 4 Clinical Laboratory Improvement Act of 1979, the Secre- 5 tary, in consultation with appropriate professional organiza- 6 tions, shall develop standards for proficiency testing of clini- 7 cal laboratories subject to national standards in effect under 8 this section, which proficiency testing standards (i). shall re- 9 quire such testing to be administered at least annually to all 10 such laboratories; (ii) shall require a system of onsite testing 11 of a laboratory's proficiency in the examination of specimens 12 which system shall require such testing to be done in accord- 13 ance with the procedures prescribed by paragraphs (1) and 14 (2) of section 376(b); and (iii) may require a system for the 15 testing of a laboratory's proficiency in the examination of 16 specimens under which system the laboratory is not informed 17 that its proficiency is being tested (commonly referred to as 18 "blind proficiency testing"). 19 "APPLICATION OF NATIONAL STAN])AEDS 20 "SEC. 372. (a) National standards for clinical laborato- 21 ries in effect under section 371 shall be administered and 22 enforced by the Secretary and shall, except as provided in 23 subsections (b), (c), and (d)- 24 "(1) apply to each clinical laboratory which is en- 25 gaged in business in interstate commerce, and PAGENO="0047" 39 9 1 "(2) apply to any other clinical laboratory which 2 is located in a State which (as determined under sec- 3 tion 374) does not. have primary enforcement responsi- 4 biity for the regulation of clinical laboratories. 5 "(b) The Secretary, upon request of a State which has 6 primary enforcement responsibility for the regulation of clini- 7 cal laboratories, shall authorize such State to regulate, under 8 the standards of the State described in section 374(a)(1), 9 clinical laboratories which are located or doing at least 10 10 per centum of their business within the State and which are 11 engaged in business in interstate commerce. 12 "(c)(1) Except as provided in section 103(a) of the Olini- 13 cal Laboratory Improvement Act of 1979, during the two- 14 year period beginning on the date that national standards 15 first take effect under section 371, such standards shall not 16 apply to clinical laboratories which are not engaged in busi- 17 ness in interstate commerce. 18 "(2) During the two-year period beginning on the date 19 that national standards for clinical laboratories first take 20 effect under section 371 (or, in the case of a clinical labora- 21 tory which is not engaged in business in interstate commerce 22 and which is not subject to section 103(a)(2) of the Clinical 23 Laboratory Improvement Act of 1979, during the two-year 24 period beginning on the date such standards are first made 2~ applicable to such laboratory), the provisions of such stand- PAGENO="0048" 40 10 1 ards prescribing qualifications for supervisory personnel or 2 the provisions of such standards prescribing qualifications for 3 technologists, or both such provisions, shall not apply to a 4 clinical laboratory which- 5 "(A) the Secretary determines is located in a 6 rural area (as defined by the Secretary) in which there 7 is not a sufficient number of individuals with the quali- 8 flcations prescribed by such provisions for supervisory 9 personnel or technologists, as the case may be, 10 "(B) performs services solely for hospitals and II- 11 censed physicians, dentists, or podiatrists (or any coin- 12 bination of such practitioners) located within such a 13 rural area, and 14 "(0) provides the Secretary satisfactory assur- 15 ances that it wifi take such actions as may be neces- 16 sary to train individuals to meet such qualifications or 17. to employ individuals with such qualifications. 18 "(3)(A) The national standards for clinical laboratories 19 shall not apply to any clinical laboratory- 20 "(i) which is located in the office of a licensed 21 physician, dentist, or podiatrist, or a group of such 22 practitioners, and 23 "(II) in which the only services which are per- 24 formed are services performed by such a practitioner in 25 . connection with the treatment of his patients; PAGENO="0049" 41 11 1 "(B) Except as provided under section 103(a)(2) of the 2 Clinical Laboratory Improvement Act of 1979, the national 3 standards for clinical laboratories shall not apply to any dm1- 4 cal laboratory- 5 "(i) which is located in ~he office of, or supervised 6 by, a licensed physician, dentist, or podiatrist, or a 7 group of not more than five such practitioners, 8 "(ii) in which the only services which are per- 9 formed are services performed in connection with the 10 treatment of the patients of such practitioner (or group 11 of practitioners) or in connection with services provided 12 for such patients by a physician assistant or nurse 13 practitioner under the supervision of such practitioner 14 or group, and 15 "(iii) which is a participant in a proficiency testing 16 program approved by the Secretary if such participa- 17 tion is required under section 103(b) of such Act. 18 "(4) The Secretary shall, upon application, exempt, on 19 such terms and conditions as may be appropriate, from the 20 national standards for clinical laboratories any laboratory in 21 which the only services which are performed are services for 22 biomedical or behavioral research. 23 "(5) Except as provided under section 104(b)(2) of the 24 Clinical Laboratory Improvement Act of 1979, the national 25 standards for clinical laboratories shall not apply to any 56-071 0 - 80 - 4 PAGENO="0050" 42 12 1 highly specialized clinical laboratory engaged exclusively in 2 the assessment of cardiac or pulmonary function. 3 "(d)(1) Federal clinical laboratories under the jurisdic- 4 tion of the Secretary shall be subject to national standards in 5 effect under section 371 and any other Federal clinical labo- 6 ratory in a State shall be subject to such standards unless (A) 7 the laboratory is under the jurisdiction of any of the Armed 8 Forces of the United States or the Administrator of Veter- 9 ans' Affairs, or (B) the agency which has jurisdiction over 10 such, laboratory has in effect standards for such laboratory 11 which are no less stringent than the national standards in 12 effect under subsection (a). 13 "(2) The Secretary shall bring the national standards in 14 effect under section 371 to the attention of the Secretary of 15 each military department and the Administrator' of Veterans' 16 Affairs so that such standards may be considered and applied 17 as appropriate by such Secretaries and Administrator to clini- 18 cal laboratories under their jurisdiction. 19 "(e) Except as authorized under section 374, no State 20 or political subdivision may adopt or continue in effect re- 21. quirements (other than licensing `requirements applicable to 22 directors, supervisory personnel, technologists, or technicians 23 in clinical laboratories and requirements applicable to clinical 24 laboratories under a certificate of need program) which- 25 "(A) are applicable to clinical laboratories, and PAGENO="0051" 43 13 1 "(B) are different from or in addition to the na- 2 tional standards for clinical laboratories in effect under 3 section 371. 4 "(f) Any clinical laboratory which is engaged in business 5.. in interstate commerce shall, during the period beginning on 6 the date of the enactment of the Clinical Laboratory [ni- 7 pro~vernent. Act of 1979 and ending on the date such labora- .8 tory is required to have. in effect a license issued under sec- 9 tion 373, comply with the licensing requirements in effect 10 under section 353 before such date of enactment. 11 "LICENSES 12 "SEC. 373. (a) The Secretary shall establish a system 13 for the licensure of clinical laboratories subject to national 14 standards in effect under section 371. A license issued under 15 such system for a clinical laboratory (1) shall specify the cat- 16 egories of services which such laboratory may perform, and 17 (2) shall be valid for such period (but not in excess of thirty- 18 six months) as the Secretary may presóribe. A fee may be 19 required by the Secretary for the issuance or renewal of a 20 license in an amount not to exceed $500. The Secretary may 21 prescribe variances, in such fees based on the volume of serv- 22. ices performed by the clinical laboratories required to be ~$. licensed. *.. .. .. . , .. . . PAGENO="0052" 44 14 1 "(b)(1) The system established under. subsection (a) shall 2 require the following as a condition to the issuance or renew- 3 al of a license under the system: 4 "(A) The submission of an application in such 5 form and manner as may. be prescribed by the 6 Secretary. 7 "(B) A determination by the Secretary that the 8 applicant meets the national standards in effect under 9 section 371. 10 "(0) The su~bmission by the applicant to the 5cc- 11 retary and to the health systems agency serving the 12 area in which the applicant is located of (1) an accurate 13 itemized schedule of all current rates the applicant 14 Oharges0ncluding sUch aschedule of rates for commOn groUpings of tests) for the laboratory services it pro- 16 vides, and (ii) such information as may be `necessary to 17 " disclose any contractual relationships in effect between 18 the~ applicant and physicians and other health profes- 19 sionals respecting the laborator~s services and the 20 terms of any contracts between the applicant and such 21 persons. 22 "(2) From the information submitted in accordance with 23 paragraph (1)(0) a health systems agency may not disclose- 24 "(A) the identity of any person for whom an ap- 25 plicant for a license . performed services, except that a, PAGENO="0053" 45 15 1 health systems agency may make such a disclosure in 2 response to a request of an officer or employee of the 3 United States or a State made in accordance with reg- 4 ulations of the Secretary and in connection with the 5 functions or duties of the officer or employee in the en- * 6 forcement of this part or of a. Federal or State criminal `7 law; and 8 "(B) any contractual relationship described in 9 clause (ii) of such paragraph, except that, in accord- 10 ance with regulations promulgated by the Secretary, 1.1 the health systems agency may disclose (i) a contrac- 12 tual relationship between the applicant and any physi- 13. cian for the performance of services if the applicant re~ 14 ceives compensation under title XVIII of the Social 15 Security Act or under a State plan for medical assist- 16 ance approved under title XIX of such Act for the per- 17 formance of clinical laboratory services, and (ii) any 18 contractual relationship described in such clause (ii) in 19 response to a request of an officer or employee of the 20 United States or a State made in connection with the 21 functions or duties of. the officer or employee in the en- 22 .~ foreernent of'this part or~a Federal' or State criminal 23 law. .. ,. .~ 24 .: :~fç)(~if the.: Secretary..:finds,. after reasonable notice 25 and opportunity for hearing, that- . PAGENO="0054" 46 16 1 * "(A) a clinical laboratory licensed under this sec~ 2 tion is not in compliance with applicable national 3 standards in effect under section 371, or 4 "(B) such laboratory has (i) failed to comply with 5 reasonable requests of the Secretary for any informa- 6 tion or specimens, or testing of specimens, the Secre- 7 tary deems necessary to determine the laboratory's 8 continued eligibility for its license under this section or 9 continued compliance with applicable national stand- 10 anTs in effect under section 371, or (ii) refused a re- 11 quest of the Secretary or any individual duly designat- 12 ed by him for permission to inspect under section 13 376(b), the laboratory and its operations and pertinent 14 reóordE at .any reasonable time, : 15 the Secretary m~y revoke such laboratory's license for the 16 remainderof its term or may limit, or suspend such labora- 17 tory's license until the laboratory has demonstrated to the 18 satisfaction of the Secretary that the laboratory is. in compli- 19 ance with such national. standards or such requests will be 20 complied with, as the case may be. 21 "(2) If the Secretary finds, after reasonable notice and 22 opportunity for a. hearing, that a clinical laboratory licensed 23 under this section- 24 "(A) has been guilty of misrepresentation in ob. 25 taming the license; . PAGENO="0055" 47 17 1 "(B) has engaged or attempted to engage in, or 2 represented itself as entitled to perform, any laboratory 3 service or category of services not authorized by the 4 license: 5 "(0) has engaged in a billing practice under which 6 charges for laboratory services provided a patient, on 7 whose behalf reimbursement (in whole or in part) for 8 such charges is provided under a program receiving 9 Federal flnancial~assistance, are made at a higher rate 10 than charges for comparable services provided a pa- 11 tiënt for whom such reimbursement is not made; 12 "(D) has offered, paid, solicited, or received any 13 remuneration (including any kickback, bribe, finder's 14 fee, or rebate, but excluding any discount or other re- 15 duction in price and excluding any amount paid by an 16 employer for employment in the provision of the serv- 17 ices) directly or indirectly, overtly or covertly, in cash 18 or in kind in connection with the provision of clinical 19 laboratory services; or 20 "(B) has engaged in any false, fictitious, or fraud- 21 ulent billing practice for the purposes of obtaining pay- 22 ment under any program the funds for which are pro- 23 vided in whole or in part by the United States, 24 the Secretary may revoke such license for the remainder of 25 its term or may make the laboratory or any person deter- PAGENO="0056" 48 18 1 mined by the Secretary to have made the misrepresentation 2 described in subparagraph (A) or to have engaged in any ac 3 tivity described in subparagraph (B), (0), (1)), or (B) ineligible 4 to apply for a license under this section for such period (not 5 to exceed two years) as the Secretary may prescribe, or take 6 both such actions. A billing practice which results in different 7 charges for the same laboratory services solely because of 8 differences in administrative costs related to receiving reim- 9 bursement for the provision of such services shall not be con- 10 sidered a billing practice described in subparagraph (0). 11 "(d) Any person who is convicted under subsection (a) of 12 section 375 or under section 1877(b) or 1909(b) of the Social 13 Security Act after the date of enactment of the Clinical Labo- 14 ratory Improvement Act of 1979 for a violation occurring 15 after such date shall not be eligible to apply for a license 16 under this section for a clinical laboratory during the ten-year 17 period beginning on the date such person's conviction became 18 final and the license of the laboratory involved in such viola- 19 tion shall be revoked. 20 "(e)(1) Any person aggrieved by any final action taken 21 under subsection (c)~ of this section may at any time within 22 sixty days after the date of such action file a petition with the 23 United States court of appeals for the circuit wherein such 24 person resides or has his principal place of business for judi- 25 cia! review of such action. A copy of the petition shall be PAGENO="0057" 49 19 1 forthwith transmitted by the clerk of the court to the Secre- 2 tary or other officer designated by him for that purpose. The 3 Secretary thereupon shall file in the court the record on 4 which the action of the Secretary is based, as provided in 5 section 2112 of title 28, United States Code. 6 "(2) If the petitioner applies to the court for leave to 7 adduce additional evidence and shows to the satisfaction of 8 the court that such additional evidence is material and that 9 there were reasonable grounds for the failure to adduce such 10 evidence in the proceeding before the Secretary, the court 11 may order such additional evidence (and evidence in rebuttal 12 thereof) to be taken before the Secretary, and to be adduced 13 upon a hearing in such manner and upon such terms and 14 conditions as the court may deem proper. The Secretary may 15 modify his findings as to the facts, or make new findings, by 16 reason of the additional evidence so taken, and he shall file 17 such modified or new findings, and his recommendations, if 18 any, for the modification or setting aside of his original 19 action, with the return of such additional evidence. 20 "(3) Upon the filing of the petition referred to in para- 21 graph (1) of this subsection, the court shall have jurisdiction 22 to affirm the action, or to set it aside in whole or in part, 23 temporarily or permanently. The findings of the Secretary as 24 to the facts, if supported by substantial evidence, shall be 25 conclusive. PAGENO="0058" 50 20 1 "PRIMARY ENFORCEMENT RESPONSIBILITY 2 "SEC. 374. (a) For purposes of this section, a State has 3 primary enforcement responsibility for the regulation of clini- 4 cal laboratories described in subsection (c) during any period 5 for which the Secretary determines (pursuant to regulations 6 prescribed under subsection (d)) that such State- 7 "(1) has adopted (A) standards applicable to dm1- 8 cal laboratories which are no less stringent than the 9 national standards in effect under section 371, and (B) 10 a system for the licensure of laboratories which meets 11 the requirements of subsection (b) and which includes 12 provisions respecting applications and submissions to 13 health systems agencies for the health service areas in 14 which the applicants are located or doing at least 10 15 per centum of their business which provisions are no 16 less stringent than the provisions of subsection (b) of 17 section 373 and includes provisions respecting the sus- 18 pension, revocation, and eligibility for licenses which 19 provisions are no less stringent than the provisions of 20 subsections (c) and (d) of such action; 21 "(2) is able to enforce such State's standards, in- 22 cluding enforcement by such monitoring and such in- 23 spections as the Secretary may require by regulation; PAGENO="0059" 51 21 1 "(3) will keep such records and make such reports 2 with respect to its activities under paragraphs (1) and 3 (2) as the Secretary may require by regulation; 4 "(4) if it permits exemptions from the require- 5 ments of its standards which meet the requirements of - 6 paragraph (1)(A), permits such exemptions under condi- 7 tions and in a manner which are no less stringent than 8 the conditions and the manner in which exemptions are 9 or may be granted under section 372(c); 10 "(5) has adopted and can implement adequate 11 procedures for the effective and timely control of health 12 hazards which may result from an activity of a clinical 13 laboratory within the State; 14 "(6) has designated a single agency of the State 15 to enforce its standards and to administer its system 16 for licensure of dllncial laboratories; and 17 "(7) for the purpose of avoiding the application of 18 duplicative requirements to clinical laboratories, will 19 coordinate with other States in carrying out its prima- 20 ry enforcement responsibifites. 21 "(b) For the purpose of primary enforcement responsi- 22 biity under this section, a State system for the licensure of 23 clinical laboratories- 24 "(1) shall prescribe that licenses issued under 25 such system shall - be ~valid for such period (but not in PAGENO="0060" 52 22 1 excess of thirty-six months) as is prescribed under the 2 system, and may require~ a fee for the issuance or re- 3 newal of a license in an amount (not in excess of $500) 4 determined under the system; 5 "(2) may provide for variances in such fees based 6 on volume of services performed by the clinical labora- 7 tories required to be licensed; and 8 "(3) shall provide that licenses issued for a clinical 9 `laboratory shall specify the categories of services which 10 such laboratory' may perform. 11 "(c) The clinical laboratories subject to regulations by a 12 State which has primary enforcement responsibifity are- 13 "(1) clinical laboratories (other than clinical labo- 14 ratories described in section 372(d)) which are located 15 within such State and which are not engaged in busi- 16 ness in interstate commerce, and 17 "(2) if authorized under section 372(b), any other 18 clinical laboratory (other than a clinical laboratory de- 19 scribed in section 372(d)) engaged in business in inter- 20 state commerce and located or doing at least 10 per 21 centum of its business within the State. 22 "(d)(1) The Secretary shall, by regulation (proposed 23 within one year of the date of the enactment of the Clinical 24 Laboratory Improvement Act of 1979), prescribe the. manner 25 in which a State may~ apply toithe Secretary for a determina- PAGENO="0061" 53 23 1 tion that the State has met the requirements of subsection 2 (a), the manner in which and the standards upon which the 3 determination will be made, the period for which the determi- 4 nation will be effective, and the manner in which the Secre- 5 tary may determine that such requirements are no longer 6 met. The Secretary shall, at least every two years, review 7 the clinical laboratory regulatory activities of a State with 8 primary enforcement responsibility to determine if the State 9 continues to meet the requirements of subsection (a). 10 "(2) Regulations under paragraph (1) shall require that 11 before a deteri~ination of the Secretary that a State has not 12 met the requirements of subsection (a) or no longer meets 13 such requirements may become effective, the Secretary shall 14 notify such State of the determination and the reasons there- 15 for, shall provide* an opportunity for public hearings on the 16 determination, and, in the case of a determination that such 17 requirements are no longer being met by a State, shall pre- 18 scribe the period within which such State must comply with 19 such requirements to retain its primary enforcement responsi- 20 bifity. 21 "(3) Regulations under paragraph (1) shall be promul- 22 gated~with such modifications as.the Secretary deems appro- 23 priate). within:ninety days of the publicatiOn of the proposed 24. regulations in. th~-.Féderal .~Registei~...: The &cretary~ shall 25 promptly notify:ii~:~rit n~' ~ è~ecuth~é officer~o~ each PAGENO="0062" ~54 24 1 State :of the promulgation of regulations under:paragraph (1). 2 Such notice shall contain a copy of the regulations and shall 3 specify a State's authority under this part when it is deter- 4 mined to have primary enforcement responsibifity for clinical 5 laboratories. 6 "(e) When an application is submitted in accordance 7 with the Secretary's regulations under subsection (d), the 8 Secretary shall within ninety days of the date on which such 9 application is submitted (1) make. the determination applied 10 for, or (2) deny the application and notify the applicant in 11 writing of the reasons for the denial. 12 "PROHIBITED ACTS 13 "SEC. 375. (a) Any person who solicits, or accepts, di- 14 rectly or indirectly, any specimen for a laboratory service by 15 a clinical laboratory which is required to have in effect a 16 license issued by the Secretary under section 373 and which 17 does not have such a license in effect or which is not author- 18 ized by its license to perform such service, shall be fined not 19 more than $10,000 or imprisoned for not more than one year, 20 or both. 21 "(b) No clinical laboratory which is required to have in 22 efiect a license issued by the Secretary under section 373 or 23 a license issued by ~a State with primary enforcement respon- 24 sibifity for the regulation of clinical laboratories and which 25 does not have such a license in effect may- PAGENO="0063" 55 25. 1 . . "(1) receive a grant,. contract, or other form of fi- 2 nancial assistance under this Act, or. 3 "(2) charge or collect for laboratory services for 4 any entity which receives a grant, contract, or other 5 . fori. of, financial assistance under this Act. 6 The charges of such a laboratory may not be included in 7 determining Federal payments under title XVIII or XIX of 8 . the Social Security Act. 9 . .. . "ENFORCEMENT 10 . "SEC. 376. (a) Whenever the Secretary. has reason to 11 believe that continuation of. any activity by. a clinical labora- 12 tory required to be licensed under section 373 by the Secre-' 13 tary would constitute a significant hazard to the public 14 health, he may bring suit in the United States district court 15 for the district in which such, laboratory is situated .to enjoin 16 continuation of such activity and, upon proper showing, a 17 temporary injunction or restraining order .agains(continu-' 18 ation of such activity pending issuance of a final ,order by the 19 court shall. be granted without bond. ., . 20 "(b)(1) For purposes of enforcement of this part, individ-: 21 uals designated as inspectors by the Secretary, upon present-. 22 ing appropriate credentials and a written notice .to the person 23 in charge of the clinical laboratory to `be inspected and after 24 clearly informing him of their authority, are authorized to.. 25 enter and inspect any laboratory in a State which is subject PAGENO="0064" 56 26 1 to national standards in effect under section 371. A separate 2 notice shall be given for each such inspection, but a separate 3 notice shall not be required for each entry made during the 4 period covered by the inspection. Such an inspection (A) shall 5 be made during the normal business hours of the laboratory 6 being inspected and in a reasonable maimer, and (B) may 7 extend only to relevant equipment, materials, containers, rec- 8 ords, files, papers (including financial data, sales data, and 9 pricing data), processes, controls, facilities, and all other 10 things in the laboratory bearing on whether it is being oper- 11 ated in compliance with such standards. 12 "(2) Upon completion of any:such inspection and prior 13 to leaving the premises inspected, the inspector shall give to 14 the person in charge a preliminary report which summarizes 15 any conditions or practices observed by the inspector which, 16 in his judgment, indicate a violation of national standards in 17 effect under section 37L The inspector shall also prepare a 18 written final report of his findings and send it to such persOn 19 within thirty days of the completion of the inspection. 20 "(3) No individual designated by the Secretary to enter 21 a laboratory and conduct an inspection pursuant to paragraph 22 (1) shall be required to obtain a search warrant from any 23 judicial officer prior to ~entering any laboratory and conduct- 24 ing any inspection which is authorized by such paragraph. PAGENO="0065" 57 27 1 "(4) For the purpose of carrying out the review pre- 2 scribed by sections 374(d)(1) (relating to primary enforcement 3 responsibffity), the Secretary may designate individuals to 4 conduct inspections of clinical laboratories which are not sub- 5 ject to national standards in effect under section 371 to deter- 6 mine if such laboratories are in compliance with applicable 7 State standards. Each such inspection shall be conducted in 8 accordance with the requirements of paragraph (1). 9 "(c)(1) No employer may discharge any employee or 10 otherwise discriminate against any employee with respect to 11 the employee's compensation or the terms, conditions, or 12 privileges of his employment because the employee (or any 13 person acting pursuant to a request of the employee)- 14 "(A) caused to be commenced a proceeding under 15 section 373(c) or 275(a) of subsection (a) of this sec- 16 tion, a proceeding by a State in carrying out its pri- 17 mary enforcement responsibility, or an inspection under 18 subsection (a) or by such a State in carrying out such 19 responsibility; 20 "(B) testified or is about to testify in any such 21 proceeding; or 22 "(0) assisted or participated or is about to assist 23 or participate in any manner in such a proceeding, in- 24 spection, or in any other action to carry out the pur- 25 poses of this part. 56-071 0 - 80 - PAGENO="0066" 58 28 1 "(2) Any employee who believes that the employee has 2 been discharged or otherwise discriminated against by any 3 persónin violation of paragraph (1) may, within thirty days 4 after such alleged violation occurs, file (or have any person S file on the employee's behalf) a complaint with the~ Secretary 6 of Labor (hereinafter in this subsection referred to as the 7 `Secretary') alleging such discharge or discrimination. Upon 8 receipt of such a* complaint, the Secretary shall notify the 9 person named iii the complaint of the filing of the complaint. 10 "(3) Upon receipt of a complaint filed under paragraph 11 (2),the Secretary shall conduct an investigation of the viola- 12 lion alleged in the complaint. Within thirty days of the re- 13 ceipt of such complaint, the Secretary shall cOmplete such 14 invOstigatión and shall notify in writing the complainant (and 15 any person acting on behalf of the complainant) and the * 1ff persOn alleged to have cOmmitted such violation of the results 17 of the investigation conducted pursuant to this paragraph. 18 Within ninety days of the receipt of such complaint the 5cc- 19 retary shall, unless the proceeding on the complaint is termi- ~0- nated by the Secretary~on the: basis of a settlement entered 21 into by the Secretary and the person alleged to have commit- `22 ted such violation, issue an order either providing the relief 23 prescribed by paragraph (4) or denying the complaint. An 24 order of the SeCretary shall be made on the record alter 25 notice and opportunity for agency hearing. The Secretary PAGENO="0067" 59 2 1 may not enter into, a settlement terminating a proceeding on 2 a complaint without the participation and consent of the 3 complainant. 4 "(4) If in response to a complaint filed under paragraph 5 (2Y the Secretary determines that a violation of paragraph (1) 6 has occurred, the Secretary shall order (A) the person who 7 committed such violation to take affirmative action to abate 8 the violation, (B) such person to reinstate the complainant to 9 the complainant's former position together with the compen- 10 sation (including back pay), terms, conditions, and privileges 11 of the complainant's employment, and (0) the award of corn- 12 pensatory damages. If such an order is issued, the Secretary, 13 at the request of the complainant, shall assess against the 14 person against whom the order is issued a sum equal to the 15 aggregate amount of all costs and expenses (including attor- 16 ney's fees) reasonably incurred, as determined by the Secre- 17 tary, by the complainant for, or in connection with, the bring- 18 ing of the complaint upon which the order was issued. 19 "(5)(A) Any person adversely affected or aggrieved by 20 an order issued under paragraph (4) may obtain review of the 21 order in the United States court of appeals for the circuit in 22 which the violation, with respect to which the order was 23 issued, allegedly occurred. The petition for review must be 24 filed within sixty days from the issuance of the Secretary's PAGENO="0068" 60 30 1 order. Review shall conform to chapter 7 of title 5 of the 2 United States Code. 3 "(B) An order of the Secretary, with respect to which 4 review could have been obtained under subparagraph (A), 5 shall not be subject to judicial review in any criminal or other 6 civil proceeding. 7 "(6) Whenever a person has failed to comply with an 8~ order issued under paragraph (4), the Secretary shall file a 9 civil action in the United States district court for the district 10 in which the violation was found to occur to enforce such 11 order. In actions brought under* this paragraph, the district 12 courts of the United States shall have jurisdiction to grant all 13 appropriate relief, including injunctive relief and compensa- 14 tory damages. Civil actions brought under this paragraph 15 shall be heard and decided expeditiously. 16 "(7) Any nondiscretionary duty imposed by this subsec- 17~ tion is enforceable in mandamus proceeding brought under 18 section 1361 of title 28, United States Code. 19 "(8) Paragraph (1) shall not apply with respect to any 20 employee who, acting without direction from the employee's 21 employer (or any agent of the employer), deliberatedly causes 22 a violation of any requirement of this part or of a clinical 23 laboratory regulatory requirement of a State with primary 24 enforcement responsibility. PAGENO="0069" 61 31 1 "AGREEMENTS AND ASSISTANCE 2 "SEC. 377. (a) The Secretary and any State which has 3 primary enforcement responsibility for the regulation of cmi- 4 cal laboratories may enter into agreements with qualified 5 public or nonprofit private entities which, as determined by 6 the Secretary or such State, as the case may be, have adopt- 7 ed laboratory standards at least as stringent as those in effect 8 under section 371 (or in the case of agreements to be entered 9 into by such a State, at least as stringent as those in effect in 10 such State under section 374) under which agreements such 11 entities would- 12 "(1) make such inspections as the Secretary or 13 such State may require to determine if clinical labora- 14 tories are in compliance with applicable standards, 15 "(2) administer (A) such proficiency tests as the 16 Secretary or such States may require for clinical labo- 17 ratories, or (B) such examinations of laboratory person- 18 nel as the Secretary or such State may require, or 19 "(3) do any combination of the activities described 20 in paragraphs (1) and (2). 21 An agreement entered into under this subsection with an 22 entity may provide for financial assistance to the entity to 23 assist it in meeting its costs of conducting the activities pre- 24 scribed for it by the agreement. PAGENO="0070" 62 32. 1 "(b) If the Secretary has entered into an agreement 2 under the first sentence of section 1864(a) of the Social Secu- 3 rity Act ,for the enforcement of the requirements of section 4 1861 of such Act with respect to clinical laboratories by a 5 State which does not have primary enforcement responsibili- 6 ty for the regulation of clinical laboratories, the Secretary 7 may enter into an agreement under this subsection with such 8 a State for the enforcement within such State of the require- 9 ments of national standards in effect under section 371 with 10 respect to clinical laboratories not subject to the requirements 11 of such section 1861. An agreement entered into under this 12 subsection with a State may provide for financial assistance 13 to the State to assist it in meeting its costs of enforcing the 14 requirements of the national standards. 15 "(c)(1) The Secretary may enter into agreements with 16 States with primary enforcement responsibility under which 17 agreements financial assistance will be provided to such 18 States to assist them in meeting the cost of administering and 19. enforcing their programs for the regulation of clinical labora- 20 tories which are not covered under agreements authorized by 21 title XVIII of the Social Security Act. 22 "(2) The Secretary may provide technical assistance to 2a any State to assist it in meeting the requirements of. section 24 374. PAGENO="0071" 63 33 1 "(d) For the purpose of agreements authorized by sub- 2 sections (a), (b), and (c), there are authorized to be appropri- 3 ated $3,000,000 for the fiscal year ending September 30, 4 1981, $3,000,000 for the fiscal year ending September 30, 5 1982, and $3,000,000 for the fiscal year ending September 6 30, 1983. 7 "ANNUAL REPORT 8 "SEc. 378. (a) Not later than the first January 1, which 9 occurs more than 9 months after national standards first take 10 effect under section 371 and each succeeding January 1, the 11 Secretary shall make a report to the Congress (1) respecting 12 the accuracy and reliability of services performed by clinical 13 laboratories during the preceding fiscal year, and (2) evaluat- 14 ing the effect of the costs of clinical laboratory services on 15 the overall cost of health care services and the relation of the 16 costs of such tests and procedures to the costs of the health 17 care services for which the services are conducted. 18 "UNIFORM ADMINISTRATION 19 "SEc. 379. The Secretary shall establish a uniform reg- 20 ulatory program for the administration of the functions au- 21 thorized under this part and the laboratory certification and 22 regulation functions presently administered under this Act, 23 titles XVIII and XIX of the Social Security Act, and the 24 Federal Food, Drug, and Cosme~tic Act.". PAGENO="0072" 64 34 1 (b) Subpart 2 of part F of title ifi of the Public Health 2 Service Act is repealed. 3 (c) If, within twenty years from the date of completion 4 of construction, any hospital or other medical facility con~ 5 structed with the aid of grants under section 372 of the 6 Public Health Service Act (as in effect before the date of 7 enactment of the Clinical Laboratory Improvement Act of 8 1979) shall cease to be a publicly owned facility operated for 9 the care or treatment of patients under Alaska's mental 10 health program, the United States shall be entitled to recover 11 from Alaska the then value of the hospital or other medical 12 facffity, reduced, however, proportionately to the extent to 13 which Alaska may have contributed to the cost of construc. 14 tion thereof. 15 STUDY RESPECTING REQUIREMENTS FOR LABORATORIES 16 AND LABORATORY PERSONNEL 17 SEC. 102. (a) Thern Secretary of Health, Education, and 18 Welfare (hereinaft~r in this section referred to as the "Secre- 19 tary"), in cooperation with appropriate public and private en- 20 titles, shall conduct a study of (1) existing voluntary certifica- 21 ton standards and State licensure laws for clinical laboratory 22 supervisors, technologists, and technicians; (2) qualifications 23 of entities that certify such personnel as qualified to perform 24 laboratory procedures in clinical laboratories licensed under ~25 section 37~3 of the Public Health Service Act, (3) existing and PAGENO="0073" 65 35 1 proposed public and private mechanisms to determine the 2 continued competence of such personnel, (4) existing labora- 3 tory proficiency testing methods used to evaluate the per- 4 formance of clinical laboratories, and (5) the relationship of 5 requirements for such personnel and of clinical laboratory 6 proficiency testing requirements with clinical laboratory 7 performance. 8 (b) The study required by subsection (a) shall include- 9 (1) an assessment of the need for certification of 10 such personnel pursuant to Federal standards and for 11 assurance of their continued competence; 12 (2) development of Federal standards which the 13 Secretary determines should be used as guidelines for 14 entities which certify such laboratory personnel with 15 consideration of the need for increased geographic and 16 career mobility of such personnel; 17 (3) a determination of the numbers of technical 18 laboratory personnel who would meet standards devel- 19 oped by the Secretary under paragraph (2) and a pro- 20 jection of the numbers of such personnel in the calen- 21 dar years 1980, 1985, and 1990; 22 (4) an analysis of lhe effect on the costs of labora- 23 tory tests and procedures and quality of such tests and 24 procedures of. a requiremeiit that a laboratory may not 25 be licensed under se~jo~ 373 of the Public Health PAGENO="0074" 66 36 1 Service Act unless its personnel meet standards devel- 2 oped by the Secretary under paragraph (2); and 3 (5) consideration of the unique difficulties that 4 clinical laboratories located in rural areas have in ob- 5 taming and retaining qualified laboratory personnel. 6 (c) Within two years of the date of the enactn~ent of this 7 Act the Secretary shall submit to the Congress the results of 8 the study conducted pursuant to subsection (a) and recom- 9 mendations for legislation which the Secretary considers nec- 10 essary. 11 STuDY AND REPORT ON PRACTITIONERS' OFFICE 12 LABORATORIES 13 SEC. 103. (a)(1) The Secretary of Health, Education, 14 and Welfare shall conduct or arrange to have conducted a 15 study concerning clinical laboratories which are located in 16 the offices of physicians, dentists, or podiatrists and which 17 are exempted from national standards under section 371 of 18 the Public Health Service Act (as amended by this Act) by 19 subsection (c)(3)(B) of section 372 of such Act. The study 20 shall assess the quality of clinical laboratory services being 21 provided by such laboratories and shall include an evaluation 22 of (A) proficiency testing programs in which such laboratories 23 participate and the effect participation by such laboratories in 24 such programs has on the medical reliability of the results of 25 tests performed by them, and (B) quality- control programs, PAGENO="0075" 67 37 1 personnel qualifications and proficiency of laboratory person- 2 nel, and other factors bearing on the medical reliability of 3 tests and procedures performed by laboratories so exempted 4 from such standards. 5 (2) Any clinical laboratory which refuses to participate 6 in the study in the manner requested by the Secretary shall, 7 as prescribed by the Secretary, be required to meet the 8 standards in effect under section 371 of the Public Health 9 Service Act, on and after the date of the enactment of this 10 Act, for clinical laboratories engaged in business in interstate 11 commerce. 12 (b)(1)(A) Within one year of the date of the enactment of 13 this Act the Secretary shall report to the Congress the re- 14 suits of the evaluation made under subsection (a)(1)(A). If the 15 Secretary finds on the basis of such evaluation that the re- 16 suits of tests performed by laboratories participating in ap- 17 propriate (as determined by the Secretary) proficiency testing 18 programs are, as determined on a statistical basis, significant- 19 ly more medically reliable than the results of tests performed 20 by laboratories which are not participants in such proficiency 21 testing programs, the Secretary may by regulation require as 22 a condition to the exemption of clinical laboratories described 23 in subsection (a) from the national standards in effect under 24 section 371 of the Public Health Service Act that such labo- PAGENO="0076" 68 38 1 ratories participate in proficiency testing programs approved 2 by the Secretary. 3 (B) A regulation under subparagraph (A) shall- 4 (i) prescribe procedures and standards for the ap- 5 proval of proficiency testing programs, and 6 (ii) be promulgated only after affording reasonable 7 opportunity for an oral hearing. 8 (2) Within two years of the date of the enactment of this 9 Act, the Secretary shall report to the Congress the results of 10 the evaluation made under subsection (a)(1)(B). In such 11 report the Secretary shall make recommendations as to 12 whether clinical laboratories granted an exemption under sec- 13 tion 372(c)(3)(B) of the Public Health Service Act should be 14 required as a condition to such exemption to have laboratory 15 procedure manuals or other items or procedures bearing on 16 the medical reliability of tests and procedures perform'ed by 17 such laboratories. 18 STtJDY AND REPORT ON BIGHLY SPECIALIZED CLINICAL 19 LABORATORIES 20 SEc. 104. (a) The Secretary of Health, Education, and 21 Welfare shall conduct, or arrange to have conducted, a study 22 to assess the quality of the tests and other procedures and 23 services provided by highly specialized clinical laboratories, 24 including highly specialized clinical laboratories exempted 25 from national standards under section 371 of the Public PAGENO="0077" 69 39 1 Health Service Act (as amended by this Act) by subsection 2 (c)(5) of section 372 of such Act (as so amended). The study 3 shall be carried out in consultation with appropriate prof'es- ~4 sional organizations and shall include an evaluation of per- 5 sonnel qualifications, quality control programs, proficiency of 6 laboratory personnel, and other factors bearing on the medi- 7 cal reliability of the tests, other procedures, and services per- 8 formed by the laboratories studied. 9 (b)(1) Within two years of the date of the enactment of 10 this Act the Secretary shall report thp results of the study 11 prescribed by subsection (a) and shall include in the report 12 such recommendations for legislation as he determines 13 appropriate. 14 (2) Within two years of the date of the enactment of this 15 Act the Secretary shall promulgate regulations to make the 16 national standards in effect under section 371 of the Public 17 Health Service Act applicable (with such changesas the Sec- 18 retary may prescribe and include in the regulations) to the 19 highly specialized clinical laboratories des~ribed in subsection 20 (c)(5) of section 372 of such Act. - 21 STUDY OF CLINICAL LABOBATOBY SEBVICES 22 SEC. 105. (a) During the period beginning on the date of 23 the enactment of this Act and ending on the date national 24 standards first take effect under part H of the Public Health 25 Service Act and during the two-year period beginning on the PAGENO="0078" 70 40 1 date such standards first take effect, the Secretary of Health, 2 Education, and Welfare shall conduct a study to~ determine 3 the quality of the tests, procedures, and other sevices pro~ 4 vided by clinical laboratories during each such period and the 5 costs of such sevices during such periods. The Secretary shall 6 compare the data on the quality and cost of the services pro- 7 vided in the two periods studied to determine the effect of the 8 amendments made by the Clinical Laboratory Improvement 9 Act of 1979 on the quality and cost of clinical laboratory 10 services. 11 (b) Data on the quality and cost of clinical laboratory 12 services shall be assembled under the study conducted under 13 subsection (a) on the basis- 14 (1) the size and type of clinical laboratories stud- 15 ied and the categories of persons for whom services 16 were provided; 17 (2) the volume of services provided; 18 (3) the qualifications and experience of the person- 19 nel who performed or supervised the services studied; 20 (4) the protocols followed by the laboratories in 21 providing such services; and 22 (5) the States or other geographic regions in 23 which such services were provided. 24 (c) The Secretary shall make a preliminary report to the 25 Congress on the results of the study conducted under subsec- PAGENO="0079" 71 41 1 tion (a) not later than ninety days after the expiration of the 2 first period studied and shall make a final report on the study 3 (together with any reconimendations for legislation) not later 4 than one hundred eighty days after the expiration of the 5 second period studied. 6 TITLE 11-SOCIAL SECURITY ACT AMKNDMENTS 7 AND STUDY AND REPORT 8 AMENDMENTS TO TITLE XI OF THE SOCIAL SECURITY ACT 9 SEC. 201. (a) Part A of title XI of the Social Security 10 Act is amended by adding after section 1131 the following 11 new section: 12 "PROCEDURES FOR DETERMINING REASONABLE COST AND 13' CHARGES FOR LABORATORY SERVICES 14 "SEC. 1132. In determining the amount of any payment 15 for a dininal laboratory service (other than such a service 16 which' is' provided by a clinical laboratory which is located in 17 a hospital and which provides services primarily in conned- 18 tion with the furnishing by the hospital of other inpatient or 19 outpatient services) furnished under title XVIII, under a pro- 20 gram established pursuant to title IT, or under a State plan 21 for medical assistance approved under title XIX, no reim- 22 bursement will be available for any element of the cost or 23 charge for such service to the extent that such element is- PAGENO="0080" 72 42 1 "(1) a commission (other than a commission paid 2 to an employee of a clinical laboratory in the course of 3 its usual and customary business) or under's fee, or 4 "(2) an amount payable for any facility (or part or 5 activity thereof) under any rental or lease arrangment, 6 which such amount (A) is unrelated or disproportionate 7 to the market value of the facility (or part thereof), or 8 (B) is, directly or indirectly, determined, wholly or in 9 part, as a per .centum, fraction, or portion of the 10 charge or cost attributed to the laboratory service.". 11 (b) Section 1124(a)(1) of the Social Security Act is 12 amended by inserting before the period at the end the follow- 13 ing: ", and in the case of a disclosing entity which is an 14 independent clinical laboratory, furnish such information and 15 access to its records as* the Secretary may require to deter- 16 mine whether and in what amounts the laboratory has 17 charged a physician for laboratory services performed by the 18 laboratory". 19 AMENDMENTS TO TITLE XVIII OF THE SOCIAL SECURITY 20 ACT~ 21 SEC. 202. (a)(1) Section 1842 of the Social Security 22 Act is amended by inserting at the end the following new 23. subseetiom~ . . 24 "(h) If a physician's bill or request for payment for a 25 physician's services includes a charge to a patient for a labo- PAGENO="0081" 73 43 1 ratory test for which payment may be made under this part, 2 the amount payable with respect to the test shall be deter- 3 mined as follows: 4 "(1) If the bill or request for payment indicates 5 that the physician who submitted the bill or for whose 6 services the request for payment was made personally 7 performed or supervised the performance of the test or 8 that another physician with whom that physician 9 shares his practice personally performed or supervised 10 the test, the payment shall be the reasonable charge 11 for the test (less the applicable deductible and coinsur- 12 ance amounts). 13 "(2) If the bill or request for payment indicates 14 that the test was performed by a laboratory, identifies 15 the laboratory, and indicates the amount the laboratory 16 charged the physician who submitted the bill or for 17 whose services the request for payment was made, 18 payment for the test shall be the lower of-' 19 "(A) the laboratory's reasonable charge to 20 individuals enrolled under this part for the test, or 21 "(B) the amount the laboratory charged the 22 physician for the test, 23 plus a nominal fee (where the physician bills for such a 24 service) to cover the physician's costs in collecting and 25 handling the sample on which the test was performed 56-071 0 - 80 - 6 PAGENO="0082" 74 44 1 (less the applicable deductible and coinsurance 2 amounts). 3 "(3) If the bifi or request for payment (A) does 4 not indicate who performed the test, or (B) indicates 5 that the test. was performed, by a laboratory but does 6 not identify the laboratory or include the amount .7 charged by the laboratory, payment shall be the lowest 8 charge at which the carrier estimates the test could 9 have been secured by a physician from, a laboratory 10 serving the locality (less the applicable deductible and 11 coinsurance amounts).". 12 (2) The amendment made by paragraph (1) shall apply 13 to bills submitted and requests for payment made on or after 14 such date (not later than July 1, 1980) as the Secretary of 15 Health, Education, and Welfare (hereinafter in this title re- 16 ferred to as the "Secretary") prescribes by a notice published 17 in the Federal Register. 18 (b)(1)(A) The second sentence of section 1861(s) of the 19 Social Security Act is amended to read as follows: "No diag- 20 nostic tests performed in any laboratory shall be included in 21 paragraph (3) unless the laboratory meets applicable Federal 22 or `State licensing requirements under part H of title III of 23 the Public Health Service Act, or, if those requirements are 24,: not applicable, meets such conditions relating to the health PAGENO="0083" 75 45 1 and safety of individuals with respect to whom such tests are 2 performed as the Secretary may fmd necessary.". 3 (B)(i) Paragraphs (12) and (13) of section 1861(s) of 4 such Act are redesignated as paragraphs (10) and (11), 5 respectively. 6 (ii) The first sentence of section 1864(a) of such Act is 7 amended by striking out "the requirements of paragraphs 8 (10) and (11) of section 1861(s)" and inserting in lieu thereof 9 "the requirements of section 1861(e)(9), section 1861(j)(15), 10 or the second sentence of section 1861(s)". 11 (2)(A) Section 1861(e) of such Act is amended- 12 (i) by striking out "and" after the semicolon at 13 the end of paragraph (8); 14 (ii) by redesignating paragraph (9) as paragraph 15 (10); and 16 (iii) by inserting after paragraph (8) the following 17 new paragraph: 18 "(9) meets applicable Federal or State licensing 19 requirements under part H of title III Of the Public 20 Health Service Act with respect to any laboratory 21 which is a part of the institution; and". 22 (B) Section 1861(j)(15) of such Act is amended by in- 23 serting after "physical facilities thereof" the following: "(in- 24 eluding applicable Federal or State licensing requirements 25 under part H of title III of the Public Health Service Act PAGENO="0084" 76 46 I with respect to any laboratory which is a part of the 2 institution)". 3 (C)(i) Subparagraphs (0) and (D) of section 1814(a)(2) of 4 such Act are each amended by striking out "and (9)" and 5 inserting iii lieu thereof "and (10)". 6 (ii) Subsections (f)(2) and (g)(2) of section 1861 of such 7 Act are each amended by striking out "(3) through (9)" and 8 inserting in lieu thereof "(3) through (10)". 9 (iii) Section 1865(a)(4) of such Act is amended by strik- 10 ing out "paragraph (9)" and inserting in lieu thereof "para- 11 graph (10)". 12 (3) The first sentence of section 1864(a) of such Act is 13 amended by inserting before the period at the end thereof the 14 following: "; except that the Secretary may not make an 15 agreement with a State under this sentence for the purpose 16 of determining whether a laboratory meets the requirements 17 of section 1861(e)(9), section 18'31(j)(15), or the second sen- 18 tence of section 1861(s) (or include provision for such purpose 19 in any such agreement) unless either the State has primary 20 enforcement responsibility for the regulation of clinical labo- 21 ratories, as determined under part H of title III of the Public 22 Health Service Act, or the State provides assurances satis- 23 factory to the Secretary that it will implement procedures for 24 the enforcement of such requirements". PAGENO="0085" 77 47 1 (c)(1) The first sentence of section 1865(a) of the Social 2 Security Act is amended- 3 (A) by striking out "and" at the end of paragraph 4 (3); 5 (B) by redesignating paragraph (4) as paragraph 6 (5); and 7 (0) by inserting after paragraph (3) the following 8 new paragraph: 9 "(4) paragraph (9) thereof, and". 10 (2) The second sentence of such section is amended- 11 (A) by inserting before "or imposes" the second 12 time it appears the following: ", imposes standards 13 with respect to laboratories which the Secretary (and 14 the applicable State agency designated in accordance 15 with section 374(a)(6) of the Public Health Service 16 Act, in the case of any laboratory in a State which has 17 primary enforcement responsibility under part H of 18 title III of such Act) determines are at least equivalent 19 to the national standards for clinical laboratories in 20 effect under section 371 of such Act,"; 21 (B) by inserting ", section 1861(e)(9)," after :"sec.. 22 tion 1861(e)(6)"; and 23 (0) by striking out "paragraph (4)" and inserting 24 in lieu thereof "paragraph (5)" each place it appears. PAGENO="0086" 78 48 1 (3) The third sentence of such section is amended by 2 inserting after "the Secretary" the following: "(and the ap- 3 plicable State agency designated in accordance `with section 4 374(a)(6) of the Public Health Service Act, to the extent that 5 licensing requirements for laboratories under part H of title 6 III of such Act, as specified in section 1861(e)(9) or 7 1861(j)(15) of this Act, are involved, if the institution or 8 agency is located in a State which has primary enforcement 9 responsibility under part H of title ifi of such Act)". 10 (d)(1) Section 1833 of the Social Security Act is 11 amended- 12 (A) by striking out "subsection (g)" in subsection 13 (a)(1XD) and inserting in lieu thereof "subsection (11)"; 14 and 15 (B) by redesignating as subsection (h) the subsec- 16 tion (g) that begins "With respect to diagnostic tests" 17 and was added by section 279(b) of the Social Security 18 Amendments of 1972. 19 (2) Sections 1833(g), 1832(a)(2)(O), and 1833(a)(2)(O) of 20 such Act are each amended by striking out "next to last sen- 21 tence of section 1861(p)" and inserting in lieu thereof "the 22 second sentence of section 1861(p)". 23 (3) Section 1837(g)(1) of such Act is amended (A) by 24 striking out "section 226(a)(2)(B)" and inserting in lieu there- PAGENO="0087" 79 49 1 of "section 226(b)" and (B) by striking out "section 1839(e)" 2 and inserting in lieu thereof "section 1839(f)". 3 (4) Section 1866(a)(1)(B) of such Act is amended by in- 4 serting "of section 1862(a)" alter "paragraphs (1) or (9)" and 5 section 1870(c) of such Act is amended by striking out "sec- 6 tion 1862" and inserting in lieu thereof "section 1862(a)". 7 AMENDMENT TO TITLE XIX OF THE SOCIAL SECURITY 8 ACT 9 SEC. 203. (a)(1) Section 1902(a)(23) of the Social Secu- 10 rity Act is amended by inserting "(A)" before "has entered 11 into" and by inserting before the semicolon at the end the 12 following: ", or (B) during the three-year period beginning on 13 the date of enactment of the Olinical Laboratory Improve- 14 ment Act of 1979, has made arrangments through a competi- 15 tive bidding process or otherwise for the purchase of labora- 16 tory services referred to in section 1905(a)(3), if the .Secre- 17 tary has found that (i) adequate services will be available 18 under such arrangements, (ii) such laboratory services will be 19 provided only through laboratories (I) which meet the i~- 20 quirements of section 1861(e)(9), paragraphs (10) and (11) of 21 section 1861(s), or part H of title III of the Public Health 22 Service Act, and such additional requirements as the Secre- 23 tary may require, and (II) no more than 75 per centum of 24 whose charges for such services are for services provided to 25 individuals who are entitled to benefits under this title or PAGENO="0088" 80 50 1 under part A or part B of title XVIIT, and (iii) charges for 2 services provided under such arrangements are made at the 3 lowest rate charged (determined without regard to adminis- 4 trative costs whióh are related solely to the method of reim- 5 bursement for such services) for comparable services by the 6 provider of such services, or, if charged for on a unit price 7 basis, such charges result in aggregate expenditures not in S excess of expenditures that would be made if charges were at 9 the lowest rate charged for comparable services by the pro- 10 vider of such services". 11 (2) The Secretary shall evaluate arrangements made for 12 the purchase of laboratory services under section 13 1902(a)(23XB) of the Social Security Act and shall transmit 14 that evaluation to the Congress, together with reconimenda- 15 tions as to whether such section 1902(a)(23)(B) should be 16 extended or modified, no later than twenty-four months after 17 the date of enactment of this Act. 18 (b) Section 1902(a)(28) of such Act is amended by in- 19 serting before the semicolon the foll~ring ", and provide 20 that any laboratory services paid for under such plan must be 21 provided by a laboratory which during the three-year period 22 beginning on the date of enactment of the Clinical Laboratory 23 Improvement Act of 1979 meets the requirements of section 24 1861(e)(9) or paragraphs (10) and (11) of section 1861(s) and PAGENO="0089" 81 51 1 after the expiration of such period is licensed in accordance 2 with part H of title ifi of the Public Health Service Act". 3 (c) Section 1902(a)(30) of such Act is amended by in- 4 serting before the semicolon the following: "and, in the case S of laboratory services referred to in section 1905(a)(3), such 6 payments do no exceed the lowest amount charged (deter- 7 mined without regard to administrative costs which are relat- 8 ed solely to the method of reimbursement for such services) 9 to any person or entity for such services by that provider of 10 laboratory services". 11 (d)(1) Section 1902(a) of the Social Security Act is 12 amend~ed (A) by striking out "and" at the end of paragraph 13 (39), (B) by striking out the period at the end of paragraph 14 (40) and inserting in lieu thereof "; and" and (C) by adding 15 after paragraph (40) the following new paragraph: 16 "(41) if the State plan makes provision for pay- 17 ment to a physician for laboratory services the per- 18 formance of which such physician (or any other physi- 19 cian with whom he shares his practice) did not person- 20 ally perform or. supervise, include provision to insure 21 that payment under the State plan for such laboratory 22 services not exceed the payment authorized for such 23 services by section 1842(h).". 24 (2)(A) The amendments made by paragraph (1) shall 25 (except as otherwise provided in subparagraph (B)) apply to PAGENO="0090" 82 52 1 medical assistance provided, under a State plan approved 2 under title XIX of the Social Security Act, on and after the 3 first day of the first calendar quarter that begins more than 4 six months after the date of enactment of this Act. 5 (B) In the case of a State plan for medical assistance 6 under title XIX of the Social Security Act which the Secre- 7 tary determines requires State legislation in order for the 8 plan to meet the additional requirements imposed by the 9 amendments made by paragraph (1), the State plan shall not 10 be regarded as failing to comply with the requirements of 11 such title solely on the basis of its failure to meet these addi- 12 tional requirements before the first day of the first calendar 13 quarter beginning after the close of the first regular session of 14 the State legislature that begins after the date of enactment 15 of this Act. 16 STUDY OF FINANCIAL ARRANGEMENTS MADE BY 17 HOSPITALS FOR CLINICAL LABORATORY SERVICES 18 SEC. 204. (a) The Secretary shall conduct a study of the 19 financial arrangements entered into by hospitals, reimbursed 20 for the provision of health services under title XVIII of the 21 Social Security Act or a State plan for medical assistance 22 under title XIX of such Act, for the provision of clinical labo- 23 ratory services by persons who provide such services in such 24 hospitals to determine if such arrangements are in the public 25 interest. Such study shall include an examination of- PAGENO="0091" 83 53 1 (1) arrangements between hospitals and providers 2 of dilnical laboratory services under which the fee for 3 the provision of such services is based on a percentage 4 of the gross revenues received by the providers for 5 such services, 6 (2) leasing arrangements for facilities and equip- 7 ment entered into by hospitals and providers of such 8 services, and 9 (3) arrangements by hospitals for salaries and 10 other forms of compensation for the providers of such 11 services. 12 (b) Within six months of the date of enactment of this 13 Act such study shall be completed and a report made to the 14 Congress setting forth the findings of the study and recom- 15 mendations of the Secretary for such corrective legislation as 16 the Secretary determines to be necessary. 17 REPORT ON BILLING FOR LABORATORY SERVICES 18 SEC. 205. Not later than twenty-four months after the 19 effective date of the amendments made by section 202(a), the 20 Secretary shall report to the Congress (1) the proportion of 21 bills and requests for payment submitted (during the eight- 22 een-month period beginning on such effective date) under 23 title XVIIT of the Social Security Act for laboratory tests 24 which did not identify who performed the tests, (2) the pro- 25 portion of bifis and requests for payment submitted during PAGENO="0092" 84 54 1 such period for laboratory tests with respect to which the 2 amount paid under such title was less than the amount that 3 would otherwise have been payable in the absence of section 4 1842(h) of such Act, (3) with respect to requests for payment 5 described in clause (2) which were submitted by patients, the 6 average additional cost per laboratory test to patients result- 7 ing from reductions in payment that would otherwise have 8 been made for such tests in the absence of such section 9 1842(h), and (4) with respect to bifis described in clause (2) 10 which were submitted by physicians, the average reduction in 11 payment per laboratory test to physicians resulting from the 12 application of such section 1842(h). PAGENO="0093" 85 96TH CONGRESS 1ST SEssioN * To amend title XIX of the Social Security Act to repeal section 1902(f) and to provide for extended medicaid coverage of the severely medically impaired. IN TIlE HOUSE OF REPRESENTATIVES OCTOBER 11, 1979 Mr. WAXMAN introduced the following bifi; which was referred to the Committee on Interstate and Foreign Commerce A BILL To amend title XIX of the Social Security Act to repeal section 1902(f) and to provide for extended medicaid coverage of the severely medically impaired. 1 Be it enacted by the Senate and House of Bepresenta- 2 lives of the United States of America in Congress assembled, 3 That this Act may be cited as the "Medicaid Disability 4 Amendments of 1979". 5 SEC. 2. Section 1902 of the Social Security Act (42 6 U.S.C. 1396a) is amended- 7 (1) by striking out subsection (f); and PAGENO="0094" 86 2 1 (2) by adding at the end the following new sub- 2 section: 3 "(g) In the case of an individual who, in the month 4 before the effective date of this subsection, was determined to 5 be eligible for medical assistance under the plan because of 6 the application of subsection (f) and who (but for this subsec- 7 tion) would have become ineligible for such medical assist- 8 ance in the subsequent month because of the repeal of such 9 subsection, such repeal shall not apply to such individual for 10. each subsequent month untll~the~, first month in which the: 11 individual otherwise becomes ineligible for such assistance 12 under such subsection.". 13 SEC. 3. (a) Section 1902 of the Social Security Act is 14 amended by adding after subsection (g) (as added by section 2 15 of this Act) the following new subsection: 16 "(h) For purposes of this title, an individual shall be 17 treated as an individual with respect to whom supplemental 18 security income benefits are being paid under title XVI if- 19 "(1) such benefits would be payable with respect 20 to the individual but for paragraph~ (4) of section 21 1611(e) (as added~ by the: Supplemental Security 22 Income Disability Amendments of 1979), or 23 "(2) the Secretary determines that- 24 "(A) the individual has a severe medical dis- 25 ability and meets, except for the individual's earn- PAGENO="0095" 87 3 1 ings, all non-disability-related requirements for eli- 2 gibility to have supplemental security income 3 benefits paid with respect to the individual under 4 title XVI; 5 "(B) the income of the individual does not, 6 except for earnings, exceed the amount which 7 would cause the individual to be ineligible for 8 payments under section 1611(b) (if the individual 9 were otherwise eligible for such payments); 10 "(0) the individUal has been receiving mcdi- 11 cal assistance under this title, without such deter- 12 mination the individual would not be eligible for 13 continuation of such assistance, and the termina- 14 tion of such eligibility would* seriously inhibit the 15 individual's ability to continue employment; and 16 "(ID) the individual's earnings are not suffi- 17 cient to allow the individual to provide for himself 18 for a reasonable equivalent of the benefits which 19 would be available to the individual in the ab- 20 sence of such earnings under this title and title 21 XVI. 22 For purposes of this subsection, an individual shall be consid- 23 ered to have. a~ severe xñ&lical disthility if the individual's 24 impairment is sufficiently severe to result in a functional limi- PAGENO="0096" 88 4 1 tation requiring medical assistance in order for the individual 2 to work.". 3 (b) Section 1902(a)(17) of such Act is amended- 4 (1) by striking out "and" before "(I))" in para- 5 graph (17); and 6 (2) by inserting before the semicolon at the end of 7 clause (D) the following: ", and (E) in the. case of mdi- 8 viduals who have disabilities which are sufficiently 9 severe as to result in functional limitations requiring 10 medical assistance in order that they may work, pro- 11 vide for the exclusion from income of such amounts as 12 may be excluded by clauses (ii) through (iv) of section 13 1612(b)(4)(B) (as added by the Supplemental Security 14 Income Disability Amendments of 1979) from the 15 determination of income under title XVI". 16 (c) The first sentence of section 1905(a) of such Act is 17 amended-. 18 (1) by striking out "or" at the end of clause (vi), 19 (2) by inserting "or" at the end of clause (vii), 20 and : 21 (3) by adding after clause (vii) the following new 22 clause: 23 :"(vuli) individuals who have. impairments ~uffi~ 24.. ciently severe to result in. a functional limita on requir-. PAGENO="0097" 89 .5 1 ing assistance for the provision of such care and serv- 2 ices in order for the individuals to work;". 3 Sec. 4. (a) The amendments made by this Act shall 4 (except as otherwise provided in subsection (b)) apply to 5 medical assistance to be provided under State plans, ap- 6 proved under title XIX of the Social Security Act, on or after 7 the first day of the first calendar quarter that begins more 8 than six months after the date of the enactment of this Act. 9 (b) In the case of a State plan for medical assistance 10 under title XIX of the Social Security Act which the Secre- 11 tary of Health and Human Resources determines requires 12 State legislation in order for the plan to meet the additional 13 requirements imposed by the amendments made by this Act, 14 the State plan shall not be regarded as failing to comply with 15 the requirements of such title solely on the basis of its failure 16 to meet these additional requirements before the first day of 17 the first calendar quarter beginning after the close of the first 18 regular session of the State legislature that begins after the 19 date of the enactment of this Act. 56-071 0 - 80 - 7 PAGENO="0098" 90 96TH CONGRESS T T TI 1ST SESSION 1*1. ~ To strengthen and improve the early and periodic screening, diagnosis, and treatment program, arid for other purposes. IN THE HOUSE OF REPRESENTATIVES FEBRUARY 15, 1979 Mr. CARTER introduced the following bill; which was referred to the Committee on Interstate and Foreign Commerce A BILL To strengthen and improve the early and periodic screening, diagnosis, and treatment program, and for other purposes. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 SHORT TITLE; REFERENCE TO ACT 4 SECTION 1. (a) This Act may be cited as the "Ohild 5 Health Assurance Act of 1979". 6 (b) Whenever in this Act an amendment or repeal is 7 expressed in terms of an amendment to, or repeal of, a see- 8 tion or other provision, the reference shall be considered to PAGENO="0099" 91 2 1 be made to a section or other provision of the Social Security 2Act. 3 PURPOSE 4 SEC. 2. The purpose of this Act is to modify the early 5 and periodic screening, diagnosis, and treatment program and 6 broaden medicaid eligibility- 7 (1) to introduce needy children into a health care 8 system within their community that will provide corn- 9 prehensive, ongoing primary and preventive health 10 care; 11 (2) to increase the number of children eligible for 12 such care; 13 (3) to assure the continuity of care for a period 14 after a child would on account of income become ineli- 15 gible for medical care under the medicaid program; 16 (4) to assure that appropriate prenatal and post- 17 partum care is made available for needy pregnant 18 women; 19 (5) to increase immunization levels of children; 20 and 21 (6) to provide further incentives to States to ar- 22 range for and encourage quality health care for 23 children. PAGENO="0100" 92 3 1 MEDICAID ELIGIBILITY OF POOR CHILDREN, PREGNANT 2 WOMEN, AND HARD-TO-PLACE ADOPTED CEILJDREN 3 SEC. 3. (a)(1) Section 1902(a)(l0) is amended- 4 (A) by inserting~ "(i)" after "(A)" in subparagraph 5 (A); 6 (B) by striking out "clause (A)" and inserting in 7 lieu thereof "subparagraph (A)" each place it appears; 8 (0) by inserting after subparagraph (A) the follow- 9 ing new clauses: 10 "(ii) for making medical assistance available 11 to any individual who is under the age of 18 and 12 (at the option of the State) to any individual over 13 the age of 17 and under the age of 21 (or within 14 a reasonable classification of such individuals), if 15 the individual is a member of a family- 16 "(I) which, on the basis of resources, 17 either is eligible for aid under the State plan 18 approved under part A of title IV or would 19 be eligible for aid under such State plan but 20 for the fact that the individual is not a de- 21 pendent child under part A of title IV, and 22 "(II) the income of which does not 23 exceed the higher of the income standard for 24 such a family to be eligible for any medical 25 assistance under the State plan or the na- PAGENO="0101" 93 4 1 tional CHAP income standard established 2 under section 1902(d); 3 "(iii) for making medical assistance available 4 to any woman for a period of her pregnancy and 5 for 60 days following the date of termination of 6 her pregnancy- 7 "(I) who, on the basis of resources, 8 either is eligible for aid under the State plan 9 approved under part A of title IV or would 10 be eligible for aid under such State plan if 11 she had a dependent child (as defined in part 12 A of title IV) living with her, and 13 "(II) whose income (including the 14 income of the family of which she is a 15 member) does not exceed the higher of the 16 income standard for such a woman to be eli- 17 gible for any medical assistance under the 18 State plan or of the national maternal 19 income standard established under section 20 1902(d);". 21 (2) Section 1902(f) is amended (A) by striking out 22 "clause (10)(C)" and inserting in lieu thereof "paragraph 23 (10)(C)" each place it appears, and (B) by striking out 24 "clause (10)(A)" and inserting in lieu thereof "paragraph 25 (10)(A)(i)" each place it appears. PAGENO="0102" 94 5 1 (3) Sections 1903(a)(1), 1903(f)(4)(O), and 1905(a) aie~ 2 amended by striking out "section 1902(a)(10)(A)" and insert- 3 ing in lieu thereof "section 1902(a)(10)(A)(i)" each place it 4 appears. 5 (b)(1) Section 1905(a) is amended- 6 (A) by striking out ", except for section 7 406(a)(2)," in clause (ii); 8 (B) by striking out "or" at the end of clause (vi); 9 (0) by inserting "or" at the end of clause (vii); 10 (I)) by inserting after and below clause (vii) the 11 following new clause: 12 "(viii) women during pregnancy and during the 60 13 days following the date of termination of pregnancy,"; 14 (E) by striking out "all of such cost-" in the 15 matter before paragraph (1) and inserting in lieu there- 16 of "all of such cost, or who are adopted children with 17 special needs (as defined in subsection (m))-"; and 18 (F): by adding at the end thereof the following 19 sentence: "An individual described in clause (i) of this 20 subsection sMil be considered to have income insuffi- 21 cient to meet all of the cost of the care and services 22 described in this subsection if the income of his family 23 does not exceed the national CHAP income standard 24 established under section 1902(d), and an individual de- ~25 scribed in clause (viii) of this subsection shall be con- PAGENO="0103" 95 6 1 sidered to have income insufficient to meet all of the / 2 cost of the care and services described in this subsec- 3 tion if the income of the individual (and of the family of 4 which the individual is a member) does not exceed the 5 national maternal income standard established under 6 section 1902(d)." 7 (2) Section 1902(b) is amended by striking out para- 8 graph (2) and redesignating paragraphs (3) and (4) as para- 9 graphs (2) and (3), respectively. 10 (c) Section 1902 is amended by inserting after subsec- 11 tion (c) the following new subsection: 12 "(d)(1) For the purpose of establishing the eligibility of. 13 and extent of medical assistance provided to certain children 14 and pregnant women, the Secretary shall establish by regula- 15 tion a national ChAP income standard and a national mater- 16 nal income standard. 17 "(2)(A) The national CHAP income standard shall be 18 $2,400 for one individual, $3,000 for a family of two, $3,600 19 for. a family of three, and $4,200 for a family of four; shall be 20 increased by $600 fo~r each additional family member, over 21 four members and. up to such family size as the Secretary 22 may establish by regulation; and Shall be increased by such 23 amount for each additional family member above such speci- 24 fled family size as the Secretary establishes by regulation. PAGENO="0104" 96 7 1 "(B) The national maternal income standard shall be 2 $3,000 for a pregnant woman; shall be increased by $800 for 3 each additional family member up to such family size as the 4 Secretary may establish by regulation; and shall be increased 5 by such amount for each additional family member above 6 such specified family size as the Secretary establishes by 7 regulation. 8 "(3) In applying the iti~ome standards established under 9 paragraph (2), each State shall take into consideration the 10 same income and expenses (including work-related expenses) 11 and disregard the same items of income in the same manner 12 as they would be taken into consideration or disregarded 13 under the State's plan under part A of title IV.". - 14 (d) Section 1905 is amended by adding after subsection 15 (1) the following new subsection: 18 "(m) The term `adopted child with special needs' means 17 an individual who- 18 "(1)(A) is under the age Of 18 or (B) (at the 19 option of the State) is over the age of 17 and under 20 the age of 21 (or within a reasonable classification of 21 such individuals); 22 "(2) has been placed for adoption; 23 "(3) was living in foster care immediately before 24 the date of his placement for adoption; and PAGENO="0105" 97 8 1 "(4) on the date of his placement for adoption suf- 2 fered from a condition requiring continuing medical 3 care and services which condition the State determines 4 was a contributing factor to the difficulty of placing the 5 individual for adoption, 6 but only during the period beginning on the date of his place- 7 ment for adoption and ending on the date the individual turns 8 the age specified in paragraph (1) or, at the State's option 9 and if earlier, the date the State determines that the indi- 10 vidual no longer requires the continuing care and services 11 described in paragraph (4).". 12 (e) Section 1902(a)(17) is amended by inserting ", 13 except as provided under section 1902(d)," after "include 14 reasonable standards (which". 15 REQUIRED SERVICES 16 SEC. 4. (a)(1) Section 1902(a)(13) is amended- 17 (A) by inserting at the end of subparagraph (A) 18 the following new clause: 19 "(ffl) in the case of any individual under the 20 age of 21 who has received a timely periodic child 21 health assessment (as defined in section 1905(n)), 22 (1) for inclusion of all care and services (other 23 than inpatient services in an institution for mental 24 diseases or in an intermediate care facility for the 25 mentally retarded), without regard to any .limita- PAGENO="0106" 98 9 1 tion in the amount, duration, or scope of medical 2 assistance, for which payment is available under 3 this title, whether or not under the State plan for 4 the State such care and services are provided to 5 individuals who have not been so periodically as- 6 sessed, and (II) for referral for appropriate care 7 and services not available under this title; and"; 8 (B) by amending subparagraph (B) to read as fol- 9 lows: 10 "(B) in the case of any individual described ii in paragraph (10)(A), for the inclusion of at least 12 the care and services listed in paragraphs (1) 13 through (5) of section 1905(a), and "; 14 (C) by striking out "clauses" in subparagraph 15 (C)(i) and inserting lieu thereof "paragraphs"; and 16 (D) by striking out "clauses numbered" in subpar- 17 agraph (C)(ii)(I) and inserting in lieu thereof "para- 18 graphs". 19 (2) Section 1902(a)(14)(A)(i) is amended by striking out 20 "clauses" and inserting in lieu thereof "paragraphs". 21 (b) Clause (I) of section 1902(a)(10) is amended by in- 22 serting "or services described in clauses (iii) and (iv) of para- 23 graph (13)(A)" after "section 1905(a)". 24 (c) Section 1905(a)(4)(B) is amended to read as follows: 25 "; (B) child health assessments (as defined in subsection (n)), PAGENO="0107" 99 .10 S 1 diagnosis, treatment, referral, and medical case management 2 of individuals under the age of 21;". 3 (d) Section 1905(a)(4) is amended (1) by striking out 4 "and" before "(C)" and (2) by inserting "; (D) routine dental 5 care (as defined in subsection (o)) for individuals under the 6 age of 21; and (E) prenatal and postnatal services" before the 7 semicolon at the end thereof. 8 (e) Section 1905 is amended by adding after subsection 9 (m), added by section 3(d) of this Act, the following new sub- 10 sections: 11 "(n)(1) The term `child health assessment' means such 12 an assessment provided in accordance with this subsection for 13 an individual under the age of 21 for such health problems 14 and at such periods as the Secretary shall specify in regula- 15 tions. Such assessments and other services described in sec- 16 tion 1905(a)(4)CB) shall be provided under a program (to be 17 known as the `child health assurance program') to be devel- 18 oped by each State in accordance with this title. 19 "(2) Such assessments may only be provided under this 20 title by a health care provider who enters into a written 21 agreement (described in paragraph (3)) with the single State 22 agency responsible for administering or supervising the ad- 23 ministration of the State plan under this title. * PAGENO="0108" 100 11 1 "(3) The written agreement referred to in paragraph (2) 2 must provide, in accordance with standards established by 3 the Secretary, that the provider agrees as follows: 4 "(A) To provide timely and appropriate child 5 health assessments to individuals under the age of 21 6 and eligible under the State plan to receive such as- 7 sessments (such individuals hereinafter in this subsec- 8 tion referred to as `eligible individuals'). 9 "(B)(i) To provide directly to eligible individuals 10 whom it has assessed such basic diagnostic and treat- 11 ment services (including immunization against child- 12 hood diseases) aS the Secretary shall specify in regula- 13 tions, or. 14 "(ii) To provide to eligible individuals whom it has 15 assessed (I) timely referral to other health care provid- 16 ers for the provision of these basic diagnostic and 17 treatment services, and (II) followup services to insure 18 the provision of the services for which such a referral 19 has been made. 20 "(O)(i) To provide directly to eligible individuals 21 routine dental care (as defined in subsection (o)), or 22 "(ii) To provide to eligible individuals whom it has 23 assessed information, from a list provided by the State 24 agency, on dentists participating in the child health 25 assurance program. PAGENO="0109" 101 12 1 "(D)(i) To refer eligible individuals to appropriate 2 providers for any corrective treatment the need for 3 which is disclosed by an assessment but which is not 4 available directly from the provider, and (ii) to follow 5 up to assure the proper provision of such treatment. 6 "(E) To take responsibifity for the management of 7 the medical care of each eligible individual whom it 8 has assessed and to assure that child health assess- 9 ments are performed on a timely and periodic basis. 10 "(F) To be reasonably accessible on an ongoing 11 basis to eligible individuals whom it has assessed in 12 order to provide continuing medical care or to assure 13 the continuing availabffity of medical care and services. 14 "(G) To make such reports (i) to the single State 15 agency administering or supervising the administration 16 of the plan as the agency determines to be necessary 17 to assure compliance with the requirements of the con- 18 tract, and (ii) to the Secretary as he determines to be 19 necessary to assure compliance with the requirements 20 of the contract. 21 In lieu of the followup services required under subparagraph 22 (B)(ii)(ll) or (D)(ii), the written agreement with a health care 23 `provider may provide that the provider will furnish the single 24 State agency that administers, or supervises the administra- 25 tion of, the State plan with such information as such agency PAGENO="0110" 102 13 1 determines to be necessary to allow followup on the provision 2 of needed services. Such agreement also shall provide for the 3 State agency providing the health care provider with the 4 names of dentists participating in the child health assurance 5 program in the area in which the provider is located. 6 "(4) As used in this subsection and section 1902(a)(41), 7 the term `health care provider' includes a private practi-. 8 tioner, public health department, community health clinic or 9 center, primary care center, day care or headstart program, 10 rural health clinic, maternal and child health center, and a 11 school system. 12 "(5) Payment may be made under a State plan to a 13 health care provider for the provision of child health assess- 14 ments, and other medical card and services to children, under 15 an agreement described in paragraph (2) notwithstanding the 16 fact that the provider does not ordinarily bifi other third- 17 party payers for the provision of such assessments, care, and 18 services. 19 "(o) The term `routine dental care' means necessary di- 20 agnostic, preventive, restorative, and emergency dental serv- 21 ices, but only includes such orthodontics as the Secretary 22 determines by regulation to be appropriate for different age 23 groups for conditions causing major physical or psychological. 24 handicap.". 25 (f) Section 1903(i) is amended- PAGENO="0111" 103 14 1 (1) by striking out the period at the end and in- 2 serting in lieu thereof "; or", and 3 (2) by adding at the end thereof the following new 4 paragraph: 5 "(5) with respect to any amount expended for 6 dental screening apart from the provision of other rou- 7 tine dental care (as defined in section 1905(o)).". 8 TREATMENT OF COPAYMENTS FOR MOTHERS AND CHAP 9 CHILDREN 10 SEC. 5. (a) Section 1902(a)(14) is amended- 11 (1) by striking out "and" at the end of subpara- 12 graph (A), and 13 (2) by striking out the semicolon at the end of 14 subparagraph (B) and inserting in lieu thereof ", and", 15 and 16 (3) by adding after subparagraph (B) the following 17 new subparagraph: 18 "(0) in the case of individuals under the age * 19 of 21 who have received a timely child health as- 20 sessment (as defined in `section 1905(n)), no en- 21 roliment fee, premium, deduction, cost sharing, or 22 similar charge with respect to any of the care and 23 services listed in section 1905(a) will be imposed 24 under the plan;". PAGENO="0112" 104 15 1 (b) Section 1902(a)(14)(A) is further amended by insert- 2 ing ", individuals described in paragraph (10)(A)(iii)," before 3 "and individuals with respect to whom there is being paid". 4 CONTINUATION OF ELIGLBILITY 5 S~c. 6. Section 1902(e) is amended- 6 (1). by inserting "(1)" after "(e)", and 7 (2) by adding at the end thereof the following new 8 paragraph: 9 "(2) Notwithstanding any other provision of this title, 10 each State plan approved under this title must provide that 11 any individual under the age of 21 who, having had a timely 12 child health assessment (as deSned in section 1905(n)), be- 13 comes ineligible (for a reason other than age) to receive care 14 and services provided under the State plan shall, nonetheless, 15 remain eligible for all such care and services provided under 16 the State plan to individuals who have had a timely child 17 health assessment until the end of the 6-calendar-month 18 period beginning with the month folowing the month in which 19 the individual became ineligible. 20 "(3) Notwithstanding any other provision of this title, 21 each State plan approved under this title must provide that 22 any pregnant woman who is eligible, has applied for, and has 23 received medical assistance under this title and who becomes 24 ineligible for such assistance because of increased income or 25 resources shall, nonetheless, remain eligible for all such PAGENO="0113" 105 16 1 medical assistance provided under the State plan until the 2 end of the 60-day period beginning on the date of the termi- 3 nation of her pregnancy.". 4 FEDERAL MATCHING FOR CHAP PROGRAM 5 Snc. 7. (a)(1) Section 1905(b) is amended- 6 (A) by striking out "(1)" and "(2)" and inserting 7 in lieu thereof "(A)" and "(B)", respectively; 8 (B) by inserting "(1)" after "(b)"; and 9 (0) by inserting at the end thereof the following 10 new paragraph: 11 "(2) The term `Federal CHAP percentage' for any 12 State shall be a percentage equal to the leSser of- 13 "(A) the Federal medical assistance percentage 14 (determined under paragraph (1)) pIus 25 percentage 15 points; or 16 "(B) 90 percent, 17 except that the Federal medical assistance percentage shall 18 be 100 percent with respect to amounts expended for medical 19 assistance for services which are received through an Indian 20 Health Service facffity whether operated by the Indian 21 Health Service or by an Indian tribe or tribal organization (as 22 defined in section 4 of the Indian Health Care Improvement 23 Act).". 56-071 0 - 80 - 8 PAGENO="0114" 106 17 1 (2) Section 1903(a)(1) is amended by striking out "sec- 2 tion 1905(b)" and inserting in lieu thereof "section 3 1905(b)(1)". 4 (b) Section 1903(a) is amended- 5 (1) by inserting "subject to subsections (r) and 6 (s)," in paragraph (7) after "(7)"; 7 (2) by redesignating paragraph (7) as paragraph 8 (9);and 9 (3) by inserting after paragraph (6) the following 10 new paragraphs: 11 "(7) an amount equal to the Federal CHAP per- 12 centage (as defined in section 1905(b)(2)) of so much of 13 the sums expended during such quarter as are attribut- 14 able (A) to child health assessments (as defined in sec- 15 tion 1905(n)) or (B) to medical assistance for care and 16 services (other than inpatient care and services and 17 other than dental services that are not routine dental 18 services, as defined in section 1905(o)) provided to in- 19 dividuals who are under the age of 21 and who have 20 had a timely child health assessment; plus - 21 "(8) an amount equal to 75 percent of so much of 22 the sums expended during eaoh such quarter as are at- 23 tributable to costs of outreach and followup services for 24 individuals under the age of 21 and eligible for the as- PAGENO="0115" 107 18 1 sessments and services described in section 2 1905(a)(4)(B); plus". 3 (c) Section 1902(a) is amended- 4 (1) by striking out "and" at the end of paragraph 5 (39); 6 (2) by striking out the period at the end of para- 7 graph (40) and inserting in lieu thereof "; and"; and 8 (3) by adding at the end thereof the following new 9 paragraph: 10 "(41) provide that the State will develop (and 11 make available to the public for review and comment) 12 a plan for the implementation of a child health assur- 13 ance program described in section 1905(n) which will 14 meet the applicable level of acceptable performance es- 15 tablished under section 1903(r)(1)(.B) and which will 16 (A) identify, and make provision for written agreements 17 ~described in section 1905(n)(3) with, all qualified health 18 care providers on such terms as will reasonably be ex- 19 pected to elicit their involvement in child health assess- 20 ments, (B) assure coordination between State and local 21 agencies participating in such assessments and feder- 22 ally funded programs in the State providing health care 23 services to children, and (0) assure the availabffity of 24 appropriate support services (including outreach and PAGENO="0116" 108 19 1 followup services), in accordaiice with regulations of 2 the Secretary.". 3 (d) Section 1903 is amended by adding after subsection 4 (q) the following new subsection: 5 "(r)(1)(A) In order to evaluate, and provide penalties 6 and bonuses with respect to, each State's conduct of its child 7 health assurance program (described in section 1905 (n)), the 8 Secretary shall establish by regulation performance standards 9 for child health assurance programs, which shall include 10 stand~ards that measure- 11 "(i) the proportion of families of children eligible, 12 under subparagraphs (A) or (B) of section 1902(a)(10), 13 for services under the State plan who are informed in a 14 timely manner of the availability of such services; 15 "(ii) the~ proportion of such children who are pro- 16 vided child health assessments (as defined in section 17 1905(n)) in a timely manner; 18 "(iii) the timely provision of medical care or serv- 19 ices the need for which is disclosed by a child health 20 assessment; 21 "(iv) the proportion of such children who are ap- 22 propriately immunized within a reasonable time follow- 23 ing their assessment; and PAGENO="0117" 109 20 1 "(v) the compliance of health care providers with 2 the terms of agreements entered into pursuant to 5cc- 3 tion 1905(n). 1 4 "(B) In order to evaluate the performance of each 5 State's child health assurance program for periods beginning 6 after April 1, 1979, with respect to the standards established 7 under subparagraph (A), the Secretary shall establish, and 8 provide timely notice to the State of, a level of acceptable 9 performance and a level of outstanding performance applica- 10 ble to the State's program for each such period. 11 "(0) Each State shall cooperate with the Secretary by 12 providing appropriate documentation of the performance of 13 its child health assurance program in relation to the perform- 14 ance standards and levels of performance established under 15 subparagraphs (A) and (B). 16 "(2) The Secretary shall evaluate at least biannually the 17 performance of each State child health assurance program, 18 with respect to its meeting the levels of performance estab- 19 lished under paragraph (1)(B), and shall report his deterrnina- 20 tion evaluating the State's performance for a six-month 21 period to the State not later than six months after the end of 22 the period. 23 "(3)(A) If the Secretary determines, in such an evalua- 24 tion, that a State has failed to have a child health assurance 25 program which meets the applicable level of acceptable per- PAGENO="0118" 110 21 I formance established under paragraph (1)(B), the Secretary 2 shall notify the State of such failure and of the fact that the 3 amount otherwise required to be paid to the State, with re- 4 spect to each fiscal quarter beginning after the date of the 5 notification, pursuant to paragraphs (2), (3), (4), and (9) of 6 subsection (a) for administration of the State plan shall, 7 except as provided in subparagraphs (B) and (0), be reduced 8 by 20 percent of that amount until the State shows to the 9 satisfaction of the Secretary that the failure with respect to 10 which the reduction applies has been corrected. 11 "(B) If the Secretary is satisfied that a State intends to 12 correct a failure established under subparagraph (A), he may 13 withhold the imposition of a reduction under such subpara- 14 graph for a period of time (not exceeding six months) to allow 15 the State to fully achieve the applicable level of acceptable 16 performance. If at the end of the period, the Secretary deter- 17 mines that the failure has been corrected, he may waive the 18 imposition of the reduction in whole or in part with respect to 19 the period. 20 "(0) Any State dissatisfied with a determination of the 21 Secretary under subparagraph (A) may, not later than 60 22 days after the date it was notified of the determination, file a 23 petition withthe Secretary for a review of the determination 24 in accordance with procedures established by the Secretary. 25 Such procedures shall provide that such review shall be con- PAGENO="0119" iii 22 1 ducted by an impartial party and shall be comp~ted, and 2 findings and a final determination made, not later than 180 3 days after the date the State filed its petition for such review. 4 "(4) H the Secretary determines, in such an evaluation, 5 that a State's child health assurance program has met its 6 applicable level of outstanding performance established under 7 paragraph (1)(B) for a calendar quarter, the Secretary shall 8 notify the State of such achievement and of the fact that the - 9 amount paid under subsection (a)(9) with respect to the calen- 10 dar quarter shall be increased by an amount equal to 25 per- 11 cent of the remainder specified in such subsection. 12 "(5) The Secretary shall report to Congress, not later 13 than February 1 of each year (beginning with 1980), on 14 actual levels of performance of each State's child health as- 15 surance program in relation to applicable levels of perform- 16 ance established under paragraph (1)(B).". 17 STATE MAINTENANCE OF EFFORT REQUIREMENT 18 SEC. 8. Section 1903 is amended- 19 (1) by inserting "except as provided under subsec- 20 tion (s)," in subsection (a)(7), as added by section 21 7(b)(3), after "(7)", and 22 (2) by adding after subsection (r), as added by sec- 23 tion 7(d), the following new subsection: 24 "(s) No State shall be entitied to payment of any 25 amount specified under subsection (a)(7) for a quarter begin- PAGENO="0120" 112 23 1 ning during the four-year period beginning on the date of 2 enactment of the Ohild Health Assurance Act of 1978, if the 3 Secretary determines that the State has taken an action, 4 during such quarter or a previous quarter during the period, 5 which (1) reduces the standard of income for eligibility for 6 nedical assistance for individuals under the age of 21 below 7 the applicable standards in existence on the date of the enact- 8 ment of such Act, or (2) reduces the amount, duration, or 9 scope of medical assistance (other than inpatient care and 10 services) ma~Ie available to individuals under the age of 21 11 below the applicable medical assistance available on such 12 date of enactment." 13 REPEAL OF AID TO FAMILIES WITH DEPENDENT 14 CHILDREN PENALTY 15 SEC. 9. Section 403(g) is repealed. 16 CLARIFICATION OF MEDICAID RESIDENCY REQUIREMENT 17 SEC. 10. (a) Section 1902(a)U6) is amended by striking 18 out "who are residents of the State" and inserting in lieu 19 thereof "who are determined to be living in the State". 20 (b) Section 1902(b)(2), as redesignated by section 3(b)(2) 21 of this Act, is amended by striking out "resides in the State" 22 and inserting in lieu thereof "lives in the State (in accordance 23 with standards established by the Secretary)". PAGENO="0121" 113 24 1 REPORT ON COORDINATION OF CHILD HEALTH PROGRAMS 2 SEC. 11. The Secretary of Health, Education, and We!- 3 fare (hereinafter in this Act referred to as the "Secretary") 4 shall evaluate and shall submit to Congress, not later than 5 October 1, 1980, a report on- 6 (1) the coordination and integration of health care 7 services to children under titles V and XIX of the 8 Social Security Act, and 9 (2) on actions undertaken, and recommendations 10 for actions that should be undertaken, by the States 11 and the Federal Government to improve the coordina- 12 tion and integration of child health services provided 13 under these titles and services provided under other 14 federally funded programs substantially involved in the 15 provision of health services to children. 16 STUDY AND DEMONSTRATION PROJECTS ON PROVIDER 17 PARTICIPATION IN CHAP PROGRAM 18 SEC. 12. (a) The Secretary, directly or through grants 19 to or contracts with public or private agencies or organiza- 20 tions, shall study and, to the extent he determines to be nec- 21 essary, conduct demonstration projects in order to evaluate 22 (1) the participation of health care providers in the child 23 health assurance programs established pursuant to section 24 1905(n) of the Social Security Act, md (2) methods of im- 25 proving their level of participation in these programs. PAGENO="0122" 114 25 1 (b) The Secretary directly or through grants to or con- 2 tracts with public or private agencies and organizations, shall 3 develop and carry out experiments and demonstration pro- 4 jects designed to determine the effect of payment on a capita- 5 tion basis for child health. assessments and other sei'vices pro- 6 vided under child health assurance programs established pur- 7 suant to section 1905(n) of the Social Security Act upon the 8 level of participation and performance of such providers in 9 these programs. 10 (c) In the case of projects under this section, the Secre- 11 tary may waive compliance with the requirements of title 12 XIX of the Social Security Act, including those requirements 13 which relate to methods of payment for services provided, to 14 the extent and for the period he finds necessary to enable 15 States, agencies, or organizations to carry out such projects. 16 Costs incurred in such projects in excess of those which 17 would otherwise be reimbursed or paid under such title may 18 be reimbursed or paid to the extent that such waiver applies 19 to them (with such excess being borne by the Secretary, 20 under such terms and conditions as he may establish). Grants 21 and payments under contracts made for such projects may be 22 made in advance or by way of reimbursement, and in such 23 installments and on such conditions as the Secretary finds 24 necessary to carry out the purpose. of this section. PAGENO="0123" 115 26 1 (d) The Secretary shall submit to Congress, not later 2 than October 1, 1982, a report on the studies and projects 3 conducted under this section, including such findings, conclu- 4 sions, and recommendations as he deems appropriate. 5 CONTINUING MEDICAID ELIGIBILITY FOR CERTAIN INDI- 6 VIDUALS BY DISREGARDING CERTAIN INVOLUNTARY 7 INCREASES IN INCOME 8 SEC. 13. (a) The next to last paragraph of subsection (a) 9 of section 1902 is amended by adding at the end the follow- 10 ing new sentence: "In the case of an individual who, for a 11 month alter May 1978, was determined to be eligible for 12 medical assistance under the plan and was receiving a 13 monthly insurance benefit under title II of this Act or under 14 the Railroad Retirement Act of 1974, or compensation, de- 15 pendency and indemnity compensation, or a pension, under 16 chapter 11, 13, or 15 of title 38, United States Code (relat- 17 ing to veterans and other persons) and who (but for this sen- 18 tence) would have become ineligible for such medical assist- 19 ance in the subsequent month because of an increase in the 20 amount of such benefit due to an increase in a cost-of-living 21 index, or because of an annual increase in the amount of such 22 compensation or pension becoming effective in such. subse- 23 quent month, respectively, for purposes of establishing the 24 individual's eligibility for medical assistance under the plan 25 for such subsequent month (and each month thereaiter until PAGENO="0124" 116 27 1 the first month in which the individual otherwise becomes 2 ineligible for such assistance) there shall not be included in 3 the individual's income any such increase in the amount of 4 such benefit, compensation, or pension which becomes S effective in or after such subsequent month.". 6 CONTINUING MBDICAID ELIGIBILITY FOB CERTAIN CmL- 7 DREN PLACED IN CERTAIN JUVENILE INSTITUTIONS 8 SEC. 14. (a) Section 1905(a) is amended by inserting 9 "and in subsection (p)" after "except as otherwise provided 10 in paragraph (16)" in the matter before subdivision (A). 11 (b) Section 1905, as amended by section 4(e) of this Act, 12 is further amended by adding after subsection (o) the follow- 13 ing new subsection: 14 "(p)(l) Notwithstanding subdivision (A) of subsection 15 (a), a State may include, in its plan for medical assistance 16 under this title, payments with respect to care and services 17 for an individual under 21 years of age while the individual is 18 an inmate of a public institution for juveniles if- 19 "(A) the individual, on the day before h&became 20 an inmate of the institution, was eligible for medical 21 assistance under the State's plan, or 22 "(B) the family in which the individual resided (on 23 the day before he became an inmate of the institution) 24 was eligible for medical assistance under the State's 25 plan or would be eligible for medical assistance under PAGENO="0125" 117 28 1 the State's plan if the individual was stifi residing with 2 the family. 3 "(2) Notwithstanding paragraphs (10) and (14) of sec- 4 tion 1902(a), an individual for whom payment for care and 5 services is provided under paragraph (1) shall be treated 6 under the plan, with respect to the amount, duration, and 7 scope of medical assistance and to fees, premiums, deduc- 8 tions, cost sharing, and other charges- 9 "(A) in the case described in paragraph (1)(A), in 10 the same manner as the individual was treated on the 11 day before he became an inmate of the public institu- 12 tion, or, in the case of such an individual who was eli- 13 gible for but not provided medical assistance on that 14 day, would have been treated if provided medical as- 15 sistance on that day, and 16 "(B) in the case described in paragraph (1)(B), in 17 the same manner as the individual would otherwise be 18 treated if still residing with bis famil~y.". 19 EFFECTIVE DATES 20 SEc. 15. (a)(1) Except as otherwise provided in this sec- 21 tion, the amendments made by this Act shall apply to medical 22 assistance provided, under a State plan approved under title 23 XIX of the Social Security Act, on and after April 1, 1979. 24 (2) In the case of any State plan, for medical assistance 25 under title XIX of the Social Security Act, which the Secre- PAGENO="0126" 118 29 1 tary determines requires State legislation in order for the 2 plan to meet the additional requirements imposed by the 3 amendments made by this Act, the State plan shall not be 4 regarded as failing to comply with the requirements of such 5 title solely on the basis of its failure to meet these additional 6 requirements before the first day of the first calendar quarter 7 beginning alter the close of the first regular session of the 8 State legislature that begins after the date of the enactment 9 of this Act. 10 (b) The amendment made by section 3(b)(1)(E) (relating 11 to establishing eligibifity for hard-to-adopt children) shall 12 only apply to individuals placed for adoption on or alter the 13 date of the enactment of this Act. 14 (c) The amendment made by section 9 (relating to repeal 15 of aid to families with dependent children penalty) shall apply 16 to quarters beginning after June 30, 1974. 17 (d) Any individual under the age of 21 who has been 18 screened pursuant to section 1905(b)(4)(B) of the Social Se- 19 curity Act (as in effect on the date of the enactment of this 20 Act) on a date before the effective date of the amendments 21 made by section 4 of this Act shall, for purposes of sections 22 1902(a)(13)(AXiv) and 1903(a)(7) of the Social Security Act 23 (as amended by this Act) be deemed, in accordance with reg- 24 ulations established by the Secretary, to have had a child PAGENO="0127" 119 30 1 health assessment (as defined in section 1905(n) of the Socini 2 Security Act, as amended by this Act) on that date. 3 (e) The amendments made by section 14 shall apply to 4 medical assistance provided, under a State plan approved 5 under title XIX of the Social Security Act, on and after Oc- 6 tober 1, 1978. 7 (f) The Secretary shall first establish final regulations to 8 carry out the amendments made by this Act not later than 9 February 1, 1979. PAGENO="0128" 120 96rn CONGRESS T T TI 1ST SESSION jj~ J~* To extend through October 1, 1979, provisions which expired on October 1, 1978, relating to payment under the Social Security Act for services of physicians rendered in a teaching hospital. I~ TI[E HOUSE OF REPRESENTATIVES FEBRUARY 26, 1979 Mr. CARunE introduced the following bill; which was referred jointly to the Committees on Ways and Means and Interstate and Foreign Commerce A BILL To extend through October 1, 1979, provisions which expired on October 1, 1978, relating to payment under the Social Security Act for services of physicians rendered in a teach- ing hospital. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That section 15(d) of Public Law 93-233 (as amended by 4 section 7(c) of Public Law 93-368, the first section of Public 5 Law 94-368, and section 7 of Public Law 95-292) is 6 amended by striking out "October 1, 1978" and inserting in 7 lieu thereof "October 1, 1979". PAGENO="0129" 121 2 1 SEc. 2. The amendment made by the first section of this 2 Act shall be effective from October 1, 1978, except that 3 nothing in this Act shall be deemed to render improper any 4 determination of payment under title XVIII of the Social Se- 5 curity Act made prior to the date of the enactment of this Act 6 for any service provided during a cost accounting period 7 which began on or after October 1, 1978. 56-071 0 - 80 - PAGENO="0130" 122 [H.R. 2445, introduced by Mr. Carter on February 27, 1979, Cosponsored on March 21, 1979, by: Mr. Preyer, Mr. Pritchard, Mr. Smith of Iowa, Mr. Moakley, Mr. Collins of Texas, Mr. Davis of Michigan, Mr. Mathis, Mr. Lott, Mr. Duncan of Tennessee, Mr. Quillen, Mr. Corrada, Mr. Martin, Mr. Erdahl, Mr. Emery, Mr. Hutto, Mr. Gradison, Mr. Broyhill, Mr. Hance, Mr. Dornan, Mr. Price, Mr. Badham, Mr. Glickman, Mr. Stangeland, Mr. Abdnor, and Mr. Cleveland; Cosponsored on May 31, 1979, by: Mr. Bethune, Mr. Edgar, Mr. Beard of Rhode Island, Mr. Cavanaugh, Mr. Florio, Mr. Forsythe, Mr. Bedell, Mr. Patten, Mr. Markey, Mr. Derwinski, Mr. Rin. aldo, Mr. Mollohan, Mr. Coelho, Mr. Coughlin, Mr. Kindness, Mr. Hammer. schmidt, Mr. Dannemeyer, Mr. Patterson, and Mr. Waigren.] A BILL To amend the Social Security Act to encourage philanthropic support for nonprofit hospitals. 1 Be it enacted by the Senate and Howse of Representa- 2 tives of the United States of America in Congress assembled, 3 That this Act may be cited as the "Voluntary Hospital Phil- 4 anthropic Support Act". 5 SEC. 2. (a) Congress finds that while there continues to 6 be a need to focus on the deficiencies in the health care 7 system and on corrective reform measures that might be 8 taken, there is a need to focus on the enhancement of its 9 strengths. Congress finds that existing philanthropic support 10 for hospitals is a strength which should be preserved and 11 enhanced because- 12 (1) philanthropy imbues members of the commu- 13 nity with a sense of pride in their voluntary nonprofit 14 hospitals and creates a setting in which members of 15 the community are willing to devote time and effort to PAGENO="0131" 123 2 1 improve health care available in the community in a 2 way that government action cannot replace; 3 (2) philanthropy allows voluntary nonprofit insti- 4 tutions to conduct research and to engage in other in- 5 novative efforts to improve health care in the United 6 States; 7 (3) philanthropy allows hospitals to replace worn- 8 out and obsolete facilities when, in a period of high in- 9 flation, historical costs accumulated through depreci- 10 ation are not sufficient to provide for such replacement; 11 and 12 (4) philanthropy pays for necessary expenditures 13 that otherwise would have to be paid by patients or by 14 government. 15 (b) The purpose of this Act is to clarify the intent of 16 Congress in order to encourage philanthropy and voluntarism 17 in the health care field. 18 SEc. 3. Part A of title XI of the Social Security Act is 19 amended by adding after section 1131 the following new sec- 20 tion: 21 "ENCOURAGEMENT OF NONPROFIT HOSPITAL 22 PHILANTHROPY 23 "SEc. 1132. (a) It is the policy of the United States PAGENO="0132" 124 3 1 that philanthropic support for health care be encouraged and 2 expanded, especially in support of experimental and innova- 3 tive efforts to improve the health care delivery system. Poli- 4 cies of States that discourage philanthropic contributions to 5 hospitals tend to interfere with the development and oper- 6 ation of hospitals which purchase goods in interstate corn- 7 merce and provide services in interstate commerce. 8 "(b) For purposes of determining under titles V, XVIII, 9 and XIX the reasonable costs of services furnished by non- 10 profit hospitals, gifts, grants, and endowments, and income 11 therefrom, shall not be deducted from any operating costs of 12 such hospitals or otherwise taken into account in determining 13 such reasonable costs. 14 "(c) No State shall establish a law or regulation respect- 15 ing the limitations upon the revenues of hospitals which 16 treat, directly or indirectly, as revenues of the hospital any , 17 amount which is attributable to- 18 "(1) a donor designated or restricted grant, gift, 19 or income from an endowment, as defined in section 20 405.423(b)(2) of title 42 of the Code of Federal Regu- 21 lations; 22 "(2) a grant or gift, or income from such a grant 23 or gift, which is not available for use as operating 24 funds because of its designation by the hospital's gov- 25 erning board; PAGENO="0133" 125 4 1 "(3) a grant or similar payment which is made by 2 a governmental entity and which is not available, 3 under the terms of the grant or payment, for use as 4 operating funds; 5 "(4) the sale or mortgage of any real estate or 6 other capital assets of the hospital which the hospital 7 acquired through a gift or grant and which is not avail- 8 able for use as operating funds under the terms of the 9 gift or grant or because of its designation by the hospi- 10 tal's governing board; and 11 "(5) a depreciation fund which is (A) created by 12 the hospital in order to meet a condition imposed by a 13 third party for the third party's financing of a capital 14 improvement of the hospital, and which fund is used `15 exclusively to make payments to such third party for 16 the financing of the capital improvement. 17 "(d) Notwithstanding any other provision of law (except 18 such provisions of law as specifically refer to this provision), 19 no Federal law which provides for the containment or control 20 of hospital costs shall treat, directly or indirectly, as revenues 21 any amounts which such a State law may not treat as rev- 22 enues under subsection (c).". 23 SEc. 4. (a) Subsection (b) of section 1132 of the Social 24 Security Act (as added by section 3 of this Act) shall apply to PAGENO="0134" 126 5 1 determinations of reasonable costs of services for any period 2 beginning on or after the date of the enactment of this Act. 3 (b) Subsection (c) of such section shall apply to laws and 4 regulations which take effect after the date of the enactment 5 of this Act. PAGENO="0135" 127 96TH CONGRESS 1ST SESSION * * To amend title XVIII of the Social Security Act with respect to reimbursement of physicians' services in teaching hospitals. IN TIlE HOUSE OF REPRESENTATIVES FEBEUAEY 1, 1979 Mr. SATTEEFIELD introduced the following bill; which was referred jointly to the Committees on Ways and Means and Interstate and Foreign Commerce A BILL To amend title XVIII of the Social Security Act with respect to reimbursement of physicians' services in teaching hospitals. I Be it enacted by the Senate and Howse of Representa- 2 tives of the United States of America in Congress assembled, 3 That (a) paragraph (7) of section 1861(b) of the Social Secu- 4 rity Act is amended to read as follows: 5 "(7) a physician where the hospital has a teaching 6 program approved as specified in paragraph (6), if (A) 7 the hospital elects to receive any payment due under 8 this title for reasonable costs of such services, and (B) 9 all physicians in such hospital agree not to bill charges PAGENO="0136" 128 2 1 for professional services rendered in such hospital to 2 individuals covered under the insurance program estab- 3 lished by this title.". 4 (b) Section 1861(v)(1)(O) of such Act is amended by in- 5 serting "and where the conditions of subsection (b)(7) have 6 been met" after "services at such hospital". 7 (e) Section 1832(a~(2)GB)(i)~ll~ of such Act is amended 8 by striking out ", unless either clause (A) or (B) of paragraph 9 (7) of such section is met" and inserting in lieu thereof 10 "where the conditions specified in paragraph (7) of such see- 11 tion are met". 12 SEC. 2. The amendments made by this Act shall apply 13 with respect to cost accounting periods beginning on or after 14 October 1, 1978. A hospital's election under section 15 1861(b)(7)(A) of the Social Security Act (as administered in 16 accordance with section 15 of Public Law 93-233) as of Sep- 17 tember 30, 1978, shall constitute such hospital's election 18 under such section (as amended by this Act) on and after 19 October 1, 1978, until otherwise provided by the hospital. PAGENO="0137" 129 [H.R. 3854, introduced by Mr. Maguire on May 1, 1979, Cosponsored on May 22, 1979, by: Mr. Downey, Mr. LaFalce, Mr. Weiss, Mr. Scheuer, Mr. Seiberling, Mr. Ottinger, Mr. Mitchell of Maryland, Mr. Guarini, and Mr. Nolan; Cosponsored on June 18, 1979, by: Mr. Gudger; Cosponsored on September 18, 1979, by: Mr. Stokes, and Mr. Weaver.] A BILL To amend part B of titles XI and XVIII and titles V and XIX of the Social Security Act to require a second opinion as a condition for payment for elective surgical procedures and to provide additional financial incentives for the provision of these opinions. I Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 SHORT TITLE; REFERENCES IN ACT 4 SECTION 1. (a) This Act may be cited as the "Quality of 5 Surgical Care Act of 1979". 6 (b) Whenever in this Act an amendment or repeal is 7 expressed in terms of an amendment to or repeal of a section 8 or other provision, the reference shall be considered to be 9 made to a section or other provision of the Social Security 10 Act. PAGENO="0138" 130 2 I AMENDMENT TO PSRO PROGRAM 2 SEC. 2. Section 1155(a) (42 U.S.C. 1320c-4(a)) is 3 amended by adding at the end the following paragraph: 4 "(8)(A)(i) Except as provided in clause cii), each Profes- 5 sional Standards Review Organization has the duty and ftmc- 6 tion of making the determination described in paragraph (2) ~ in the case of any elective surgical procedure (as defined by 8 the Secretary by regulation). 9 "(ii) Clause (i) shall not apply in the case of such surgi- 10 cal procedures and under such circumstances as the Secre- 11 tary determines to be either impracticable due to insufficient 12 resources available to conduct such determinations or in such 13 other circumstances as the Secretary determines to be 14 appropriate. is "(B) No such procedure may be found by such an orga- 16 nization to be medically necessary and appropriate unless in 17 the written opinion of at least two qualified physicians, the 18 procedure is considered necessary and appropriate. 19 "(C) The Secretary shall provide for making available, 20 to individuals eligible for surgical benefits, health insurance 21 benefits, or medical assistance under title V, XVIII, or XIX 22 of this Act, lists of qualified physicians who have indicated 23 that they will provide, in accordance with the provisions of PAGENO="0139" 131 3 I the respective title, written opinions with respect to particu- 2 lar elective surgical procedures. 3 "(ID) For purposes of this paragraph, the term `qualified 4 physician' means, with respect to an opinion on the surgical 5 procedure for treatment of a medical condition, a physician 6 who- 7 "(i) is a board-certified specialist with respect to a 8 procedure recommended for that condition or meets 9 such other comparable qualifications as the Secretary 10 may establish; and 11 "(ii) agrees not to perform the surgical procedure 12 for which the opinion is sought (except under such 13 emergency and other circumstances as the Secretary 14 may provide by regulation).". 15 AMENDMENTS TO MEDICARE PROGRAM 16 . SEC. 3. (a) Section 1862(a) (42 U.S.O. 1395y(a)) is 17 amended- 18 (1) by striking out "or" at the end of paragraph 19 .. (12);. : 20 (2) by striking out. the. period at the end of pâra- 21 graph (13) and inserting in lieu thereof:"; or", and 22 ~. (3) by adding after. paragraph (13) the following~ 23 "(14) where such expenses (including expenses for 24 inpatient hospital care) are for any elective surgical PAGENO="0140" 132 4 1 procedure for which a determination and second opin- 2 ion are required under section 1 155(a)(8), unless the 3 determination and opinion are provided before the pro- 4 cedure is undertaken.". 5 (b) Section 1861(q) (42 U.S.C. 1395x(q)) is amended by 6 inserting "(including consultation as to the necessity and ap- 7 propriateness of surgical procedures)" after "consultation". 8 (c)(1) Section 1833(a)(1) (42 U.S.C. 13951(a)(1)) is 9 amended- 10 (A) by striking out "and" before clause (E), and 11 (B) by adding at the end thereof the following: 12 "(F) with respect to a second or third opinion required 13 under section 1 155(a)(8), the amounts paid shall be 14 equal to 100 per centum of the reasonable charge for 15 such opinion, and". 16 (2) The first sentence of section 1833(b) (42 U.S.C. 17 13951(b)) is amended*by striking out "and" before clause (2) 18 and by inserting before the period the following new clause: 19 ", and (3) such total amount shall not include expenses in- 20 curred for a second or third opinion described in subsection 21 (a)(1)(F) for an elective surgical procedure". 22 (d)(1) Section 1842(b)(3) (42 U.S.C. 1395u(b)(3)) is 23 amended by adding at the end thereof the following: "No PAGENO="0141" 133 5 1 charge for a second or third opinion described in section 2 1833(a)(1)(F) may be determined to be reasonable, if it ex- 3 ceeds such maximum charge as the Secretary may establish 4 by regulation.". 5 (2) Section 1842(b)(3)(B) (42 TJ.S.O. 1395u(b)(3)(B)) is 6 amended by inserting "in paragraph (6).of this subsection or" 7 after "(except as otherwise provided". 8 (3) Section 1842(b) is further amended by adding after 9 paragraph (5) the following new paragraph: 10 "(6) No such contract shall provide for payment for a 11 second or third opinion described in section 1833(a)(1)(F) on 12 a basis other than that described in clause (ii) of paragraph 13 (3)(B).". 14 AMENDMENTS TO TITLE V AND MEDICAID PROGRAMS 15 SEC. 4. (a) Sections. 506(f): and 1903(i) (42 U.S.O. 16 706(0, 1396b~i)~ are each amended- 17 (1) by striking out the period at the end of para- 18 graph (4) and inserting in lieu thereof "; or", and 19 . ... (2) by adding after:paragraph (4) the following: 20 ~.: "(5) with respect to any amount expended~for ai~ 21 elective surgical procedure: for which a* determination 22 and second opinion are required under section 23 1155(a)(8), unless the determination and opinion are 24 provided~before the :procedure:is undertaken.". PAGENO="0142" 134 6 1 (b)(i) Section 506(a) (42 U.S.C. 706(a)) is amended by 2 striking out "one-half of the total sum" and inserting in lieu 3 thereof "the sum of (1) an amount equal to 90 per centum of 4 the sums expended during such quarter which, are attributa- 5 ble to the performance of a second or third opinion described 6 in subsection (0(5) under such plan,, and' (2) one-half of the 7 remaining sums". . .` 8 (2) Section 1903(a) (42' U.S~0. 1396b(a)). is amended by 9 .redesignating paragraph (7) as paragraph (8) and by inserting 10 after paragraph (6) the following'new paragraph:~. 11 "(7) an amount equal to .90 per centurn of the 12 sums expended. during such quarter. which are. attribut- 13 able to the performance of a second or third opinion 14 described in subsection (i)(5); plus".''. . 15 (~) Sections .506(0(1)' and. 1903c~)(1) are each amended 16 by striking out "and. fifth" and inserting' in lieu thereof ", 17 fifth, and ninth".. . .1~ 18 ~pnc'rrv~ DrATE~ 19 SEc.. 5. (a) The~ amendments made by' sections 1, 3(a), 20. and 4(a) of this Act shall app1y~ tc~ elective; surgical proce- 21 dures performe~i on or after the. first d~y.of the first calendar 22. quarter heginni~g. more. than. 60 days ±after. :the..date of the 23- enactment of this Act.' . " ,~ ", ,`: ,"~ 24 (10 `.`Except.:as :provided in :.siibsection~ (a}~. the amend- 25 ments made by this Act shall apply to requests for payment PAGENO="0143" 135 7 I made for second or third opinions submitted on or after the 2 first day of the first calendar quarter beginning after the date 3 of the enactment of this Act. PAGENO="0144" 136 I 96rn CONGRESS T T 1~ 1s~ SESSION ~* 3 ~3 I To amend titles XVIII and XIX of the Social Security Act to provide for inclusion of services rendered by a certified nurse-midwife under the medi- care and medicaid programs. IN T}[E HOUSE OF REPRESENTATIVES APRIL 9, 1979 Ms. MIKuI~sin introduced the following bill; which was referred jointly to the Committees on Interstate and Foreign Commerce and Ways and Means A BXLL To amend titles XVIII and XIX of the Social Security Act to provide for inclusion of services rendered by a certified nurse-midwife under the medicare and medicaid programs. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That (a) subsection (s)(2) of section 1861 of the Social Secu- 4 rity Act (42 U.S.C. 1395x) is amended- 5 (1) by striking out "and" at the end of subpara- 6 graph (E); 7 (2) by adding the word "and" at the end of sub- 8 paragraph (F); and PAGENO="0145" 137 2 1 (3) by adding at the end thereof the following new 2 subparagraph: 3 "(G) services furnished by a nurse-midwife (as de- 4 fined in subsection (bb)) which he is legally authorized 5 to perform under State law (or the State regulatory 6 mechanism provided by State law);". 7 (b) Such section is further amended by adding at the end 8 thereof the following new subsection: 9 "Nurse-Midwife 10 "(bb) The term `nurse-midwife' means a registered 11 nurse who has successfully completed a program of study and 12 clinical experience meeting guidelines prescribed by the Sec- 13 retary, or has been certified by an organization recognized by 14 the Secretary, and performs services in the area of manage- 15 ment of the care of mothers and babies (throughout the ma- 16 ternity cycle) which he is legally authorized to perform in the 17 State in which he performs such services.". 18 SEc. 2. (a) Section 1905(a) of the Social Security Act 19 (42 U.S.C. 1396d(a)) is amended- 20 (1) by striking out "and" at ~the end of paragraph 21. (16); 22 (2) by redesignating paragraph (17) as paragraph 23 (18); and 24 (3) by inserting after paragraph (16) the following 25 new paragraph: 56-071 0 - 80 - 10 PAGENO="0146" 138 3 1 "(17) services furnished by a nurse-midwife (as 2 defined in section 1861(bb) of this Act) which he is le- 3 gaily authorized to perform under State law (or the 4 State regulatory mechanism provided by State law); 5 and". 6 (b) Section 1902(a) of such Act (42 U.S.C. 1396a(a)) is 7 amended- 8 (1) by striking out "clauses (1) through (5)" in 9 paragraph (13)(B) and friserting in lieu thereof "clauses 10 (1) through (5) and (17)"; 11 (2) by striking out "clauses (1) through (5)" in 12 paragraph (13)(C)(i) and inserting in lieu thereof 13 "clauses (1) through (5) and (17)"; 14 (3) by striking out "(1) through (16)" in para- 15 graph (13)(O)(li) and inserting in lieu thereof "(1) 16 through (17)"; and 17 (4) by striking out "clauses (1) through (5) and 18 (7)" in paragraph (14)(A)(i) and inserting in lieu thereof 19 "clauses (1) through (5), (7), and (17)". 20 SEc. 3. (a) The amendments made by the first section of 21 this Act shall be effective with respect to payments under 22 title XVIII of the Social Security Act for calendar quarters 23 beginning after the date of the enactment of this Act. 24 (b) The amendments made by section 2 of this Act shall 25 be effective with respect to payments under title XIX of the PAGENO="0147" 139 4 1 Social Security Act for calendar quarters beginning more 2 than one hundred and twenty days after the date of the en- 3 actment of this Act. PAGENO="0148" 140 [H.R. 211, introduced by Mr. Corrada (for himself and Mr. Won Pat) on January 15, 1979, Cosponsored on March 7, 1979, by: Mr. Mitchell of Maryland, Mr. Richmond, Mr. Scheuer, Mr. Vento, Mr. Green, Mr. Rangel, Mr. Dellums, Mr. Roybal, Mr. Evans of the Virgin Islands, Ms. Mikuiski, and Mr. Garcia.] ABILL To amend the Social Security Act to increase the dollar limita- tions and Federal medical assistance percentages applicable to the medicaid programs of Puerto Rico, the Virgin Is- lands, and Guam. 1 Be it enacted by the Senate and Hou3e of Representa- 2 tives of the United States of America in Congress a3sembled, 3 ADJUSTMENT OF DOLLAR LIMITATION ON MEDICAID 4 PAYMENTS TO PUERTO Rico, THE Vn~o~ ISLANDS, 5 6 SECTION 1. (a) Subsection (c) of section 1108 of the 7 Social Security Act (42 U.S.C. 1308(c)) is amended to read 8 as follows: 9 "(c) The total amount certified by the Secretary under 10 title XIX with respect to any fiscal year- 11 "(1) to Puerto Rico shall not exceed $80,000,000, 12 "(2) to the Virgin Islands shall not exceed 13 $2,600,000, and PAGENO="0149" 141 2 1 "(3) to Guam shall not exceed $2,375,000.". 2 (b) The amendment made by subsection (a) shall apply 3 to fiscal years beginning after September 30, 1978. 4 ELIMINATION OF SPECIAL LIMITATION ON THE FEDERAL 5 MEDICAL ASSISTANCE PERCENTAGE FOR PUERTO 6 Rico, THE VIRGIN ISLANDS, AND Gu~ 7 SEC. 2. (a) The first sentence of section 1905(b) of the 8 Social Security Act (42 U.S.C. 1396d(b)) is amended- 9 (1) by striking out "(1)", and 10 (2) by striking out ", and (2)" and all that follows 11 through "shall be 50 per centum"; 12 and the second sentence of such section is amended by insert- 13 ing "(including Puerto Rico, the Virgin Islands, and Guam)" 14 after "State". 15 (b)(1) Except as provided in paragraph (2), the amend- 16 ments made by subsection (a) shall apply with respect to care 17 and services provided, under a State plan approved under 18 title XIX of the Social Security Act, in a calendar quarter 19 beginning after September 30, 1979. 20 (2) Each of the agencies administering or supervising 21 the administration of the State plan, approved under title 22 XIX of the Social Security Act, for Puerto Rico, the Virgin PAGENO="0150" 142 3 1 Islands, or Guam may elect not to have the amendments 2 made by subsection (a) apply to any care or services provided 3 in its jurisdiction to an individual over a period of time begin- 4 ning before October 1, 1979, and ending after October 1, 5 1979. PAGENO="0151" 143 96TH CONGRESS 1sT SESSION To change the method of medicare reimbursement for health maintenance organizations. IN THE HOUSE OF REPRESENTATIVES JUNE 13, 1979 Mr. RANGEL (for himself, Mr. ULLMAN, Mr. CORMAN, and Mr. PEPPER) intro- duced the following bill; which was referred jointly to the Committee on Ways and Means and Interstate and Foreign Commerce A BILL To change the method of medicare reimbursement for health maintenance organizations. 1 Be it enacted b~j the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 SHORT TITLE 4 SECTION 1. This Act may be cited as the "Health 5 Maintenance Organizations Medicare Reimbursement 6 Amendments of 1979". 7 PAYMENTS TO HEALTH MAINTENANCE ORGANIZATIONS 8 SEC. 2. (a) Section 1876 of the Social Security Act is 9 amended to read as follows: PAGENO="0152" 144 2 1 "PAYMENTS TO HEALTH MAINTENANCE ORGANIZATIONS 2 "SEC. 1876. (a)(1) The Secretary shall annually deter- 3 mine a per capita rate of payment for each class of individ- 4 uals entitled to benefits under parts A and B who are en- 5 rolled under this section with a health maintenance organiza- 6 tion with which he has entered into a contract under subsec- 7 tion (i), and shall annually determine a per capita rate of 8 payment for each class of individuals entitled to benefits 9 under part B alone who are enrolled under this section with 10 such a health maintenance organization. The Secretary shall 11 define appropriate classes of members, based on such factors 12 as age, sex, institutional status, disability status, and place of 13 residence. The rate for each class shall be equal to 95 per- 14 cent of the adjusted average per capita cost for that class. 15 Each month the Secretary shall pay each such organization 16 the appropriate rate, in advance, for each individual enrolled 17 under this section with the organization, or such lesser 18. amount as the organization requests. Those payments shall 19 be instead of the amounts which would be otherwise payable, 20 pursuant to sections 1914(b) and 1833(a), for services fur- 21 nished by or through the organization to individuals enrolled 22 under this section with the organization, or enrolled other 23 than under this section with the organization but eligible to 24 enroll under this section with the organization. PAGENO="0153" 145 3 1 "(2) For purposes of this section, the term `adjusted 2 average per capita cost' means the average per capita 3 amount that the Secretary estimates in advance (on the basis 4 of actual experience, or retrospective actuarial equivalent 5 based upon an adequate sample and other information and 6 data, in a geographic area served by a health maintenance 7 organization or in a similar area, with appropriate adjust- 8 ments to assure actuarial equivalence) would be payable in 9 any contract year for services covered under parts A and B, 10 or part B only, and types of expenses otherwise reimbursable 11 under parts A and B, or part B only (including administrative 12 costs incurred by organizations described in sections 1816 13 and 1842), if the services were to be furnished bj other than 14 a health maintenance organization (and, for services covered 15 only under section 1861(s)(2)(G), if the services were to be 16 furnished by a physician or as an incident to a physician's 17 service). 18 "(3) The payment to a health maintenance organization 19 under this subsection for individuals enrolled under this see- 20 tion with the organization and entitled to benefits under parts 21 A and B shall be made from the Federal Hospital Insurance 22 Trust Fund and the Federal Supplementary Medical Insur- 23 ance Trust Fund. The portion of that payment to the organi- 24 zation for a month to be paid by the latter trust fund shall be 25 equal to 200 percent of the sum of- PAGENO="0154" 146 4 1 "(A) the product of (1) the number of such mem- 2 bers for the month who have attained age 65, and (ii) 3 the monthly actuarial rate for supplementary medical 4 insurance for the month as determined under section 5 1839(c)(1), and 6 "(B) the product of (i) the number of such mem- 7 bers for the month who have not attained age 65, and 8 (ii) the monthly actuarial rate for supplementary medi- 9 cal insurance for the month as determined under sec- 10 tion 1839(c)(4). 11 The remainder of that payment shall be paid by the former 12 trust fund. 13 "(b)(1) For purposes of this section, the~ term `health 14 maintenance organization' means a legal entity that meets 15 the definition of `health maintenance organization' under sec- 16 tion 1301(a) of the Public Health Service Act as that defini- 17 tion applies (or would apply) to individuals not entitled to 18 benefits under this title, except that- 19 "(A) with respect to individuals enrolled under 20 this section with the organization- - 21 "c') the term `basic health services' in title 22 XILI of that Act sh.all be considered to mean (1) 23 the services listed under parts A and B that are 24 available to individuals residing in the geographic 25 area served by the organization, and (II) preven- PAGENO="0155" 147 5 1 tive health services under section 1302(1) of that 2 Act, 3 "(ii) the term `supplemental health services' 4 in title XIII of that Act shall be considered to in- 5 dude those services listed in section 1302(1) of 6 that Act that are not included in clause (i) of this 7 subparagraph, 8 "(iii) the organization may not include any 9 supplemental health services in its basic health 10 services, 11 "(iv) the organization fixes the payments re- 12 quired from those individuals as prescribed by 13 subsections (g) and (i)(2), and 14 "(v) the organization provides the services 15 listed under parts A and B through institutions, 16 entities, and persons meeting the applicable re- 17 quirements of section 1861, and 18 "(B) with respect to the enrollment of individuals 19 with the organization under this section- 20 "(i) subsections (c)(4) and (d) of section 1301 21 that Act shall not apply, and 22 "(ii) the organization must enroll individuals 23 eligible to enroll under this section without regard 24 to their health status (but may commence or cease 25 enrolling such individuals at any time). PAGENO="0156" 148 6 1 "(2)(A) The administration of the duties and functions of 2 the Secretary, insofar as they involve making determinations 3 as to whether an organization is a `health maintenance orga- 4 nization' within the meaning of paragraph (1), shall be inte- 5 grated with the administration of section 1312 of the Public 6 Health Service Act. 7 "(c) If an individual is enrolled under this section with a 8 health maintenance organization, neither the individual nor 9. any other person or entity (except for the health maintenance 10 organization) shall be entitled to receive payments from the 11. Secretary under this title for services furnished to the individ- 12 ual. 13 "(d) Subject to the provisions of subsection (e), every 14 individual entitled to benefits under parts A and B, Or part B 15 only (other than an individual medically determined to have 16 end-stage renal disease), shall be eligible to enroll under this 17 section with any health maintenance organization with which 18 the Secretary has entered into a contract under subsection (i) 19 that serves the geographic area in which the individual re- 20 sides. 21 "(e) An individual may enroll under this section with a 22 health maintenance organization as may be prescribed in reg- 23 ulations, and may terminate his enrollment with the health 24 maintenance organization as of the beginning of the first cal- PAGENO="0157" 149 7 1 endar month following a full calendar month after he has 2 requested termination. 3 "(f) Any individual enrolled with a health maintenance 4 organization under this section who is dissatisfied by reason 5 of his failure to receive any health service to which he be- 6 lieves he is entitled and at no greater charge than he believes 7 he is required to pay shall, if the amount in controversy is 8 $100 or more, be entitled to a hearing before the Secretary 9 to the same extent as is provided in section 205(b), aria in 10 any such hearing the Secretary shall make the health mainte- 11 nance organization a party. If the amount in controversy is 12 $1,000. or more, the individual or health maintenance organi- 13 zation shall, upon notifying the other party, be entitled to 14 judicial review of the Secretary's final decision as provided in 15 section 205(g), and both the individual and the health mainte- 16 nance organization shall b& entitled to be parties to that judi- 17 cial review. 18 "(g)(1) The portion of a health maintenance organiza- 19 tiOn's premium rate and the actuarial value of its other 20 charges for individuals enrolled under this section with the 21 organization and entitled to benefits under parts A and B, 22 and the portion of its premium rate and the actuarial value of 23 its other charges for individuals enrolled under this section 24 with the organization and entitled to benefits under part B 25 only, for services covered under parts A and B, or part B PAGENO="0158" 150 8 1 only, respectively, may not exceed the actuarial value of the 2 coinsurance and deductibles that would be applicable on the 3 average to individuals enrolled under this section with the 4 organization (or, if the Secretary finds that adequate data are 5 not available to determine that actuarial value, the actuarial 6 value of the coinsurance and deductibles applicable on the 7 average to individuals in the area, in the State, or in the 8 United States, eligible to enroll under this section with a 9 health maintenance organization) and entitled to benefits 10 under parts A and B, or part B only, respectively, if they 11 were not members of a health maintenance organization; and 12 the portion of its premium rate and the actuarial value of its 13 other charges for those individuals for other services may not 14 exceed the value of the adjusted community rate for those 15 services (except as prescribed by the last three sentences of 16 section 1301(b)(1) of the Public Health Service Act). 17 "(2) For purposes of this section, the term `adjusted 18 community rate' for a service means the rate of payment for 19 that service that the Secretary annually estimates would 20. apply to an individual enrolled under this section with a 21 health maintenance organization if the rate of payment were 22 determined under a `community. rating system' ~as defined in 23. section 1302(8) of the Public Health Service Act, other than 24 subparagraph (0)), but adjusted for differences between the 25 utilization characteristics of the individuals enrolled with the PAGENO="0159" 151 9 1 health maintenance organization under this section and the 2 utilization characteristics of the other members of the organi- 3 zation (or, if the Secretary finds that adequate data are not 4 available to adjust for those differences, the differences be- 5 tween the utilization characteristics of individuals in the area, 6 in the State, or in the United States, eligible to enroll under 7 this section with a health maintenance organization and the 8 utilization characteristics of the rest of the population in the 9 area, in the State, or in the United States, respectively). 10 "(h)(1) Except as provided in paragraph (2), each health 11 maintenance organization with which the Secretary enters 12 into a contract under this section shall have an enrolled mem- 13 bership at least half of which consists of individuals who are 14 neither entitled to benefits under this title nor entitled to 15 benefits under a State plan approved under title XIX. 16 "(2) The Secretary may modify or waive the require- 17 ment imposed by paragraph (1) in circumstances which the 18 Secretary finds warrant special consideration (and may take 19 into account, in determining whether to modify or waive that 20 requirement, the reasonableness of the organization's premi- 21 urn rate and other charges for members entitled to benefits 22 under this title or under a State plan approved under title 23 XIX). 24 "(i)(1) The Secretary is authorized to enter into a con- 25 tract with any health maintenance organization that under- PAGENO="0160" 152 10 1 takes to provide the benefits described in title XIIT of the 2 Public Health Service Act (as modified by subsection (b)) to 3 individuals enrolled under this section with that organization. 4 "(2) The contract shall provide that, if the adjusted 5 community rate for services under parts A and B (as reduced 6 for the actuarial value of the coinsurance and deductibl~s 7 under those parts), for individuals enrolled under this section 8 with the organization and entitled to benefits under those 9 parts, or if the adjusted community rate for services under 10 part B (as reduced for the actuarial value of the coinsurance 11 and deductibles under that part), for individuals enrolled 12 under this section with the organization and entitled to bene- 13 fits under that part only, is less than the average per capita 14 payment to be made under subsection (a) at the beginning of 15 an annual period for individuals enrolled under this section 16 with the organization and entitled to benefits under parts A 17 and B, or part B only, respectively, the health maintenance 18 organization shall provide to each individual enrolled under 19 this section with the organization and entitled to benefits 20 under parts A and B, or part B only, respectively, certain 21 additional benefits that the Secretary finds are at least equal 22 in value to the difference between that average per capita 23 payment and that adjusted~ community rate (as so reduced). 24 Those additional benefits shall be as follows, and provided in 25 the following order: PAGENO="0161" 153 11 1 "(A) first, reduction (or elimination) of that por- 2 tion of the premium rate attributable to preventive 3 health services under section 1302(1) of the Public 4 Health Service Act, 5 "(B) second, reduction (or elimination) of that por- 6 tion of the premium rate attributable to coinsurance or 7 deductibles under part A or B, and reduction of any 8 other charges for services listed under part A or B to 9 the lowest charges (other than the premium rate) for 10 those (or similar) services for any other enrollee (other 11 than enrollees under a Federal or State program) of 12 the organization, and 13 "(0) third, reduction (or elimination) of any re- 14 maining charges for services listed under part A or B, 15 and provision of supplemental health services without 16 an increase in the premium rate. 17 "(3) Each contract under this section shall be for a term 18 of at least one year, as determined by the Secretary, and may 19 be made automatically renewable from term to term in the 20 absence of notice by either party of intention to terminate at 21 the end of the current term; except that the Secretary may 22 terminate any such contract at any time (after such reason- 23 able notice and opportunity for hearing to the health mainte- 24 nance organization involved as he may provide in regula- 25 tions), if he finds that the organization (A) has failed substan- 56-071 0 - 80 - 11 PAGENO="0162" 154 12 1 tially to carry out the contract, (B) is carrying out the con- 2 tract in a manner inconsistent with the efficient and effective 3 administration of this section, or (0) no longer substantially 4 meets the applicable conditions of subsection (b). 5 "(4) The effective date of any contract executed pursu- 6 ant to this subsection shall be specified in the contract. 7 "(5) Each contract under this section- 8 "(A) shall provide that the Secretary, or any 9 person or organization designated by him- 10 "(i) shall have right to inspect or otherwise 11 evaluate the quality, appropriateness, and timeli- 12 ness of services performed under the contract, and 13 "(ii) shall have right to audit and inspect any 14 books and records of the health maintenance orga- 15 nization that pertain to services performed or de- 16 terminations of amounts payable under the con- 17 tract, 18 "(B) shall require the organization to provide (and 19 pay for) written notice in advance of the contract's ter- 20 mination, as well as a description of alternatives for~ 21 obtaining benefits under this title, to each individual 22 enrolled under this section with the organization, 23 "(0) shall require the organization to comply with 24 subsections (a) and (c) of section 1318 of the Public 25 Health Service Act, and PAGENO="0163" 155 13 1 "(D) shall contain such other terms and conditions 2 not inconsistent with this section as the Secretary may 3 fInd necessary. 4 "(6) The Secretary may prescribe the procedures and 5 conditions under which a health maintenance organization 6 that has entered into a contract with the Secretary under this 7 subsection may inform individuals eligible to enroll under this 8 section with the organization about the organization, or may 9 enroll such individuals with the organization. 10 "(7) The Secretary may not enter into contract with a 11 health maintenance organization under this subsection if a 12 former contract with that organization under this subsection 13 was terminated at the request of the organization within the 14 preceding five-year period, except in circumstances which the 15 Secretary finds warrant special consideration. 16 "(j) The function vested in the Secretary by subsection 17 (i) may be performed without regard to such provisions of law 18 or regulations relating to the making, performance, amend- 19 ment, or modification of contracts of the United States as the 20 Secretary may determine to be inconsistent with the further- 21 ance of the purpose of this title.". 22 (b) Section 1833(a)(1)(A) of that Act is amended by in- 23 serting after "organization" the first place it occurs the fol- 24 lowing: "(other than a health maintenance organization, as 25 defined in section 1301(a) of the Public Health Service Act, PAGENO="0164" 156 14 1 that has received payments, under this clause or under see- 2 tion 1876, before or after becoming a health maintenance 3 organization, for more than 3 years in the aggregate without 4 good cause shown to the Secretary or for more than 5 years 5 in the aggregate if good cause has been~ shown)". 6 (c) Section 1861(s)(2) of that Act is amended- 7 (1) in subparagraph (E), by striking out "and", 8 (2) in subparagraph (F), by adding "and" at the 9 end, and 10 (3) by adding after subparagraph (F) the following 11 subparagraph: 12 "(G) services furnished pursuant to a contract 13 under section 1876 to a member of a health mainte- 14 nance organization by a physician assistant or by a 15 nurse practitioner and such services and. supplies fur- 16 nished as an incident to his service to such a member 17 as would otherwise be covered under this part if fur- 18 nished by a physician or as an incident to a physician's 19 service;". 20 (dXl) Section 1861(aaX3) of that Act is amended by 21 striking out ", for the purposes of paragraphs (1) and (2),". 22 (2) Paragraph (3) of section 1861(aa) of that Act is re- 23 designated as subsection (bb) of section 1861 and is assigned 24 the heading "Physician Assistant and Nurse Practitioner". PAGENO="0165" 157 15 1 EFFECTIVE DATE 2 * SEC. 3. The amendments made by section 2 shall apply 3 with respect to services funished on or after the first day of 4 the thirteenth calendar month that begins after the date of 5 enactment of this Act, or earlier with respect to any health 6 maintenance organization if the organization so requests and 7 the Secretary of Health, Education, and Welfare agrees, but 8 shall not apply- 9 (1) with respect to services furnished by a health 10 maintenance organization to any individual who is en- 11 rolled with that organization and entitled to benefits 12 under title XVIIT of the Social Security Act at the 13 time the organization first enters into a contract sub- 14 ject to the amendments made by this section, unless- 15 (A) the individual requests at any time that 16 the amendments apply, or 17 (B) the Secretary determines at any time 18 that the amendments should apply to all members 19 of the health maintenance organization because of 20 administrative costs or other administrative bur- 21 dens involved and so informs in advance each af- 22 fected member of the health maintenance organi- 23 zation, or 24 (2) with respect to services furnished by a health 25 maintenance organization during the five year period PAGENO="0166" 158 16 1 beginning with the date of enactment of this Act, if a 2 contract between the organization and the Secretary of 3~ Health, Education, and Welfare under section 4 1876(i)(2)(A) of that Act was in effect immediately 5 before enactment of this Act, unless the organization 6 requests that the amendments apply earlier. PAGENO="0167" 159 I 96TH CONGRESS 1ST SEssioN To make improvements in the medicare and medicaid programs. IN TIlE HOUSE OF REPRESENTATIVES JuNE 14, 1979 Mr. RANOEL (for himself and Mr. WAxi~N) introduced the following bill; which was referred jointly to .the Committees on Ways and Means and Interstate and Foreign Commerce A BILL To make improvements in the medicare and medicaid programs. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 SHORT TITLE AND REFERENCES IN ACT 4 SECTION 1. (a) This Act may be cited as the "Medicare 5 and Medicaid Amendments of 1979". - 6 (b) Whenever in this Act an amendment or. repeal is 7 expressed. iii terms of an amendment to, or repeal of, a see- 8 tion or other provision, the reference shall be considered to 9 be made to a section or other provision of the Social Security 10 Act, unless otherwise specifically stated. PAGENO="0168" 160 2 I TITLE I-MEDICARE PROVISIONS 2 INPATIENT HEALTH BENEFITS FOR THE WORKING AGED 3 SEC. 101. (a)(1) Part IX of subchapter B of chapter~ 1 of 4 the Internal Revenue Code of 1954 is amended by adding at 5 the end the following section: 6 "SEC. 280D. CERTAIN EXPENSES FOR INPATIENT HEALTH 7 BENEFITS. 8 "No deduction shall be allowed under section 162 for 9 one-half of the expenses of an employer with respect to inpa- 10 tient hospital services health benefits provided to his employ- 11 ees if the employer does not offer such benefits to his employ- 12 ees who are 65 years of age or older but under 70 years of 13 age, that are at least equal in amount, scope, and duration to, 14 but of no greater cost to those employees than the cost to 15 employees under 65 years of age of, such benefits that he 16 offers to his employees under 65 years of age.". 17 (2) The table of sections for that part is amended by 18 adding at the end the following new item: "Sec. 280D. Certain expenses for inpatient health benefits.". 19 (3)(A) The amendment made by paragraph (1) is effec- 20 tive with respect to health benefits prOvided by an employer 21 a.fter one year after the date of enactment of this Act pursu- 22 ant to a contract entered into before the ninety-first day fol- 23 lowing the date of enactment of this Act. PAGENO="0169" 161 3 1 (B) The amendment made by paragraph (1) is otherwise 2 effective* with respect to health benefits provided after the 3 ninetieth day following the date of enactment of this Act. 4 (b)(i) Section 1814 is amended by adding at the end the 5 following new subsection: 6 "(k) Payment under this part may not be made with 7 respect to any inpatient hospital services to the extent that 8 payment has been made, or can reasonably be expected to be 9 made (as determined in accordance with regulations), with 10 respect to such services, as health benefits provided by an 11 employer. Any payment under this part with respect to any 12 such services shall be conditioned on reimbursement to the 13 Federal Hospital Insurance Prust Fund established by this 14 part when notice or other information is received that pay- 15 ment for such services has been made as such benefits.". 16 (2) The amendment made by paragraph (1) applies to 17 services furnished after the ninetieth day following the date 18 of enactment of this Act. 1~9 CONTRACTS FOR THE ADMINISTRATION OF BENEFITS ~20 SEC. 102. (a) The heading to section 1842 is amended 21 by striking out "Oarriers" and inserting instead "Public and 22 Private Entities". 23 (b)(1) The matter in subsection (a) of that section pre- 24 ceding paragraph (1) is amended- PAGENO="0170" 162 4 1 (A) by striking out "and with a view to furthering 2 coordination of the administration of the benefits under 3 part A and under this part,"; 4 (B) by striking out "carriers, including carriers 5 with which agreements under section 1816 are in 6 . effect," and inserting instead "public and private enti- .7. ties"; and .8 (0) by striking out the semicolon and all that fol- 9 lows up to the colon. 10 (2) Paragraph (1)(A) of that subsection is amended- 11 (A) by inserting "(subject to the provisions of sec- 12 tion 1878 and to such review by the Secretary as may 13 be provided for by the contract)" after "determina- 14 . tions", and 15 . (B) by striking out "or reasonable charge" and in- 16 serting instead ", reasonable charge, or other". 17. (3) That subsection is amended by striking out "part" 18 each place it occurs and inserting instead "title". 19 . (4) That subsection is amended- .20 . (A) by striking out "and" at the end of paragraph 21. (3), . . . .. .. . . .. 22 (B) by redesignating paragraph (4) as paragraph 23 . (5), and . . 24 (0) by inserting after paragraph (3) the following 25 . new paragraph: PAGENO="0171" 163 5 1 "(4) provide consultative services to entities fur- 2 nishing health services to enable them to establish and 3 maintain fiscal records necessary for purposes of this 4 title and otherwise to become or remain eligible for 5 payments under this title; and". 6 (c)(1) Subsection (b) of that section is amended by strik~ 7 ing out paragraphs (1) and (4). 8 (2) Pari~graph (3) of that subsection is amended- 9 (A) in the matter preceding paragraph (A), by in- 10 sertmg ", as appropnate," after-"prôiride'~, 11 (B) in subparagraph (A), by striking out "part" 12 and inserting instead "title"; 13 (0) in the matter in subparagraph (B) preceding 14 clause (i), by inserting "(if any)" after "subscribers"; 15 (I)) in subparagraph (0), by striking out "this 16 part" each place it occurs and inserting instead "part 17 B"; 18 (E) in subparagraph (I)), by striking out "part" 19 and inserting instead "title"; 20 (F) in subparagraph (E)- 21 (i) by inserting "(and to its claims processing: 22 operations)" after "thereto", and 23 (ii) by striking out "part" and inserting in- 24 stead "title"; PAGENO="0172" 164 6 1 (0-) in the second sentence,~ by striking out "for 2 purposes of this paragraph"; 3 (II) in the third sentence- 4 (i) by striking out "part" each place it occurs 5 and inserting instead "title", (ii) by striking out "(i)" and inserting instead 7 "(1)", 8 (iii) by striking out "the carrier" and insert- 9 ing instead "an entity under section 1868", and 10 (iv) by striking out "(ii)" and inserting in- 11 stead "(2)"; 12 (I) in the fourth sentence, by striking out "(ii)" 13 each place it occurs and inserting instead "(2)"; 14 (J) in the seventh sentence, by striking out "fiscal 15 intermediary, carrier" and inserting instead "entity 16 under this section"; and 17 (K) in the eighth sentence, by striking out "third 18 and fourth sentences preceding.this sentence" and in- 19 - serting instead "second and third sentences of this sub- 20 section". . 21: (3) The first sentence of paragraph (5) of that subsectiofl 22 is amended by itriking:out."thispart" and inserting instead 23"partB". . 24 ~4) That subsection is amended by:.striking-out "carrier'! 25 each place it occurs. and inserting instead "entity". PAGENO="0173" 165 7 1 (d) Subsection (c) of that section is amended to read as 2 follows: 3. "(c) Any contract entered into with an entity under this 4 section may provide for advances of funds to the entity for 5 the making of payments by it under this title.". 6 (e) Subsection (d) of that section is amended- 7 (1) by striking out "a carrier" and inserting in- 8 stead "an entity", 9 (2) by striking out "such carrier" `and inserting in- 10 stead "the entity", and 11 (3) by striking Out "surety" and inserting instead 12 "fIdelity". 13 (f) Subsection (f) of that section is repealed. 14 (g) Subsection (g) of that section is amended- 15 (1-) :by striking out "a carrier or~ carriers" and in- 16 serting instead "an entity or entities", and 17 (2) by inserting "in relation to part B" after "this 18 . section". 19 (h) The second, third, fourth, fifth, sixth, and eighth sen- 20 tences of subsection (b)(3) of that section are consolidated 21 into a new subsection, designatedas subsection (bb), assigned 22 the heading "Reasonable Charge", and placed at the. end of 23 section 1861. 24 (i) The remainder of section 1842 is redesignated as sec- 25 tion 1868 and inserted into part 0 after section 1867. PAGENO="0174" 166 8 1 (j) Section 1816 is repealed. 2 (k)(1) Subsection (a) of section 1878 is amended- 3 (A) in paragraph (1)(A), by striking out "the orga- 4 nizatión serving as its fiscal intermediary pursuant to 5 section 1816" and inserting instead "an entity under 6 section 1868", 7 (B) in paragraph (1XB), by striking out "interme- 8 diary" and inserting instead "entity", and 9 (0) in paragraph (3), by striking out "interme- 10 diary's and inserting instEad "entity's". 11 (2) Subsection (d) of that sectionis amended- 12 (A) by striking out "intermediary" each place it 13 occurs and inserting instead "entity", and 14 (B) by striking out "fiscal". 15 (3) Subsection (g) of that section is amended by striking 16 out "a fiscal intermediary" and inserting instead "an entity .17 under section 1868". 18 (1) Contracts with entities under section 1868 may be 19 entered into during the . five-year period beginning with the 20 date of enactment of this Act without regard to section 3709 21 of the Revised Statutes or any other provision of law requir- 22 ing competitive bidding. PAGENO="0175" 167 9 1 RESTRICTION ON PAYMENTS FOR RADIOLOGY 2 ADMINISTRATIVE SERVICES FURNISHED IN HOSPITALS 3 SEC. 103. (a) Section 1861(v)(1) is amended by adding 4 after subparagraph (F) the following new subparagraph: 5 "(G) No cost attributable to services performed by a 6 physician in administering a radiology department during an 7 accounting period of a hospital shall be considered reasonable 8 if the physician received any payments under part B for radi- 9 ological services furnished to an inpatient of the hospital 10 during the accounting period.". 11 (b) The amendment made by subsection (a) applies to 12 services furnished in accounting periods of a hospital begin- 13 ning after enactment of this Act. 14 LIMITATION ON PAYMENTS TO RADIOLOGISTS AND 15 PATHOLOGISTS 16 SEc. 104. (a) Subsections (a)(1)(B) and (b)(2)- of section 17 1833 are each amended by inserting "who has in effect an 18 agreement with the Secretary by which the physician agrees 19 to accept an assignment of claim (as provided for in section 20 1842(b)(3)(B)(ii) for all physicians' services furnished by him 21 for hospital inpatients enrolled under this part" after "pathol- 22 ogy". 23 (b) The amendments made by subsection (a) apply to 24 services furnished after the sixth calendar month beginning 25 after enactment of this Act. PAGENO="0176" 168 10 I ELIMINATION OF MEDICARE COVERAGE FOR 2 CHIROPRACTORS' SERVICES 3 SEC. 105. (a) The first sentence of section 1861(r) is 4 amended by striking out everything after "prosthetic lenses" 5 and inserting instead a period. 6 (b) The amendment made by subsection (a) applies to 7 services furnished after the end of the third calendar month 8 beginning after enactment of this Act. 9 INCREASE IN PSYCHIATRIC BENEFITS UNDER PART B 10 SEC. 106. (a) Section 1833(c) is amended- 11 (1) by striking out "there" and inserting instead 12 "not more than $937.50", 13 (2) by inserting "for physicians' services" after 14 "considered as incurred expenses", and 15 (3) by striking out everything after "subsections 16 (a) and (b)" and inserting instead a period. 17 (b) Section 1866(a)(2)(A) is amended by striking out the 18 last sentence. 19 (c) The amendments made by this section apply to cx- 20 penses incurred in calendar years beginning after enactment 21 of this Act. 22 UNLIMITED REENROLLMENT UNDER PART B 23 SEC. 107. Section 1837(b) is repealed. PAGENO="0177" 169 11 1 REPEAL OF PRESUMED ELIGIBILITY PROVISIONS FOR 2 POST-HOSPITAL EXTENDED CARE AND POST-HOSPI- 3 TAL HOME HEALTH SERVICES 4 SEC. 108. Subsections (h) and (i) of Section 1814 are 5 repealed. 6 LIMITATION ON REIMBURSEMENT FOR SERVICES UNDER 7 PART B FURNISHED BY OR UNDER ARRANGEMENT 8 WITH A PROVIDER OF SERVICES OR CERTAIN OTHER 9 ENTITIES 10 SEC. 109. (a) Section. 1833(a)(2) is amended to read as 11 follows: 12 "(2) in the case of services described in section 13 1832(a)(2) (except those services described in subpara- 14 graph (D) of section 1832(a)(2))- 15 "(A)(i) with respect to home health services, 16 the lesser of (I) the reasonable cost of the services 17 (as determined under section 1861(v)), and (II) 18 the customary charges for the services, 19 "(ii) with respect to other services (unless 20 otherwise specified in section 1881), the least of 21 (I) 80 percent of the reasonable cost of the serv- 22 ices (as determined under section 1861(v)), (II) 80 23 percent of the customary charges for the services, 24 and (III) the reasonable cost of the services (as 56-071 0 - 80 - 12 PAGENO="0178" 170 12 1 determined under section 1861(v)) less 20 percent 2 of the reasonable charges for the services, or 3 "(B) if the services are furnished by a public 4 * provider of services free of charge or a nominal 5 charges to the public, the amount determined in 6 accordance with section 1814(b)(2),". 7 (b)(1) Section 1832(a)(2)(B) is amended by striking out 8 the last "and". 9 (2) Section 1832(a)(2)(O) is amended by striking out 10 "next to last" and inserting instead "second". 11 (3) Section 1861(s)(2)CD) is amended by inserting "to 12 which the second sentence of subsection (p) applies" after 13 "services". 14 (4) The first subsection (g) of section 1833 is amended 15 by striking out "next to last" and inserting instead "second". 16 (5) The second subsection (g) of section 1833 is redesig- 17 nated as subsection (h). 18 (c) The amendment made by subsection (a) applies to 19 services furnished in accounting periods beginning after en- 20 àctment of this Act. 21 SHORTENED PART B TERMINATION PERIOD FOR CERTAIN 22 INDIVIDUALS WHOSE PREMITUMS MEDICAID HAS 23 CEASED TO PAY 24 SEC. 110. (a) Section 1843(e) is amended by adding at 25 the end the following: "The coverage period under this part PAGENO="0179" 171 13 1 of any such individual who, in the last month of his coverage 2 period attributable to the State agreement or in any of the 3 following six months, files notice that he no longer wishes to 4 participate in the insurance program established by this part, 5 shall terminate at the close of the month in which the notice 6 is filed.". 7 (b) The second sentence of section 1838(b) is amended 8 by inserting "(except as otherwise provided in section 9 1843(e))" after "shall". 10 (c) Section 1843~g)(2) is amended- 11 (1) by adding "and" at the end of clause (A), 12 (2) by striking out ", and" at the end of clause 13 (B) and inserting instead a period, and 14 (3) by striking out clause (C). 15 (d) The amendments made by this section apply to no- 16 tices filed after the third calendar month beginning after en- 17 aetment of this Act. 18 (e) The coverage period under part B of title XVIII of 19 an individual whose coverage period attributable to a State 20 agreement under section 1843 is terminated and who has 21 filed notice before the end of the third calendar month begin- 22 ning after enactment of this Act that he no longer wishes to 23 participate in the insurance program. established by part B of 24 title XVIII shall terminate on the earlier of. (1) the day speci- 25 fled in section 1838 without the amendments made by this PAGENO="0180" 172 14 1 section, and (2) (unless the individual files notice before the 2 day specified in this clause that he wishes his coverage period 3 to terminate as provided in clause (1)) the day on which his 4 coverage period would terminate if the individual filed notice 5 in the fourth calendar month beginning after enactment of 6 this Act.. 7 REPEAL OF PLANTAB WARTS BENEFITS EXCLUSION 8 SEC. 111. (a) Section 1862(a)(13)(O) is amended by 9 striking out ", warts,". 10 (b) The amendment made by this section applies to serv- 11 ices furnished after the third calendar month beginning after 12 enactment of this Act. 13 PAYMENT FOR ANTIGENS 14 SEC. 112. (a) Section 1861(s)(2) is amended- 15 . . (1) by striking out "and" at the end of subpara- 16 graph (E), 17 (2) by inserting "and" at the end of subparagraph 18 (F),and :. . `19 (3) by inserting after subparagraph (F) the follow- 20 . iñgl subparagraph: . 21 "(G) antigens furnished by a physician for admin- 22 istration by or under the supervision of another physi- 23 cian (or for administration to an outpatient of a rural 24 health clinic);". PAGENO="0181" 173 15 1 (b) The amendments made by this section apply to anti- 2 gens furnished after the third calendar month beginning after 3 enactment of this Act. 4 PAYMENT FOR CERTAIN SERVICES WHEN BENEFICIARY 5 HAS DIED 6 SEC. 113. (a) Section 1870(f) is amended to read as 7 follows: 8 "(f) If an individual who received medical and other 9 health services for which payment may be made under sec- 10 tion 1832(a)(1) dies, and no assignment of the right to pay- 11 ment for the services was made by the individual before his 12 death, and payment for the services has not been made- 13 "(1) if the person who furnished the services 14 agrees that the reasonable charge is the full charge for 15 the services, payment for the services shall be made to 16 that person, and 17 "(2) if the person who furnished the services does 18 not agree that the reasonable charge is the full charge 19 for the services, payment for the services shall be 20 made on the basis of an itemized bill to a person who 21 has a legal obligation to pay for the services (and pro- 22 vides evidence of the legal obligation as may be re- 23 quired in regulations), PAGENO="0182" 174 16 1 but only in the amount and subject to those conditions as 2 would be applicable if the individual who received the serv- 3 ices had not died.". 4 (b) The first sentence of section 1870(g) is amended- 5 (1) by striking out "of the Social Security Act", 6 (2) by inserting "which were not due" after "pre- 7 miums" the first place it occurs, and 8 (3) by striking out "after the mOnth of his death". 9 (c) The amendments made by this section apply to re- 10 qu~sts for payment made after the date of enactment of this 11 Act. 12 REPEAL OF STATUTORY TIME LIMITATION ON 13 AGREEMENTS WITh SKILLED NURSING FACILITIES 14 SEC. 114. The second sentOnce of section 1866(a)(1) is 15 repealed. 16 REPEAL OF PROVISIONS CONCERNING CONSULTANTS FOR 17 SKILLED NURSING FACILITIES 18 SEC. 115. Section 1864(a) is amended by striking out 19 the third and fourth sentences. 20 REQUIREMENT THAT SKILLED NURSING FACILITIES 21 PARTICIPATE IN BOTH MEDICARE AND MEDICAID 22 SEC. 116. Section 1866(a)(1) is amended (1) by deleting 23 the period at the end and inserting instead a comma, and (2) 24 by inserting after and below subparagraph (D) the following: 25 "and if, in the case of a skilled nursing facifity located in a PAGENO="0183" 175 17 1 State which has a plan approved under title XIX of the Act, 2 it also files with the State agency administering the plan 3 under that title an agreement to participate as a provider of 4 skilled nursing facility services under that plan.". 5 SANCTIONS AGAINST SKILLED NURSING FACILITIES OUT 6 OF COMPLIANCE WITH CONDITIONS OF PARTICIPATION 7 SEC. 117. Section 1866 is amended by adding at the 8 end the following new subsection: 9 "(f) Where the Secretary determinesthat a skilled nurs- 10 ing facility which has an agreement pur~uant to subsection 11 (a)(1) to participate in the program under this title (A) is not 12 complying substantially with the provisions of such agree- 13 ment, or with the provisions of this title and regulations 14 thereunder, or (B) no longer substantially meets the provi- 15 sions of section 1861(j), but further finds that such failure to 16 comply does not jeopardize the health or safety of patients, 17 he may, instead of terminating such facility's agreement, 18 impose such other sanctions as appropriate, which sanctions 19 may include denial of reimbursement with respect to all pa- 20 tients, or with respect to patients admitted to the facility 21 after the date of the notice, until such time as he finds that 22 the deficiencies noted have been corr~ctèd.". PAGENO="0184" 176 18~ 1 AUTHORITY OF SECRETARY TO DETERMINE APPROPRIATE 2 LIFE SAFETY CODE REQUIREMENTS 3 SEC. 118. Section 1861(j)(13) is amended by striking 4 out all that precedes the first semicolon and inserting instead 5 "meets such provisions of such edition or editions of the Life 6 Safety Code of the National Fire Protection Association ap- 7 plicable to nursing homes as are specified by the Secretary in 8 regulations". 9 TITLE 11-MEDICAID PROVISIONS 10 DEFINITION OF "RESIDENT" 11 SEC. 201. (a) Section 1902(a)(16) is amended by insert- 12 ing "(as defined by the Secretary)" after "State". 13 (b) Section 1902(b)(3) is amended by striking out "re- 14 sides in the State" and inserting instead "is a resident of the 15 State (as defined by the Secretary)". S 16 REPEAL OF CONTINUED EMPLOYMENT REQUIREMENT 17 DURING EXTENDED MEDICAID COVERAGE 18 SEC. 202. Section 1902(e) is amended by deleting 19 "shall, while a member of such family is employed, remain 20 eligible" and inserting instead "shall remain eligible". 21 ELIMINATION OF MEDICAID COVERAGE FOR 22 CHIROPRACTORS' SERVICES 23 SEC. 203. (a) Section 1905(a)(6) is amended by insert- 24 ing "(other than chiropractors)" after "practitioners". S 25 (b) Section 1905(g) is repealed. PAGENO="0185" 177 19 1 (c) The amendments made by this section apply to mcdi- 2 cal assistance provided, under a State plan approved under 3 title XIX, in calendar quarters beginning after the close of 4 the first regular session of the State legislative that begins 5 after enactment of this Act. 6 REQUIREMENT THAT SKILLED N1JRSING FACILITIES 7 PARTICIPATE IN BOTH MEDICARE AND MEDICAID 8 SEC. 204. Section 1902(a)(28) is amended (1) by insert- 9 ing "(A)" immediately following "provide", and (2) by insert- 10 ing immediately before the semicolon the following: ", and 11 (B) that any such facility (except an institution which is pri- 12 manly for the care and treatment of tuberculosis or mental 13 diseases) must file with the Secretary an agreement to pro- 14 vide skilled nursing facility services pursuant to section 15 1866(a)(1)". 16 CERTIFICATION BY SECRETARY OF LONG-TERM-CARE 17 FACILITIES PARTICIPATING IN MEDICAID 18 SEC. 205. (a) Section 1902(a)(33)(B) is amended (1) by 19 inserting immediately after "institutions and agencies" the 20 following: "(other than skilled nursing facilities and interme- 21 diate care facilities)", and (2) by inserting immediately before 22 the semicolon the following: ", and will make reconimenda- 23 tions to the Secretary with respect to whether institutions in 24 the State qualify as skilled nursing facilities (for purposes of PAGENO="0186" 178 20 1 paragraph (28)) or as intermediate care facilities (for purposes 2 of section 1905(c))". 3 (b) Section 1902(a)(9) is amended (1) by deleting "and" 4 at the end of subparagraph (A), (2) by deleting the semicolon 5 at the end of subparagraph (B) and inserting instead ", and", 6 and (3) by inserting at the end the following subparagraph: 7 "(0) that the State agency administering or 8 supervising the administration of the plan under 9 this title will enter into an agreement for skilled 10 nursing facility or intermediate care facility serv- 11 ices under the plan with any facility, only upon 12 notice from the Secretary that such facility is 13 qualified, as appropriate, as a skilled nursing fa- 14 cility for purpos&s of paragraph (28), or as an in- 15 termediate care facility for purposes of section 16 1905(c), and only for the period specified by the 17 Secretary in such notice;". 18 (c) Section 1910(a) is amended- 19 (1) by redesignating paragraph (2) as paragraph 20 (3), 21 (2) by inserting after paragraph (1) the following 22 paragraph: 23 "(2) The Secretary shall determine whether institutions 24 which are primarily for the care and treatment of mental dis- 25 eases and t~ibercuIosis qualify as skilled nursing facilities for PAGENO="0187" 179 21 1 purposes of section 1902(a)(28), and whether institutions 2 qualify as intermediate care facilities for purposes of section 3 1905(c). In making these determinations, the Secretary shall 4 take into consideration the recommendations made to him 5 pursuant to section 1902(a)(33)(B).", 6 (3) in paragraph (3), as redesignated, by inserting 7 immediately before the period "or intermediate care fa- 8 diity", and 9 (4) by inserting after paragraph (3) the following 10 paragraph: 11 "(4) The Secretary may determine that an institution 12 that has been found, pursuant to paragraph (1) or (2), to meet 13 the standards for certification as a skilled nursing facility for 14 purposes of section 1902(a)(28) or as an intermediate care 15 `facility for purposes of section 1905(c) has ceased to meet 16 such standards. He shall promptly notify the State agency 17 administering the plan under this title of such determination. 18 Where he finds that the failure to meet such standards jeop- 19 ardizes the health or safety of patients, he shall require the 20 State agency, after reasonable notice to the provider of serv-' 21 ices and the public, to terminate its agreement with the pro- 22 vider. Where he finds that the failure to meOt' such standards' 23 does not jeopardize the health or safety of' patients, he may 24 require the State agency, after reasonable notice to the pro-' 25 vider of services and the public, to terminate its agreement PAGENO="0188" 180 22 I with the provider, or to impose such other sanctions as ap- 2 propriate, which sanctions may include denial of reimburse- 3 ment with respect to all patients, or will respect to patients 4 admitted to the facility after the date of the notice, until the 5 Secretary finds that any deficiencies noted have been cor- 6 rected.". 7 (d) Section 1902(a)(13)(E) is amended by inserting im- 8 mediately before "for payment" the following: "(subject to 9 section 1910(a)(4))". 10 AMENDMENTS TO REQUIREMENTS FOR MEDICAL REVIEW 11 AND INDEPENDENT PROFESSIONAL REVIEW 12 SEC. 206. (a) Section 1902(a)(26) is amended to read as 13 follows: 14 "(26) if the State plan includes medical assistance 15 for inpatient mental hospital services, (A) provide with 16 respect to each patient receiving such assistance, for a 17 regular program of review (including medical evalua- 18 tion) of his need for such care, and for a written plan 19 of care; (B) provide for periodic inspections in all 20 mental hospitals within the State by one or more medi- 21 cal review teams (composed of physicians and other 22 appropriate health and social service personnel) of the 23 care being provided to each person receiving such as-~ 24. sistance, including (i) the adequacy of 1he SerViCeS~ 25 available to meet his current health:needs ~and promote PAGENO="0189" 181 23 1 his maximum physical well-being, (ii) the necessity and 2 desirability of his continued placement in the institu- 3 tion, and (iii) the feasibility of meeting his health care 4 needs through alternative institutional or noninstitu- 5 tional services; (C) provide for full reports to the State 6 agency by each medical review team of the findings of 7 each inspection under clause (B), together with any 8 recommendations; and (D) provide that, if required by 9 the Secretary, reviews under clause (B), will be per- 10 formed jointly with reviews under paragraph (33), in 11 accordance with such standards and procedures as the 12 Secretary may prescribe;". 13 (b) Section 1902(a)(31) is amended to read as follows: 14 "(31) with respect to skilled nursing facilities 15 (and, where the State plan includes medical assistance 16 for intermediate' care facility sérvicés, provide with re- 17 spect tO such facilities) (A) provide with `respect to 18 each patient receiving such assistance, : fOr a regt~lar 19 program of independent professional review (including' 20 medical evaluatiOn) of his need for such care, and for a 21 written plan of care in accordance with regulations of 22 the Secretary; (B) provide for periodic inspections in all 23 such facilities within the State by one or more inde- 24 pendent professional review teams (composed of a phy- 25 sician Or registered nurse, or where permitted by the PAGENO="0190" 182 24 1 Secretary in regulations, another appropriate health 2 professional, and other appropriate health and social 3 service personnel) of the care being provided to each 4 person receiving such assistance, including (i) the ade- 5 quacy, of the services available to meet his current * 6 health needs and, promote his maximum physical well- 7 being, (II) the necessity and desirabifity of his continued V 8* placement in the facility, and (lii) the feasibifity of V 9 V V V meeting;his health care :needs through alternative insti- V V 10 V V V tutional or noninstitutional services; :(O) provide for full V V, reports to theV State V agency by, each V independent pro- 12 fessional review team of the findings of-each inspection 13 ` `V under clause (B),V together with any recommendations; 14 and (D) provide that, if required by the Secretary, re- V 15 ` views under clause (B) will be performed jointly with 16 V V reviews under paragraph (33), in accordance with such 17 -standards and procedures as the Secretary may pre- 18 scribe;". ` 19 V (c) Section 1903(g)(1)(A) is amended by ~inserting imme- 20 diately after "under the State plan" the following: "for inpa- 21 tient services in a hospital (including an institution for tuber- 22 culosis) or in a hospital for mental diseases". ``V V .23 - -id). Section i9O3~gX1XB) isamendedby strikirg out ffi~n 24.. each such case": and. ixisertin.g "in ~achçase for which pay- .25 ..ment is made :under the State~pIan". V `:` V ~` ` PAGENO="0191" 183 25 1 (e) Section 1903(g)(1)(D) is amended to read as follows: 2 "(ID) such State has an effective program of medi- 3 cal review of the care of patients in mental institutions 4 pursuant to section 1902(a)(26) and of independent 5 professional review of the care of patients in skilled 6 nursing facilities and intermediate care facilities pursu- 7 ant to section 1902(a)(31) whereby the professional 8 management of each case is reviewed and evaluated~ at 9 least annually.". 10 COORDINATED AUDITS UNDER MEDICARE AND MEDICAID 11 SEC. 207. (a) Section 1902(a) is further amended- 12 (1) by striking out "and" at the end of paragraph 13 (39), . . . . 14 (2) by striking out the period at the end of para- 15 graph (40) and inserting instead "; and", and 16 (3) by inserting after paragraph (40) the following 17 paragraph: 18 "(41) provide (A) that the records of hospitals, ~19i : skilled nursing facilities, and bornehealth. agencies par- 20 ticipating ~ thc~ plin will be audited: as the SecretaIr~ 21 determines to be necessary to insure that proper pay- 22 ments are made under the plan, (B) that such audits, 23 for. hospitals also providing services under title XVIII, 24 will be coordinated and conducted jointly (to . such 25 extent . and in .. such manner as :the Secretary shall pro- PAGENO="0192" 184 26 I scribe) with audits conducted for purposes of that title, 2 and (C) for payments of that portion of the costs of 3 each such common audit which exceeds the costs 4 which would be incurred in conducting that audit solely 5 for purposes of title XVIII, as determined in accord- 6 ance with method.s specified in regulations prescribed 7 by the Secretary.". 8 (b) The amendments made by subsection (a) shall apply 9 to medical assistance provided, under a State plan approved 10 under title XIX of the Social Security Act, on and after the 11 first day of the first calendar quarter beginning more than 30 12 days after the. date. of enactment of this Act. 13 FEDERAL FUNDING FOR MEDICAID IN PUERTO RICO, 14 GUAM, THE VIRGIN ISLANDS, AND THE NORTHERN 15 MARIANAS 16 SEC. 208. (a) Section 1108(c) is amended to read as 17 follows: 18 "(c) The total amount certified by the Secretary under 19 title XIX with respect to any fiscal year shall not exceed- 20 "(1) for payment to Puerto Rico- 21 "(A) $30,000,000 with respect to fiscal 22 years before fiscal year 1980, and 23 "(B) $32,800,000 with respect to fiscal year 24 1980 and succeeding fiscal years; 25 "(2) for payment to the Virgin Islands- PAGENO="0193" 185 27. 1 "(A) $1,000,000 with respect to fiscal years 2 before fiscal year 1980, and 3 "(B) $1,100,000 with respect to fiscal year 4 1980 and succeeding fiscal years; 5 "(3) for payment to Guam- 6 "(A) $900,000 with respect to fiscal years 7 before fiscal year 1980, and 8 . "(B). $1,000,000 with respect to fiscal year 9 1980 and succeeding fiscal years, and 10 "(4) for payment to the Commonwealth of the 11 Northern Mariana Islands, $200,000 with respect to 12 fiscal year 1980 and succeeding fiscal years"~ 13 (b) Section 1 101(a)(1) is amended by adding at the end 14 the following new sentence: "For the applicability of the pro- 15 visions of this Act to the Commonwealth of the Northern 16 Mariana Islands, see Public Law 94-241, the Joint Resolu- 17 tion to approve the `Covenant to Establish .a Commonwealth 18 of the Northern Mariana Islands in Political Union with the 19 UnitedStatés of America', andfor other purposes". 20 (c) The amendments made by this section shall be effec- 21 tive beginning October 1, 1979. 22 HEALTH MAINTENANCE ORGANIZATIONS TECHNICAL 23 AMENDMENTS .. 24 SEC. 209. (a) Section 1903(m)(1)(A) is amended to read 25 as follows: . . 56-071 0 - 80 - 13 PAGENO="0194" 186 28 1 "(m)(1)(A) For purposes of this section, the term `health 2 maintenance organization' means a legal entity that meets 3 the definition of `health maintenance organization' under see- 4 tion 1301(a) of the Public Health Service Act as that defini- 5 tion applies (or would apply) to individuals not entitled to 6 benefits under a State plan approved under this title, except 7 that, with respect to its members who are entitled to benefits 8 under a State plan approved under this title- 9 "(i) the term `basic health services' in title X1IE 10 of that Act shall be considered to mean the care and 11 services described in paragraphs (1), (2), (3), (4)(C), 12 and (5) of section 1905(a), and, to the extent required 13 by section 1902(a)(13)(A)(ii) to be provided under the 14 State plan, the care and services described in section 15 1905(a)(7), and 16 "(ii) the term `supplemental health services' in 17 title XIII of that Act shall be considered to include 18 those services listed in section 1302(i) of that Act that 19 are not included in clause (i) of this subparagraph.". 20 (b) Section 1903(m)(2)(A)(li) is amended to read as fol- 21 lows: 22 "(ii) at least half of the membership of the entity 23 consists of individuals who are neither entitled to bene- 24 fits under a State plan approved under this title nor 25 entitled to benefits under title XVUL". PAGENO="0195" 187 29 1 TITLE rn-PROFESSIONAL STANDARDS REVIEW 2 PROVISIONS 3 REQUIRED ACTIVITIES OF PROFESSIONAL STANDARDS 4 REVIEW ORGANIZATIONS 5 SEC. 301. (a) The second sentence of section 1154(b) is 6 amended by striking out "institutions" and inserting instead 7 "hospitals". 8 (b)Section 1155(a)(1) is amended by striking out "at the 9 earliest date practicable" and inserting instead "to the extent 10 and at the time specified by the Secretary". 11 (c) Section 1155(g) is amended- 12 (1) by striking out paragraph 2, and 13 (2) by striking out the paragraph designation 14 "(1)". 15 (d) Section 1155 is amended by adding at. the end the 16 following subsection: 17 "(Ii) If the Secretary has designated an organization 18 (other than under section 1154) as a Professional Standards 19 Review Organization, but that organization has not assumed 20 responsibility for the review of particular activities .in its area 21 included in subsection (a)(1), the Secretary may enter inth an 22 agreement with another organization (including another Pro- 23 fessional Standards Review Organization) to assume the re- 24 sponsibiity for the review of some or all of those particular 25 activities. That organization, with respect to its responsibility PAGENO="0196" 188 30 1 for the review of those activities,, shall be considered a Pro~ 2 fessional Standard Review Organization for purposes of sec- tiolis: 1152(e) and 1153, subsections (~i)~ (b), (c), (e), and (f) of 4 this section, and sections 1156 through 1173.". 5 HEALTH CARE PRACTITIONERS OTHER THAN PHYSICIANS 6 ` AS MEMBERS OF PROFESSIONAL STANDARDS REVIEW 7 ORGANIZATIONS `8 ` SEc. 302. (a) Section 1 152(b)(1)(A) is amended- (1)'in clause (ii),' by inserting "and of other health 10 care practitioners who (I) belong to a profession. all of 11 whose members who meet the requirements of sub- 12 clauses ~IIJ and Ull~ have been invited by the organi- 13 ..` zation to become members of the organization, (II) are 14 engaged in the practice of their profession in such area~ .~nd:.~(Ui~ hold. independent hospital. adthitting priri- 16 leges," after the comma, and ~ .. .. `~ :. 17. . . (2) in clause (vi), by' inserting "(except as other- 18 ` . wise provided under section 1155(c))" after ~"does 19. . not".. . 20 . (b) Section 1155(a)(6) is amended (1) by striking out 2.1~ "physician" and inserting instead "health care practitioner", 22. and `(2). by striking out "physician's" and `inserting instead~ 23:. "health care practitioner's". . ... .: . . PAGENO="0197" 189 31 1 PROFESSIONAL STANDARDS REVIEW ORGANIZATIONS NOT .2 TO BE TREATED AS GOVERNMENT AGENCIES OR AD- 3 VISORY COMMITTEES . . . 4 SEC. 303. Section 1166 is amended by adding at the 5 end the following subsection: . . 6. ~. "(e) No Professional Standards Review Organization 7 shall be considered ~n `agency' for purposes of chapter 5 or 8 chapter 7 of title 5, United States Code, or an `advisory corn- 9: mittee' for purposes of the Federal Advisory Committee 10. Act.". 11 ABOLITION OF STATEWIDE PROFESSIONAL STANDARDS 12 . . REVIEW COUNCILS 13 . SEC. 304. (a) Section 1157 is amended- 14 (1) in the first sentence, by striking out everything 15 . after "report the matter to the" and inserting instead 16 "Secretary, together with the recommendations of such 17 organization as to the action which should be taken 18 with respect. to the matter.", and 19 (2) by. striking out the .second sentence. 20 . (b)(1) Section 1159(a) is amended by. striking .out every- 21 thing after . "Professional Standards Review Organization" 2.: the second.place it occurs and inserting.instead :a peEiOd. 23 (2) The first. sentence .of section i15~(b) is amended by 24 strildng.out everything before "by: the Secretary" ~nd insert-~ 25 ing instead "Where the determination of the .Proféesion~l PAGENO="0198" 190 32 1 Standards Review Organization is adverse to the beneficiary 2 or recipient and the amount in controversy is $100 or more, 3 the beneficiary or recipient shall .be entitled to a hearing on .4 the matter". 5 (c)(1) Section 1160(b) is amended by striking out .6 "(which report and recommendations shall be submitted 7 through the Statewide Professional Standards Review (Joun- 8 cil, if such Council has been established, which shall prompt- 9 ly transmit such report and recommendations together with 10 any additional comments and recommendations thereon as it 11 deems appropriate)". 12 (2) Section 1160(c) is amended by striking out "and 13 each Statewide Professional Standards Review Council". 14 (d) Section 1162 is repealed. 15. (e) Clauses (2) and (3) of section- 1163(e) are each 16 amended by striking out "Statewide Professional Standards 17 Review Councils and". 18 (0(1) Section 1166(d) is amended by striking out ", a 19 Statewide Professional Standards Review Council,". 20 (2) A patient record that was subject to the provisions of 21 section 1166(d) (as in effect before enactment of this Act) 22 because the record was in the possession of a Statewide Pro- 23 fessional Standards Review Council shall remain subject to 24 those provisions until it is returned to the entity that pro- 25 vided the record to the Council. PAGENO="0199" 191 33 1 ~(g)(1) Section 1167(a) is amended- 2 (A) by striking out "or to any Statewide Profes- 3 sional Standards Review Council", and 4 (B) in clause (1), by striking out "or such Coun- 5 cii". 6 (2) Section 1167(b)(1) is amended- 7 (A) by striking out "or of any Statewide Profes- 8 sional Standards Review Council", and 9 (B) by striking out "or of Statewide Professional 10 Standards Review Councils". 11 (3) The provisions of section 1167 (as in effect before 12 enactment of this Act) concerning activities related to 13 Statewide Professional Standards Review Councils shall con- 14 tinue to apply with respect to activities carried out before 15 enactment of this Act. 16 DENTIST, NURSE, AND OTHER HEALTH CARE PRACTITION- 17 ER MEMBERS OF THE NATIONAL PROFESSIONAL 18 STANDARDS REVIEW COUNCIL 19 SEC. 305. (a)(1) Section 1163(a)(1) is amended by in- 20 serting "one dentist, one registered nurse, and one health 21 care practitioner not a physician, dentist, or registered 22 nurse," after "physicians,". . . . 23 (2) The first sentence of section 1 163(a)(2) is amended 24 by striking out "four members" and inserting instead "five 25 members". . . . - PAGENO="0200" 192 34 1 (3) The first sentence of section 1163(b) is amended by 2 strikiig out "Members" and: inserting instead "The physician 3 members". 4 (4~ The second~sentence hf section 1163(b) is amended 5 by striking out "by the Secretary" the first place it occurs. 6 (5) Section 1173 is amended by. striking, out "(except 7 sectiOns 1155(c) and 1163)"V and inserting instead "(except 8 section 1155(c))". - -: `9 (b) The amindments made by this section are effective 10 180 days after the date of enactment of this ACt.V V V 11 ELIMINATION OF INDIRECT PAYMENT FOR PROFESSIONAL 12 V V STANDARDS REVIEW OF HOSPITAL SERVICES V V 13 V SEC.: 306., (a) Section 1815 is amended by striking out 14 subsection (b). V V - V V V VV V V V V V 15 (b)Section 1861(w) is amended- 16 (1) by striking out- paragraph (2), and: V 17 V V - V (2) V by V striking out the ~V paragraph V designation 18 "(1)". V 19 V (c) The amendments made by this section `apply to utili- 20 V zation review activities conducted after the date of enactment 21 V of Tthis Act. V V V VVV V 22 CONSULTATION BY PROFESSIONAL STANDARDS REVIEW 23 V V .: V V ORGANIZATIONS- 24 V V SEC. 307. (a) Section 1155(a) is amended byadding at 25 the end the following paragraph: V V PAGENO="0201" 193 .~35 1 "(8) Each Professional Standards Review Organization 2 shall consult with representatives of health care practitioners 3 other than physicians, and of institutional and noninstitu- 4 tional providers of health care services, in relation to the Pro- 5 fessional Standards Review Organization's responsibility for 6 the review under paragraph (1) of the professional activities 7 of such practitioners and providers.". 8 (b) The amendment made by this section is effective 180 9 days after the date of enactment of this Act. 10 TITLE IV-MISOELLANEOUS PROVISIONS 11 AUTHORITY TO WAIVE REQUIREMENTS OF THE SOCIAL 12 SECURITY ACT FOR PURPOSES OF EXPERIMENTS AND 13 DEMONSTRATIONS ON INCENTIVES FOR ECONOMY 14 SEC. 401. (a) Section 402(b) of the Social Security 15 Amendments of 1967 is amended in the first sentence by 16 deleting all the matter preceding the semicolon and inserting 17 instead the following: "In the case of any experiment or dew- 18 onstration project under subsection (a), the Secretary may 19 waive compliance with any of the requirements of titles 20 XVIII, XIX, and X of the Social Security Act, to the extent 21 and for the period he finds necessary to conduct such experi- 22 ment or project". 23 (b)Section 222(a)(3) of the Social Security Amendments 24 of 1972 is amended in the first sentence- PAGENO="0202" 194 36 1 (1) by striking out "the requirements" and insert- 2 ing instead "any requirements", and 3 (2) by striking out "insofar as such requirements 4 relate to methods of payment for services provided" 5 and inserting instead "to the extend and for the period 6 he finds necessary to conduct such experiment or 7 project". PAGENO="0203" 195 I 96TH CONGRESS 1ST SESSION * * To amend the Social Security Act to change the calendar quarters during which a State's showing to the Secretary of Health, Education, and Welfare of satisfactory control over the utilization of certain services to aged individuals waives any reduction in the Federal medical assistance percentage to such State. IN TIlE HOUSE OF REPRESENTATIVES SEPTEMBER 28, 1979 Mr. WraTH introduced the following bill; which was referred to the Committee on Interstate and Foreign Commerce A BILL To amend the Social Security Act to change the calendar quarters during which a State's showing to the Secretary of Health, Education, and Welfare of satisfactory control over the utifization of certain services to aged individuals waives any reduction in the Federal medical assistance percentage to such State. 1 Be it enacted by the Senate and House of Bepresenta- 2 tives of the United States of America in Congress a8sembled, 3 That section 1903(g)(3)(B) (42 U.S.C. 1396b(g)(3)(B)) is 4 amended by striking out "the calendar quarter ending on Dc- 5 cember 31, 1977" and inserting in lieu thereof "any calendar 6 quarter ending on or before December 31, 1978". PAGENO="0204" Honorable Harley 0. Staggers Chairman, Committee on Interstate and Foreign Commerce House of Representatives Washington, D. C. 20515 Dear Mr. Chairman: This is in response to your request of June .15, 1979 for the views of this Office on H.R. 4000, a bill "To amend the Social Security Act with reépect to health programs authorized under it, and for other purposes." in testimony before your Committee on June 27, 1979, the Administrator, Health Care Financing Administration, Department of Health, Education, and Welfare explained. the Administration's position on H.R. 4000. The Admin- istration supports those provisions in H.R. 4000 that are inc1u~ded in the Administration's proposed "Medicare and Medicaid Amendments of 1979," H.R. .4475. The Administra- tion does not favor the enactment of certain other provisions in H.R. 4000 for the reasons stated in the June 27, 1979 testimony. . . . Accordingly, we recommend enactment of H * R. of H.R. 4000. Enactment of .H.R. 4475 would with the program of the President. - Sincerely, (Signed) 3aites U Fret. James M. Frey Assistant Director for Legislative Reference 3 196 EXECUTIVE OFFICE OF THE PRESIDENT OFFICE OF MANAGEMENT AND BUDGET WASHINGTON. D.C. 20503 JUL 24 197. 4475 in lieu be in accord PAGENO="0205" 197 - DEPARTMENT OF HEALTH, EDUCATION. AND WELFARE JUL 9. The Honorable Harley 0. Staggers. Chairman, Committee on Interstate and Foreign Coazerca Houge of Representatives Washington, D.C. 20315 Dear Mr. Chairman: This is in response to your request for a report on Ii. 4104, the Medicare and Medicaid Fraud and Abuse Aa.ndaents of 1~7~'. We transmitted the bill to the Congress, on b.balf of thi Administration, on May 4, l97~, with accoapamyteg explana tory materials, and urged that it be promptly and favorably considered. We are advised by the Office of Management and Rudget that the bill's enactment would be in accord with the program of the President. Sincerely, ~iat Joseph A. Ca].ifano, J~,1 Secretary PAGENO="0206" 198 EXECUTIVE OFFICE OF THE PRESI1DENT Q~1CE OF MA1~4AGEMENT AND BUDGET WASHINGTON. D.C. 20503 JUL 16 179 Honorable Harley 0. Staggers Chairman, Committee on Interstate and Foreign Commerce House of Representatives Washington, D. C. 20515 Dear Mr. Chairman: This is in response to your request of June 15, 1979 fOr the views of this Office on H.R. 4106, a bill "To amend title XI of the Social Security Act to authorize civil monetary penalties for certain fraudulent activities in the Medicare and Medicaid programs, and for other purposes." H.R. 4106 is identical to draft legislation submitted by the Secretary of Health, Education, and Welfare on May 4, 1979. The bill would provide the Department of Health, Education and Welfare with the necessary administrative procedures and remedies to enable it to efficiently and effectively control fraud arid abuse in its health care financing programs, notably Medicare and Medicaid. We concur with the views expressed by the Secretary of Health, Education, and Welfare in his transmittal letter. Accordingly, we recommend that the Committee give favorable consideration to the bill. Enactment of H.R. 4106 would be in accord with the program of the President. Sincerely, ~signed) Neosi R. $we.sI? Naomi R. Sweeney Acting Assistant Director fOr Legislative Refernce PAGENO="0207" 199 EXECUTIVE OFFICE OF THE PRESIDENT OFFICE OF MANAGEMENT AND BUDGET WASHINGTON. D.C. 20503 OCT 5 1979 Honorable Harley 0. Staggers Chairman, Committee on Interstate and Foreign Commerce House of Representatives Washington, D. C. 20515 Dear Mr. Chairman: This is in response to your request of September 4, 1979 for the views of this Office on H.R. 4444, a bill "To change the method of medicare reimbursement for health maintenance organizations." H.R. 4444 is identical to draft legislation submitted by the Secretary of Health, Education, and Welfare on June 13, 1979. The draft bill would change the method of Medicare reimbursement for health maintenance organizations (HMOs) to encourage their use as an alternative to fee-for-service medicine. The bill would provide incentives for liMOs to enroll beneficiaries and would provide those beneficiaries with the first major expansion in benefits since the inception of the Medicare program. We concur with the views expressed by the Secretary of Health, Education, and Welfare in his transmittal letter and recommend that the Committee give favorable consideration to the bill. Enactment of H.R. 4444 would be in accord with the program of the President. Sincerely, ~ ~q James M. Frey / /Assistant Directort for Legislative Reference cc ~ ~ PAGENO="0208" 200 THE SECRETARY OF HEALTH. EDUCATION,ANO WELFARE WASHINGTON. D.C.ZO2OI The Honorable Hrley 0. Staggers SEP 2 01979 Chairman, Committee on Interstate and Foreign Commerce House of Representatives S * Washington, D.C. 20515 Dear Mr. Chairman: This responds to your request for a report on H.R. 4444, a bill 5To change the method of medicare reimbursement for health maintenance organizationsU. S H.R. 4444 is the Administration's proposal concerning the reimbursement of health maintenance organizations under the Medicare program. The Department transmitted the proposal as a draft bill on June 13 to the Speaker of the House. A copy of our transmittal letter is enclosed. We urge that the Committee give H.R.. 4444 its prompt and favorable consideration. The Office of Management and Budget advises that enactment of H.R. 4444 would be in accord with the program of the President. Sincerel yours, Patricia Roberts Harris Enclosure S PAGENO="0209" 201 DEPARTMENT OF HEALTH. rf)L'CAr1C~~, `~ND WELFARE June 13, 1979 The Honorable Thomas P. O'Neill Speaker of the House of Representatives Washington, D. C. 20510 Dear Mr. Speaker: Enclosed for consideration by the Congress is a draft bill uTo change the method of Medicare reimbursement for health maintenance organizationsa. Health maintenance organizations (HMOs) typically provide high quality health care at costs below those associated * with the traditional fee-for-service sector. LIMOs have demonstrated the capacity to reduce hospitalization by as much as 50 percent, emphasize preventive health services, and provide an attractive alternative for the purchaser of health benefits. Yet current Medicare reimbursement * policy, by providing only retrospective reimbursement to organizations whose operating efficiencies are based upon prospectively determined fixed payments, and by failing to * reward Medicare beneficiaries for their choice of a less familiar though more efficient delivery system, works against using UMOs as an alternative to fee-for-service medicine. The draf~.bi1l recognizes that Medicare payments can be used to contain health care costs by way of competitive, rather than regulatory, measures. Accordingly, the draft.bill would change Medicare reimbursement to LIMOs to a prospectively determined fixed amount for~ each enrolled beneficiary, an approach consistent with the way in which LIMOs are paid for their private enrollees. The draft bill would also enable enrolled Medicare beneficiaries tO share in the savings generated by an efficient LIMO through broader benefits and reduced cost sharing. The draft bill would thus provide incentives for LIMOs to enroll Medicare bene- ficiaries and provide those beneficiaries who enroll in LIMOs with the first major expansion in benefits since the inception of the Medicare program. At the same time,. the draft bill would generate long term budgetary savings, as LIMOs would be paid at a rate below the average rate paid to the fee-for-service sector. In addition, increased competition from LIMOs would assist in containing cost increases in the health care delivery system. 56-071 0 - 80 - 14 PAGENO="0210" 202 The honorable Thomas P. O'Neill Estimates of additional federal outlays for five years and a summary of the draft bill are enclosed. Although the draft bill would entail considerable long term savings for the Federal government, the expected transfer to a prospective fixed paynent basis of Medicare HMO members presently enrolled on a retrospective cost basis would increase costs to the Federal government during the first five years. Even those initial costs, however, would be balanced by the increase in benefits made available to Medicare beneficiaries. We urge that the Congress give the draft bill its prompt and favorable consideration. We are advised by the Office of Management and Budget that enactment of the draft bill would be in accord with the program of the President. - Sincerely, Is! Joseph A. Califano, Jr. Secretary EncloSures - PAGENO="0211" 203 ESTIMATED FEDERAL COSTS Proposed Health Maintenance Organizations Medicare Reimbursement Amendments of 1979 (in millions of dollars) FY 1980 FY 1981 FY 1982 FY 1983 FY 1984 0 5 25 35 40 SUMMARY OF PROPOSED HEALTH MAINTENANCE ORGANIZATIONS MEDICARE REIMBURSEMENT AMENDMENTS OF 1979 The draft bill would replace the present provisions of law under which a health maintenance organization (HMO) may contract for Medicare reimbursement on either a cost or a risk basis; the existing risk basis reimbursement authority has not been acceptable to HMOs and has been used only once. Under the new method, HMOs would be paid, on a prospective basis, 95 percent of the amount the Secretary estimates would be paid for Medicare services furnished by entities other than fiMOs. Members of the HMO entitled to Medicare would be required to purchase preventive health services as well as Medicare services. The Secretary would also estimate the amount that the HMO would charge its Medicare members if that amount were determined by using a community rating system, adjusted for utilization characteristics of Medicare beneficiaries. If that amount were lower than the Medicare reimbursement rate, the HMO would have to return the difference to its members entitled to Medicare in a specified order of reduced payments and extra services. Services pot furnished by or through the HMO could not be paid for by Medicare. The new reimbursement method would not take effect for one year, unless the Secretary and a particular lIMO agreed to utilize it earlier. It would also not apply to the first three years of an liMO's Medicare contract (or five for good cause shown), or for the first five years after enactment of the draft bill to a risk contract previously entered into, unless the lIMO chose otherwise. In addition, Medicare beneficiaries enrolled in an lIMO at the time the new method was first applied to the lIMO could continue under the present method if they so -wished. The Secretary, however, could, because of administrative costs or other administrative burdens involved,, require the new method to apply to all members of a particular lIMO. The draft -bill would also require at least 50 percent of an lIMO's membership to consist of individuals who were neither Medicare nor Medicaid beneficiaries; the Secretaryr however, could waive this requirement in circumstances which he found warranted special consideration. PAGENO="0212" 204 TH~ SECRETARY OF ~(EALTH, EDUCATION,ANO WELFARE WASH N GTO N, 0. C. 2020 AUG 2 1 The Honorable Harley 0. Staggers Chairman, Committee on Interstate and Foreign Commerce House of Representatives Washington, D.C. 20515 Dear Mr. Chairman: This is in response to your request for a re,port on H.R. 4475, a bill "To make improvements in the medicare and medicaid programs". H.R. 4475 is the Administration's proposal for improvements in the Medicare and Medicaid programs, transmitted as a draft bill to the Speaker of the House on June 14 of this year. A copy of our transrnictal is enclosed. We urge that the Committee give H.R. 4475 its prompt and favorable consideration. The Office of Management and Budget advises that enactment of H.R. 4475 would be in accord with the program of the President. Sincerely yours, ~ i-ot:icia Roboris Norris Patricia Roberts Harris PAGENO="0213" 205 DEPARTME'.T OF HEA~.TH EDUCATION AN) WELFARE JUN 141979 The Honorable Thomas P. O'Neill Speaker of the House of Representatives Washington, D.C. 20515 Dear Mr. Speaker: Enclosed for consideratiàn by the Congress is a draft bill "To make improvements in the Medicar( and Medicaid programs". The draft bill would require employers to offer the same inpatient hospital benefits to older employees as they offer to other employees, and would make Medicare a secondary payer with respect to such benefitS. The draft bill would also triple to $750 the maximum psychiatric benefit payable by Medicare, would make a number of needed reimbursement and administrative changes under Medicare and Medicaid, including needed changes in the area of claims processing contracts and of long term care, and would enact certain improvements in the Professional Standards Review Program. Enactment of the draft bill would result in savings to the Federa,1 government of $181 million for fiscal year 1980, and $1,805 million for fiscal years 1980 through 1984. The savings under the bill are presented in detail at Tab A; a summary of the draft bill appears at Tab 9. Health plans provided to employees by employers do not now generally offer hospital inpatient benefits to employees age 65 or older, because Medicare provides such benefits. The draft bill would require an employer to offer the same inpa- tient hospital benefits to his employees age 65 or older (but under 70) that he offers to his other employees, and would make. Medicare a secondary payer for inpatient hospital services. This provision would not in any way adversely affect the benefits to be received by Medicare beneficiaries who work; it would simply require employers to treat them equally. PAGENO="0214" 206 The Administration strongly supports measures designed to improve the mental health system in the United States. The~ draft bill, as part of the Administration's mental health initiative, would triple the maximum ahnual Medicare benefit for psychiatric services, and would reduce the beneficiary's coinsurance from the current special' rate of 50 percent to the 20 percent rate utilized in general for physician services. A number of specific changes are needed in various Medicare and Medicaid provisions concerned with reimbursement and administration, especially in relation to claims processing contracts and in relation to long term care. These various provisions, taken together, would correct certain inequities in the current reimbursementeystem and would provide for more efficiànt administration of the Medicare and Medicaid programs. The provisions in the bill concerning th~ Professional Standards Review Program would provide for greater participation by health care practitioners who are not physicians, would give the Secretary of Realth, Education, and Welfare greater flexibility in assigning to individual professional standards review organizations the responsibility of reviewing health services other than hospital seryices, and would make certain other amendments. We urge that the Congress give the draft bill its prompt and favorable consideration. The Office of Management and Budget advises that enactment of this draft bill would be in accord with the prograit of the President.. Sincerely, Joseph A. Califano, Jr. Secretary Enclosures PAGENO="0215" 207 Medicare and Medicaid Amendments of 1979 Estimated Savings for Federal Government (in millions of dollars) Section number FY 1980 FY 1981 FY 1982 Fl 1983 FY 1984 101 140 230 260 295 335 102 - 0 23 48 78 119 103 0 0 0 0 10~4 5 - 15 17 20 24 105 .34 38 42 47 51 106 - -22 -26 -31 -37 - -45 107 0 ~ 0 0 0 108 0 0 0 0~ ~~109 - 3 7 8 10 12 119 0 0 -- 0 0 0 -2 -2 -2 112 0 0 ..0 0 113 0 0 0 0 0 114 0 0 0 0 115 0 0 0~ 0 0 - 116 0 0 0 0 0 117 0 0 0 -0 0 118 0 0 0 0 201 a ~9 -9 -9 -9 202 0 0 ~203 - 1 1 - 1 1 - 204 0 0 0 0 205 0 0 0 0 - 206 0 0 0 0 207 3~ 32 32 32 32 208 -3 - -3 -3 -3 -3 209 0 0 0 0 0 301 0 0 0 0 0 302 - 0 0 - 0 0 - ~~303 0 0 0 0 0 304 2 2 2 2'. 2 305 0 0 0 0 ~306 ~0 0~ 0 0 307 0 0 0 0 401 - 0 0 0 0- 0 181 308 365 434 517 Total Savings (FYs 1980-1984): $1,805,000,000 (table assumes enactment on June 30, 1979) ~ PAGENO="0216" 208 SUMMARY OF DRAFT BILL TITLE I MEDICARE PROVISIONS Section 101 would require an employer to offer his employees age 65 or over (but; under 70) the same inpatient hospital benefits offered to his other employees. If an employer did not offer such health benefits to his older employmes, the employer would lose half the Fede~ral income ta~ deduction to which be would otherwise be entitled for his expenses in providing his employees such health benefits. The section would also make Medicare a secondary payer with respect to inpatient hospital services covered by such benefits. Section 102 would make changes in the provisions of law. under which Medicare contracts with outside organizations to determine and pay claims under parts A and B of Medicare. Providers of services would no longer have the rightto nominate specific organizations to process Medicare claims, reimbursement on the basis of costs wouldjio longer be required, contracts could be entered into with amy public. or private entity, and, after an initial five year phase~in pined, all contracts would be subject t.o the same competition~ requirements as. are other Federal contracts. Section 102 would also consolidate the contracting requirements into one section, and move to a more appropriate section of the Medicare title provisions concerned with defining `reasonable charge'. Section 103 would deny hospitals reimbursement for their costs in paying for radiological administrative services. if the physician concerned received payments under Medicare for radiological, services furnished to iripatients of the hospital. Section 104 would limit the special 100 percent reimbursement (withno deductible) for physicians in the fields of radiology. and pathology to physicians who agreed to accept assignment for all services furnished to hospital inpatients. Section 105 would eliminate coverage of chiropractors' services. Section 106 would triple to $750 the maximum yearly psychi-' atric benefit payable under part B, would reduce from 50 percent to 20 percent the coinsurance required of the beneficiary, and would make clear that the $750 limitation applies only to physicians' services.. . Section 107 would eliminate the restriction against any indivi~ua1 re~nrolling under part B ~f Medicare more than once. PAGENO="0217" 209 Section 108 would repeal the authority of the Secretary to establish, for specific medical conditions, periods of time during which an individual is presumed eligible for post~ hospital extended care or post-~hospital home health services. Section 109 would provide that reimbursement for part B services calculated on a reasonable cost basis could not, when added to 20 percent of the reasonable charges for the services (the coinsurance payable by the beneficiary), exceed the reasonable cost of the services. The section would also make conforming changes and technical corrections to provisions concerned with outpatient physical therapy services. Section 110 would shorten the period for certain individuals no longer entitled to Medicaid payments of Medicare part B premiums to terminate part B coverage under Medicare. Section 111 would repeal the statutory exclusion from coverage of the removal of plantar warts. Section 112 would provide for part B payment for antigens furnished by physicians for administration by or under the supervision of another physician. Section 113 would provide for payment of Medicare benefits to a person legally responsible for the bill of a beneficiary who has died even though the person has not yet paid the bill, and would provide for the refund of a premium payment made although not due by or for a beneficiary who has died. Section 114 would repeal the 12 month statutory limitation on agreements with skilled nursing facilities. Section 115 would repeal a provision authorizing payment for consulting services provided by State agencies to skilled nursing facilities. Section 116 would require skilled nursing facilities partici~ pating in Medicare which are located in a State with a Medi~- caid program to participate in Medicaid as well. Section 117 would authorize the Secretary, where appropriate, to apply sanctions less severe than decertificatio'n against skilled nursing facilities which he found had ceased to meet the conditions of participation. Section 118 would authorize the Secretary to specify in regu~ lations the provisions of the Life Safety Code of the National Fire P~etectio~ Association which participating skilled nursing facilities would be required to meet. Current law requires compliance with the 1973 Code, which is out of date. PAGENO="0218" 210 The: proposed amendment would allow the Department periodically to update its requirements without requiring periodic legislative changes. TITLE II MEDICAID PROVtS IONS Section 201 would clarify the Secretary's authority to define "residence~' for purposesof Medicaid eligibility. Section 202 would repeal the requirement that a `member of an AFDC family remain employed during the four months of extended Medicaid coverage allowed an AFDC family which loses cash assistance because of increased earnings' from employment. ` .` Section 203 would eliminate coverage of chiropractors' services'. Section 204 would require skilled nursing facilities partici- pating in Medicaid (other than those primarily for treatment of tuberculosis and mental diseases) to participate in Medicare as well. Section 205 would require all skilled nursing facilities and intermediate' care facilities to be certified by the Secretary to participate in Medicaid', and would authorize the Secretary, where appropriate, to apply sanctions `less severe than decer- tification against such facilities which he found had ceased to' meet the conditions of participation. Section 206 would remove the statutory distinction between medical review of skilled nursing facilities and independent professional review of intermediate care facilities. (This amendment would clarify the requirements of current law. P.L. 95-142, which repealed the `requirement that a medical review team in a skilled nursing facility include a physician, removed the only difference in the statutory requirements concerning team composition and review in the two types of facilities.) This amendment would also permit the Secretary to allow teams reviewing long term care facilities to be headed by a health professional other than a physician or registered nurse, and would repeal the requirement for physician certifi- cation and recertification of the need' for care in long-term care facilities. Finally, this amendment would permit the Secretary `to require States to combine medical review with survey and certification review of the same facility or institution. ` Section 207 would require that State Medicaid plans provide for co~ion audits under -Medicare and Medicaid of hospitals, skilled nursing facilities, and home health agencies participating in both programs. ` PAGENO="0219" 211 Section 208 would increase federal funding for Medicaid in Puerto Rico, Guam, and `the Virgin Islands. For' fiscal year 1980 and succeeding~ fiscal years the current limitation of $30 million for Puerto Rico would be increased to $32.8 million; the. limitation of $1 million for the Virgin Islands would. be increased to $1.1 millionr and the limitation of $900,000 for Guam would be increased to $1 million. Funding of $200,000 would be provided for the Northern Mariana Islands. Section 209 would make technical changes in provisions of. law concerned with Medicaid reimbursement to health maintenance, organizations. TITLE III PROFESSIONAL STANDARDS REVIEW PROVISIONS Section 301 would permit a conditionally designated professional standards review organization to become fully designated if the organization,, at a minimum, was satisfactorily conducting reviews of health care services provided by or in hospitals, rather than only if the organization was satisfactorily con- ducting reviews of health care services provided by or in all institutions. The section would also eliminate the requirement that a, professional standards review organization must, if capable, review ambulatory care services within two years of becoming fully designated. In addition, the section would permit the Secretary' of Health, Education, and Welfare to determine, with respect to each fully designated professional standards review organization, when and the extent to which the organization must conduct reviews of services other than those provided by or in hospitals. The Secretary could designate another organization to conduct reviews of services not yet' being conducted by a fully designated professional standards review organization. Section 302 would permit individual professional standards review organizations to accept as members health care practitioners who are not physicians but who hold independent hospital `admitting privileges. Section 303 would declare that professional standards review organizations are not to be considered government agencies for purposes of the freedom of information, privacy, and related provisions of law generally `applicable to government agencies, and are not to be considered advisory committees for purposes of the Federal Advisory Committee Act. Section 304 would abolish the statewide professional standards review councilsf PAGENO="0220" 212 Section 305 would. add a dentist, a registered nurse, and one other health care practitioner not a physician to the National Professional Standards Review Council Section 306 would eliminate indirect payment through hospitals by Medicare of professional standards review activities Section 307 would require each professional standards review organization to consult with representatives of health care practitioners other than physicians, and of institutional and noninstitutional providers of health care services TITLE IV -~ MISCELLANEOUS PROVISIONS Section 401 would make clarifying amendments to section 402 * of the Social Security Amendments of 1967 and to section 222 of the Social Security Amendments of 1972, to make clear the Secretary's authority to waive compliance with any require- ments of title XVIII, XIX, or V of the Social Security Act, to the extent necessary to conduct experiments. and.demon- strations authorized by these sections PAGENO="0221" 213 EXECUTIVE OFFICE OF THE PRESIDENT OFFICE OF MANAGEMENT AND BUDGET WASHINGTON. D.C. 2O5O~ AUG10 1979 Honorable Harley 0. Staggers Chairman, Committee on Interstate and Foreign Commerce House of Representatives Washington, 0. C. 20515 Dear Mr. Chairman: This is in response to your request of July 31, 1979 for the views of this Office on H.R. 4475, a bill "To make improvements in the medIcare and medicaid programs." H.R. 4475 is identical to draft legislatioxl submitted by the Secretary of Health, Education, and Welfare on June 14, 1979. The bill wo~.ild implement legislative recommendations proposed in the President's 1980 Budget to improve the benefit provisions and the administra- tion of theMedicare and Medicaid programs. The bill would also amend the Professional Standards Review Organization program. We concur with the views expressed by the Secretary of Health, Education, and Welfare in his transmittal letter. Accärdingly, we recommend that the Committee give favorable consideration to the bill. Enactment of H.R. 4475 would be in accord with the program of the President. Sincerely, :(si~nea) 3arnes M. Tre~ James M. Frey As~;Istant Director for Legislative Reference PAGENO="0222" 214 Mr. SATrERFIELD. I am pleased to welcome to the subcommittee today our first witness, Mr. Leonard Schaeffer, Administrator of the Health Care Financing Administration. Mr. Schaeffer's agency administers both medicare and medicaid, two massive programs which are responsible for financing health care for some 47 million Americans. Clearly, Mr. Schaeffer has his work cut out for him. Mr. Schaeffer, we welcome you to the committee today. You may begin your statement when you are ready. And, for the information of the committee and the record, I would appreciate it if you would begin by identifying those who have accompanied you to the table. STATEMENT OF LEONARD D. SCHAEFFER, ADMINISTRATOR, HEALTH CARE FINANCING ADMINISTRATION, PUBLIC HEALTH SERVICE, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE, ACCOMPANIED BY HELEN SMITS, M.D., DI- RECTOR, HEALTH STANDARDS AND POLICIES BUREAU; JEF- FREY MERRILL, DIRECTOR, OFFICE OF LEGISLATION AND POLICY; AND PETER FOX, PH. D., DIRECTOR, OFFICE OF POLICY ANALYSIS Mr. SCHAEFFER. Thank you very much, Mr. Chairman. We are pleased to be here today to consider the proposed improvements in the medicare and medicaid programs. I would like to introduce the individuals with me today. On my right is Dr. Helen Smits, Director of the Health Standards and Quality Bureau. To my immediate left is Jeffrey Merrill, Director of our Office of Legislation and Policy. On my far left is Peter Fox, who is Director of the Office of Policy Analysis. Dr. Fox has done much of the work on our HMO and medigap intiatives and has met with the staff of this committee and others with regard to some of those topics. He is here to answer whatever questions you may have of a technical nature on those two topics. I would like to submit my written testimony for the record. (See p. 221.) I would like to commend your committee's efforts to assure that the health care needs of the aged, the disabled and the poor, our beneficiaries, are met to the fullest extent within the existing budgetary constraints. I believe we have common goals. HCFA goals are directed toward efficient and effective management of existing programs in order to serve our beneficiaries better. It is our goal to restore public confi- dence in the ability of Government to respond to social needs in an acceptable manner and at an affordable price. It is also our goal to produce savings to finance improvements in our programs, and to build a foundation for management of broader programs in health care. We have taken a variety of steps to improve the management of Federal health programs including integration and consolidation of medicare, medicaid, and PSRO administration which we feel will be very helpful. We have also supported a number of health sys- tems' innovations, among them support for health maintenance organizations prospective ratesetting systems, and a variety of other mechanisms to improve health care delivery. Many of the proposals before you today will enable HCFA to more effectively achieve these management improvements. I will PAGENO="0223" 215 not attempt to cover in detail all of the proposals before the com- mittee today. I would, however, like to touch on four areas. First: I would like to discuss reimbursement of HMO's and the "medigap" issue, two issues which I know are of concern to you. And, second: I would like to briefly touch on the proposals con- tained in H.R. 4000 as reported by the Ways and Means Subcom- mittee on Health. Third: I would like to talk about the major legislative proposals included in the administration's bill, H.R. 4475, which were not acted on by the Ways and Means Subcommit- tee on Health. And last, I would like to touch briefly on some provisions in H.R. 934 which are under consideration by this sub- committee. H.R. 4444 is the administration's bill. It is designed to promote three important objectives. First: It uses HMO payments to help contain health care costs by increasing competition in the health sector. It provides a mecha- nism to reward providers for efficiency, and at the same time, reward beneficiaries for seeking out efficient providers. It puts the right incentives into health care delivery. Second: The bill would expand the benefits for HMO enrolled beneficiaries at lower total longrun program costs. Third: The bill helps make available to beneficiaries the same health care choice that Federal law now mandates that employers offer their employees. The bill accomplishes these objectives through the following mechanism: HMO's would be reimbursed prospectively at 95 per- cent of the estimated cost of providing these services on a fee for service basis. The HMO then calculates what is called the adjusted community rate, which is the amount which includes medicare benefits adjusted for utilization and permits the HMO to have the same profit or loss ratio for medicare as for private enrollees. The difference between the 95 percent of fee for service cost and the adjusted community rate would be returned to medicare beneficia- ries in the form of reduced cost sharing or increased benefits provided by the HMO. We estimate the typical HMO would realize enough savings to be able to both provide better services to our beneficiaries and to eliminate cost-sharing for medicare beneficiaries. Thus, `the ap- proach embodied in this bill would be significant, both in terms of the competitive incentives it puts into the system and in terms of the added benefits which would accrue to our beneficiaries. The approach embodied in the bill has been endorsed by a large number of organizations representing the aged, the HMO industry itself, labor, and business. We hope you will consider this favor- ably. The second major issue I want to address is the problem of supplemental medicare insurance, often referred to as the medigap problem. As you know, medicare covers only 43 percent of the annual health expenditures of the elderly. Two-thirds of the aged now purchase supplemental insurance policies to cover those ex- penses not covered by `the medicare program. The widely varying quality of these policies and the abusive sales practices of some agents and companies offering these policies have received a great deal of public attention. Among the major prob- lems we have uncovered are: PAGENO="0224" 216 First: Beneficiaries are confused as to what they are buying. Confusion about coverage is a basic problem with the medicare program but it is particularly troublesome with regard to supple- mental insurance. Second: The policies themselves are often fragmented and have limited benefits. They tie into the medicare benefit structure, often in a confusing and incomplete manner. Third: These policies often have high premium costs when com- pared to the relatively low level of benefits. In response to these problems, HCFA has taken a number of important administrative actions which we will summarize for you today. Two primary actions are designed to increase consumer awareness. First, we have worked with the National Association of Insurance Commissioners, the NAIC, to prepare what is known as the shoppers guide; 3 million copies of this pamphlet were printed. We informed 18.5 million beneficiaries, via enclosures sent out with social security benefit checks of the existence of the shoppers guide. Through these materials we tried to outline some of the problems inherent in the supplemental coverage policies currently on the market. The response has been rather incredible. We have distributed over 2 million copies of the guide. We have requests for all of them we have on hand now. In addition, we have another 600,000 copies of the guide being printed for future distribution. If you are inter- ested, we have a few copies with us here today. Second: We are working with the administration on aging to organize a system of peer counseling. The approach will be to train individuals who are medicare eligibles themselves to provide coun- seling services to their peers. We also participated on the advisory committee to the NAIC task force on medicare supplement and limited health insurance. The work of this task force led to the full NAIC adopting a State regulatory package for the sale of medicare supplemental insur- ance. In addition to the administrative actions taken to date, we rec- ommend a number of legislative actions to provide better protec- tion to beneficiaries who purchase supplementary coverage. We favor legislation authorizing HEW to establish a voluntary certifi- cation system. In developing criteria for certifying a policy, we would consider the following areas; The value and scope of benefits offered, the ratio of premiums collected to benefits provided, the so- called loss ratio, marketing practices of the company offering the insurance, consumer protection provisions, and the customer serv- ice capacity of the company providing the coverage. We favor legislation requiring insurers which write supplemen- tary insurance policies to provide to the prospective purchasers information in a standardized format on the following areas: Bene- fit inclusions and exclusions, descriptions of what medicare covers and what the policy covers, limitations on coverage of preexisting conditions, loss ratios, and other items which consumers need to consider when shopping for coverage. We also endorse legislation providing severe penalties for individ- uals selling supplementary insurance who represent themselves as being associated with the medicare program. Many of our benefi- PAGENO="0225" 217 ciaries have expressed concern over individuals who represent themselves as either knowledgeable about medicare or actually representing the Federal Government. It seems to us this practice must be stopped. We believe these steps will help beneficiaries better meet their health care needs and prevent some of the current abuses which exist. I would now like to turn to H.R. 4000 and some of the major provisions favored by the administration which were adopted by the Ways and Means Subcommittee on Health. The bill contains several modifications of PSRO composition and procedures which were also covered in the administration's bill, H.R. 4475; They include the following: A proposal which would permit a conditionally designated PSRO to become fully designated if it satisfactorily conducts, at a minimum, review of health care services provided by hospitals. Many conditionally designated PSRO's now face potential termination because they cannot expand review. This proposal would permit PSRO's to be fully designated for hospital review and conditionally designated for other types of review. PSRO review of long term and ambulatory care is still in the early stages of development and we have very little experience with PSRO review of other types of noninstitutionally based ambu- latory care. This proposal would also permit other types of review to be carried out by a different review organization. For example, the proposal would permit drawing on expertise of a neighboring PSRO to expand our capacity to do long-term and ambulatory care review. Two additional proposals we favor would address the shortage of long-term care services. The first is differential reimbursement of hospitals based on patients' needed level of care. This proposal permits reimbursement to hospitals for care provided at the SNF level on a case-by-case basis under the following circumstances. First: The PSRO must determine that a level lower than acute care is appropriate for the individual patient. Second: An SNF bed is not available in the community. Thus, under these conditions reim- bursement would be at the long-term care rate. Another proposal would allow certain hospitals to be reimbursed for long-term care services without setting aside a separate or distinct part of the hospitals for such care. Under this concept, the so-called swing bed approach, if the Health Planning Agency certi- fies that long-term care beds are needed in the community, inpa- tient beds could be used for long-term care services would be reim- bursed at long-term care services rates. This would allow HCFA to reimburse for needed long-term care services rendered in such hospitals at an appropriate reimbursement level. I would like to turn now to a number of other administration proposals in H.R. 4475 and H.R. 4106 which were also included by the Ways and Means Committee in H.R. 4000. The first topic is common audits. This provision would require common audits of entities providing services under titles V, XVIII, and XIX. The provision would mandate use of this common audit approach in 17 out of a total of 53 States and territories which do not yet use common audit procedures. This approach would reduce the cost of audits in many ways. More important, it avoids conflicting treat- 56-071 0 - 80 - 15 PAGENO="0226" 218 ment of cost items under medicare and medicaid. It would help us improve the integration and management of these two programs, and it would reduce paperwork and inconvenience to providers. One of the most common problems we find is the feeling on the part of providers that there are unnecessary burdens placed upon them by the Federal Government. This is one place we think we can become more efficient and more effective and provide an easier environment for institutions providing care to our beneficiaries. Another important provision contained in both H.R. 4475 and included in amended form by the Ways and Means Committee would permit the Secretary to apply sanctions less severe than decertification against SNF's which no longer comply with the conditions of participation. This is an extremely serious problem for us in that currently we do not have leverage short of decertifi- cation to use vis-a-vis long-term care facilities which have not met the very basic conditions of participation in our program. These proposed sanctions might include not permitting any future admissions to a facility for medicare and medicaid beneficia- ries until that facility is in compliance, that is, until they meet our standards of providing care. This would allow us to take action short of actually closing a facility and permit us to provide an incentive for these facilities to comply with our conditions of par- ticipation. It also allows facilities flexibility in that this process would allow them a period of time to come up to standard rather than forcing us to close down a facility. A number of the administration's proposals in H.R. 4106, many of which were also sponsored by Mr. Waxman, were included in H.R. 4000. These include the imposition of civil money fines by the Secretary for provider fraud. If you look at the history of our programs, you will find that criminal penalties have not been an adequate deterrent to some kinds of provider fraud. Some cases involving medicare and medicaid receive relatively low priority in the judicial system. This is due to the fact that they are often very complex in terms of the reimbursement question at issue. They frequently require familiarity not only with the legal system, but with the health care delivery system. Also, they some- times appear to the U.S. attorneys to be less significant than other cases which the prosecutors may handle. Less money may be in- volved. It may be more complicated to take through the court system. Thus, we have a proposal which would allow us to impose civil money penalties so that we would have an additional deter- rent complementary to the existing court system. This would permit HEW to take action and impose sanctions on more cases involving fraud or abusive activity than the current system allows. There are two other proposals included in H.R. 4000 which are supported by the administration which I would like to mention briefly. One would expand the Public Law 95-142 exclusion of convicted practitioners from the program to include other catego- ries besides physicians, such as suppliers of durable medical equip- ment and providers of other services. This would give us additional leverage over those individuals who are convicted of fraudulent activities within our programs. PAGENO="0227" 219 The second provision would permit us to withhold the Federal share of payments to medicaid providers to recover medicare over- payments. We need this authority so we can prevent providers overpaid by medicare from circumventing recovery efforts by no longer accepting medicare patients. There are a number of other bills containing provisions of inter- est and I would like to briefly touch on them-particularly. Some of the provisions, of H.R. 934, the Medicare-Medicaid Administra- tive and Reimbursement Reform Act of 1979, which has been or- dered reported by the Finance Committee. My comments today reflect our understanding of the bill's provisions based upon the committee's decision during markup. The bill has many outstanding provisions which we support and which are also covered in H.R. 4000 and H.R. 4475. I would like to briefly discuss some provisions of the bill which we favor in concept but believe require modification. We favor limiting medicaid eligibility of individuals who transfer property without receiving reasonable compensation in order to obtain medicaid benefits. We feel this removes an unfair burden on the taxpayer and allows limited public funds to be used for those truly in need. However, H.R. 934 leaves the use of these limitations up to State discretion, and applies only to the medicaid program. The administration favors making this provision mandatory to assure equity nationwide so that the way you are treated in this regard is not a matter of the State in which you reside. We feel we should have the same transfer of assets rule in all States. We also feel it should apply to the supplementary security income program to make it more consistent and easier to administer. This approach was proposed by the administration in H.R. 4321, the Social Welfare Reform Amendments of 1979. The provision addressing transfer of assets to establish SSI eligibility has been included in H.R. 4904 reported by the Ways and Means Committee. The Ways and Means Committee did not include medicaid transfer of assets because medicaid is not within its jurisdiction. In addition, thare is a provision in H.R. 934 which requires uniform claims forms to the extent feasible. We favor the concept of using uniform claims forms, but I would point out to the com- mittee that we should not interfere with the States' use of ad- vanced technology and a variety of other innovative techniques to handle this information. In other words, a paper form is not always the optimum way to deal with the information. I do not think it was the intent of the committee to prevent such efforts, and we would hope the language would not be too restrictive. Another item of concern is reimbursement of physicians in teaching hospitals. This is a very complex issue with far-reaching effects. It has been before the Congress and HEW for many years. We have endeavored to work very closely with the Association of American Medical Colleges to prepare regulations implementing section 227 of Public Law 92-603. We think we have reached agreement, or at least agreement to disagree, with all parties. We hope to publish an NPRM shortly to provide opportunity for more comment. We favor the extension of the implementation date for section 227 to allow sufficient time for the regulations process to provide full opportunity for public com- PAGENO="0228" 220 ment and we would be happy to work with the subcommittee on this issue. The subcommittee has also been asked to consider a number of other bills. My comments on those bills are contained in the full statement submitted for the record. In the interests of time, I would be happy to respond to specific questions in those areas I have not touched on already. I would like to conclude, however, by reaffirming our commit- ment to improving the management and administration of the medicare-medicaid program. We exist to finance services on behalf of our beneficiaries, to make sure they receive the health care services to which they are entitled. We are also concerned about controlling the cost of that health care so that our beneficiaries can, indeed, receive all of the serv- ices. I appreciate the opportunity to appear before you and will be happy to work with you and your staff on the proposals discussed today and others which may be developed. I am ready to answer whatever questions you might have and would like to call on the others with me today to answer some of the questions you may have on some of these technical areas if you so desire. [Testimony resumes on p. 252.] [Mr. Schaeffer's prepared statement and attachments follow:] PAGENO="0229" 221 TESTIMONY OF MR LEONARD D SCHAEFFER ADMINISTRATOR, HEALTH CARE FINANCING ADMINISTRATION MR CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE I AM PLEASED TO BE HERE TO DISCUSS PROPOSED LEGISLATION YOU ARE CON~ SIDERING WHICH IS INTENDED TO BRING ABOUT IMPROVEMENTS IN THE EFFEC TIVENESS OF ThE MEDICAID AND PROFESSIONAL STANDARDS REVIEW ORGANIZATION (PSRO) PROGRAMS AND IN THE SUPPLEMENTAL MEDICAL I NSURANCE (PART B) PORTION OF THE MEDICARE PROGRAM I COMMEND THE EFFORTS OF THE SUB- COMMITTEE TO ASSURE THAT HEALTH CARE NEEDS OF ThE AGED, DISABLED, AND POOR ARE MET WE SHARE THAT OBJECTIVE THE MISSION OF HCFA IS TO ASSURE THAT OUR PROGRAMS ARE ADMINISTERED EFFICIENTLY SO AS TO PROMOTE TIMELY DELIVERY OF APPROPRIATE AND HIGH QUALITY HEALTH CARE TO OUR BENEFICIARIES OUR GOALS, WITHIN THAT MISSION, ARE DIRECTED TOVARD EFFICIENT, EFFECTIVE, AND COMPASSIONATE MANAGEMENT OF EXISTING HCFA PROGRAMS WE MUST STRENGTHEN OUR MANAGEMENT FOUNDATION TO PREPARE FOR ADMINISTRATION OF EXPANDED PROGRAMS, WE MUST PRODUCE BUDGETARY SAVINGS, AND WE MUST RESTORE PUBLIC CONFIDENCE IN THE ABILITY OF THE FEDERAL GOVERNMENT TO RESPOND TO SOCIAL NEEDS IN AN ACCEPTABLE MANNER AND AT AFFORDABLE COST HCFA HAS BEEN TAKING STEPS TO IMPROVE MANAGEMENT OF FEDERAL HEALTH CARE FINANCING PROGRAMS THROUGH SYSTEMS INNOVATIONS AND THROUGH INTE GRATION AND GEOGRAPHICAL CONSOLIDATION OF THE MEDICARE, MEDICAID, AND PSRO PROGRAMS WE BELl EVE THAT THESE ACTIONS WILL ENABLE HCFA TO CARRY OUT ITS MISSION AND RESPOND TO THE HEALTH CARE NEEDS OF OUR BENEFICIARES -1- PAGENO="0230" 222 MANY OF ThE PROPOSALS BEFORE ThE SUBCOMMITTEE TOI~IY ALSO ADDRESS ThESE CONCERNS I WILL NOT ATTEt~T TO COVER ALL OF THESE PROPOSALS, BUT WOULD LIKE TO DISCUSS BRIEFLY AREAS WHICH I UNDERSTAND ARE OF SPECIAL INTEREST TO MEMBERS~ OF ThIS GROUP HEALTH MAINTENANCE ORGAN!- ZATIONS (H!~t)s) AND THE `MEDIGAP' ISSUE; PROPOSALS CONTAINED IN H.R. 14000, AS REPORTED BY ThE HOUSE WAYS AND MEANS SuBColltlrrrEE ON HEAL.Th; MAJOR ADMINISTRATION LEGISLATIVE PROPOSALS CONTAINED IN H.R. 141475 AND H.R. 14106 RELATING TO MEDICAID, PSROs, FRAUD AND ABUSE, AND PART B OF MEDICARE; H.R. 934 (As IT I~LATES TO PSRUs, MEDICAID AND PART B OF MEDICARE)) AND FINALLY, PROVISIONS OF SEVERAL OThER BILLS CURRENTLY BEING CONSIDERED BY ThIS SuBCOttlrrrEE. FIRST, LET t'E TURN TO H.R. 44~44: `THE HEALTH MAINTENANCE ORGANIZATIONS MEDICARE REIMSuRsEt1~r A~NDf.ENTS OF 1979". CURRENTLY, HMOs WITH MEDICARE CONTRACTS ELECT BENEEN COST AND RISK BASED REIt~URSEt~ENT. WHEN WE PAY ON THE BASIS OF COSTS, THERE IS NO REWARD TO THE MMO FOR BEING EFFICIENT, NO REASON FOR HMOs TO SEEK ACTIVELY TO ENROLL MEDICARE BENEFICIARIES, AND LITTLE INCENTIVE FOR BENEFICIARIES TO SEEK OUT ECONOMICAL DELIVERY SYSTEMS. UNDER, THE CuRRENT RISK REIMSURSEt~ENT FORMULA, HMD PAYt'ENTS ARE CALCU LATED RETROSPECTIVELY, THUS LIMITING THEIR ABILITY TO BUDGET. ALSO, ENROLLED BENEFICIARIES DO NOT NECESSARILY GAIN FROM THEIR CHOICE OF AN EFFICIENT MMD SINCE ANY SAVINGS ARE SHARED EXCLUSIVELY BY THE MMD AND THE GoVERNt~NT. THEREFORE, BENEFICIARIES HAVE LITTLE INCENTIVE TO SEEK OUT EFFICIENT DELIVERY SYSTEMS. Nor SURPRISINGLY, BOTH ThE -2- PAGENO="0231" 223 NUMBER OF HMOs WITH MEDICARE CONTRACTS AND THE WMBER OF ENROLLED BENEFICIARIES ARE SMALL UNDER H R 4LILLI, HMOs WOULD BE REIMBURSED ON A PROSPECTIVE BASIS 95 PERCENT OF WHAT WE ESTIMATE MEDICARE WOULD PAY FOR SIMILAR SERVICES IN THE FEEFORSERVICE SECTOR THE HMD WOULD CALCULATE ITS "ADJUSTED COMMUNITY RATE," WHICH IS THE AMOUNT THAT WOULD RETURN TO THE HMO THE SAME PROFIT OR LOSS ON MEDICARE BENEFICIARIES AS ON PRIVATE ENROL LEES Am' DIFFERENCE BETWEEN THE 95 PERCENT AND THE ADJUSTED COMMUNITY RATE WOULD BE RETURNED TO THE HMO' s MEDICARE ENROLLEES THROUGH REDUCED COS~T SHARING OR BROADER BENEFITS WE WOULD REQUIRE THE HMD TO PROVIDE THESE ADDITIONAL BENEFITS IN THE FOLLOWING ORDER FIRST, PREVENTIVE SERVICES, SECOND, REDUCED COST SHARING, AND LAST, ANY OTHER HEALTH SERVICES THIS MANDATED ORDERING WILL IMPROVE THE BENEFICIARY'S ABILITY TO COMPARE HMOs WITH EACH OTHER AND WITH THE MEDICARE BENEFIT PACKAGE IN THE FEE'FORSERVICE SYSTEM IT ALSO ASSURES THAT HIGH PRIORITY BENEFITS ARE PROVIDED FIRST WE ESTIMATE THAT THE TYPICAL HMO WILL BE ABLE TO PROVIDE PREVENTIVE SERVICES AND ELIMINATE BENEFICIARY PAYMENTS FOR MEDICARE DEDUCTIBLES AND COINSURANCE WE BELl EVE THAT OUR BILL PROMOTES THREE IMPORTANT OBJECTIVES FIRST, IT WOULD USE MEDICARE HMO PAYMENTS TO CONTAIN HEALTH CARE COSTS RATHER THAN FUEL INFLATION IT WOULD DO SO BY STItIJLATING COMPETITION IN THE MEDICAL CARE MARKET WE WANT TO GIVE PROVIDERS INCENTIVES TO BE EFFICIENT AND, FOR THE FIRST TIME IN THE MEDICARE PROGRAM, WE COULD REWARD BENEFICIARIES FOR SEEKING OUT EFFICIENT DELIVERY SYSTEMS' -3- PAGENO="0232" 224 SECOND, IT wwu EXPAND BENEFITS FOR OUR BENEFICIARIES ENROLLED IN Hr'Ds WHILE GENERATING LONGTERM BUDGETARY SAVINGS. THIRD, IT WOULD MAKE AVAILABLE. TO BENEFICIARIES THE SA1~ CHOICE IN HEALTH CARE DELIVERY SYSTEMS THAT THE FEDERAL Gov N~'ENT MANDATES EMPLOYERS OFFER THEIR EMPLOYEES. IN ORDER TO ASSURE UNI FOR?&Y HIGH QUALITY AND FINANCIAL SOUNDNESS OF HMOs UNDER CONTRACT WITH MEDICARE, WE PROPOSE TO USE THE QUALIFICA TION AND COMPLIANCE PROCESSES CONTAINED IN TITLE XIII OF THE PUBLIC HEALTH SERVICE ACT. WE STRONGLY BELIEVE THAT THE MOST WORKABLE AND EFFECTIVE WAY TO PROTECT OUR BENEFICIARIES IS BY CONFORMING THE MEDI- CARE AND TITLE XUI DEFINITIONS OF MI HMO. ANY PROBLEMS IN DEFINITION SHOULD BE ADDRESSED THROUGH CHANGES IN TITLE XIII RATHER THAN THROUGH SPECIAL EXEMPTIONS FOR MEDICARE PURPOSES. FURTHERMORE, A BROADER DEFINITION FOR MEDICARE PURPOSES COULD DO MAJOR DAMAGE TO THE OVERALL TITLE XIII QUALIFICATION PROCESS BY PLACING THOSE WHO DO OBTAIN FEDERAL QUALIFICATION AT A SIGNIFICANT COMPETITIVE DISADVANTAGE, IN STATES WITH THEIR (Y#IN WAL CHOICE LAWS. THE APPROACH EMBODIED IN THE ADMINISTRATION'S HND BILL IS SUPPORTED BY A WIDE SPECTRUM OF ORGANIZATIONS, INCLUDING THOSE REPRESENTING THE AGED, HMOS, LABOR, AND THE ØJSINESS COMIIJNITY. WE URGE ITS PROMPT ENDORSEMENT. I WOULD LIKE NOi~ TO DISCUSS PROBLEMS ATTENDING THE SALE OF PRIVATE -4- PAGENO="0233" 225 HEALTH INSURANCE TO THE ELDERLY AND THE ACTIONS OF THE DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE IN COMBATTING THESE PROBLEMS ALTHOUGH MEDICARE HAS DONE MUCH TO PROTECT THE ELDERLY AGAINST THE FINANCIAL CONSEQUENCES OF ILLNESS, IT COVERS ONLY 43 PERCENT OF THEIR HEALTH EXPENDITURES As A RESULT, SOME TWO-'THI RDS OF THE AGED ALSO PURCHASE PRIVATE COVERAGE TO SUPPLEMENT MEDICARE~-SO-CALLED "MEDIGAP" POLICIES ASUSES IN THE SALE OF SUCH PRIVATE INSURANCE HAVE RECEIVED CONSIDERABLE PUBLIC ATTENTION RECENTLY SEVERAL CONGRESSIONAL COMMITTEES, THE FEDERAL TRADE CoMMISsION, AND THE MEDIA HAVE ALL REVEALED NUMEROUS TROUBLESOME ASPECTS OF THE MEDIGAP MARKETPLACE~ SOME OF THE PROBLEMS IDENTIFIED INCLUDE BENEFICIARY CONFUSION, IN PART CAUSED BY A HC~T OF MISLEADING OR EXPLOITATIVE MARKETING PRACTICES, HIGH PREMIUM COST RELATIVE TO BENEFITS, AND FRAGMENTED POLICIES WITH LIMITED, AND SOME~ TIMES EVEN ILLUSORY, BENEFITS IN RESPONSE TO THE VERY REAL HARDSHIPS THAT SUCH AØJSES CREATE FOR THE AGED, HCFA HAS TAKEN SOME IMPORTANT ADMINISTRATIVE ACTIONS THESE STEPS ARE DIRECTED PRIMARILY AT ASSISTING MEDICARE BENEFICIARIES TO BE MORE INFORMED SHOPPERS OVER THE PAST YEAR HCFA HAS WORKED WITH THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) TO PREPARE A "SHOPPERS GUIDE" FOR MEDIGAP POLICIES SINCE SEPTEMBER 1, WHEN THE PAMPHLET WAS FIRST MADE AVAILABLE, HCFA HAS DISTRISUTED ALMOST 2 5 MILLION COPIES PUBLIC -5-.. PAGENO="0234" 226 RESPONSE HAS BEEN MOST FAVORABLE, AND WE ARE ALREADY PLANNING AN UPDATED 1980 EDITION. To ALERT MEDIcARE BENEFICIARIES TO THE EXISTENCE OF THE MEDIGAP PROBLEMS, SOME 18.5 MILLION 1CHECKSTUFFERS" WERE INCLUDED IN THE SEPTEMBER SOCIAL SECURITY CHECK MAILINGS. THE INSERT BRIEFLY DESCRIBED THE MEDIGAP ISSUE AND INFOR?D BENEFICIARIES WHERE THEY MIGHT OBTAIN COPIES OF ThE `SHOPPERS GUIDE'. HCFA HAS ALSO PREPARED PUBLIC SERVICE ANNOUNCE MENTS ON MEDIGAP FOR DISTRI~JTION BY SOCIAL SECURITY DISTRICT OFFICES * IN NOVEMBER. HCFA IS ALSO WORKING WITH THE A~MINISTRATION ON AGING (AOA) IN HEW TO ORGANIZE A SYSTEM OF PEER CWNSELLING, WHICH WWLD UTILIZE SENIOR CITIZENS ORGANIZATIONS AND THE ~)A AREAWIDE AGENCIES. THIS SYSTEM IS INTENDED TO PROVIDE MCK~1JP AND INDIVIDUALIZED ASSISTANCE TO REIN FORCE THE PUBLIC INFORMATI ON CAMPAIGN. IN ADDITION TO NE PUBLIC INFORMATION CAMPAIGN, HCFA HAS ALSO WORKED TO IMPROVE NE REGULATION OF MEDIGAP INSURANCE AND ITS MARKETING. WE HAVE BEEN' PL.EASED TO SERVE ON THE ADVISORY COMMITTEE TO THE NAIC TASI FOROE ON MEDIcARE Suppi.~i~i INSURANCE. THIS TASI FORCE RECOMMENDED, AND IN JUNE THE NAIC FORMALLY ADOPTED, A MODEL REGULATORY PACKAGE FOR THE `SALE OF MEDICARE SUPPLEMENT INSURANCE. WE ARE ALSO COOPERATING WITH THE FTC TO MEASURE ThE MAGNITUDE OF THE MEDIGAP PROBLEM AND THE IMPACT OF DIFFERENT REGULATORY ACTIVITIES. WE BELIEVE THE DEPARTMENT'S PUBLIC INFORMATION CAMPAIGN CAN INCREASE -6- PAGENO="0235" 227 BENEFICIARY AWARENESS AND IS AN IMPORTANT FIRST STEP IN ALLEVIATI PIG THE MEDIGAP PROBLEM THIS EFFORT IS LIMITED, H(1t~lEVER, IN THAT WE CANNOT ASSURE THAT RELEVANT INFORMATION IS READILY AVAILABLE AT THE TIME A BENEFICIARY IS ACTUALLY CONTEMPLATING AN INSURANCE PURCHASE THUs, WE PROPOSE THREE MEASURES THAT WILL DECREASE THE CONSUMER CON FUSION THAT IS THE ROOT OF SO MANY OF THE CURRENT PROBLEMS FIRST, WE PROPOSE TO REQUIRE THAT ALL HEALTH INSURERS PROVIDE ESSENTIAL INFORMATION TO PERSONS THEY SOLICIT TO PURCHASE MEDICARE SUPPLEMENTARY INSURANCE* THE INFORMATION TO BE REQU I RED WWLD INCLUDE 1 BENEFIT INCLUSIONS AND EXCLUSIONS, WITH A CLEAR EXPLANA TION OF ThEIR RELATION TO MEDICARE COVERAGE, 2 LIMITATIONS AND PRECONDITIONS AI~FECTING COVERAGE, 3 THE RATIO OF PREMIUMS COLLECTED TO CLAIMS PAID (THE "LOSS RATIO"), AND 4 A CHECKLIST OF ITEMS TO BE CONSIDERED WHEN SHOPPING FOR COVERAGE SEVERAL STATES HAVE ALREADY IMPLEMENTED SOME FORM OF DISCLOSURE REQUIREMENTS WITH ENCOURAGING RESULTS WE BELIEVE A FEDERAL DISCLOSURE REQUIREMENT WILL ASSURE THAT ALL MEDICARE BENEFICIARIES ARE AFFORDED THESE ADDITIONAL PROTECTIONS, REGARDLESS OF THE STATE IN WHICH THEY LIVE SECOND, WE FAVOR LEGISLATION AUTHORIZING HEW TO ESTABLISH A CERTIFICATION SYSTEM UNDER WHICH INSURERS COULD VOLUNTARILY SUBMIT -7- PAGENO="0236" 228 MEDICARE SUPPLEMENTARY INSURANCE POLICIES FOR REVIEW. THOSE FOUND ACCEPTABLE WOULD BE `FEDERALLY CERTIFIED", AND ONLY A CERTIFIED POLICY COULD BE ADVERTISED OR SOLD AS A "MEDICARE SUPPLEMENT'. A POLICY WOULD BE JUDGED AS TO THE NATURE AND SCOPE OF BENEFITS PROVIDED, INCLUDING ANY LIMITATIONS OR EXCLUSIONS ON RECEIPT OF SUCH BENEFITS' THE SECRETARY WOULD SET A CERTAIN MINI~JM RATIO OF PREMIUMS COLLECTED TO BE RETURNED IN BENEFITS' MARKETING PRACTICES, CONSUMER PROTECTION PROVISIONS AND THE GENERAL CUSTOMER SERVICE RECORD OF THE COMPANY WOULD ALSO BE CONSIDERED. THIRD, WE ENDORSE THE PROVISION CONTAINED IN SEVERAL BILLS INTRO- DUCED IN CONGRESS TO IMPOSE FEDERAL PENALTIES OF UP TO $25,000 AND/OR 5 YEARS IMPRISONMENT ON ANYONE WHO MISREPRESENTS HIM OR HERSELF AS HAVING AN ASSOCIATION WITH THE MEDICARE PROGRAM FOR PUF~'OSES OF SELLING INSURANCE. THESE PENALTIES ARE CONSISTENT WITH THOSE IN THE MEDICARE STATUTE. THE ADMINISTRATION BELIEVES THAT ADOPTION OF THESE MEASURES WILL SIGNIFICANTLY IMPROVE THE PROTECTION OF MEDICARE BENEFICIARIES AND ALSO THE LEVEL AND QUALITY OF INFORMATION THEY HAVE AVAILABLE. WE ARE PREPARED TO WORK WITH THE SUBCOMMITTEE TO DEVELOP LEGISLATIVE SPECIFICATIONS TO ACCOMPLISH THESE OBJECTIVES' BY ASSISTING CONSUMERS TO MAKE EDUCATED CHOICES, WE THINK THESE MEASURES WILL ALSO HAVE A POSITIVE EFFECT ON COMPETITION AND AT THE SAME TIME, IMPROVE THE BENEFITS OF PRIVATE COVERAGE. -8- PAGENO="0237" 229 I NOW WILL TURN TO DISCUSSION OF THOSE PROVISIONS INCLUDED IN H.R. 14000 WHICH ARE FAVORED BY THE ADMINISTRATION, INCLUDING PROVISIONS RELATED TO PSROS, SKILLED NURSING FACILITIES, CO?~1ON AUDITS, AND FRAUD AND ABUSE. THE PSRO MODIFICATIONS IN H.R. 14000 WHICH WE SUPPORT WERE ALSO INCLUDED IN THE ADMINISTRATION'S BILL, H.R. 141475. THESE PROPOSALS WOULD AUTHOR IZE PSROS TO OFFER MEMBERSHIP TO NONPHYSICIAN HEALTH PRACTITIONERS WHO HOLD INDEPENDENT HOSPITAL ADMITTING PRIVILEGES, AND WOULD EXPAND THE MEMBER- SHIP OF THE NATIONAL PSRO COUNCIL TO INCLUDE A DENTIST, NURSE, AND ONE OTHER NONPHYSICIAN HEALTh PROFESSIONAL. THE BILL ALSO WOULD PERMIT CONDITIONALLY DESIGNATED PSROS TO BECOME FULLY DESIGNATED IF THEY SATISFACTORILLY CONDUCT, AT A MINIMUM, REVIEW OF INPATIENT HEALTH CARE SERVICES PROVIDED BY HOSPITALS IN THE PSRO AREAS (IN DISTINCTION TO SATISFACTORILLY REVIEWING SERVICES PROVIDED BY ~LJ.. INSTITUTIONS, I.E., SNFS). WE BELIEVE THIS PROVISION IS NECESSARY BECAUSE PSRO REVIEW OF LONGTERM CARE AND AMBULATORY CARE IS STILL IN THE DEMONSTRATION STAGE: VIRTUALLY NO EXPERIENCE EXISTS WITH PSRO REVIEW OF OTHER TYPES OF INSTITUTION-BASED AMBULATORY CARE. UNDER CURRENT LAW, r~t~1Y PSROs MAY FACE POTENTIAL TERMINATION BECAUSE ThEY ARE UNABLE TO EXPAND THEIR REVIEW BEYOND HOSPITAL CARE. THIS PROPOSAL RECOGNIZES ThE STATE OF THE ART OF PSRO REVIEW, WHILE ENABLING THE PROGRAM TO CONTINUE TO BUILD EXPERTISE IN NONIIOSPITAL REVIEW. PROPOSALS IN H.R. 14000 RELATED TO SNFS INCLUDE REIMBURSEMBNT ON A "SWING BED" OR "DIFFERENTIAL" BASIS FOR LONGTERM CARE SERVICES, EXTENDED AGREEMENTS OF PARTICIPATION FOR HIGH PERFORMANCE, "INTERMEDI -9- PAGENO="0238" 230 ATE SANCTIONS", AND FLEXIBILITY WITH RESPECT TO APPLICABILITY OF LIFE SAFETY Cot~s. H.R. 4000 WOULD ALLOW CERTAIN HOSPITALS TO BE REIMBURSED FOR LONG-TERM CARE SERVICES ON A "SWING BED" BASIS' THAT IS, INPATIENT HOSPITAL BEDS COULD BE USED FOR LONG-TERM CARE SERVICES AND REIMBURSED ON THAT BASIS, PROVIDED THE HOSPITAL HAS BEEN GRANTED A "CERTIFICATEOF' NEED" BY THE STATE PLANNING AGENCY FOR THE PROVISION OF LONG'TERM CARE SERVICES' IN ADDITION, THE BILL PROVIDES FOR "DIFFERENTIAL REIMBURSE MENT" BASED ON THE LEVEL OF CARE NEEDED BY AN INDIVIDUAL' THIS PRO POSAL DIFFERS FROM THE "SWING BED" MEASURE IN THAT REIMBURSEMENT TO A HOSPITAL AT A RATE APPROPRIATE FOR LESS THAN ACUTE CARE COULD BE t'tADE FOR AN INDIVIDU~4 PATIENT ON A CASEBYCASE BASIS WHERE A SNF o~ ICF BED IS NOT AVAILABLE IN THE CO1UNITf. Boiii OF THESE PROPOSALS WOULD ALLOW THE MEDICARE AND MEDICAID PROGRAMS TO REIMBURSE AT AN APPROPRIATE LEVEL FOR LONGI'ERM CARE SERVICES' THE ADMINISTRATION ALSO SUPPORTS PROVISIONS OF H.R. 4000 WHICH WOULD ALLOW THE SECRETARY TO EXTEND THE TIME PERIOD TO UP TO 24 MONTHS OVER WHICH AGREEMENTS OF PARTICIPATION WITH SNFS CAN BE EFFECTIVE, IN AN EFFORT TO ENABLE STATES TO FOCUS SCARCE RESOURCES ON REV! EN OF THOSE WHICH MAY NOT BE AS H!GHLEVEL PERFORMERS AS OTHERS' ANOTHER SNF- RELATED PROVISION IN H.R. 4000 WHICH WE SUPPORT IS THAT WHICH PERMITS THE SECRETARY TO APPLY SANCTIONS LESS SEVERE THAN DECERTIFICATION PAGENO="0239" 231 AGAINST FACILITIES WHICH SHE FINDS DO NOT MEET CONDITIONS OF PARTICI~ PATTON AND, FINALLY, THE BILL WOULD ALLOW ThE SECRETARY TO DETERMINE THE APPROPRIATE EDITION OF THE LIFE SPF~rv CODE TO BE APPLIED TO SNFs THIS PROVISION WOULD ALLOW THE SECRETARY TO SELECT A MORE CURRENT EDITION OF THE CODE (CURRENT LAW REQUIRES COMPLIANCE WITH THE 1973 CODE, WHICH IS NOW IN MANY RESPECTS OUTi)F~DATE) ANOTHER PROVISION IN H R 14000 WHICH WE STRONGLY SUPPORT WOULD REQUIRE THAT THE MEDICARE AND MEDICAID PROGRAMS PERFORM COMMON AUDITS OF ENTI TIES PROVIDING SERVICES UNDER THOSE PROGRAMS THIS WOULD EXPAND COMMON AUDIT ACTIVITIES TO THE 17 (OUT oF 53) STATES AND TERRITORIES WHICH DO NOT YET USE COMMON AUDIT PROCEDURES, AND WILL THEREBY REDUCE AUDIT COSTS AND AVOID PERMAPS CONFLICTING TREATMENT OF COST ITEMS THE FINAL PROVISIONS INCLUDED IN H R 4000 WHICH WE FULLY SUPPORT ARE THOSE RELATED TO FRAUD AND ABUSE WHICH WERE ALSO CONTAINED IN H R 4106 (THE ADMINISTRATION'S PROPOSED "MEDICARE AND MEDICAID FRAUD AND ABUSE AMENDMENTS OF 1979") CIVIL MONEY PENALTIES, EXCLUSION OF CERTAIN HEALTH CARE PROFESS I ONALS CONVICTED OF PROGRAM~RELATED CRIMES FROM PARTICIPATION IN MEDICARE AND MEDICAID, AND RECOVERY OF MEDICARE OVER PAYMENTS FROM MEDICAID PROVIDERS. H R 4000 WOULD AUThORIZE THE ASSESSMENT OF A "CIVIL MONEY PENALTY" OF UP TO $2,000 AGAINST THOSE WHO DEFRAUD THE MEDICARE AND/OR MEDICAID PROGRAM WE HAVE FOUND THROUGH OUR STATE FRAUD CONTROL UNITS THAT CRIMINAL PENALTIES HAVE NOT PROVEN TO BE ADEQUATE DETERRANTS AGAINST -11-' PAGENO="0240" 232 FRAUDULENT ACTS UNDER THE PROGRAMS. IN SOME CASES, DEFRAUDERS ARE ABLE TO ASSESS THE LIMITS BELOW WHICH IT IS NOT WORTH THE FEDERAL GOVERNMENT'S EFFORT TO PURSUE THEM. SUCH FRAUD IS ALSO OF RELATIVELY LOW PRIORITY WITHIN THE JUSTICE SYSTEM, AS THE CRIMINAL PROCESS IS TIt'ECONSUMING AND OFTEN NOT COST-BENEFICIAL. WE BELIEVE THE "CIVIL MONEY PENALTY" WOULD BE COST-EFFECTIVE (AS FINES AND DETERRENT EFFECTS WOULD EXCEED COSTS OF IMPLEMENTATION) AND WOULD HELP TO CONTROL FRAUD, ABUSE, AND WASTE. H.R. 14000 WOULD ALSO EXPAND P.L. 95-142's CURRENT PROVISION WHICH EXCLUDES PRACTITIONERS CONVICTED OF FRAUD AGAINST THE PROGRAM FROM PARTICIPATION IN MEDICARE AND MEDICAID TO INCLUDE OTHER CATEGORIES OF HEALTH CARE PROFESSIONALS SUCH AS SUPPLIERS OF DURABLE MEDICAL EQUIP MENT, ADMINISTRATORS OF HOSPITALS, AND SNFS. THE BILL WOULD ALSO ALLOW WITHHOLDING OF THE FEDERAL SHARE OF PAYMENTS TO MEDICAID PRO- VIDERS IN ORDER TO RECOVER MEDICARE OVERPAYMENTS TO THE SAME PRO- VIDERS. THIS PROVISION WOULD PREVENT OVERPAID PROVIDERS FROM CIRCUM VENTING RECOVERY BY REDUCING THEIR MEDICARE CASELOAD, AND ENABLE OFF-SET OF MEDICARE PART B OVERPAYMENTS AGAINST PHYSICIANS AND OTHER PRACTITIONERS WHO CONTINUE TO PARTICIPATE IN THE MEDICARE PROGRAM. THE ADMINISTRATION'S PROPOSAL TO REQUIRE THAT SNFs WHICH PARTICIPATE IN EITHER MEDICARE OR MEDICAID PARTICIPATE IN BOTH PROGRAMS WAS NOT - ADOPTED BY THE SuBco~Y'wrTEE ON HEALTH. INSTEAD, A ONE YEAR STUDY OF THE ISSUE WOULD BE AUTHORIZED. THE ADMINISTRATION SUPPORTS THE STUTh' PROVISION. -12- PAGENO="0241" 233 I WOULD NOW LIKE TO ADDRESS A PROVISION WHICH WE STRONGLY SUPPORT AND WHICH WAS INCLUDED IN OUR BILL BUT NOT INCLUDED IN THE BILL REPORTED BY THE WAYS AND MEANS/HEALTH SUBCOMMITTEE. WE BELl EVE THAT UNRERTRICtED DISCLOSURE OF PSRO DATA WEAKENS THE EFFECTIVENESS OF THE PROGRAM AND RAISES THE VERY REAL POSSIBILITY THAT PHYSICIANS MAY TERMINATE MEMBERSHIP IN PSROS. PSROs MUST BE ALLOWED TO FUNCTION IN AN ENVI RONMENT WHICH GUARANTEES FREEDOM OF EXPRESSION TO MEMBER~ REVIEWERS. UNDER CURRENT INTERPRETATION CF PSRO STATUTE VISAIIIS THE FREEDOM OF INFORMATION Aci, THIS MAY NOT BE POSSIBLE. THIS IS OF PARTICULAR CONCERN, AS THE U.S.. DISTRICT COURT OF THE DISTRICT OF COLUMBIA HAS RECENTLY RULED THAT PSRO DATA CAN BE RELEASED TO THE HEALTH RESEARCH GROUP UNDER THE TERMS OF THE FOIA. I WILL NEXT TURN TO H.R. 934, "THE MEDICARE-MEDICAID ADMINISTRATIVE AND REIMBURSEMENT REFORM ACT OF 1979" WHICH HAS BEEN ORDERED REPORTED BY THE SENATE FINANCE CoI'vlIrrEg. SINCE THE REPORT AND BILL LANGUAGE HAVE NOT BEEN FILED, MY COMMENTS REFLECT OUR UNDERSTANDING OF THE BILL'S PRO VISIONS, BASED ON ThE CC~T1ITTEE'S DECISIONS DURING MARKUP. THE BILL HAS MANY MERITORIOUS PROVISIONS WHICH ARE ALSO COVERED IN H.R. 41475 AND H.R. 4000. I WILL NOW TOUCH UPON SIGNIFICANT PROVISIONS OF H.R. 934 WHICH ARE NOT CONTAINED IN THOSE BILLS. * THE DEPARTMENT ENDORSES THE H.R. 934 PROVISION PERMITTING PURCHASE OF LABORATORY SERVICES AND MEDICAL SERVICES ON A COMPETITIVE BID OR OTHER BASIS UNDER MEDICAID. BECAUSE OF THE ECONOMIES AVAILABLE THROUGH -13- 56-071 0 - 80 - 16 PAGENO="0242" 234 BULK PURCHASING, THERE ALSO MAY BE MERIT IN EXPANDING THIS PROVISION TO OTHER SERVICES WHERE BENEFICIARIES GENERALLY DO NOT CHOOSE THEIR PROVIDER. HOWEVER, IT IS ESSENTIAL THAT ANY PROVISION ADOPTED ASSURES ThAT BENEFICIARIES HAVE ADEQUATE ACCESS TO CARE. WE ALSO FAVOR THE PROVISION OF H.R. 934 WHICH REQUIRES THAT FEDERAL MATCHING PAYMENTS TO STATES FOR MEDICAID COSTS BE TIED TO THE ~TE ON WHICH ThE STATE ACTUALLY EXPENDS ITS FUNDS. SUCH AN APPROACH MAKES THE MATCHING METHODOLOGY MORE ACCURATE AND THEREBY IMPROVES PROGRAM ADMIN ISTRATION* BECAUSE SOME STATES MAY HAVE MORE DIFFICULTY THAN OTHERS IN MAK ING ADJUSTMENTS NECESSARY TO IMPLEMENT THIS PROVISION, THE DEPART- MENT INITIALLY WOULD PREFER TO START THIS ACTIVITY WITH 10 STATES AND GRADUALLY PHASEIN ITS APPLICATION ACROSS THE NATION. THERE ARE SOME OTHER PROVISIONS IN H.R. 934 WHICH WE FAVOR IN CONCEPT, BUT WHICH WE BELIEVE REQUIRE MODIFICATION. WE FAVOR LIMITING MEDICAID ELIGIBILITY OF INDIVIDUALS WHO TRANSFER PROPERTY WITHOUT RECEIVING REASONABLE COMPENSATION IN ORDER TO OBTAIN MEDICAID BENEFITS. THIS PROVISION WOULD REMOVE AN UNFAIR BURDEN CURRENTLY PLACED ON ThE TAXPAYERS BY ThOSE WHO HAVE THE MEANS TO CARE FOR THEMSELVES, AND ALLOW LIMITED PUBLIC FUNDS TO BE USED FOR ThOSE TRULY IN NEED. HOWEVER, APPLICATION OF THE TRANSFER OF PROPERTY PROVISION IN H.R. 934 WOULD BE A MATTER OF STATE DISCRETION AND WOULD ONLY APPLY TO MEDICAID. TME ADMINISTRATION FAVORS A MANOATORY RESTRIC TION ON ELIGIBILITY WHEN PROPERTY IS TRANSFERRED IN ORDER TO OBTAIN MEDICAL OR FINANCIAL ASSISTANCE' WE WOULD APPLY THE SAME RULES TO ALL AND USE THOSE RULES FOR ThE SUPPLEMENTARY SECURITY INCOME (SSI) PROGRAM -14- PAGENO="0243" 235 AS WELL AS MEDICAID. THE APPROACH WE RECOMMEND (WHICH WAS INCLUDED IN THE ADMINISTRATION'S 1980 DISABILITY INITIATIVE) WOULD BE CONSISTENT AND EQUITABLE, AS WELL AS EASY TO ADMINISTER, SINCE SSI STAFF DETER- MINES MEDICAID ELIGIBILITY FOR AGED, BLIND, AND DISABLED APPLICANTS IN MOST STATES. USE OF SEPARATE RULES FOR SSI AND MEDICAID WOULD COMPLI- CATE DETERMINATION OF ELIGIBILITY. WE SUGGEST MODIFICATION OF THE H.R. 934 PROVISION REQUIRING USE TO THE EXTENT FEASIBLE OF UNIFORM CLAIMS FORMS UNDER MEDICARE AND MEDICAID. WHILE WE FAVOR USE OF UNIFORM CLAIMS FORMS, AND HAVE BEEN WORKING CLOSELY WITH VARIOUS ORGANIZATIONS ENGAGED IN DEVELOPING SUCH FORMS, WE DO NOT FAVOR A REQUIREMENT WHICH WOULD INTERFERE WITH STATES' USE OF ADVANCED TECHNOLOGY E.G. OPTICAL SCANNERS ACCORDINGLY, WE SUPPORT THIS. PROVISION IF A WAIVER AUTHORITY IS INCLUDED TO ALLOW FLEXIBILITY TO STATES WITH INNOVATIVE PROCESSING METHODS. THERE ARE SOME PROVISIONS IN H.R. 9314 WHICH WE MUST OPPOSE. H.R. 934 CONTAINS A NUMBER OF SECTIONS RELATING TO PHYSICIAN REIMBURSEI'ENT UNDER THE MEDICARE PROGRAM, INCLUDING A SECTION RELATING TO REIMBURSE MENT OF PHYSICIANS WHOSE PRACTICES ARE HOSPITALBASED,REIMBURSEMENT TO PHYSICIANS LOCATING IN SHORTAGE AREAS, AND USE OF RELATIVE VALUE SCALES. ALTHOUGH WE ARE SYMPATHETIC TO THE OBJECTIVES OF MANY OF THESE SECTIONS, WE DO NOT THINK THEY ADEQUATELY ADDRESS CURRENT PROBLEMS. WE WILL RELEASE SHORTLY REGULATIONS TO PROVIDE FOR MORE APPROPRIATE REIMBURSEt'ENT TO HOSPITAL-BASED PHYSICIANS. WE DO NOT FEEL THE RELATIVE VALUE SCALE APPROACH IS NECESSARILY THE MOST APPROPRIATE AND IT CAN BE ACCOMPLISHED UNDER CURRENT LAW IN ANY EVENT. THE PHYSICIAN SHORTAGE PROVISION MAY NOT BE COST EFFECTIVE. WE HAVE PROPOSED OTHER APPROACHES TO THESE PROBLEMS IN THE NATIONAL HEALTH PLAN. -15- PAGENO="0244" 236 SIMILARLY, WHILE WE SHARE THE OBJECTIVE OF CLOSURE AND CONVERSION OF UNDER UTILIZED FACILITIES, WE DO NOT ENDORSE THE PROVISIONS OF H.R. 934 WHICH WOULD PROVIDE SPECIAL REIMBURSEMENT FOR FACILITY CLOSURE AND CONVERSION' INSTEAD, THE ADMINISTRATION SUPPORTS GRANTS FOR A 3 YEAR DEMONSTRATION PROGRAM ADDRESSED TO CLOSUME AND CONVERSION. WE WOULD NOT FAVOR MOVING BEYOND AN EXPERIMENTAL APPROACH AT THIS TIME. WE ALSO FAVOR THE CONCEPT OF PERMITTING STATES WHICH HAVE NOT ALREADY DONE SO TO ENTER INTO AGREEMENTS FOR PAYING THE PREMIUMS OF MEDICAID BENEFICIARIES WHO QUALIFY FOR MEDICARE ("BUY-IN"). H~1EVER, IT WOULD NOT BE FISCALLY RESPONSIBLE TO RECOMMEND EXTENS ION OF THE "BUY-I N" DURING THIS TIME OF BUDGETARY CONSTRAINTS' WE THEREFORE SUGGEST THAT YOU DEFER ADOPTION OF A "BUY1N" EXTENSION UNTIL A LATER OATE WHEN BUDGETARY CIRCUMSTANCES ARE MORE FAVORABLE. THE DEPARTMENT ALSO OPPOSES SPECIAL GRANTS FOR TRAINING AND EMPLOYMENT OF AFDC ~CI PIENTS AS HOME HEALTH AIDES, AS WELL AS FOR REGIONAL PEDIATRIC PULMONARY CENTERS. ESTABLISHMENT OF A SEPARATE CATEGORICAL GRANT PROGRAM FOR PEDIATRIC PULMONARY CENTERS IS INAPPROPRIATE WITHOUT FURTHER STUDY OF THEIR EFFECTIVENESS. THE COST OF GRANTS FOR HOMEMAKER HOME HEALTH AIDES COULD BE EXCESSIVE, AND WE BELIEVE DUPLICATES PJJTHOR ITY UNDER CURRENT LAW. FURTHER, WE RECO'VIENDTHAT YOU NOT ADOPT THE HUMAN EXPERIMENTATION PROVISION IN H.R. 934. CURRENT LAW ENABLES THE SECRETARY TO PROTECT BENEFICIARIES BY APPLYING APPROPRIATE HUMAN EXPERIMENTATION REQUIRE MENTS TO RESEARCH' THE PROPOSED PROVISION WOULD LIMIT THE SECRETARY'S AUTHORITY TO APPLY THESE PROTECTIONS' -16- PAGENO="0245" 237 I WOULD N~N LIKE TO DISCIJSS SEVERAL OTHER BILLS WHICH I UNDERSTAND ARE OF PARTICULAR INTEREST TO THIS Suxo1~irnt~E. H.R. 211 RELATES TO MEDICAID MATCHING PAY?NTS TO Guftil, PUERTO Rico, AND THE VIRGIN Is- LANDS. EXISTING LAW PLACES A CEILING ON FEDERAL MATCHING FUNDS FOR MEDICAID IN PUERTO Rico, GUAM AND THE VIRGIN ISLANDS. SINCE 1972 PJERTO RICo HAS BEEN LIMITED TO $30 MILLION ANNUALLY AND THE VIRGIN ISLANDS TO $1 MILLION. GUAM's CEILING HAS BEEN $9 MILLION SINCE 1968. THE FEDERAL MEDIcAL ASSISTANCE PERCENTAGE FOR THESE JURISDIC- TIONS HAS BEEN RESTRICTED TO 50 PERCENT. THE BILL WOULD INCREASE THE FEDERAL AUTHORIZATION CEILING TO $80 MILLION FOR PuERTo Rico, $2.6 MILLION FOR THE VIRGIN ISLANDS, AND $2.375 MILLION FOR GUAM A TOTAL OF NEA~Y $85 MILLION. THIS BILL WOULD ALSO REMOVE THE EXISTING 50 PERCENT LIMITATION ON FEDERAL MATCHING RATE FOR MEDICAID IN THESE JURISDICTIONS. WE BELIEVE THAT FUNDING FOR GUAM, PUERTO Rico, AND THE VIRGIN ISI.ANDS SHOULD BE ADJUSTED. H~EVER, WE OPPOSE THE BILL BECAUSE IT WOULD ESTABLISH FUNDING LEVELS GREATLY ABOVE THOSE IN CURRENT LAW, AND THIS WOULD BE INCONSISTENT WITH CURRENT WDGETARY CONSTRAINTS. INSTEAD WE URGE YOUR ADOPTION OF SECTION 208 OF H.R. 4~t75 WHICH WOULD PROVIDE A MODEST INCREASE IN THE CEILING. H.R. 1821 WOULD PROVIDE THAT SERVICES RENDERED BY PHYSICIANS IN TEACHING HOSPITALS BE REIt~URSED ON A COST, RATHER THAN CHARGE BASIS, WHERE THE HOSPITAL ELECTS TO RECEIVE PAYIENT BASED ON COSTS AND WHERE AU.. PHYSICIANS IN ThAT HOSPITAL AGREE NOT TO BILL CHARGES FOR SERVICES PROVIDED TO MEDICARE PATIENTS. REIMBURSE1ENT OF TEACHING HOSPITALS IS A VERY COMPLEX 1'~TTER. WE CURRENTLY ARE WORKING VERY CLOSELY WITH THE AMERICAN ASSOCIATION OF MEDICAL COLLEGES TO PREPARE REGULATIONS IMPLEMENTING THE REQUIREMENTS FOR TEACHING HOSPITAL REIMEURGEI'ENT, WHICH WERE ESTABLISHED -17- PAGENO="0246" 238 IN SECTIoN 227 OF P.L. 92-603. WE THINK WE HAVE WORKED OUT MOST CF THE DIFFICULTIES) AND SHORTLY WILL BE ISSUING A NOTICE OF PROPOSED RULEMAKING FOR FUTURE PUBLIC COMMENT. WE FAVOR AN EXTENSION CF THE IMPLEMENTATION DATE FOR SECTION 227 BECAUSE ADDITIONAL TIME IS NEEDED TO COMPLETE THE REOULATIONS ISSUANCE PROCESS (INCLUDING FULL OPPORTUNITY FOR COMMENT). WE DO NOT FAVOR ANY OTHER LEGISTIVE CHANGE AT THIS TIME' SECTION 13 OF H.R. 2159 WOULD PROTECT MEDICAID BENEFICIARIES FROM LOSS OF~ ELIGIBILITY DUE TO INCREASES IN CERTAIN SOURCES OF UNEARNED INCOME. IT WOULD APPLY TO INCREASES AFTER MAY 1978 IN SOCIAL SECURITY, RAILROAD RETIREMENT, VETERANS', AND OTHER SERVICE-RELATED BENEFITS. WE OPPOSE ENACTMENT OF THIS SECTION BECAUSE WE BELIEVE ThAT DISREGARDING PARTI- CULAR TYPES OF BENEFIT INCREASES IN ORDER TO ESTABLISH MEDICAID ELIGI- BILITY IS INEQUITABLE AND DIFFICULT TO ADMINISTER' IT RESULTS IN DIFFERENT TREATMENT FOR MEDICAID APPLICANTS, OR RECIPIENTS WHOSE INCOME AND RESOURCES ARE INDENTICAL EXCEPT FOR THE SOURCE OF INCOME. MOREOVER, IT COMPLICATES THE ELIGIBILITY PROCESS AND ADDS TO THE POTENTIAL FOR CASE WORKER ERROR, ESPECIALLY IN THOSE STATES WITHOUT ADVANCED SYSTEMS CAPABILITIES. H.R. 3854 WOULD REQUIRE A SECOND OPINION AS A CONDITION FOR PAYMENT UNDER MEDICARE OR MEDICAID FOR ELECTIVE SURGICAL PROCEDURES. UNDER THE BILL, BOTH PROGRAMS COULD REIMBURSE FOR SECOND (AND THIRD) OPINIONS, PROVIDED THE PSRO MAKES A DETERMINATION THAT ThE PROCEDURES MEET APPROPRIATE CRITERIA BEFORE SERVICES ARE PERFORMED' MEDICARE REIMBURSE MENT FOR THE SECOND/THIRD OPINION WOULD EQUAL 100 PERCENT OF REASONABLE CHARGES FOR THE OPINI ON, WITH DEDUCTIBLE AND COINSURANCE NOT APPLI CABLE. MEDICAID REIMBURSEMENT WOULD EQUAL 90 PERCENT OF THE TOTAL QUARTERLY PAYMENTS ATTRIBUTABLE TO SUCH OPINIONS' -18- PAGENO="0247" 239 THE ADMINISTRATION SUPPORTS A VOLUNTARY SECOND OPINION PROGRAM. THERE IS NO HARD EVIDENCE AVAILABLE WHICH SHOWS THAT A MANDATORY PROGRAM IS MORE EFFECTIVE (IN COST-BENEFIT TERMS) THAN A VOLUNTARY PROGRAM. 1w ADDITION; WE BELIEVE A-MAF~rnATORY SE~êND OPINION PROGRAM WOULD CREATE ADMINISTRATIVE, LEGAL, AND HUMAN PROBLEMS; WOULD~POSE A RISK OF PATIENTS BEING PENALIZED BECAUSE THEY MISUNDERSTAND PROGRAM REQUI REMENTS; AND WUJLD CREATE PROBLEMS FOR AREAS HAVING A SHORTAGE OF PHYSICIANS. IN CONCLUSION, I WOULD LIKE TO REAFFIRM OUR COF4IITMENT TO IMPROVED* MANAGEMENT OF OUR PROGRAMS FOR THE BENEFIT OF OUR BENEFICIARIES AND TO CONTROL COSTS OF HEALTH CARE. I APPRECIATE THE OPPORTUNITY TO APPEAR BEFORE YOU AND WILL BE GLAD TO RESPOND TO ANY QUESTIONS YOU MAY HAVE. -19- PAGENO="0248" 240 DEPARTMENT OF HEALTh. EDUCATION. AND WELFARE 4 *OFPJCE CF THE SECRETARY WASHINGTON. D.C. ~OI HEW PCSITI~S (~ H.R. 4000 A. PS~ provisions 1. M~nbership of PSK)s. Eath PS~ would be authorized to offer m~nbership, at its ewn cption, to nerçhysician health pro~ fessionals who hod irdepeudent hospital edrnitting privileges. HEW position: Support. This prcpcsal is included in the Department's Medicare/?'!edicaid bill, H.R. 4475. 2. Methership on Stat~ide Council Advisory Group. At least one registered professional rurse arx3 one dentist must be included in the nienbership of eadi Statewide Council's Advisory Group. HEW position: Although this was recouierx3ed ~` the Department last year, we are prcçosing, as part of H.P. 4475, to eliminate Statewide ccuncils. 3. Norçhysician Meiibership on National Council. M~nbership of the National Council would be exparded to include a dentist, a registered professional rurse, one other rxDrphysician health professional, ard a consiz~er representative. HEW position: Support. The Department proposed, as part of H. R. 4475, the inclusion of a dentist, a registered rtirse, ard one other rorphysician health professional in the methership of the National Council. Because considerable attention is devoted }q the Council to issues directly affecting the delivery ard use of health services, we would net object to expansion of inenbership to include a constzner representative. 4. Advisory Cainittee to National Council. An Advisory Carmittee to the National Council, canpose3 of nerphysician health profes- sionals, ~ild be created. HEW position: Cppose. Legislation is net necessary to accanplith this, ard it is the policy of the Administration net to encourage the proliferation of unnecessary a3visory councils. 5. Bequired Activities of PSIOs. A corx3itionafly designated PSIO cculd becane fully designated if it is satisfactorily corducting reviews of hospital services. The Secretary would be authorized to detesriine, with respect to eadi fully designated P510, when ard the extent to whidi sudi a PSID must corduct reviews of other services. HEW position: Support. This is~ a provision in H.R. 4475. PAGENO="0249" 241 6. Direct Reimbursenent of PSIOs. PS~ would be réimbürsed directly for costs involved in corductir~ hospital reviews. HEW position: Support. This proposal, included in H.R. 4475, would eliminate the pass-through option in present law where a hospital may receive Medicare payment for a PSIO'S review of its sei:vices arr~ then pass the payment on to the PSRD. The pass-S through option has served rc real purpose ard has unnecessarily conplicated the P510 reixthirsEnent process. 7. Consultation by PSIOs with Health Care Practitioners. Repeal. the pr~zision of present law reguirir~ the creation of advisory groups of health care practitioners to irx1ividual PS10s ard provide instead that the Secretary establish more flexible guidelines to assure approprite operational P510 consultation with r~resentatives of all health care disciplines on the performance of review activities. HEW position: Support. In cur view, mardated formal advisory groups to~ assist PSIOs are not totally effective in assurin appropriate consultation on operational matters. The establish- ment an3 application of flexible guidelines would be a more practical ard effective arrarxjenent. (Similar to sec. 307 in H.R. 4475.) 8. P510 Review of Routine Hospital Admission Services ard Preoperative Hospital Stays. PSIOs would be directed to review routine hospital admission services arx1 preoperative stays to assure prograi~ payments are made only when routine tests arxl unusually lorg preoperative stays for elective corditions are medically appropriate. HEW position: We favor the principle of PS10s exaninirr~ these areas. H~ever, the settir~ of priorities of PS10s can be most appropriately accamiplithed administratively. r'breover, we are concerned that detailed review in this regard could be very costly initially. It should be noted that our hospital cost containnent bill should pro- vide hospitals with an incentive to eliminate unnecessary tests arx~ services. PAGENO="0250" 242 9. Stixiy of PSm Norms, Standards ar~ Criteria. The Secretary ~u1d be reuire~ to cx~rz~uct, in cerEultátion with the National Ccxincil, a sttx1y of the differex~s in PSRD's m~1ical criteria ard lergth- of~stay moses, ard to report the firdiogs of this sttxly, together with ~ecairnexde3 actione to be taken to eliminate unjustifiable r~ioral differences. The intent of the prcçxsal is to determine what hasis there is for suth differex~s ard to ascertain whether - sose steps might be taken to avoid the perpetuation of inefficiencies. H~i position: ~ B. Skilled Nursirg Facilities (~F) Pr~isione 1. Agreenents with SNF's. The Secretary w~,.i1d be authorized to exterd be~ord 12 months (bet generally rot to exceed 24 months) the term of an egreenent with an SNF ecesistently in car~liance with the Medicare cerditiona of participation. H~i position: Support. The 1~parteent prcposed, in H.R. 4475, to repeal the 12-month statutory limitation on egreenents with SNFs. !~i has bed experiex~ with high quality hones whith have rot hed deficiencies for years, yet, by statute, must still be surveyed anrually. 1~ ~ild rot cçpose, hcx~~er, this modification, whicth is consistent with the practice generally foU~d by the 1~arteent in surveyiog hospitals. 2. Consultative Services for ~Fs ~ pr~ision authoriziog Medicare reimbirseeent for consultative services furnithed by State a3encies to SNFs ~i1d be repealed. (Suob consultative services s~i1d con- time to be prcwided urz3er Medicaid, I~er.) HTh~ position: Support. This wes prçx~e3 by the Departhent in H.R. 4475. 3. Study of Need for Dial Participation of ~Fs. The Secretary ~ould be required to corduct a study of the causes for the present scarcity of skilled rrirsirg hone beds, includieg the extent to whidi existirg laws ard regulations (as well as other factors) disccura3e dual participation, ard report the results of the study to Coogress within ore year after enactment. HEW ~osition: Support. The Department proposed, in H.R. 4475, to require SNFs participatirg in either Medicare or Medicaid to participate in ~both prograns. The requirenent ~uld a3dress the problen of insuf- ficient availability of SNF beds for Medicare beneficiaries by ircreasiog the zunber of facilties participatirg in Medicare aid ~ild make SNF services core widely available for Medicaid patients as well. Hc~ezer, concerns have been raised thciit he ispact of this requirenent on lorg- term care facilites. Because the corsequemes are rot fully predictable at this time, the Department s~ild rot object to carryirg cot a one-year study prior to imposirg mardatory participation requirerents on long-term care facilities. - PAGENO="0251" 243 4. Alternative to Decertification of SNFs alt of Caupliance with Corxlitions of Participation. In lieu of decertification of an SNF out of caT~liance with the couditions of participatiOn, the Secretary would be authorized to der~r reimbursenent for services furnished ty the facility to Medicare ard Medicaid beneficiaries adnitted after a date designated ty the Secretary until such time (bit rot to exceed 12 months) as the facility corrects, or is determined to be making good faith efforts to correct, its deficiencies. HEW position: The Departhent's preferred approach, included in H.R. 4475, is to give the Secretary authority to apply an alternative sanction which she determines is appropriate aud which s'~.ild rot re- sult in hardship to the beneficiary. 5. Life Safety Code Requireuents. The requirenent of present law that an SNF must meet the 1973 edition of the Life Safety Code would be repealed, ard the Secretary ~ild be authorized to determine in regulations when SNFs would be requirenent to meet the prc~iision of reused editions of the Life Safety Code. HEW position: Support. This is an HEW proposal ard is interded to all<~ the Deparbnent to reuse the Life Safety Code requirenent on a more timely basis without having to seek legislative changes. C. Fraud arx3 Abuse Procuisions The folla~ing preuisions were proposed by HEW in H.R. 4106: 1. Exclusion of Health Care Professionals Corwiced of Medicare or Medicaid Related Crimes. The application of present preuisions of law authorizing the Secretary to bar physicians ard other practitioners corwictd of Medicare or Medicaid fraud fran participation in both programs would be broadened to include additional categories of persons-i.e., health care professionals, such as health care insti- tution administrators, pharmacists, suppliers of durable medical eguipoent. This provision would also clarify the authority of the Secretary to bar Medicaid-only providers. 2. Requirenents concerning Reporting of Financial Interest. Present law requirenents relating to the reporting of financial interests would be anerded to provide that sri entity would be required to report only those irdividual interests ~n mortgages or other obliga- tions equal to at least $25,000 or 5 percent of the entity's total assets. PAGENO="0252" 244 3. Withho1dir~ of Federal Share of Payments to Medicaid Providers to Recover Medicare Overpayments. The Secretary's authority uuder present law to withhold the Federal share of Medicaid payments otherwise due in order to recoup any existirg Medicare overpayment where a Medicare provider has withdrawn or been terainated fran participation in the Medicare progran, would be made applicable in those instances where the provider continues to participate in Medicare bet reduces its acceptance of Medicare patients. 4. Civil Money Penalties. The Secretary would be authorized to impose a civil money penalty of ~ to $2,000 for a fraudulent claim for reimbursenent urder. the Medicare,44edicaid prograns; arx1 to ii~ose as danages a fine of twice the anount of the fraudulent portion of the claim. Before a penalty could be imposed, opportunity would be provided for a hearir~. Estimated Savir%3s: F? 80 81 82 83 84 Medicare $9 9 9 9 9 Medicaid $14 14 14 14 14 D. Additional Provisions 1. Hospitals Providir~ Lon~-Tera Care Services "Swirt~ Beds" The Secretary s~i1d be authorized to enter into an agreenent with a hospital whith has been granted a certificate of need for the provision of lorsg-tenn care services. H~ position: Urder develc~nent, in teras of specifics. Differential Reimbersener~ ~ere a hospital does not have a swing-bed agreenent, payment for lorg-terin care services furnished to a beneficiary who renains in the hospital because no lorg-terrn beds are available in the cotum~inity would be made at the average SNF rate if the hospital's average occupancy rate is belcw 80% ard the hospital axild get a certificate-of-need to provide lorr- tetn services. ~ position: Support. ait wo favor renoving the certificate of need ard 80% occupancy requirenents. We believe the acute care rate should not be used for lorg-ters care. PAGENO="0253" 245 2. Voluntary Certification of Private Supplenentary Policies. Prcs.Tision would be tn~e for (a) a progran of voluntary certification by the Secretary of private supplamentary health insurance policies for the aged meeting staix3ards relatirg to retention ratios, exclusions azx3 simplicity of policy prnisions, (b) penalties for misrepresentation in the sale of supplamentary policies; arr1 (c) a study by the Secretary of private supplanentary health insurance policies. * HEW position: (see separate document) 3. D~nonstration Project Relating to the Training of AFDC Recipients ard Hose Health Aides. The Secretary would be authorized to enter into agreenents with a limited rumber of States for the purpose of (x)rduct- irg denorLstration projects for the training ard enployment of AFDC recipients as hanenakers ard hose health aides. HEW position: Oppose. This program can be carried out urx1er existing marpcwer programs. 4. Reiinhursenent for Health Maintenance Organizations (HMO5). An HMO whith elects to be reimbursed by Medicare on a risk basis would re- ceive, on a prospective basis, 95 percent of the per capita anaint the Secretary estimates would be paid for services prcnided to Medi- care beneficiaries by other pr~riders in the geographic area of the HQ~O. The Secretary would also estimate the amount that Medicare beneficiaries would be ctharged on a caiuTh~inity rating basis ard if that amount were l~er than the Medicare reimbursenent rate, the HMO would be required to return the difference in a3ditional bene- fits to its Medicare menbers. * HEW position: Favor, with modification. This is similar to the Depart- mont's bill, H.R. 4444. We cppose the inclusion of an irx3efinite cost cption. We would also récanmerx1 that participating I!4Os be limited to title XIII-qualified HMOs, ard that, the bill proide that ~ditional benefits be praiided according to a specified order, as in H.R. 4444. We support the concept of qen enrollment. PAGENO="0254" 246 DEPARTMENT OF HEALTh. EDUCATION. AND WELFARE CFF1~E ~ THE ~TARY WA~~TO~ ~ H~i Positiors on Major Medicaid ard Part B Medicare Prc~7isiorE, H.R. 934 Sec. 206. Ccxrdinated Audits. Pr~ides for ocordirated audits of facilities participatix~ in Medicare,44edicaid. H~i position: Support. Sec. 211. zthirsenent for Inapprcpriate Irpatient Hospital Services Medicare ard Medicaid payments to hospitals wc*ild be mede at the average SNF, ICF, or detoxification facility payment rate in the State, rather than the hospital rate for patients medically detemtined ty P510 reviewers to reed care in the l~r-ccst facility. The bill also authorizes that benefits be prr~iided ard payment be mede urder Medicare to irpatient detoxification facility services, includirg physicians' services, furni~ed cutside a hospital. H~ p~ition: Support the differential prcposal. (See H.R. 4000) Oppose givir~ prc~zider status to detoxification facilities, whith co~1d result in significant costs, ard whith needs further study. Sec. 212. Corwersion to Lorq-Tevn Care Facility . Authorizes a prograti of grants aid loans to facilitate the ocrwersion of surplus acute care hospital beds to lorr~-terrn care beds in poblic aid son-profit hospitals. Priority wculd be given to hospitals located in high-~t urban areas aid to canplete corwersion of hospitals to exterded care facilities as cppcsed to a partial cthargerwer. H~i position: Oppose. The Departoent prrposes to go forward with a 3-year dar~rEtration closure aid conversion progran aid wculd sot favor arythiog beyord that experimental approath at this time. Sec. 213. P510 Review of Hospital Admissions, 1~itire Testirp aid Precperative Stays. Directs PS~ to give priority to reviewiog areas of frequent werutilization. I~i position: Support in prisoiple. ~er, we are concerned abcut the initial cxitlay of furds whith ~uld be necessary for this type of detailed review. (See LR. 4000) Sec. 221. Hospital Providers of L~r~-ters Care Services (Swirp Beds) Pevnits Medicare aid Medicaid reirnbursanent for bog-term care in anall rural hospitals that use the facilities' beds inter- thangeably as either acute or long-term care beds, deperxlirg on the need. H~ position: Support giving the Secretary the authority to apply this policy where the need exists. PAGENO="0255" 247 Sec. 222. Medicaid Certification aed A~prc,ia1 of Skilled Nursir~ ar~ Intermediate Care Facilities; Intermediate Sanctions Praiides that final determinations of basic eligibility of skilled rursing facilities (SNFs). aed intermediate care facilties (ICFs) urx1er Medicaid be made by the Secretary. The Secretary ~ild be authorized to validate State determinations on the eligibility of SNFs arx1 ICFs ard make birilirg determinations regardieg their eligibility status. HEW position: Support. Intermediate Sanctions. Provides the Secretary with the authority to impose :~t~~th sanctions, less severe than decertification, on lon3-terrn care facilities faird to be cot of canpliance. The intermediate sanctions. wcold consist of reduction in reimbursenent or a restriction on the rusher or kirx3s of patients for whan reiinbursenent may be made, until the failure is corrected. HEW position: Support the concept. This is similar to HEW's proposal. Sec. 223. Visits away f run Institution by SNF ard ICF patients._ Prohibits the Secretary fran iinpcsirg zunerical limits on the number of hone visits whith might be made by SNF or ICF patients urder the Medicaid. progratz. HEW position: C~pose. The legislation is sot necessary, as it was ~nterded to thange the Department's former polic~r of limiting matcthing furds with respect to tenporary absences. O.ir regulations have been revised. Sec. 227. I~imnburserzent Rates urrier Medicaid for Skilled Nursing ard Intermediate Care Facilities. Deletes the requirenent established by sec. 249 of P.L. 92-603 that SNFs arz1 ICFs urder Medicaid be reimbursed on a reasonable cost-related basis. (Position beirg developed) PAGENO="0256" 248 Sec. 231. Incentives for Physiciana to Accpt Assigrinent. Proc'ides [ncentives for ~iysiciana to becane ~rticipating ~ysicians urder M&icare~ Also authorizes five to ten pilot projects to - experiment with ~ys of en r~ing ~ysicians to becane paticipatirg ~*iysiciana. H~i position: Cppose. We are airrently exploring alternative methods of eliminating the present bill-by-bill assigirnent approath as part of ccrerall ~thysician relznbirsenent reforns being developed. We ~ild sot oppose the pilot projects authorized by this section. Sec. 232. Use of Aporc~ied Relative Value Sctiedule. Authorizes the Secretary to appreve the use of tevnirclogy systsos ard relative value sthedules by ~tysicians in billing Medicare ard Medicaid. HEW position: Cppose. The Departoent is sot corwinced that a relative value scthedule is the most apprcpriate basis for a fee schedule for ~ysician reinixirsenent. In ar~ event, legislation is sot oscessary; a procedural tennisology systen can be iziplenented by regulation. Sec. 233. Teaching Physicians. Exterds the lxplenentation date for section 227 of P.L. 92-603 for an a3ditional year. Also pr~rides an alternative reimbursenent method for teaching hospitals ~ith do sot qualify for fee-for-service reiithurse-' mont for thedical services uzr1er Medicare. HEW position: Favor extension of the time period for liiplenenting provisions of the 1ev regarding reiithursenent of physicians in teaching hospitals. ~ier, ~e oppose alternative reiithirsanent methods in view of the fact that s~ are developing 227 regulations. Sec. 234. Certain Surgical Procedures Perfonned on an Mtulatory Basis Permits Medicare reinilxirsenent on the basis of an all- inclusive rate, withoct deductible or coinsurance, for certain surgical procedures performed on an enbulatory basis to free-starding surgical centers ard to physicians perfoirnirg surgery in their offices, for certain procedures specified by the Secretary. HEW position: Support the concept. We are reviewing varicos approaches to coverage of anbilatoty surgery. We ~uld oppose ~iving coinsurance. PAGENO="0257" 249 Sec. 235. Criteria for Determining Reasonable tharge for Physicians' Services. Z't)difies the method for determining Medicare reiz~i~ienent to physicians by pr~~iiding for calculating Statewide median charges in eddition to prevailing charges in a locality. ~3ditionaUy, provides reimbursenent incentives for r~i physicians locating in a designated physician shortage area. I~ positiçn: Cppose. The Department is develcping a physician reimburse- inent reform plan with an alternative approach, which we believe is preferable. There is insufficient evidence to determine whetheer the prc~osed physician shortage incentives would be effective. `Sec. 242. Deductible Not Applicable ~ Expenses for Reral Health Clinics Waives applicability of the Medicare part B deductible with respect to services furnished in rural health clinics. HEW positiorn Cppose. This would give preferential treatment to one category of benefIciaries ard would also result in an increase in progran costs. Sec. 252. Procedures for Determining Reasonable Cost ard Reasonable tharge Pzthibits percentage-based relinbursenent t contractors~ etiplc~'ees, or related organizations. Percentage arrangenents in the case of hospital-based physicians would be recognized if the amount does rot exceed an amount which would have been paid urr1er a relative value schedule appreved by the Secretary, which takes into consideration the physician's time arx~ effort. The Secretary would be directed to corduct a study of hospital-based physician reimbursenent aid make legislative reccsrnen3ations. HEW position: Cppose. The Department is develcping regulations which would reform the hospital-based physician reimbursenent systen. This section would interfere with these regulations, ard will issue then in the near future. Sec. 254. Develcçxnent of Uniform Claim Forms for use Urder Health Care Programs. Requires the Secretary to edcpt, to the extent feasible, stardardized claims forms for Medicare arx3 Medicaid. HEW position: We favor the concept of stardauiization, but, if enacted, we would want waiver authority to avoid limiting the flexibility of those States which use edvanced tethrology'-e.g. cptical scanning. 56-071 0 - 80 - 17 PAGENO="0258" 250 Sec. 257. Rescurces of Medicaid 2~pplicant. Petrnits States, at their cçrtion, to der~' Medicaid eligibility in cases where a per~n deliberately disposes of significant assets at less than fair market value for the purpose of attaiir~ Medicaid eligibility. HEW position: Support, with modification. We favor a maix1atory approad~. Sec. 258. Payment for Laboratory Services ard Certain Medical Devices Urx3er Medicaid. All~s States to pirdiase laboratory services ard medical devices for their Medicaid pcpulations thrc*2gh caitpetitive bidding or other arrangei~ents for a 3-year experimental period. HEW position: Support. Sec. 259. Authority for Certain States to Buy Medicare part B Coveragn~ for their Medicaid pcpilatiorE. Gives States whith do nct currently have a 9xiy-in" agree~ent with Medicare an a3ditional 12 months to enter into suth arrang~nents. HEW position: Oppose for bodgetary reasone. Sec. 261. Medicaid Payments to States. Pr~ides that Federal Medicaid furx3s may rct be drawn upon until they are actually needed by the State to pay pr~ziders ard practitioners. HEW position: Support. Sec. 264. Health Maintenance Organization Enrolling Over 50 Percent Medicare or Medicaid Recipients. Prcvides that HMOs con tracting with States wcxild have up to 3 years after being fcurx3 qualified by }~ to meet the ncn-Medicare/Medicaid enrollment requirenents. ~~pcsition: Support the conc~t. This is ~ included in the Health Planning Law. PAGENO="0259" 251 Sec. 265. Denonstration Projects for Trainir~ and !~pl~jment of ~FDC I~cipients as Hanenakers and Hane Health Aides. Provides for denonstration prograns in up to 12 States to formally train AFDC recipients as hanenakers and bane health aides. Ninety percent Federal matthirg is authorized for the costs of corr1uctieg the denoretration projects. HEW Position: Oppose. This can be carried cot under existieg mar~pa~ier prograns. Sec. 267. Adninistrator of Health Care Financin Adninistration (HCFA). The ?~dministrator of HCFA s~ild be appointed by the President with the a3vice and consent of the Senate. HEW position: Support Sec. 268. P810 Participation of Certain Practitioners. 1~quires local PS10s to th~rolve health care practitioners who hold inde- pendent hospital aknittirg privileges in the review of care ordered or rendered by these practitioners. (HcwecTer, they ~uld rot be menbers) HEW position: We prefer the Department's prcposal which ~uld allcw local PS10s to include these practitioners as xnenbers. Sec. 269. Norphysician Menbership on National P510 Council. The Menbership of the National Council would be expanded to include a doctor of dental surgery or dental medicine and a registered rurse. HEW position: Support. We ~uld also recarmerd inclusion of at least one other mn-physician. PAGENO="0260" 252 Mr. SATTERFIELD. Thank you very much, and by all means feel free to call upon your colleagues to respond to questions that will be propounded by the panel. I am not sure I understood your initial remark. Is it your inten- tion that the statement which was forwarded to us pursuant to the rules of this committee and that we had a chance to look at before you came, be admitted to the record? Mr. SCHAEFFER. Yes, sir. Mr. SATTERFIELD. How about the statement you just finished reading? We did not get it. Could you explain why it was not supplied in accordance with the rules of this committee? Mr. SCHAEFFER. This was an attempt to summarize that state- ment. Mr. SATTERFIELD. Oh, the statement you read was a summary? We will admit both of those statements to the record. And unfortu- nately, I think the committee will be in a position only to examine you on the one that was submitted in advance. The purpose of requiring advance submissions is to give the members of the panel an opportunity to propound legitimate questions to you, and, of course, we did not have the benefit of the statement you just read. I will call on the members of this committee to propound questions in the order in which they appeared. The first gentleman I will call on is Mr. Gramm, who was here at 10:30. Mr. Gramm? Mr. GRAMM. Thank you, Mr. Chairman. Mr. Schaeffer, I would like to ask a series of questions. I would like to first of all say that I appreciate the fact that HMO's are becoming increasingly accept- able, in fact, are being encouraged by HEW. I am concerned, how- ever, that we are limiting the scope of competition by simply focussing on HMO's. And, I would like to get your views on the feasibility of moving beyond HMO's to other prepaid providers in allowing reimbursement under medicare and medicaid. Mr. SCHAEFFER. We have in the law already a definition of HMO's which we have used as the basis for the proposals that are before you today, and there are a variety, I think, of technical issues that surround what exactly is an HMO. Our concern, in terms of the Health Care Financing Administra- tion, is that we be consistent with the public health service pro- gram to promote development of HMO's as defined by law, and further that we deal with providers that are so organized and so arranged to deliver services that we can be sure that our beneficia- ries will receive adequate care and that these competitive incen- tives will be realized. That is, that there are incentives to our beneficiaries for added services at no extra costs and there are incentives to the organizations to control costs. I think there are a variety of other entities, other prepaid plans, that have about them other things to recommend them in terms of the way in which they deliver services. We are not in all cases assured that the kind of benefits we think will accrue for our beneficiaries will be realized in all of those cases. Mr. GRAMM. Well, you are talking about wanting to be sure that incentives are present to control costs. The thing I have simply recognized in trying to come to grips with the system as it now exists, is that the consumer is not very cost-conscious because the PAGENO="0261" 253 consumer pays relatively little of the cost. The provider is competi- tive; but since the consumer is not cost-conscious, the provider does not compete on the basis of price. What I have been trying to do, since I do not want socialized medicine and I see increasingly the positions we are taking as moving us almost irreversibly in that direction, is to look for some way that we might bring competitive forces to bear in the medical marketplace. And, the reasons that I have come up with a prepaid provider, and the HMO is simply one part of that spectrum, is that once the provider has the payment for service in advance, he has every incentive in the world to be efficient. Take the simplest case of a prepaid provider. If Denton Cooley in Houston decided to go on a prepaid basis and sent out a letter to the 1,000 richest men in the country saying for $10,000 a year if anything happens to your ticker, I will personally treat you. Send your $10,000 check down here and I will provide everything you need. OK, he gets $10 million and puts it in his pocket. Now, you do not ever have to worry about a certificate of need on Denton Cooley because he's getting every incentive in the world not to spend that money. He has the strongest incentive ever known to mankind, self-interest. Yet, he has an incentive to give those people care because he wants them to renew. He wants the $10 million again next year. It seems to me that what we need to do is to put the self-interest criteria to work in the medical market to the extent we can. I have attempted on this committee in things like the certificate of need legislation, hopsital cost containment, and in the CHAP program, and I will attempt to do so also in medicare and medicaid, to build in provisions which will encourage the development of these com- petitive systems. I understand your problem with definitions, but I do not want to limit competition just to the big huge HMO's. I would like to give the small clinic or even the individual provider a greater piece of the action. Do you see any way that we might obtain some support from HEW in trying to move in that direction? Dr. Fox. What we are trying to do is very consistent with your objective of providing different incentives to providers and more importantly, or equally as important, different incentives to benefi- ciaries to be conscious of the costs of the systems in which they receive services. The issue at hand is that of definition. We are relying on the title XIII of the PHS Act definition for several reasons. One, as Mr. Schaeffer said, it offers important elements of protection to our beneficiaries, in terms of controls that are exerted on the entity we call an HMO. Second: We feel it is important to achieve policy consistency between what we would do under medicare and what the Federal Government mandates for private employers. So, we would argue not against a broadening of the definition as such, but against a broadening in the context of medicare alone. Thus, we would say that if the title XIII definition is too narrow, then by all means reexamine it, and title XVIII would come along by reference. PAGENO="0262" 254 The next point is from a perspective of administrative simplicity. We very much want to administer the medicare program for HMO's jointly with the title XIII system of administration, mean- ing that we would rely insofar as possible on the Office of HMO's to do the qualification and continuing compliance process. It becomes more difficult if you have two separate standards, one for medicare and one for private employers. And, again, I would ask that one look at why would one want something broader for medicare than private employers? Finally, and I think this point is important, the broadening of the definition is a two-edged sword. On one hand, you do bring in new organizations with which we would be dealing on a prepaid basis with, as you say, all the right incentives. On the other hand, in some sense, we would be stifling competition, particularly in States with their own dual choice laws for the following reason; we find that in States with dual choice laws, the prepayment entity, has fewer reasons to seek Federal qualification. And if in addition these entities may have access to the medicare market without their having to come in for Federal qualification, the only set of HMO's that really needs Federal qualification is the new strug- gling HMO that has applied for a Federal grant or a loan. So, in effect, we would be advantaging the existing big boys relative to the struggling HMO that requires Federal qualification for purposes of getting grants and loans. So, I would suggest that the competition aspect of this is a two-edged sword. Mr. GRAMM. Let me just respond. I want to ask one final ques- tion. I do not know that I buy the idea that by setting out require- ments for the federally qualified to particpate in Federal programs or to be exempt from things like certificate of need, you encourage competition. And, I think there is logic for setting a different standard on things like certificate of need than we have on things like the payment of medicare and medicaid. It seems to me that people in HEW went crazy in opposing the prepaid provider amendment because they saw that as a vehicle whereby hospitals might find a loophole to get at a certificate of need by going into some kind of prepaid format. It seems to me there was too much concern with them escaping control and too little recognition of concern that that is exactly what we would like them to do, to go to a format whereby they were at risk for decisions that they made. And, by escaping controls, they were moving into exactly the kind of system, at least in the direction of it, that we would choose for them to move in. Mr. SATFERFIELD. Would the gentleman yield? Mr. GRAMM. I would be happy to yield. Mr. SATTERFIELD. I would like to follow up on a question you asked because I read the statement Mr. Schaeffer submitted, and, frankly, I am not real clear about the answer you just got about the HMO's. The gentleman who responded to the question talked about defi- nitions. The statement of Mr. Schaeffer talks about qualifications. And, my question is, are we saying and is what you are attempting to say here that for medicare purposes only federally qualified HMO's shall be group practices with which contracts may be let? PAGENO="0263" 255 Dr. Fox. On an at risk basis, that is correct. By qualification we mean those organizations that are qualified under the dual choice provisions of title XIII of the Public Health Service Act, which was drafted by this subcommittee. Mr. SATTERFIELD. I have some difficulty in understanding the assertion's made here in the prepared statement, and I have the same difficulty with your follow up on this. To limit medicare to federally qualified HMO's do otherwise would do damage to other kinds of HMO's or group practices in terms of competition, and yet, I understood the original statement, the oral one given by Mr. Schaeffer, to place some emphasis on the need for competition. I do not follow what you are saying. Mr. SCHAEFFER. I think the confusion has to do with the level at which you describe competition. If you look back at the history of the Federal Government's involvement in trying to stimulate HMO's-- Mr. SATTERFIELD. I know all about that and I do not look back at it with any great pride, but go ahead. Mr. SCHAEFFER. The locus of responsibility and the method for stimulating that development had to do with a public health serv- ice statute which permits them to provide funding to create HMO's and then loans once an HMO is up and running. What Dr. Fox was saying is that under a certain set of assump- tions if you were to broaden the definition and permit other enti- ties that are not HMO's in the sense of title XIII to participate, that perhaps dealing with those entities would make it less likely or less viable for new HMO's to grow and develop under title XIII. Mr. SATTERFIELD. I understand that, but what you are really saying is that what you want is a monopoly, preferring federally qualified HMO's to the exclusion of all others. Dr. Fox. Any organization can come into HEW to be federally qualified. There is no aspect of monopoly---- Mr. SATTERFIELD. I understand that, but I understand that when they do come in there are certain inabilities they must assume and certain prerogatives they must surrender in order to attain qualifi- cation. Dr. Fox. But, what we are saying is if there are problems with the way in which title XIII is drafted-- Mr. SATTERFIELD. I know what you are saying and I would like to ask this question. Let's go one step further. If federally qualified HMO's are the standardized provider that you seek, and you think Federal qualification guarantees the best service, can we anticipate then that ultimately a decision will be made that only HMO's can deliver medicare services and then physicians, rather than being paid on a reimbursement for services basis, will have to be a part of a federally qualified HMO? And, if not, why is that not a logical conclusion? Dr. Fox. Absolutely not. Mr. SCHAEFFER. I think a concern that we have is that the current fee for services approach to reimbursing physicians, coup- led with the methodology used to provide the specific payment for the specific service, has in many cases led to or assisted, the rapid increase in costs. We are searching together with the Congress and PAGENO="0264" 256 many people in the academic world for alternative ways of deliver- ing service. Our model at this point in time would be to try to stimulate a variety of options so that the consumer, our beneficiaries, over 40 million consumers in America, will have a variety of options, and we certainly would not want to choose one option only, either all fee for service or all HMO. What we would like to do is develop a variety of options, support those options through the medicare program, and then permit beneficiaries to choose the option that they feel most comfortable with. Mr. SATrERFIELD. I am not going to take any more time, but you mentioned briefly that you have got to understand the history of HMO's, and that is exactly what bothers me, because the first time it was mentioned to this subcommittee in this room by Elliott Richardson, he outlined a system of 2,000 federally qualified HMO's to serve 85 percent of our population. Then it was admitted that in order to do that, HEW would have to franchise them on a geographic basis. That idea bothers me, and it seems to me that this is all tied in to what is being said today and where we may be going. Ms. MIKuISKI. Would the gentleman yield, whoever's time it is? Mr. GRAMM. I would be happy to yield. Ms. MIKuLsKI. I would like to pick up, if I may, on Mr. Schaeffer's comment that they want to stimulate a variety of inno- vations to bring about competition. It seems that the discussion has been limited to reimbursement of physicians, whether they are fee for service doctors or corporate doctors. I would like to ask, as part of that stimulation of innovations, what other options and innovations are you talking about other than reimbursement of physicians? It seems to me that we contin- ue to use the marketplace vocabulary, and I do not happen to think it is appropriate to health care because I do not believe that the consumers control themselves the way they do in insurance. What other options are you talking about to stimulate competition other than this? For example, I am interested in direct reimbursements to other health professionals. I am interested in the reimbursement of pre- ventative approaches, such as nutritional counseling to older people. Are you considering options along the lines or is the battle- ground simply going to be the fight between fee for service docs and corporate docs? Mr. SCHAEFFER. The discussion we have been having this after- noon has been, I thought, in the context of the HMO proposals. If you go broader than that, I think you will find there are a variety of things we are doing which we think are very innovative. Rural health clinics, for instance, provide a setting in which physicians' assistants and nurse practitioners can be reimbursed. We have a variety of innovative ways for reimbursing hospitals across the country in State prospective reimbursement systems. And, we have a variety of demonstration projects that embrace sometimes hospital care, acute care, but more typically a variety of long-term care options that span the need from the acute setting all the way to home care. And, in most of these areas, we are PAGENO="0265" 257 looking at both different or innovative ways of organizing to pro- vide the care and frequently an innovative way for reimbursing. In our ESRD regulations, for instance, we have the opportunity to reimburse in other than the reasonable cost methodology that we must currently use for hospitals, and in the rural health area, we have the opportunity to reimburse-- Ms. MIKuLsKI. Mr. Schaeffer, those examples are helpful for me to know, as we debate HMO's since we are really looking at what the other policy issues than medicare and medicaid are going to be and that is why the discussion has broadened. If I could just summarize before we go to a vote, does the expira- tion of these other alternatives for a health care system-a compet- itive health care system, not a competitive medical care system, have a policy priority within HCFA and HEW and does it rank along with HMO's, or is the administration intent on pursuing the HMO strategy as its single and foremost approach? Mr. SCHAEFFER. I think it is an excellent question and by virtue of the way we have come out on the particular HMO issue because it is before the committee, we may have given the wrong impres- sion, but I would say quite the opposite. Our concern is to be an actor in a health care delivery system which has a variety of options for our beneficiaries and which provides alternatives for them, the one they are the most comfort- able with in a manner that is cost-effective. So, our goal is not simply to stimulate HMO's in isolation, but to be a facilitator in the entire health care system for a variety of different ways, better ways, we hope in all cases of providing care to our beneficiaries. By virtue of our size, the number of beneficia- ries, and the amount of dollars that we put into the system, how we go about doing that can be helpful or can disadvantage some of the providers. Therefore, we try to move as deliberately as we can and be as helpful as we can. But, our goal would be to have a general system improvement, and not simply HMO's and every- thing else the way it is now. Ms. MIKULSKI. I yield back my time. Mr. SATTERFIELD. We now have a vote on the floor. Before I recognize Mr. Dannemeyer, I think it would be proper for us to recess so that Members may go to the floor and vote. Therefore the committee will stand in recess pending the vote on the floor. We should reconvene in about 10 minutes. [Brief recess.] Mr. SATTERFIELD. The subcommittee will come to order. The chair recognizes Mr. Dannemeyer. Mr. DANNEMEYER. I would like to ask Mr. Schaeffer, on page 14 of the statement furnished to the members, not the one from which you read, Mr. Schaeffer, you make reference at the bottom of that page to a point about "The administration favors the mandatory restriction on eligibility when property is transferred to obtain medical or financial assistance." Would you tell me your reason why you want to make that mandatory? Why wouldn't you be content to leave that decision to the States? Mr. SCHAEFFER. I think the issue is consistency nationally. PAGENO="0266" 258 Mr. DANNEMEYER. Why must we have consistency nationally? What is the good being served by a consistent national policy on that issue? Mr. SCHAEFFER. It simply would, again if you look at it national- iy, provide a different kind of treatment depending upon the State in which the individual lived, and in terms of these kinds of ques- tions, it seems to us there should not be a differing interpretation. That is, if the transfer of that kind of asset is inappropriate, if it is an attempt to get around the provisions of the program. Mr. DANNEMEYER. Do you believe there are States in the Union where there is not an adequate enforcement of eligibility for people who have transferred assets in order to acquire eligibility? Is that what your concern is? Mr. SCHAEFFER. No, the medicaid program is a State-Federal partnership, and the Federal legislation has in it a variety of minimums or a variety of Federal mandates. Many other things are left up to State discretion. And, on this point, we felt that this one belonged in the set of those things which the Federal Govern- ment requires. Mr. DANNEMEYER. Ordinarily, when you find a need to change something you must say or be able to say that what exists now is not working right. Normally, that is a progression which is not unreasonable or illogical to pursue. And, if you believe that this requires a mandated Federal provision as opposed to a discretion- ary State provision, you must have some evidence that the discre- tionary aspect is not being followed or pursued at the State level to protect taxpayers' interests. And, I am interested in what evidence you have to disclose that the discretionary element at the State level is not being enforced. Mr. ScHAEFFER. I think that most of the background work which has been done on this issue has to do with and is embodied in the Social Welfare Reform Amendments of 1979, the so-called welfare reform. It has to do with SSI. We can submit that for the record. Mr. DANNEMEYER. Well, what do you know about it? Mr. SCHAEFFER. The consistency we are trying to achieve has to do with eligibility, not just for medicaid, but for SSI. The concern is that there be a national set of minimums. Mr. DANNEMEYER. But what evidence do you have? Mr. SCHAEFFER. I personally do not have the evidence you are seeking. I do not know. Mr. DANNEMEYER. If you do not have that evidence I will have to ask you what justification you have for including such a statement in your statement. Mr. ScHAEFFER. There is no statement about evidence. Mr. DANNEMEYER. You see, normally when someone comes before a committee and testifies as to a conclusion, "The adminis- tration favors a mandatory restriction on eligibility", and so on, there must be some evidence which you or somebody in the Depart- ment has run across somewhere in the administration which prompts you to come to that conclusion. In other words, what we have now is not working right and we will have to change it. The Federal Government will have to assert more of its authority in this field. PAGENO="0267" 259 And, I am asking you a very simple question. What is your evidence to support the conclusion that the existing system is not functioning adequately so that it is necessary from the standpoint of protecting public interest that we make a change for more Federal control? Mr. SCHAEFFER. I would rather submit that for the record be- cause it is based upon, to my understanding, the work that has been done with regard to the welfare reform amendments, and I would rather defer to that work. I think Dr. Fox has background in the welfare reform area. Perhaps he can speak to it. Dr. Fox. Mr. Dannemeyer, there is a very real problem we are trying to address, which is the problem of a certain number, maybe a small number of persons, who are aged or disabled and who often have very high levels of assets they have acquired over a lifetime. In some cases, they will give those assets, say to their children, for the expressed purpose of getting on SSI and medicaid, perhaps because they have already entered a nursing home. And, if they can give away their assets, then they qualify for Federal welfare programs. What we are saying is that this is wrong, and therefore, where individuals do give away their assets for a 2-year period we have proposed to assume that they still have access to those assets. What is going on is wrong, people who are in some cases fairly wealthy, giving away their assets for purposes of getting SSI and medicaid. We are proposing to change both SSI and medicaid to not allow people to become eligible for federal programs where that happens. There is indeed a very real problem. Mr. SATTERFIELD. May I interrupt at this moment? Mr. Schaeffer mentioned he wanted to submit something for the record. Do you still wish to do so? Mr. SCHAEFFER. Yes, sir. Maybe I misunderstood the question. Mr. SATTERFIELD. Without objection, that is ordered, and if you will submit the information, it will be accepted into the record. [The material to be submitted was not available to the subcom- mittee at the time of printing.] Mr. DANNEMEYER. Thank you, Mr. Chairman. If this recommendation were adopted, that is the provision would be made mandatory, then whose duty would it be to enforce or go after the transferee for the assets so that eligibility would be deferred until those assets had been exhausted? Dr. Fox. That responsibility would be vested in the agencies that now do the eligibility determination which, in the case of the medicaid program, depending upon the nature of the State, it may be done by the Federal Government or by the State. Mr. DANNEMEYER. Under existing law it is the responsibility of the State to pursue that, is it not, under eligibility? Dr. Fox. In States having agreements with the Secretary the Federal Government establishes medicaid eligibility for SSI recipi- ents, in other cases the eligibility determination is made through the States. Mr. DANNEMEYER. Yes, so right now the State is supposed to enforce that, to go after the transferee and compel the transferee to exhaust those resources before resort is made to the public treasury, isn't that right? PAGENO="0268" 260 Dr. Fox. Again, it depends upon the individual State involved and the specific relationship between the Federal Goverment and that State. It does vary among States as to what the relationship with the State is. Mr. DANNEMEYER. Your department has facts or evidence that this problem is going on. Have you a means under existing law to compel the State to go after that transferee? Dr. Fox. Yes, we do. Mr. DANNEMEYER. Under existing law? Dr. Fox. Oh, under existing law, no. In fact, as I understand it, we are prohibited from going after the transferee, and that is what we are trying to change. Mr. DANNEMEYER. Is there not some provision in the law where if those facts come to your attention you have enough leverage under the program to say that the State is going to have to make an effort to recover those transferred assets before eligibility is established or resort to medicaid? Dr. Fox. No, sir. As I understand existing law, an individual is indeed free to transfer assets if they want to, and having done so to immediately claim that they are impoverished. That is under exist- ing law. We have no authority to change that under existing law. Therefore, we are asking for legislative change. Mr. DANNEMEYER. Thank you. Mr. SATTERFIELD. Mr. Schaeffer, I would like to invite your atten- tion to pages 11 and 12 of your prepared statement. I understand that in H.R. 4000 you support a provision for civil money penalties for fraud. I am interested in your observation that: We have found through out State broad control units that criminal penalties have not proven to be adequate deterrants against fraudulent acts under the programs. In some cases, defrauders are able to assess the limits below which it is not worth the Federal Government's effort to pursue them. Are you saying that the Department of Justice is not prosecuting a crime when we have defined that crime simply because of the amount of money stolen? Mr. SCHAEFFER. On occasion, either the State prosecutors or Fed- eral prosecutors, depending-- Mr. SATTERFIELD. Aren't we talking about Federal prosecutors? Isn't it a Federal crime? Mr. SCHAEFFER. Many of the problems coming up at the State level under State medicaid programs are referred to the State prosecutors rather than the Federal, but it could be either. There is a combination of factors that often leads to the case not being taken all the way through. Mr. SArrERFIELD. Is it based upon the amount of money in- volved? Mr. SCHAEFFER. It varies. Sometimes it is the amount of money, or that is the impression we have. Mr. SATTERFIELD. Do you know this for a fact? Mr. SCHAEFFER. Yes, sir. Mr. SArFERFIELD. That the Department of Justice has refused to prosecute because of the amount of money involved? Would you submit for this committee some instances in which that happened? I think if the Department of Justice is pursuing such a policy, we would want to know about it and pursue that. They are under an PAGENO="0269" 261 obligation to prosecute for criminal activity in this country and the only basis on which they can refuse to do so is that they do not have a case. Mr. SCHAEFFER. Well, I think that the typical case would be one where there is referral from the State's section 17 unit, the fraud and abuse unit, to the prosecutor, and that prosecutor feels that the case could not be taken through to a successful conclusion. Mr. SATTERFIELD. Well, that might indicate that there is not a fraud. Mr. SCHAEFFER. Right. Mr. SATTERFIELD. Then, the amount is not involved. It is a ques- tion of whether or not a fraud is-- Mr. SCHAEFFER. Correct. Mr. SATTERFIELD. Then, I am interested in why you feel in that circumstance, if there is not sufficient evidence of fraud that would sustain a prosecution, that you feel you should then pursue assess- ment of penalties on some test which is less severe. That is what you are talking about, is it not? Mr. SCHAEFFER. My understanding is that the typical process or the typical life cycle for many of these situations involves a very costly process and a very time-consuming process on the part of the prosecutor, State or Federal. Mr. SATTERFIELD. Then, I go back to what I just said. Are you contending that because of the costs involved the Department of Justice is not pursuing its duties? Mr. ScHAEFFER. No, sir. What I am saying is there are a variety of things that come before the prosecutor and there are decisions made on a daily basis as to which case to pursue. For some of the activities that concern us, there may be a pattern of abuse. For instance, in terms of the way a certain series of bills is submitted by a practitioner of one kind or another. The civil money process which would have all the appeals rights would serve notice on those kinds of people or institutions. Mr. SATTERFIELD. You said it includes due process and the right of appeal. Do they have a trial by jury? What jury? Mr. SCHAEFFER. They can go through this process and then take it to the courts. Mr. SATTERFIELD. Not to a jury. Under this particular provision, your appeal is to the appellate courts on the basis of the record, and that record comes about by virtue of the Secretary of HEW assessing the charge, the Secretary of HEW conducting the hear- ing, the Secretary of HEW making the decision, and that is not due process in the same sense that I am talking about. They do not have a right to a jury trial, is that not correct? Mr. SCHAEFFER. Yes, sir, but I believe it is similar to the way the administrative law judges adjudicate disputes. Mr. SATTERFIELD. I happen to have been a Federal prosecutor and I happen to know a little bit about what I am talking about. And, I cannot believe for one single minute that there is a Federal prosecutor in this country who would take into consideration how much time or trouble a criminal case would cost the Government or his office and refuse to prosecute. I do not believe it and if you have any evidence of it, I hope you will submit it to the committee because I think we would want to pursue that. PAGENO="0270" 262 I would like to ask you another question. Is it not your right under civil remedies to sue to recover the moneys falsely paid because of fraud? Mr. SCHAEFFER. Yes. Mr. SATTERFIELD. Why do you want to assess an additonal penal- ty? Mr. SCHAEFFER. Because the kinds of practice that are of concern to us are deliberate and consistent abuse over time. In many cases, they appear at a very low level in terms of the amount of money involved. Mr. SATTERFIELD. If that be true, they are guilty of a crime are they not? Mr. SCHAEFFER. A crime or an abuse of practice. Mr. SATTERFIELD. Well, an abusive practice would be enough evidence for the Federal Government to get back the money wrong- fully obtained. Why should it get any more? Mr. SCHAEFFER. Let me put it differently. This proposal is aimed at individuals or organizations who have a pattern of this behavior who have been able to, for one reason or another, feel safe in behaving in this manner. Mr. SATTERFIELD. In other words, you are telling me that you think even though you cannot establish an offense of fraud or abuse for the purpose of prosecution, that it would help your office if you could exact somewhat the same penalties, even in the ab- sence of that offense? Mr. SCHAEFFER. I think we think there are mechanisms more efficient to get at this kind of abusive practice. Excuse me just a second. Mr. MERRILL. Mr. Satterfield, we would be happy to provide for the record some information on the number of cases referred to the Justice Department and the number of cases acted upon. Mr. SATTERFIELD. That does not mean a thing. The prosecutor might know something you don't know. Mr. Schaeffer has stated here today that there are cases where the Federal Government refused to prosecute because of the cost involved or because there was not enough money involved to justify it. Mr. MERRILL. I was going to say that we will try to determine in providing that information for the record on what basis the Justice Department did not act. Mr. SATrERFIELD. I would assume you would already know. Mr. MERRILL. I am saying we will provide it for the record. But, I do not think Mr. Schaeffer or anyone here is trying to indict the Justice Department for lack of action. Mr. SATTERFIELD. I realize you are not trying to but in your statement that is precisely the result. Mr. MERRILL. I think what we are concerned about and what the Justice Department is concerned about, is the fact that their work- load is considerable, their resources are limited and, at times, while they might take action on a case eventually, the time frame in which that occurs can include quite a delay. I would like to point out one other thing that this proposal that we are advancing is not unique in the Federal Goverment. There are, I think, 19 agencies in the Federal Government that have civil money penalties, and they are used quite extensively. PAGENO="0271" 263 Mr. SATTERFIELD. I want to say my questions on it are not unique either because I disagree with most of the other instances. Mr. MERRILL. The last thing, on your question about jury trial. While our proposal was not specific on this, we would certainly be happy to discuss the possibility of putting in a de novo judicial review requirement within this proposal. Mr. SATTERFIELD. I think any views you have in that regard might be helpful because this committee wants to try to develop legislation, and any supporting evidence we get from you people would be very helpful. Mr. MERRILL. I would be pleased to provide it. Ms. MIKui~sKI. Mr. Satterfield, could I ask you a lawyer's ques- tion? Mr. SATTERFIELD. I was going to cease my questioning at this point. You are next in line, so I will recognize you. Ms. MIKULSKI. Mr. Satterfield, as you know, I am not an attorney and I am just wondering who prosecutes these cases and would they be different? In other words, right now we have criminal penalties, the proposed legislation would move it to civil penalties. Does that mean that the prosecutor would be different, or would it occur at a different level? Mr. SATTERFIELD. Are you asking me? Ms. MIKuLsKI. Yes. Mr. SATTERFIELD. Yes. In a civil case, you are proceeding in that branch of law that does not involve criminal activity. In a criminal case you are charging a person for doing something wrong, regard- less of what the result or money involved may be. If he has violat- ed a law, a criminal law, he is then prosecuted. The point I make about the suggestion here of a civil penalty is that the initial hearing would not follow due process in terms of normal civil proceedings. It would not go to a court by bringing action, but it would be an assesssment imposed by the Secretary of HEW who would conduct the trial and who would make the deci- sion, and the appeal would not be for a trial de novo with right to a jury, but would be to an appellate court in which the record cre- ated by the Secretary is the record to be considered. Ms. MIKULSKI. So, if I can go back to Mr. Schaeffer, the U.S. attorney or the attorney general of the State would no longer be the prosecutor. Therefore, you think you could proceed in a more rapid or targeted way; is that correct? Mr. SCHAEFFER. The individual, the practitioner, or the provider would have the right of an attorney and would be protected, and I started to say this and did not complete it, by the due process protections of administrative law, similar to these other agencies where this approach is followed. It is not our intent to use a flawed mechanism. This is in use in other departments and we felt it would be appropriate here. We would be happy to work with you to develop additional protections as you feel them necessary. Mr. SATTERFIELD. Would the gentlelady yield for me to respond to that? Ms. MIKULSKI. Certainly, Mr. Satterfield. Mr. SATTERFIELD. It is not a question of it being flawed, I am talking about the approach in general. You can go through a civil proceeding and if you can prove what you are alleging, get your PAGENO="0272" 264 money back or damages. But, HEW is not content to do that. They want to burn the guy and they want to burn him because he has done something wrong for which he is not really liable in the criminal court. I do not understand that kind of approach. It is the penalty aspect of it, the punitive aspect that I find somewhat repulsive, and the fact that there is a punitive aspect to it under which the individual is deprived of a trial by jury, I find that offensive also~ And, even though the Federal Government does it a great deal today, I find it offensive, and I disagree with it. Ms. MIKur~sKI. One of my concerns, and then I will get to my question, is that there have been too few prosecutions in Federal white collar crime. I remember Secretary Califano talking about a list of 100 providers and some of these were never brought to trial. And, in speaking to my own attorney general, we have been talk- ing about how they have been coordinating with you. So, I am interested in ways that we can really move and provide absolute due process. I would also like to congratulate you on your efforts to deal with consumer fraud and the medigap area. This committee held exten- sive hearings, along with Congressman Pepper, on this. And, even in my own newsletter, I tried to present a shoppers guide on that. So, I would really like to congratulate you. I think that that kind of public information, we will save a lot of people a lot of money and heartache. This takes me to my question on HMO's. There are about 50,000 questions I could ask on those 20 pages of your testimony, but I want to focus strictly on the HMO legislation and express to you my concern about HMO's and see what your response would be. My concern is that in order for an HMO to be both effective, efficient, and profitable, that it needs to have as its major popula- tion the most healthy of populations, and that, therefore, I find in my own personal observations that HMO's really are not compet- ing for the old and poor. I do not see them running into the inner city. In fact, I see them practicing what I call beltway medicine, trying to get out as fast and as far as they can. Question No. 1 is, who is competing for whom, No. 1? And, No. 2, do you really feel that using HMO's-I think it is H.R. 4444, that sounds like a good lottery number to play. Is that really going to deal with health care to the old, or are we just kidding ourselves? Are we creating a new cumbersome heavily subsidized federal organizational structure and, in many ways still have the old people of Baltimore or Houston just not being served? Mr. SCHAEFFER. That is certainly not our intent. I am sure you have heard allegations of HMO's skimming the cream and trying to get a population that will be well more of the time than the normal population, you may find that. I don't know. I think from our point of view, though, in terms of our beneficia- ries, our major concern is there is currently no incentive for an HMO to enroll a medicare beneficiary because the payment that medicare makes to the HMO is not the same kind of payment in the same amount that the other enrollees pay. Further, there is no incentive to the beneficiary. The beneficiary gets nothing out of it. What we are trying to do in our proposal is two things. First, PAGENO="0273" 265 provide a better deal to the extent that an HMO is more efficient for the beneficiary by virtue of having that differential in cost. There is one between what the HMO experience would be and fee for service. Ms. MIKuLsKI. What is the better deal? Mr. SCHAEFFER. To the extent that there is a differential between 95 percent of what the fee for service cost would be and whatever the experience of the HMO is with its nonmedicare enrollees that differential in cost in our proposal has to be reinvested, if you will, into the benefits that are provided to the medicare beneficiaries. And, we require that reinvestments result in two things: First, the coinsurance that the beneficiary has to normally pay will no longer have to be paid because the reinvestment is there and, second, which is important for long-range consideration, additional services can be made available. A richer selection of benefits can be given to the beneficiary because there is money available to provide it, richer than what they would ordinarily get under medicare. So, that provides a financial incentive to the beneficiary and it provides a better menu, hopefully, of services for that beneficiary to receive. On the other hand, it provides a mechanism for reim- bursing the HMO in a manner where they know that the money can come in and, indeed, pay for services beyond thOse currently reimbursed. We currently reimburse HMO's on a cost basis, and this would give them more flexibility and a little bit more incentive to participate. Ms. MIKuLsKI. Mr. Schaeffer, I want to be sure I understand what you are saying. If, in fact, an HMO makes money, that money then is to be reimbursed back into expanding services and not as a profit to the HMO. Is that right? Mr. SCHAEFFER. In the case of medicare eligibles? Ms. MIKuLsKI. That is what I am talking about. Mr. SCHAEFFER. Yes. Ms. MIKuLSKI. Well, first of all, I mean I have a certain amount of skepticism about that approach. Remembering why HMO's are in business anyway to provide efficient service at reasonable cost and, at the same time to make a profit for the providers. The HMO's are around to make a buck. I am not knocking them, but that is it. Take the medicare eligibles, which are your old people. They tend to have a high need for primary care. There tends to be multiple and chronic illnesses, often in the same person. So, they are large consumers of health care. No. 1, there might not be a lot of money left over and there is also not an incentive to the HMO to take them if, in fact, the money does not go to a profit but goes into more service. Where would the incentive be? Mr. SCHAEFFER. Two things. First: We are talking about an adjusted rate. In other words, they would be paying a rate equal to what beneficiaries in this particular age bracket would need. So, that in some cases, depend- ing on the enrollment of the given HMO, they would receive a greater amount of money for some of these enrollees than for other individuals. Second: Although the HMO would not profit in the sense of more money taken home, they would indeed have all of their costs 56-071 0 - 80 - 18 PAGENO="0274" 266 covered for a wider range of services. The problem we have now is that HMO's provide a variety of services which we do not cover under medicare which, if provided, can reduce the need for more expensive services. And, in effect, what we are hoping is we will see preventive and diagnostic and counseling services provided. Nutrition counseling services, for instance, could be provided by an HMO under our proposal and be reimbursed by medicare. We believe that focussing of those services and the focussing of medical and associated professionals on health maintenance, as opposed to providing care in an acute setting, will result in a lower cost overall. Further, as the population ages and more individuals become medicare eligibles, it becomes a bigger market and HMO's will become more interested in it, provided there is an easier or more efficient way for us to deal with them. We feel this provides a more efficient mechanism. We are par- ticularly concerned for the portion of the population currently employed which will be retiring in the next 5, 10, or 20 years, which has a relationship with an HMO. We would like to see those relationships continue and we would like to attract additional people into the HMO setting, and we think this mechanism will accomplish that. Ms. MIKuJSKI. Mr. Chairman, I have no other questions. Mr. SATTERFIELD. Mr. Dannemeyer. Mr. DANNEMEYER. Along the lines of the gentlelady from Mary- land, do you believe it consistent with the public interest to estab- lish a policy which hopefully will reduce the cost of medical care for taxpayers and the people in this country? Mr. SCHAEFFER. Yes, sir. Mr. DANNEMEYER. If that is a legitimate objective, isn't it logical that if an HMO is, as a result of cost savings, shouldn't that HMO be permitted to pass on those cost savings to its members rather than being required to increase other services which some Federal agency in its wisdom decides is necessary for the protection of the public good? Mr. SCHAEFFER. In the proposal before you, we attempt to do that by saying the differential, this money can be reinvested in addi- tional services and also in offsetting- Mr. DANNEMEYER. Where does the Federal Goverment get the right to tell this HMO what the HMO is to do with that savings? If we agree that to reduce costs is desirable and if they can reduce it, it is in their economic interest to do so. We are just working counterproductive when we turn right around with your suggested policy change and tell them what they have to do with their cost savings. What sense does that make? Mr. SCHAEFFER. I think the goal of the proposal is to provide an incentive for the HMO and for the beneficiary. The second way the savings can be used-- Mr. DANNEMEYER. Apparently, you do riot have confidence in the ability of the HMO to watch out for the physical health of its members as well as its financial health. Mr. SCHAEFFER. I think the options are for the HMO to offset the coinsurance. In other words, a typical medicare beneficiary is reim- bursed or their services are reimbursed at 80 percent of their PAGENO="0275" 267 reasonable or customary charges after the initial $60 of àharges. The beneficiary pays the first $60 and 20 percent coinsurance of remaining charges. In the case of the HMO proposal we are saying the savings realized can be used to offset that $60 and 20 percent, so that the HMO keeps the money. The beneficiary does not have to pay the $60 and 20 percent. So that is a financial incentive for both of them. In other words, the HMO gets reimbursed at 100 percent of cost, and the beneficiary does not have to pay the 20 percent. Mr. DANNEMEYER. It strikes me it is counterproductive for you and your Department to suggest what this HMO would be doing with this cost savings. I do not think that is good public policy. Mr. SATTERFIELD. I have several questions that I did want to propound. I realize the lateness of the hour. I do have one point I would like to clear up. On page 17, you refer to H.R. 1821 and a provision relating to reimbursement of teaching hospital physicians. It has been a rather controversial issue, as you well know. My question is, in light of the statement you make in connection with the language of that bill, which would provide that a hospital may elect to receive payments on the basis of cost, where it and all of the physicians agree to it, are you saying you do not agree with that proposal? Mr. SCHAEFFER. If I could get the quote-are you referring to the statement on the top of 18, "We do not favor legislative changes * * ~ Mr. SATTERFIELD. On the bottom of 17. We are talking about the question of reimbursement of physicians who operate in teaching hospitals. The question, as you well know, is that many Congress- men feel that this was originally enacted for the purpose of elimi- nating the double payment, where you had interns and residents providing physician's services. The question is, the physician practicing in one of these hospitals would not normally get under this provision-would not be reim- bursed on a fee basis but rather on a cost basis, which makes him different from a physician in a nonteaching hospital. This proposal in H.R. 1821 would say that reimbursement would be on a cost basis where the hospital agreed to it and all of the physicians agreed. What I am not clear on is whether you are stating you disagree with that provision or whether you are just saying that we ought not do anything right now except extend the implementation date? Mr. SCHAEFFER. The department's position is to extend the imple- mentation date. As you know, there has been a tremendous contro- versy over this since it was enacted, and we feel we are nearing some understanding with the professionals. It is still extremely difficult to draft regulations which will get at the problem identi- fied in the Congressional Record, and through our own research, through the mechanism provided in the existing section 227 lan- guage, which speaks to the question of what is a private .patient. What we would like to do is to firm up implementation of this so that the regulations that we have developed can be published in the Federal Register and we can receive public comment. Mr. SATTERFIELD. Is your difficulty with section 227? Mr.~ SCHAEFFER. Excuse me? PAGENO="0276" 268 Mr. SATTERFIELD. Is the difficulty you are experiencing a result of the language of the act? Mr. SCHAEFFER. I think it is a result of real concerns on the part of teaching hospitals that although the act is aimed at correcting an abuse or avoiding a double payment, that in the process of trying to correct that problem other problems are created not intended by the statute for those hospitals. Balancing that off has proven to be very difficult. And, there is a great concern on the part of the teaching hospitals and of Congress, I think, that it be done well. Mr. SATTERFIELD. I can understand the difficulties but I do not comprehend why it would not be a helpful concern for Congress to address the issue and maybe restructure the provision involved to eliminate some of the problems we have. You are not in a position where you could give us any idea what concessions may be likely. I assume that if we extend this for 1 year, we will come to a point next year where you will have the regulations in place and then we will be in a position of having to set them aside. I am just wondering if it wouldn't be better to act in advance. Mr. SCHAEFFER. We would encourage any opportunity that you would like to provide for us to work with the staff on the topics. They are, as you know, rather complicated, but there are a variety of options the Congress might want to pursue and we would be happy to support you. Mr. SArFERFIELD. Thank you. I think we will probably be in touch with you. Are there any other questions of the subcommit- tee? If not, Mr. Schaeffer, thank you very much for a long and te- dious session with us today. I think your remarks will be very helpful to this committee and we appreciate very much your taking the time to appear, along with your colleagues. Our next witness today is our distinguished colleague from Michigan, Hon. William M. Brodhead. We welcome you to the committee and we will be very happy to receive your remarks. STATEMENT OF HON. WILLIAM M. BRODHEAD, A REPRE- SENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN Mr. BRODHEAD. Thank you, Mr. Chairman, for giving me the opportunity to testify here today. I have prepared a statement and submitted it to the committee. You should have copies of it, and I would ask that it be submitted in full in the record. [See p. 271.] Mr. SATTERFIELD. Without objection, the statement will be ad- mitted into the record. Mr. BRODHEAD. Let me try to summarize for you, Mr. Chairman, as briefly as I can what my statement is about. I am here to talk about medigap insurance, which is private insurance sold to senior citizens to close the gap between what seniors actually have to pay for health care costs and what is covered by medicare. As you know, there are very large areas of medical costs which are not covered by medicare. So, quite an industry has sprung up to market these policies to senior citizens. Now the Committees on Aging, both of the House and Senate, have conducted extensive investigations of this field, and they have found that senior citizens are being bilked to the tune of $1 billion PAGENO="0277" 269 a year. That is the estimate the Senate committee made. They are being bilked in a number of ways. First of all, policies are sold which duplicate coverage which is already provided by medicare. Seniors obviously do not know the provision of the medicare law in any detail. None of us do. And, certainly these policies are written in language they cannot under- stand. So, what some companies are doing is selling a policy so they are actually paying for coverage they already have under medicare. Second: In many cases those seniors are buying more than one policy and these policies themselves overlap, so they are paying three times for the same coverage. These policies, many of them, are written in unnecessarily difficult language. They exclude so- called preexisting conditions. And, of course, when you get .to be 65 or 70 years of age just about everything is a preexisting condition. Some of these policies are way overpriced. They are sold by scare tactics. There have been a number of abuses in this field. They are amply documented in both the House and the Senate. It seems to me, Mr. Chairman, there ought to be some standards set by the Federal Government. Therefore, I introduced H.R. 165, the Senior Citizens Health Insurance Act of 1979, sponsored by a number of members, including six members of the Committee on Interstate and Foreign Commerce. This legislation seeks to set some basic Federal standards for these policies. For example, in the area of return of premium, the studies by the House and Senate Committee on Aging have found a wide variation. The more reputable companies, Blue Cross/Blue Shield, for example, return in excess of 90 percent of the premiums they collect in benefits. John Hancock, Aetna, Prudential, State Farm, Home Life, and others have a good record in this area. There are a large number of companies in the field, and some of these companies return as little as 20 percent of the premiums in benefits. Now, if John Hancock, Aetna, and Blue Cross can return 90 percent and some of these companies are only returning 20 per- cent, it is obvious that the public is being ripped off. And, there is no way this problem can be solved without some sort of Govern- ment action because senior citizens cannot be expected, cannot reasonably be expected to know each and every provision of the medicare law. Nor can they be expected to understand these poli- cies. So, without some standard set, they will continue to be ripped off and 8iey are going to continue to be denied the coverage they ought to get. It seems to me it has been made amply clear by these reputable companies that policies can be marketed at a fair price that provides decent coverage, and the companies can make a profit doing it. All I am saying is we ought to require these policies to meet a basic minimum standard. H.R. 165 establishes five standards. They are set forth on the third page of my statement near the top. First of all: A policy must return, or an insurance company must return at least 75 percent of the premiums for medigap coverage in the form of benefits. PAGENO="0278" 270 Second: An absolute prohibition on the sale of insurance which duplicates medicare coverage. Third: A drastic limitation of preexisting condition clauses, which is a big area of abuse. Fourth: A requirement of full disclosure of all policy provisions to the purchaser and a means of implementing that. Fifth: A requirement that policies be written in plain and simple language. A number of States have experimented with these standards. They have found that you can write insurance policies in plain, simple English so people can understand them. If you are going to expect the free market system to work, we are going to expect that people, the consumer, will seek out the best values and companies will compete against each other, as they should, to provide the best value to the consumer. This requires that the policies be set forth in plain and simple English so that the consumer can judge which policy is the best buy. The way my bill would work, we would give the States a couple of years to move on this. If they did not move on it, then the Federal Government would set some standards. I think this is an area that basically should be left to the States. Let's face it. The States have had the responsibility. They have not done it. The studies document this fact. It is time for the Federal Government, which has undertaken the responsibility for the health care of senior citizens and undertaken the responsibility for medicare, to see that this program is not abused by the insurance companies. The Ways and Means Committee has adopted a form of my bill, the Shannon amendment which, essentially, is a combination of a bill introduced by Mr. Pepper and myself. I would ask you, Mr. Chairman and members of this committee, to look at my bill and to consider it very carefully. I think it properly belongs in this piece of legislation that is in front of you. At least the Ways and Means Committee felt this way, and I hope you will feel this way and look at it very carefully. Thank you. [Mr. Brodhead's prepared statement follows:] PAGENO="0279" 271 TESTIMONY OF REPRESENTATIVE WILLIAM M. BRODHEAD ON H.R. 4000 BEFORE THE SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE OCTOBER 16, 1979 Mr. Chairman, I am here to discuss the problem of Medi-gap insurance. Medi-gap is a term applied to private health insurance which supplements coverage provided to senior citizens under Medicare. I have introduced H.R. 165, the Senior Citizens' Health Insurance Standards Act of 1979. This bill which has been co- sponsored by 6 members of the Committee on Interstate and Foreign Commerce (Representatives Luken, Madigan, Markey, Mikulskl, Moffett, and Ottinger) has been referred jointly to this Subcommittee and the Subcommittee on Health of the Ways and Means Committee. H.R. 165 would outlaw gross abuses In the marketing of Medi- gap insurance to senior citizens. As the members of this Subcommittee know, health care costs are a major expense Item and source of concern for the elderly. Medicare covers only 38% of the Senior Citizen's total health bill, a fact which in Itself constitutes a national disgrace. Persons over 65 must pay for Medicare's deductibles and coinsurance and for many kinds of care which Medicare will never cover, including drugs, dental care, eyeglasses, hearing aids, routine examinations and most nursing home care. Even after Medicare and private insurance, the average per capita health care expenditure for the over- 65 age group was $409 in 1978. Because of the gaps in Medicare, senior citizens have turned to private insurance to supplement their health coverage. More than half of the elderly have at least one policy, and many have purchased multiple policies. The annual premium volume of this Medi-gap business is $4 billion. Half of this amount, or $2 billion, represents Blue Cross/Blue Shield business. 10% is accounted for by group sales through commercial insurers. The remaining 40% or approximately $1.6 billion involves individual policies sold to senior citizens. Hearings and a recently-released staff study by the House Select Committee on Aging, chaired by Representative Claude Pepper, and hearings before the Senate Special Committee on Aging, chaired by Senator Lawton Chiles, have documented gross abuses in the marketing of supplemental health insurance to the elderly. Among these outrages were the selling of duplicative and overlapping policies, the sale of policies with misleading conditions and language (for example, policies which claim to cover nursing home expenses but neglect to Inform purchasers that the type of care offered by three-quarters of the nation's nursing homes was exempt), sale of policies with PAGENO="0280" 272 clauses disqualifying beneficiaries who have a disease or condition within a specified period ("pre-existing conditions), the use of scare tactics by agents to sell policies, and failure to disclose In clear, understandable language the contents of policies sold. I wish to extend my highest praise to Representative Pepper and Senator Chiles for the excellent work they have done in uncovering these abuses. The lack of consumer information in the Medi-gap market is so great that it is almost impossible to make rational purchase decisions. There is no standardization of private Insurance policies. Therefore, buyers cannot comparison shop. As a result, these policies often do not compete on the basis of price and offer only a low rate of return to the consumer. In an effort to get complete protection, many people over 65 buy two or more policies which overlap. An estimated 23% of those who do buy private health insurance have some unnecessary duplication in coverage. Unscrupulous agents selling door-to-door and mail order advertisements often mislead or frighten the elderly into `loading up' on two or more policies or replacing policies each year. When theyfile claims, many find that the coverage they thought would fill all the gaps in Medicare falls far short of their expectations. Most supplemental policies will not pay for pre-existing conditions or major gaps in Medicare, a fact which is never clearly stated to the concerned senior citizens. One of the best indications of whether an insurance company is taking unfair advantage of its clients is that firm's loss ratio, which refers to the percentage of health insurance premium dollars paid out in claims. Blue Cross/Blue Shield generally returns about 90% of premiums to the insured in claims. The Major conanercial companies such as John Hancock, Aetna, Prudential, State Farm, Home Life, and others either do not sell Medicare supplemental policies or offer group policies which have loss ratios in the 80% range. Unfortunately, there are far too many companies which have shockingly low loss ratiOs-- some bet~en 20% and 40%. The House Select Conrittee on Aging has estimated that senior citizens are being bilked to the tune of $1 billion every year by unscrupulous companies and their agents. I believe this is a national disgrace and the federal government which helped create the problem through the gaps and If mltations in Medicare has a clear responsibility to act. My bill, H.R. 165, mandates federal minimum standards which companies selling Medi-gap insurance to the elderly must meet. It also directs the Secretary of Health, Education and Welfare to make a comprehensive study of methods PAGENO="0281" 273 to assure that good quality health insurance is available to the elderly at a reasonable price. Under H.R. 165 each state must submit a minimum standards plan to the Secretary of H.E.W. which will accomplish the following objectives: 1. Insurance companies must return at least 75% of premiums in the form of benefits. 2. Prohibition of the sale of insurance which duplicates Medicare coverage. 3. Drastic limitation of pre-existing condition clauses. 4. Requirement of full disclosure of all policy provisions to purchaser. 5. Requirement that policies be written in plain and simple language. The bill utilizes the existing state regulatory mechanisms by requiring each state to change its law and/or regulations to meet at least the minimum standards set up by the bill. States are left the option of adopting standards stronger than those proposed by this legislation. If the states do not regulate the companies themselves, the Secretary of Health, Education, and Welfare shall enforce the minimum standards in that state. Except for minimal administrative expenses, these vital reforms could be accomplished with little additional cost to the taxpayer. Despite recent initiatives by the Department of H.E.W., the state insurance commissioners, and the insurance industry, I strongly believe that federal legislation is needed to correct the abuses found in the Medi-gap market. The Office of Policy Planning in HEW has been working on informational and disclosure aspects of the Medi-gap problem. These actions include: (1) preparation of special materials for mailing to Medicare beneficiaries to help them evaluate supplementary coverage; (2) revision of the Medicare handbook and forms to provide explanations of supplementary policies, and (3) working with various senior citizens' groups to distribute other information which will be helpful to beneficiaries. I welcome these initiatives and regard them as essential first steps in bringing the influence of the federal government to bear on the problem. However, these efforts should be viewed as a beginning. in reviewing this problem. The National Association of Insurance Commissioners on June 8 adopted a model proposal which includes minimum benefit standards for Medicare supplement insurance, a requirement that benefits be reasonable in relation to premiums and specified policy disclosure forms outlining the extent and limitations of medicare supplemental coverage. The NAIC would have us believe that this model PAGENO="0282" 274 proposal and the accompanying disclosure forms would preclude the necessity for any federal legislation in this area. However, only a few states have adopted this model regulation. Finally, the role of the states in dealing with the Medi-gap problem underscores the need for federal legislation. The states have not done an adequate job of regulating Medicare supplemental insurance. Six states have promulgated specific regulations addressed to abuses in the sale of Medi-gap insurance. Only eight states have minimum loss ratios. Less than half of the states have attempted to address the Medi-gap problem in a meaningful manner. Major scandals have transpired in many states and most states have been ineffective in protecting the consumer. Under these circumstances, I do not see how we can afford to continue to leave the states without any federal guidance in this matter. Several weeks ago the Health Subcommittee of Ways and Means adopted the Shannon Amendment while considering H.R. 4000. This amendment combines the approach taken by Mr. Pepper's bill, H.R. 2602, and my bill. It provides for a program of voluntary certification of health insurance supplementing Medicare and mandates a two year study by the Department of Health, Education and Welfare of all aspects of private health insurance which supplements Medicare for the purpose of recommending legislation. Frankly, I favor a more aggressive approach than the Health Subcommittee has taken, and I may offer a substitute when the full Ways and Means Committee considers H.R. 4000. The approach taken by the Shannon Amendment is the very least that this Congress should do in dealing with this problem. While I would prefer the more aggressive regulatory approach taken by H.R. 165, I want to see action taken this year which will assure continuing progress at all levels of government to protect senior citizens from abuses in the marketing of health insurance for the elderly. PAGENO="0283" 275 Mr. SATTERFIELD. Thank you. As a former member of the Commerce Committee I can assure you that we are very interested in your views. I can also assure you that your proposals will receive consideration when we get around to marking up this legislation. Mr. Dannemeyer? Mr. DANNEMEYER. Would you just cover for me a synopsis of what your bill would do in terms of encouraging the States to act? What time table are you suggesting to give to them before the Federal action would become operable? Mr. BRODHEAD. We give them 2 years. We set the standards and we give the States 2 years to meet these standards through what- ever processes. Some of the States-for example, California would already be in compliance, as I understand it. That State has acted. This would require action in some States by the State legislature. In other States a Commission or a Commissioner could take these actions themselves. My bill would give the States 2 years to act and set up standards at least as strong as the standards in my bill. If they do that, then the whole State would be opted out. I have every confidence, Mr. Dannemeyer, that under this ap- proach the Federal Government would never have to act because the States do not want to give up this responsibility. The insurance companies would much rather deal with the States than with the Federal Government, and I would much rather have the States deal with it than the Federal Government. My own view is, let's set up these standards. Then I think the States will comply-some already have. Mr. DANNEMEYER. What does your bill provide, that if a State did not act in a 2-year period, then the Federal Government-- Mr. BRODHEAD. The Federal Government, then, would regulate the sale of medigap insurance in that State. Mr. DANNEMEYER. What if that State thereafter would adopt its own regulations? Mr. BRODHEAD. Then the Federal Government would no longer regulate the sale of those policies in that State. Mr. DANNEMEYER. Thank you. Mr. SATTERFIELD. I would like to ask you one question. I recog- nize that the conditions, the ones that you mention, the No. 1 and No. 3, the return of treatment on the one hand and limiting preexisting illnesses could have an effect one way or the other. What I am not sure, when you mention drastic limitations on preexisting illness, are you really talking about preexisting health conditions or the preciseness of language in identifying those condi- tions, or both? Mr. BRODHEAD. Well, clearly we are talking about the preciseness of language, but there also needs to be, Mr. Satterfield, some modification in the use of these things. When a person gets to be 65 or 75 years of old, normally their body starts to wear out. There are a number of problems. It is hard to say what the genesis of all diseases are. I sympathize with the problem of the insurance company not wanting to take on, or not being able to make money in taking on, PAGENO="0284" 276 somebody who is going to drop over tomorrow or go in for a long hospitalization tomorrow. I have no quarrel with that. What the studies have shown, while some of the companies have taken a responsible approach, others have written their policies in such a way that practically anything a person comes in for, arthritis, a heart condition or anything, that they cannot get anything back. When they are only paying out 20 percent of their premium in the form of benefits, they are pocket- ing 80 percent of the premium. One of the ways they are doing that is just saying "excluding." That needs to be limited. I am not qualified to say exactly how my bill does not set forth, exactly how. The experts in the insurance and medical field should agree on a set of standards, that this is a preexisting condition. If you have to go under the knife tomorrow, it is unreasonable to expect an insurance company to pay for that. On the other hand, you have to recognize that something like arthritis, for example-it may be something that is normal and is going to go on. Mr. SATTERFIELD. I would assume during the course of hearings we will be getting some specific information. I can envision that this might be one of the problems in marking up a provision like this. As we proceed, if you have any additional views in light of the testimony we would be most appreciative to receive them. Mr. BRODHEAD. Thank you, Mr. Chairman. Mr. SArFERFIELD. Thank you very much. Our next witness is Ms. Gail Shearer, program analyst, Office of Policy Planning and Evaluation, Federal Trade Commission. We welcome you to the committee. We would be very happy to receive your statement. If you have a lengthy one, and if you would like to paraphrase it, we would be happy for you to do so. STATEMENT OF GAIL SHEARER, COORDINATOR OF INSURANCE TASK FORCE, OFFICE OF POLICY PLANNING, FEDERAL TRADE COMMISSION, ACCOMPANIED BY TERRY LATANICH, BUREAU OF CONSUMER PROTECTION; AND ELIZABETH HILDER, BUREAU OF CONSUMER PROTECTION Ms. SHEARER. Given the lateness of the hour, I think I would prefer to summarize my remarks. I have submitted a statement for the record. I would appreciate it if it would be included. [See p.-.] Mr. SATTERFIELD. Without objection, your full statement will be admitted into the record at this point. We will be happy to receive any other comments that you have. Ms. SHEARER. Thank you, Mr. Chairman, for the opportunity to testify today about private health insurance to supplement medi~ care. Before I begin, I must mention I am testifying as a member of the staff of the Federal Trade Commission. My testimony does not necessarily reflect the views of the Commission or any of its mem- bers. Let me point out today that this is standard FTC policy and that the Commission has voted to approve the statement as written. PAGENO="0285" 277 I would like to introduce two people with me today: Terry Latan- ich on my left and Elizabeth Hilder on my right from the Bureau of Consumer Protection. I would like to begin by highlighting four major points I would like to make today. First: We are convinced of a need for more data before an at- tempt should be made to regulate this market. We endorse the concept of an impact evaluation of the approaches that have been tested in various States. Second: We prefer that any legislation at this point not include a presumption in favor of voluntary certification. We have no reason to think that the voluntary certification approach is better than some of the approaches that currently are being tested in the States, such as standardization of policies and minimum standards. In addition, we have some reason to think that the voluntary certification approach could be worse than some of these other approaches and could actually do some harm to the market. Third: We propose that the study be a joint study between the FTC, HEW, and the NAIC. In light of the FTC's expertise in this issue and in evaluating consumer information and disclosure pro- grams, we suggest that the FTC be the lead agency in this study. Fourth: Today, the medigap problems confront 23 million elderly Americans. If national health insurance becomes a reality and if a national health insurance plan leaves any gaps in coverage, the scope of the problem could explode. If we could learn from the medigap problem, perhaps we could avoid problems such as sales abuse and consumer confusion under national health insurance. Previous hearings have covered in great detail the many prob- lems that exist in this market. Rather than go into great detail today, I will attach to my testimony copies of former FTC Commis- sioner Elizabeth Dole's testimony before two congressional commit- tees and will summarize the FTC staffs view of the problems. Mr. SATTERFIELD. Let me say that your attachments, without objection, will be admitted into the record of this proceeding. Ms. SHEARER. Thank you, Mr. Chairman. In the staffs view, the most significant problem in the medigap market is widespread consumer confusion. Medicare's complicated benefit structure leaves an extremely complex set of gaps. Of the hundreds of private policies marketed to fill some of the gaps in coverage, no two are exactly alike. Since there is no standardiza- tion of supplemental policies, it is extremely difficult for prospec- tive purchasers to compare benefits and premiums. As a result, insurers who sell to the over-65 age group do not compete on price. Thus, while inadequate consumer information gives unscrupu- lous agents an opportunity to misrepresent what they are selling, the underlying information problems will not be solved by policing against dishonest and fraudulent agent behavior. Even knowledge- able, assertive consumers who resist agents' pressure tactics and take plenty of time to reach a decision are unable to compare policies. In seeking the solutions to the problems, we urge you to attack not only the problems of agent abuse, of which there are many, but also the lack of price competition, the marketing of PAGENO="0286" 278 inadequate and inappropriate products, and the sale of duplicative coverage. I would like to say at the outset that the FTC has no interest in regulating the marketing of insurance. By adopting the McCarran- Ferguson Act, the Congress decided to grant primary regulatory authority over the business of insurance to the States. But as I will discuss more fully in a few minutes, I do believe that the Commis- sion can be of assistance to Congress in obtaining answers to the questions which hold the key to sound medigap legislation. The main point I would like to emphasize today is the need for more information about the effectiveness of various policy alterna- tives for regulating this market. Fortunately, a natural experiment is already underway, as several States have already implemented a variety of regulatory approaches ranging from disclosure of infor- mation, to minimum loss ratios, to standardization of policy bene- fits. In addition, last June the National Association of Insurance Commissioners adopted a model regulation that establishes a mini- mum standard for some of the health insurance policies sold to the medicare-eligible. In August 1978, the FTC's Office of Policy Planning released a policy issues paper on medicare supplement insurance. This paper recommended that an impact evaluation be conducted to determine the effectiveness of state regulations in this area. We are now funding the first step-the design phase-of such a study. Attached is a detailed description of the work that is under- way. Later in this statement I will expand on our recommendation that Congress direct the FTC to conduct a full-scale study and report its results to Congress. First, since the subcommittee is currently considering several bills that would attempt to regulate this market, I will describe the key principles which we believe should be followed in shaping good medigap regulation, and some questions which must be answered to develop sound remedies. In my written statement, I set forth a number of principles which we feel should be followed in shaping good medigap regula- tion. I will summarize those. The first is comprehensiveness. Legislation should address all the kinds of health insurance sold to people over 65. This includes medigap insurance, hospital indemnity policies, dread disease poli- cies and policies sold not only by mail but also by agents. Our concern here is that if the legislation does not address all of these sectors, the effect may be to shift abuses into another seg- ment of the market. The second point deals with uniformity. For some regulatory approaches, uniformity may be desirable to both reduce compliance costs and consumer confusion. There are advantages and disadvan- tages of uniformity. We think it is a primary area that should be studied. The third principle deals with price competition. Any regulatory intervention in the medigap market should aim to bring about constructive competition based on price. We are not sure whether voluntary certification or the minimum standard approach will facilitate this. It r~~eds more study. PAGENO="0287" 279 The fourth principle deals with reasonable return. Policy holders should be assured that any medicare supplement policy will give them a reasonable return on their premium dollars. We have a number of questions about whether minimum loss ratios can be effectively enforced. This is one option for attempting to assure a reasonable return. The fifth area is full information. Consumers should get full information about medicare is gaps and about the coverage that supplemental policies provide. The sixth deals with public participation. Consumers and citizen groups should be able to participate in developing any regulations in this area. Seventh, the regulation should try to end agent abuses. We ques- tion whether voluntary certification programs such as those envi- sioned under H.R. 2602 and H.R. 4000 will substantially reduce agent abuses. As we understand these proposals, HEW will be instructed to develop guidelines for acceptable medigap policies and would certify policies which meet those standards. I do not believe that there is enough information to decide whether voluntary certification would solve or exacerbate the cur- rent medigap problem. As we have learned in the vocational school market, Veterans Administration approval of courses for VA bene- fits has been used as a marketing tool by unscrupulous sales agents. So-called governmental approval has led many an unsu- specting consumer to believe that the Government endorsed or stood behind the product being sold. The same scenario has been true with respect to the land sales area where the involvement of HUD in preparing reports has been converted by unscrupulous sales persons into a formal Government endorsement or involve- ment in their activities. Creating yet another form of government approval may place in the hands of sales agents another sales tool to prey on the unwary. Another fundamental problem raised by a system of voluntary certification is that we simply do not know enough to say what standards a "certified policy" should attain. In this sense, creating a system of voluntary certification begs the critical questions. The point we are continually emphasizng is that until data is gathered to analyze the substance of the policies being marketed, the premium/benefit ratios of those policies and other similar ques- tions-it is difficult, if not impossible, to draft guidelines that can state with certainty what a good medigap policy must include. And finally I will turn to our recommendation that the FTC conduct an impact evaluation of the effectiveness of the different regulatory approaches. We have posed, but we have not answered, some of the difficult questions about regulation of medigap insurance. These questions must be addressed before an effective remedy can be devised to cure the problems in the medigap market. Numerous mechanisms have been proposed to solve the medigap problem-voluntary certi- fication, presale disclosures, standardization, regulation of loss ratios-yet no one really knows how effectively they work, or what costs may flow from these regulations in the form of higher premi- um costs and reduced consumer choice. PAGENO="0288" 280 An impact evaluation study would answer these questions. Sever- al States have implemented regulations concerning medigap, and their regulatory approaches differ widely. Some States require agents and insurers to give out booklets or special disclosure forms. Other States use a benchmark minimum loss ratio; they look into any policy which does not return a certain percentage of premiums to policyholders in the form of benefits. One State, Wisconsin, has established four benefit levels for medigap policies; each one must bear the number for its category. California has set up a different system for medicare supplement plans, labeling them "in-hospital", "in-and-out-of-hospital" and "catastrophic." Just last month, the Massachusetts Insurance De- partment adopted a regulation that bans the sale of cancer insur- ance to people over 65 and establishes three fixed benefit levels for medicare supplement policies. An impact evaluation study would permit policy makers to take advantage of the experimentation which is occuring now in the States. It would help to determine the best features of each State's method of providing information, by studying what kinds of infor- mation consumers were able to use to their advantage in their purchasing decision. It would help to show what kinds of labels or categories are easily understandable. Perhaps most important, the study would tell us whether some formal standardization is necessary in order to permit price comparisons and make the supplemental health insurance market function competitively. 5. 395, the bill introduced by Senator Chiles, directs the FTC to conduct an assessment of State regulatory approaches in the course of a study of unfair and deceptive practices in the sale of medicare insurance. If funds can be secured, the FTC would be willing to undertake such a full-scale impact evaluation. FTC staff members have also been exploring with the staff of the Health Care Financ- ing Administration the possibility of conducting the study as a joint project. We recommend that Congress seriously consider the approach of 5. 395 which directs the FTC to conduct an impact evaluation, in conjunction with HEW and the NAIC. For several reasons, we believe that primary responsibility for the study should lie with the FTC. First: We have experience with the issues. We have been in- volved in closely studying the medigap market since early 1978 and issued a report in July 1978 outlining the problems the elderly face in purchasing medicare supplemental insurance and exploring some of the key policy issues. We are near completion of our design-phase project to devise the methodology for an impact evalu- ation. The two main components of the study are the development and pretesting of a consumer survey and the collection and classifica- tion of all health insurance policies sold to people over 65 in five States. Second: We bring to the task our expertise in consumer protec- tion issues and experience in evaluating the impact of regulations. Measuring the costs and benefits of regulations is not an easy task, but it is one that we have undertaken increasingly in recent years. PAGENO="0289" 281 We now have an impact evaluation office, staffed by economists and market research experts, that is responsible for designing and monitoring research to determine the economic impact of all major FTC rules. We have done a number of studies measuring the impact of disclosure. For example, last summer we completed a study measuring the impact of the life insurance cost disclosure system that has been adopted in New Jersey. Third: And most important, we have the law enforcement per- spective which is needed to gather information to answer the ques- tions which Congress and the States must face in designing sound medigap legislation. A law enforcement perspective is essential to the success of an impact evaluation. What is called for is not simply defining the problem-that has been done. The task is now to test and evaluate the utility of various types of remedies keeping in* mind the possible effect on consumers in terms of increased premium costs and lessening of consumer choice. Without law enforcement tools to gather information, the valid- ity of a study of the industry would be seriously jeopardized. Our experience in the design-phase project has taught us that data required by law to be filed with State insurance commissioners is often unavailable, or nearly impossible to obtain. Many State insurance departments simply do not have the re- sources to maintain information in an accessible fashion. Thus, it will be necessary to go directly to the industry. While we expect that voluntary cooperation would be the norm, we must prepare for the possibility that it will not be universal. And those unwilling to cooperate may well reflect the worst prob- lems in the market. Section 6 of the Federal Trade Commission Act authorizes the Commission to conduct investigations and report to Congress its findings and recommendations. This approach would provide Con- gress with the information it needs to make fully informed legisla- tive decisions. We are, of course, conscious that our authority to take regulatory action in the medigap market is circumscribed by the McCarran-Ferguson Act. However, our section 6 authority to investigate the serious consumer problems in the medigap market and to report the results of our investigation, is not barred by McCarran-Ferguson. We recommend, therefore, that Congress direct the FTC to con- duct an impact evaluation. We recommend that this be a joint effort, with the participation of HEW, the individual State insur- ance departments, and NAIC. This will provide the needed information to permit policymakers to design the best regulatory scheme to solve the medigap problem. The cost of the study depends on its scope, but would be in the $200,000 to $400,000 range; it would take about 2 years to complete. If you should decide to proceed with any regulatory approach, such as voluntary certification, before completion of an impact evaluation, we urge you to require that a longitudinal study, com- paring the market before and after its implementation, be carried out. Only through such a study can the effectiveness of the regula- tion be studied. Thank you for the opportunity to testify on this important issue. [Testimony resumes on p. 328.] [Ms. Shearer's prepared statement and attachments follow:] 56-071 0 - 80 - 19 PAGENO="0290" 282 TESTIMONY OF GAIL SHEARER Coordinator of Insurance Task Force Office of Policy Planning Federal Trade Commission Thank you for the opportunity to t~stify today about private health insurance sold to supplement Medicare. Before I begin, let me mention that I am testifying as a member of the staff of the Federal Trade Commission and that my testimony does not necessarily reflect the views of the Commission or any of its members. With me today are Terry Latanich and Elizabeth Hilder with the Commission's Bureau of Consumer Protection. The Medigap problems confronting the 23 million elderly Americans who are eligible for Medicare are problems which may soon face all of us, if National Health Insurance becomes a reality. It is virtually certain that any National Health Insurance plan adopted will leave gaps in coverage and that private insurers will begin marketing policies to fill some or all of those gaps. Because of this potential explosion in the scope of the Medigap problem, it is imperative that Congress act to correct the current abuses, and do so with the best data and views available to make a sound public policy determination. If we can learn from the Medigap problem, we may be able to prevent a similar set of problems -- the s~ales abuse, low value products and consumer confusion -- under National Health Insurance. Previous hearings have covered in great detail the many problems that exist in this market. Rather than repeat these problems today, I will attach to this festimony copies PAGENO="0291" 283 of former FTC Commissioner Elizabeth Dole's testimony before two Congressional Committees, and will summarize the FTC staff's view of the problems. In the staff's view, th~ most significant problem in the Medigap market is widespread consumer confusion. Medicare's complicated benefit structure leaves an extremely complex set of gaps. Of the hundreds of private policies marketed to fill some of the gaps in coverage, no two are exactly alike. Since there is no standardization of supplemental policies, it is extremely difficult for prospective purchasers to compare benefits and premiums. As a result, insurers who sell to the over 65 age group do not compete on price. Thus, while inadequate consumer information gives unscrupulous agents an opportunity to misrepresent what they are selling, the underlying information problems will not be solved by policing against dishonest and fraudulent agent behavior. Even knowledgeable, assertive consumers who resist* agents' pressure tactics and take plenty of time to reach a decision are unable to compare policies. In seeking the solutions to the problems, we urge you to attack not only the problems of agent abuses, of which there are many, but also the lack of price competition, the marketing of inadequate and inappropriate products, and the sale of duplicative coverage. I would like to say at the outset that the FTC has no interest in regulating the marketing of insurance. By adopting the McCarran-Ferguson Act in 1945, the Congress decided to PAGENO="0292" 284 grant primary regulatory authority over the business of insurance to the States. But as I will discuss more fully in a few moments, I do believe that the Commission can be of assistance to Congress in obtaining answers to the questions which hold the key to sound Medigap legislation. The main point I'd like to emphasize today is the need for more information about the effectiveness of various policy alternatives for regulating this market. Fortunately, a natural experiment is already underway, as several states have already implemented a variety of regulatory approaches ranging from disclosure of information, to minimum loss ratios, to standardization of policy benefits. In addition, last June the National Association of Insurance Conixnissiôners (NAIC) adopted a model regulation that establishes a minimum standard for some of the health insurance policies sold to the Medicare-eligible. In August 1978, the FTC's Office of Policy Planning' released a policy issues paper on Medicare supplement insurance. This paper recommended that an "impact evaluation" be conducted to determine the effectiveness of state regulations in this area. We are now funding the first step--the design-phase-- of such a study. Attached is a detailed description of the work that is underway. Later in this statement I will expand on our recommendation that Congress direct the FTC to conduct a full-scale study and report its results to Congress. -3- PAGENO="0293" 285 First, since the Subcommittee *is currently considering several bills that would attempt to regulate this market, I will describe the key principles which we believe should be followed in shaping good Medigap regulation, and some questions which must be answered to develop sound remedies. Principles for Medigap Legislation 1. Comprehensiveness. First, any measure should be comprehensive., It should address the problems connected with all the different kinds of health insurance sold to people over 65: group as well as individual, policies sold by mail as well as by agents, and dread disease, hospital and nursing home indemnity as well as the policies called Medicare supple- ments. If a measure applies to only one type of policy, the supplemental market may only shift to the other types. Two bills that have been introduced in Congress, H.R. 165 and S. 395, would be comprehensive since they would apply to all health insurance sold to people eligible for Medicare. It is not clear whether H.R. 2602 would apply to dread disease and indemnity plans. We do not consider H. R. 4000 to be comprehen- sive, since it would leave a large segment of the market unregulated. Finally, we do not consider the model regulation recently adopted by the NAIC to be comprehensive, since it applies only to policies sold to fill in the gaps in Medicare; it does not apply to hospital indemnity or dread disease insurance. An impact evaluation would show whether regulations aimed only at the "gap-filling" Medicare supplement policies cause PAGENO="0294" 286 the Medigap market to shift to hospital indemnity, nursing home, and other types of policies sold to the elderly. 2. Uniformity. Uniformity may be desirable, at least for informational measures, minimum standards or standardization. Medicare is the same in all 50 states; there does not seem to be any compelling reason why Medicare supplement policies should differ among the several states. Diversity among state regulations may confuse prospective purchasers, many of whom move when they retire or shortly afterwards. Also, insurers bear the costs of complying with differing state requirements. It is probably impossible for a company to sell the same Medicare supplement policy in all states. None of the proposals advanced recently would assure uniformity. The need for and value of uniformity of Nedigap policies to consumers and to the industry could be studied in the proposed impact evaluation. 3. Price Competition. Any regulatory intervention in the Medigap market should aim to bring about constructive competition based on price. At present, supplemental policies are not comparable, so insurers do not need to compete on price. The minimum standard approaches in H.R. 165, 5. 395, and the NAIC model regulation will probably not substantially facilitate price competition; in each case, insurers would still be free to add on benefits above the floor so that no two policies are alike and consumers may still be unable to evaluate policies against each other. Similarly, voluntary PAGENO="0295" 287 certification programs such as those that would be established under H.R. 2602 and H.R. 4000 would set a floor for coverage. However, since additional benefits could be added, voluntary certification would not assure price competition, even for certified policies. In order to promote price competition, it may be necessary to reduce the number of options theoretically available to the Medicare-eligible, to make comparison shopping easier. This is a key question an impact evaluation could answer. 4. Reasonable Return. Minimum loss ratio requirements could provide one way to assure policyholders of some reasonable return on their premium dollars. Under normal competitive conditions, consumers would not select low value products and there would be no need for a minimum loss ratio. But in the Medicare supplement market, consumers are unable to compare the benefits and prices of unstandardized policies. While loss ratios alone probably can not distinguish "good" and "bad" policies, minimum loss ratio regulation could theoretically require companies to return a specified percentage of the premiums they take in to their insureds in the form of benefits. Although minimum loss ratios at first seem to be a simple way to deal with low-value insurance, there are still ~a number of questions which an impact evaluation could help answer: are anticipated loss ratios easy~to manipulate? To what extent are minimum loss ratios enforceable? Is it necessary for regulators to wait for several years to see PAGENO="0296" 288 discrepancies between anticipated and actual loss experience, or would it be possible to set an increasing minimum for each year following the introduction of a new policy? Is withdrawal of approval for a particular policy form an effective remedy? Can insurers circumvent it by devising a new policy with only trivial differences? Are there a~lternatives to minimum loss ratios that would assure a reasonable return for a lower enforcement cost? The voluntary certification programs under H.R. 2602 and H.R. 4000 would include a minimum loss ratio. H.R. 165 would require HEW to set minimum standards for policies, including a minimum loss ratio of 75%. The NAIC model regulation includes an optimal benchmark minimum loss ratio of 60%. The proposed impact evaluation would help shed light on the question of whether a minimum loss ratio is needed to assure that low-value products be eliminated from the market. 5. Full information about coverage gap~. People over 65 hope and expect that the supplemental insurance they buy will fill Medicare's largest gaps, including nursing home care, doctor bills above the level Medicare determines to be reasonable, drugs and dental care. Information about the gaps and the benefits provided by Medicare and by private health insurance should be provided to consumers. There should also, be strong warnings about the gaps that neither PAGENO="0297" 289 Medicare nor private insurance will ever fill, such as most types of nursing home care. Disclosure of Medicare's gaps would not undermine people's confidence in Medicare, but would enable the substantial number of people who want to buy supplemental policies to make an informed purchase decision. In an effort to increase consumer awareness, some states require that insurance agents provide prospective purchasers with brochures, guides, or special disclosure forms. An impact evaluation would demonstrate whether such consumer information. remedies are effective. 6. Public Participation. The public should have an opportunity to participate in the processes of developing regulations and setting standards relating to Medicare supplement insurance. It is important that regulations be shaped not only by the companies in the market, but by consumers who stand to benefit (or lose) from the regulations. We urge you to include a provision to fund suTch participation by senior citizen and. other consumer organizations. 7. Ending Agent Abuses. Finally, any legislation should strive to put an end to agent abuses. In addition to proposals fot industry self-policing, this subcornn4ttee might consider modifications of the present commission structure, which' gives agents an incentive to' engage in "twisting.". First-year commissions are far higher than subsequent renewal commissionS, so agents find it in their interest to sell their customers a PAGENO="0298" 290 new policy every year, subjecting them to new waiting periods and exclusions for pre-existing conditions, instead of giving them services. By changing the incentive structure which fosters agent abuses, regulators may be able to effectively eliminate them. We question whether voluntary certification programs (such as those envisioned under H.R. 2602 and H.R. 4000) will substan- tially reduce agent abuses. As we understand these proposals, HEW would be instructed to develop guidelines for "acceptable" Medigap policies, and would certify policies which meet those standards. . I do not believe that there is enough information to decide whether voluntary certification would solve or exacerbate the current Medigap problem. As we have learned in the vocational school market, Veterans Administration approval of courses for VA benefits has been used as a marketing tool by unscrupulous sales agents. "Government approval" has led many an unsuspecting consumer to believe that the government endorsed or stood behind the product being sold. The same scenario has been true with respect to the land sales area where the involvement of HUD in preparing reports has been converted by unscrupulous salespersons into a form of government endorsement or involvement in their activities. Creating yet another form of government "approval" may place in the hands of sales agents another sales tool to prey on the unwary. Another fundamental problem raised by a system PAGENO="0299" 291 of voluntary certification is that we simply do not know enough to say what standards a "certified policy" should attain. In this sense, creating a system of voluntary certification begs the critical questions. The point we are continually emphasizing is that until data is gathered to analyze the sub- stance of the policies being marketed, the premium/benefit ratios of those policies, and other similar questions, it is difficul~T~ not impossible, to draft guidelines that can state with certainty wh~agod Medigap policy must include. Recommendation: FTC Impact Evaluation We have posed, but we have not answered, some of the difficult questions about regulation of Medigap Insurance. These questions must be addressed before an effective remedy can be devised to cure the problems in the Medigap market. Numerous mechanisms have been proposed to solve the Medigap problem - voluntary certification, pre-sale disclosures, standardization, regulation of loss ratios - yet no one really knows how effectively they work, or what costs may flow from these regulations in the form of higher premium costs and reduced consumer choice. An impact evaluation study would answer these questions. Several states have implemented regulations concerning Medigap, and their regulatory approaches differ widely. Some states require agents and insurers to give out bookThts or special disclo~ure forms. Other states use a benchmark minimum loss ratio; they look into any policy which does not return a PAGENO="0300" 292 certain percentage of premiums to policyholders in the form of benefits. One state, Wisconsin, has established four bene- fits levels for Medigap policies; each one must bear the number for its category. California has set up a different system for Medicare supplement plans, labeling them "in-hospital", "in-and- out-of-hospital", and ~catastrophic". Just last month, the Massachussetts insurance department adopted a regulation that bans the sale of cancer insurance to people over 65 and establishes three fixed benefit levels for Medicare supplement policies. An impact evaluation study would permit policy makers to take advantage of the experimentation which is occuring now in the states. It would help to determine the best features of each state's method of providing information, by studying what kinds of information consumers were able to use to their advantage in their purchasing decision. It would help to show what kinds* of labels or categories are easily understandable. Perhaps most important, the study would tell `us whether some formal standardization is necessary in order to permit price comparisons and make the supplemental health insurance market function competitively. S. 395, the bill introduced by Senator Chiles, directs the FTC to conduct an assessment of state regulatory approaches in the course of a study of unfair and deceptive practices in the sale of Medicare insurance. If funds can be secured, the FTC would be willing to undertake such a full-scale impact evaluation. FTC PAGENO="0301" 293 staff members have also been exploring with the staff of the Health Care Financing Administration the possibility of conducting the study as a joint project. We recommend that Congress seriously consider the approach of S. 395 which directs the FTC to conduct an impact evaluation, in conjunction with HEW and the NAIC. For several reasons, we believe that primary responsibility for the study should lie with the FTC. First, we have experience with the issues. We have been involved in closely studying the Medigap market since early 1978, and issued a report in July, 1978, outlining the problems the elderly face in purchasing medicare supplemental insurance and exploring some of the key policy issues. We are near comple- tion of our design-phase project to devish the methodology for an impact evaluation. The two main components of the study are the development and pretesting of a consumer survey, and the collection and classification of all health insurance policies sold to people over 65, in five states. Second, we bring to the task our expertise in consumer protection issues, and experience in evaluating the impact of regulations. Measuring the costs and benefits of regulations is not an easy task, but it is one that we have undertaken increasingly in recent years. We now have an impact evaluation office, staffed by economists and market res~arch e~xperts, that is respbnsible for designing and monitoring research to determine the economic impact of all major FTC rules. We have done a number PAGENO="0302" 294 of studies measuring the impact of disclosure. For example, last summer we completed a study measuring the impact of the life insurance cost disclosure system that has been adopted in New Jersey. Third, and most important, we have the law enforcement perspective which is needed to gather information to answer the questions which Congress and the states must face in designing sound Medigap legislation. A law enforcement perspective is essential to the success of an impact evaluation. What is called for is not simply defining the problem--that has been done. The task is now to test and evaluate the utility of various types of remedies, keeping in mind the possible effect on consumers in terms of increased premium costs and lessening of consumer choice. Without law enforcement tools to gai~her. information, the validity of a study of the industry would be seriously jeopardized. Our experience in the design-phase project has taughtus that data required by law to be filed with state insurance commissioners is often unavailable, or nearly impossibleto obtain. Many state insurance departments simply do not have the resources to maintain information in an accessible fashion. Thus, it will be necessary to go directly to the industry. While we expect that voluntary cooperation would be the norm, we must prepare for the possibility that it will not be universal. And those unwilling to cooperate may well reflect the worst problems in the market. PAGENO="0303" 295 Section 6 of the Federal Trade Commission Act authorizes the Commission to conduct investigations and report to Congress its findings and recommendations. This approach would provide Congress with the information it needs to make fully informed legislative decision. We are, of course, conscious that our authority to take regulatory action in the Nedigap market is circumscribed, by the McCarran-Ferguson Act. However, our §6 authority to investigate the serious conswne~ problems in the Medigap market, and to report the results of our investigation, is n'ot barred by .McCarran-Ferguson. We recommend, therefore, that Congress direct the FTC to conduct an impact evaluation. We reôoinmend that this be a joint effort, with the participation of HEW, the indivi-' dual state insurance departments, and NAIC. This will provide the needed information to permit policymakers to design the best regulatory scheme to solve the Medigap problem. The cost of the study depends on its scope, but would be in the $200,000 to $400,000 range; it would take about two years to complete. If you should decide to proceed with any regulatory approach (such as voluntary certification) before completion of an impact evaluation, we urge you to require that a longitudi- nal study, comparing the market before and after its implementa- tion,.'be carried out. Only through such a study can the effective- ness of the regulation be studied. Thank you for the opportunity to testify on this important issue. PAGENO="0304" 296 TESTIMONY OF ELIZABETH HANFORD DOLE COMMISSIONER FEDERAL TRADE COMMISSION BEFORE THE SPECIAL COMMITTEE ON AGING OF THE UNITED STATES SENATE ON MEDI-GAP: PRIVATE HEALTH INSURANCE SUPPLEMENTS TO MEDICARE JUNE 29, 1978 PAGENO="0305" 297 Mr. Chairman and Members of the Committee: Thank you for inviting me to testify here today on behalf of the Federal Trade Commission. I welcome this opportunity, for I share with you a deep personal concern about the problems of the elderly. 1 am pleased that, thanks to your efforts, the issue of Medicare supplement or "Medigap" insurance is beginning to receive the attention it so urgently needs. More than half the people in this country aged 65 and over have private health insurance in addition to Medicare. They purchase it because they worry about meeting the medical expenses which Medicare does not cbver, and with good reason.~ On the average, elderly individuals spend $1360 per year on health care, three times as much as the rest of the adult population. In 1976 Medicare paid only 38% of their health care costs. 1/ . . 1/ They must pay initial and daily hospital deductibles under Part A, and the initial ddductible and 20% coinsurance for mediôal services under Part B. In addition, they must pay the entire bill for certain kinds of care: routine physical examinations; most eye, hearing, and dental care; medical appliances such as eyeglasses, hearing aids., and dentures; out-of-hospital prescription drugs which can be self-administered; and homemakers' services or meals at home, among others. The Medicare program was never intended, of course, to provide complete coverage. In,stead, it was meant to serve as a base on which people could build by * means of private health insurance and employer retirement plans. * See Medicare ~ps and Limitations, Hearing Before the Subc6i~. ~ Heilth and Long-'Pe~m Care of the House Select Committee on Aging, 95th Cong., 1st Sess. 36 (1977) (Appendix I; "The Aged and their Health Expenditures"). 56-071 0 - 80 - 20 PAGENO="0306" 298 At this Committee's hearing on Nay 16, both state officials and cónswners told of the abuses associated with the marketing of Medicare supplement insurance. There was testimony that some dishonest agents take advantage of the isolation or physical disability of many older people. Some agents engage in ~stacking," or selling several policies with overlapping coverages to the sane person. Another common marketing abuse is "twisting," or persuading people to cancel their policies and buy new ones which subject them to new exclusions and waiting periods. Some agents also misrepresent that they are from Medicare or Social Security or that the policies they sell have Iieen approved or sponsored by the federal government. The Federal Trade Commission commends those state insurance commissioners who have increased their enforcement efforts in order to put an end to misconduct by agents. It is also important to recognize that there is such a dearth of consumer information in the Medicare supplement market that it is almost impossible for consumers to make rational purchase decisions; agent misconduct is thus facilitated. A great variety of differing policies effectively precludes buyers from comparing benefits or premiums, resulting in lack of price competition and the sale of duplicate coverage to hundreds of thousands of people who are under the impression that they are filling all the gaps in Medicare. Other areas of widespread misunderstanding are the limited nature of PAGENO="0307" 299 Medicare supplement coverage, the relatively high cost of cover- age for the initial deductibles compared to insurance against catastrophic medical expenses, and exclusions for pre-existing medical conditions. This morning I would like to describe some of the connton informational problems in the Medicare supplement area, and then review briefly the public policy alternatives and some recent state initiatives. These subjects are discussed at length in a staff report which is nearing completion and which we hope to release to you next month. Finally, I'd like to discuss the possibility of an impact evaluation of various state approaches, conducted perhapsas a cooperative federal- state effort, to determine the most effective method of making Medigap supplement insurance comprehensible to everyone. Why should the federal government become involved in this area? First, the Medicare supplement market is a by-product of the federal Medicare program. Supplemental insurance is confusing because Medicare's benefit structure is complicated. Commissioner Harold Wilde of Wisconsin has observed that the federal government has a moral responsibility to cope with the problems Medicare has caused. Second, there are argtunents for a uniform approach to Medicare supplement regulation, which federal study could facilitate. continuing variation in state standardization -3- PAGENO="0308" 300 regulations carries the spectre of insurers having to market different Medigap policies in every state, with obvious increasing costs. In addition, it would appear that uniformity would benefit consumers by ensuring that the categories for Mecligap insurance will be the seine should they move to another state. These and other issues should be assessed in the impact evaluation to determine if there are particular reasons why uniformity is desirable in this segment of the insurance market. Third, most states would not be able to enforce their Medicare supplement regulations against mail order insurers not licensed in their states. Many supplement and indemnity plans are sold by mail. As you know, the McCarran-Fergusofl Act generally immunizes the "business of insurance" from the Sherman, Clayton, and FTC Acts to the extent that such business is tegulated by state law. However, federal agencies can make valuable contributions to the deliberations in this important area by undertaking studies and making recommendations to Congress and to the states. The Complexity of the Narket~ Three types of health insurance policies are commonly sold to the elderly. "Medigap" or Medicare supplement policies pay service benefits to fill some of the gaps in Medicare;2/ generally they pay some or all of Medicare's initial and daily deductibles and coinsurance. 2/ The health insurance industry sometimes designates such ~edigap policies as "wraparound" coverage. - -4-. PAGENO="0309" 301 The second and third types, hospital indemnity an~ dread disease policies, may be sold to adults of any age, but many companies emphasize sales to the elderly. 3/ Unlike Medigap policies, indemnity policies pay a certain dollar amount per day of hospitalization, typically $20 to $50, to offset daily hospital costs which usually run to $150 or more. Finally, dread disease contracts cover only some of the expenses.incurred for care of a particular illness, such as cancer. Even in the Medigap category alone, there is virtually no standardization. 4/ Let me give you a few examples. Some Medigap policies cover only the Part A initial and daily hospital deductibles; some place low dollar limits on coverage for the 20% coinsurance under Part B.; some cover virtually the full 20% Part B coinsurance, but others only for those medical services rendered in a hospital setting, and not for the sane procedures performed outside a hospital. Some sell several policies with piecemeal, but overlapping, coverages. Some mix service and indemnity benefits. 3/ Some companies make a special sales pitch to older women with limited incomes. Commercial Health and Accident Industry, Hearings before the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary, 92nd Cong~ 2nd Sess. 591, 829, 1150 (1972). . 4/ See generally Health Insurance for~Older People: Filling the ~t~s in Medicare, Consumer Reports 27 (Jan. 1976). -.5-. PAGENO="0310" 302 It is. difficult enough for anyone to have a thorough understanding of Medicare's complex benefit structure and its gaps. Now add to that the bewildering variety of ways each different insurer fills some of those gaps. Then, when hospital and nursing home indemnity plans and dread disease contracts complicate the picture, comprehension and comparison become almost impossible for consumers. Confusion caused by the multiplicity of policies often leads consumers to buy t4io or more policies in an effort to obtain complete coverage. It has been estimated that twenty~ three percent of the people over 65 who have private insurance have two or more policies covering hospital costs, resulting in some degréeof overlapping coverage. 5/ Medigap policies generally include àoordination of benefits clauses. This means that in the areas of overlap, only one poli~y will pay for each gap. For instance, a perspn who, buys three policies which cover the $144 Part A deductible will not' reàeive $432 5/ G. Ellenbogen, Private Health Insurance Supplementary ~o,Medicare (a working paper prepared for the Senate Special Committee on Aging) 7-8 (1974) (1972 Social Security Adinin- istration estimate). For another estimate based on the `l974'NationalHealth Survey of 40,000 households,.see 52 Ho~pi't~ls (Journal of the ~mer'ican Hospital Ass9ciation) .20 TNay i~Th.978~ (In 1974 53.8% of those 65and older had private hospital insurance in addition to' Medicare and 12.1% of those had two or more plans). PAGENO="0311" 303 in the event of hospitalization. Only the first policy will pay $144 in benefits: The buyer has wasted the portion of the second and third premiums which paid for the duplicate coverage of the initial deductible. Those elc3erly persons. who live on fixed incomes can ill afford to spend their money on such worthless duplication. Both indemnity and dread disease plans will pay benefits in addition to Medicare and any other private insurance, giving "extra cash." 6/ However, these policies often produce few benefits in relation to the amount of money invested; they typically have very low loss ratios. Even the elderly person with only one Mecftigap policy nay have a low value product. Since comparison shopping is foreclosed, many Medicare supplement insurers are not obliged to price or operate competitively. Recently the outgoing Chairman of the Board of the Health Insurance Association of Mierica criticized those companies whose loss ratios are "far too low," saying they "give a bad name to the who:Le industry." 7/ 6/. Since indemnity and dread disease policies are a fixed aollar amount per day regardless of Medicare coverage, the benefits are not necessarily related to a Medicare patient's need for cash to pay for medical expenses. 7/ Speech by Robert A. Beck, CLU, Chairman and Chief Executive ~fficer-E1ect and President of Prudential Insurance Company of Mterica, to the Health Insurance Association of ~xnerica., Group Insurance Forum, Chicago, Illinois, May 1, 1978. Mr. Beck said that these low loss ratios "could never be expected to reach a reasonable figure." Sometimes ~a low loss ratio reflects the fact thata policyhas only been in use for a few years; in later years the claims paid out to policy-holders will increase. Apparently, Mr. Beck meant that some supplemental policies will never show a loss experience sufficiently favorable to represent a good value for buyers, because of limited benefits, ~arbitrary denials of claims, and/or unreasonable expense ratios. PAGENO="0312" 304 Lack of Information Many people purchase supplemental coverage in the belief that their private insurance will take care of all of the medical expenses Medicare will not pay. Often agents tell their prospects: "This policy will cover everything that Medicare doesn't cover." 8/ In reality many Medigap policies exclude from coverage the very same areas which Medicare will never cover: out-of-hospitalprescription drugs, most nursing home care, routine physical examinations, eyeglasses, hearing aids, and dental care. Medicare will not pay for the portion of physicians' fees which exceed a "reasonable charge," as determined by the Medicare carrier. 9/ We are not aware, either, of any Medicare supplement insurer who will pay those excess charges. Of course, Medicare's determination of reasonable charges is a measure designed to control costs. We are not suggesting that Medigap insurers should provide reithursement for excess 8/ See, ~ International Security Life Insurance Co. V. ~inc~475 S.W. 2d 263 (Tex. Civ. App7~X~'12); aff'd Th~art ieV'd in ~ 496 S.W. 2d 544 (Tex. 1973). 9/ During the second quarter of 1977, Medicare Part B carriers ~ade some reduction in 80% of the unassigned claims for physicians' services filed with them. They reduced the total dollar amount of unassigned Part B claims filed by 21%. This means that Medicare patients can expect to pay, on the average, 36% of their physicians' bill themselves (20% coinsurance plus roughly 20% of the remaining 80%). Medigap policies which cover the 20% coinsurance under Part B generally pay 20% of the amount the Me4icare carrier determines to be reasonable. -8-- PAGENO="0313" 305 physicians' charges. Nor do we mean to say that supplemental policies should fill every gap in Medicare. The problem is the common misperception that Medicare supplemental coverage is comprehensive. Actually its role is limited; private health insurance accounts for only 5% of the health care expenses of the elderly. How many people would buy Medigap policies if they knew how incomplete their coverage might prove to be? Consumers may not realize that some kinds of Medicare supplement coverage are more expensive than others. ~or~ example, they pay more for coverage for the initial deductibles than for insurance covering those catastrophic medical expenses which could mean financial disaster. The California Department of Insurance estimates that it costs, on the average, $30 per year to buy insurance for the $60 annual Part B deductible. It is important that consumers know how much first-dollar insurance coverage really costs them, as well as which Medigap policies provide it and which do not. Some people, however, want first-dollar coverage for health care expenses because it gives them a sense of security, and they may not realize that not all Medigap policies cover the initial deductibles. Once again, the problem is lack of information. And if consumers knew the true cost of first-dollar coverage, perhaps they would not choose it... -9.. PAGENO="0314" 306 Many Medigap policIes exclude coverage or require waiting periods before they.will. cover pre-existing conditions. Under "pre-X" clauses, an insurance company can deny coverage for conditions which existed before the policy went into effect. Since many elderly people have multiple health problems, a policy may lose much of Its value if the insurer interprets a pre-X clause strictly to deny claims for any illness which developed out of pre-existing conditions.. Some companies insure all applicants regardless of medical history, then deny their claims, citing pre-existing conditions. 10/ Because pre-X clauses are not uniform, it may be extremely difficult for the consumer to anticipate what his premium dollar is buying. Possibilities `for Governmental' Action: ~tate Approaches In attempting, to solve the consumer information problems in the Medicare supplement area,. the states have developed three possible approaches. The first of these is the establish- tnent of minimum standards. California has set a benchmark `10/ Dishonest agents sometimes "clean-sheet" elderly applicants, ~ encourage submission of their applications without any in- dication of prior health problems, to ensure that the company will underwrite the risk. Again, the company can deny claims on the basis of pre-existing conditions, a practice known as "post-claims underwriting." -10- PAGENO="0315" 307 minimum loss ratio ~of 55?; for Medicare supplement policies. 11/ An Illinois statute requires that all such policies delivered in that state must fill certain gaps, including the initial Part A deductible, Part A Copayments, and Part B coinsurance. A second approach is to bring about standardization by establishing categories for policies and requiring that each ~policy carry an appropriate label. Wisconsin's new rule sets up four benefit levels for Medigap policies, which must now bear the corresponding number. Categories 1 to 3 range from most to least comprehensive. Policies in category 4A supple- ment only Part A of Medicare, which those in category 4B supplement only Part B. 12/ California has also established, in a different way, three categories for Medicare supplement policies, labelling them "in-hospital only", "in-and out- of-hospital", and "catastrophic." The third type of public policy initiative involves efforts to provide informatIon to consumers in order to permit * the market to function more effeqtively. The most common method is a disclosure requirement. Wisconsin requires agents to give * 11/ Recently, New Jersey Insurance Commissioner Sheeran banned tEe sale of more than 100 individual health policies with loss ratios of less than 50%, including many low-value products marketed especially to the elderly. * * 12/ The major factor which distinguishes categories 1, 2, and ~is the difference in the lowest permissible dollar limit each may set on claims. Categories 4Aand 4Bhave dollar limits as high as category 1, but each supplements only one part of Medicare. 4B policies may also provide for a large deductible, *up to $500. * * -11- PAGENO="0316" 308 out an 18 page booklet and California mandates the use of general one-page disclosure forms. In Oregon, insurers or agents must fill in the blanks on a disclosure chart showing Medicare benefits, gaps, and policy benefits. New Mexico requires a slightly different disclosure chart. In my c$inion, a chart would be particularly useful if it could show not only Medicare's coverage and gaps and the policy's benefits and costs, but also the expenses the consumer would still have to pay out-of-pocket. I should emphasize that these state approaches - minimum standards, standarization combined with labelling, and dis- closure requirements - are not mutually exclusive * It may well be that a combination of these regulatory measures would be most effective. At present, when an agent or an advertisement exaggerates the worth of a Medigap policy, the prospective buyer typically has no where else to turn for impartial information to correct the misunderstanding. Other methods have been suggested besides mandatory written disclosures to assure that buyers get the information they need, such as individualized insurance counsel- ing and consumer education measures to furnish facts which insurers do not generally provide: Medicare coverage and gaps; -12- PAGENO="0317" 309 eligibility for Medicaid; 13/ health risk information (e.g., average length of hospital stay for the over-65 age group); and rating of companies' records in handling claims. In addition, nontraditional avenues for increasing consumer awareness, such as the use of television spots, should be explored. Impact Evaluation What is needed to ferret out the problems and evaluate the public policy implications of alternative solutions? We believe the answer is an impact evaluation of existing state regulations of Medicare supplement insurance, with central focus on the effectiveness of different regulatory systems in facilitating the purchase of Medicare supplement insurance which meets consumers' needs and expectations. Considerable groundwork would be necessary to narrow the focus of the study. , Basic facts about the Medicare supplement industry, such as total premium volume, are presently unavail- able. 14/ It is evident that duplicate coverage is a serious problem, but no one knows its precise nature or extent. It would, be important to learn from consumers what information they feel is essential to make wise purchasing decisions. `13/ In most states, Medicaid programs pay for almost all the iii~dical expenses for people whose incomes are low enough to qualify. If is almost always unnecessary and inadvisable, for an elderly person who is eligible for Medicaid to buy any private health insurance at all, but many now do. `14/ Estimates of total annual Medicare supplement premium ~lume range from $0.5 to $3. billion. However, no reliable figure exists because insurance companies are generally not required to separate Medicare supplement experience from the accident and health insurance data they report to state in- surance departments. PAGENO="0318" 310 A full-scale impact -evaluation would help to answer the complex and important policy questions which abound in the Medicare supplement area: Is it possible to provide complete yet comprehensible explanations of Medicare and the multitude of ways private insurers fill some of its gaps? Is standardiza- tion necessary to make the market's offerings understandable? Should public policy try to inf1ue~~ce the consumer's choice between costly first-dollar coverage and what economists might call more rational insurance for catastrophic medical expenses? What are the arguments for and-against the sale of dread disease or indemnity policies? An impact evaluation would be timely because several states' regulations have become effective within the past year. As I have already indicated, Wisconsin and California have established totally different systems of standardization and labelling. Oregon and New Mexico have different disclosure requirements, but no regulations involving standards. Illinois sets minimum standards but does not prescribe any particular disclosures. An evaluation should point up the strengths and weaknesses of each state's system and should assess the desir- ability of a model regulation. An impact evaluation could also provide information about the effectiveness of various disclosures and recommend follow-up consumer education and counseling measures. And if -current debates lead to the establishment of some form of national health -14- PAGENO="0319" 311 insurance, it appears that the results of such a study would be valuable to policy makers since a similar supplemental market might well develop under any system providing a less than coTapre- hensive benefit package. The results of the impact evaluation w6uld be available, of course, for ~ use of state regulators and legislators, Congress and the public. How should this impact evaluation be performed? Perhaps a cooperative federal/state effort would be best, with participation by the National Association of Insurance Commissioners, FTC, and HEW. A joint HEW/FTC/NAIC project would bring together different types of expertise, each of which would contribute greatly to such a study. The NAIC and state insurance departments have first-hand experience with insurance regulation and access to data.. In fact, on June 12 the Accident and Health Subcommittee of the National Association of Insurance Commissioners voted to create a Task Force to investigate regulation of health insurance sold to the elderly and identification of other health insurance products "which do not fulfill the public's interest." HEW would contribute knowledge about the Medicare program, and the FTC'S expertise in the areas of consumer protection, information disclosure, and competition would be pertinent. We would welcome the opportunity to work with the NAIC and HEW in such an undertaking. .in conclusion1 Mr. Chairman, I am convinced that inappro- priate Medicare supplement insurance purchases can impose severe hardships on the elderly. We must begin now to determine the best approaches for resolving these problems, and I hope that my testimony this morning will make some contribution to that endeavor. PAGENO="0320" 312 TESTIMONY OF * ELIZABETH HANFORD DOLE COMMISSIONER FEDERAL TRADE COMMISSION BEFORE THE SELECT COMMITTEE ON AGING OF THE UNITED STATES HOUSE OF REPRESENTATIVES ON MEDI-GAP: PRIVATE HEALTH INSURANCE SUPPLEMENTS TO MEDICARE * November 28, 1978 PAGENO="0321" 313 Mr. Chairman and Members of the Committee: Thank you for inviting me to testify today about consumer problems in the sale of private health insurance to supplement Medicare. on June 29, I testified before the Senate Special Committee on Aging on this subject of great importance to the nation's elderly, and today I will summarize very briefly the remarks I made at that time and submit a copy for the record. I would then like to bring you up to date on the attempts of the Federal Trade Commission and others to deal with Medigap insurance issues. The Medicare Supplement Insurance Market As you well know, health care costs are a major .source of expense -- and worry to the senior citizen. The average expenditure for health care by people over 65 was $1521 in 1976; this was more than three tin~es as much as the average expenditure by adults aged 19-64. Medicare paid only 38% of the health care costs of the elderly in 1976. Medicare recipients must pay initial and daily hospital deductibles, as well as an initial deductible and 20% co~ insurance for doctors' services. They must also pay for many types of health care costs which Medicare doesn't 56-071 0 - 80 - 21 PAGENO="0322" 314 cover, such as eyeglasses, dental care, hearing aids, out- of-hospital perscription drugs, routine physical examinations, and most nursing home care. Because of the gaps in the Medicare program, more than half the people in this country over 65 purchase private health insurance in addition to Medicare. At the end of 1975, 12.6 million people held at least one Medicare `supple- ment policy. The annual premium volume is estimated to be ab~ut $1 billion. The total figure for health insurance expenditures by senior citizens is probably much higher, since the $1 billion estimate does not include hospital indemnity or so-called dread disease policies. Estimates show that approximately 23% of those who buy Medicare supplement insurance have some unnecessary duplication in coverage. Sales abuses on the part of dishonest agents appe'ar to be cormnon. Some agents sell several~ policies with over- lapping, worthless coverage to the same person; this is called "stacking." Prospects are often induced to make unnecessary or duplicative purchases by sales pitches re- presenting that their current coverage is inadequate and that extra policies will fill the gaps. A resident of my home state, North Carolina, testified at the. Senate hearings that his 76 year old mother had been sold 13 health and life * -2- PAGENO="0323" 315 insurance policies by seven agents from one insurance corn- *pany over a two year period; she was paying 68% of her annual income in premiums. Wisconsin Insurance Commissioner Harold Wilde stated that agents circulate among themselves lists of easy "rnarks"--infirin or mentally confused elderly people who will "take anything offered to them." A postal inspector and district attorney who have investigated and prosecuted Medigap fraud in Texas testified that a number of agents use hit lists in identifying and locating aged victims who are individually known to be susceptible to repeated health insurance sales. Among the many examples they provided was an 84 year old woman who paid at least $15,000 on 23 health and accident policies over a two year period. Another common marketing abuse discussed at the Senate hearings is "twisting," or persuading people to cancel their policies and buy new ones which subject them to new exclusions and waiting periods. Many agents have an incentive to engage in this practice because they typically receive a high first year commission on Medigap policies; a 65% corn- mission is routine, and a 100% commission is sometimes the case. The commission rate after the first year is usually far lower. Some agents attempt to "roll over" their clientele each year. -3- PAGENO="0324" 316 Some agents misrepresent that they are from Medicare or Social Security. Others fraudulently. represent that their policies have been approved or sponsored by the federal government, that the premiums will never go up, or that the policy will cover all medical expenses not covered by Medicare. Aside from possible unfair trade practices such as mis- leading presentations by agents and deceptive mail order insurance advertisements, there are, in general, severe consumer information ptoblems in the Medicare supplement insurance market. It is extremely difficult to understand Medicare's complex benefit structure and its gaps. To com- pound the problem, there is absolutely no standardization among policies sold to supplement Medicare. Prospective purchasers must try to differentiate among three kinds of policies: (1) Medicare Supplement or "Medigap" policies (which generally pay for some or all of Medicare's deduct- ibles and coinsurance); (2) hospital. indemnity policies (which pay a certain amount per day of hospitalization); and (3) dread disease policies (which pay benefits ~ if the policyholder is diagnosed as suffering from a specific disease, most commonly cancer). The result is that it is -4- PAGENO="0325" 317 almost impossible, even for conscientious, well informed consumers, to make a rational purchase decision. The lack of information in this market facilitates agent misconduct. The bewildering variety of policies, which makes it extremely difficult for buyers `to compare benefits and premiums, appears to have resulted in a lack of price competition between companies. Many policies return only 40% to 70% of the premiums in benefits, while group health insurance plans generally pay back 85% to 90%. Reasons for Federal Involvement - Every state has in place an unfair trade practices act applicable to the business of insurance. These laws, and the regulations issued under them, typically prohibit fraud, abuse, or misrepresentations in the marketing of Medicare supplement insurance. Why, then, should there be any federal involvement in the Medicare supplement area? Let me suggest several reasons. First, the federal Medicare program created the Medicare supplement insurance business, and some feel the federal government~ has an obligation to cope with the problems it has engendered. Second, consideration should be given as to whether this is an area where there may be a special need for consistency in regulatory approaches such as disclosure, star~dardization, and labelling. Different systems in every state would impose added costs of compliance PAGENO="0326" 318 on insurers and may confuse-consumers, many of whom move at or after retirement. Third, many supplement and indemnity plans are sold by mail, and some states could not enforce Medicare supplement regulations against mail order insurers not licensed in their states. As you know, the McCarran Ferguson Act generally immunizes the "business of insurance" from the Sherman, Clayton, and FTC Acts to the extent that it is regulated by state law. However, certain types of nonregulatory fe6eral action are consistent with the McCarran Act. We believe that the FTC and other federal agencies can make significant contribu- tions to the public debate about Medigap insurance by undertaking studies and by making recommendations to Congress and the states, where appropriate. In June, I recommended that an impact evaluation be conducted to assess the effec- tiveness of the Medicare supplement regulations which several states have recently put into effect. We suggested a joint effort, with the participation of the FTC, the Department of Health, Education, and Welfare, and the National Association of Insurance Commissioners. This project, which we consider to be very significant, is still at an early stage. We hope that it will -result in responsible policymaking, following careful legal, economic, and policy analysis and study of the cost effectiveness of a -6- PAGENO="0327" 319 number of possible approaches. We also look forward to a * complementary and cooperative relationship between federal agencies and state insurance regulators. "Private Health Insurance to Supplement Medicare": The FTC staff paper In July, the FTC released a lengthy issues paper pre- pared by two staff members of our Office of Policy Planning. * We have furnished you a copy of this paper, called "Private Health Insurance to Supplement Medicare." The paper describes the supplemental insurance market and the regulatory initia- tives which have been tried or proposed in this area, including those which recently became effective in Wisconsin, California, Oregon, Illinois, New Mexico, and Washington. It analyzes the pros and cons of each of the aiterna~tives, measuring them against a set of criteria. The. paper poses, but does not answer, the difficult policy questions `about regulation of Medigap insurance, in an attempt to identify the issues which must be resolved before regulatory measures can be put in place. It has generated a great deal of comment on these issues, including whether (and how) to discourage first dollar coverage and promote insurance for catastrophic expenses; and whether insurance which pays indemnity benefits in addition to Medicare or other private insurance constitutes wasteful duplication, or whether it has real advantages for over-65 policyholders. The report seems to have increased public -7-. PAGENO="0328" 320 awareness that Medicare supplement insurance is an extremely *serious problem. We hope that it will make many older people stop, think twice, and try to get more information before they buy the first policy a hard selling agent may bring to their door. The response to the staff report has confirmed the severe lack of consumer information in the supplemental insurance market. Many requests have been received from members of the public, from agencies which deal with the aging, and from Congressional staffs for more information, especially for some ratfng or ranking of Medigap policies. There are no published rankings of the policies sold in any given area; this is reflective of the general unavailability of comparative policy information, and suggests the need to consider the desirability of nationwide uniformity and standardization of supplemental policies, so that consumers can make meaningful comparisons between policies. There have been some recent dev'elopments among the states attempting to deal with Medigap problems. The New York State Consumer Protection Board will soon be publishing a guide which will rank all the policies sold on an individual basis to people over 65 in the state of New York, including hospital indemnity plans. `the Board has already collected copies of the plicies and an independent coflsultant is devising a system for rating policies, based on their -8- PAGENO="0329" 321 comprehensiveness and their cost effectiveness. The New York project appears to hold promise for helping buyers comparison-shop for Medicare supplement policies, and the market response to consumers' use of the ratings will be of great interest to us. Design Studies for an Impact Evaluation In discussing its recommendations, the staff issues paper noted that an impact evaluation of state regulations would be an extremely complex undertaking and that it would have to be very carefully designed in order to be manageable. Experience with other impa~ct evaluation, studies has taught us that it is not an easy task to identify and measure the costs and benefits of regulations, but we are convinced that this type of analysis, difficult as it may be, is essential to determine how best to reduce consumer confusion and promote competition, at the lowest possible cost. The FTC is now in the process of selecting a contractor, through the competitive bidding process, to perform design studies' to lay the groundwork for a full-scale, impact evaluation. The pilot study will be divided into two distinct parts, for the impact evaluation will have to measure the effects of regulation both on the Medicare supplement insurance industry, and on consumers. We hope that the two preliminary studies will determine the feasi- bility of evaluating certain variables by collecting infor- mation from insurers and consumers. . - -9- PAGENO="0330" 322 The first stage, an industry study, is designed to collect the.basic information we now lack about the policies sold to supplement Medicare and what gaps in Medicare they fill. The contractor will develop a framework for analyzing those policies and classify them. As a part of the industry study, the contractor will also be asked to draft an industry questionnaire for use in the full-scale impact evaluation, pretest it with voluntary respondents from the health in- surance industry, and prepare a methodology report for the impact evaluation. The second stage of the pilot project will be a consumer- related study. It will involve the design, pretesting, and subsequent revision of a questionnaire for use in personal interviews with elderly consumers. The questionnaire will attempt to measure variables which, could be influenced by regulation, such as consumer knowledge and understanding of Medicare, private health insurance, and any regulations in effect; insurance purchasing behavior; and cost and quality of coverage purchased. We are confident' that these initial design studies will determine, at a relatively low cost, the feasibility of, and methodology for, a well designed impact evaluation to yield data about the cost effectiveness of various regulatory approaches. -10- PAGENO="0331" 323 The Health Care Financing Administration of the Depart- ment of Health, Education, and Welfare (HCFA) has indicated its deep concern for the Medigap problem and has agreed to work closely with the FTC. HCFA has already begun sharing information with us, particularly data collected by HEW which would be useful to our contractor in performing the industry survey portion of the design study. We are also discussing the possibility of a joint project in the future. HCFA will concurrently be exploring what action it might take on its own to better serve Medicare program benef i- ciaries with respect to supplemental health insurance. Cooperation with the States The NAIC has recently appointed a special task force on Medicare supplement and "other limited health insurance policies." This indicates that the NAIC intends to address the issues raised by the sale of policies with restricted coverage sold as supplemental insurance to all age groups, as well as the Medicare-eligible. The first meeting of the newly formed task force was held on October 9, at which our staff reported on the FTC's activities. At the request of the task force, a member of the FTC staff will also be serving On the Advisory Committee. We understand that at the December meeting of the NAIC, the task force will propose drafts of a model disclosure regulation, a minimum standard, and a buyers' guide for Medicare supplement policies. -11- PAGENO="0332" 324 I:would like to stress once again that the Federal Trade Commission is looking forward to working with state insurance regulators in the Medigap field. We believe that we can serve as a resource fOr the National Association of Insurance Commissioners task farce and for individual state insurance departments. The study of state regulation of Medicare supplement insu~rance would provide an opportunity for federal agencies and state regulators to combine their efforts to determine the relative effectiveness of a variety of regulatory approaches and to design the most cost effec- tive regulatory scheme, which the states can then consider for implementation. S I appreciate the opportunity to take part in this hearing on behalf of the Federal Trade Commission. By helping to focus public attention upon Medigap insurance problems and other problems which afflict the elderly, this Select Committee is performing ar~ invaluable service. Remedying those problems is a paramount responsibility for all of us. The eminent historian Arnold Toynbee observed that a society's quality and durability can best be measured by the respect and care given its elderly citizens. We must strive to insure that this respect and care are the best our society can offer. Thank you. -12- PAGENO="0333" 325 Design Study for an Impact Evaluation of Medicare Supplement Insurance Regulation Background Because the federal Medicare progran does not cover all health care expenses, more than 50% of the nation's elderly have at least one health insurance policy in addition to Medicare. Medicare pays only 38% of the health care costs of people over 65. The private health insurance contacts sold to fill some or all of the gaps in Medicare coverage are known as Medicare supplement or "Medigap'~ policies. In addition, large numbers of elderly persons purchase other types of supplemental policies, such as hospital indemnity plans and dread disease policies. Medicare's complex benefit structure and the lack of standard- ization among Medicare supplement policies makes it extremely difficult for consumers to engage in comparison shopping. An estimated 23% of the people over 65 who buy private health insurance have two or more policies which overlap. Some may purchase duplicate coverage in an effort to fill all the gaps in Medicare. Others are misled by un- scrupulous agents who persuade them to "load up" on multiple policies or to buy a new policy each year. Several states have adopted regulations governing the marketing of Medigap insurance, using a variety of regulatory mechanisms, in- cluding regulation of loss ratios, standardization of benefits, and pre-sale disclosures. In July, 1978, staff members in the Federal Trade Commission's Office of Policy Planning recommended that a study be conducted to assess the effects of the various approaches on both the Medicare supplement insurance industry and on consumers, to determine which features are most effective. As a preliminary step, the FTC contracted for a pilot study to design the methodology for a full-scale impact evaluation. The design study is expected to be completed in late 1979. The Design Stud~y The two maim components of the study are the development and and pre-testing of a consumer survey, and the collection and clas- sification of health insurance policies sold to persons over 65. In addition, the study will identify other information about the supplemental health insurance industry which would be needed to assess the effects of state regulations. PAGENO="0334" 326 Consumer Surve5 This part of the project is intended to determine the feasibility of evaluating the impact of Medicare supplenent regulations through personal interviews with elderly consumers. The consumer study will (1) develop a consumer questionnaire for use during in-depth interviews, (2) pretest it with at least 45 Medicare-eligible individuals in three states and (3) prepare a final questionnaire for use in the consumer part of the inpact evaluation. In addition, the contractor will pre- pare a report analyzing the results of the pretest. The questionnaire will cover such things as: (a) consumers' knowledge about Medicare and its gaps, and about the coverage provide by their own private health insurance policies; (b) purchasing behavior, including policies con- sidered, sources of information, mode of purchase, and sales presentations or solicitations encountered; and (c) the nature of coverage purchased and its price. (Factors to be considered in assessing coverage include the incidence and nature of duplication or overlap in coverage, and the extent of utilization of benefits.) The questionnaire will be pretested in three states with different regulatory schemes: W~sconsin, California, and New Mexico. All three states have attempted to increase the amount *of information available to consumers by requiring disclosures in connection with the sale of Medigap insurance. Wisconsin and California have also established minimum standards for Medicare supplement policies. - Wisconsin regulations require that all policies sold as supplements to Medicare meet the standards for one of four classes of coverage, and bear a number 1 through 4 (from most to least comprehensive coverage). There are minimum benefit levels for each category, but there may be variation among policies in a given category. In addition, insurance agents must distribute an 18-page booklet prepared by the Insurance Commissioner's Of fice; "Health Insurance Advice for Senior Citizens," at the time they provide a prospective buyer with an application. Agents must also provide purchasers with an outline of coverage summarizing Medicare benefits, the benefits the policy provides, and expenses which remain uncovered. PAGENO="0335" 327 - California has established minimum coverage standards for Medicare supplement, dread disease, and hospital indemnity policies. Medicare supplement policies are subject to a 55% benchmark minimum loss ratio regulation. All supplemental policies must cover gaps in both Medcare Part A and Part B coverage (i.e., both. hospital* and medical expenses), but insurers may offer three types of policies: in-hospital, in- and out-of-hosptãl and catastrophic. California also mandates the use of a special "Outline of Coverage" disclosure form for. Medicare supplement policies, which indicates the extent to which the policy fills certain specified gaps in Medicare coverage. - New Mexico has no minimum coverage requirements. At the time a policy is delivered, purchasers must be given a summary disclosure form which includes a chart explaining what Medicare pays and what the policy pays. The form must also include inforthation on the exceptions and limitations contained in the policy. The consumer questionnaire will be pre-tested on elderly persons with different characteristics, including age, race, sex, income level, educational level, and residential arrange- ment. Industry Survey The primary purpose .of the industry survey is to obtain basic information about the health insurance policies sold to the elderly. The project will also consider the feasibility of collecting other information which would be needed for an impact evaluation. Because health insurers are not required to separate Medicare supplement data in the reports they file with state insurance departments, we lack many basic facts about the industry, including: a) the type of policies marketed and which gaps in Medicare each one covers; b) the mix of Medigap, hospital or nursing home indemnity and dread disease plans sold to the elderly; c) the number of companies selling supplemental* insurance in a market area; d) their loss and expense ratios; and e) their procedures (if any) to assure that their policy-holders are not buying duplicate or over- lapping coverage. . The project will provide an inventory of the private health insurance which is sold to the elderly in five states, showing what types of policies are. marketed, and which gaps in Medicare each one, covers. The five states are Tennessee, PAGENO="0336" 328 New York, and the three states where the consumer survey will be pre-tested (Wisconsin, California, and New Mexico). Tennessee does not have regulations specifically applicable to Medicare supplement insurance. New York has no specific Medicare supplement regulation, but has relatively striôt regulations governing health insurance in general. All health insurance policies sold to individuals over 65 will be collected, including hospital indemnity, dread disease, and other policies not specifically classified as Medicare supplements. Mail order policies will also be collected. A classification scheme for analyzing policies will be developed. This classification scheme will be applied to all the policies collected, and will show the range of choices available to consumers, the features of various policies, and, where premium information is available, the relationship of premiums to benefits. The study will also indicate whether there are systematic variations in the-quantity, quality, and cost of policies marketed, according to the type of _egulation in effect. In addition, the project will assess the feasibility of developing a point scoring system to rate policies. Mr. SATTERFIELD. Thank you. I think your testimony is very good. I think you have raised and addressed those questions which are pertinent to this issue. Obviously, they are questions the mem- bers of this committee are going to have to struggle with. I do not know what the will of this committee will be. I think your remarks will be very helpful in that regard. Mr. Dannemeyer. Mr. DANNEMEYER. I have no questions. Mr. SATTERFIELD. Ijust have one question. In the event that the committee should agree with you that a study ought to be conduct- ed, do you have any idea how long such a study would take? Ms. SHEARER. We estimate that it would take approximately 2 years. As I stated we do have the first step of such a study under- way. That should give us a head start. It is not an easy task, measuring the effect of these regulations. We think 2 years would be a reasonable estimate. Mr. SATTERFIELD. If the FTC were designated to conduct such a study, would they be able to do it with their existing assets? Ms. SHEARER. The answer is pretty definitely no. We have a budget of roughly $600,000 for studying the impact of regulations. We need the bulk of that to study the impact of proposed rules. We were able to find $30,000 for a study this year. We have been working with HCFA to see if there might be some shift of funds, or whether we could work with them to carry out a study. Mr. SATFERFIELD. Do you have any idea how much money would be required over the 2-year period? Ms. SHEARER. It depends on how much detail we wanted to get into and how many States we would want to look at. We estimate a range of $200,000 to $400,000 or $500,000. We could define a study within that range. Mr. SATFERFIELD. Thank you very much. Are there any other questions? PAGENO="0337" 329 There being no other questions, we thank you very much for appearing here today. We are sorry to have kept you waiting. I think your testimony will be very helpful to the committee. Ms. SHEARER. Thank you, Mr. Chairman. Mr. SATTERFIELD. Our next and last witness today is Mr. James Sullivan, special assistant, Member Service Coordination, NRTA- AARP. Mr. Sullivan, we welcome you. We have a vote on the floor which means that probably in 5 minutes we are going to have to leave. I wonder if you would prefer us to go now and come back or would it be all right if in just 5 minutes we interrupted you and proceeded to the floor? Mr. SULLIVAN. I would prefer to go ahead. Maybe the committee would not need to come back. Mr. SATTERFIELD. If you wish to paraphrase your statement, we would be happy to have a summary as well as your original state- ment in the record, if that is your wish. Mr. SULLIVAN. All right, Mr. Chairman. I will do that. Mr. SATTERFIELD. Without objection, your full statement is ad- mitted into the reôord. We will be interested in any supplemental statements you may wish to make. STATEMENT OF JAMES F. SULLIVAN, SPECIAL ASSISTANT TO THE EXECUTIVE DIRECTOR FOR MEMBER SERVICES, NA- TIONAL RETIRED TEACHERS ASSOCIATION AND ALSO AMERICAN ASSOCIATION OF RETIRED PERSONS Mr. SULLIVAN. Thank you, sir. I appreciate your courtesy at this late hour in the day. I want to say I speak on behalf of the 12 million members of the National Retired Teachers Association and the American Associ- ation for Retired Persons, that this legislation is a matter of prima- ry concern to our membership and we certainly want to congratu- late the committee in digging into the real issues involved here and looking toward some sort of solution to it. Let me quickly paraphrase H.R. 2602, sponsored by Representa- tives Pepper and Scheuer, and H.R. 165 and H.R. 4000. I would like to particularly state that our association had originally been feel- ing that H.R. 165, as introduced by Congressman Brodhead, was a step in the right direction of establishing compulsory minimum standards where we could get quick and concerted action. However, we were pleased when subsequently Representative Shannon introduced his amendment-the medigap amendment-to the medicare amendments of 1979 for the particular reason that we felt that it provides an opportunity to give careful and deliberate attention to the specific elements that should go into the develop- ment of State programs' meeting certain Federal standards and insure against protracted delay in their establishment in each State. We feel that the amendment, as it was drawn, was carefully calculated to try to provide that experience, yet give the Secretary of HEW the opportunity to move ahead and increase those stand- ards as the studies and other indications and practice would dem- onstrate the wisdom of those moves. 56-071 0 - 80 - 22 PAGENO="0338" 330 Let me say that the associations have been particularly con- cerned that there should be a more concerted effort on the part of organizations, the Government and everybody else, to attack this program problem head on. Sometime ago, we started working on our own version of a booklet that we felt would meet the long-range needs for under- standing of what medicare is and what it is not. What kind of medigap points that have to be filled and show members how very simply they could work out their own checklist and find out where the gaps exist. We have sent this booklet to every Member of Congress. We have brought it to the attention of age-related organization leaders. We have asked Government agencies to consider this type of publica- tion and make it generally available for every person over age 65 who is a medicare beneficiary. We feel that this kind of a program is most important that it move ahead. We also want to introduce a peer group approach upon which we heard testimony today where older persons would serve as volunteers in advising medicare beneficiaries regarding the gaps in the medicare system and the considerations in filling them. We have offered to try to work with the Government in estab- lishing that kind of a program, much as we have the tax-aid program where 11,000 volunteers are now out helping older people fill out their income tax forms each year. Last year, in 3,500 communities they helped fill out over three-fourths of a million returns. We feel the same kind of people who can work in that area can do a very excellent job in providing peer group consultation to help resolve some of the problems forced by older people in understand- ing their medical coverage. I would want to say, Mr. Chairman, that we certainly want to cooperate with the committee and we would support the amend- ments so that the medigap amendment-so that we could start moving ahead in this area. We look forward to an intensive study in this area provided for by H.R. 4000 as proposed by Representative Shannon that could give us the answers to make the whole program effective in each of the States. Thank you, sir. I would be happy to answer any questions. [Testimony resumes on p. 351.] [Mr. Sullivan's prepared statement and summary statement follow:] PAGENO="0339" 331 * STATEMENT of the NATIONAL RETIRED TEACHERS ASSOCIATION and the AMERICAN ASSOCIATION OF RETIRED PERSONS Mr. Chairman: I am James F. -Sullivan, NRTA/AARP. Special Assistant to the-Executive Director for Member Services. Accompanying me today are.Peter W. Hughes, our Legislative Counsel and James Hacking, Assistant Legislative Counsel for Federal'~egislation. Our Associations, representing over 12 million older persons, appreciate the, opportunity to comment on pending legislative proposals designed to curb abuses involved in the sale of private health insurance policies which supplement Medicare. Thorough investigations made by the Federal Trade Com- mission and the Ho~ise and Senate Committees on Aging have firmly documented widespread abuse and unscrupulous practices in the sale of `Medigap" policies to elderly persons. The record is clear and the problem is obvious. Every year thousands of elderly persons -- fearing that even a minor illness could financially devastate them -- purchase private health insurance which proves to be duplicative or of questionable value in meeting their needs. Too often, they make these purchases man information vacuum -- with little or no information other than an insurance salesman's sales pitch or advertising received through the mail to aid them in making a rational purchase decision. Without the protection of government regulation to ensure at least a fully reliable and accurate presentation of the terms and conditions of the Medigap policy'they purchase, it is almost impossible fo~ the PAGENO="0340" 332 elderly to make such a rational decision. There is little standarization of the terns of policies so buyers can not comparison-shop. Therefore, Medigap policies do not. compete en price and often offer low rate of return in benefits paid to purchasers. This sad situation is initially caused by the complexity of Medicare's benefit structure combined with the physical limitations which often impair the ability, particularly of the frail elderly, to examine adequately the terms of a supple- mental policy and whether.it meets their needs. The rapid rise in health care costs which we have experienced over the past decade and the numerous benefit gaps existing in the Medicare Program have undoubtedly exacerbated the difficulties these older people face. In 1967, Medicare's first full year of operati-on, the average health bill for an aged person was $532 of which Medicare paid 41%. By 1977, the average bill had increased to $1,745 with Medicare again picking up only 41%. While the average health bill for the elderly over this ten-year period more than tripled, their out-of-pocket expenses for health care in 1977 were $563 or 220% higher than in l967;~ Private health insurance played a very small role -- covering only 5% of the elderly's health care bill during this period. Today it is estimated that per capita health care spending PAGENO="0341" 333 for the elderly is three and one-half times that for persons under age 65. Yet, statistics show that elderly family units have roughly one half the median income of their younger counterparts. The increasing ultimate cost to the older consumer of health services demonstrates just how vulnerable the aged are to the pre~ent inadequacies of public-private health care programs an4 the absolute necessity of public and private agencies joining togethed to improve this sit- uation. The increasing health care costs that impact so heavily on the elderly are steadily increasing the opportunities for deceptive practices in the sale of inadequate Medigap policies. Very few beneficiaries understand the complexities of Medicare and its gaps. Lacking uniform information, many older Americans do not realize that insurance sold with a claim to cover all of Medicare's gaps rarely includes the largest gaps -- those medical services for which Medicare pays no- thing (such as nursing home care, out-of-hospital prescription drugs and eye care). FO1 the most part, insurers offer benefits for services not covered by Medicare far less fre- quently than benefits for the noncovered costs of covered services, that is Medicare's deductibles and coinsurance charges for hospital and physician services. Where private coverage is available for essential services not included under Medicare, PAGENO="0342" 334: such "major medical" protection has relatively 1-ow ceilings. - on `benefits which limits the-protection of such policies against catastrophic expensès~. It is clear that the Federal and State Governments must take an active, role to protect the elderly consumer by providing adequate information, requiring sufficient standard- .ization so as to promote cost comparisions, and ultimately regulating the quality of the product sold by requiring that Medigap policies-meet certain minimum standards. Pending Legislation The two bills currently pending in the House -- H.R. 2602, sponsored by Representatives Pepper and Scheuer and H.R. 165, sponsored by Representative Brodhead -- offer somewhat different approaches to solving the Medigap problem. The end result of each, however, would be for the federal government to take an active role in establishing certain minimum standards against which Medigap policies could be judged. Currently, the States have the role of directly regulating -insurance although only six States have specific laws or regulations designed to assist and protect the elderly in the purchase of health insurance by. requiring uniform disclosures or minimum standards that deal with the kind of problems I am speaking of in this testimony. Major scandels have - PAGENO="0343" 335 transpired in many states and most states have b~en ineffective - (as the record will show) in nrotectin~ .the elderly, consumer. Sináè the Medicare supplement market was created by the. - federal Medicare program, the federal government has the oblicra- tion to protect the Medicare population against fraud and.. -. `abuse in the sale of Medigap policies. H.R. 2602, the Senior Citizen's Health Insurance Reform Act of 1979, would attempt to encourage insurers to have their policies meet certain minimum standards through a voluntary certification program. HEW would be charged with establishing federal minimum standards within 18 months of enactment. These standards must include, but not be limited to, the following: * supplement both Parts A and B; * be written in simple language and printed in large type; * limit pre-existing condition clauses to a 60-day period; * provide a 30-day,no premium loss right of cancellation; * and return 75% of premiums collected through benefits paid to the inspxed. Insurance companies would voluntarily seek certification of ~their policies under these standards (and any others HEW deems appropriate) and be able to advertise their certification by displaying an emblem indicating HEW's approval. HEW would also be asked to share with the States a list of certified policies and encourage the States to approve only those policies PAGENO="0344" 336 meeting federal standards. H.R. 2602 would also directly prohibit insurance sales- nen from implying they are Medicare representatives and make it unlawful for them to knowingly sell duplicative coverage. Further,~ insurance companies would be prohibited from selling or advertising through the mail policies which have not been approved by the State into which the policies are mailed. H.R. 165, the Senior Citizens Health Insurance Standards Actof 1979, specifies similar minimum standards as those prescribed by H.R. 2602 with the addition of a requirement for specific disclosure regarding the policy's benefits, its loss ratio, limitations, exclusions and other additional information such as the name, address and toll-free telephone number of the insurance agency. H.R. 165 would require the States to submit to HEW within two years plans adhering to these minimum standards. If a State failed to produce such a minimum plan within the prescribed time, the Federal Government would en- force the minimum standards in that State. H.R. 165 recognizes the general lack of basió information about the Medigap industry. Some of these basics include the number and kinds of coverages available, premium and sales volume, the feasibility of standardization, complaint records, the sale of dread disease and indemnity policies, and causes ~or variabilities in loss ratios, to name a few. In recognition PAGENO="0345" 337 of this lack of infornation, H.R. 165 nandates a 2-year HEW study to. examine sdmè of these basic questions and recommend to Congress a uniform and comprehensive approach to regulation of all private health insurance offered for sale to the aged and disabled. . NRTA/AARP Recommendations In general, our Associations prefer the more aggressive regulatory approach outlined in Representative Brodhead's legislation, H.R. 165. The States should he largely responsi- ble for implementing a meaningful and effective certification program since they are in the best position to monitor and enforce compliance. However, before the ultimate goal of mandatory certifi- cation is pursued, our Associations believe it is necessary to gather the basic information referred to above and to make a thorough evaluation of the feasibility of a mandatory certification program. The direct impact on consumers that such a mandatory program would have in terms of possible increased premium costs or lack of flexibility in consumer *choice must also be examined. A trade-off between these possible negative effects and the, improved benefit coverage and consumer protection that would occur must be evaluated so that any mandatory certification program can strike an appropriate balance between these negative and positive aspects. PAGENO="0346" 338 In addition, the effectiveness of various existing state regulator.y programs should also be evaluated. As I have already indicated, State insurance commissionorsand State and local proseci~tors have had a most difficult time in monitoring the actions of companies and agents enga9ed in the sale of Medigap policies. While many older Americans are simply notaware of the fact they are being victimized by unscrupulous agents, others are often too embarrassed to admit that they have been victimized or ~to participate in court proceedings against agents. Clearly, few States have comprehensive regulations and the quality of enforcement of these regulations leaves a great deal .to be desired. Our Associations suggest that the best way to proceed is: first: to adopt the Shannon Amendment to II.R. 4000 (1979 Medicare Amendments) as reported out of the Health Subcommittee of the Committee on Ways and Means and institute a voluntary certification program so that pertinent knowledge and experience with certification and federal minimum standards can be gleaned; and second: to direct the Secretary of HEW to undertake ~ comprehensive two-year study of Medigap insurance for the p3lrpose of making recommendations to the Congress for a com- * prehensive approach to the regulation of such insurance. Based upon the results of the voluntary certification program ~nd drawing from the experiences gained in utilizing voluntary minimum standards, legislation should then be enacted ei~h~r PAGENO="0347" 339 perpetuating the voluntary program if warranted) or establish- ing a mandatory program with the States being given sufficient time to develop their own plans which meet Federal.minimum standards. At the very , the study should thoroughly examine: minimum loss ratios; the effectiveness of labels, numerical ratings and disálosure information; method~ of eliminating agent misconduct; the sale of dread disease and other indeTnthity policies; and the effects of policy standard- ization. - In our opinion, specifying a minimum loss *ratio under defined terms of measurements is extremely important to en- * suring that purchasers Qf Medigap policies are getting a policy that is reasonably valuable. As the Select Committee on Aging has reported, only eight states have regulations setting minimum loss ratios. With the loss ratios of some of the group policies of Blue Cross/Blue Shield reported as high as 92% and for some of the major commerical insurers (employer-employee group policies)ranging from 80-95%. A floor figure of 70% or more, subject to adjustment by the Secretary of HEW based on further study and experience, could be studied. One way to approach i~his problem would be to require that for a policy to be labeled "Medigap or Medicare supplementary then it must supplement both Parts A and B of the Medicare Act. If it is a hospital-only or medical benefit-only plan, then it could not belabele~as Medicare-Medigap to such requirements. PAGENO="0348" 340 Requiring'that policies sold and advertised through the mail be approved or certified by the State into which the policies are mailed is another important area. However, this requirement should b~ `in~1enented after minimum standards are adopted. Federal involve- ment could thus insure that all policies sold to supplement Medicare are subject to regulation. Presently, only 14 states have mandatory review regulations for advertisng to be used in their states. Inimediai~e., Short-Term Action Required There are, some immediate actions that can be taken to protect elderly purchasers of Medigap policies. As part of the voluntary certification program outlIned in the Shannon Amendment to H.R. 4000; insurance companies must make appro- priate disclosures of policy benefits, limitations and ex- clusionsin order to receive certification. This could be accomplished through written summary statements in bold type which would include the . name~, address and toll-free phone number of the agent selling the policy. In addition, discernable and beneficial information on Medicare coverage and options for supplementation needs to be distributed to guide consumers in making reasonably informed choices. A number of steps in this direction have been taken by HEW and consumer groups to publish basic guides to potential purchasers of supplemental insurance.. The HEW Guide is available at all Social Security offices and area agencies on aging. This pamphlet has been developed in response to widespread criticism over the lack of information for Medicare beneficiaries on the various types of supplemental coverage and what to consider in selecting a policy. . PAGENO="0349" 341 I am pleased to state that our office in NRTA/AARP has pub- lished what is being increasingly recognized as the most helpful of these guide books. - I am also attaching to this statement a copy of a consumer guide that was developed by NRTA/AARP for the education of our membership. The availability of the guide, en- titled "Information on Medicare and Health Insurance for Older People.," was announced in our NEWS BULLETINS several months ago. The demand for this booklet indicated to us the need for substan- tial distribution in the initial month after the announcement we have received over 100,000 requrest for copies. We are now preparing for the fourth printing of the guide. We have received partfcularly favorable comments on the "Policy Checklist for Medicare Gaps" contained in the booklet's back cover. We expect to keep calling member attention to the availability of this document in forthcoming publications and expect that a large percentage of our membership will request copies. We would be happy to cooperate with Federal and State agencies as well as members of Congress in maxi- mizing the dissemination of this document or a similar presentation to help us accomplish this objective of consumer education. Furthermore,in the context of improving their beneficiary services, HEW should develop a-program wherein a cadre of volunteers (preferably older persons) are trained by HEW to PAGENO="0350" 342 assist .Medicare beneficiaries in understanding the program's benefits and claim~ process and in scrutinizing Medigap policies. It is our understanding the HEW is in the process. of considering the development of such a program. Our Associations have had trememdous success with a sImilar vo- * luntuer income tax assistance program which we have operated for the past ten years. This program,"Tax-A±de'~, utilized over 10,000 volunteers this year to assist elderly persons to file over 750,000 federal, state and local income tax re- turns. From programs such as Tax-Aide there exists a sub- stantial foundation dn which to build an effective national volunteer assistance program. However, to be effective in the Medigap area such a program would need the support of agencies such as the Health Care Financing Administration (HCFA) of HEW. Our ~Associations believe the necessary funds should be made available to HEW for the purpose of developing an aggres- sive information campaign that includes publication and dis- tribution of a consumers.' guide and the creation of a Medicare volunteer assistance program. But these two elements, an aggressive information campaign and an effective volunteer assistance program can not stand alone. Combined, they present a real potential for a significant change in the~ perception of Medicare services by our nation's elderly. PAGENO="0351" 34~~ As I have already noted, an important step that can be taken -immediately is to require adequate discioure to the elderly in order that people unde~rstand what protection they are buying. Proper standards for such disclosur,e sheets should have to be developed by HEW as propsoed by these legislative proposals. As a part of this disclosure, supplemental insurers should also * be required (where possible) to indicate to the consumer througi~ a unifo~m format the premium cost of filling the various gaps in Medicare. Such "unit-pricing" would allow the elderly to see the high cost of insurance for the initial deductibles and the relatively low price of gap-filling coverage. The consumer is able through such disclosure to clearly weigh policy benefits against premiums. Three states -- Oregon, New Mexico and Washington -- al- ready require affirmative disclosures. These three states require delivery of a two-page disclosure form with Medicare supplement policies. Each agent or insurer is supposed to fill in the blanks on a chart to show what Medicare gaps the policy fills. California also requires the delivery of a one-page form with very general disclosures along with policies. These states' experiences with this requirement should be examined in developing federal disclosure standards. *The implementation of appropriate disclosure standards and labeling requirements could eventually lead to a standardization * of policies. Such a standardization would promote cost comparisons and competition among Medigap policies. PAGENO="0352" 344 Conclusion The elderly are today living with the consequences of limited information or misinformation about Medigap insurance policies. The lack of standardization and the complexity of available coverage make comparison shopping and price competition nearly impossible; duplicate coverage ~ the rule and riot the exception; few older Americans' coverage ever meet their expectations; and most Medigap policyholders are reluctant to challenge high rates of claim denial for fear of not being able to obtain health insurance protection be- cause of advanced age and/or existing health problems. Our Associatio~ns urge this Subcommittee to take action nowin the area of regulating the advertising and sale of supplemental private health insurance policies to the aged. Inappropriate tactics and unscrupulous practices can be elimi- nated where federal and state regulatory bodies address them. Without doubt, the complexities of Medicare and the con- fusing array in which the program has been described to the potential purchasers have fueled the present crisis. Since reform regulations adopted by 50 states relating to the Federal Medicare program cannot help but be confusing, it is necessary that the Congress intervene to assure a uniformity in those * regulations applicable to the sale of Medigap policies in every staie across the country. Most states have recognized that they ~re doing a far less than adequate job in protecting the elderly through affirmative guidance due to inherent limitations on re- sources available for concerted action. PAGENO="0353" 345 Our Associations believe that the most rational process to follow in implementing regulation of this industry is: first, to adobt immn~diately the Shannon Medigap Amendment to H.R. 4000 (1979 Medicare Amendments) which would provide for voluntary certification of Medigap policies (with certain Federal minimum standards) by the Secretary of HEW and at the same time mandate a comprehensive study of private Medigap insurance and the feasibility of a Federal mandatory certi- fication program (based upon the success of the voluntary program); second, through the Health Care Financing Admin- istration of HEW, ~n information base should be established so that one source (HCFA) is charged with compiling and evaluating all existing data concerning the types of Medigap coverage available, premiums charged, sales volumes, varia- tions in loss ratios, complaint records, etc and third, requirements for disclosure of policy provisions and coverages should be developed immediately while HEW launches an aggres- sive Medicare consumer information campaign. 56-071 0 - 80 - 23 PAGENO="0354" 346 SUMMARY STATEMENT bf the NATIONAL RETIRED TEACHERS ASSOCIATION and the AMERICAN ASSOCIATION OF RETIRED PERSONS CHAIRMAN WAXMAN, MEMBERS OF THE SUBCOMMITTEE: My name is James F. Sullivan. I am Special Assistant to Executive Director Cyril F. Brickfield in the area of Member Service Coordination. I have submitted a full statement for the record, but in the interest of conserving the committe&s time, I would like to briefly condense the substance of my remarks. Our Associations, representing over 12 million older Anvricans, do appreciate the opportunity to comment on pending legislative proposals designed to curb abuses involved in the sale of private health insur- ance policies which supplement Medicare. Investigations by the Federal Trade Commission and both the House and Senate Committees on Aging have firmly documented that thousands of elderly persons --fearing that even a minor illness could financially devastate them--purchase private health insurance which proves to be duplicative or of question- able value in meeting their needs. Too often, they make these purchases in an information vacuum and lack the kind of con- sumer information necessary to aid them in making a rational purchase. They need the protection of governmental regulation to assure them a fully reliable and accurate presentation of the terms and conditions of the coverage they purchase. PAGENO="0355" ~347 The increasing gap between average reimbursement through Medi- care and the fees charged for hospital, doctor and nursing care only demonstrate that each year more older Americans are forced to look to gap-filling insurance to pay their bills while living on relatively low monthly income. With their per capita health care spending estimated at three and one-half times that for persons under age 65, it is a growing burden that will become even more pronounced unless they can have some assurance that the coverage they purchase does in fact meet their expectations by requiring standards of presentation and terminology. I wish to comment briefly on three bills currently pending in the House -- H.R. 2602, sponsored by Representatives Pepper and Scheuer, H.R. 165, sponsored by Representative Brodhead, and H.R. 4000 (the 1979 Medicare Amendments), with its Medigap amend- ment which was recently offered by Representative Shannon. While they offer somewhat different approaches to solving the Medigap problem, the end result of each would be for the Federal government to assume a more active role in establishing minimum standards against which Medigap policies could be judged and in deterring widespread fraud and abuse in the sale of these policies. I will not take the committee's time here to discuss the specific terms of these three measures, but I do want to comment in these respects. First, our Associations believe immediate relief -2- PAGENO="0356" 348 is needed for the elderly. Therefore, we support the Shannon Amendment to P.R. 4000 whereby a voluntary certification program would be instituted by the Secretary of HEW with specific Federal minimum standards and a comprehensive study of private Medigap insurance would be undertaken. Based upon the results of this voluntary certification program and drawing from the experiences gained in utilizing voluntary minimum standards, legislation could then be enacted either perpetuating the voluntary program or establishing a mandatory program - with the states being given sufficient time to develop their own plans which, according to the Secretary, meet Federal minimum standards. We believe Congress should act now to prescribe specific minimum standards before initiating a wide-ranging study of the Medigap problem. Closely paralleling the Shannon, Brodhead and Pepper proposals, these standards should address the need for limi- tations on pre-existing conditions, use of simplified lancruame in large type, provision for a no-loss cancel clause, require- ments for disclosure about the policy's performance - including loss ratios - percentage of claims denied, processing time of claims, etc. At the same time, we must be sure that we do not come up with standards so inflexible as to hamper the consumer's freedom of choice and lead to greatly increased premiums for older Americans on fixed incomes. For instance, there is a question of whether Medigap policies must supplement both Parts A and B. On this matter, we suggest that if a policy is -3- PAGENO="0357" 349 labeled `Medigap or Medicare supplementary, then it should be required to supplement both Parts A and B. However, if it is advertised or described as a hospital - only or a medical benefit - only plan, then it should not be subjected to such require- ments. Without doubt, the complexities of Medicare and the confusing way in which the program has been described to the public have fueled the present crisis. Since reform regulations adopted by 50 states relating to the Federal Medicare program cannot help but be confusing, it is necessary that the Congress intervene to assure a uniformity in those regulations applicable to the sale of Medigap policies in every state across the country. Existing state regulations have not been enforced and most states have recognized that they are doing a far less than ad~quate job in protecting the elderly against unscrupu- lous companies and agents who seek to defraud and take ad- vantage of them. Let me close with a few words on what our Associations are currently doing in this area. Attached to my formal state- ment is a publication "Information on Medicare and Health Insurance for Older People." We are now making this publiqation available to all of our members. We believe that HEW should actively disseminate its recently released "Guide to Health Insurance for People with Medicare" as well as take advantage of similarly available guides that show how Medicare is PAGENO="0358" 350 structured, what it does and does not cover, and what types of private supplemental~ coverage are available to fill in its gaps. We have nailed out, at member request, over 250,000 copies of our NRTA-AARP'guide since notice of its availability was first printed in our News Bulletins. We intend to pursue it. We have received particularly favorable comments on the `policy checklist" which appears in the back of the book. We would be happy to cooperate with federal and state agencies and Con- gress in maximizing the dissemination of this document at cost or a similar presentation by others to help ~F~W in launch- ing an aggressive consumer education campaign for Medicare beneficiaries. Finally, we believe HEW could develop a program around a cadre of volunteers to assist Medicare beneficiaries in understanding program benefits, the claims process and in scrutinizing Medigap policies. Our own Associations have had tremendous success with this concept through our volunteer income tax assistance program which we have operated for the past ten years. This year, for example, "Tax-Aide" utilized over 10,000 volunteers to assist elderly persons in filing over 750,000 federal, state and local income:tax returns. Our Associations believe the nea.~ssary funds should be available to HEW for the purpose of developing an aggressive information campaign that includes the publication and distribution of consumer information materials and the creation of a Medicare volunteer assistance program. We congratulate the Subcommittee on its efforts to correct de- ficienci~ in the standards of care provided Medicare bene- ficiaries and offer our full support to your effort. PAGENO="0359" 351 Mr. SATTERFIELD. Thank you very much for a fine statement. We are aware of how particularly interested you and the people you represent are in this area. I am confident that the statement you have given will be of help to us. Mr. Dannemeyer. Mr. DANNEMEYER. No questions. Mr. SATTERFIELD. I would like to thank you very much for your patience in waiting all afternoon. We appreciate your statement. There being no other business coming before the committee at this time, it shall stand adjourned until 10 a.m. Friday morning. Thank you. [Whereupon, at 4:40 p.m. the subcommittee adjourned, to recon- vene on Friday, October 19, 1979.] PAGENO="0360" PAGENO="0361" MEDICAID AND MEDICARE AMENDMENTS FRIDAY, OCTOBER 19, 1979 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The subcommittee met, pursuant to notice, at 10 a.m., in room 2123, Rayburn House Office Building, Hon. Henry A. Waxman, chairman, presiding. Mr. WAXMAN. The committee will come to order. Today we are continuing our hearings on medicare and medicaid. This morning we are going to be particularly concerned with the administration proposal for medicare reimbursement to HMO's. Our first witnesses this morning will be Donald Brennan repre- senting the Group Health Association of America, and John Igie- hart, representing Kaiser. We welcome you. I am pleased to see you brought an expert along, Mr. Jim Lane. STATEMENTS OF DONALD BRENNAN, TREASURER, GROUP HEALTH ASSOCIATION OF AMERICA, ACCOMPANIED BY JAMES DOHERTY, EXECUTIVE DIRECTOR, GHAA; AND CANDACE KELLER, LEGISLATIVE REPRESENTATIVE, GHAA; AND JOHN K. IGLEHART, VICE PRESIDENT, KAISER FOUNDATION HEALTH PLAN, INC., ACCOMPANIED BY JIM LANE, VICE PRESIDENT Mr. BRENNAN. Mr. Chairman, members of the committee, I am Donald Brennan, treasurer of Group Health Association of Amer- ica and executive vice president of Group Health Cooperative of Puget Sound, a consumer directed health maintenance organiza- tion which provides comprehensive health care services to 275,000 voluntarily enrolled members in the Puget Sound area. I am testi- fying on behalf of the prepaid group practice HMO's of GHAA. With me this morning are James Doherty, executive director of Group Health Association of America, and Candace Keller, GHAA legislative representative. I am particularly pleased to be here today to discuss H.R. 4444, the administration's bill to reform the medicare law regarding reimbursements of HMO's, because group health cooperative has been serving medicare beneficiaries for more than 13 years, and because our plan represents the only HMO plan in the United States currently engaged in a risk-sharing contract. Our current medicare members number 19,111, representing approximately 7 percent of total enrollment. (353) PAGENO="0362" 354 I have submitted written testimony portions of which I would like to present and highlight this morning. [See p. 356.] Today, for a variety of reasons, medicare enrollment in HMO's is small, with only 1.5 percent of medicare beneficiaries receiving their health care through HMO's. On the belief that HMO's offer more efficient use of the medicare dollar incentives to HMO's to enroll medicare beneficiaries were added by the 1972 amendments to the Social Security Act establishing an additional method of reimbursing health maintenance organizations. Under section 1876, an HMO meeting title XIII HMO require- ments can elect a capitation payment on either a risk basis or cost basis for both part A and part B services. Although the risk option was designed to more closely reflect the HMO's normal method of payment and the new cost option was intended to provide a cost reimbursement alternative more compatible with prospective pre- payment of comprehensive services, both provisions have signifi- cant shortcomings. Most importantly, both involve retrospective adjustment and therefore are fundamentally cost reimbursement systems which are at odds with the HMO's manner of operation. As the only section 1876 risk contract, I would like to share with the committee some of Group Health Cooperative's experiences under that contract. Beginning on October 1, 1976, Group Health Cooperative entered into a risk-sharing contract under section 1876 of the present medi- care law. Under such an arrangement the law provides that if the HMO is able to render services to its medicare enrollees at a cost below the average cost of medicare services in the local fee-for- service community, it is entitled to receive a portion of the savings, equally divided between the Government and the HMO, up to 20 percent of the average community cost for the same services in the fee-for-service sector. During the first 15 months, from October 1976, through Decem- ber 1977, Group Health Cooperative's costs were sufficiently below the average community costs such that the cooperative received $1.3 million as its share of the savings. Based upon our experience, I would like to briefly highlight two problems. The first is the retroactive calculation of savings. No final settle- ment on the savings for the first 15 months to which group health is entitled has been made. In addition, only recently the coopera- tive has been advised that the estimated average community cost for the second period under the contract, January 1978, through December 1978, has now been adjusted downward for a second time, the result of which is to lower the reimbursement for the savings to Group Health Cooperative. This lengthy delay with the possibility of adjustment in previously determined savings places an organization at risk in passing such savings on to the medicare population. A second major problem has been the requirement that the medicare beneficiary agree to receive all medicare coverage serv- ices either directly or through arrangements provided by the HMO. This requirement referred to as the lock-in represented a change in the habitual pattern of seeking care, and for a small number proved to be traumatic. PAGENO="0363" 355 The alternative faced by the medicare beneficiary in the HMO is equally unattractive. That is, terminating membership in the HMO or absorbing the total cost of the out of plan care. In order to study the effect of the out of plan utilization, Group Health Cooperative entered into a demonstration project under section 222 of the 1972 Social Security Amendments for an experimental waiver of the requirements that the medicare beneficiary agreed to receive all medicare covered services through the HMO. This allowed for re- imbursement of out of plan services. The degree of out of plan utilization studied since January 1, 1977, suggests that the opportunity for out of plan care will not cause any significant shift to out of plan care but significantly increased the satisfaction of medicare members by providing them with a choice of an HMO as the source of their health care. Group Health Association of America and Group Health Cooper- ative support the provisions of H.R. 4444 as recently amended by the health subcommittee of the House Ways and Means Commit- tee. The bill recognizes for the first time an alternative and com- peting delivery system with different financial reimbursement re- quirements. By assuring the risk basis HMO's reimbursement of allowable costs at 95 percent of what Medicare pays on the average in the local community, the HMO is able to determine prospective- ly those funds available for support to its medicare beneficiaries. It provides greater incentive for the HMO to become a risk basis HMO and to market services to the medicare enrollees. A second provision of the bill which we fully support is that it allows current medicare members of HMO's the option of choosing to receive services under a cost arrangement or under a risk arrangement. In addition, in concert with the goal of maximizing opportunities for medicare beneficiaries to join HMO's, we support the continued availability of section 1833, cost reimbursement for those which for fiscal or other reasons do not feel comfortable with the risk based reimbursement. Finally, we strongly endorse the requirement that savings achieved by the HMO be used to provide additional benefits for medicare enrollees, and the related provision reserving to HMO the discretion to tailor these added benefits to the needs of its medicare members. In conclusion, we strongly urge that you support the passage of H.R. 4444 as amended as a bill which would provide important incentives for medicare beneficiaries to enroll in HMO's and which would lead to long-term cost savings for the Federal Government. Thank you. [Testimony resumes on p. 370.] [Mr. Brennan's prepared statement and attachment follow:] PAGENO="0364" 356 STATEMENT OF DONALD BRENNAN TREASURER GROUP HEALTH ASSOCIATION OF AMERICA Mr. Chairman and Nembers of the Comittee I am Donald Brennan, Treasurer of Group Health Association of America and Executive Vice President of Group Health Cooperative of Puget Sound, a consumer directed health maintenance organization which provides comprehensive health care services to 275,000 voluntarily enrolled members in the Puget Sound area. I am testifying on behalf of the prepaid Group Practice HMOs of GHAA. Its member plans represent more than 70% of the national HMO enrollment of 7,500,000. I am accompanied by James Doherty, Executive Director of Group Health Association of America and Candace Keller, GHAA's Legislative Representative. I am particularly pleased to be here today to discuss H.R. 4444, the administration's bill to reform Medicare reimbursement for HMOs because Group Health Cooperative has been serving Medicare beneficiaries for more than 13 years, and because our plan represents the only HMO plan in the United States currently engaged in a risk-sharing contract. Our current Medicare members number 19,111 representing approximately 7% of total enrollment. When the Medicare program was enacted in 1965, it held out to the elderly the promise of access to adequate, affordable health care. Unfortunately, for too many beneficiaries this promise has gone unfulfilled. The program did not recognize alternative and competing delivery systems; thus the reimbursement mechanisms were developed around the fee for service system and retroactive cost finding with no provision for prospective reimbursement which is the basic method of payment for HMOs. Further difficulties in convincing physicians to accept assignment of Medicare claims, fees in excess of the Medicare coverage which must be borne by the patient, and a myriad of other added expenses and restrictions on care have in many cases resulted in a failure of the program to deliver services to those most PAGENO="0365" 357 in need. As an alternative to the traditional fee-for-service delivery system, health maintenance organizations can offer the elderly a measure of relief from some of these administrative and financial burdens and at the same time can offer the federal government more efficient utilization of its Medicare dollar. Not only is health care more readily available to Medicare beneficiaries through HMOs, but the more efficient utilization of services which the HMO achieves results in lower costs than are found in the fee-for-service sector. i have attached a deftnittve study whi:ch supports' thi'~ proposition. The experience of Group Health Cooperative of Puget Sound has shown that it can deliver a comprehensive range of services at substantially below the cost of those services in the fee-for-service sector. This experience of Group Health Cooperative is not unique. A 1975 Social Security study on Medicare experience with group practice prepayment plans supports this statement. Nevertheless, Medicare enrollment in HMOs has been small, with only 1 .5 percent of Medicare beneficiaries receiving their health care through HMOs. In attempting to provide incentives to HMOs to enroll Medicare beneficiaries, the 1972 amendments to the Social Security Act established an additional method of reimbursing health maintenance organizations. Under Section 1876 an HMO meeting Title XVIII HMO requirements can elect a capitation payment on either a risk-basis or cost-basis for both Part A and Part B services. Although the risk option was designed to more closely reflect the HMO's normal method of payment and the new cost option was intended to provide a cost reimbursement alternative more compatible with prospective prepayment of comprehensive services, both provisions have significant shortcomings. Most importantly, both involve retrospective adjustment and therefore, are fundamentally cost reimbursement systems which are at odds with the HMO's manner of operation. The need for change in the present risk option is demonstrated by the fact that to date only one HMO, Group Health Cooperative PAGENO="0366" 358 of Puget Sound, has entered into a Section 1876 risk contract. I would like to share with the Committee some of our experiences under that contract. Beginning on October 1, 1976, Group Health Cooperative entered into a risk-sharing contract under Section 1876 of the present Medicare law. Under such an arrangement the law provides that if the HMO is able to render services to its Medicare enrollees at a cost below the average cost of Medicare services in the local fee-for-service community, it is entitled to receive a portion of the savings. Under 1876 this savings is equally divided between the government and the HMO up to 20% of the average community cost for the same services in the fee-for-service sector. Savings of more than 20% are allocated entirely to the government. There is no requirement that the savings be passed on to the beneficiary. The risk is that the HMO's cost will exceed the average cost of Medicare services in the community, in which case the HMO receives no savings and must absorb the excess cost. During the first 15 months from October 1976 through December 1977, Group Health Cooperative's costs were sufficiently below the average community cost such that the Cooperative received $1.3 million as its share of savings. This amount was paid in addition to the amounts reimbursed by Medicare to the Cooperative for services provided. While Group Health was not required by Section 1876 to apply the savings to the Medicare beneficiaries, the $1.3 million received by the Cooperative have been used exclusively to cover (1) the Medicare enrollees' share of funds required to meet capital needs which are not reimbursed by Medicare, (2) to reduce dues charged Medicare enrollees that cover the co-payments and deductibles not covered by Medicare, and (3) to increase benefits for Medicare enrollees without increasing dues. H.R. 4444 specifically requires that the savings will be used for the Medicare beneficiary, a requirement that we support as an improvement of the program. PAGENO="0367" 359 During this period of time from October 1976 through December 1977, the Cooperative's Medicare population enrolled in the risk contract increased nearly 29 percent from 11,876 at the outset of the. risk-sharing contract to 15,261 at the end of the initial 15-month period in December 1977. This increase came from "aging-in" to the Medicare eligibility by existing Co-Op enrollees, from selection of Group Health by other Medicare eligibles through a group plan sponsored by an employer, and from open enrollment of other eligibles without an employer sponsor. The new individual Medicare enrollees through open enrollment numbered 448. While Group Health Cooperative generally believes that the risk-sharing contract has been beneficial both for the Cooperative and for the Medicare enrollee, and for the government, nevertheless, there have been some problems. I would like to share two of those issues with you this morning, and if during the question and answer period I can address other issues, I would be happy to do so. First is the retroactive calculation of the savings. While I referenced in my comments that Group Health Cooperative has received $1 .3 million in savings for the initial 15 months of the contract dating back to October of 1976, no final settlement on the savings to which Group Health is entitled have been made. In other words, this figure is still subject to adjustment. In addition, only recently the Cooperative has been advised that the estimated average community cost for the second period under the contract, January, 1978 through December,l978, has now been adjusted downward for a second time, the result of which is to lower the reimbursement for the savings to Group Health Cooperative. This lengthy delay with the possibility of adjustment in previously determined savings places an organization at risk in passing such savings on to the Medicare population. Since the HMO develops a yearly budget based upon prospective prepayment by all enrollees, the incompatibility of this delay is clear. This is a 4 PAGENO="0368" 360 clear illustration of how a retrospective or cost reimbursed system runs counter to the HMO system. A second major problem has been the requirement that the Medicare beneficiary agree to receive all Medicare covered services either directly or through arrangements provided by the HMO. For those Medicare beneficiaries that are currently enrolled in Group Health Cooperative and accustomed to seeking Medicare reimbursement for out-of-plan services, this requirement, referred to as the lock-in, represented a change in their habitual pattern of seeking care and for a small number proved to be traumatic. The alternative faced by the Medicare beneficiary in the HMO is equally unattractive, and that is terminating membership in the HMO or absorbing the total costs of the out-of-plan care. In order to study the effect of out-of-plan utilization, Group Health Cooperative entered into a demonstration project under Section 222 of the 1972 Social Security amendments for an experimental waiver of the requirement that the Medicare beneficiary agree to receive all Medicare covered service through the 1-1110. This allowed for reimbursement of out-of-plan services. The degree of out-of-plan utilization has been studied since January 1, l977,and will expire at the end of December, 1979. Our experience under this project has been that the opportunity to receive out-of-plan care has not caused any significant shift to out-of-plan care but hassignificantly increased the satisfaction of our Medicare members by providing them with a choice of an 1-1110 as a source for their health care. Group Health Association of America and Group Health Cooperative support the provisions of H.R. 4444 as recently amended by the Health Subcommittee of the House Ways and Means Committee. The bill recognizes for the first time an alternative and competing delivery system with different financial reimbursement requirements. By assuring the risk-basis HMOs reimbursement of allowable costs at 95% of what Medicare pays on the average in the local community, the HMO is able to determine prospectively those funds available PAGENO="0369" 361 for support to its Medicare beneficiaries, and at the same provides greater incentive for the HMO to become a risk-basis HMO and to market services to the Medicare. enrollees.. A second provision of the bill , . which we. feel is appropriate, is that it allows current Medicare members of HMOs the option of choosing to receive services under a cost arrangement or under a risk arrangement. Based upon the experience of those at Group Health Cooperative, we would fully support this move to accommodate the habits of many Medicare enrollees who take advantage of the Medicare reimbursement for out-of-plan services. In addition, in concert with the goal of maximizing opportunities for Medicare beneficiaries to join HMOs, we support the continued availability of Section 1833 cost reimbursement for those HMOs which, for fiscal or other reasons, do not feel comfortable with risk-based reimbursement. Finally, we strongly endorse the requirement that savings achieved by the HMO be used to provide additional benefits for Medicare enrollees and the related provision reserving to the HMO the discretion to taylor these added benefits to the needs of its Medicare members. In sumary, we believe that H.R. 4444 as amended provides improved incentives that offer several advantages. First, in our opinion, Medicare reimbursement with costs limited to 95% of fee-for-service, average reimbursed cost would lead to cost savings to the federal government in the long term as risk-basis HMO enrollment expands. Second, we believe that by using the savings it achieves, an HMO would be able to eliminate all or most of the premium it charges for prepayment of the Medicare deductible and co-insurance requirements that becomes such a financial burden to Medicare beneficiaries. Finally, Medicare beneficiaries, similarly to employees of private or governmental enterprise, would be offered an option of broader benefits or reduced cost sharing as a reward for selection of a more cost-efficient approach to health care. In conclusion, we strongly urge that you support the passage of H.R. 4444 as amended as a bill which would provide important incentives for Medicare beneficiaries to enroll in HMOs and which would lead to long term cost-savings for the federal government. 56-071 0 - 80 - 24 PAGENO="0370" 362 SPECIAL ARTICLE HOW DO HEALTH-MAINTENANCE ORGANIZATIONS ACHIEVE THEIR "SAVINGS"? Rhetoric and Evidence HAROLD S. Luvr, PH.D. Abstract Health-maintenance organizations have been auggeated aa a way to atop spiraling medical coata. Although many of the arguments have been largely rhetorical, theoretical conaiderations auggeat that the ahift from fee for service to a fixed budget for the providers (physicians and hospitals) will result in substantial savings. Total coats (premium and out-of- pocket) for enrollees are 10 to 40 per cent lower than those for comparable people with health insurance. Enrollees in health-maintenance organizations have about as many ambulatory visits as comparison HEALTH - maintenance organizations, or HMO's, are receiving renewed interest from policy makers as a method to control medical-care ex- penditures. The argument for HMO's rests on a com- bination of economic theory, political rhetoric and some evidence. Given the highly charged nature of the debate about medical-care policy, it is important to distinguish conjecture and rhetoric from convincing evidence. Results from selected studies are of limited value without examination of contrary results from other studies. To help focus the policy discussion, this paper presents virtually all the evidence of the last 25 years concerning HMO "savings," or cost and utiliza- tion differences, and examines various explanations of how such "savings" are achieved. Although federal legislation provides a definition of an HMO, it is so restrictive as to exclude many organizations commonly thought of as HMO's.t In this paper an organization will be considered an HMO if it assumes a contractual responsibility to provide or assure the delivery of health services to a voluntarily enrolled population that pays a fixed premium that is the HMO's major source of revenue.' It should be noted that this definition allows a wide variation in the organization and operation of the plans. Even within types of HMO's, such as prepaid group practices and individual practice associations, substantial variability exists. Thus, the focus in this paper is on generic types, rather than the best, or worst, performers within each type of plan. From the Hralth Sersices Research Disision, Department of Family, Community and Prenrntis'r Medicine, Stanford Unisersity School of Mrdi- cine, Suite 0.1,703 Welch Rd., Stanford, CA 94305, where reprint requests should be addressed to Dr. LufL An earlier sertion of thin paper sos p,esentrd at theunnuat conference of the `sVestem Economics Association, Anaheim, CA, Jone 21, 1977. tam indebted to Rachel F. Boaz,John P. Bunher, Diana B. Dutton,Atucn C. Enthosen, James F. Fries, Stesen A. Scheondre, and Carol `sVinograd for Supported inputs by a grunt (lS-P-90335/9.5l1 from the Social 5ecurtly Administration. groups. Most of the cost differences are a'tributable to hospitalization rates about 30 per cent lower than those of conventionally insured populations. These lower hospitalization rates, in turn, are due almost en- tirely to lower admission rates; the average length of stay shows little difference. There is no evidence that health-maintenance organizations reduce admis- sions in discretionary or "unnecessary" categories; instead, the data suggest lower admission rates across the board. (N Engl J Med 298:1336-1343, 1978) The data in this paper are drawn from a com- prehensive review of studies published since 1950. (Sources were identified from previous review ar- ticles'~7 and the major journals publishing health- services research, and are described in more detail in 17 pages of appendix tables available through NAPS.*) .Although most of the studies are relatively recent, the changing medical-care environment re- quires caution if one attempts to project any histori- cal experience for future policy purposes. Variations in such features as methods, populations and time period are controlled by use of studies that contrast the experience of people in an HMO with a com- parison group of people having conventional health- insurance coverage.. None of the studies are ex- perimental in the sense that people were randomly as- signed to different plans. In fact, one may assume that participants selected the option they thought was best for them. Thus, differences in cost and utilization can- not be identified as savings due So one type of plan or another, but must be discussed simply as being lower in one plan. TOTAL MEDICAL-CARE EXPENDITURES The major claim supporting HMO's - that they contain the total cost of medical care - follows from the different economic incentives inherent in HMO's as compared to fee-for-service practice with conven- tional health insurance.' Estimates of total medical- care expenditures, which include premiums and out- of-pocket costs, require household surveys to measure "out-of-plan" use. The few available studies are presented in Table 1. All five studies include at least one California Kaiser-Permanente plan. In each, the 50,der NAPS Document 03276 from ASIS/NAPS c/a Microfiche Publications, P.O. Box 3513, OrondCrnteal Station, New York, NY 10017. Remit, is odcanm, 53 for each microSche.copy reproduction of 55 for each photocopy. Outside the United States and Canada, postage is 53 for a photocopy or St for a microfiche. Make checks payable to Microfiche Publications. Reprinted from the New England Journal of Medicine 298:1336-1343 (June 15), 1978 PAGENO="0371" `D,tsil,d drsc,iptiore of eeprrsrs ircludrd ir each srudy p,ooidrd i,~ Apperdinee ~osilsblr f,o,,, NAPS. Methods cn,y 1, tadyt,, study, bat noreistert sc,oss ptsre nithi,trschoudy. tPrrpaid group p,scticr. Kaiser enrollees have the lowest expenses, and can therefore serve as a basis for comparison. Yearly costs for Blue Cross/Blue Shield enrollees average 50 per cent more (range of 16 to 88 per cent) than those for Kaiser enrollees. Enrollees in indemnity plans have an intermediate position, with costs that average 21 per cent (5 to 48 per cent) above those for Kaiser en- rollees. People in the other prepaid group practice, Ross-Loot, have costs about 12 per cent (6 to 16 per cent) above those for Kaiser enrollees. There are two estimates for enrollees in individual practice associa- tions (these are foundations for medical care that bear at least part of the financial risk for services deliv- ered).'4 In 1962-63 these costs were close to the level of Blue Cross/Blue Shield - 27 per cent above the Kaiser level - whereas in 1970-71, they were in a more intermediate position, at 24 per cent above Kaiser. Although these findings are based on data from 1958 to 1971, they are supported by 1970 data com- paring Medicare reimbursements for beneficiaries enrolled in seven prepaid-group-practice HMO's with other Medicare beneficiaries residing in the same counties)' With the exception of two plans in New York, reimbursements adjusted for age and sex were lower for HMO enrollees. The average difference in reimbursement for all seven plans was 13 per cent. To summarize, the available studies support the claims and expectations that medical-care expen- ditures arC lower for HMO enrollees than for people with conventional insurance coverage. The most con- vincing evidence pertains to enrollees in the California Kaiser plans, whose total costs were 10 to 40 per cent below those with conventional coverage. Enrollees in another California prepaid group practice, Ross- Loot, had lower costs than those in conventional plans in only two out of three studies and, in two cases, had substantially higher costs than the Kaiser enrollees. There is no documented evidence that costs for en- rollees in individual practice associations are lower than those for people with conventional insurance. NUMBER AND Mix OF SERVICES How does the cost differential between enrollees in HMO's and conventional plant arise? The two major possibilities are the more efficient production of given services and changes in the number and mix of ser- vices provided. There is no theoretical reason to ex- pect HMO's to be more efficient than fee-for-service providers, nor is there evidence that HMO's provide a day of hospital care or a physician's office visit at substantially lower cost."~" Solo practitioners recog- nize that they bear the costs of their own inefficiencies, whereas physicians in groups face a dilution in incen- tives. When economies of scale exist - for instance, in the use of allied health personnel - they are equally available to prepaid and fee-for-service groups. Rather, the observed expenditure differentials between HMO's and fee-for-service systems seem to reflect differences in practice patterns - i.e., the number and mix of services. These changes are likely to be concentrated in hospital, rather than am- bulatory, care, since it is much easier to control hospitalization: the consumer can directly initiate an ambulatory visit but only a physician can admit a pa- tient to the hospital. HMO's typically offer more ex- tensive coverage for ambulatory care, thus increasing demand for these services. In addition, if there is a choice between providing care on either an inpatient or an outpatient basis, the HMO will probably choose the less costly outpatient mode. Because there is still an incentive for the HMO to reduce "unnecessary" ambulatory visits, the total will represent the net effect of these incentives. There is only one study that allows a comparison of the number and mix of services offered in an HMO and a comparison group." The prepaid group enroll- ees had substantially lower hospital use. Their physi- 363 Table 1. Yearly Medical-Care Expenditures per Person Ac- cording to Type of Health-Insurance Plan.* `too Pesawa Dear, Torus. Rurtoor Otw.or- Torus.Cosr POCKET TO Lowesr cosrs Torut.Cosr Blue.collar unios members, 1958': Blue Cross-Blur Shield, NJ Major Medical.tndrmnily Kaisert Auto tcorkers, Oakland, CA, 1959": Blue Ceoss-Blue Shield Kaisert CA stole employees, 1962-63": tndemsity Blue Cross-Blue Shield Kaisert Rass-Loost Individual practice Enrollees in 6 Southern CA plots, 1967-68": Large commercial Small commeecial Blur Crass Blur Shield Kaisert Ross-Loost CA slate employers, 1970/71": Indemnity plans Blue Cross-Blur Shield Kaisert Ross-Loos/Fumily Health Plant Individual proctice $38 $51 $89 1.25 35-38 44 79-82 1.11-1.15 39 32 71 1.00 $58 $63 $121 1.27 57 38 95 1.00 $57 $47 $104 1.12 71 50 121 1.30 71 22 93 1.00 68 31 99 1.06 77 41 118 1.27 $104 $79 $183 1.48 91 69 160 1.29 127 108 235 1.90 157 74 231 1.86 111 13 124 1.00 92 50 142 1.15 $102 $82 $184 1.05 160 89 249 1.42 137 38 175 1.00 140 63 203 1.16 128 89 217 1.24 PAGENO="0372" Figure 1. Ambulatory Visits per Person per Year in 26 Pairs of HMO's and Comparison Groups. Data are drawn from 15 studies covering the period 1951- 759,12i3i9-29 The 45~ line representsequal utilization in the HMO and comparison group. PGP denotes prepaid group practice, and PA individual practice association. cian use was only slightly (6 per cent) lower than that of the comparison group, but this is the net effect of substantially lower use of surgical care and higher use of ambulatory care. Although comparable data are not available for other plans, the utilization findings presented below overwhelmingly support the argu- ment that most HMO "savings" are attributable to lower hospitalization rates. Ambulatory Visits Figure 1 presents data on annual ambulatory visits per person from 26 pairs of H~uIO's and comparison groups.'12"3"52' Plotting the number of visits for HMO enrollees against the number for the com- parison group controls for differences in population mix and research design in the various studies; these factors are generally held constant within each pair. In 18 of the 26 pairs, the HMO enrollees have more visits than the comparison group. Eliminating four cases whose methods suggest a potential under- estimate of visits in the non-HMO group because of a reliance on claims data does not substantially alter the findings - 15 of the remaining 22 pairs show higher rates in the HMO group. All five observations of individual practice associations show substantially higher ambulatory-care rates than their comparison groups. This observation is consistent with the hy- pothesis that fee-for-service payments to physicians within the individual practice associations provide less of an incentive to "reduce" visits than for physicians paid by salary, as is common in the prepaid group practices. Only 10 of the 17 remaining prepaid group practices show higher ambulatory-visit rates - hard- ly strong evidence of a consistent difference. For the 17 studies of prepaid group practices, the H~vIO enrollees had 4.41 visits per year in contrast to 4.19 visits for those with conventional coverage. In the five individual practice associations the difference was substantially larger - 5.11 visits versus 4.32. These findings support the expectation that HMO enrollees receive at least as many (or more) ambulatory visits as enrollees in conventional plans. They also suggest that HMO's do not save money by reducing ambulatory visits. Hospltatization The overall measure of hospital use is the number of inpatient days per 1000 enrollees per year, which, in turn, is the product of admissions per enrollee times the average length of stay per admission. The latter two variables may be influenced on a case-by-case basis. Table 2 summarizes the findings for 51 com- parisons of HMO and non-HMO enrollees. In 41 of the 51 pairs, the HMO enrollees had fewer hospital days than the comparison groups, and in 42 cases, their admission rate was lower. The data are much more mixed for length of stay: it was lower for HMO enrollees in 29 of the 51 cases, about the same in eight and higher in 14. About 80 per cent of the cases sup- 3fi4 0 COMPARISON GROUP Table 2. Summary of Findings Concerning Hospital Utilization of HMO and Non-HMO Enrollees - Comparisons from 1951 to 1975.* D,usIOOvE~uo~uus vu E,uu,~us A~u~,uu Luwv, uwv ,~u5 ,u~uu ~t ?u5 uuu~u ~u~t ~u5 vu~uu HMOunrollees non-HMO Tutals 5 38 4 13 9 31 4 38 2 13 6 51 12 36 2 13 14 31 thu ~ ~P,upsid g~~p p,~atitt. ttutl~dus wupsuis~us iu =hah thu HMO ~ full iu b,tuu,u thusu ,f2u~t5MO g,u'aps. PAGENO="0373" 365 port the expectations of lower inpatient utilization, but do the remaining 20 per cent cast substantial doubt on the findings? The breakdown between prepaid group practices and individual practice associations provides one clue to interpretation of the data. The latter type of HMO is less likely to demonstrate lower rates of hospitaliza- tion. Although the individual practice associations represent 25 per cent of the 51 data points, they ac- count for 44 per cent of the comparisons with more total days in the HMO and 33 per cent of the "unex- pected results" for admissions. Prepaid group practices, on the other hand, are supposed to be able to control utilization; what about the remaining results? Careful examination of the studies suggests reasonable explanations for most of the findings. Of the six studies that indicate higher or equal total utilization for prepaid-group-practice enrollees, three refer to plans in which the physicians either had no financial stake in the plan's success or belonged to a predominantly fee-for-service group practice in which the physicians could not identify the HMO enrollees."."4° A fourth study has been crit- icized for substantially underestimating non-HMO admissions.3.2' The remaining two studies, both of which indicate utilization about equal to that of the comparison group, cannot be so easily dismissed. In one, the study population is composed of union members with a dual choice between an HMO and a self-insured union-sponsored plan that pays physi- cians on a fee-for-service basis.3' A key feature of the latter program was active member education and con- trol over expenditures, which may have provided in- centives for the non-HMO patients and their physi- cians similar to those faced by the HMO enrollees. The second study is based on a carefully conducted survey of union members in three plans: Blue Cross in New Jersey; Kaiser in Northern California; and Major Medical Indemnity in Utica, Milwaukee and Cincinnati.' The unexpectedly similar utilization pat- terns are probably attributable to regional differences in admission rates and lengths of stay. (The West Coast typically has more admissions and shorter lengths of stay.) With two possible exceptions (for which there are other explanations), there is no evidence to reject the hypothesis that the prepaid-group-practice form of HMO demonstrates lower rates of hospital days and admissions. But how strong is the evidence supporting the hypothesis? The quality of the research designs varies, but in most cases, it is excellent. Most provide age-sex-standardized data. More than half involve dual-choice or multiple-choice situations. In 21, the data were collected by means of household interviews, and thus included out-of-plan utilization. Another 13 studies used populations with identical hospitaliza- tion coverage and reporting systems. Interview data were often checked with medical records. Out-of-plan utilization is one of the major problems in com- parisons of utilization rates. The available data sug- gest that out-of-plan use is relatively low; it ranges from less than I per cent in some studies" to about 8 per cent.' The 51 comparisons reported here indicate days and admissions per thousand enrollees that are about 80 per cent as high in individual practice associations as in comparison groups and 70 per cent as high in prepaid group practices as in comparison groups. These estimates are based on the average values for each group. If, however, regressions are estimated relating days (or admissions) in the HMO to values in the comparison group, then, within the observable range, hospital days are 25 to 45 per cent lower in prepaid group practices and 0 to 25 per cent lower in individual practice associations. The corresponding figures for admissions are 15 to 40 per cent and 0 to 25 per cent. WHAT ACCOUNTS FOR THE DIFFERENCES IN HOSPITALIZATION RATES? The previous section provides conclusive evidence that the overall number of hospital days is lower for HMO enrollees. This reduction can occur through shorter stays or lower admission rates. If it occurs through the length of stay, do average figures mask differences in case mix? If it occurs through reduced admission rates, do they occur differentially by diagnosis and, if so, do HMO's reduce the admissions of patients less in need of hospital care? Length of Stay There are no consistent differences in the average length of stay for HMO enrollees and comparison groups; in only 29 of the 51 pairs was the stay shorter for the HMO sample. Only two of 13 inidividual prac- tice associations, however, had longer stays, in con- trast to 12 of 38 prepaid groups. This finding suggests that, whereas the individual practice associations are relatively less effective in keeping people out of the hospital, their physicians send patients home a little sooner than other physicians do. The average stay for a given type of case and the mix of cases together determine the overall length of stay. Although she first few days for a certain condi- tion might be considered necessary or good practice, for every additional day, an increasing proportion of clinicians would agree that further stay is dis- cretionary. The HMO's financial incentives suggest that they will try to eliminate such "marginal" days within each type of case. If the lower admission rate in HMO's does not occur across the board, and if less serious (more discretionary) cases tend to require shorter stays, reducing the proportion of such cases will increase the average length of stay if everything else remains constant.4' Examination of the only detailed set of data, PAGENO="0374" however, indicates the length-of-stay issue is rather complex. Riedel et al.36 provide admission rates and length of stay according to 45 specific diagnoses for federal employees in Washington, D.C. For the 43 di- agnoses with comparable coverage, the overall length of stay for Blue Cross/Blue Shield members is 6.44 days - almost the same as that of Group Health As- sociation (an HMO) members, which is 6.56 days. The Blue Cross admission rate, however, is almost twice that of the Group Health Association: 118.4/ 1000 versus 68.8/1000. (All data are age and sex adjusted.) Is it possible that Group Health Asso- ciation both reduces the stay for the patients it ad- mits and excludes discretionary admissions that have shorter than "average" stay, resulting in canceling ef- fects? If so, weighting the average length of stay for the HMO patients by the admissions mix of Blue Cross patients would yield a substantially lower overall average stay. The resulting figure is 6.46 - scarcely different from the original values. Thus, the equality in overall stay is not attributable to offsetting differ- ences in case mix. Several points warrant discussion. First of all, the 43 diagnostic categories may be too crude to capture fine differences in severity and "true" case mix. Within each category, the HMO patients may have been "sicker," just offsetting the incentive to reduce stay, but such fine balancing is unlikely. Secondly, the negative results are not attributable to the similarity in case mix in the two groups. Admission rates ac- cording to diagnosis in Blue Cross range from 0.7 to 8.0 times those of Group Health Association. Thirdly, there is substantial variation in the stay for specific di- agnoses in each program. These factors suggest that if true differences were present, they would be seen in these data. Instead, the observed variations in stay ap- pear to be randomly distributed, and the diagnoses that have lower admission rates in the H~vIO include both long-stay and short-stay cases. These data strongly suggest that, on the average, HMO's do not obtain very much of their lower hos- pitalization rates through shorter stays. The data also indicate, however, that both the lower admissions rate and other factors, such as self-selection, result in case mixes in HMO's that differ substantially, but in rather subtle ways, from those in comparison groups. "Discretionary" Admissions There has been considerable public debate about "unnecessary" operations and, in some cases, the argument is supported by pointing to low surgical rates in HMO's.'2" Do the data support the expecta- tion that HMO's derive a disproportionate share of their "reductions" in admissions from the surgical category? Secondly, do HMO's achieve relatively greater "reductions" when there are relatively more surgical procedures in the "community"? Thirdly, are 5U.1UU~4UU..63 0.40 tOO 0.60 0.70 RATIO OF SURGICAL TO TOTAL ADMISSIONS IN COMPARISON GROUP Figure 2. Ratio of Surgical Admissions to Total Admissions in 23 Pairs of HMO's and Comparison Groups. Data are from numerous studies.9'3'92554252730313° The 45' line represents an equal proportion of surgical admissions in HMO's and comparison groups. Abbreviations as in Figure 1. individual practice associations less effective in "reducing" the number of operations because their surgeons are paid on a fee-for-service basis? One way of examining these questions is to com- pare the proportion of total admissions accounted for by surgical procedures in HMO's and comparison populations. Data for 23 such pairs are presented in Figure 2. None of the expected relations are supported by the data. Of the 23 pairs, Ii show a lower propor- tion of operations in HMO's, and 11 show a higher proportion, with one pair having exactly equal rates. Furthermore, the scatter is tightly clustered around the 450 line. This fact indicates that the HMO's "reduce" admissions equally in the surgical and non- surgical categories. If HMO's found it easier to achieve "reductions" in operations when surgical procedures accounted for a greater proportion of ad- missions in the comparison population, the scatter would have a slope of less than 450* There is no dif- ference, however, between the scatter and the 450 line. (The "reduction" in surgical procedures in the HMO in relation to all admissions also has no connection with the absolute rate of surgical admissions in com- parison populations.) Thirdly, the data directly con- tradict the expectation that individual practice as- sociations, with their fee-for-service payments to sur- geons, would find it more difficult to "reduce" the rate of surgical procedures. All four had a lower propor- tion of operations than their comparison groups, in contrast no only eight of the 19 prepaid group prac- tices. 366 0 ".~ 0< <;S 0.70 t.60 0.50 0.40 0.30 0.20 0.10 /0 , PAGENO="0375" 367 These rather surprising findings require some dis- cussion about potential biases in the data that might account for these results. The two major categories omitted are obstetric and diagnostic admissions. HMO's tend to have relatively more of the former and less of the latter. Including obstetrics in the total ad- mission figures biases upward the estimate of the HMO's effect on surgical rates by reducing the proportion of admissions attributable to operation. For diagnostic admissions, the bias works in the other direction. Data from one study show that excluding maternity, diagnostic, x-ray and laboratory admis- sions actually increases the role of surgical admission in the HMO's." No one really argues that there is "too much sur- gery" of all kinds, but rather that there may be too many "discretionary" procedures. If certain proce- dures are, in general, more discretionary than others, greater relative reductions should be found in such ad- missions in HMO's than for all surgical admissions. Table 3 presents data on eight selected procedures and associated diagnoses in eight HMO's and com- parison populations. The eight procedures have been suggested in several studies4'4' as being relatively dis- cretionary. The data do not support the expectation that HMO's differentially reduce discretionary proce- dures. In only 22 of 37 entries are the ratios for specific procedures lower than the overall ratios, a finding un- likely to differ from what one would obtain at random. With one exception, however, the HMO's seem to have very low rates of tonsillectomies, even when considered in relation to their overall surgical rates. Given the long standing controversy over the need for tonsillectomies, they are likely to have been sub- ject to particularly careful review. The remaining seven "discretionary" procedures are evenly split between those above and those below the overall ra- tios. It is evident that previous discussions of hospital utilization in HMO's have focused on only part of the story. It is true that people in HMO's have markedly lower surgical rates and also that prepaid group prac- tices have very low rates for some specific "discretion- ary" procedures. However, the rates for nonsurgical admissions tend to be equally low, and the "discre- tionary" rates, with the exception of tonsillectomies, are not consistently lower than the rates for all surgi- cal procedures. Furthermore, the data lend little sup- port to the hypothesis that HMO's differentially reduce short-stay admissions. Also contrary to expec- tations, individual practice associations appear to have proportionately lower surgical rates than prepaid group practices. There is support, however, for the prediction of the lower rate of admissions for diagnosis and tests. Table 3. Comparison of Rates for Selected Procedures and Diagnoses in HMO's and Comparison Plans.~ Cot .sructt~ Ttsr~n,c- H usn ~ ~ ~ 74 0 ,,,~e. ~ Vuuc,tre Au. Au. Health Insurance Plan/Blue Cross- Blue Shield" Health Plan/GHI5 Health Insurance Plon/GHl~ Health Insurance Plan/ union plan" Kaiser/Blue Cross- Blue Shield + indemnity' Federal employees- PG Blue Cease" Group Health Centre/ indemnity" Group Health Association/ Blue Cross" Medical Care Geoup/ 0.56 ItS t.t6 1.09 - 0.53 t.S6 0.93 0.83 0.79 - - 0.69 0.92 - 0.11 2.08 - 0.95 0.93 0.46 0.65 t.3S 0.74 - 0.71 - t.4t 0.76 0.76 0.69 0.76 0.77 0.87 - 0.95 - 0.88 0.98 0.35 - - - - - - .08 0.35 0.52 0.71 - - - - - 0,45 0.32 - - - - - - - - 0.80 0.25 - 0.83 0.55 - - 0.57 - - 0.53 .35 0.73 1.30 1.14 0.49 - - - 1,14 0.92 5within specilic studiet. dute urns coded rithr, by peocrdu,r leg., tontillectomy uith ot nithout udrnoidrctomyl c, diugnotie leg., hyprrtrophy of tensile tnd odrnoidsl. tAdm,nsion rstrso,eucr.sen edjusted oe ugr.srssprciflc for ce,toin ttudirt5"; populutiane ate from the come geogruphicuerue for ,thr, oudir,.":" lPttpaidg,ouppeocticr. PAGENO="0376" DIscussIoN 368 Some of these results support, and others counter, strongly held beliefs and rhetoric. There is clear evidence that total medical-care costs are lower for HMO enrollees than for comparable people with con- ventional health insurance. Although out-of-plan use exists, it is generally not very substantial. HMO enrollees do have a somewhat higher rate of am- bulatory visits. But only studies of enrollees in in- dividual practice associations show consistently more visits; studies of prepaid groups are evenly split between those showing more and those showing fewer outpatient visits. The key to lower total costs in HMO's seems to be in the lower hospital utilization rate. This difference is not attributable to the length of stay, which on the average is about the same, but, instead, it comes from a generally lower admission rate. The case in favor of HMO's would be substantially strengthened if it could be shown not only that they reduce utilization of expensive services but also that reduction comes in categories thought to be medically unnecessary. Un- fortunately, the data are inconclusive on this point and provide at least as much support for the hypothe- sis that admission rates in HMO's are lower for both "discretionary" and "nondiscretionary" hospital treatment. The measures of "discretionary" care used are rather blunt tools to identify what may be rather fine distinctions in patient care. More importantly, the designation of certain categories as "discretionary" says little about the other cases. The emphasis on "unnecessary" surgical procedures may result from two factors related not to "necessity" but to data availability - i.e., tissue review and diagnostic categorization. Negative pathological reports for "too many patients" (by some criteria) are often used to identify "unnecessary" procedures. Internists are rarely confronted wion similar evidence that their pa- tients would have improved without hospitalization. The fuzziness of admitting medical diagnoses also makes it much more difficult to compare nonsurgi- cal admissions. Thus, truly "unnecessary" or dis- cretionary admissions may be just as common in the "all-other" category. (The clearer categorization of surgical admissions may enhance the ability of their control through peer review and may, in turn, explain the unexpectedly better performance of individual practice associations in surgical admissions.) This observation leads to three alternative, but not mutually exclusive, interpretations of the existing evidence. In the first place, there may be some dis- cretionary cases in all categories, and an effective HMO develops ways of preventing such patients from being admitted. It need not limit itself to cases iden- tified in the literature as "discretionary." Secondly, self-selection may be an important factor in explain- ing the differences in admission rates - that is, HMO enrollees may be basically healthier or may merely prefer less hospital care, and this factor may account for the relatively low rates in "nondiscretionary" categories. Thirdly, HMO's may "undertreat,"or the traditional providers "overtreat," "nondiscretionary" cases. Few good outcome studies have been done to determine the appropriate level of treatment, instead of just identifying the "standard community prac- tice." Until these and other, more detailed studies are done to identify how HMO's really obtain their sav- ings, it is important to recognize the substantial varia- tions in performance within HMO's, and it is best to move cautiously and carefully to separate rhetoric from evidence. REFERENCES I. Department of Health, Education and Welfare: Health Maintenance Orgunioations. Fed Register 39:37308.37323, October It, 1974 2. Welberille RL, Nordby JM: A Censu, of HMOs. Minneapolis, lnter- Study, 1974 3. Klarman HE: Effect of prepaid geoup practice on hospital use. Public Health Rep 78:955.965, 1963 4. `sVeinerman ER: Patients' perceptions of group medical care. Am Public Health 54:880.889, 1964 5. Donubedian A: An ecaluution of prepuid group practice. Inquiry 6: 3.27, 1969 6. Roomer MI, Shonick \V: HMO performance: the recent esidence. Mil- bunk Meni Fund Q 51:271-317, 1973 7. Klunmun HE: Analysis of the HMO peoposul: its assumptions, implica. lions, and prospects, Health Maintenance Organizations: A recon- figuration of she health sect-ices system (proceedings ofthe 13th annual Symposium on Hospital Affairs, Unicersity of Chicago Center for Health Administration Studies, May 1971). Chicago, Uni,'ersity of Chicago Center for Health Administration, pp 24-38 8. Momma ON Jr. Marginal ensenue and the demand for physicians' ser- sizes, Emptrical Studies in Health Economics. Edited by HE Klarman. Baltimore, Johns Hopkins Press, 1970, pp 145-160 9. Family Medical Cure under There Types of Health Insurance. Neu York, Foundation on Employee Health, Medical Care, and Welfare, 1962 10. 0/oIlman B: Medical enpenses and choice zf plans: a case study. Monthly Labor Res 84:1186-1190, 1961 11. Dozier D, Krupp 54, Mellinkoff 5, et al: Report of the ictedical and Hospital Adcisory Council to the Board of Administration of the Cal,fornia State Employees' Retirement System. Sacramento, Califor- n,a, 500rdofAdministrationoftheCuliforniaStuteEmployrnn'p,etire. mentSystem, 1964 12. Hetherington RW, Hopkins CE, Roemer MI: Health In,urascn Plans: Prom,sr and performance. Nest York, Wiley-Intersciencr, 975 13. Dozier D, Harnington DC, Krupp MA, et al: 1970-71 Outcry of Con- sumer Enperiencr, Report of the Stole of California Employees' Medical and Hospital Cure Program. Sacramento, Califomia, Board of Administration of the Public Employees' Retirement System, 1973 14. Egdohl RH: Foundations for medical care. N Engl J Med288:491-498, 1973 15. Corbin SI, Krute A: Some uspecns of Medicare espeeirnce uith group practice prepayment plans. Soc Scour Bull 38:3-11, 1975 16. Klarmun HE: Economic research in group medicine, Ness Horizons in Health Care, Proceedings of Ihe first International Congress on Onoup Medscine, Winnipeg, Manitoba, April 26-30, 1970. Manitoba, Canada, Wallingford Press, 1971, pp 178.193 17. Sasand EOV, Oreenlick MR: Health policy and the HMO. Milbusk Hem Fund Q 50:147-176, 1972 18. Luft HO: Trends in medical care costs: do HMOs tosser the rate of gnossnh7 Presented at the 105th annual meeting of the American Public Health Associalios (Medical Care Section) Washington, DC, Noonm. her 1977 19. Andenson O',V, Sheatsley PB: Comprehensise Medical Insurance: A studyofcosts, use, and attitudes under lou plans. [Research Series No. 9[. Nest York, Health Information Foundation 1959 20. Oaus CR, Cooper BS, Hirschmun CG: Contrasts in HMO and gre-for- section performance. Soc Secur Bull 39(S):3.l4, 1976 21. Committee for the Special Research Project in the Health Insurance PAGENO="0377" 369 Plan af Greater Neo York: Health and Medical Care in Nen York City. Cambridge, Massachusetts, Harvard University Press, 1957 22. Darsky BJ, Sinai N, Anetrod Si: Comprehensive Medical Services Under Voluntary Health Insurance: A study of Windsor Medical See. vices. Cambridge, Massachusetts, Harvard University Press, 1958 23. Dozier D, Harrington DC, Hegarty WK, et at: Final Report on the Survey of Consumer Experience Under she Stole of Cstifornia Employers' Hospital and Medical Care Act. Sacramento, California, Board of Administration of she Public Employees' Retirement System, 1968 24. Hastings JEF, Mutt FD, Barclay A, el at: Prepaid group practice in Sault Ste. Marie, Ontario. I. Analysis of utilization ercoeds. Med Care 11:91-103, 1973 25. Fatter N, Patera M: Report on a Study of Medicaid Utilization of Ser~ vices in a Prepaid Group Practice Health Plan. Rockville, Maryland, United States Public Health Service, 1976 26. Broida J, Lrroer M, Loheexo FN, et at: Impact of membership in an enrolled prepaid population ox utilization of health services in a group practice. N EngI J Med 292:780-783, 1975 27. Peekoff OT, Kahn L, Hoas PS: The effects of an experimental pmpaid group practice ox medical cam utilization and cost. Med Care 14:432- 449, 1976 28. Shapiro 5, Williams ii, Yerby AS, et at: Patterns of medical use by she indigent aged under too systems of medical care. Am J Public Health 57:784-790, 1967 29. Beekanovic E, Reeder LG, Marcus AC, el at: Perceptions of Medical Care: The impact of prepayment. Lexington, Massachusetts, DC Heath, 1974 30. Densen PM, Balamuth E, Shapiro 5: Prepaid Medical Care and Hospital Utilizadon. Chicago, American Hospital Association, 1958 31. Deesen PM, Jones EW5lalamulh E, et al: Prepuid medical care and hospital utilization, in a dtiol choice situation. Am J Public Health 50:1710-1726, 1960 32. Falk IS, Srnturia 3: The slrelccorkers suevey their health services: a preliminary report. Am J Public Health 51:11-17, 1961 33. Densex PM, Shapiro 5, Jones EW, et at: Peepaid medical care and hospital utilization: comparison ofageouppractice and a self-insurance situation. Hospitals 36(22):62-68, 138, 1962 34. Peerott OS: The Federal Employees Health Benefits Program. Washiegtne, DC, Oovernment Printing Office, 1971 35. Jones EW, Densen P, Altman I, et at: HIP Incentive reimbursement ex~ periment: utilization and costs of medical care, 1969 and 1970. Soc Secur Ball 37(12):3-34, 1974 36. Riedel DC, Walden DC, Siegsrn AG, et at: Federal Employees Health Benefits Program: Utilization Study. (DHEW Publication No. [HRA] 75.3125). Washington, DC, Ouveremeel Printing Office, 1975 37. DeFriese OH: On paying the fiddler to change the tune: further evidence from Ontario regaeding the impact of universal health so- surance on the organization and patleron of medical practice. Mslbaek Mem Fund Q 53:117-148, 1975 38. Wersiegee R, Roghmaen KJ, Oavett JW, et al: Inpatient hospital utilization in them prepaid comprehensive health care plans compaeed mish a regular Blue Cross plan. Med Care 14:721.732, 1976 39. Egdahl RH, Taft CH, Frirdland J, et at: The potential of oegaeioatsoes of fm-for-service physicians foe achieving significant decreases hospitalization. Ann Surgery 106:388-399, 1977 40. Broida J, Lennee M: Keovvledge of patient's method of payment by physicians in a group practice. Public Health Rep 90:113-188, 1975 41. Rafferty JA: Hospital output indices. Ecox Business Bull 24:21-27, 1972 42. Feederick L: Hoes much unnecessary surgery?: a hard look at the evidence. Med World Nesvs 17(lfl):50-66, 1976 43. United Stales House of Representative, Subcommittee on Overssght and Investigations of the Committee on Interstate and Foreign Com- merce: Cost and Quality of Health Care: Unnecessary surgery. Washington, DC, Government Printing Office, 1976 44. Banker JP: Surgical maepoo'er: a comparison of operations and sur- geons in she United Stales and in England and Wales. N EngI J Med 282:135.144, 1970 45. Vayda E: A comparison of surgical rates in Canada and in England and Wales. N EngI J Med 289:1224.1229, 1973 46. Weenberg 3, Oiltelsohe A: Small area variations in health care delivery. Science 102:1102-1108, 1973 47. Perkoff OT, Ballieger WF, Tureen 5K, et at: Lack of effect of an ex- perimental prepaid group practice ox utilization of sargical care. Sargery 77:619-623, 1975 eCopyright, 197B, by the Massachasctts Medical Society Printed in the U.S.A. PAGENO="0378" 370 Mr. WAXMAN. Thank you very much. Mr. Iglehart. STATEMENT OF JOHN K. IGLEHART Mr. IGLEHART. Mr. Chairman and members of the committee, I am John Iglehart, vice president of Kaiser Foundation Health Plan and director of its Washington office. The Kaiser-Permanente medical care program is an economically self-sustaining organized health care delivery system that provides health services on a direct service basis to the 3.7 million members in California, Oregon, Washington, Hawaii, Ohio, and Colorado. On June 1, the program began delivering services in Texas, in a new undertaking with the Prudential Insurance Co. called Kaiser- Prudential health plan. All Kaiser-Permanente members join vol- untarily and remain members by choice. They receive services through 29 hospitals, 78 outpatient facilities, more than 3,700 full- time physicians, and 32,000 other employees. The Kaiser-Permanente program is the largest health mainte- nance organization, HMO, in the United States. The program's membership includes over 165,000 individuals who are medicare beneficiaries. The vast majority of these individuals belonged to Kaiser-Permanente before they reached 65 and continued their membership in the program by enrolling in its comprehensive medicare supplement plan. The purpose of this statement is to discuss how we believe the medicare program should be changed to create greater incentives for its 25 million beneficiaries to seek HMO membership and to encourage HMO's to enroll more elderly citizens. The changes in the medicare program that we advocate are, with two exceptions that are explained later, incorporated in H.R. 4444. To older Americans, as you well know, the traditional health care system is a vital but bewildering array of medical specialties, hospitals, nursing homes, claim forms, and unplanned expenses. No one can erase the physical, psychological, and economic problems imposed by advancing age, but the medical care system can move to deal more equitably and effectively with the health problems which place such heavy burdens on older Americans. In our judgment, an organized system of care that is provided through an HMO is an effective approach to dealing with the health problems of the elderly. The advantages to the elderly of receiving quality care at a single location at a reasonable cost are particularly pronounced. HMO's provide a comprehensive system of care through a single access point, 24 hours a day, 7 days a week. Typically, all diagnostic and specialty services are provided at the same site, as are pharmacy services. In addition, the compre- hensive coverage of HMO's relieves elderly members of their con- cerns about the high cost of a serious and prolonged illness and an HMO virtually eliminates medicare paperwork for the medicare beneficiary. The comprehensive coverage of HMO's is particularly important in light of the problems created for medicare beneficiaries by so- called "medicap" health insuvance plans. HMO medicare plans do not contain the exclusions, waiting periods, high deductible, and PAGENO="0379" 371 coinsurance requirements and other gaps found in some medicare supplemental health insurance policies. The assignment problem that medicare beneficiaries face today in the fee for service world is eliminated in an HMO. In a health maintenance organization, prepayment to providers removes the incentive to overserve and replaces it with an incentive to main- tain health and reduce unnecessary hospitalization. In 1976, for example, the rate of hospitalization in the United States per 1,000 persons age 65 and over was 4,121 days. In the Kaiser-Permanente program, the age/sex adjusted hospitalization utilization rate for the over 65 population was 1,945 days per 1,000 members, less than one-half the national average. When medicare was enacted in 1965, it did not contain any provision that would have paid group practice prepayment plans, one type of HMO, on a basis which was consistent with the way they were paid for their under-65 members. Instead, hospitals which served group practice prepayment plan members were paid under part A on the same basis as other hospitals and such plans were allowed to receive payment for part B services on a per capita basis which was cost based. The only other option was to submit bills and be paid on a fee-for-service basis. In 1972, Congress added section 1876 to title 18 of the Social Security Act. This section provided for a new method of payment for HMO's and was an improvement over the existing law. It provided for a capitation payment for both part A and B services on either a cost or risk basis and established the important princi- ple that an HMO that chooses a risk contract would receive some of the savings (the difference between the AAPCC in the area for fee-for-service medicare beneficiaries and the HMO's costs for its medicare members) which result from its efficiencies. This provision contained a number of problems. First, the final payment to the HMO is made retrospectively and may not be determined until 2 or 3 years after services are provided. Second: Section 226(b) of Public Law 92-603-the bill which added section 1876 to title 18-provides that when an HMO enters into a risk agreement, all its existing members must agree to obtain all their medicare covered services through the HMO or terminate their membership. Under the existing arrangements, medicare will pay for services received outside the HMO. Making the change to coverage under a different arrangement would be traumatic for many older persons. This was discovered by Group Health Cooperative of Puget Sound when it conducted a medicare experiment which required this change for its medicare members. Third: Section 1876 requires an HMO to offer one benefit pack- age that covers only medicare services. This essentially excludes preventive and health maintenance services. This requirement is so alien to the concept of health maintenance organizations that it makes no sense. Finally, there is no requirement in section 1876 about how HMO savings are to be used. Thus, HMO's need not pass on the savings to their members in the form of added benefits or reduced premi- ums. The legislative proposal introduced as H.R. 4444 would signifi- cantly change the way medicare reimburses HMO's. The proposal PAGENO="0380" 372 would lead to long-term savings for the Federal Government and thus the taxpayer, a significant expansion in medicare benefits and added incentives to HMO's to enroll elderly individuals. Furthermore, the proposal would extend to medicare beneficia- ries the same choice of medical care delivery systems that the Federal Government now mandates private employers offer their employees. Under the proposal an HMO would receive 95 percent of what it costs medicare to finance the medicare benefit package for persons not covered by HMO's. Thus, the Federal Government would save 5 percent at the outset of what it costs medicare to finance the services to which all eligible beneficiaries are entitled, but beyond the savings to Government, and perhaps more importantly, benefi- ciaries would be offered broader benefits or reduced cost sharing as a reward for their selection of a more cost-efficient approach to health-care delivery. This selection obviously is voluntary. These benefits would be paid for by the savings generated through the HMO. The additional benefits or reduced cost sharing offered elderly or disabled medicare beneficiaries would be made available through a requirement that HMO's use the difference between the payment to it by medicare and the HMO's adjusted community rate for the benefit of its medicare members. The adjusted community rate is the rate an HMO charges its private members adjusted to reflect the utilization and benefit differences between the HMO's medi- care and nonmedicare population. In other words, the community rate is based largely on the market. For example, for our program as a whole, the number of hospital days used per 1,000 members per year is 386; for our members over 65 this is approximately 1,680, more than four times higher. For the entire program, the number of doctor office visits per thousand members per year is 3,342; for our members over 65 this number is approximately 5,800. Using the savings it achieves an HMO may be able to eliminate all or most of the premium it charges for prepayment of the medicare deductible and coinsurance requirements that have become such a financial burden to medicare beneficiaries and to prepay additional benefits that emphasize disease prevention, such as an annual physical examination, immunizations, hearing, and sight examinations, and we believe these kinds of preventive serv- ices are every bit as important to the elderly population as they are to the under 65 members. Significantly, individuals who join an HMO are relieved of the financial burden imposed when physicians charge a medicare bene- ficiary more than the maximum amount allowed by medicare. These additional charges have increased from 2 percent of the total physician bill for the aged in fiscal 1968 to 10 percent of a much larger total in fiscal 1977. This has increased congressional concern over medicare's assignment policy. The Kaiser-Permanente medical care program is fundamentally in agreement with the legislative proposal developed by the Carter administration and introduced by Congressmen Ullman and PAGENO="0381" 373 Rangel, and supported by a wide range of consumer groups. We do, however, recommend modification of two provisions of that propos- al. First, the administration proposes to mandate the way all HMO's should use the savings which accrue by virtue of their efficiency. We believe this requirement is inflexible and inappropriate because it presumes that HEW knows the needs of an HMO and its mem- bers better than the HMO does. As an alternative, we recommend that this decision be left to the discretion of each HMO. The legislation further requires an HMO to use all of the savings to serve the health needs of the beneficiaries, but these needs may differ in various areas of the country. Some HMO's may favor allocating all of the savings to offset medicare cost-sharing requirements. Others may prefer a broader prescription drug benefit, added emphasis on disease prevention or other services not now offered by medicare. In any event, an HMO knows the needs of its members far better than HEW. Mr. WAXMAN. Excuse me, gentlemen. I am sorry to interrupt you, but we have a vote on the House floor. I don't know how close you are to finishing, but rather than hearing you through and since you are getting to your recommendations on the change in the legislation, we will break now. We will reconvene as soon as we can respond to the vote and return. [Brief recess.] Mr. PREYER [presiding]. Mr. Iglehart? Mr. IGLEHART. The Kaiser-Permanente program is fundamentally in agreement with the legislative proposal developed by the Carter administration and introduced by Congressmen Ullman and Rangel. We do, however, recommend modification of two provisions of that proposal. I went over the first one. I will go to the second one. Second, the administration's bill requires a mature HMO to con- tract with medicare on a risk basis, rather than giving an HMO the option of going on risk or opting for a cost approach. We believe that this decision should be left to the discretion of the HMO. If the public policy goal is to enroll more medicare beneficia- ries in HMO's, then we believe an HMO should be granted the option to select the payment method that best suits its needs. An HMO may not be strong enough financially to accept the financial uncertainty involved in a risk contract, but at the same time be perfectly capable of enrolling medicare members on a cost reimbursement basis. Further, an HMO may lack the management sophistication to calculate precisely in advance the cost of rendering care to the elderly and disabled but interested in doing so on a retrospective cost basis. We do not anticipate that many HMO's would want to continue on a cost basis, but we do not know any reason why they should be denied the opportunity since the principal policy objec- tive is to enroll more medicare beneficiaries in health maintenance organizations. Both of these changes were recommended to the Health Subcom- mittee of the House Ways and Means Committee chaired by Con- gressman Rangel. The subcommittee has recommended to the full Committee that these changes be made in the bill it has reported. PAGENO="0382" 374 in addition, since H.R. 4444 was introduced, Congress, through the leadership of this subcommittee, I might add, has passed and the President has signed amendments to the National Health Plan- ning and Resources Development Act that exempts some HMO hospitals from State certificate of need programs. However, section 1122 of the Social Security Act which provides for review of capital expenditures was not amended. Thus, section 1122 is presently inconsistent with the National Health Planning and Resources Development Act. We believe that the Federal health planning statutes should be consistent and therefore recommend that the next medical bill which this subcommittee reports should contain an amendment to section 1122 that would make it consistent with the new Federal policy you have developed on HMO hospitals. This bill has a larger importance,. we feel, than the significant improvement in the medicare program it will make and the bene- fits it will give medicare beneficiaries. It is a significant step in the efforts of the Federal Government to recognize cost effective health care delivery systems. It will assist in their growth and develop- ment, make them more available to all Americans and is likely to have a beneficial impact on the cost of health care in the United States. We wish to commend the administration for its considerable accomplishment in understanding the uniqueness of HMO's and development a payment proposal which takes that uniqueness into account. We believe this proposal is well balanced and will benefit HMO's, their medicare members and the Federal Government. Therefore, with the two exceptions noted, we are strongly in favor of it and urge its enactment as quickly as possible. .Thank you, Mr. Chairman. Mr. WAXMAN. Thank you very much. Dr. Carter, would you like to lead off with questions? Mr. CARTER. I have no questions at this time. Mr. WAXMAN. Ms. Mikulski. Ms. MIKuISKI. Thank you, Mr. Chairman. My first question is for Mr. Brennan, because you raised on page 5 of your testimony a question I have for some time related to the utilization of HMO's, particularly by old people, one of which, of course, is the freedom of choice issue, but here you describe how you developed something operated on an out `of plan waiver. Let me back up and tell you what my concern is. From my own background as a social scientist, I know that people's behaviors, of course, influence their economic decisions, and . for many senior citizens they have had long-term relationships with maybe a partic- ular health provider like an ophthalmologist and they are reluc- tant to join a group practice because they feel they are going to be locked into something. Am I right in that? Mr. BRENNAN. For some, yes. Ms. MIKuL5KI. For some. All right. In your description you talked about how you were able to obtain a waiver under medicare and medicaid to allow for certain out of plan activity. Could you ex- plain to me how that worked, one, from the consumer's point of view, and second, how that worked as a financial mechanism. In other words, did all reimbursement come to you if they chose an PAGENO="0383" 375 out of plan ophthalmologist? In other words, could you describe to me what that meant to the consumer and also what the reimburse- ment of the HMO, meant to the management. Mr. BRENNAN. Briefly, the first 15 months of our contract, all medicare enrollees were in fact locked in. That is, they were re- quired to get all care through the plan unless urgent emergency or referred care through the plan. During the second 2-year period beginning January 1, 1978, we entered into this experimental sec- tion 222 grant in which the lock-in was removed. medicare enroll- ees were able to receive care out of plan, the purpose of which really is to measure the degree of out of plan utilization both in area as well as out of area. The degree of out of plan utilization has been relatively small, frankly. The cost formula is that-- Ms. MIKuISKI. Before we move on to cost formula, did the fact that you had this out of plan waiver increase enrollment in any significant rate? We are talking about the Puget Sound area? Mr. BRENNAN. Yes, that is correct, we are talking about the Puget Sound area. Ms. MIKULSKI. Because I have a background paper prepared by the Senate Finance Committee that expressed concern over the fact that a lot of old folks were not enrolling in your Puget Sound plan even when you had open enrollment opportunities. In other words, did this waiver influence more people to enroll? Mr. BRENNAN. I think the answer is no, in part, because it was recognized as a limited experiment, that is, not intended to be ongoing beyond the 2-year experimental period, so that in terms of presenting that as a continuing option available to the medicare enrollee, there was no way the plan could assure that beyond the end of the experiment period that option would continue to exist, so it was not used as a marketing incentive, given the experimental nature of that. Ms. MIKuLsKI. I see. Could you explain to me, then, how it worked in terms of actual reimbursement to you and to the other providers? Mr. BRENNAN. I am speaking from a level of detail I may not be absolutely familiar with. Ms. MIKULSKI. That is all right. Mr. BRENNAN. Essentially, the cost of out of plan services is measured and added into the total cost of care in our reimburse- ment formula so that we take plan care, that is, cost of care delivered by the plan, and add into that the cost of out of plan services, and the total of those two costs are measured against the average community cost to determine the savings. Ms. MIKuI~sKI. How does that work, though? In other words, let's say Mrs. Smith goes to an ophthalmologist. Does she pay that ophthalmologist? Does that ophthalmologist bill you? Mr. BRENNAN. Medicare reimburses that ophthalmologist. Ms. MIKuisKJ. As a direct fee for service? Mr. BRENNAN. I believe so. Ms. MIKuL5KI. Then was your per capitation monthly payment, or however, medicare pays you, reduced because of this? Mr. BRENNAN. I am sorry. I don't have the answer to that. I will try to provide it. I am not sure whether it was an adjustment to just our monthly payment. I don't know. [The following letter and chart were received for the record:] PAGENO="0384" 376 Group Health Cooperative of Puget Sound 200 - 15th Avenue East * Seattle, WA 98112 * (206) 326-6262 November 30, 1979 The Honorable Henry Waxman Chairman, Subcommittee on Health Committee on Interstate and Foreign Commerce 1721 Longworth House Office Building Washington, D.C. 20515 The Honorable Barbara, Mikuiski Member, Subcommittee on Health Committee on Interstate and Foreign Commerce 238 Cannon House Office Building Washington, D.C. 20515 Dear Congressman Waxman and Congresswoman Mik~lski: On October 19, 1979, I presented testimony on behalf of Group Health Association of America in support of HR4444 (currently HR4000). During the period of questioning, Representative Mukulski posed a hypothetical situation to better understand the payment mechanism for out-of-plan services, that is care provided to Group Health Cooperative Medicare enrollees by other than Group Health hospitals and physicians. As an extension of this questioning, Ms. Mikulski requested that I furnish to the committee a model that would illustrate the payment mechanisms for both Part A and Part B claims. This discussion can be found on Pages 17 (line 388) through Page 20 (line 476) of the transcript of testimony. I have attached a flow diagram that shows the process of claims payment. To understnad how the reimbursement mechanism works for the care Medicare enrollees at Group Meelth Cooperative receive outside of Group Health, it is necessary to review the two major parts of Medicare sepaateiy. Our Medicare enrollees may receive care outside of Group Health Cooperative for emergencies, for referrals from physicians for a particular specialty that Group Health does not provide, or under the experimental waiver in effect during 1978-79, because they themselves decided to seek care else- where. We refer to this third example as elective care. The mechanisms outlined in the attached diagram work the same way for urgent, enier~ent, referred and elective care. To use Representative Mikulskis example, what happens when Mrs. Smith goes to a non Group Healthophthalmologist? As I explained in my testimony, Group Health ends up paying that bill. That portion of the diagram titled Part B displays what happens since Medicare Part B applies to physician office visits. An equal employmeur opportunity employer PAGENO="0385" 377 What would happen if Mrs. Smith is told she needs to have surgery on her eyes and goes to a non Group Health hospital for the surgery? That portion of the diagram, titled Part A, displays what happens when the inpatient care is provided. Part A claims are paid by Medicare, not Group Health Cooperative, therefore they do not become part of Group Health's capitation payment. However, in determining the amount of "savings" under the risk-sharing contract for a given year, the Part A costs that Medicare paid are added to Group Health costs. It is a combination of the direct Group Health cost and these added Medicare paid costs that determine the basis of comparison with the average adjusted community costs. Basically, then, Group Health Cooperative is paid a prepayment capitation based soley on costs we pay for, not costs Medicare pays for. In addition, Group Health is `charged for" care received outside as well as inside the Cooperative when the savings share is determined. I hope this illustration addresses the question raised by Representative Mikulski. Thank you for the opportunity to submit this additional information. Sincerely, Donald A. Brennan Executive Vice President DAB:sm attachment cc Chief Clerk Committee on Interstate and Foreign Commerce Staff Director Committee on Interstate and Fo~-eign Co~'merce 56-071 0 - 80 - 25 PAGENO="0386" 378 PAYMENT MECHANI~1 FOR 01ff-OF-PLAN SERVICES UNDER SECrION 1876 MEDICARE CONIRACT GROUP HEALTH COOPERATIVE OF PUGET SOUND `January 1978 - December 1979 Part A Claims Part B Claims Patient enters hospitalj for treatment 1.~ Hospital provides services to patients 1. Hospital sends bill to Medicare Medicare pays bill less coinsurance and deductibles Costs not included in Group Health per capita payment PAGENO="0387" 379 Ms. MIKuLsKI. This is, I think, a significant issue, Mr. Brennan, and if we could have a model it would help if you could furnish for the committee a model of how that worked, I think it would be helpful to us in seeing how we may want to amend that legislation. Would you recommend as we craft this legislation that such flexibility be built into H.R. 4444? Mr. BRENNAN. We believe those existing enrollees should have the option of remaining under a cost basis, as that is to be able to take advantage of out of plan care as well as the risk basis. Ms. MIKuLsKI. Fine. Thank you. Mr. Iglehart, I have a question for you. On page 4 of your testimony, you refer to preventive and other health maintenance services which, of course, could be one of the issues in terms of funding, what some people might call profit to the HMO or what- ever. Could you tell me what you mean by preventive and other health maintenance services? We use those words a lot in this committee, and I just wonder what people who have to administer the program mean by it. Do not misunderstand. I am not trying to catch you or whatever. Mr. IGLEHART. No; that is fine. It is a legitimate question. I have before me the services that are provided under the medicare sup- plemental plan which medicare beneficiaries who are enrolled in Kaiser buy for a monthly premium. I would be glad to submit the whole list for the record, but to run over the preventive services which are covered by the supplemen- tal plan. Ms. MIKULSKI. Sure. Just give me a few. Mr. IGLEHART. Physical examinations, examinations for eye- glasses, special duty nursing, immunizations, papanicolaou tests, hearing tests, nurse practitioners and nurse home calls are all preventive services not covered by medicare which are provided in the Kaiser-Permanente supplemental plan offered to medicare beneficiaries. Ms. MIKur~sKI. Those are currently not covered under medicare? A physical exam is not covered? A pap smear for a postmenopausal or senior citizen woman wouldn't be considered? Mr. IGLEHART. A routine physical exam is not covered under medicare presently. All of these things are not covered presently. That is why it is included in the supplemental plan. Other things that are also covered in the supplemental plan include special duty nursing, nurse practitioners, nurse home calls, and also the deduc- tibles and coinsurance requirements that are imposed upon the beneficiary. Ms. MIKuLsKI. I see. So by the very nature we have structured medicare goes against the very concept of what an HMO is, be- cause you have routine examinations. You would diagnose. You would come in for an eye test and you would pick up glaucoma early on, and this is what we are saying. Mr. IGLEHART. Yes. Ms. MncuLsKI. Coming back to this reimbursement issue, one of the things that Mr. Gramm of the committee raised is that in effect, when an HMO achieves a cost saving over and above, say, its income, it is a profit back to the HMO, and that is one of the PAGENO="0388" 380 incentives to discipline its cost. Under this legislation, which, of course, you raise on pages 6 and 7, we mean that that is funded back to services. It seems we are falling into an either or situation. Do you think that really should go back to services? I know you think each HMO should decide what those services should be based upon region, population, necessity or whatever, but there is a whole other school of thought that says it should go back to the HMO as a. profit. What do you think? Mr. IGLEHART. We absolutely think it should be returned to the beneficiary. One of the problems with current law is that the savings are shared by the Government and the HMO but not by the beneficiary, so there is no reward there for the beneficiary to enroll in an HMO, no incentive to do so currently. Ms. MIKuLsKI. So your feeling is, a return to the beneficiary would be one in terms of a wider range of services or the elimina- tion of some of these codeductibles, et cetera, close the medigap gap, and so on? Mr. IGLEHART. Yes. Ms. MIKuIsKI. I see. Really, the fundamental issue, then, it seems here, is, you have outlined preventive and health mainte- nance services, that the whole concept of what we call medicare is really oriented to crisis intervention medicine rather than compre- hensive prevention. Mr. IGLEHART. Yes. I think that is true. There is some dispute about the value of preventive services to the elderly population. We happen to believe strongly that preventive services are every bit as important to the elderly population as they are to the under 65. Ms. MIKur~sKI. I have taken in excess of my time, but for older people, very often it may not be preventive in the sense of a child with the Salk vaccine, but we can talk also about stabilization services. An eye exam certainly indicates diabetes as well as glau- coma, and then that can be stabilized and treated to prevent fur- ther deterioration. We are not talking about sick or well. We are talking about sick or sicker. Mr. IGLEHART. Right. Mr. BRENNAN. May I add a point to Mr. Iglehart's statement, Congresswoman? That is, the position of GHAA as well as my own plan is in support of the return of the savings to the beneficiary in a manner as best determined by the plan, but in an effort to meet the need you have described. Ms. MIKuISKI. Thank you. Thank you, Mr. Chairman. Mr. WAXMAN. Mr. Dannemeyer. Mr. DANNEMEYER. Yes. Mr. Iglehart, your business is in Califor- nia, my home State, so I will ask it of you. What about people walking in off the streets in Orange County, Calif.? Will you accept them into the Kaiser plan these days, with particular reference to the over-65 group we are talking about? Mr. IGLEHART. Currently enrollment in Orange Connty, as I un- derstand it, is closed to new members. Mr. DANNEMEYER. Over 65? Mr. IGLEHART. Well, over or under 65, because of a lack of capacity at the moment. PAGENO="0389" 381 Mr. DANNEMEYER. You just bought a hospital out there. Mr. IGLEHART. We are currently renovating the purchased facili- ty to accommodate ambulatory services and hope to take on more members when the construction is completed. Mr. DANNEMEYER. In those areas where you are operating and you have capacity, are you permitting individual people over 65 to come into your plans? Mr. IGLEHART. Yes. Mr. DANNEMEYER. What type of screening examination do you give them as a condition to letting them in? You can't take anyone who walks in off the street. They might be a hypocondriac or something. Mr. LANE. May I answer that? Mr. DANNEMEYER. Yes. Mr. LANE. Because medicare pays us on a cost reimbursement basis at the present time, it is not necessary for us to screen most individuals over-65. Our major problem is really a capacity prob- lem. It takes a lot more resources in terms of physicians and hospitals to provide services for over 65 persons than under 65. You can see that in the figures we have set forth. Mr. DANNEMEYER. So your answer is, you will take anyone that wants to join you? If an over 65 wants to join today, what do you charge him in the way of a premium? Mr. IGLEHART. The premium that is charged an elderly individu- al is for the supplement which medicare does not cover. In north- ern California in 1980 that premium is $18.71 a month. In southern California, it is $15.63. Mr. DANNEMEYER. Come again? Mr. IGLEHART. $15.63. Mr. DANNEMEYER. I guess you are in support of this plan that the administration has come up with because you think right now your cost is 80 percent of the total and you are getting 10, because you get half. The administration says if your costs continue at 80 they are going to give you 15, so you think you are going to get more? Mr. IGLEHART. Kaiser has never signed a section 1876 contract, which is the authority under which HCFA operates the risk shar- ing arrangement Mr. Brennan's plan has signed such a contract, but Kaiser is strictly reimbursed on a cost basis for its medicare population. Mr. DANNEMEYER. What has been your analysis of the Kaiser experience in terms of cost for the average medicare beneficiary? What have you been running at? Mr. IGLEHART. The problems with it we outlined in testimony. They are, one, that it does not reward either the beneficiary or the HMO for operating on a more efficient basis. Mr. DANNEMEYER. Wait. We are not talking about the same thing. If you know, what is the cost you estimate you can run at? These folks in Washington say they can go at 80. What do you say in California, if you know that? Mr. IGLEHART. We can supply the answer to that. It is around 80. But we would have to supply it. [The following information was received for the record:] PAGENO="0390" 382 The Kaiser-Permanente program provides medicate beneficiaries all of the bene- fits to which they are entitled for 80 percent of what it costs in the fee-for-service realm, according to the Health Care Financing Administration. Mr. DANNEMEYER. If it is 80, and you would sign a contract, you would get 10, right? Mr. IGLEHART. Yes. Mr. DANNEMEYER. Under existing law. [Mr. Iglehart nods affirmatively.] Mr. DANNEMEYER. If this bill is passed, if your costs continue at 80, you will get 15, right? Mr. IGLEHART. We are not going to get it, the beneficiaries will. Mr. DANNEMEYER. But you will turn around and spend the 15 in ways the Federal Government will tell you how to spend it. You must feel you will economically come out ahead. Otherwise, you wouldn't be supporting the bill. Is that a fair statement? Mr. LANE. May I address myself to that? Mr. DANNEMEYER. Unless you are eleemosynary minded, which is possible. Mr. LANE. Both Health Plan and Kaiser Foundation Hospitals are nonprofit organizations, so there are no stockholders to partici- pate in any excess of revenues over expenditures. We have two primary objectives or perhaps three primary objectives in support- ing a basic reform in the medicare system. The first is to make sure that the medicare members do receive benefits. The second is to make sure that our existing members are not forced to be locked in, as has happened in Puget Sound. We have over 165,000 medicare members, many of whom have been health plan members for a long period of time, and if we had to sign a Social Security Act section 1876 contract, we would have to lock them all in or disenroll them, and we don't feel that an appropriate thing for us to do for our over 65 members. Third, we do have capital requirements because we own our own hospitals. At the present time, medicare does not pay for future capital requirements. They pay depreciation and interest on what we call the group practice prepayment program, which was for part B of medicare. But there is no capital component under part A. We are interested in receiving enough payments for our over-65 members to provide for their capital requirements. At the present time, they are being subsidized by our under 65 members, who bear that capital cost. Finally, we are concerned because of the long-range implications of the medicare program as far as future national health proposals are concerned, that there be an adequate reimbursement system for health maintenance organi- zations that is basically consistent with their method of operation. Those are the reasons why we are in support of this proposal. Mr. DANNEMEYER. Thank you. Mr. WAXMAN. Mr. Preyer. Mr. PREYER. Thank you, Mr. Chairman. I have no questions, but I want to thank you for excellent testi- mony. They were very good statements. Thank you. Mr. WAXMAN. Gentlemen, let me ask some questions of you if I might. The administration's proposal would allow only those health maintenance organizations which are federally qualified under title PAGENO="0391" 383 XIII of the Public Health Service Act to be reimbursed under the special risk formulas for HMO's. The bill reported by the Ways and Means Committee adopts a definition similar to present medicare law. The HMO must (a), provide all covered medicare benefits to medicare enrollees, and (b), be organized and operated in a manner prescribed by the Public Health Service Act. What requirements should an HMO meet to be eligible for the proposed medicare reimbursements? Do you feel a broader defini- tion of an HMO would put federally qualified HMO's in States with a choice of criteria at a competitive disadvantage? Mr. BRENNAN. Mr. Chairman, it is our position that the defini- tion should be not so restrictive as to apply only to federally qualified HMO's. That would eliminate a number of plans, my own being one which is not federally qualified from participating in a medicare contract. We would support a more generic definition. That definition, as included in the House Ways and Means bill, is an acceptable definition, one we could support. Mr. WAXMAN. What would be your reaction to expanding the definition to be more similar to this committee's definition of an HMO under the planning act as it passed out of the House? Mr. BRENNAN. We would support the more generic definition and would work with staff to pursue that. Mr. WAXMAN. The administration's proposal requires an HMO to enroll medicare beneficiaries without regard to their health status, but the HMO may commence or cease enrolling such individuals at any time. There is some concern that this provision does not insure that an HMO will make a genuine effort to enroll all medicare beneficiaries who wish to join. By allowing an HMO to commence or cease enrollment at any time, the proposed requirement lends itself to easy discrimination in favor of more healthy medicaid beneficiaries. Medicare presently requires the HMO to have an open enrollment period every year, during which it accepts medicare beneficiaries up to the limit of its capacity and without restriction. However, no HMO has to accept proportionately more medicare enrollees than are represented in the population of the geographic areas served by the HMO. What recommendation do you have with regard to open enrollment? Mr. BRENNAN. It is our position that there should be open enroll- ment, that the HMO should aggressively enroll medicare enrollees in the community up to the limits of its capacity to serve, and I think both Mr. Iglehart and Mr. Lane identified problems in the Orange County area in terms of ability to serve. We have, at least speaking for my plan, similar problems from time to time in which we have reached capacity, either in clinics or hospitals. We would accept and support the proposal that as a goal the distribution of the medicare population in the plan should equal that in the community within the capacity of the plan to meet that goal. Mr. WAXMAN. And what restrictions would you suggest? In other words, you don't think there is shopping going on by HMO's for a certain type of medicare eligible person? Mr. BRENNAN. No, I do not. PAGENO="0392" 384 Mr. WAXMAN. It is only the limits of the facilities? You would then have open enrollment based upon limitations of the facilities themselves to handle them? Mr. BRENNAN. Yes. Puget Sound had open enrollment for 30 days. We kept it extended beyond that period, and currently, through the Social Security Administration we have notified, all medicare beneficiaries in our area of the availability of group health coverage. We think that is a positive gesture which should be taken by a plan. Mr. WAXMAN. The administration's proposal is obviously de- signed to provide HMO's with incentives to enroll medicare benefi- ciaries. The existing risk-sharing contract has similar savings, yet you state that in your first 15 months medicare enrollment in- creased by 29 percent as a result of your own members aging into the medicare program while only 448 medicare enrollees were at- tracted through open enrollment. At the risk-sharing for contract, the cost of the medicare trust fund was $1.43 million more than what had been paid under a cost payment mechanism. Why was the number of new enrollees so small? Mr. BRENNAN. I don't know that any of us have good answers to that. I think clearly the gearing up in any period of change raises questions and difficulties for people making decisions. I think part of it was the realization that in the central area of our city the plan was not open because of capacity limitations. That is one reason. I think it is just a period of time getting geared up, commu- nicating to the medicare enrollee. Identifying the advantages of change will take time. Over the long haul, we believe that in fact open enrollment will increase enrollment into HMO plans but not over such a short, quick period of time as 15 months. Mr. WAXMAN. If the administration's proposal is going to save this money, there will have to be a dramatic increase in the number of medicare eligible enrolled in HMO's. How likely is this? Mr. BRENNAN. I don't think any of us can give you assurances. None of us have a crystal ball. I think in fact the benefits of the act which translate to the HMO, to the medicare beneficiary, and to the Government will all take place over time. Mr. WAXMAN. What would be your reaction to an amendment to the administration's proposal to apply only to new enrollees of an HMO? Mr. BRENNAN. I am not sure I understand that question. Mr. WAXMAN. I am referring to the administration's proposal on reimbursements. What would be the effect if they applied only to new enrollees in medicare who join the HMO as opposed to those who age into the medicare system who were already members of the HMO. Mr. BRENNAN. I think there should be the incentive in the reim- bursement such that a current enrollee would have a choice, and if that current enrollee wished to stay on the cost basis, he or she should be allowed to do so, but also the current enrollee should be given the choice of going on the risk basis with the provision of lock-in, and accordingly would have some reduced premium to them. In other words, get advantage of the savings passed on. I don't think it should be limited only to new, enrolles but that existing enrollees should have a choice.. PAGENO="0393" 385 Mr. WAXMAN. Concern has been expressed about the depart- ment's ability to calculate accurately the adjusted average per capita cost, the amount medicare would have to pay if a benefici- ary were receiving services outside the HMO. It is suggested, for example, that many of the existing medicare enrollees who have aged in the program are not as likely to require as much care as a similar member outside the HMO. Also, the HMO is unlikely to attract patients with chronic conditions because of the established care patterns that exist for their conditions. They are already seeing physicians to take care of those chronic problems. Unless these and related factors can be accurately estimated and adjustments made to the average per capita cost, it is likely that excessive payments will be made to the HMO. Do you feel that HEW is in a position to make accurate estimates so that this potential for excessive payments is reduced or eliminated. Given your own medicare enrollments, what actuarial adjustment do you feel would be necessary to compare fairly your enrollees with the larger medicare population? Mr. BRENNAN. Mr. Chairman, I don't think I am technically qualified to speak to the calculation of the adjusted community rate. It is my understanding that HCFA did empanel a group of consultants that looked at the method of calculating the AAPC. And to the extent of my knowledge, their report suggested that in fact the community rate could be prospectively determined. Mr. WAXMAN. You feel that if HEW feels it can handle it, you are satisfied? Mr. BRENNAN. Yes. Mr. WAXMAN. Mr. Lane. Mr. LANE. I would like to elaborate on that a bit. The concept of AAPPC is in the existing statute and HCFA has a responsibility right now to make that determination, and that will not change under this proposal. The thing that will change is, they will be required to make it prospectively. We are a bit concerned, as others might be, that their estimates will not be, as you suggest, excessive, but will be less than the cost will truly be, and in fact, if the administration, for example, is suggesting a hospital cost contain- ment proposal estimated to save $2 billion or $3 billion and predi- cating their assumptions on the passage of that proposal in terms of cost in the United States, and that does not occur, then there are going to be shortfalls, and we are concerned about that. We think that is as likely or more likely to occur. What we are interested in, despite that, is the predictabiity of the rate, and knowing what it will be, and being able to plan accordingly, and that is what we are basically interested in. Mr. WAXMAN. Mr. Iglehart, under present law, HMO's can be reimbursed on a cost basis or a risk basis. The administration proposal would require that any entity defined as an HMO can participate in medicare only on a risk reimbursement basis. You suggested in your testimony that you would have HMO's be given both cost and risk options. Would you amplify on why you think an HMO should be given both choices? Mr. IGLEHART. The cost basis is in law today. That is the way virtually all HMO's except Puget Sound are reimbursed. We feel there will be new HMO's that do not have the management capac- PAGENO="0394" 386 ity to calculate ahead of time their rate. Also, some HMO's may not feel they are financially viable enough to take the risk involved in calculating that rate prospectively and then live with it under a fixed budget for 1 year, but we also think that these HMO's are capable of serving medicare beneficiaries. Thus we see no reason why the HMO should not have the discretion to go either on a cost basis or on a risk basis. Mr. WAXMAN. Do you think there should be the requirement of the medicaid law that States must contract with HMO's if the HMO agrees to serve the medicaid~ population? Mr. IGLEHART. Conceptually, we don't have a problem with that. We think that it makes sense. I think there probably are a number of practical problems that would be involved in terms of crafting a bill that deals with both populations now. One of the problems is that a number of the States already have contracted with HMO's to serve the medicaid population, and in many instances those contracts call for reimbursement at less than 95 percent, and we assume that States would not be anxious to increase their costs in order to participate in this particular proposal. Another problem is that an HMO's ability to market its services to medicaid beneficiaries is somewhat limited by State policies the intent of which is to protect the privacy of individuals against inappropriate solicitations. There is no requirement for the State to provide medicaid beneficiaries who live in the service area of the HMO the opportunity to enroll with an HMO at the time eligibility is determined and periodically thereafter~ If the State merely con- tracts with an HMO for services but does not provide medicaid persons the opportunity to join the HMO, the contract will not achieve its purposes. Conceptually though, we think that in the long run, it is a sound idea. Mr. WAXMAN. Do you think there should be a negotiation be- tween the State and the HMO to determine the rate, that the Federal Government should tell the States how to determine it? Mr. IGLEHART. Under the current medicaid program, as you know, it is a Federal-State partnership, and the State has much of the administrative responsibility, and if the program continued like that, presumably the State would negotiate a rate with the HMO, unless the Federal law stated to the contrary. Mr. LANE. Mr. Waxman, we do have problems with negotiated rates, because as you know from your California experience, they are subject to some abuses, and we would much prefer to see a set way of determining the rate which is comparable to this medicare provision. We are now working on such a system in California. One of the essential problems is that situations do vary from State to State, and that creates problems, as you know, in terms of the Federal requirement. Another problem, I understand that HCFA is not convinced that all of the States have the data capability to determine what the costs are in a given area in those States. That is a substantial problem. We did, when Under Secretary Champion was in office, promise him that we would be submitting some ideas on medicaid. We intend to do that to the administration, despite the fact he is no longer there. It will probably be consistent with what we are PAGENO="0395" 387 trying to do in California, and we would like to submit those to this committee also. Mr. WAXMAN. We would be pleased to receive it. Thank you very much, Dr. Carter. Mr. CARTER. Thank you, Mr. Chairman. I have a few questions here. Mr. Brennan, do you think HMO's with memberships significant- ly smaller than Puget Sound's could still achieve enough savings under the administration's proposal to provide additional benefits to medicare beneficiaries as you have been able to do? Mr. BRENNAN. Mr. Carter, I don't think that all could, and I think given that recognition, the importance of having in the bill the opportunity for an HMO to either enter into a risk basis contract where it has the financial capacity, as well as the ability to managerially calculate its experience with medicare, is an im- portant provision. Mr. CARTER. At the present time, I believe you have $1.3 million, is it, something like that? Mr. BRENNAN. In savings; yes. Mr. CARTER. In savings, and you are having difficulty using that money. Is that correct? Mr. BRENNAN. We seldom have difficulty using money. Mr. CARTER. I understand that certain medicare regulations have caused problems for you in using these funds as you would like to. Mr. BRENNAN. The problem we have is the retroactivity of ad- justment and the fact that the number is not firm, so we worry about passing those savings on to medicare beneficiaries until we are sure that those savings are in fact firm savings. We were hesitant, as I think you can appreciate, in passing on $1.3 million, only to have that number adjusted to something below that. So the problem is not the utilization of those savings, but the difficulty in firming up the number. Mr. CARTER. Is it in your statement that if you have savings of 20 percent, you retain that? Mr. BRENNAN. Half. Mr. CARTER. Half of it. I thought it was all of that. And above 20 percent, what do you retain? Mr. BRENNAN. Any savings greater than 20 percent go directly to the Government. Mr. CARTER. Above 20 percent? Mr. BRENNAN. Yes. Mr. CARTER. What becomes of the 20? Mr. BRENNAN. Of the 20, the formula now states that if our costs, for example, are 80 percent of the community, the Government receives half, we receive half. If our savings are 22 or 23 percent, we still receive only the 10 percent or half of the difference be- tween the 80 and the 100. Mr. CARTER. And the Government gets the extra 2 or 3 percent? Mr. BRENNAN. Yes, which is the case in our first 15 months. Mr. CARTER. Making a total of 12 to 13 percent in this case? Mr. BRENNAN. Yes, sir. Mr. CARTER. As I understand H.R. 4444, it would require HMO's to enroll medicare beneficiaries without regard to their health status. Now, it permits an HMO to commence or cease enrollment PAGENO="0396" 388 at any time. How do we insure against possible discrimination in favor of the more healthy medicare beneficiary under this ap- proach? Mr. BRENNAN. I think that ceasing enrollment would be based upon explicit criteria as to the capacity of the plan to serve the enrollees. It is not in my understanding just a unilateral decision to cease enrollment, but a recognition that the plan not only un- derwrites but provides service to those enrollees, and it must have the capacity to do so. In my understanding, it is not a unilateral decision on the part of the plan to cease enrollment. Mr. CARTER. Are additional safeguards needed? Mr. BRENNAN. Jim. Mr. LANE. Dr. Carter, under the provisions of H.R. 4444, it is a unilateral decision by the HMO but we agree with Chairman Waxman there should be a provision similar to that in the existing law for open enrollment Without any regard to health status, pro- vided there is assurance that the HMO can close enrollment when it does not have the capacity to take care of the members. That is our basic concern. It is not any arbitrary desire to open and close, to try to in any way influence who enrolls or who does not enroll, and we in fact would really like to have an agreement with HCFA ahead of time about what our capacity is and have an orderly process for enrolling persons and not a disjointed process. Mr. CARTER. Yes, sir. You would not skim. You would just take them to the limit of the number for which you could care. All right. Under what circumstances would you expect the Secre- tary of HEW to waive the bill's requirement that half the enrollees participating in an HMO must be nonmedicare beneficiaries? Mr. LANE. I can think of one or two examples. One is the case of a developing HMO in Florida, which is in an area that appears to have predominantly over-65 residents, most of whom are not on welfare, are eligible for medicare. It would be extremely difficult for that HMO to meet the requirements of the act, because most of the people in the area are over 65. In this particular case, many of them are former members of an HMO in New York called the Health Insurance Plan of Greater New York, HIP, and they appear to be very interested in joining an HMO there. So I think there is one example. You might find another example in other areas similar to Florida and Arizona which have concentrations of senior citizens. Mr. CARTER. Why should we insist on 50 percent nonmedicare patients? Mr. LANE. I think a little history might be in order. The basic reason for the 50-percent rule goes back to the California experi- ence. It was argued, and the Finance Committee supported the rule, I believe, and I believe this committee endorsed it, that a safeguard for welfare recipients especially but also medicare per- sons who were placed in that category would be that if over half of all the members of an HMO were private members, and there was dual choice. One of the unfortunate things in the early days of the California experience was that people were enrolled in HMO's for prepaid health plans and not allowed to disenroll, and that was a very PAGENO="0397" 389 serious mistake in California, and this was a reaction to it. It is in my opinion not always necessary to assume that persons who are over 65 are not able to make intelligent, informed choices, and I think that is something that must be taken into consideration. Mr. CARTER. Could you give me a resume of your preventive care program, either of you gentlemen, for the families of your enroll- ees, particularly youngsters, say, from birth to 18? Mr. LANE. We have the standard routine physical examinations more frequently in the first year of life, of course, and subsequent- ly we have hearing tests, eye tests, all the required immunizations. As you probably know, we have pioneered the notion of multipha- sic physical examinations, and we have pediatric multiphasic phys- ical examinations in many of our locations. Those are the kinds of preventive services we provide for children. Mr. CARTER. Great. What about dental care? Do you provide dental care? Mr. BRENNAN. Dental care is not a basic part of ours. Mr. CARTER. It is not a part. It is not included even for the youngsters? Mr. BRENNAN. That is correct. Mr. LANE. We do in one region. The Oregon region of our pro- gram has a dental care program. In all of our other regions we have not done so to date. Mr. CARTER. What about psychiatric care? Mr. BRENNAN. Psychiatric care in our plan is a basic benefit and is covered? Mr. CARTER. It is covered? Are home visits covered? Mr. BRENNAN. Yes. Mr. CARTER. Up to what number a year? Do you limit the number? Mr. LANE. We do not. Mr. BRENNAN. We do not. Mr. CARTER. And hospital care is not limited? Mr. BRENNAN. No. Mr. LANE. Unlimited. Mr. CARTER. How would the average community costs for the same services in the fee for service community be determined? Mr. LANE. Well, I think HCFA should answer that question. But essentially the way they do it now is to determine from the paid claims tapes the bills that have been received and paid for mem- bers in those areas. Then they make adjustments to those numbers. They get an average number, and they adjust it. When compared with the HMO's population for age, for sex, for institutional status, for disability status, and for welfare status, and those adjustments are supposed to then give comparable figures. Mr. CARTER. What is the average cost per year for a family enrolling in your HMO? Mr. LANE. We don't really have an average cost. We have many different plans with a number of different features, but I would like to give you the Federal employee's cost, which is one of our programs. We have different numbers in different regions. I could submit this for the record if you would like, but basically it is around $1,000 a year. Mr. CARTER. Thank you very kindly. PAGENO="0398" 390 Mr. LANE. $90 to $100 a month for family. Mr. WAXMAN. Thank you very much. We appreciate your testi- mony. I would like to call now a panel of Jack MacDonald, execu- tive vice president, National Counsel of Health Care Services, Laurence F. Lane, director for public policy, American Association of Homes for the Aging, and Marianne Follingstad, research asso- ciate, National Citizens' Coalition for Nursing Home Reform. I would like to welcome you to our hearing. For those of you who are not familiar with the procedures we follow in the committee, we would appreciate it, even though you may have a written statement that would be longer than 5 minutes to present to us, if the whole statement could be made a part of the record, and if you would try to keep as close to 5 minutes as possible in the summary, so that we could have opportunities for questions and answers. Mr. MacDonald. STATEMENTS OF JACK MacDONALD, EXECUTIVE VICE PRESI- DENT, NATIONAL COUNCIL OF HEALTH CARE SERVICES; LAURENCE F. LANE, DIRECTOR FOR PUBLIC POLICY, AMERI- CAN ASSOCIATION OF HOMES FOR THE AGING; AND MARI- ANNE FOLLINGSTAD, RESEARCH ASSOCIATE, NATIONAL CITI- ZENS' COALITION FOR NURSING HOME REFORM Mr. MACDONALD. Mr. Chairman, distinguished members of the subcommittee, we appreciate the opportunity to come before you today to talk about various medicaid issues affecting long-term care, and more particularly, as they impact skilled and intermedi- ate nursing facilities. I am going to summarize my comments. [See p. 394.] I am the executive vice president of the National Council of Health Care Services, a nonprofit association representing a select group of proprietary providers of long term health care. Our mem- bers-representing over 100,000 beds-are multifacility nursing home companies which also provide many other types of care such as home health, meals on wheels, hospice, and adult day care. Basically, I would like to cover five issues with you this morning. First, dual certification of nursing facilities, intermediate sanc- tions for nursing home providers, civil sanctions for all providers, cost-related reimbursements, and cost limits for skilled nursing facilities. Mr. Chairman, before I begin with these specific issues before the committee, I believe I should bring to your attention a particularly serious problem which will have serious ramifications for all medic- aid nursing home patients. The problem is the efforts by HEW to merge the medicare-medicaid nursing home programs. While Congress has, through legislation, expressed its desire to integrate medicare and medicaid, we feel that HEW has instituted via transmittal letters and guidelines many changes without the benefit of public comment. A case in point is the guideline for skilled care. These guidelines, which were developed last summer, require PSRO's to apply the same criteria for skilled nursing care, for medicaid patients, as for medicare patients. The criteria to be used is the exclusively stringent, medically- oriented medicare definition of skilled care which presently pro- vides coverage to less than 5 percent of all nursing home patients. PAGENO="0399" 391 We cannot believe that Congress intended for the medicaid pro- gram to become the same disaster as medicare, yet this is what most assuredly will occur if the program integration continues to follow only the medicare model. We are very concerned that the ultimate result of this process will be to classify nearly all nursing home patients as intermediate, regardless of their needs. If this occurs patients will not get the necessary rehabilitation and therapy and HEW could justifiably be charged with "warehousing" the elderly. Mr. Chairman, we do not want this to happen and we hope that your committee, in having jurisdiction over medicaid, shares our concerns. We urge you to look into this important matter and will be happy to provide you with any necessary data or other informa- tion. Turning to dual certification, a prime example of HEW's efforts at program integration is its proposal for dual certification of all nursing homes which currently provide care to medicare or medic- aid patients-sections 116 and 204 of H.R. 4475. A study of mandatory dual participation by the Georgia Institute of Technology advised that the advantages of increased medicare beds was far outweighed by the disadvantages of decreased total availability of skilled beds as well as an increase in the net cost of providing the same service. The National council urges the subcommittee not to support mandatory certification of skilled nursing facilities at this time. Instead, we hope that you will follow the actions of the Ways and Means Committee and the Senate Finance Committee by requir- ing-we understand this has been changed from a 6-month study to a 1-year study, to be conducted for the reasons we have outlined. Second, cost-related reimbursement. It is our understanding that the Senate Committee on Finance in its consideration of H.R. 934 has amended it by including a number of sections from 5. 505, Medicare and Medicaid Administrative and Reimbursement Reform Act of 1979. Among the sections voted by the Committee on Finance is an amendment, section 227, to section 249 of Public Law 92-603, that is, section 1902(a)(13)(E) of the Social Security Act. Because of the importance of this legislation to nursing home patients, State and Federal agencies, and the facilities themselves, we believe that there are several factors which this subcommittee should be made aware of during its consideration of amendments to the Social Security Act. First, in 1972, the National council supported the intent as well as the adoption of section 1902(a)(13)(E) by the Senate Committee on Finance. That support was predicated on the Finance commit- tee's intention which was best expressed by its report which stated that the members did not: * * * intend that this provision should require use of the specific medicare rea- sonable cost reimbursement formula by States for purposes of reimbursing skilled nursing homes and intermediate care facilities under medicaid, although States are free to choose this option. Rather, the States could develop other reasonable cost- related methods of rate-setting. The National Council remains supportive of that objective today just as we did in 1972, as well as on the numerous occasions when we have publicly testified on this section. However, as has been PAGENO="0400" 392 accurately pointed out by Senator David L. Boren in proposing the amendment of this section: * * * Four years after the enactment of this six-line addition to the statute, HEW issued detailed and complex regulations which have prompted widespread adoption of the much-criticized medicare cost reimbursement practices, despite the expressed intent of the Senate Finance Committee that the medicare formula need not be used by states in order to comply with section 249A. Even the critics of Senator Boren's amendment have acknowl- edged that "the protracted and obscure nature of the Department's regulation and guideline writing procedures with respect to section 249 has provoked the ire of many." It is our understanding that Senator Boren's amendment would reform the medicaid payment structures, and I have listed in my formal statement the four points there. I would like to turn now to a couple of points I think need to be clarified. It has been alleged that in addition to the preceding four items which I list in my complete statement, section 227, would specifi- cally remove HEW's authorities to set or review the quality of state medicaid nursing home services, any limitation on profits or growth for facilities, and eliminate the requirement that facilities submit cost reports. That is simply not true. It does~not eliminate the Secretary of HEW's responsibility to review, and authority to approve State activities concerning the facilities and the standards relating to the quality of their services under sections 1902(A) (6), (28), (30), (31), (36), and (40) of the Social Security Act. I would like to point out that the requirement that facilities submit cost reports is not specified in section 249 of Public Law 92- 603. Instead, it is a requirement of section 1121 of title II of the Social Security Act. Mr. Chairman, that section was a part of the Medicare-Medicaid Antifraud and Abuse Amendments of 1977, which we supported and continue to support today. To further clarify the issue, I would call your attention to a Government Accounting Office report released this Wednesday by the Chairman of the House Select Committee on Aging which discusses the impact of the proposed amendment. I have an extra copy I would be happy to submit for the record. We would recommend that this subcommittee review the find- ings of the GAO report and consider, at the appropriate time, the amending of section 1902(a)(13)(E) to reflect the intent of the Senate Committee on Finance's amendment, section 227. I think there are two relevant points which I would call the committee's attention to in terms of the problems that were ad- dresssed in the GAO report. The question was asked, what does GAO expect to be the result of enacting the proposed amendment? The GAO responded by stating: You requested our opinion on the effect the proposed amendment is likely to have. We believe unless payments rates are increased, at least some States would have a difficult time assuring that rates for nursing home services are reasonable and adequate to assure that services are as available to medicaid recipients as to the public. Therefore, we expect that enactment of the proposed amendment would result in increased nursing home reimbursements. They go on to state that as to the availability of long term care services, that there is a severe problem in terms of having enough PAGENO="0401" 393 skilled and intermediate days available in States, and they state that there were 212,265 hospital days which were approved for payment because SNF beds were not available in nursing homes. They also point out that 39,484 days were approved for payment because ICF beds were not available. GAO goes on to make two recommendations. First, until there are enough utilization review requirements and the States are following those, that the 249 legis- lation should be kept as is. However, they make the point that if the Congress feels they wish to amend this for the purposes or reasons given by the Senate Finance Committee, they propose two additions to the current existing statutory amendment that is being considered on the Senate side. Concerning one other area that I will turn to, because I know I am running out of time, the fourth item--- Mr. WAXMAN. Pardon me. You have consumed 10 minutes now. Let me suggest that we leave those last points for the questions. We do have the whole statement. We will review it all. Thank you very much. Mr. MACDONALD. All right. [Testimony resumes on p. 423.] [Mr. MacDonald's prepared statement and attachments follow:] 56-071 0 - 80 - 26 PAGENO="0402" 394 STATEMENT BY JACK MACDONALD, EXECUTIVE VICE PRESIDENT OF THE NATIONAL CouNciL OF HEALTH CARE SERVICES MR. CHAI~i'~jt DISTINGUISHED MEMBERS OF THE SUBCOI'NITrEE, WE APPRECIATE THE OPPORTUNITY TO COME BEFORE YOU TODAY TO TALK ABOUT VARIOUS MEDICAID ISSUES AFFECTING LONG TERM CARE, AND MORE PARTICULARLY, AS THEY IMPACT SKILLED AND INTERMEDIATE NURSING FACILITIES MY NAME IS JACK MACDONALD. I AM EXECUTIVE VICE PRESIDENT OF THE NATIONAL COUNCIL OF HEALTH CARE SERVICES, A NON-PROFIT ASSOCIATION REPRESENTING A SELECT GROUP OF PROPRIETARY PROVIDERS OF HEALTH CARE. REPRESENTING OVER iOO,OCYJ BEDS, MEMBERS OF THE NATIONAL COUNCIL ARE MULTIFACILITY NURSING HOME COMPANIES WHICH MUST MEET THE HIGH STANDARDS OF QUALITY REQUIRED BY THE JOINT COMMISSION ON ACCREDITATION OF HOSPITALS. OUR MEMBERS ALSO PROVIDE MANY OTHER TYPES OF CARE SUCH AS HOME HEALTH, MEALS ON WHEELS, HOSPICE, AND ADULT DAY CARE. SINCE OUR TIME IS LIMITED, I WOULD LIKE TO LIMIT MY REMARKS TO FIVE IMPORTANT ISSUES: DUAL CERTIFICATION OF NURSING FACILITIES) INTERMEDIATE SANCTIONS FOR NURSING HOME PROVIDERS; CIVIL SANCTIONS FOR ALL PROVIDERS) Cosi RELArED NEIMI3URSEMENT; AND COST LIMITS FOR SKILLED NURSING FACILITIES MR. CHAIRMAN, BEFORE I BEGIN WITH THE SPECIFIC ISSUES BEFORE THE COM- MITTEE, I BELIEVE I SHOULD BRING TO YOUR ATTENTION A PARTICULARLY SERIOUS PROBLEM WHICH WILL HAVE SERIOUS RAMIFICATIONS FOR ALL MEDICAID NURSING HOME PATIENTS. THAT PROBLEM IS THE EFFORTS BY HEW TO MERGE THE MEDICARE AND MEDICAID NURSING HOME PROGRAMS. WHILE CONGRESS HAS, THROUGH LEGISLATION, EXPRESSED ITS DESIRE TO INTEGRATE MEDICARE AND MEDICAID, WE FEEL THAT HEW HAS INSTITUTED VIA TRANSMITTAL LETTERS AND GUIDELINES, MANY CHANGES WITHOUT THE BENEFIT OF PUBLIC COEMENT. THE FULL EFFECT OF THESE CHANGES WILL BE TO DENY SKILLED CARE TO MANY QUALIFIED SKILLED NURSING PATIENTS JUST AS THE MEDICARE PROGRAM HAS BEEN DOING ON A CONSISTENT AND PREMEDITATED BASIS OVER THE PAST SEVEN YEARS. A CASE IN POINT 15 THE GUIDELINES FOR SKILLED CARE. THESE GUIDELINES, -1- PAGENO="0403" 395 WHICH WERE DEVELOPED THIS SUMMER, REQUIRE PSRO's TO APPLY THE SAME CRITERIA FOR SKILLED CARE FOR MEDICAID PATIENTS AS FOR MEDICARE PATIENTS THE CRITERIA TO BE USED IS THE EXCESSIVELY STRINGENT MEDICALLY ORIENTED MEDICARE DEFINITION OF SKILLED CARE, WHICH PRESENTLY PROVIDES COVERAGE TO LESS THAN FIVE PERCENT OF NURSING HOME PATIENTS. ONE MIGF{~ HAVE PREDICTED THIS JUST BY FOLLOWING THE LATEST REORGANIZATION BY HCFA: EXCEPT IN ONE CASE, VIRTUALLY ALL OF THE APPOINTMENTS IN THE PROGRAM AND REIMBURSEMENT AREAS WERE. MADE TO FORMER MEDICARE OFFICIALS, WE CANNOT BELIEVE THAT CONGRESS INTENDED FOR THE MEDICAID PROGRAM TO BECOME THE SAME DISASTER AS MEDICARE, YET ThIS IS WHAT WILL MOST ASSUREDLY OCCUR IF THE PROGRAM INTEGRATION CONTINUES TO FOLLOW ONLY THE MEDICARE MODEL. WE ARE VERY CONCERNED THAT THE ULTIMATE RESULT OF THIS PROCESS WILL BE TO CLASSIFY NEARLY ALL NURSING HOME PATIENTS AS INTERMEDIATE, REGARDLESS OF THEIR NEEDS, IF ThIS OCCURS PATIENTS WILL NOT GET THE NECESSARY REHABILITATION AND THERAPY AND HEW COULD JUSTIFIABLY BE CHARGED WITH "WAREHOUSING" THE ELDERLY. MR. CHAIRMAN, WE DO NOT WANT THIS TO HAPPEN AND WE HOPE THAT YOUR COMMITTEE, IN HAVING JURISDICTION OVER MEDICAID, SHARES OUR CONCERNS. WE URGE YOU TO LOOK INTO THIS IMPORTANT MATTER AND WILL BE HAPPY TO PROVIDE YOU WITH ANY NECESSARY DATA OR OTHER INFORMATION. ~L~AL CERTIFICATION A PRIME EXAMPLE OF HEW'S EFFORTS AT PROGRAM INTEGRATION IS ITS PROPOSAL FOR DUAL CERTIFICATION OF ALL NURSING HOMES WHICH CURRENTLY PROVIDE CARE TO MEDICARE OR MEDICAID PATIENTS. HEW WANTS THEM TO SERVE 130TH. WHILE THIS MAY SEEM A REASONABLE PROPOSAL, WE SUGGEST THAT THERE ARE GOOD REASONS THAT NURSING HOME PROVIDERS HA'IE NO WISH TO PARTICIPATE IN THE MEDICARE PROGRAM AND THAT THESE REASONS SHOULD BE IDENTIFIED BY HEW AND CORRECTED BEFORE ATTEMPT- -2- PAGENO="0404" 396 1MG TO MANDATE DUAL CERTIFICATION. EVERY DAY MORE AND MORE PROVIDERS ARE DROPPING OUT OF THE MEDICARE PROGRAM BECAUSE OF ITS ARCHAIC POLICIES AND BURDENSOME PAPERWORK. A NUMBER OF STATES HAVE ATTEMPTED TO MANDATE DUAL PARTICIPATION ON THEIR OWN BUT HAVE REJECTED IT BECAUSE, INSTEAD OF LEADING TO INCREASED MEDICARE UTILIZATICNOF SKILLED SERVICES, IT RESULTED IN DECREASED AVAILABILITY OF SKILLED BEDS. THESE STATES FOUND THAT NURSING HOMES, RATHER THAN BE FORCED TO PARTICIPATE IN MEDICARE, DROPPED OUT OF THE SKILLED PROGRAM ALTOGETHER. A STUDY ON MANDATORY DUAL PARTICIPATION BY THE GEORGIA INSTITUTE OF TECHNOLOGY' ADVISED THAT THE ADVANTAGES OF INCREASED MEDICARE BEDS WAS FAR OUTWEIGHED BY THE DISADVANTAGES OF DECREASED TOTAL AVAILABILITY OF SKILLED BEDS AS WELL AS AN INCREASE IN THE NET COST OF PROVIDING THE SAME SERVICE. (NURSING HOMES PARTICIPATING IN MEDICARE INCUR AN ADDITIONAL EXPENSE OF $5,000 ANNUALLY IN COST REPORTING REQUIREMENTS ALONE.) THE RATIONAL COUNCIL URGES THE SUBCO~1ITTEE flQI TO SUPPORT MANDATORY CERTIFICATION OF SKILLED NURSING FACILITIES AT THIS TIME. INSTEAD, WE HOPE THAT YOU WILL FOLLOW THE ACTIONS OF THE WAYS AND MEANS COc~IUEE AND THE SENATE FINANCE COMMITTEE BY REQUIRING A SIX-NONTH STUDY TO BE CONDUCTED OF THE REASONS FOR DECLINING MEDICARE PARTICIPATION AND THE STEPS NECESSARY FOR OVERCOMING THEM. WE SUGGEST THAT HEW's DELIBERATE POLICY OF DENYING MEDICARE BENEFITS IN THE INTERESTS OF COST SAVINGS, HAS DIRECTLY AFFECTED AND PUT AN UNDUE BURDEN ON THE STATE'S MEDICAID PROGRAMS. FOR THIS REASON, WE BELIEVE THE STUDY SHOULD NOT BE CO TICTEY) BY HEW BUT RATHER AN INDEPENDENT AGENCY SUCH AS THE GENERAL &~OQUNILNG OFFICE. `Cost Benefit Policy Analysis: Mandatory Medicare Participation of Medicaid Certified Nursing Homes. Kenneth L. Hanilton, College of Industrial Manage- ment, Georgia Institute of Technology. November 1977. -3- PAGENO="0405" 397 ~ IT IS OUR UNDERSTANDING THAT THE SENATE COMMITTEE ON FINANCE IN ITS CONSIDERATION OF HR 934 HAS AMENDED IT BY INCLUDING A NUMBER OF SECTIONS FROM S. 505, "MEDICARE AND MEDICAID ADMINISTRATIVE AND REIMBURSEMENT REFORM ACT OF 1979." PIVDNG THE SECTIONS VOTED BY THE CoMMITTEE ON FINANCE IS AN AMENDMENT TO SECTION 249 OF PL 92-GO~ (SECTION 1902 (A) (13) (E)) OF THE SOCIAL SECURITY' ACT. BECAUSE OF THE IMPORTANCE OF THIS LEGISLATION TO NURSING HOME PATIENTS, STATE AND FEDERAL AGENCIES, AND THE FACILITIES THEMSELVES, WE BELIEVE THAT THERE ARE SEVERAL FACTORS WHICH THIS SUBCOMMITTEE SHOULD BE MADE AWARE OF DURING ITS CONSIDERATION OF AMENDMENTS TO THE SOCIAL SECURITY /~CT. FIRST, IN 1972 THE NATIONAL COUNCIL SUPPORTED THE INTENT AS WELL AS THE ADOPTION OF SECTION 1902(A) (13) (E) BY THE SENATE COMMITTEE ON FINANCE. THAT SUPPORT WAS PREDICATED ON THE FINANCE COMMITTEE'S INTENTION WHICH WAS BEST EXPRESSED BY ITS REPORT WHICH STATED THAT THE MEMBERS DID NOT: "..INTEND THAT THIS PROVISION SHOULD REQUIRE USE OF THE SPECIFIC MEDICARE REASONABLE COST REIMBURSEMENT FORMULA. BY STATES FOR PURPOSES OF REIMBURSING SKILLED NURSING HOMES AND INTERMEDIATE CARE FACILITIES UNDER MEDICAID, ALTHOUGH STATES ARE FREE TO CHOOSE THIS OPTION. RATHER, THE STATES COULD DEVELOP OTHER REASONABLE COST-RELATED METHODS OF RATE-SETTING." THE NATIONAL COUNCIL REMAINS SUPPORTIVE OF THAT OBJECTIVE TODAY JUST AS WE DID IN 1972~ AS WELL AS ON THE NUMEROUS OCCASIONS WHEN WE HAVE PUBLICLY TESTIFIED ON THIS SECTION. HOWEVER, AS HAS BEEN ACCURATELY POINTED OUT BY SENATOR DAVID L. BOREN IN PROPOSING ThE AMENDMENT OF THIS SECTION: FOUR YEARS AFTER THE ENACTMENT OF THIS SIX-LINE ADDITION TO THE STATUTE, HEW ISSUED DETAILED AND COMPLEX REGULATIONS WHICH HAVE PROMPTED WIDESPREAD ADOPTION OF THE MUCH-CRITI- CIZED MEDICARE COST REIMBURSEMENT PRACTICES, DESPITE THE EXPRESSED INTENT OF THE FINANCE COMMITTEE THAT THE MEDICARE FORMULA NEED NOT BE USED BY STATES IN ORDER TO COMPLY WITH -LI- PAGENO="0406" 398 SECTION 21~9(AW' LVEN ThE CRITICS OF SENATOR BOREN'S AMENDMENT HAVE ACKNOWLEDGED THAT "THE PROTRACTED AND OBSCURE NATURE OF THE DEPARTMENT'S REGULATION AND GUIDE- LINE WRITING PROCEDURES1 WITH RESPECT TO SECTION 2149, HAS PROVOKED THE IRE OF MANY~" IT IS OUR UNDERSTANDING THAT SENATOR B0REN' S AMENDMENT WOULD REFORM THE 1~1EDICAID PAYMENT STRUCTURES BY: (1) DELETING ANY LANGUAGE SUCH AS "COST RELATED BASIS" WHICH WOULD INFER ANY RELATIONSHIP OR REQUIREMENT THAT METHODS AND STANDARDS DEVELOPED BY THE STATES MUST FOLLOW THE ACKNOWLEDGED INFLATIONARY AND COSTLY [~EDICARE REIMBURSEMENT SYSTEM (2) RESOLVING THE OVERLA~ BETWEEN EE9 AND THE STATES FOR THE DEVELOPMENT OF METHODS AND STANDARDS BY PLACING THAT RESPONSIBILITY EXPLICITLY ON THE STATES~ (3) REQUIRING ThE STATES TO FIND AND ASSURE THAT THE RATES ARE ADEQUATE TO MEET THE EXPENSES OF FACILITIES OPERATED "EFFICIENTLY AND ECONOMICALLY" IN PROVIDING "CARE AND SERVICES IN CONFORMITY WITH APPLICABLE STATE AND FEDERAL LAWS AND REGULATIONS~" (4) NOT ELIMINATING THE SECRETARY OF HEW'S RESPONSIBILITY TO REVIEW, AND A'SIHORITY TO APPROVE STATE ACTIVITIES CONCERNING THE FACILITIES AND THE STANDARDS RELATING TO THE QUALITY OF ThEIR SERVICES UNDER SECTION 1902(A) (6), (28), (39)., (31)~ (36), ~o (40) OF THE SOCIAL SECURITY ACT, (SEE ATTACF-IMENT FOR TEXT OF THESE SECTIONS) (5) PROTECTING THE STATE AND FEDERAL GOVERNMENT FROM AN OPEN-ENDED APPROACH OF THE "MORE YOU SPEND-THE MORE YOU GET PAID" BY TYING THE ASSURANCE OF THE REASONABLENESS AND ADEQUACY OF THE RATE TO THOSE FACILITIES WHICH ARE "EFFICIENTLY AND ECONOMICALLY OPERATED" -.5- PAGENO="0407" 399 IT HAS BEEN ALLEGED THAT IN ADDITION TO THE PRECEDING FIVE ITEMS,' SENATOR BOREN'S AMENDMENT WOULD ALSO SPECIFICALLY REMOVE ANY LIMITATION ON PROFITS OR GROWTH ALLOWANCES THAT IS SIMPLY NOT TRUE IN FACT, SENATOR BOREN'S AMENDMENT SETS FORTH THE BASIS FOR A COMPARISON TEST OF THE EFFICIENCY AND REASONABLENESS OF A NURSING FACILITY'S RATE WITH THAT OF SINILAR FACILITIES WE FIRMLY SUPPORT THIS CONCEPT AS BEING A REASONABLE APPROACH TO CONTAINING THE EXPENDITURES BY THE FEDERAL GOVERNMENT AND THE STATES UNDER THE MEDICAID PROGRAM FOR NURSING FACILITY SERVICES. BOTH PROPRIETARY AND NONPROFIT FACILITIES ~±IOULD NOT BE GUARANTEEDIU~I. THE GOVERNMENT WILL PAY THEIR FULL COSTS PLUS A GROWTH ALLO~LANCE FOR NONPROFIT FACILITIES OR PROFIT FOR PROPRIETARY FACILITIES. INSTEAD, THE PAYMENT SYSTEMS SHOULD PROVIDE THE OPPORTUNITY FOR THESE RETURNS FOR ALL TYPES OF FACILITIES IF THEY PROVIDE SERVICES IN CONFORMITY WITH THE APPLICABLE FEDERAL AND STATE REGULATIONS THIS PRINCIPLE IS IN KEEPING WITH THIS SUBCO~4'1ITTEE'S LONG STANDING CONCERN THAT THE GOVERNMENT SPEND ITS "DOLLARS AS REASONABLE AND EFFICIENTLY AS POSSIBLE." THEREFORE WE KOULD RECOMMEND THAT THIS SUBCOMMITTEE FAVORABLY CONSIDER, AT THE APPROPRIATE TIME, THE AMENDING OF SECTION 1902(A) 03) (E AS APPROVED BY THE SENATE Co~MIuEE ON FINANCE. ~ PARTICIEAUOII MANY SERIOUS QUESTIONS NEED TO BE ANSWERED BEFORE THE NATIONAL COUNCIL COULD SUPPORT THE SO CALLED INTERMEDIATE SANCTIONS AGAINST SKILLED NURSING HOME PROVIDERS. THIS PROVISION AS PROPOSED BY THE i~DMINISTRATION, IS MUCH TOO BROAD IN SCOPE AND VAGUELY WRITTEN. WHILE WE AGREE THAT, DECERTIFICATION, CURRENTLY THE ONLY AVAILABLE SANCTION FOR NONCOMPLIANCE, IS TOO HARSH, WE CANNOT AUTO- -6- PAGENO="0408" 400 MATICALLY SUPPORT AN INTERMEDIATE STEP JUST BECAUSE IT MAY BE LESS SEVERE. P~NY BILL WHICH ADDRESSES THIS PROBLEM MUST SPECIFICALLY DELINEATE WHAT THE PROVIDERS RIGHTS ARE, AS WELL AS THE LIMITS TO HEWS AUTHORITY. THAT MEANS THE BILL MUST DEFINE WHAT IS A SANCTIONABLE ACT?~ WHO DETERMINES THAT THE ACT HAS BEEN CQ~4MIUED? 0 WILL THE PROVIDER BE ALLOWED SUFFICIENT TIME TO CORRECT THE DEFICIENCY? * WHAT DUE PROCESS RIGHTS ARE TO BE AFFORDED? 0 WHAT ARE THE SANCTIONS TO BE? THE WAYS AND MEANS SUBCOI~T1IUEE ON HEALTH HAS APPROVED A PROVISION WHICH RESPONDS TO MANY OF THESE CONCERNS AND WE WOULD FAVOR THAT VERSION OVER THE SENATE FINANCE COWHITTEE'S LANGUAGE, BECAUSE IT IS MUCH MORE EXPLICIT. WHILE WE MIGHT FAVOR ONE VERSION OF THE BILL OVER ANOTHER, WE STILL HAVE SERIOUS RESERVATIONS REGARDING THE GENERAL ISSUE OF SANCTIONS. FIRST, THERE IS THE QUESTION OF LEGALITY REGARDING THE DEPARTMENT'S AUTHORITY TO WITHHOLD REIMBURSEMENT FOR SERVICES WHICH HAVE, IN FACT, BEEN RENDERED. SECOND, ANY SANCTION SYSTEM WILL ULTIMATELY PENALIZE THE PATIENT, MOST ESPECIALLY IF THAT SANCTION IS A MONETARY FINE. FOR THAT REASON, WE FEEL THAT THE WAYS AND TIEANS APPROVED VERSION OF SANCTIONS WOULD BE LESS ONEROUS BECAUSE IT DENIES REIMBURSEMENT FOR BENEFICIARIES A1)MIUED AFTER A SPECIFIC DATE, RATHER THAN TO ALL PATIENTS IN THE FACILITY. THIRD, THERE HAS BEEN NO DISCUSSION RELEVANT TO THOSE STATES WHICH HAVE ALREADY ENACTED THEIR CHN LEGISLATION ON INTERMEDIATE SANCTIONS. SINCE A NUMBER OF STATES HAVE THEIR O~4 STATUTES FOR MEDICAID PATIENTS, WE BELIEVE THAT THE LEGISLATION WE ARE DISCUSSING TODAY SHOULD ONLY APPLY TO MEDICARE PATIENTS SO THAT ANY POTENTIAL CONFLICT CAN BE AVOIDED AND ALSO SO THAT HEW SHOULD NOT INFRINGE ON EACH STATE'S RIGHT TO ADDRESS THE ISS~JE AS IT SEES FIT. -7-. PAGENO="0409" 401 141 Civit. PENALIIIES1ORJ~RAUDULENT MEDICARE OR MEDICAID CLAIMS (HFLLI1O6) TI~E ADMINISTRATION IS SEEKING AUTHORITY UNDER HR `4105 TO IMPOSE FINANCIAL PENALTIES ON PROVIDERS DETERMINED BY hEM TO HAVE SUBMITTED FRAUDULENT CLAIMS UNDER MEDICARE OR MEDICAID. WE HAVE SERIOUS RESERVATIONS ABOUT THIS PROPOSAL NOT THE LEAST OF WHICH IS THAT HEW IS ATTEMPTING TO crRcUt'TvENT THE JUDICIAL PROCESS AND IS SEEKING TO BECOME PROSECUTOR, JUDGE, AND JURY ALL IN ONE, WE BELIEVE THAT THERE WILL NEVER BE SUFFICIENT SAFEGUARDS WHEN. THE AGENCY RESPONSIBLE FOR WRITING, INTERPRETING, AND ADMINISTERING THE LAW ALSO SITS AS THE JUDGE. THIS IS ESPECIALLY DISTURBING IN THE CONTEXT OF A PROGRAM OF THIS SIZE ~AND COMPLEXITY, PARTICULARLY GIVEN THE CONSTANT CONFUSION AND UNCERTAINTY REGARDING INTERPRETATIONS OF REGULATIONS. THERE IS FREQU~NTLY A QUESTION OF ~IETHER THE PROGRAM ITSELF CONTRIBUTES TO THIS CONFUSION. SECONDLY, THERE IS NO DOUBT THAT THE AUTHORITY CONFERRED UPON THE SECRETARY iN HR 14106 DUPLICATES ALREADY EXISTING PROVISIONS IN THE MEDICARE/MEDICAID [INTl-FRAUD AND ABUSE ACT. WHAT HR `1105 IN FACT DOES IS TO ALLOW THE SEC- RETARY TO DUPLICATE, AT AN ADMINISTRATIVE LEVEL, SANCTIONS WHICH SHOULD ONLY BE IMPOSED AFTER PROPER ADJUDICATION OF FAULT BY THE COURTS. WE FIND NO EVIDENCE THAT THE SECRETARY NEEDS THIS AUTHORITY AND DO NOT BELIEVE THAT CONGRESS SHOULD MAKE IT EASIER FOR THE SECRETARY TO IMPOSE FINANCIAL PENALTIES. IT SEEMSTHAT HEW HAS CHOSEN THE PATH OF ADMINISTRATIVE EXPEDIENCY OVER THE TRADITIONAL CONSTITUTIONAL PROTECTIONS OF DUE PROCESS AND INDEPENDENT AND IMPARTIAL TRIAL BY JURY. THE NATIONAL COUNCIL CANNOT SUPPORT ANY LEGI- SLATION WHICH WOULD RELEGATE ThE FINDING OF WRONGDOING TO AN ADMINISTRATIVE LEVEL. OUR LAST CONCERN WITH REGARD TO HR `4105 IS ThE IMPACT IT WOULD HAVE ON -8- PAGENO="0410" 402 LEGITIMATE CHALLENGES TO HEW POLICIES OR STANDARDS. WE BELIEVE THAT THE LEGISLATION WILL HAVE A CHILLING EFFECT ON ANYONE WHO DISAGREES WITH A REGULATION OR INTERPRETATION. IF HR 4105 WERE ENACTEDJ NO ONE WOULD BE WILLING TO TAIIedicaid pro~rarn due to Colorado's alleged failure to comply with Section 1903(g) of the Social Security Act. I consider such a penalty unwarranted and unnecessary at this time, for. :o the best of my knowledge, Colorado is in compliance with the Hedicaid program and has shown that it can and will comply ~ith the provisions of Section 1903(g). As the Chairman of the Subcormnittee on Health and the Environment and a prüiciple author of the Hedi~aid legislation. 1 think you would agree with me that theDepartment'S interpretation of the statute is incorrect. Let me explain.- The problem grows out of the Department of HEW's interpretation of what a state would have to do to avoid the penalty prescribed * in Section 1903(g): As you.know, the Section requires each State to have an "effective" program of utilization control. ..An effective program must include an annual review of the care * provided each patient in the State's Skilled Nursing Facilities, [~nrcrmediate Care Facilities, and Hental Hospitals. Additionally, each state must deincinstrate every quarter to the Secretary the results of the utilization control program. HEW alleged that Medicaid reviews in Colorado were inappropriately performed - during the first three quarters of 1977 and that to cone into compliance with the statute, the State would have had to re-nerform all reviews conducted during the first three quarters of the year. Nv ~:nderstanding is that the Congressional intent in passing !l.us.245 was to require states to come into- full compliance f~~r inspections regularly scheduled during the last quarterS ~f ~977. States which met this obli'gation would be free form ~ risk of penalties for the first three quarters of 1977. PAGENO="0851" 843 The' Honorable Paul Kogers U.S. House of Representatives pap.c2 Assuming that a state also continued to comply aftet the last quarter of1977, then no penalties would be necessary in the future. . The State of Colorado made the same interpretation of PL-245 as I do and was never informed of the contrary by HEW during 1977. ~ndeed, HEW, through its own action transmittal (HCFA A.T. ~o. 77-106) which was sent to each state, supports this interpreta- tion. Therefore, the State proceded in good faith with the inspections originally scheduled for the last quarter of 1977 and the first two quart,ers'of 1978. These reviews were completed in an appropriate manner within the framework of the Act. The `State has not gone back to re-do the earlier allegedly deficient inspections because of this understanding of the intent of PL95-245. ~:` * Hoping' you agree with me that the authors `of this legislation* wou'd not have intended that a state be penalized under these - circumstances, I propose that we submit this letter and one you as an official exchange of correspondence for the record. * ` With bestwishes, * Since ` - yoLirs,. * Timothy E. Wirth TtW/ di PAGENO="0852" 844 %~ongrt«=«= ot t~)e ~H~teb I'. * - ~,`ou«=c ~1 ~cprc~cnL~tibc~ .~ ~ - .tLbt ns..Te a.b I."v C.~'~rcr ~da~'~'eç?ea. D.C. 205t5 August 16, 1978 ) The Honorable TizrothyWirth JJ.S. House of ~epresentatives Washington, D.C. 20515 - .~earTim: Thank you very much for your letter concerning the p~ssibi1ity of action by the Deperonent of Health, Education and Welfare açainst - rho State of Colorado for alleged failure to comply with the pro- visions of Section l903(g) of the Social Security Act. As an author of Section 20 of P.L. 95-142 relating to this section and the applica- dons of penalties thereunder, r certainly agree with your interprets- * non that HEW action against colorado under the present circumstances would be inappropriate and mot in keeping with the intent oL the law. In passing Section 20 of P.L. 95-142, we meant to give States an opçornunity to wipe the slate c1ean~f all penalties which eight otherwise be assessed under Section 1903(g) for quarters filling in 1977 - if they conducted reviews of facilities in conformity with the requirements of the law in the fourth quarter. We certainly did not intend to r~~ire anu State to review all facilities in the State in one quarter because thc- review done in the previous three quarters was in so~ way insufficient. There can be no doubt that the penalty being considered now would be c.~:anterproductive and could seriously undermine the State's ability to * .a-Jminister a i-iedicaid program for its low income citizens. No one wants - this to occur, andl believe it can and should be avoided. I understand that Colorado is now in full compliance with.the law, and was in compliince for all reviews conducted during the final quarter of 1977, aM, therefore, it is my opinion that no penalty should be app1i&T.~ I gladly submit to the Record these rq.sarks along with yours as an nf~ icial exchange of corresprndence. Sincerely yours, FA(JL G. R)5ERS, N.C. Chairnan, Subeorrrit:oe O'2 1k-al th and the Eat-i tc'ruacnt PAGENO="0853" 845 STATEMENT OF HON. DAVID L. BOREN, A U.S. SENATOR FROM THE STATE OF OKLAHOMA Mr. BOREN. Chairman Waxman and members of the Subcommit- tee on Health and Environment, I appreciate the opportunity to present this statement in connection with your current hearings on various proposed amendments to the medicaid law. I wish in partic- ular to invite your attention to section 227 of H.R. 934, an amend- ment which I offered in the Finance Committee on June 14. As approved by the Finance Committee, section 227 of H.R. 934 would modify section 1902(a)(13)(E) of the Social Security Act which relates to medicaid payments for skilled nursing facility and inter- mediate care facility services. The present statutory provision was added by section 249 of the Social Security Amendments, of 1972- Public Law 92-603-and reads as follows: 1902(a) A state plan for medical assistance must * * * (13) provide * * * (E) effective July 1, 1976, for payment of the skilled nursing facility and interme- diate care facility services provided under the plan on a reasonable cost-related basis, as determined in accordance with methods and standards which shall be developed by the State on the basis of cost-finding methods approved and verified by the Secretary; Section 227 of H.R. 934 would change this provision to read as follows: 1902(a) A state plan for medical assistance must * * * (13) provide * * * (E) effective January 1, 1980, for payment of the skilled nursing facility and intermediate care facility services provided under the plan through the use of rates, determined in accordance with methods and standards developed by the State, which the State finds and assures are reasonable and adequate (i) to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable State and Federal laws and regulations, and (ii) to assure the reasonable availability of these services so that eligible persons can receive such services included in the plan at least to the extent such services are available to the general population; Very simply, my amendment differs from the present law in two major respects: First, it deletes the requirement that rates be estab- lished on a "reasonable cost related basis"; and second, it removes the obligation of prior HEW approval of the methods and stand- ards of payment. The amendment thus places responsibility squarely on the States to establish adequate payments to nursing homes. At the same time, it gives States the necessary latitude to determine the most appropriate methods and standards free of the substantial regula- tory' incumbrances which have developed under the present law and which have contributed little to improved patient care while spurring further inflation of health care costs. HEW would have the continuing role of monitoring the perform- ance of States with respect to the essential requirements set forth in the amendment. Furthermore, HEW would retain its present regulatory authority to require that payment rates established by the States do not exceed what the average medicare payments would be for comparable services. The cost-related payment requirement of the present law is a brief, well-intended provision which appeared to give States great flexibility to establish payments closely related to the costs neces- sarily incurred by institutions in providing care of acceptable qual- ity to medicaid recipients. Previously States had been free to devel- PAGENO="0854" 846 op their own bases for reimbursement to SNF's and ICF's. Concern had been expressed that some facilities were being overpaid while others were being paid too little to support the quality of care that medicaid patients were expected to need and receive. The latter concern took on added importance in view of efforts then underway by HEW to upgrade Federal standards for health and safety in nursing homes and actions by Congress to increase the Federal minimum wage. Hence it was felt that the medicaid statute should be amended to provide some assurance that mandated cost increase would be passed through to facilities. It now appears that rates being paid to nursing homes across the country are, on the whole, now adequate. Unfortunately, HEW 3 years ago issued detailed and complex regulations which have prompted widespread adoption of the much-criticized and inflation- ary medicare cost reimbursement practices, despite the expressed intent of the Finance Committee that the medicare formula need not be used by States in order to meet the requirements of section 249. These regulations take up a total of 10 pages in the Federal Register and the accompanying guideline require more than 30 pages of print, quite an amplification on six lines in the statute. Apart from the increased administrative costs occasioned by these Federal requirements, the major policy consideration at issue is the question of perpetuating, in the nursing home area, reliance upon cost-based methods of provider reimbursement. The committees on which we serve have heard hours of testimo- ny regarding the causes of and cures for the rising costs of health care. There is almost universal agreement that cost-based reim- bursement by third-party payors is inherently inflationary and is at the very heart of our present dilemma. There is wide agreement as well that our reform efforts must make the greatest possible use of competitive market forces where they exist in the health system-and where such forces are not present, ways must be found to induce efficient production of services vicariously. Federal regulations issued under section 249 require that medic- aid rates be established directly on the basis of actual costs report- ed by nursing homes. The target of my amendment is this total dependence of the ratesetting system on cost reporting by the providers. Such a system gives no consideration to its effects on provider behavior and insufficient consideration as to whether re- ported costs are a proper reflection of what services ought to cost in view of other factors, including supply and demand. To be sure, provider costs data comprise an important element of information in the ratesetting process. Under my amendment, States would continue to have access to that information as pro- vided by various sections of the Social Security Act, including the Fraud and Abuse Control Amendments of 1977. A State would, however, be free to determine the degree to which it would rely on reported costs as a factor in ratesetting together with other rele- vant factors. While my amendment does not propose a specific ratesetting, it will, by removing the cost-related requirement, encourage the adop- tion of negotiated, budget-based, and other prospective rate meth- ods which will require nursing homes to manage efficiently in order to remain in business. I believe substantial savings will PAGENO="0855" 847 accrue from avoiding the inflationary pressures associated with cost reimbursement. Savings in administrative costs may also be anticipated by permitting States to design simpler and less expen- sive payment systems. It should be observed that while our recent attention has been directed chiefly toward hospitals, nursing home care is the most rapidly growing segment of the health service sector and accounts for a greater proportion of medicaid expenditures than does hospi- tal care. It is therefore inconceivable to me that Congress should continue to mandate cost-based reimbursement for nursing homes while we are striving to reform medicare and medicaid reimburse- ment policies with respect to hospitals. I strongly support and believe that Congress should and will enact Senator Talmadge's proposal, included in H.R. 934, which would establish an alternative system for paying hospitals. Sub- stantially the same rationale underlies my own limited amendment with respect to nursing homes-the principle of providing incen- tives for efficient performance and disincentives to inefficient oper- ation. As a former Governor, I believe the States will respond affirmatively in that direction if given the mandate and the free- dom to do the job. It is important to recognize that some 70 percent of long-term care facilities are proprietary and that about half of their revenues are derived not from third-party paying agencies but from the private funds of patients and families. These institutions are there- fore already subject to a substantial degree of competition and are very responsive to inducements for efficient operation. My proposal has attracted a degree of opposition from several quarters. The sources of this opposition and the conflicting charges made against the amendment confirm my belief that what I have proposed is directly on target. The examples are illustrative. First, certain nursing home industry groups have implied that my amendment would prompt States to make drastic cuts in sup- port for nursing homes, threatening quality of services. Second, several consumer groups and representatives of the media have charged that my amendment would have the opposite effect of creating unbridled rate increases and windfall profits for nursing home operators. Third, while former HEW Undersecretary Hale Champion endorsed my proposal during the Finance Committee's consideration of the bill, certain officials at the Health Care Fi- nancing Administration now complain that they cannot do a proper job of monitoring the States' practices if much more than paper approval is involved-a tacit admission that paper compli- ance characterizes the whole of HCFA's activities to date under the current law. These charges are without substance and are based on three unsupported assumptions: First, that the States are, in general, less concerned and responsible than is the Congress or HEW when it comes to the issue of quality nursing home care; second, that my amendment would diminish the authority of HEW to monitor the performance of States with respect to payment levels and quality of care; and third, that cost reimbursement is an indispensible guar- antor of quality. The first assumption is simply fatuous. PAGENO="0856" 848 Regarding the second, my amendment provides for no reduction in accountability requirements for either States or facilities~ On the contrary, the amendment would require accountability on the basis of results of the State's system rather than measurements of presumed compliances with a maze of regulatory and procedural details. HEW would clearly retain State plan approval authority utilizing the criteria of section 1902(a)(30) of the act and the tests of compliance set forth in my amendment. As to the final assumption, while it is conceded that quality services cannot be produced by nursing homes below a certain minimum of financial support, there is much evidence that costs for the same services vary widely and little evidence to indicate that quality varies in direct proportion. On the contrary, a 1977 report of a task force for the Los Angeles County Board of Supervi- sors noted that well-managed, profitable institutions were provid- ing good care at lower costs, while a number of higher cost institu- tions were providing substandard care because of bad management and financial instability-Los Angeles County Nursing Home Study, 1975-77. Having the taxpayers pick up the tab willy-nilly with no differ- entiation between well-managed and poorly managed institutions is not the answer to either cost containment or quality assurance. We cannot look to the payment system to assure quality care. Vigorous enforcement of quality standards is an imperative no matter how we choose to pay nursing homes. In addition to promoting inflation, cost-based reimbursement sys- tems are vulnerable to fraud and abuse. The potential for conceal- ment, misrepresentation, and misallocation of costs is dramatically increased when payments to institutions are based directly on costs claimed in detailed and complex reports. Substantial expenses must be incurred by States in order to protect program integrity. These undesirable features can be minimized by the use of fixed rates for comparable facilities. It has been suggested by opponents of my amendment that it is too early to make a decision to change section 249(a) in view of the fact that its regulations have only been in effect since July 1, 1976. My response is that cost reimbursement has been in effect in medicare medicaid for more than 13 years. Its deficiencies are by now too obvious to require further observation. Therefore, I believe it would be extremely unwise to continue the mandate of section 249 for nursing homes. I have noted that a significant portion of the nursing home industry opposes my amendment. On the other hand, a number of nursing home groups around the country are supporting my amendment, convinced that the best interests of nursing homes and their patients lie, in the long run, with the establishment of stable prices and the removal of the burdensome costs, paperwork and frustration of Federal cost-reimbursement regulations. I hope you will join in supporting my amendment. Mr. WAXMAN. I would like to now call Mr. Richard Verville, counsel to the Easter Seal Society; Mary Akerley, director of na- tional affairs for the National Society for Autistic Children; and Jean Hollowell, member, board of directors of the National Society for Autistic Children. PAGENO="0857" 849 I welcome you today to the hearing, and we look forward to your testimony. STATEMENTS OF RICHARD VERVILLE, LL.B., COUNSEL, NA- TIONAL EASTER SEAL SOCIETY FOR CRIPPLED CHILDREN AND ADULTS, AND ALSO ON BEHALF OF AMERICAN COALI- TION OF CITIZENS WITH DISABILITIES, AMERICAN CON- GRESS OF REHABILITATION MEDICINE, EPILEPSY FOUNDA- TION OF AMERICA, NATIONAL ASSOCIATION FOR RETARDED CITIZENS, NATIONAL ASSOCIATION OF PRIVATE RESIDEN- TIAL FACILITIES FOR THE MENTALLY RETARDED, NATIONAL ASSOCIATION OF STATE MENTAL RETARDATION PROGRAM DIRECTORS, NATIONAL SOCIETY FOR AUTISTIC CHILDREN, UNITED CEREBRAL PALSY ASSOCIATIONS, INC.; AND JEAN HOLLO WELL, MEMBER, BOARD OF DIRECTORS, NATIONAL SOCIETY FOR AUTISTIC CHILDREN, ACCOMPANIED BY MARY AKERLEY, DIRECTOR, NATIONAL AFFAIRS (NSAC) Mr. VERVILLE. Thank you, Mr. Chairman. I won't bother repeating my name, but I will deal with the issues in the bill which you introduced, H.R. 5544, that deal with work disincentives, and then Jean Hollowell, who is also at the table at the far right, will deal with the issue of those States, some 15, that do not automatically make SSI recipients eligible for medicaid, and she will discuss it in terms of a very personal experience with her son and his loss of medicaid which pretty severely affected their family. I would like to take just a minute to reflect on the fact that there has been about 2½ years now of effort by disabled people in this country to try and deal with this problem of work disincentives that are inherent in the SSI program and in medicaid, and in many of the hearings that have taken place over the last 2½ years before the Ways and Means Committee and the Finance Commit- tee dealing with medicaid and SSI, there have been witnesses, particularly individuals from California, but also from some other States, who are very severely disabled and were here speaking about their own personal experiences of being a 25-year-old with quadraplegia, but who still had a very functioning brain and a lot of courage and wanted to work, but working for those individuals was just too high a risk deal. Their loss of medicaid eligibility, which might well have covered their attendant care and possibly some very necessary medical management, was too high a risk for any of them to choose. The bill which you have introduced, Mr. Chairman, as a comple- ment to Congressman Corman's bill which has passed the House, H.R. 3464, would essentially get rid of literally all of those work disincentives that are in SSI and medicaid. I won't belabor the issue of the SSI bill because that is not within your jurisdiction and I don't have much time. Certainly in my experience with the individuals that I have met over the last 3 years in trying to deal with this issue, who are disabled, it is the loss of medicaid eligibil- ity that is the big risk. It is not keeping that cash, that extra cash benefit; it is the medicaid that they need. Very simply, the problem is that in the law now, both SSI and medicaid, there is a definition of disability that has in it an earn- PAGENO="0858" 850 ings limit. Otherwise, SSI, like any other welfare program, allows you to earn certain amounts of money, and then counts let's say 50 percent of those earnings against your benefit until you phase out of the program. And that is what is called a 50 percent tax rate, and it is in there to encourage people to work. The disabled are caught in a terrible bind because they are not treated like the aged and blind under SSI, or an AFDC recipient. They don't get the benefit of that graduated earnings ability or the tax rate which allows them to keep earning until they phase out of the program, which under SSI is at about $443 of earnings a month. The definition of disability essentially says if you earn over $280 a month, you are not disabled. You are the same person, sitting in that same wheelchair with those same arms and legs that don't work, but you are not disabled if you earn $281. The last page of our testimony has a chart which shows that what economists call the notch effect of earning the $281. And it doesn't really take a mastermind to figure out that anybody making a clean, economic choice about what to do with their lives has really got to choose at many points not to work because the losses are too great. The bill that you have introduced would take care of that in a number of ways. It would enable for those who need the medicaid coverage to work, and yet continue that coverage in all States when one is on SSI as well as when one earns a sufficient amount to exit SSI under the Corman bill. That might mean that someone could earn $500 or $600 a month, but still that $500 or $600 a month, if that person had heavy medical or medicaid coverage needs, like continuing medical care, like an attendant, like home help, would not be worth the risk to that person of earning above the $443 a month. H.R. 5544 would take care of that because in those limited cir- cumstances where someone needed that assistance to work, and only then, this bill would let that person keep the medicaid eligibil- ity so that person could work, so long as that person couldn't otherwise pay for that care that they needed. And because it is drawn that way, there are no cost effects. By definition you need that medicaid coverage in order to work. If you don't get it, you are going to be on SSI drawing SSI benefit and be drawing medicaid anyway. Continuing medicaid for those people is not giving them anything they don't already have. So in my opinion there is literal- ly no cost effect in any of these provisions. Just very briefly, the other provision would, in States that have medical indigency programs, provide that if you have an impair- ment that prevents you from working and medicaid coverage would allow you to work, then you will be defined as a person who can keep that medicaid coverage whereas otherwise the medicaid law says you have got to be disabled, which means you can't earn over $280 a month. So you are in that catch-22 box again. I think that is enough time on technicalities. Let me just try to explain who these people are we are talking about. The disabled under SSI are not terribly different from the dis- abled under disability insurance, or the disabled that the Social Security Administration surveys every 6 years. There is some dif- ference. Thirty percent of them either are persons having mental PAGENO="0859" 851 retardation or severe mental illness. Thirteen percent are persons having mental retardation, and the other 17 percent a severe form of mental illness. There is a high proportion of people, 20 percent, with cardiovascular disease. This is in general. The population we are talking about with respect to these work disincentives, however, in my opinion-I don't really have any data that will support this, but I am quite certain instinctively that it is true-are the younger people, because the average age of a dis- abled person is likely to be about 54 or so, and work is not easy when you are disabled at that age. We are talking about people between 20 and 35. These are the people who have come to testify over the last 3 years. It is not a big population. Our estimates are that it may mean 10 percent of the SSI disabled would benefit from this work incentive provision. Three percent of them now work up to that $280 a month limit, but we think 10 percent could utilize the provisions of this bill and the Corman bill and would work more than they would otherwise. But that is not necessarily a large part of the population. A large number of those people, though, have very severe disabil- ities like paraplegia, quadraplegia, cerebral palsy. They are young, their brains still function, their spirit is great, and it is these kinds of provisions that let them function in a way that is good for them and that is good for the economy because you are not losing any medicaid money through these provisions, and you are letting somebody get into the work stream, probably pay taxes, hopefully get into a health insurance program at some point, and then not have to be on medicaid. Let me just turn it over now to Jean Hollowell, who will talk about the other matter. [Testimony resumes on p. 859.] [Mr. Vervilles prepared statement and attachment follows:] PAGENO="0860" 852 TESTIMONY OF THE American Coalition of Citizens with Disabilities American Congress of Rehabilitation Medicine * Epilepsy Foundation of America National Association for Retarded Citizens National Association of Private Residential Facilities For The Mentally Retarded National Association of State Mental Retardation Program Directors National Easter Seal Society for Crippled Children &Adults National Society for Autistic Children / United Cerebral Palsy Associations, Inc. Mr. Chairman: Thank you for the opportunity to testify on H.R. 5544, the Medicaid Disability Amendments of 1979. The groups on behalf of which this testimony is submitted have worked for three years on legislation to improve the Supplemental Security Income (`SSI") program and related Medicaid eligibility and coverage to encourage the disabled to work. We welcome the chance to endorse H.R. 5544, a bill, like House-passed H.R. 3464, designed to provide work incentives for the disabled on SSI. Statement of the Problem Regarding Work Disincentives Under SSI Under SSI, income support is provided to the aged, blind and disabled whose assets and income are sufficiently low to qualify then as needing such assistance. As an individual earns income, the law specifies that 50% of all earnings after the first $780 per year are counted against the SSI payment and when equal to one and other, at about $443 of income per month, the individual is no longer eligible for SSI. As you well know, in all but 15 states eligibility for SSI entitles one to Medicaid eligibility. The disabled have faced a unique problem, however, because the definition of disability itself includes an absolute, non- progressive, limitation on earnings. The definition of disability for purposes of SSI and disability insurance is that one have a phys- ical or mental impairment that prevents one from engaging in subs- tantial gainful activity (`SGA"), meaning employment. If one has a disability meeting any one of a medical listing of impairments, that person is presumed to be disabled and unable to work. 80% of SSI disability recipients are in this category of having medical impairments with the other 20% being determined to be disabled based on age, education, prior work history and the nature of the PAGENO="0861" 853 disability. However, no otherwise disabled person can earn more than $280 a month and be disabled under SSI regardless of whether they meet a definition of medical impairment since the law speci- fies that substantial gainful activity equals earning more than $280 a month. The effect of such a limitation is to cause severe inequities and discourage one from working. If a person earns $281 a month, that person becomes ineligible for SSI and loses both his or her SSI henfit and Medicaid eligibility as well as eligibility for cover- age under Title XX of the Social Security Act in some states. However, if one earns only $280 a month, that major loss of bene- fits does not occur. Unlike the provisions affecting the aged and blind, the disabled do not have a graded system of earnings which gradually phase an individual out of his benefits. The attached chart reflects this rapid loss of benefits and total income when one earns more than $280 a month. Also, last, though not shown on the chart, is Medicaid eligibility which nay be lost when SSI benefits terminate. With respect to Medicaid eligibility, there is a problem in addition to the definition of disability in SSI law which re- sults in the loss of SSI and Mediciad eligibility if one earns over $280 and that is the use of term disability in the sections dealing with the medical indigency program. H.R. 3464 deals with the definitional problem in the SSI law but not the problems of the medical indigency program. Nor does it deal with the problems of disabled people needing Medicaid coverage for services enabling then to work in states without a medical incligency program. Section 1905(a) extends the medical indigency program to the PAGENO="0862" 854 ~ "disabled" as defined in SSI law, Section 1614. That definition includes the SGA limitation that the person not earn more than $280 a month. If the person earns less, the indigency program is not necessary except in states where SSI eligibility and Medi- caid eligibility are not linked. If the person earns more, the indigency program does not apply unless the person meets one of the other criteria such as being under 21, over 65, blind or the relative of a child who is dependent under the AFDC law. A Profile of the Disabled on SSI and Affected By H.R. 5544, H.R. 3464 and 5. 591 In 1978 there were about 2,200,000 disabled on SSI, 302,000 of which were over 65. Of those, 35% also qualify for and receive disability insurance ("DI") with SSI serving as a supplement to that DI payment. That 35% would he eligible for Medicare as well as Medicaid since DI recipients are automatically eligible for Medicare but have a 29 month waiting period prior to receiving the benefits of Medicare; 5 months wait for the receipt of the DI benefit and 24 months wait thereafter for Medicare benefits to be available. A 1975 assessment of the diagnostic classifica- tion of the disabled on SSI shows that 30% have mental impairments including 13% with mental retardation, 20% have diseases of the circulatory system -- primarily forms of heart disease, 12% have diseases of the musculoskeletal system -- primarily arthritis, and 10% have diseases of the nervous system -- primarily diseases of the central nervous system including stroke. These impairments are somewhat different from t1~se of disabled workers eligible for disability insurance where the percentage of those with mental illness including mental retardation is far lower -- 12%, hut PAGENO="0863" 855 the percentage of those with circulatory problems (30%) and cancer (10%) and musculoskeletal disease (19%) is higher than the percentage of SSI beneficiaries with those impairments -- 20.7%, 5.4 % and 12.7%, respectively. While the median age of the non-disabled population was 38, the median age of a totally disabled person was about 53. Obviously, the age factor affects one's ability to work. The percentage of disabled on SSI with earnings in most recent data is about 3%, whereas the percentage of the blind, not sub- ject to the SGA limits, with earnings is about 6.6% in 1975. 75% of the disabled on SSI with earnings in 1975 had earnings of less than $100 per month and only 11% between $150 and $500 a month. On the other hand, 35% of the blind had earnings over $300 a month. This evidence seems to document the effectiveness, though not of great magnitude, of reducing the impact on the dis- abled of lost benefits. Another piece of useful data on earnings potential of the disabled is the evidence from the 1972 disability survey. That data indicates that of those with disabilities severe enough to qualify one for SSI, 12% were able to actually work full-time and 9% part-time. Our general estimate is that the effects of passage of H.R. 3464 and H.R. 5544 would be to enable about 10-12% of the disabled on SSI to have earnings at $300 a month or more whereas only about 3% do now. Commentary on the Bills Dealing With Medicaid Eligibility -- H.R. 5544 and S. 591 H.R. 5544 would make a number of changes in Medicaid law to eliminate work disincentives which relate to the loss of Medi- PAGENO="0864" 856 caid eligibility. First, H.R. 5544 would require that all states extend Medicaid coverage to individuals with severe medical disabilities who meet all the SSI disability tests except the limitation on earnings and who need the care offered by Medicaid to continue working but whose earnings are not sufficient to provide the equivalent in benefits to the Medicaid coverage. This provision clearly limits its scope to those who must have the services Medicaid will pay for in order to work. Such ser- vices might include an attendant, homemaker or home health ser- vices, equipment including artificial limbs and braces, and continuing medical management. This provision is similar to that in 5. 591 pending before the Senate Finance Committee. H.R. 5544 and 5. 591 differ in their definition of the class of disabled people to whom this benefit would apply. 5. 591 would extend these provisions to anyone of the 80% of SSI reci- pients with a disability meeting the medical listings while H.R. 5544 would extend this provision only to those whose im- pairment, whether meeting the listing or not, is so severe as to cause functional loss for which medical assistance is neces- sary to enable the individual to work. This provision is somewhat unnecessary because the Secretary must determine that Medicaid- covered care is necessary to enable the person to be employed. The Senate version seems somewhat clearer on this point. In addition, H.R. 5544 amends the provisions dealing with eligibility for the medical indigency program in those 35 or so states with that program to include individuals with impairments sufficiently severe to cause functional loss for which the care and services of Mediciad are necessary in order to enable the PAGENO="0865" 857 person to work. This provision would therefore enable a disabled person who earned over $443 a month, e.g., $500 a month, but needed an attendant to dress him in the morning or needed continuing medical management to retain Medicaid for purposes of paying for the provision of that attendant care. The disabled individual would still have to meet income, assets and other tests of the Medicaid medical indigency program. However, the person would not have to meet the eligibility requirements such as assets and unearned income of 551. S. 603, pending before the Senate Finance Committee, is a bill similar in concept. Finally, H.P.. 5544 would permit those with severe disabil- ities to deduct general and special work-related expenses as well as 50% of other earned income for purposes of determining eligibility for medical indigency programs. This provision is a counterpart to the provisions of H.R. 3464 and conforms Medi- caid to SSI law on the point of income exclusions for purposes of Medicaid eligibility under the medical indigency program. S. 591 has no like provisions. Cost Implications of H.R. 5544 -- Its Work Incentives Provisions The provisions of H.R. 5544 dealing with work incentives described above should have few increased cost effects. There should be savings from these provisions in that individuals will be encouraged to work and SSI payments will be reduced and possibly eliminated. In addition, regular employment may eventually lead to insurance coverage which would eliminate the need for Medicaid coverage. In many cases, the individuals would be eligible for Medicaid anyway, if they did not work and remained on SSI, so any Medicaid costs would not be additional. These cases are likely to be cases of those made eligible for the medical indigency program or the extended 551-Medicaid coverage because the care was necessary to work. Any new Medicaid caseload -- cases not otherwise likely to be SSI eligibles -- is engendered by the amendments of H.R. 3464 already passed by the House, not the amendments of H.R. 5544. 56-071 0 - 80 - 55 PAGENO="0866" 858 U) U) z 0 U z $100 $100 $200 $300 $400 $500 $600 ~!onthly Earned Income AT~AC1~ENT A: Total monthly income as a function of monthly earned income for various categories of SSI recipients April, 1979 (assuming no other type of income) B A,C A,B A,C = $280 A C __________ Disabled - federal benefit only Aged and blind - federal benefit Disabled with $50 state supplement PAGENO="0867" 859 STATEMENT OF JEAN HOLLOWELL Ms. HOLLOWELL. Mr. Chairman and subcommittee members, I thank you for the opportunity to share an experience I have had in receiving medicaid coverage for our son Dwight. I am a member of the National Society for Autistic Children's board of directors, and Dwight, my son, is 30 years old and has autism. It wasn't until 1974 he started receiving SSI, and in May 1978 he was approved for medicaid. However, this was short-lived. In April 1979 he was dropped. The reason given was excessive resources, and I might explain that was based on my and my husband's income. When Dwight's termination took place, my husband was in the hospital and I was suffering from a broken foot. I depended totally on others for transportation during this period. The local depart- ment of social services called and asked several times that I come to the office to sign Dwight's termination paper. Finally, when the social worker involved realized that I could not transport myself, she came to my office with the papers. At this point I told her I did not want to sign. I did sign, however, saying I thought that I had been informed of Dwight's ineligibility, I thought it was unfair for Dwight, and all other Dwights, too. When she left, I thought medicaid had gone out the door. And to make matters even worse, this upset Dwight. The father being in the hospital, my not being able to do things for Dwight, he started head-banging which he had not done in 15 years, and we had to have him back to the doctor, and he was put on Melaril, increasing much expense in the family. The same afternoon, feeling real defeated, when I returned home, I had in the mail an issue of the most current issue of Advocate from the National Society for Autistic Children, and right on the front page it read, "Any person receiving SSI is eligible for Medicaid." And I thought gosh, how can this be? And Dwight has just been discontinued. Anyway, I called the National Society for Autistic Children the next morning and told them my problem and asked for help, and I was given the name of a man to call in Raleigh and tell him my problem, and I did. I was told when I called Raleigh that there was a bill on the floor that would be voted upon within the next 2 weeks, and if this bill passed, that Dwight's coverage would be reinstated. Well, I then got to work. I called all my neighbors and friends and asked them to call and voice their concern. I called my daugh- ter living in Burlington, N.C. She passed out notices at work plead- ing for help. I then called my local representative and the senator and told them the problem, and they told me they would support the bill. Well, the bill passed-well, I then called the State chairperson of the budget appropriations committee. And when I identified myself, he said "Gosh, lady, you sure have done your homework." But in our conversation he did tell me he thought the bill would pass, and it did, and Dwight is now receiving medicaid, and thanks to NSAC, now lots of other people too. PAGENO="0868" 860 But what if Dwight's parents hadn't known where to go or how to get help, and 3 years ago I wouldn't have known either. My reason for relating this story is to plead for help for other persons and their parents who are still suffering from unfair laws and regulations. I fought this battle with the love for my son my only motivation. It was time consuming, a long, hard-fought battle, and I think a battle no parent should have to fight. Thank you. Mr. VERVILLE. I think just to comment very briefly, the problem in North Carolina was that North Carolina is one of those 15 States that does not automatically make an SSI recipient eligible for medicaid, and in North Carolina, the State medicaid plan for the indigency program, I guess, had certain assets and income tests that were tougher than SSI dealing with the deeming of income of the family for an adult individual that SSI will never do if you are over 21. And the problem would not have existed if North Carolina had had to have-in other words, she wouldn't have had to get a special bill passed in the legislature to get rid of that particular problem of deeming the parents' income to an adult son for pur- poses of medicaid eligibility under the medicaid plan in North Carolina if he would have been automatically eligible for medicaid just by being an SSI recipient, which is what the provision in your bill does. Mr. WAXMAN. Ms. Akerley, did you have anything? Ms. AKERLEY. I am going to be silent today, Mr. Chairman. Mr. WAXMAN. Let me thank all of you very much for your testimony. One of the provisions in the bill is to take care of the problem in North Carolina, which is one of the few States anach- ronistically holding to the old version of the law. We want to bring them to the same level as all other States for the reasons that you pointed out and to provide for all the people that expect that they would have the same coverage as anybody else. We appreciate your testimony and your support for legislation. Dr. Carter? Mr. CARTER. Thank you, Mr. Chairman. I think it is indeed fortunate that North Carolina passed this law and helped your son. Of course, in most of the other States, those who receive SSI are also eligible for medicaid, and I'm happy that is the case in my State. If anyone were to know the difficulties you have had with an autistic child for 30 years, I don't think he would begrudge your youngster getting medicaid. I think he deserves it. Thank you, Mr. Chairman. Mr. WAXMAN. Thank you, Dr. Carter. Mr. Dannemeyer. Mr. DANNEMEYER. No questions. Mr. WAXMAN. We very much appreciate your coming and shar- ing this information. I would like to call forward now Dr. Tyra T. Hutchens, president of the College of American Pathologists, accompanied by Dr. Edwin E. Pontius and Dr. Jerald Schenken. PAGENO="0869" 861 STATEMENT OF TYRA T. HUTCHENS, M.D., PRESIDENT, COL- LEGE OF AMERICAN PATHOLOGISTS, ACCOMPANIED BY EDWIN E. PONTIUS, M.D., CHAIRMAN, COUNCIL ON GOVERN- MENT RELATIONS; AND JERALD R. SCHENKEN, M.D., CHAIR- MAN, LEGISLATIVE AND REGULATORY ACTIVITIES COMMIT- TEE Dr. HUTCHENS. Mr. Chairman and members of the committee, I am Tyra T. Hutchens, M.D., President of the College of American Pathologists. And with me today are Edwin E. Pontius, M.D., here on my right, of Indianapolis, md., and Jerald R. Schenken, M.D., on my left, of Omaha, Nebr. We represent nearly 8,000 physicians who practice the medical specialty of pathology. We have submitted a written statement for the record [see p. 864], and we appreciate this opportunity to give a very brief oral state- ment. Mr. Chairman, we are focusing our testimony on two areas of specific concern, reimbursement reform and competitive bidding. First, a major concern of the college since 1976 has been legisla- tive efforts to redefine the practice of medicine. When introduced earlier this year, S. 505, now incorporated in H.R. 934, included a section 6, which would have redefinied physicians' services, rede- fined what constitutes pathology services, and finally,, limited phy- sician reimbursement under what is known as a percentage con- tract. The existence of a physician's component in each clinical pathol- ogy procedure historically has been recognized. Patient care, con- sultation, diagnosis, and applied research are inseparable functions normally provided concurrently during the pathologist's daily prac- tice. The pathologist must correlate data, interpret test results, and assess other information critical to a patient's diagnosis. The re- quirement for this medical decisionmaking is not compatible with a rigid definition based on a concept of personally performed or personally supervised. Our written statement details our concerns with the redefinition of physicians' services. Mr. Chairman, the Senate Finance Committee, considering this legislation, deleted the redefinition of physicians' services from S. 505, an action which we believe came about because of the merits of our position. Although we have not seen final H.R. 934 legislative language, we understand it contains a section 252, which was identified in DHEW testimony last week before this committee. This section would limit reimbursement under a percentage arrangement to an amount not to exceed that which would have been allowed under a relative value schedule approved by DHEW in consultation with appropriate professional organizations. The college supports the concept of relative value schedules which recognize the physician's component in each laboratory procedure. We also understand that a provision calling for a study of com- pensation arrangements of hospital-based physicians is contained in section 252. Considerable support exists for such a study, and attached to our written statement is a justification for such a study. PAGENO="0870" 862 We commend the chairman of this committee for the approach to reimbursement reform embodied in sections 201 and 204 of H.R. 4894, which establish procedures for determining reasonable costs and charges for laboratory services. Mr. Chairman, S. 590, the Senate CLIA bill, and H.R. 4754, Mr. Leland's CLIA bill, contain sections which also would redefine pathology services. The language contained in these two bills could have the same damaging effect on the delivery of medical care as would section 6 of S. 505. We urge this committee not to adopt section 8 of H.R. 4754. We will now address another area of concern to pathologists, competitive bidding for laboratory services, contained in both H.R. 934 and H.R. 4894. The college is strongly opposed to competitive bidding for clinical laboratory services. We foresee the likely possibility of serious deg- radation of quality in laboratory services under competitive bid- ding. Furthermore, it could result in discrimination between medic- aid and other patients. We would like to identify some of the potential major problems. Competitive bidding could place cost before quality. Competitive bidding could reduce competition, which might, over a period of time, defeat any projected cost-savings. Competitive bidding could prolong diagnostic and treatment serv- ices, thus potentially increasing overall costs for the patient. We fear that competitive bidding could be devastating to labora- tories attempting to provide quality, accuracy, good patient care, and an appropriate broad spectrum of laboratory services. Mr. Chairman, in regard to the billing procedures in sections 202 and 205 of H.R. 4894, the college has supported the concept of disclosure billing. We believe, however, that this provision is unnecessary in view of HCFA's implementation of new procedures. Further, DREW's Project Integrity is conducting audits which will provide informa- tion similar to that sought by the proposed study. Mr. Chairman, regarding provisions on limitations on payments to pathologists and radiologists in H.R. 934 and H.R. 4475, the college must reassert previously stated opposition to restrictions on the established procedure of reimbursing inpatient services that would limit full reimbursement to only those physicians accepting assignment for all hospital inpatient services. This proposal would lose sight of the original intent, may be counterproductive, and could result in cost-transfers, not cost-savings as suggested by some. Mr. Chairman, in conclusion, we recognize and share your com- mittee's concern with health care costs and the related issue of fraud and abuse. The college is cooperating with the voluntary effort on hospital cost containment. We are proud to be the first major medical specialty to have developed cost containment recommendations which are appended to our written statement. We have supported medicare and medicaid fraud and abuse legis- lation and cooperated with HCFA in its implementation. Mr. Chairman, the college appreciates this opportunity to ex- press our views on the bills under consideration, both in this brief testimony and in our written testimony. We will be pleased to PAGENO="0871" 863 respond to any questions you or the members of the committee may have. Thank you very much. [Testimony resumes on p. 897.] [Dr. Hutchens' prepared statement and attachments follow:] PAGENO="0872" 864 STATEMENT OF THE COLLEGE OF AMERICAN PATHOLOGISTS ON MEDICARE-MEDICAID AMENDMENTS BEFORE THE SUBCOMMITTEE ON HEALTH INTERSTATE AND FOREIGN COMMERCE COMMITTEE UNITED STATES HOUSE OF REPRESENTATIVE OCTOBER 23, 1979 Mr. Chairman and Members of the Committee: I am Tyra T. Hutchens, M.D., President of the College of American Pathologists. With me are Edwin E. Pontius, M.D. of Indianapolis, Indiana, and Jerald R. Schenken, M.D., of Omaha, Nebraska. We welcome the opportunity to appear here today to represent the College of American Pathologists and to present its views on the Medicare and Medicaid Amendments that are the subject of these hearings. The College is anon-profit medical specialty organization of physicians with headquarters in Skokie, Illinois. We represent nearly 8,000 physicians who practice the medical specialty of pathology. College Fellows are certified by the American Board of Pathology. Our members practice in hospitals, in independent medical laboratories, in medical schools, in military institutions, and in various facilities of the Federal, State and local governments. In addition, our members work in medical laboratory research institutions and in industries producing medical devices and in vitro diagnostic products. PAGENO="0873" 865 Mr. Chairman, we would like to focus our testimony on areas of specific concern to pathology -- particularly reimbursement reform, competitive bidding and pre-admission diagnostic testing -- that are contained in legislative bills being considered today. Physician Reimbursement Reform (H.R. 934 and H.R. 4894) A major concern of the College since 1976 has been legislative efforts to redefine the practice of pathology. When Senator Talmadge introduced the Medicare-Medicaid Administrative and Reimbursement Reform Act in 1976, the College took a strong position against provisions of the bill (S. 3205) which were designed to restructure the practice of medicine -- particularly as practiced by hospital- based physicians. Those provisions have appeared in subsequent versions of Senator Talmadge's bill, including S. 505, now known as H.R. 934. The reimbursement provisions which we generally believe will appear as final legislative language in H.R. 934 are very different than those which were present in the bill as introduced. We believe many of those changes came about because of the efforts of the College in providing factual information on the administrative chaos those sections would have imposed on the practice of medicine. We believe it appropriate to provide the Committee with a summary of what changes have taken place in H.R. 934 and an under- standing of our position on this issue. When introduced, S. 505 (H.R. 934) contained a section 6 which would have (1) redefined physicians' services as contained in PAGENO="0874" 866 section 1861(q) of the Social Security Act; (2) redefined what constitutes pathology services as provided by a physician; and (3) limited reimbursement to a physician who is compensated under what is know as a percentage arrangement. Section 6 proposed to amend existing law by stating that a service is a physician's service except any service that a physician may perform as an educator, an executive or a researcher; or any professional patient care service unless the service (a) is person- ally performed, or personally directed, by a physician for the benefit of the patient, and (b) is of such nature that its per- formance by a physician is appropriate. Although this language appeared under the heading of hospital- based physicians it was clear the effect of the proposed change would have affected all physicians because of its location in the statute. The impact on many physicians by such a redefinition would be profound. The proposed redefinition of physicians' services had been put forth as a cost containment measure. In fact, DREW in its Fiscal Year 1980 Budget estimated that redefining hospital-based physicians' services to be only those personally performed and personally directed would save $55 million. We have had no access to the Department's supporting data. We would have to question the Department's proposed savings. The College is of the opinion that the redefinition as it appeared in section 6 would have seriously impaired the administra- tion of the Act. Defining the term "personally performed by or PAGENO="0875" 867 personally directed" would inevitable lead to a complex maze of regulations. How could these regulations define "personally directed" in an equitable fashion assuring optimal patient care? We also believe that such complex regulations would result in so much red tape as to impair the quality of physicians' services provided to patients. This redefinition was not a cost containment measure. It was a major reordering of the nature of the practice of medicine. Historically, all activities of physicians customarily recog-' nized as part of the physician's practice have been reimbursed as a physician's service. We submit that this is indeed the case to- day. A pathologist is praticing medicine not only in his role as the provider of individual patient care, but also in his role as a physician/patient educator, researcher into patient medical problems and director of the clinical pathology laboratory. It might be helpful at this point for the Committee to have a better understanding of what is the practice of pathology. Pathology is that specialty in the practice of medicine that deals with the causes and consequences of disease and with the diagnosis, treatment and prognosis of patients, using primarily laboratory methods developed from the biological, chemical and physical sciences. As the basic science most closely related to clinical medicine, and the clinical discipline closest to basic science, pathology is often called the bridge between the basic sciences of anatomy, PAGENO="0876" 868 biochemistry, genetics, microbiology, physiology, and pharmacology; and such clinical disciplines as internal medicine, surgery, obstet- rics, gynecology, and pediatrics. Separation of the services provided by pathologists to patients and those provided by other physicians is inappropriate. We of course recognize that payment for didactic classroom teaching and basic research is not one of the objectives of the Medicare program. When we speak of patient care, we speak of providing the laboratory data and clinical pathology consultation essential for the assessment, diagnosis, treatment and management of disease in the individual patient. When we speak of education, we speak of the need for the pathologist to educate the attending and in-training physician in a consultative role on individual patient-related matters. When we speak of research, we speak of the developement, or refinement, or installation of procedures for daily use to im- prove the care of the individual patient. As these functions are normally provided concurrently during the pathologist's daily practice, they are inseparable. Because it is a large and complex field, pathology practice is usually subclassified by the following two major categories: 1. Anatomic pathology, which deals with the gross and micro- scopic structural changes caused in tissues by disease; and 2. Clinical pathology, which is concerned with the functional change produced by disease as reflected in blood, urine, and other fluids and tissue. PAGENO="0877" 869 The close interrelationships between these areas consolidate the specialty in practice. It has been stated by some that supervisory functions of the physician-director of the laboratory are "appropriately per- formed by non-physician personnel." However, this statement recog- nizes only a small part (the manual-technical portion) of the responsibilities often performed personally by technical personnel, but does not recognize that the policy and procedure setting, standardization, evaluation, and action initiation must be the medical responsibility of the pathologist director of the labora- tory. This is especially critical for the hospital laboratory. We believe that the unique services provided by the medical director of the clinical laboratory are most appropriately provided by a physician specializing in pathology. The cornerstone of the College's position in testimony oppos- ing any redefinition of pathology services has been and remains the fact that there exists a physician's (professional) component in every laboratory procedure. There is strong evidence to support our position in both the daily practice of pathology and in Medi- care's legislative and regulatory history. In everyday practice, the pathologist must correlate clinical data, test results, and other information to determine the diagnosis for a patient. The requirement for this medical decision-making transcends the arbitrary division between personally performed or personally supervised. PAGENO="0878" 870 This is why clinical pathologists review not only abnormal results, but also normal results that can often be indicative of a patient's condition. These services are not always obvious but they are physician's services nonetheless. Because of their medical training and experience, pathologists can see warning flags in subtle abnormalities which take on mean- ing not only in a single test but in the context of multiple tests. Mr. Chairman, all fifty states have successfully defined medical practice in their laws. None of those laws require a physician to perform every medical function personally. But as a physician engaged in the practice of medicine, the pathologist is held accountable by law for the services performed by those he employs, supervises or engages to perform medical services based on his medical judgment. The provision of clinical laboratory services has had a number of interpretations over the years, both legislatively and in regula- tion. It is clear, however, that the existence of a physician's component in each clinical pathology procedure is recognized. Although there was some controversy over how to treat hospital- based physicians during the time surrounding the passage of Medicare in 1965, the legislation which finally passed to a large extent placed hospital-based physicians with there clinical colleagues, under Part B, because of the strong sentiment in Congress against any major disruptive effect on the contractual arrangements be- tween physicians, hospitals and patients. The details on managing the Medicare program were yet to be determined by regulation, but PAGENO="0879" 871 the issue had clearly been joined in Congress and those who favored treating hospital-based physicians the same as all other doctors prevailed. Further, a review of the legislative history suggests that little discussion seems to have taken place concerning any distinc- tion between a physician's service to an individual patient, and a physician's service benefitting patients in general. It further appears that pathology services were without qualification assumed to be "physicians' services." This point is made in the follow- ing Senate report language: The Committee bill also makes it clear that items, supplies, services of aides, etc., that are incidential to physicians' personal services wQuld be covered in the hospital, clinic, home, or office and regardless of whether the bills are rendered by the hospital, the physician, or both. For example, the change would make it clear that a laboratory test would be covered whether performed in the physician's office or whether the physician sends the specimen to an independent laboratory and regardless of whether the physician or the laboratory bills the patient. If the test is performed in an independent laboratory, standards contained in the Committee bill, which are described below, relating to labora- tory services of independent laboratories would apply (Senate Report (Finance Committee) No. 404, June 30, 1965, p.42.) In addition, there appeared to be a consensus that both sides of the hospital--based physician reimbursement issue wanted to avoid influencing physicians' contractual arrangements. Thus, PAGENO="0880" 872 Senator Douglas (reflecting the view of a number of Senators) at the hearings stated: "In summary, the amendment would permit reimbursement under the basic hospital plan for the hospital services of radiologists, pathologists, anesthetists, and psychiatrists only where the specialist receives payment for his services from the hospital rather than rendering his own separate bill to the patient. Nothing in the amendment interferes with coverage of his services under the voluntary plan (Part B) if he renders individual bills, nor does the amendment take one side or the other in what the arrangement is to be between the hospital and the specialist." The Committee Report published after enactment confirms the Congressional intent that hospital-based physicians should be treated the same as office-based physicians. As stated in the Conference Report of the House Ways and Means~ Committee: "Scope of Services-Specialists: The House excluded physicians' services in the field of pathology, radiology, psychiatry or anesthesiology from basic hospital insurance benefit - but provided for payment under the supplementary voluntary medical insurance program... The Conference adopted the House version." The intent of Congress appears to have been that pathology services are to be reimbursed as a Part B service regardless of the mode of billing, a legislative result endorsed by Congressman Hall from Missouri: PAGENO="0881" 873 "I am particularly delighted that in amendments 70 and 141 the position of the House prevailed, and that the professional services involving involuntary servitude for certain medical special- ists was removed." Provisions that appear in the regulatory implementation of Medicare lend strong credence to the proposition that there exists an identifiable physician component in each clinical pathology laboratory procedure. The Secretary, DHEW, in section 1871, was directed to develop "such regulations as may be necessary" to carry out the administra- tion of the program. To this end, the Secretary promulgated six reimbursement principles.. Recognizing the great difficulty of applying the required procedures to the high volume of individual clinical pathology laboratory services (as compared to volume of surgery, for example) the regulation writers provided for an optional method of calculat- ing the "provider component" and the "professional component" of pathology services. Significantly, this approach recognized the presence of a professional component - "an identifiable service requiring per- formance of the physician in person." This very important principle is reflected in 42 CFR 405.483(c) (2): "(2) With respect to pathology services, for example, an individual entitled to Part B benefits under Title XVIII of the Social Security Act (in connection with a hospital stay, or in 56-071 0 - 80 - 56 PAGENO="0882" 8'74 connection with a series of out-patient diagnostic tests) will, on the average, have multiple laboratory procedures which in the aggregate permit the assumption that at some point with respect to at least some of the laboratory services there has been an identi- fiable service requiring performance by a physician in person'." The regulations also specifically recognize the hospital- based physician's right to bill his Part B charges directly. The sixth of these principles provided that `where the physician bills the patient directly, costs of operating the hospital depart- ment which are borne by the physician will be reflected in his reasonable charges which are compensable under the supplementary medical insurance program (42 CFR 405.486(a))." Much of the furor surrounding the proposals to redefine hospital-based physician services centered on what was termed "excessive incomes" under the percentage arrangement. The percentage contract is a standard arrangement in many areas and provides the basis for equitable arrangements for certain physicians practicing in hospitals. The concept of the percentage arrangement antedates the passage of Medicare by a considerable period of time. As Medicare evolved, so did the percentage contract. In fact, it was encouraged by the Social Security Administration as a desirable method of reimbursement (42 CFR 405.83(c) (2)). The regulatory authority was and still is charged with assuring that the services ordered by physicians are of high quality and that the charges made and fees paid for such ser~ices PAGENO="0883" 875 are inherently reasonable. The College has consistently recommended to its members that contractual arrangements should be fair to the physician, the patient, and the hospital, and should not in anyway interfere with the pathologist's ability to practice medicine in the best interests of the patient. The College has presented a number of uncontested studies that clearly show the amounts of individual charges to patients are not in any way related t~ the pathologist' s contractual arrangements. The College has consistently supported the concept that there should be multiple avenues available to physicians and their institutions to develop contractual arrangements which are sufficient- ly versatile to accommodate the many varied local conditions. The key factor in any of these arrangements is that they are agreeable to all parties involved. And whatever the reimbursement method, their job descriptions and responsibilites are mutually agreed upon by the pathologist, the medical staff, and the hospital administration; and then the entire professional and contractual arrangement is reviewed and approved by the hospital board of trustees. No single form of contractual arrangement can fit every situa- tion. The CAP believes that a contract is acceptable, providing it does not interfere with, or impair, the free and complete exercise of medical skill and judgement, and does not tend to. deteriorate the quality of medical care. PAGENO="0884" 876 None of which alters the fact that the rate charged for a particular unit of hospital service, including a pathology service, can vary widely from institution to institution. Rates for specific laboratory procedures should not be evaluated in a vacuum but must be evaluated in the context of the ~r diem charge, per illness charge, and patient mix -- not exclusively on the basis of the charge for the service itself. The College believes the foregoing discussion adds credence to the position that it i~ not the type of compensatory arrangement that is the cause of these apparent inequities but rather applica- tion of the compensatory arrangement. The Senate Finance Committee deleted section 6 from S. 505 during mark-up -- an action which we strongly support and which we believe came about because of the strength of our positon. During the past summer, the College was made aware of various proposals which would have add~d language to section 19 of S. 505. These proposals, some of which were as onerous as section 6, have apparently been rejected by the Committee. Although we have not seen final legislative language on H.R. 934, we understand that it contains a section (identified in DHE~7 testi- mony on October 16, 1979 as section 252) which will limit reimburse- ment under a percentage arrangement to an amount not to exceed that which would have been allowed under a relative value schedule approved by DHEW in consultation with appropriate professional organizations. PAGENO="0885" 877 Since final language is not available, we cannot offer unqualified support (or opposition) to this provision. However, the College has supported the concept of appropriate relative value schedules which recognize the physician's component in each laboratory procedure. We also understand that section 252 may contain a provision calling for a study of compensation arrangements of hospital- based physicians. The College believes considerable justification exists for such a study provided that it isnot aimed at income figures but rather at the more important issue of methods of and the variable inputs that go into those compensation arrangements. Thus we would support a study as provided for in H.R. 934 and in H.R. 4894, the Chairman's CLIA bill. To further explain why we believe such a study is necessary before fundamental changes in reimbursement policy are intelligently considered, we have attached to our testimony a position paper prepared by the College which provides justification for such a study (Appendix A). You will note that our justification is based, in part, on recommenda- tions contained in The Arthur Andersen, & Co. paper -- the of t- quoted, but unpublished, DHEW-cornmissioned study of hospital- based physician reimbursement. We have noted that Mr. Leland's CLIA bill, H.R. 4754, contains a section very similar to a provision in S. 590, which would rede- fine pathology services. The Senate Human Resources Committee PAGENO="0886" 878 dropped from S. 590 language identical to 5. 505's section 6. However, a provision with the same intent was inserted -- a provision which had been considered by the Senate Finance Committee and re- jected. We hope that this Committee will consider carefully our objections to redefining pathology services as stated in this testimony. The language contained in both S. 590 and H.R. 4754 could have the same damaging effect on the delivery of health care as would have section 6 of 5. 505. We urge this Committee, when it considers H.R. 4754, to strike section 8. Indeed, such an action would be consistent with actions of the Senate Finance Committee, which has been critically studying this specific issue for the past several years. In H.R. 4894, sections 201 and 204 represent reasonable approaches to reimbursement reform. As stated earlier we support a carefully designed study of hospital-based physician compensation. We commend Mr. Waxman for this approach. We are not opposed to provisions in section 201 of H.R. 4894 which establish procedures for determining reasonable cost and charges for laboratory services. The Committee should be aware that efficient and economical lease arrangements do exist between pathologists and hospitals. We do not believe the language in section 201 would adversely affect these arrangements. If the Committee so desires, we will provide additional data on what we consider to be appropriate circumstances for lease-type compensation arrangements. PAGENO="0887" 879 Mr. Chairman, we have gone into great detail explaining why the alteration of hospital-based physican reimbursement is inappropriate at this time. Further, we firmly believe that such initiatives will not result in cost savings to Medicare and Medicaid. We leave our discussion of physician reimbursement reform with the caveat that cost savings are often no more than cost transfers-- with undesirable professional and fiscal results. We would now like to turn our attention to another area of concern to the College -- competitive bidding for laboratory services -- which is contained in both H.R. 934 and H.R. 4894. Competitive Bidding (H.R. 934, H.R. 4894) The College is strongly opposed to the concept of competitive bidding for clinical laboratory services. This provision in the past has led to restricted patient and physician rights, and slip- shod and fraudulent work. Furthermore, it could be construed as discriminatory between Medicaid and all other patients. We foresee a serious degradation of quality in the delivery of laboratory services to Medicaid beneficiaries under competiti1.~e bidding. We believe that a number of major problems would exist under such a system: 1) competitive bidding ignores a primary aspect of laboratory services -- quality -- and concentrates instead on a sole criterion of cost; 2) competitive biddingcould lead to a reduction in competition in a locality and resultant monopolistic practices which would, over a period of time, defeat any cost-savings projected; 3) competitive bidding could affect PAGENO="0888" 880 the timeliness of services by increasing turn--around-time, and thus inevitably increase costs for patients through protraction of diagnostic and treatment services. It has long been the position of the College that the delivery of clinical laboratory services~ is the provision of medical services. The choice of a laboratory by an attending physician is a function of that physician in providing medical services to his/her patient. The physician-director of a clinical laboratory is dedicated to the provision of quality laboratory services at a reasonable cost to the patient; not "cost-effective" laboratory services at a reasonable level of quality. We believe that competitive bidding either forces a laboratory to provide the latter type of service or forces from the market place the laboratory unwilling to compromise quality. Thus, we fear that competitive bidding will be devastating to laboratories attempting to provide a broard spectrum of truly quality laboratory services. It is necessary to understand that laboratory services are far more than the mere performance of a test and generation of numbers. We believe it appropriate to identify for the Committee the many cost factors present in providing a laboratory service. The determination of the cost of a laboratory service is a very complex issue. If this determination is to be done in a meaningful way, one must evaluate all the elements of cost associat- ed with the testing process and considez the cost and value of what PAGENO="0889" 881 happens as a result of that testing. The costs directly associat- ed with testing a specimen, listed below, may represent only a minor component of total cost. Direct Costs 1. Instrument purchase or lease 4. Payroll and fringe benefits 2. Instrument maintenance 5. Reagents and standards 3. Quality Control programs 6. Supplies 7. ~Overhead A competitive bidding system would consider these costs as being the only cost of performing a laboratory service. This is simply not true. Associated costs, shown below, are an indispensible part of the testing process. The total of these associated costs may exceed the cost of running the tests. Studies have shown that high volume automated laboratories may be able to perform some laboratory tests for a relatively low cost, but when associated costs are added, the cost of the laboratory procedure from high v~Iume automated laboratories may be more than that from compre- hensive physician-directed service laboratories. Associated Costs 1. Producing and transmitting the requistion 2,. obtaining, processing and transporting the specimen 3. Evaluating, interpreting, transmitting and filing the report 4. Data processing 5. Billing and collecting fees 6. Bad debts PAGENO="0890" 882 If, despite the above-mentioned problems associated with competitive bidding, the Committee finds it appropriate to begin such a program, then we would urge the Committee to limit its initial implementa- tion to a pilot project conducted in a defined geographical area for a period not to exceed one year; at which time the results of the project could be evaluated to determine if a more widespread application of competitive bidding would be of benefit to the Medicaid program recipients. Billing Procedures (Sections 202 and 205 of H.R. 4894) The College supports the concept of this section which is in reality a procedure commonly termed "disclosure billing". In testimony and in statements (on proposed regulations) to the Secretary, DHEW, the College has urged that when physicians have laboratory services performed outside of their offices, the physician identify the laboratory providing the services and the amount charged to or paid by the physician be noted on the physician's bill requesting payment. We are of the opinion that this provision is unnecessary in view of recent actions by HCFA. During the past year, the Agency has been implementing new procedures to be used for identifying where laboratory tests were performed and establishing reimbursement levels based on the place of performance. Section 205 of H.R. 4894 provides for a two-year study of billing practices for laboratory services. While we do not object PAGENO="0891" 883 The costs listed below, which we shall term related costs, are costs that are related to what happens as a result of the per- formance of the test procedure. A clinical laboratory service is not complete unless the services below are provided when necessary. Related Costs 1. Retesting fOr equivocal results 2. Follow-up testing of positives 3. Related diagnostic procedures 4. Physician examination and consultation 5. Medical and surgical therapy 6. Therapeutic monitoring 7. Therapeutic follow-up and retesting In each element of cost, there must be recognition given to the intangible professional input cost of medical direction, super- vision and responsiblility provided at all levels by the pathologist. There is little doubt that competitive bidding will lead to a reduction in competition in a given locality due to the fact that many laboratories will not be able to offer quality services compet- itive in price with large automated laboratories. This loss of competition will result in many of the costs normally associated with monopolistic or oligopolistic markers, e.g., loss of jobs, loss of innovation, and loss of concern for the consumer -- unfor- tunately in this case, the patient. PAGENO="0892" 884 to this study, we question its necessity in light of on-going programs of DHEW. Project Intergrity, a program designed to detect fraud and abuse in government-financed health care programs, is at this time conducting audits which when completed could provide information similar to that which could result from the study envisioned in section 205. Limitations on Payments to Radiologists and Pathologists (H.R.934, H.R. 4475) The College must reassert previously stated opposition to restrictions on the established procedure of reimbursing in-patient pathology services -- restrictions that would limit full reimburse- ment to only those physicians accepting assignment for all hospital in-patient services. This proposal was addressed by members of the medical community when the Medicare-Medicaid Administrative and Reimbursement Reform Acts of 1977, and 1979, S. 1470 and S. 505 respectively, were under consideration. In both instances the College testified that: `We must oppose this restriction for the same reasons that prompted the Congress to amend the Medicare law in 1967 so as to clearly provide for 100 percent reimbursement for pathology and radiology services to hospital in-patients, provided by physicians specializing in pathology and radiology. (See Senate Finance Committee Report No. 744, 1967.) PAGENO="0893" 885 The problem is presently dramatized in those areas where fiscal intermediaries have arbitrarily reintroduced 80 percent reimbursement limits for clinical pathology, laboratory services provided to hospital in-patients when referral to an off-premises reference laboratory is required, while continuing 100 percent reimbursement for work performed in the hospital's own laboratory. If the Committee so desires, we will provide details on this situa- tion. This arbitrary interpretation of Medicare regulations is especially discriminatory against patients in small hospitals. We urge that this practice be eliminated." During Finance Committee mark-up of S. 505, section 6 language which would have restricted the 100 percent reimburse- ment to physicians accepting assignment was deleted. The College reiterated our position with regard to provisions of section 5 of S. 505 which would exclude pathologists who bill directly from the benefits of an administrative cost savings allowance; that is, expeditious processing by part B carriers to encourage acceptance of assignment. We testified that this practice would be discriminatory in the exclusion of direct billing physicians and many hospital-based physicians. As we have stated, the College has not had the opportunity to view final legislative language for H.R. 934. However, a Committee press release of March 22, 1979 states that the Committee approved parts of the legislation that are designed to encourage physicians to accept assignments by expediting payment of claims PAGENO="0894" 886 to physicians by Part B carriers. Reimbursement at 100 percent of reasonable charges, re- gardless of assignment status, was first adopted in the 1967 Social Security ~inendrnents. Mr. Chairman, we want the record to be clear on this point: Medicare determines reasonable charges at the 75th percentile of prevailing physician charges in the area. Thus, 100 percent reimbursement of the reasonable charge does not necessarily mean full reimbursement of the physician's charge. In 1967 the rationale was to foster simplified hospital and physician billing arrangements that would result in administra- tive cost savings. HEt~ states that many pathologists have sub- sequently chosed fee-for-service, or direct, biii~ing in prefer- ence to combinded billing -- therefore allegedly reaping the benefit of 100 percent reimbursement without having accepted ascigninents, simplified administrative bookkeeping, or guaranteed that the patient will not have to pay more than the Medicare reasonable charge. This is simply not the case. Section 104 of H.R. 4475, the Administrationts proposal, would limit the 100 percent reimbursement to those pathologists and radiologists who accept assignment and bill through the hospital. Savings created by this provision are touted by the Aministration to be $48 million for fiscal year 1980. The College must take issue with the Administration's explana- tion and proposed restrictions. PAGENO="0895" 887 The current net assignment rate (which excludes claims from hospital-based physicians and group practice pre-payment plans) is running at about 50 percent according to HCFA data. Pathologists who direct bill (those whose assignment rate is questioned) have been credited, by HEW, with an excellent record in accepting assign- ments -- about 60 percent. We would also like to call the committee's attention to an article in the October 1979 issue of Modern Healthcare which details a recent compensation and benefits survey conducted by Kearney Management Consultants. Part of this survey reports on the mode of compensation for chiefs of pathology: Of 774 hospital-based pathologists who are chiefs of departments of pathology, 705 -- or 91 percent -- were paid through arrangements with the hospital. Only 69 -- or 9 percent-- billed the patients directly on a fee-for-service basis. Several conclusions can be drawn at this juncture. The HEW - estimated savings appear to be based on faulty data. If that data were re-examined, a figure considerably less than $48 million might reasonably be agreed to. The perceived "consequence" of many physicians inappropriately receiving 100 percent reimbursement while billing directly does not, in fact, exist. There is no evidence that charges are greater even if this happens. In addition, pathologists who bill patients directly are then subject to Part B reasonable fee screens just as are other physicians. PAGENO="0896" 888 Finally, the College must question the fairness of section 104 -- fairness to both the physician and the patient. Pathologists who, for whatever reasons, bill directly, would be discriminated against if this provision were adopted. In turn, their patients, who have traditionally been accepted on assignment, would become responsible for the balance of the charge not reimbursed at the 100 percent of reasonable charge level, and the deductible. They would be denied benefits available to other Medicare patients. Mr. Chairman, we request the Committee delete section 104 and let stand the existing and equitable law as contained in. the Social Security Amendments of 1967. Pre-Admission Diagnostic Testing (H.R. 934) The College has publicly supported and worked for the develop- ment of mechanisms which would encourage the utilization of pre- admission diagnostic testing. In August 1978, in a statement approved by our Board of Governors, the College recommended that state and local cost containment committees should consider supporting pre-admission laboratory testing programs for appropriate elective hospitalizations in an effort to reduce length of stay. We compliment the Committee for taking this forward step in reversing practices which have been carried on by the Health Care Financing Administration (HCFA). HCFA, and its predecessor the Bureau of Health Insurance, have commented on the need to shorten hospital stays and thereby PAGENO="0897" 889 reduce the total costs of hospitalization. However in actual practice they have promulgated' regulations and administrative practices which reduce the benefits payable to the patient- beneficiary by limiting the amounts they pay for laboratory services provided to other than hospital in-patients. These administrative actions have taken the form of both Federal Register Notices and Transmittal Letters to Carriers implementing provisions of existing Medicare law. These actions have been aimed at reducing payments for certain out-patient laboratory services to the lowest charge level in an area. In certain instances these restrictive measures have been applied to services provided to out-patients of the hospital. The impact of such arbitrary and restrictive practices has been to force physicians to admit patients so that payment provided for diagnostic services would be equitable. These trends make it necessary for certain existing provisions of the Medicare law, and/ or regulations implementing that law, to be set aside if this for- ward step can be effective. In conjuction with our work on the Voluntary Effort program, the college has studied some methods of facilitating pre-admission testing. We are pleased to offer the committee sorie of our con- culusions. There are certain medical conditions for which a test result produced seven days earlier might not be valid at the time of admission. The Committee should consider 72 hours as a medically appropriate time interval for pre-admission testing. 56-0710-80-57 ~ PAGENO="0898" 890 Individual medical staffs involved should have the respon- sibility for determining (a) appropriate and acceptable laboratory facilities to perform pre-admission tests for inclusion in the patient's permanent record; (b) appropriate and acceptable testing- to-admission time spans (with the possibility of allowing as much as a seven day period for certain less sensitive procedures); (c) criteria to ensure that patients observe proper medical preparation for testing (i.e., tests that require pre-medication, avoidance of foods, etc.) when outside of the hospital environment. In sum, the College agrees with the Committee's approach to cost containment through pre-admission testing; however, we trust that approach will be tempered with such reasonable constraints as are necessary to provide medically appropriate facilities and methodologies. Conclusion We recognize, and share, this Committee's concern with health care costs. The College has communicated with our members as to the importance of the Voluntary Effort and the need for all physicians to cooperate in assuring tLe proper use of our health resources. We are proud to be the first major medical specialty to have developed cost containment recommendations for specific areas of med- ical care. These recommendations, in some form, are being used by a number of state and local cost containment committees. The PAGENO="0899" 891 national Voluntary Effort Committee has commended us on our effort and the American Medical Association has informed us that our recommendations have been included in their cost containment package being sent to all state medical societies. Because of the importance we place on this policy position, we are attaching a copy of our recommendations to this testimony (Appendix B). Our actions in attacking cost containment issues demonstrate our sensitivity to inflation, efficiency in the delivery of care, and real costs in the delivery of that care. We have also been active ir~ another area of concern to this Committee, Medicare- Medicaid fraud and abuse. Mr. Chairman, when the bill that became the Medicare-Medicaid Fraud and Abuse Act (P.L. 95-142) was before Congress, the College submitted testimony in support of its intent. The College has participated with the Department of Health, Eduaction and Welfare Inspector General's Office in implementing provisions of the Act. We have published in our official magazine, Pathologist, explanations of the plans of Project Intergrity as they relate to the clinical laboratory. We urged our members to cooperate with the persons carrying out this program. We continue to offer our cooperation in efforts to uncover and correct instances of fraud and abuse in the health care system. Those of our profession and specialty who violate the law should be brought to justice. Mr. Chairman, the College appreciates this opportunity to express our view on the bills under consideration. We will be pleased to answer any questions you or members of the Committee may have. Thank you. PAGENO="0900" 892 Appendix A June 1979 - College of American Pathologists - Justification for Further Study of Reimbursement Methods Based on DHEW Study of Reimbursement and Practice Arrangements of Provider-Based Physicians, prepared by Arthur Andersen & Co., December 1977. The Arthur Andersen Study, although often cited in arguments against percentage arrangements for hospital-based physicians (MB?), provides ample justification of the need for further study before implementing fundamental changes in reimbursement policies. This is expressed both implicitly by virtue of the many qualifications placed on the data used, and explicitly by the study's concluding recommendations for future research and pretesting. A brief look at the admitted caveats of the data base demon- strates the necessity of future study. Source of Data The Arthur Andersen Study states that it relied only on the surveyed hospitals' knowledge of MB? compensation. The implications of this limited source are: 1. any other source of income, or lack thereof, was arbitrarily reflected in Full Time Equivalent (FTE) computations; 2. the data does not include any direct billing input; 3. only written contracts are included, although it is stated that salary arrangements are generally oral, percentage arrangements generally written. Make-up Data Apart from the limited nature of the source, the Study con- cedes that the data itself contains serious restrictions. These include: PAGENO="0901" 893 1. percentage arrangements were examined without distinction as to whether gross or net revenues were involved; 2. salaried HBPs and those on percentage contracts were compared without distinc- tion as to the net quality of a salary vs. the gross quality of a percentage arrange- ment (e.g., the HBP under a percentage arrangement is paying for fringe benefits an~d, often, certain operating expenses of the laboratory); 3. the elimination of many forms of HBP com- pensation arrangements left a very small sample of pure salary or pure percentage examples; 4. the sample of hospitals was neither large nor random. The Andersen study concludes with a section entitle Recomrnenda tions for Further Research. The study cites the need for data from other sources and, probably, totally mew data." The following specifics are highlighted as requiring additional investigation: 1. The types, quantities and unit costs of various services performed by HBP5 cannot be adequately measured at this time, making it "difficult to link" amounts and types of compensation to the provision of services. Therefore, a more re- liable method of measure should be developed. 2. The accuracy of FTE is unknown. This is a serious shortcoming as FTE is employed for 50-75% of the sample HBPS. More complete information is needed. 3. Estimates of actual hours worked and the nature of that work (teaching, care, etc.) are only approximate. Direct observation and/or time measurement studies should be pursued. 4. Some direct measure of the benefits and expenses paid by HBPs on a percentage arrangement is required. 5. The incentives and motivations of HBPs should be taken into account. That is, why is one form of compensation chosen over another? What is the effect of the various arrangements on productivity, allocation of time, and quality of care? These particular proposals for future study represent only those problems implied by the Andersen study. Certainly many more unknown factors will appear if Section 19 (a) (1) and (2) are implemented. These must be identified and examined before an additional limitation such as 19 (a) (3) is considered. Arthur Andersen clearly anticipated this, as expressed in the report' s recommendations, following. Finally, we believe that as major changes are contemplated in the way HBP5 arere imbursed under public programs (such as the proposed Talmadge bill), all major new policies should be pretested under controlled conditions before being implemented on a nationwide basis... Such information should form an essential ingredient in the design of new reimbursement procedures. PAGENO="0902" 894 Appendix B COLLEGE OF AMERICAN PATHOLOGISTS Recommendations on the Voluntary Effort on Hospital Cost Containment As approved by the Board of Governors of (he College of American Pathologists, August 1978 The College of American Pathologists sup- ports the Voluntary Effort on Hospital Cost Containment. This program is sponsored on a national level by the American Medical Association. the American Hospital Associa- tion and the Federation of American Hospi- tals. and now is being implemented on the state and local level. In an effort to assist pathologists and others working toward the containment of health care costs, the College has set forth recommenda- tions which it believes could lead to a better understanding of the appropriate utilization of clinical pathology laboratory services and of the charges for such services. The College urges local and state voluntary cost contain- ment committees to study these recommenda- tions with the possibility of including some or all of them in programs of cost containment developed by the committees. The College will serve as a national repository for reference materials on the following recommendations. Materials will be made available on request. I. PRE-ADMISSION TESTING Laboratory testing prior to admission for ap- propriate elective hospitalization may reduce length of stay. which may reduce the total cost of the hospitalization. Patients should report to the hospital laboratory for their pre- admission laboratory testing. Upon admission to the hospital. test results would become a part of the inpatient record. To facilitate the in- clusion on inpatient records of pre-admission testing done outside of the hospital, the testing laboratory should conform to the attached policy guidelines established by the College of American Pathologists. CAP Recommendation: State and local cost containment committees should consider sup- porting pre-admission laboratory testing pro- grams for appropriate elective hospitalizations in an effort to reduce length of stay. II. REVIEW OF STANDING ORDERS FOR LABORATORY SERVICES Each medical staff should have a committee of its members to review all standing orders, including standing orders for laboratory ser- vices. This committee may be the utilization review committee, medical audit committee, or some other committee which has the respon- sibility of peer review in their hospital. Stand- ing orders which are not appropriate (in this context, appropriate refers to both overutiliza- tion and underutilization) contribute un- necessarily to the cost of hospitalization. The committee which reviews standing laboratory orders should have the hospital pathologist as a member. The committee should review both the standing orders for admission as well as standing orders (including "daily orders") for inpatients. CAP Recommendation: Each hospital should have a committee of its medical staff, which in- cludes the hospital pathologist as a member, to review all standing orders for laboratory ser- vices. UI. LABORATORY UTILIZATION Frequently duplicate testing is done on pa- tients who have been admitted to the hospital from the emergency room where initial labora- tory tests were ordered. Efforts should be made to expedite the transfer of test results from the emergency room to the inpatient chart to avoid duplicate testing. The medical staff should be sure that an analysis of laboratory test ordering by the medical staff is a component of the regular medical audit of total patient care. The medical staff of an institution must have available to it a ready source of up-to-date in- formation on appropriate procedures in labora- tory medicine. CAP Recommendation: a. A continuing medical education program should be estab- lished at each hospital which should include PAGENO="0903" 895 guidance on the proper utilization of laboratory services. b. Regular medical audits of patient care should include a component which careful- ly reviews the ordering of laboratory tests. IV. LABORATORY CHARGES In caring for the patient, the individual physician decides the course of treatment which includes the ordering of laboratory tests. A physician obviously cannot be ex- pected to know the charge for each item or ser- vice ordered for the patient. However, physi- cians should be aware of the customary charges for commonly performed procedures, including laboratory services. Often the charges for laboratory tests may be determined not so much by the cost of pro- viding the procedures, but by the hospital's need for revenue from the pathology depart- ment to finance other non-revenue producing services. Thus the laboratory charge frequent- ly includes, in addition to the direct laboratory costs and indirect expenses, a component ade- quate to enable laboratory charges to help sup~ port non-revenue producing departments. The voluntary cost containment committee should educate itself and the members of the medical staff concerning this practice and the extent to which it alters laboratory charges in their hospital. A recent study has shown1 that, when cor- rected for inflation, direct laboratory costs per admission in both teaching and non-teaching hospitals were lower in 1976 than in 1972, showing that "pathology departments on both the practice and academic setting (have) achieved cost containment." Every patholo- gist should strive to continue to be sensitive to the direct laboratory costs which are, or should be, under his control. However, no amount of cost sensitivity in the laboratory can affect in- direct costs or contributing margins, the most 1. Straumfjord, Jon V., Jr., Report of Committee on Quantification of Resources Need for Academic Clinical Laboratories to Association of Pathology Chairmen, 1977. prominent of which is general inflation. CAP Recommendation: Voluntary cost con- tainment committees should make an effort to emphasize to physcians the need for an au'are- ness on their part of the charges generated by the ordering of commonly performed proce- dures, including laboratory tests. V. ROLE OF TRAINING PROGRAMS IN TEACHING COST EFFECTIVENESS The overall concept of the cost of medical care must be taught to young physicians in their training programs. Resident physicians should be knowledgeable of not only the proper utilization of the laboratory but also should be aware of the resultant charges. in the past, em- phasis has been placed on scope or complete' ness of the workup. This is appropriate provid- ed the studies are required. The following recommendation is consistent with the National Commission on the Cost of Medical Care's recommendation No. 38, as ap- proved by the AMA House of Delegates. CAP Recommendation: Resident training pro- grams should expose physicians irs training to the appropriate utilization of the laboratory and to the charges resulting from that utiliza- tion. VI. COMMON PURCHASE OF LABORATORY SUPPLIES Considerable savings can be realized by the purchase of laboratory supplies in large volume. Hospitals should investigate the possibility of combining their orders on sup- plies that are commonly used in order to receive the most advantageous discount. In those areas where a good working relationship between hospitals exists, common purchasing of high volume supplies should be investi- gated. CAP Recommendation: Hospitals within a locality or region should investigate the joint purchase of high volume laboratory supplies to receive volume discounts. PAGENO="0904" 896 COLLEGE OF AMERICAN PATHOLOGISTS POLICY STATEMENT PRE-ADMISSION DIAGNOSTIC TESTING A. A single high quality of pathology laboratory service should be available to all patients whether they are ambulatory or are admitted to a hospital. B. Alternate responsibility for the deterrnina- tion of the acceptability of laboratory deter- minations for use by committees of a medi- cal staff should rest with the individual medical staff involved. C. Laboratory procedures performed prior to admission of hospitalized inpatients. which are to be included in the official hospital medical records, must be performed in a laboratory acceptable to the hospital medi- cal staff and which meets standards at least as stringent as those of the hospital's laboratory and: D. Laboratories providing laboratory pro- cedures used by the hospital's Utilization Review Committee (or other similar com- mittee) for the purposes of current review, must meet standards acceptable to the hos- pital's medical staff which must be at least as stringent as those of the hospital's lab- oratory and: E. Laboratories providing laboratory proce- dures for these purposes must meet, where applicable one or more of the following con- ditions: 1. Maintain standards at least equal to the CAP Inspection and Accreditation pro- gram or 2. Maintain standards required for certifi' cation under title XVIII (Medicare Law) or 3. Maintain standards required by the Clinical Laboratory Improvement Act of 1967 or 4. Maintain standards as required by the Joint Commission on Accreditation of Hospitals or 5. Maintain standards as required by state licensure laws and/or regulations and F. These laboratories should provide test pro- cedures as required to ensure that the medical staff can discharge its medical responsibility to its patients. Procedures should be performed within a medically ap- propriate time interval prior to admission. i,e., within 72 hours in most cases. G. All physicians must assume the moral. legal, ethical and professional responsibility for the services they provide or which are provided under their direction. H. Nothing in the implementation of concur~ rent utilization review should compromise the ability of hospital pathologists to pro- vide laboratory services to patients. PAGENO="0905" 897 Mr. WAXMAN. Thank you. We very much appreciate hearing your views on these issues that are before us. Dr. Carter. Mr. CARTER. Thank you, Mr. Chairman. I commend you on your statement. Certainly we will give it study and considerable consideration. Thank you. Mr. WAXMAN. Mr. Dannemeyer. Mr. DANNEMEYER. I was interested in your statement about op- posing competitive bidding for clinical laboratory services. It made reference in one point in the statement that this provision in the past has led to restricted patient and physician rights, slipshod, fraudulent work. At least that is what the written statement says. Can you tell the members of this committee where this provision was tried for bidding, and how long it lasted, and how you came to the conclusion that you did what you said it did? Dr. HUTCHENS. Yes, Congressman. In addition to our philosophic statements, we do know of two circumstances where competitive bidding did result in inferior laboratory services and a lot of associ- ated problems. I don't have all those details with me. We would be pleased to provide the information we have to the committee, if you would wish. Mr. DANNEMEYER. Thank you, I have no further questions. Mr. WALGREN [presiding]. On behalf of the committee, I would certainly like to express our appreciation for the time and effort that went into your testimony. Thank you very much, Dr. Hutchens. Dr. HUTCHENS. Thank you. Mr. WALGREN. The next witness will be the Hon. Tony Coelho, a member of the House of Representatives from California. We welcome our colleague to the subject before us, and we wel- come you to the committee. STATEMENT OF HON. TONY COELHO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA Mr. COELHO. Thank you, Mr. Chairman. Mr. Chairman, members of the subcommittee, it is an honor and a pleasure to appear before your panel today to speak in strong support of your bill H.R. 5544, which will amend our medicaid program to insure that the continued medical care which is essen- tial for so many disabled individuals will not be taken away from them when they attempt to reenter the working world and to move back into self supporting activity. I applaud your action in proposing this legislation and hope that the Congress will act favorably on this bill to complete our efforts this year to remove work disincentives under our social security, SSI, medicare and medicaid programs. The House has approved the Supplemental Security Income Dis- ability Amendments of 1979 which provide new encouragements to disabled SSI beneficiaries to attempt new work efforts without the immediate threat of losing their SSI assistance, and the changes in the medicaid program proposed in your bill, Mr. Chairman, are an essential part of the initiative to encourage those with chronic disabilities to return to gainful employment. PAGENO="0906" 898 My awareness of the need for these changes grows out of my role as a member of the National Implementation Task Force of the Epilepsy Foundation of America, and out of my personal experi- ence with a disabling condition, epilepsy. I have epilepsy, but I am fortunate because my condition is controlled and I have been able to enjoy a challenging and successful career. Many epileptics, how- ever, some 40,000 on the SSI roles, are not so lucky. Many are totally disabled by their condition, and many, even if their seizures eventually are brought under control, find that any attempt to work may be short-lived if seizures should recur, especially while on the job. The National Implementation Task Force with which I am asso- ciated, is responsible for implementing the recommendations of the Commission on the Control of Epilepsy and Its Consequences. One of the Commission's central recommendations was that urging that our social security and SSI disability programs and our medicare and medicaid programs be amended to eliminate the revolving door characteristics of these programs which under the present struc- ture inhibit so many disabled individuals' efforts to become self- supporting again. Your bill would insure that eligibility for medical benefits will continue for former cash assistance beneficiaries whose disabling conditions continue even after their eligibility for cash benefits ends due to work activity. The continuation of medical benefits is of crucial importance for individuals who suffer from chronic conditions such as epilepsy. Under the present structure of our SSI and medicaid programs, when these individuals' eligibility for medicaid ends due to income from work activity, those persons who cannot afford to pay for their own drugs and medical care privately may find themselves without the medication they need to control their seizures. Even if some are able to find an affordable private health plan, many cannot buy insurance because some companies refuse to insure them, and I can justify that from personal experience, Mr. Chair- man. When health benefits under medicaid terminate, the individ- ual with epilepsy then faces the possibility of recurring seizures, loss of employment, and a return to dependency on cash benefits. In other words, our current program structure in far too many cases virtually sets up the chronically disabled for a frustrating cycle of dependency. You have recognized the predicament of so many people whose medical impairments cannot be cured but can be overcome, and the bill will provide needed and sensible adjustments.. in our medicaid program. I know that your subcommittee has before it numerous other health and medicaid proposals, and I would just like to reiterate my strong conviction that the bill H.R. 5544 is of vital importance to the low-income disabled. I hope that H.R. 5544 will not become lost as you consider the other health issues before you and that the subcommittee and the full committee will report. this measure favorably. Thank you for the opportunity to express my position. Mr. WALGREN. Thanks for taking the time to give us your per- sonal experience and views. So often in these proceedings it is so PAGENO="0907" 899 impersonal, and it is of great help, as you know, to be directly involved in something because it has so much more meaning. Dr. Carter? Mr. CARTER. Thank you, Mr. Chairman. I think it is an excellent idea to entice and to help those who are on SSI by giving them jobs, if we can get them, to maintain them. Certainly that is a reasonable policy. Mr. COELHO. Dr. Carter, I support the concept of them going off of the assistance program when they do have a job, but it is just that short period of time there that they need to have some income to pay for the drugs to keep them off the benefits program. Mr. CARTER. Certainly I agree with that. I agree with that idea, and I support it. We have considered legislation similar to this previously. I realize you have this condition yourself, and I think you are brave to come up here and tell us. And you are in great company. Some tremendously famous men have had epilepsy, in- cluding, I believe, Julius Caesar and Napoleon. Mr. COELHO. That's right. Mr. CARTER. And so perhaps we have before us a Julius Caesar or a budding Napoleon. Thank you, Mr. Chairman, Mr. COELHO. I just might say, Dr. Carter, that when there was an attempt to use my condition against me in the campaign, I pointed that out. I am not saying I was claiming to be Caesar or somebody else, but claiming that there were many capable men in the history of our country or the history of the world who have this particular problem. Mr. WALGREN. Mr. Dannemeyer? Mr. DANNEMEYER. You know, when you take these programs one at a time and look at them, no one can quarrel with the necessity or the merits from the standpoint of philosophy or what have you of continuing medical benefits for a person with a modest income that we are talking about. But you know, we have other responsi- bilities here, and when you put all this together, we come up with-I read in the paper yesterday, I think, or this morning where the Congressional Budget Office is going to revise the estimate of the deficit for 1980 up to $40 billion--- Mr. COELHO. Well, if I can just address that--- Mr. DANNEMEYER. And you know, that the last sale of Treasury bills was at an interest rate of double digit, whether it was 11 or 12 percent, and the Federal Reserve Board to the private sector has jacked the interest rate on the available credit up to the point where it is 14 or 15 percent. In other words, the people running the economic system, at least the fiscal side, are attempting to say to the American people, you must stop spending so much money, you must bring your spending in line with your income, and we as a Congress are going blithely along, I guess, saying it is all right for everybody else but not for us. How do we reconcile that? Mr. COELHO. Well, as one who supports the idea that we need a balanced budget, and knowing your position on most of these issues, I would think that that you should become the strongest advocate for this bill in this committee. The reason for that is that under the current system all you are doing is in effect forcing PAGENO="0908" 900 people to stay on the program. Now, what I am advocating here is a way to get people off of the Federal assistance program. Let's take epilepsy, which is what I am familiar with. You have seizures and so forth, so you lose your job, and then you qualify for assistance. You get the assistance, you then can afford to get the drugs, and then you have controlled your problems. Most epilep- tics, 80 percent of them, can control their epilepsy, so that seizures are controlled. Then you get a job. You lose your assistance, but you don't have the finances to go ahead and afford the drugs, so that you are on the job a few weeks, you have another seizure, immediately you are fired, and you go back to the Federal assist- ance program. That doesn't make any sense. So that as an advocate for trying to control Federal spending you should be in effect saying let's keep those people on the job, let's help them through the transition period so that they can be pro- ductive, working citizens of this country instead of by our current system forcing them to stay on assistance programs. And that is what the system does. And this bill, which I am advocating, does the very thing that you talk about: It tries to cut down on unneces- sary Federal spending. And that is what we are doing under the current law. And I am advocating let's help those people, let's help them get out from under Federal Government, let's help them go out and become productive citizens. Under the current law today, we are not doing that, and if-- Mr. DANNEMEYER. What is the definition-how long is this tran- sition period you are talking about? Mr. COELHO. Well, I assume in the legislation-I don't know, the staff may be able to tell you. I assume there are some controls. There is, in other legislation that we have put through on SSI, there is a length of time. I don't know specifically what it is. It is a transition period. I assume it is based on medical factors. But you don't really need a great length of time. You are just talking about helping them get back on their feet and then take it over and pay for the drugs themselves. But you should be an advocate of this, a strong advocate of it. Mr. DANNEMEYER. Thank you. Mr. WALGREN. Thank you very much for your testimony. Mr. COELHO. Thank you. Mr. WALGREN. The committee will resume meeting at 1:30 and we will stand adjourned until then. [Whereupon, at 12:21 p.m., the subcommittee recessed to recon- vene at 1:30 p.m. the same day.] - AFFER RECESS [The subcommittee resumed the hearing at 1:30 p.m., Hon. Andrew Maguire, presiding.] Mr. MAGUIRE. The subcommittee will come to order. We are going to rearrange the schedule a little bit this after- noon. The next witness will be Merritt Jacoby, vice president for Federal programs of Blue Cross and Blue Shield. Mr. Jacoby, would you proceed with your testimony? PAGENO="0909" 901 STATEMENT OF MERRITT W. JACOBY, VICE PRESIDENT, BLUE CROSS AND BLUE SHIELD ASSOCIATIONS Mr. JACOBY. Mr. Chairman, the Blue Cross and Blue Shield Associations are national coordinating agencies for the 69 Blue Cross and the 70 Blue Shield plans in the country. The plans provide health care coverage for about 83 million people and serve almost another 20 million as fiscal agents or intermediaries for the medicare, medicaid and CHAMPUS programs. Directly or indirect- ly the plans serve approximately half of the Nation's population. The associations have presented a written statement which ad- dresses a great majority of the matters under your consideration. I ask that statement be accepted for the record. I will not read the statement in its entirety because of its length but I would like to summarize the Associations' positions on certain of the subjects you are addressing in these hearings. If the subcommittee wishes us to provide any supplementary information which discusses in greater detail any of the positions we have taken or you would like additional support or rationale for those positions we would be pleased to respond to any request of that sort. Mr. CARTER [presiding]. Your statement will be included for the record and we will listen to your summary now. Mr. JACOBY. Thank you. With respect to the Shannon amendment which proposes volun- tary certification of coverage policies that supplement medicare benefits the associations support the objectives expressed. We do have concerns about the procedural means proposed to achieve those objectives. These concerns are stated in some detail and are explained in our written statement. In particular we do not see the need for a Federal intervention in an area where the States, the National Association of Insurance Commissioners and the private sector have been taking positive action. With respect to H.R. 4444 which proposes certain changes in current reimbursement arrangements for health maintenance org- nizations we feel these changes will be an improvement that eases administrative problems for these health care providers. We recom- mend that a generic definition of HMO's be incorporated into the bill in place of reliance on title XIII for the purposes of determin- ing eligibility for medicare reimbursement. We do not feel the medicare beneficiaries should be denied access to about half of the HMO's in the nation because those HMO's are not qualified under title XIII. The associations see second opinions for elective surgery to be an important development in the prevention of unnecessary surgery. We also believe they would be positive in affecting the quality of care. It is not clear to us that second opinions will reduce the cost of care and we seriously question the proposed mandating of second opinions in all cases. We feel second opinions are not necessary to support some obvious and universally accepted procedures. In addition there would be a considerable challenge in educating the aged and disabled to assure a second opinion is always obtained and appropriate care is therefore not denied. PAGENO="0910" 902 We agree with the intent of H.R. 2445 to preserve and enhance philanthropic support for hospitals. In fact we recommend expan- sion of the legislation to encompass philanthropic support of all providers of health care. The associations support the proposed legislation which allows the Secretary to assure restoration to the medicare trust funds of medicare overpayments when those overpayments are recovered by withholding medicaid payments to hospitals. Mr. Chairman, ~that concludes my summary statement. We have submitted a substantial amount of testimony as I indicated cover- ing almost all of the matters under consideration. I would like to be able to say that I am prepared and qualified to answer any questions on any of those matters however I am afraid I might not be. I would request you allow me the option if I am questioned to take the question along and submit a written answer. [Testimony resumes on p. 1022.] [Mr. J acoby's prepared statement and attachments follow:] PAGENO="0911" 903 Statement of the Blue Cross and Blue Shield Associations Presented by Merritt W. Jacoby Vice President Mr. Chairman and members of the Health Subcommittee, my name is Merritt W. Jacoby. I am Vice President of the Blue Cross and Blue Shield Associations. The Associations are the national coordinating agencies for the 69 Blue Cross and 70 Blue Shield Plans in this country. The Plans provide privately under written health care coverage for about 83 million people and serve almost another 20 million as fiscal agents or intermediaries for the Medicare and Medicaid and CHAMPUS programs. Directly or indirectly, therefore, the Plans serve approximately half of the nations population. In respons&to your invitation, I should like to present the view of the Associations, on the series of draft bills under consideration, which relate to the Medicare and Medicaid programs. We have previously offered testimony to the Congress on a great majority of the matters being considered by this Subcommittee. Therefore, we are providing copies of those statements. In addition, we would like to comment on certain of the matters now under consideration which we have not previously addressed in testimony. Copies of prior testimony presented by spokesmen of the Associations which pertain to the draft bills under consideration are furnished for your reference. They are: Attachment I Medicare Complementary Coverage Attachment II HR 4475 To Make Improvements in the Medicare and Medicaid Programs - 7/12/79 Attachment III HR 4444 Medicare: Reimbursement for HMO's 7/13/79 Attachment IV HR 4281 Mandatory Second Opinion for Elective Surgery in the Federal Employee Program 8/13/79 PAGENO="0912" 904 Attachment V HR 4000 A Bill to ~iend The Social Security Act - 6/18/79 Attachment VI Reimbursement of Physicians in Teaching Hospitals 9/16/76 Attachment VII 5. 505 Medicare-Medicaid Administrative and Reimbursement Reform Act of 1979 3/14/79 Medicare Complementary Coverage As part of the 83 million people we serve, we provide hospital coverage to almost nine million individuals under Blue Cross Complementary programs, and medical/surgical coverage to over eight million individuals under Blue Shield Medicare Complementary programs. These Medicare Complementary coverage programs, as well as our other private sector programs are subject to specific state laws and state regulations, pursuant, in most cases to special enabling legislation. As a major underwriter of Medicare Complementary coverage, we would like to offer our coments on the Shannon Amendment which has been added to }-LR. 4000. Our analysis of this proposed legislation is based on six criteria--definition (what policies and individuals are covered), methodology (mandatory versus voluntary certification), minimum standards, information, studies and reports, and penalties. Definition There is no stated definition of what constitutes a Medicare eligible or what types of policies are being referred to in the bill. We would suggest a restatement of the definition in order to accomplish what we understand to be the true intent of such legislation -- to protect the PAGENO="0913" 905 elderly who have been subject to the abuses so vividly detailed and dis- cussed in previous hearings. We do not believe legislation should address group supplemental policies because these types of policies appear to be causing no problems. However, we would suggest that the definition be modified to include non-group programs such as dread disease and hospital disability income policies which, while they may not be technically" Medicare supplemental policies, are the types of abuse-prone programs targeted to the elderly. Methodp]qgy We believe that the voluntary certification of acceptable policies will not stop the sale of "substandard" policies. Carriers will submit to the certification process only those policies which they think will be certified. There is no provision in this amendment which attempts to control the sale of policies which either fail certification or have never been submitted for certification. The states should continue to bear the responsibility for certification of health care policies. To be successful and address the abuses in Medicare supplemental sales, the program must be mandatory. Minimum Standards Our principal concern with the proposed 75% loss ratio is that the 75% figure may be viewed as a maximum and not a minimum. This amendment limits pre-existing condition clauses to 60 days. We believe that limitations for pre-existing conditions should be practical and actuarially sound. 56-071 0 - 80 - 58 PAGENO="0914" 906 The "no cancellation clause" is a concept that causes us no problems. "Language which can be understood by purchasers", as the standard is defined in this amendment, does not provide an adequate guideline to in- surers in rewriting their policies. We would urge that a clearer definition be developed and that adequate lead time be provided to carriers to re- write their policies. The provision, "prohibits provisions which duplicate Medicare coverage", will not address the issue of duplicate supplemental policies. We feel such a provision would have to be strengthened to adequately address duplicative coverage. The practical application of the disclosure provision would prove highly restrictive, since subscribers often make purchasing decisions based on a mail solicitation, without the presence of a sales agent. We agree with the suggestion of a toll free number, but urge that it be a service center where subscriber inquiries might be resolved, rather than just the general insurance company office. Information The Shannon Amendment requires that the Secretary shall provide a seal of approval to approved policies and shall adequately publicize the list. The amendment does not require the Secretary to encourage states to approve for sale only those policies which have met federal standards. PAGENO="0915" 907 Inasmuch as the federal certification process will operate inde- pendently of any state certification or approval processes, the posssi- bility exists for policies to receive federal only, state only or federal and state approvals. We are concerned that the Medicare population might be confused rather than enlightened by a plethora of seals and approvals. Some states have already set minimum standards for their policies. The National Association of Insurance Commissioners has developed and approved model legislation and regulations for states to adopt and implement locally. Were state and federal minimum standards to deviate, both would probably suffer, but more importantly, the larger issue of protecting the Medicare eligible would be further confused. Studies and Reports We urge that the government study be done in concert with various other public and private studies either currently underway or planned. Penalties There are two penalty clauses referenced in the Shannon Amendment. The first makes it unlawful to provide false or mi~leading information for the purpose of obtaining or maintaining certification. However, there is no stated penalty other than "unlawful'. Considering that certification is voluntary and that the ability to sell Medicare supple- mental coverage is not prerequisite to having achieved certification, this provision is of questionable merit. PAGENO="0916" 908 The second penalty clause deals with the illegality of misrepresenting oneself as an agent of the Federal Government and thus provides penalties dealing with agent abuses does not go far enough. The penalty appears to only address the issue of "pretended character". Lack of information, disclosure, uncertified mail order policies, policy misrepresentation, and unfair sales practices should also be cited as unlawful. Further, there is no mention of how to deal with cases where an agent knowingly sells duplicate coverage to an individual. Given the cost to the individual and the health care system and the potential adverse effects on containing health care costs, this issue needs to be addressed. While the Blue Cross and Blue Shield organizations support the objectives of this amendment, we question some of the procedural means developed to achieve them. We strongly reiterate our concern with federal intervention in an area in which the states, the NAIC and the private sector have been taking positive action. You may be interested in reviewing Attachment I, which is testimony on complementary coverage the Associations presented to this comittee in June of this year. H. R. 4444 -- Medicare Reimbursement For HMOs Over 1.5 million of our subscribers are served through 65 HMOs which are operated by or affiliated with Blue Cross and Blue Shield Plans and, therefore, we have particular interest in H.R. 4444. We believe that HMO membership can be particularly valuable to Medicare beneficiaries, however, very few beneficiaries have enrolled in HMOs PAGENO="0917" 909 because current Medicare reimbursement posed administrative problems for many HMOs. The concepts in H. R. 4444 offer significant improve- ment. H. R. 4444 limits HMOs eligible for the modified Medicare reimburse- ment to those qualified under Title XIII of the Public Health Service Act. While this may be legislatively expedient, we do not believe that it serves the best interests of the nation's Medicare beneficiaries. Historically, a "dual choice" provision was included in Title XIII to assure that federally supported HMO5 would have reasonable access to the market share. Many HMOs which were not developed with federal funds have also sought qualifi- cation to obtain equitable consideration in their competitive marketplace. The result is that about half of the HMOs in the nation have become federally qualified. There are many HMOs, however, which are qualified under state laws that may never seek federal qualification. Their reasons do not relate to the issues of quality of care or financial stability. These HMOs, licensed or certified under state statutes, are regulated by one or more state agencies. Many contract with the Office of Personnel Management to provide coverage for federal employees. We believe that Medicare beneficiaries should not be denied access to half of the HMOs in the nation merely because they are not federally qualified under Title XIII. We recommend that a generic definition of HMOs be incorporated in place of reliance upon Title XIII for the purpose of determining eligi- bility for Medicare reimbursement. The authority and responsibility for approval of individual HMOs for participation in Medicare should be PAGENO="0918" 910 placed with those otherwise responsible for the Medicare program. Given these provisions the number of HMOs available to Medicare beneficiaries would be expanded significantly. Previous testimony we have given regarding Medicare reimbursement to HMOs is reflected in Attachments II and III. H. R. 3854 -- Quality of Surgical Care Act of 1979 This bill proposes a second medical opinion be required as a condition for payment by the Medicare and Medicaid programs of services incurred for elective surgery. Under certain conditions, the Associations see second opinions in support of elective surgery to be an important development in the prevention of un- necessary surgery. We also see second opinions in selected cases as being a positive impact on the quality of care. We have doubts, however, about the cost containment results from second opinions and would seriously question the bill's proposed mandating of second opinions in all cases. We believe that for a variety of diagnoses, the acceptance of elective surgery as the recognized and appropriate course of treatment can be so obvious and universally recognized as to make second opinions inappropriate and unnecessarily expensive. Examples of such diagnoses are hernias, gallbladder and cataract extractions. We also foresee problems in educating the aged and disabled on the need for second surgical opinions and, in fact, obtaining them. Should the mandate for a second opinion be established, government payment of the health care services would be precluded where elective surgery was under- PAGENO="0919" 911 gone but a second opinion was not secured in advance. Thus, the Medicare beneficiary or the Medicaid recipient could be liable for the costs related to the surgery even though the surgery was, in fact, appropriate. Additionally, we foresee operational problems with the administration of a mandated second opinionfor elective surgery. The bill proposes that Professional Standards Review Organizations verify that a second opinion was obtained. Often this could only be done once the patient is already scheduled for surgery and admitted to the hospital. Thus, unnecessary hospitalizations could result as could delays in scheduling surgery while a second opinion is obtained. Further problems could also occur in obtaining the surgical opinions from the first and second physicians as there might not be available documentation from the patient in the provider setting. Resolution of conflicting medical opinions might also cause problems where the patient opts for the surgery. To summarize, we feel that a second surgical opinion in selected, cases does have a positive impact on the quality of care and the prevention of unnecessary surgery. However, we would oppose mandating second opinions in all cases as not being cost effective, unnecessary in many cases and thus disruptive to the receipt of necessary care for the beneficiaries who would not understand how to seek surgical care under a mandated arrange- ment. Additional views of the Associations on second surgical opinions were presented in testimony before a subconinittee of the Committee on Post Office and Civil Service in consideration of H. R. 4281, see Attachment Iv. PAGENO="0920" 912 H. R. 1821 -- Reimbursement of Teaching Physicians This bill would amend the Social Security Act by requiring that physicians providing professional services in a teaching setting, whether these physicians are employed by the hospital or an affiliated university or medical school, are reimbursed on a charge basis unless the hospital elects cost reimbursement and complies with certain specified conditions. At this time, rather than this bill, we would prefer Section 8 of S. 505, now included in H. R. 934, which would postpone implementation of those provisions of the Social Security Act now in effect (Section 227 of P. L. 92-603), to allow adequate time for reasonable implementation of this section. Detailed testimony analyzing the current provisions and the study conducted by the Institute of Medicine/National Academy of Science is attached, (Attachment VI). H. R. 934 Medicare and Medicaid Amendments - Senate Finance H. R. 4000 A Bill To Amend The Social Security Act H. R. 4475 Medicare and Medicaid Improvements Act These bills as passed or considered by the Senate Finance Committee and/or the Ways and Means Health Subcommittee represent more than 85 modifications or changes in the Medicare and Medicaid programs. We have reviewed, analyzed, and commented in detail on many of those proposed changes and respectfully offer our previous testimony for your consideration (see Attachments II, V and VII). PAGENO="0921" 913 H. R. 3531 -- To Provide For Inclusion Of Services Rendered ByA Certified Nurse-Midwife Under The Medicare and Medicaid Programs The inclusion of the services rendered by a certified nurse-midwife under the Medicare and Medicaid programs would have little impact on the Medicare program due to the age and medical condition of the majority of the Medicare beneficiaries. In the Medicaid program, however, a large number of Medicaid recipients could qualify for this type of service. From the Medicare perspective, we question the inclusion of the services of nurse-midwives as a benefit. Medicare beneficiaries are either aged or disabled. Thus, pregnancy would either be precluded by age or complicated by the End Stage Renal Disease or other disability which entitled the individual to Medicare. Because mid-wives function independently of a physician and handle pregnancies where complications are not anticipated, it would not seem that the Medicare population would or should receive the services associated with their pregnancy from a nurse-midwife. We foresee two significant problems associated with this proposed benefit. First, mid-wives have limited access to hospital facilities. Thus, problems could result from lack of ability to admit and treat patients which require hospitalization in the course of their treatment. Second, we do not feel that the services of certified nurse-midwives under the conditions noted should be considered independently from the services furnished by nurse practitioners and physician extenders. Currently, the Medicare program will cover only the services of these PAGENO="0922" 914 personnel when rendered under the supervision of a physician and when the services are billed by the physician. Thus, under H.R. 3531, similar services would be covered when rendered by a certified nurse-midwife, but not when rendered by either a nurse practitioner or physician extender. Under Medicaid, states currently have the option of covering the services of certified nurse-midwives. This bill would require states to offer this service as one of the basic Medicaid program services. While we are not opposed to states covering the services of nurse-midwives, we do not support a mandate requiring this coverage. Rather, we feel the states' Medicaid Administrators should retain the authority to decide whether or not nurse-midwives' services should be offered as a benefit under their programs, based on their evaluations of their state's needs and resources. Thus, for purposes of Medicare, we do not feel that the coverage of certified mid-wife services is a needed or appropriate benefit. For Medicaid, we would recommend that coverage of nurse midwife services remain an option of the states until such time that a uniform package of Medicaid benefits is implemented under Title XIX nationally. H. R. 2445 -- Encouragement of Nonprofit Hospital Philanthropy H. R. 2445 is a bill to amend the Social Security Act to encourage philanthropic support for non-profit hospitals. The bill sets forth government policy encouraging philanthropic support for health care, especially support of experimental and innovative efforts to improve PAGENO="0923" 915 the health care delivery system. Specifically, the bill states that gifts, grants, and endowments, and income therefrom, shall not be deducted from any operating costs of non-profit hospitals in determining reasonable costs under Title V, XVIII, and XIX. The second major provision prohibits states from enacting laws or regulations limiting revenues of hospitals which consider certain philanthropic amounts as revenues. The same pro- hibition is placed on federal cost containment legislation. The intent of this legislation is to encourage philanthropic contri- butions to hospitals. These contributions have decreased in recent years, partly due to HEW and state regulations which offset these funds against operating expenses or treat them as revenues. The bill successfully removes the major obstacles, cited by fund raisers, in the quest for the philanthropic dollar by non-profit hospitals. We agree with the intent of H.R. 2445, to preserve and enhance philanthropic support for hospitals in the voluntary sector. The effect of the provisions of this bill, if enacted, would have the users of health care services pay the costs of that care. We support that proposition as well. Nevertheless, we have some concerns about the proposed bill. 1) The specific provisions of the bill do not fully support the policy enunciated in Section 1132(a), that is "support of experimental and innovative efforts to improve the health care delivery system." We encourage expansion of this legislation to encompass philanthropic support of all providers PAGENO="0924" 916 of health services, including those providers developing care in settings which are less expensive than hospitals. 2) It is not clear how Section 1132(c) would affect philanthropy that is intended/used for payment for services of those unable to pay. It does not seem approprtate that, if members of a community provide funds to pay for care of the medically in- digent, a state should be precluded from considering those funds as part of operating revenues. To the extent such funds are not considered operating revenues, these revenue requirements will be shifted to other payers. 3) Section 4(b) of the bill states that subsection (c) shall apply to laws and regulations which take effect after the date of enactment of this Act. Such treatment will result in unequal application of the law between the states. States with existing laws and regulations should be re- quired to conform, prospectively, to the requirements of this Act to assure uniform advantage to hospitals and donors. We would be happy to assist the committee in more fully developing this legislation to meet its worthwhile objective. H.R. 4106 -- Medicare and Medicaid Fraud and Abuse Amendments of 1979 Our comments on this bill pertain only to Section 205. This provision would allow the Secretary to adjust the federal matching payments to a state for Medicaid services, in order to recover overpayments due to the Medicare program. Current Medicare program instructions allow state Medicaid assistance programs to withhold Medicaid payments to a hospital to recover over- payments due to the Medicare program. The new provision would allow the Secretary to assure restoration to the Medicare trust funds of amounts recovered through this process. We support the provisions of this section. That concludes our testimony Mr. Chairman. We appreciate the opportunity to appear before you today and would be pleased to answer any questions you might have. PAGENO="0925" 917 ATTACHMENT I * Statement of the BLUE CROSS AND BLUE SHIELD ASSOCIATIONS * on MEDICARE COMPLEMENTARY COVERAGE presented to SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE by David H. Klein Vice President, Marketing June 13, 1979 PAGENO="0926" 918 Thank you very much for the opportunity to speak to you today on a subject which is of concern to all of us. I am David Klein, Vice President of Marketing for the Blue Cross and Blue Shield Associations. The Blue Cross and Blue Shield Associations are the national coordinating agencies for the 69 Blue Cross and 70 Blue Shield Plans which operate as local non-profit organizations, each with its own Board of Directors and each subject to stringent state regulation, pursuant, in most cases, to special enabling legislation. The Blue Cross and Blue Shield Plans nationwide provide health care cover- age to over 86 million individuals under our private sector programs. We provide hospital coverage to almost 9 million individuals under Blue - Cross Medicare Complementary programs, and medical/surgical coverage to over 8 million individuals under Blue Shield !~edicare Complementary pro- grams. Blue Cross and Blue Shield Medicare Complementary coverage programs vary by state, and often within states where we have more than one Plan. * * Reasons for these variations are complex. Depending on specific state laws and enabling legislation, extremes can range from mandating certain * benefit programs to prohibiting these same benefits. Additionally, Blue Cross and Blue Shield Plans pride themselves on their flexibility and responsiveness to *local comunities; often our programs are designed to meet the specific needs of the elderly population in local Plan areas. PAGENO="0927" 919 Two types of programs are written by our Plans. Non-group programs are purchased directly by the consumer from the local Blue Cross and Blue Shield Plan and group programs, where a union, company or association purchases coverage for an entire group. Quite often, the benefits for the over-65 members of the group will be the same as those for the under- 65 individuals, with the benefits provided under the Medicare program carved-out" so as to avoid duplication. I will not concentrate today on group policies since these programs appear to be working well for older Americans. Because group benefit program administrators are knowledgeable about health insurance matters, and because the nature of the group health insurance business is highly competitive, adequate and cost-effective protection is in place for group members. The same protection apparently is not always being *afforded those persons who purchase individual policies. My statement today focuses on these non-group programs. I will first discuss some of the most noteworthy features of our current Medicare Complementary benefit programs. I will.then briefly discuss the three pieces of legislation being considered. We at the Blue Cross and Blue Shield organizations take pride in the public acclaim accorded our Medicare Complementary benefit programs. Let me enumerate some of their most prominent features. PAGENO="0928" 920 First, we offer enrollment that is open to individuals without regard to prior medical care utilization. In some cases, however, our policies do include waiting periods for some pre-existing conditions. - - - Second, we return in benefits to our subscribers over 9O~ of each dollar of premium income. In many cases, our Plans are writing Medicare Complementary coverage programs which result in a financial loss to us becausa benefits paid out and admini- strative expenses do not equal premiums plus investment income. However, recognizing the special needs of the elderly and their limited income, Blue Cross and Blue Shield Plans continue to subsidize these programs as a matter of policy. - Third, recognizing the complex nature of the Medicare program, we have hired special ombudsmen whose sole responsibility it is to educate the over-65 consumer public. These personnel are available to assist in resolving problems that the elderly encounter with Medicare and their Medicare Complementary programs. Fourth, Blue Cross and Blue Shield Medicare Complementary benefit programs are broad in sçpp~. The end of 1977 is the most recent date for which specific benefit data are available. At that time, 8.9 million subscribers were covered for the cost-sharing portion of inpatient hospitalization, 7.5 million were also covered for in-hospital visits, over 6 million were covered for out-of-hospital X-ray and lab, and over 4 million had coverage for home and office visits and nursing home care. PAGENO="0929" 921 - Fifth, the only reason forcancellation of a nolicy is non-payment of premiums. We will not cancel individuals due to utilization or the cost of the services they incur. However, no matter how well respected and highly praised our programs have been, we still have shortcomings to overcome. In this regard, we are currently investigating our own Medicare Complementary coverage programs with the intent of correcting gaps in the coverage being offered. We have met with staff from executive branch agencies, including the FTC and DHEW, to discuss theirconcerns. Further, we have a comprehensive survey of all Blue Cross and Blue Shield Plans Medicare Complementary coverage programs currently underway. (As an aside, let me note that we would be glad to share with this committee the findings of this investigation when it is completed this fall.) Based on the incomplete data we have available now, we detect the fol- lowing small gaps in coverage: - half our programs do not cover prescription drugs out of the hospital. - 21 Plans do not fully cover the copayment charged on skilled nursing facility care. - 18 Plans do not offer coverage for treatment while traveling in foreign countries. 56-071 0 - 80 - 59 PAGENO="0930" 922 While these gaps may need to be filled, they do not represent a major deficiency, and do not affect the majority of our subscribers. Blue Cross and Blue Shield Plans have begun to address these problems. Individual state legislatures and insurance commissioners, as well as the National Association of Insurance Comrnissioners, have also begun to take action to address problems in Medicare Complementary programs. However, we believe the action has not been sufficient to improve these programs, and therefore support the intent of the proposed legislation which we are here to discuss today. Although HR16S, HR2602, and S395 vary in their scope and methodology as to how to curb the abuses in Medicare Complementary programs, Repre- sentatives Brodl;ead, Evans, Pepper and Scheuer, and Senator Chiles and *his distinguished colleagues should all be commended for proposing solu- tions to these problems. In our opinion, though, S395, with some modi- fications, most closely approximates the direction that we feel the Federal Government should be moving in with respect to Medicare Comple- mentary programs. Let me briefly review our difficulties with HR2602 and HR16S and then offer some suggestions for improving S395. While we support the overall goal of HR2602, we feel that voluntary certification of acceptable policies will not stop the sale of sub- standard policies. Carriers will submit to the certification process only those policies they think will be certified. There is nothing in PAGENO="0931" 923 this bill which prohibits the sale of policies which either fail certifi- cation or are never submitted for certification. Further, inasmuch as the federal certification process will operate inde- pendently of any state certification or approval processes, the possi- bility exists for policies to receive federal, or state, or federal and state approvals. This could confuse the elderly rather than enlighten them. Other difficulties we encounter with HR2602 include the definition of "Medicare eligibles." It should be broadened to include non-group programs such as dread disease and hospital disability income policies that are targeted to the elderly. *The certification standards would not, for the most part, pose a major problem for Blue Cross and Blue Shield Plans. The one exception is the requirement "that such policy supplements both Part A and Part B of Medicare." There are some multi-Plan states where the Part A supplemental policy is provided by a Blue Cross Plan and the Part B policy is offered by a Blue Shield Plan because of enabling act requirements. The standards should be modified to permit certification of these policies, as the im- pact on the consumer is negligible. Concerning thepenalities proposed in this bill, the attempt to control duplicate coverage in Section 10 needs further clarification. "Whoever PAGENO="0932" 924 ~.r~p~nl sells a health insurance policy . can be circumvented by an agent never asking whether another policy is owned by the consumer. Finally, the clauses which allow duplicate coverage run counter to cost containment initiatives and further support the need for all states to allow for coordination of benefits. HR165proposes indirect federal regulation of health insurance in effect by providing for the establishment of mandatory standards which states must administer. There are at least three ~ problems with this approach: * - First, enforced federal standards could preclude states from the flexibility required to respond to unique local needs. - Second, direct federal regulation, though only a standby possibility, duplicates existing state regulatory processes. - Third, the federal standards could contradict and impede efforts to improve regulation of those programs which are completed or underway. In this last regard, some states have set minimum standards for these policies already. The National Association of Insurance Commissioners has developed and approved model legislation and regulations for the states to adopt and implement locally. Also, in cooperation with the Department of Health, Education and Welfare, the.NAIC has developed a model buyers' guide to health insurance for people enrolled in Medicare. PAGENO="0933" 925 In addition to the three major problems we see a number of other difficulties with HR165. Let me list some of them. Regarding specific minimum standards: Blue Cross and Blue Shield Plans would have no problem docu- menting the proposed 75% return in benefits of each premium dollar. However, incentives should be established to encourage carriers to return a greater percentage of the dollar in bene- fits to the subscriber. - Limitations on exclusions for pre-existing conditions should be practical and actuarially sound. If limitations are so severe as to cause high risk and force losses, carriers may choose to eliminate their programs, which is not the intent of the legislation. With respect to the simplified languagerequirement, adequate lead time should be provided for carriers to rewrite their p01 icies. - The approach advocated to control the proliferation of dupli- * cate policies runs counter to cost.containment objectives. The act allows subscribers to purchase duplicate policies if a written statement is signed acknowledging such action. Without a requirement in such cases for coordination of benefits, PAGENO="0934" 926 - the individual is motivated to use, perhaps unnecessarily, medical care services. This payment received from two or more policies will exceed the cost of care. - Regarding disclosure provisions, the bill requires that each subscriber be provided the name and address of the sales agent. The practical application of this is highly restricted, since subscribers often make such decisions on the basis of a mail solicitation without the presence of a sales agent. We do agree, though, with the suggestion of a toll-free number, but we urge that it be a service center where subscriber inquiries might be resolved, rather than just the general insurance company number. - -We endorse, in principle, the research activities proposed. They should be done in concert with various concerned groups. However, we would sug- gest a postponment to the proposed second study. Conducting this study concurrently with the first study and before state plans are in place presupposes a need for a Medicare C program before the states and private sector have been allowed an opportunity to respond to the prob- lems which have been identified. As I stated earlier, in principle we support S395, with the modifications I am about to suggest. The measure could achieve the objectives that we all support by relying on the inplace structures the states have created to regulate the PAGENO="0935" 927 insurance business. This appears to be the most cost-effective and least disruptive way to proceed. We further support the recognition and pro- posed utilization of private sector expertise. We feel that input from the National Association of Insurance Commissioners in developing standards will prove invaluable. Let me now recommend some detailed changes which should strengthen or clarify S395. The broad definition given to "Medicare Supplemental insurance' in the bill includes group policies. We suggest a modification to limit the definition and thus the minimum standards to the non-group Medicare eligible area. With this restatement of definition, the purpose of pro- tecting those elderly who have been subject to abuse would be accomplished. In contrast, extending the definition-to include group policies would unnecessarily add, as noted earlier, substantial administrative expense since the standards would affect-a much broader scope of business. Additionally,: further definiti6n of the term "accurate and descrip.tive labeling" is sought. It should include the notion of simplified language. The majority o.f Blue Cross and Blue.Shield Plans have already or tare in the process of modifying their contracts to simplified English language, text. Some have adopted large type lettering. In surrmiary, regarding- the standards, we are confident that the vast majority of-our non-group programs will prove acceptable, and envision a minimum of effort in improving our policies to meet the standards. PAGENO="0936" 928 In our opinion, the penalties pertaining to agent abuses which were in- cluded in S395 do not go far enough. The penalty appears to only address the issue of `pretended character." Lack of information dis- clcsure and unfair sales practices should also be cited as unlawful. Further, there is no mention of how to deal with cases where an agent knowingly sells duplicate coverage to an individual. Given the cost to the individual and the potential adverse effect on containing health care costs, this issue needs to be addressed. To close, as was previously stated, the Blue Cross and Blue Shield organi- zations support the objectives of HR165, HR2602 and S395. The abuses in the non-group market have been identified and publicized, and the proposals being considered by Congress offer solutions to remedy the problem. The states and the private sector are moving on a parallel track in an attempt to improve the quality.of programs, assure reasonable cost, and respond to the concerns of the public in general, and the elderly specifically. We support S395 with the changes recommended be- cause it appears to solve the problem, maintain local flexibility, capi- talize on the positive efforts that have been or are being implemented, avoid any duplication of effort, and avoid the growth of further bureau- cracy. Thank you very much for this opportunity to express our views. PAGENO="0937" 929 ATTACHMENT II STATEMENT OF THE BLUE CROSS AND BLUE SHIELD ASSOCIATIONS on H.R. 4475 "TO MAKE IMPROVEMENTS IN THE MEDICARE AND MEDIC~ID PROGRAMS" for the SUBCOMMITTEE ON HEALTH COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES Submitted for the Record by Bernard R. Tresnowski Executive Vice President July 12, 1979 PAGENO="0938" 930 Mr. Chairman and members of the Health Subcommittee. My name is Bernard R. Tresnowski. I am Executive Vice President of the Blue Cross and Blue Shield Associations. The Associations are the national coordinating agencies for the 69 Blue Cross and 70 Blue Shield Plans in this country. The Plans provide privately under- written health care coverage for about 83 million people and serve almost another 20 million as fiscal agents or intermediaries for the Medicare, Medicaid and CHAMPUS programs. Directly or indirectly, therefore, the Plans serve approximately half of the nation's people. The Blue Cross Association is a nationwide prime contractor to the Department of Health, Education and Welfare for administration of Part A of the Medicare program. Sixty-eight Blue Cross Plans are subcontractors to the Association. In fedecal fiscal year 1977 they processed 28.5 million Part A claims repre- senting $14 billion in benefits. Thirty-two Blue Shield Plans are Medicare Part B carriers. In fiscal 1977, they processed 66 million Part B claims totaling $2.7 billion in benefits. In response to your invitation, I should like to present the views of the Associations, on behalf of the Plans, on the Secretary of Health, Education and Welfare's draft bill designed to "make improvements in the Medicare and Medicaid programs." That is a goal that we not only support enthusiastically but one to which a good deal of our combined corporate efforts have been devoted during nearly 13 years of our successful administration of, and involvement with both programs. It is a very long bill, covering a multitude of subjects, and this presenta- tion will touch on each of its sections. However, before making our detailed conmients, we would like to offer some introductory remarks about the proposed bill as a whole. Incredibly complex and far-reaching as it is, the proposed bill presents to the Congress a massive challenge. It covers relatively small, technical points of Medicare and Medicaid coverage and details of Professional Standards Review Organizations designation as well as large concepts underlying the very structure of the Medicare program. It would be a mistake to pass the entire bill as a single package because of weaknesses in it; however, equally, it would be wrong to reject the entire bill, because it also has many strengths. It appears to us that in the deliberations of this subcommittee, and of those who must consider the bill afterward, the Congress as well as the Medicare and Medicaid programs, and the millions of beneficiaries directly affected, would be better served if the changes proposed in the bill were separated into various categories. It seems unduly difficult to decide the merits of a single bill which includes such technicalities as coverage for the removal of plantar warts along with proposed alterations in the basic contractual rela- tionship between Medicare intermediaries and the federal government; which proposes changes in payments to certain specialty physicians and also details functions of Professional Standards Review Organizations that are necessary for full designation. PAGENO="0939" 931 We are particularly concerned with the portions of the proposal that attempt to diacontinue the reasonable coat negotiated contracts with Medicare inter- mediaries and carriers which have provided the flexibility clearly needed to make the program work, and substitute totally the rigidity of fixed cost or fixed rate competitively bid contracts. These and other matters are reflected in our specific comments on the in- dividual provisions of the proposal which follow. Title I: Medicare Section 101: Requirement that employers offer employees age 65 to 70 the same inpatient hospital benefits offered to other employees; makes Medicare secondary with respect to inpatient hospital services; et. al. We support this proposal assuming that Medicare rates will reflect the in- herent savings. Our general thesis is that employee benefits should be underwritten by private- carriera. - - __~_~ With this aupport, we should like to point out a few considerations. Although not many employees are staying on after age 65, current rates of inflation could cause more to continue working. Because of their higher use patterns, aged employees will raise rates for employers and all employees in the group. The amount will vary by group according to the incidence of aged persons and will be restrained by the fact that the experience of working aged persons, particularly those below age 71, is better than for the aged as a whole. The added cost of 65 to 70-year-old employees and Medicare savings should be reasonably offsetting, thus minimizing objections to the employment of aged workers. - -- -- -- - -- Movement in and out of employment will cause some coordination problems, but these can be addressed. Section 102: Eliminate provider nomination of intermediary organizationsj eliminate requirement for reimbursement of intermediary and carrier on the basis of costs; enter into contracts with any public or private entity; after 5-year phase-in period, make all contracts subject to same competitive requirements as other federal contracts; et. al. - This deceptively simple section covers a number of vitally important aspects of the Medicare program that need to be discussed separately. As a preface,_~~_------~---- - ~------- - however, a few'general remarks are in order. One of the responsibilities of ~aMedicãte iiité~dia iñd carrier isto - - -- re~eive claims from providers of care for services to Medicare beneficiaries and to pay them. If that were the extent of the responsibility, the selection of intermediaries and carriers would be simple indeed. That limited approach would obviate the need for any other functions, such as determining the eligibility of the patient; determining whether the services provided were covered by the Medicare program; determining whetherthe provider was qualified to perform the services; determining whether the services billed were actually PAGENO="0940" 932 performed at all; and, among other things, determining whether any changes had been made in the administrative regulations regarding those services or the amount to be paid for them, That approach to the Medicare program would also eliminate the necessity for the intermediary or carrier to provide consultative services to help institutions and individuals establish and maintain necessary fiscal records, serving as a center for communicating with providers, making audits of provider records, educating the provider's employees in the procedures of the program and many other related administrative, educational and communica- tions functions. A limited approach, in short, would work well for a program which never changed and whose sole purpose was to receive and pay bills in the most efficient and fastest manner at the lowest possible unit cost. But as we have seen the program work for 12 years, and as we believe we have correctly interpreted the intention of the Congress when it passed the program in 1965, Medicare has other purposes: to provide medically appropriate as well as financially efficient health care services to the millions of people who are age 65 and older, as well as certain other patients suffering dis- abilities or renal disease; to change, update and improve the benefits and administration of the program as needed to stay in step with developing medical and scientific technology and methods; and to provide a~.l services in a way that preserves the dignity and self-esteem.of the Medicare beneficiary. That view entails an entirely different approach to Medicare administration. That will become clear as this presentation discusses the principal points of Section 102, the most significant part of the total bill. Provider nomination of intermediaries. Section 1816 of the Medicare Act permits providers to nominate organizations including HEW to serve as intermediaries in dealing with the government on Medicare matters. The purpose of the intermediary is to make payments for covered services for beneficiaries performed by hospitals, physicians and others who furnish care, plus a wide range of other administrative duties already alluded to in the introduction to this discussion. The intent of the Congress in establishing provider nomination of interme- diaries was obviously to smooth program administration in several ways, in addition to handling claims payments: 1. Providers already had arrangements with organizations such as Blue Cross Plans to help them establish patient eligibility and submit claims, thus improving beneficiary services. That kind of arrangement existed for privat~e programs and was carried over intact into Medicare administra- t ion. 2. The Secretary wanted to take advantage of economies in such shared services as provider audits, provider educational programs and other related functions already being carried out between providers and existing organizations which were natural choices as intermediaries to do the same thing for the Medicare program. PAGENO="0941" 933 3. Providers would appraise intermediary performance (response to inquiries, accuracy of payment, mutual understanding and communication about program policies) by either remaining with or changing nominated intermediaries. An intermediary that did not function well in the program would find itself all alone, without providers. 4. A complex program was implemented with relative ease by taking advantage of existing operational and communication arrangements already working for the providers for their private patients and easily adaptable to government beneficiaries. That overall intent of the Congress, expressed through the intermediary nomination process, is reinforced today by 12 years of operational stability and efficiency between providers and intermediaries in almost all cases. Because of their continuing close relationships with respect to both private and governmental programs, providers and intermediaries have been able to introduce many improvements in Medicare program processes; for example, eligi- bility queries for claims processing. Several Blue Cross Plans have developed systems capabilities to accept electronically transmitted data directly from providers, sharing teleprocessing networks for transmission of both private and public admission, eligibility, utilization and billing data. Other Plans have developed systems to accept similar data directly from providers by magnetic tape. Sharing the systems between private and public programs has resulted in sub- stantial savings to the government. Faster processing of eligibility and claims data gives better service to the beneficiary. Providers benefit because quick response to eligibility queries and claims reduces uncertainty about payment; and improved provider cash flow resulting from faster process- ing reduces the provider's need for additional financing and improves overall acceptance of the Medicare program. Eliminating the provider nomination process and selecting intermediaries through any other method, in most cases without concurrence of providers, would result in the loss of this private-public sharing of systems and neces- sitate substantial expenditures to replace operating procedures that now facilitate the Medicare program. Neither intermediaries nor providers would be willing to make the necessary investment in such systems without assurance of a long-term relationship. Frequent intermediary changes would be expensive and disruptive because newly formed partnerships would start at "square one" to create new systems, assuming that equipment compatibility made it possible. Processing time would be slow, at least in the first few months of a new intermediary's responsibilities, because of the time for providers and inter- mediaries to learn the needs and systems of the other, which would be a dis- advantage to Medicare beneficiaries. Knowledge of provider characteristics that is absolutely essential to the proper performance of audit and reimbursement functions has reached a level with current intermediaries that is not duplicated anywhere outside, and can be sacrified only at severe loss of service to beneficiaries. It is essential that the intermediary has an intimate acquaintance with the functions of providers. For example, acceptance of the provider's justification for an exception to routine cost limits requires operational audits, not just f i- nancial audits. The intermediary performing operational audits must have a PAGENO="0942" 934 thorough understanding of the individual provider's operations; a working knowledge of the provider's billing procedures, accounting processes, in- patient and outpatient policies, charge structure, arrangments with hospital- based physicians, etc., that can be obtained only over a period of time through actual experience in working with the provider. Such operational audits a~e new in the Medicare program and require Medicare experience for proper application. Lack of experience in dealing with providers could also lead to large over- payments to them, and simply following program instructions would not nec- essarily be enough to prevent them. New intermediaries would not understand that certain providers traditionally have patient-day fluctuations at certain times of the year or that some providers tend to overstate expenses in making projections. Both of those situations could result in substantial overpayments with resulting costs to the Medicare trust. funds and hardship on the provider in repaying the money. On the other hand, if an intermediary lacks the experience of day-to-day dealings with providers to develop trend factors relating to their operations, inaccurate interim payments could result in substantial underpayments which create an unnecessary cash flow problem for the provider. A new intermediary and its employees will not become knowledgeable about health care matters by simply reading Medicare program manuals and instructions. Even a trained accountant needs six months to a year of experience before being able to perform Medicare audits without close supervision. This need for learning is documented by the continued demand for experienced accountants in the health care field. ~Iuch of the necessary program knowledge for auditing providers comes from regional office intermediary letters and central office interpretational letters to intermediaries. A new provider auditor would not have the necessary background to understand and implement them, and the probable results would be a decline in the quality of work performed and slower and less accurate processing of provider settlements. The performance of those and myriad other operational relationships can be judged by providers, as well as government, in terms of performance as it affects their own beneficiary services. Thus, the critical choice exercised by the provider in the nomination process is, in itself, a valid measure of intermediary performance and a very useful supplement to government standards, objectives and audits. One other point is worth making here: In addition to performing functions already mentioned, plus undertaking many joint initiatives with providers in programs of utilization review, cost containment and education, through the years intermediaries have continued to furnish the stabilizing influence that was clearly necessary in the beginning to gain acceptance of a vast government program by a professional and in- stitutional field providing highly personal services. The relationship with knowledgeable and familiar interme~diaries unites the private and public sectors and affords a safeguard for providers, shielding them from what many still see as the threat of too much federal power and interference. The right to nominate intermediaries of their choice is a cherished freedom of the providers, and its removal would be considered a confirmation of their fears for their own professional freedom. PAGENO="0943" 935 To support the nomination process is not to say we must stay where we are. The existing government audit system, which is vast and detailed, buttressed by executive authority to change intermediaries for cause, can provide needed controls. But it can be strengthened. Particularly important, the program needs standards, which the Blue Cross organization has long requested, but which have not been forthcoming. They would add another measure of protection against any poor or indifferent intermediary function without weakening an administrative structure that has worked so well for so many years. The plain facts are that HEW has had the authority, granted by the Congress, to strengthen the administration of Medicare without depriving the providers of their opportunity to nominate an intermediary. PL 95-142 authorized the Secretary to develop standards, criteria and procedures to be used in evaluating the adequacy of agencies or organizations serving or desiring to serve as intermediaries. The standards which were due in 1978 have not been completed. Contractors and their responsibilities. This section would eliminate the statutory requirements that only health insurers be used as Part B carriers. All references to carriers (and inter- mediaries) have been removed and the definition of "carrier" has been deleted. The Secretary would be able to contract with any "public or private entity" to aid in the administration of the program. - HEW's stated purpose for this section is to allow the introduction of com- petition into the selection of Medicare contractors. The removal of the statutory definition of carrier (and the provider nomination of intermediaries) is intended to expand the number of organizations eligible to compete in the Medicare program. The legislation seeks to include as potential competitors organizations which have obtained experience or can demonstrate the capability to perform administrative functions necessary for the Medicare program. To allow the Secretary to use competitive bidding, the bill removes legislative safeguards which affect the procurement of administrative services. While the legislation would permit new contracting entities to participate in the administration of the Medicare program, the bill does not assure that only organizations with the expertise and capability necessary for efficient administration of the program will be the contractors. A review of the CHAMPUS experience with competitively bid fixed price contracts demonstrates the absolute necessity for careful study and evaluation of administrators of health care service programs. Several organizations experienced in CHAMPUS administration have declined to bid on contracts and at least three computer software firms, which were awarded contracts, have been terminated from the program because of their failure to assume even a narrow band of responsi- bilities. Whenever a contractor in the Medicare Program is changed, the new contractor is faced with the following requirements: 1. To establish a working relationship with each provider. 2. To assume some backlog of unpaid or unprocessed claims, claims appeals or cost settlements not completed by the prior contractor. For cost settle- ments, the backlog would exist for up to 3 or 4 years for a cost report and would include the need to defend settlements previously made through the appeals and litigation process. PAGENO="0944" 936 3. To have in-depth knowledge of program requirements covering at least five years of prior program policy. 4. To have historical records concerning a provider's involvement under the program, or to duplicate this information. 5. To have experience in understanding utilization practices and ability to evaluate them to determine compliance with the requirements of Section 1861(K) as to utilization reviews. Continuity of performance is essential to smooth administration of a program as complex as Medicare. It is one where experience counts. The methods used to amend program instructions, which require the deletion of amended material, emphasize the need for experience. In order to assure that administration of the program continue without dis- ruption of service to beneficiaries and inconvenience to beneficiaries and providers, selection of intermediaries and carriers should be based on the following minimal criteria: 1. The entity must have management and professional staff experienced in the Medicare program. The peogram is sufficiently complex that supervisory personnel need a minimum of one year to operate effectively under the program. 2. The entity must have necessary resources to undertake the contract, including trained staff, the administrative support necessary to properly perform the contract and sufficient initial working capital. The resources must also include the ability to provide the utilization review, charge screening, auditing, settlement and hearing and appeal functions which are appropriate to the specific contract. 3. The entity must have a management and professional staff with the necessary professional qualifications and expertise. Reasonable cost negotiated contracts vs. fixed cost competitively bid contracts. There are two arguments implied, if not stated, in the proposed bill that are not new: that current Medicare cost reimbursement contracts are less than effective and not desirably efficient; and that this type of contract can lead to complacency on the part of intermediaries because it provides little or no motivation either to save money or to be innovative. Based on those arguments, suggestions have surfaced before that the government should use competitive, fixed price contracts with intermediaries and carriers. Neither argument is valid. The fact is that while current contracts are based on cost reimbursement, they do not by any means allow uncontrolled recovery of costs. Contract performance is continually monitored so that intermediaries and carriers (contractors) cannot become complacent or lax; and they must use innovative methods to administer the program under strict controls. The biggest difference, the vital difference between what could be expected to happen between the two alternatives -- fixed cost or cost reimbursement contracts -- shows in the results of the program itself. PAGENO="0945" 937 In a fixed price contract awarded on a competitive bid basis, there is a narrow profit and loss margin because of the bidding process itself. Conse- quently, the intermediary with such a contract would come under strong pressure when faced with choices of action that would affect service and quality. When program changes are necessary, for example, the choice would be to comply as little as possible in order to preserve the profit margin in the contract, thereby hindering service and quality; or to incur higher costs because of the changes, which would decrease the profit margin and make the contract less desirable. If the effect on cost is enough, the contractor is forced to petition for an adjustment in his fixed cost or fixed rate contract; or to seek relief in court. On the other hand, the cost reimbursement intermediary with built-in standards has real incentive to be innovative in handling increased workloads more efficiently and effectively within existing budget controls; and to assure renewal of the contract. The real test is to look at what has happened under. existing contracts. Intermediaries and carriers both have shown consistent reduction in admin- istrative cost per bill, coupled with consistent increases in productivity, with no deterioration in quality of service to providers and beneficiaries. -- Part A costs, when adjusted for inflation, have decreased 42 percent during the last six years. Productivity has increased 64 percent. -- Part B costs, when adjusted for inflation, have gone down 40 percent. Productivity has gone up 57 percent. -- In the past three years, the number of claims processed by all Part A intermediaries increased 31 percent. With their new methods for claims processing, intermediaries reduced pending workloads by 17 percent and cut processing errors by 52 percent. -- For Part B carriers, claims processing workloads increased 47 percent over the three years, and through innovative measures they were able to show an 18 percent reduction in processing time. -- Documentation also shows a continuing decrease in charges and an in- creased rate of recovery of overpayments during that same period. Statistical studies done by Control Analysis Corporation, under contract to the Medicare Bureau, and by the Blue Cross and Blue Shield Associations show that differences among high-cost and low-cost intermediaries and carriers lessen when costs are adjusted for uncontrollable factors. Under present cost reimbursement arrangements, contractors have substantially improved quality and effectiveness in the Medicare program through prior consultation, assistance in policy development and clarification, operation of a nationwide telecommunications system to verify eligibility of beneficiaries, development of provider audit and reimbursement training programs, cost containment activities and efforts to establish performance standards. It is extremely doubtful that a fixed price contractor would be able to carry out any of those extra activities without an increase in the contract price, since its motivation would always be -- and would have to be -- to increase profits and reduce loss. 56-071 0 - 50 - 60 PAGENO="0946" 938 Competitive bidding: would it help the Medicare program? Competitive selection of private contractors to provide administrative services is a well-established procurement method of government. However, it is most effective for the purchase of goods or services, if they are relatively well defined, can be quantified and can meet a specified level of quality, including an objective measure of performance. These stipulations do not apply to the Medicare program: its administration is extremely complex; the amount of services to be supplied is indefinite and virtually infinite; the scope and range are subject to periodic administrative and legislative change; and there are few definitive, objective standards by which to measure acceptable performance. Competition for Medicare contracts would undoubtedly be intense, with many organizations vying for them, many of which would have had little or no experience in the health care field or in the administration of a complicated, far-reaching health service program. With no experience in the Medicare program, firms such as computer service companies, management consulting organizations, software houses and presumably banks could be successful in bidding because of the high emphasis on price as the major evaluation and award criterion. They could be successful in bidding; the bigger question is whether such inexperienced organizations could be successful in handling the program. Because of its low price bid for a contract that has been secured, the new intermediary or carrier would have to operate at absolutely minimum levels, barely within compliance tolerances. There would be penalty clauses, perhaps, to prevent gross mis-administration; but no incentives to perform at better than minimum levels. The result would almost have to be immediate reduction in service levels to providers and to beneficiaries of the program. The CHANPUS program provides dramatic examples. One successful bidder for a relatively large portion of it greatly underestimated its complexity and cost of administration and within 90 days of operation under the competitively awarded fixed price contract, backlogs were so large and beneficiary and provider dissatisfaction was so acute that the Defense Department returned the program to the previous contractors on a cost reimbursement basis. Two other firms also ran into serious difficulties. One was replaced before the end o~ its first contract year; the other was allowed to complete the first year on each of two contracts, but then the government re-opened compe- tition and awarded the contracts to other organizations. Such disruptions undermine program integrity and bring about more beneficiary and provider appeals as well as litigation, if significant aisunts of nxney are involved. If that kind of situation can occur in C}tAMPUS, which is approximately one- fiftieth the size of Medicare, in terms of claims, one can only imagine the adverse publicity and congressional concern that could be generated by similar problems within the larger program. PAGENO="0947" 939 Notable problems have also occurred in the Medicaid program, which is rather widely based on competitive bidding across the country. The problems include such often publicized ones as flagrant abuse and fraudulent practices; the so- called Medicaid mills; billing for patients who were never seen; illegal use of others' eligibility cards; and abortion clinic practices paid for by the program. Medicaid has attracted several computer processing companies, one of which went out of business as a result of underestimating the complex administra- tion of the program. The problems are a cotmuent not only on the procurement process itself, but on the selection of fiscal agents largely on the basis of cost and on the acceptance of fiscal agents that lack experience and capacity to administer huge and complex programs effectively and efficiently. As a matter of fact, competitive procurement does not provide any incentive to the contractor to add administrative costs to a quoted fixed price or rate to make itself able to resolve such problems. Many potential low bidders simply do not have enough experience in such techniques as utilization review and cost containment to be able to detect erroneous billing practices or outright fraud and abuse. Program changes. Mention has already been made of the need for an intermediary or carrier to be able to change procedures and policies in the Medicare program. A brief elaboration on that subject is pertinent to this discussion. By the nature of the benefits it provides, the Medicare program is closely tied to continually changing patterns of patient care and medical technology. Medicare benefits and administration have changed frequently and substantially since 1966, with legislative amendments and Medicare Bureau directives rede- fining program requirements to meet changing and emerging beneficiary needs. A Medicare contractor must be flexible enough to deal with large numbers of necessary changes. The current cost reimbursement contracts have provided a structure within which contractors can modify operating procedures to accommodate program changes and develop innovative, cost-conscious ways to incorporate them. That ability is not only desirable, it is essential to the continuation of the program: -- In the last four years, the Medicare Bureau has issued 465 program changes, the highest total of 125 in 1976 and the lowest of 95 in 1977, for an average of 116 a year. -- At least 10 percent of them have required contractors to make major changes in administrative processes. It is unrealistic to expect a bidder to construct a bid price while facing a potential volume of more than 100 administrative directives having unknowable impact on the cost of administering the program during a year. Yet that Is exactly what has been proposed with the change to fixed cost or fixed rate contracts. Unless, of course, it Is known now that the Medicare program will never again require modification; that it has reached a point of stable per- fection. PAGENO="0948" 940 Competitive fixed price bidding does not permit flexibility in contractor performance. It establishes a rigid relationship between the contractor and the government. By nature, such contracts resist change. Even the contractor whose bid allowed for the cost effect of some anticipated number of program changes must evaluate each actual change for its effect on cost and on expected profit or loss. When the change increases the contractor's cost, he can be expected to resist it. He can choose among possible alternatives to minimize the effect: delay implementation of the change; interpret new requirements narrowly to reflect perhaps the letter but not the spirit of the change; prolong negotiations on issues and requirements of the change; or seek arbi- trated price relief. If a program change negatively affects cost and he is not successful in finding relief, he must seek a price adjustment in the contract terms. Thus, in the Medicare program where changes are common and expected to con- tinue, in order to maintain the usefulness of the program to the nation and to its beneficiaries, the price of contracts would be appealed frequently. When that happens, and it will happen or potential contractors will refuse to bid for new contracts or renewals, then fixed price becomes a fiction. Advantages of the prime contract. One more subject deserves discussion under the provisions of Section 102 to clarify how well the provider nomination system has worked. It is the Blue Cross Association prime contract for Part A Medicare benefits. Under the provider nomination system, established by the Congress for the Medicare program, 90 percent of the nation's hospitals, skilled nursing facilities and home health agencies chose the Blue Cross organization as intermediary. Because of the nomination of the Blue Cross Association (BcA) by a large percentage of providers, it was named a prime contractor to the Medicare Bureau and individual Blue Cross Plans became subcontractors to the Association. S That arrangement has provided clearly identifiable advantages to the govern- ment in the administration of Medicare. The prime contract is a management and corrrnunication concept similar to one used in the private sector by Blue Cross and Blue Shield Plans, under which, for national accounts having employees (beneficiaries) in several states, e.g., automative and steel industries, one Plan acts as "Control Plan" for the account, guiding the handling of the program by all of the other "Participating Plans." The present contractor network has served beneficiaries, providers and the government well, and has helped maintain an effective working relationship between government and the professional community in the Medicare program. A documented analysis demonstrating the BCA prime contract's cost savings and operational contributions has been furnished to the Health Care Financing Administration in connection with its study of contracting alternatives. It was also given to the General Accounting Office, which is studying the same alternatives. The analysis shows cumulative benefit and administrative cost savings of $106,000,000 over the life of the prime contract, an amount far exceeding the cost of supporting the prime contract budget of the Association. 11 PAGENO="0949" 941 Fiscal year 1977 savings of program cost, as a result of prime contract opera- tions, total more than $12,000,000, compared with annual estimated prime contract expenses of $6,701,000. Among the efficiencies that have resulted from operations under the prime contract are a nationwide telecommunications system whose cost is shared by government and the Association; and a centrally developed and maintained electronic data processing system that is used to process 60 percent of all Medicare Part A claims. In addition, the BCA has developed many administrative tools and procedures for accounting, data processing, management, utilization review, cost con- tainment and other applications, making it unnecessary for individual Blue Cross Plans or, in some cases, other Medicare contractors to duplicate develop- mental costs. The BCA is a central point of accountability and coordinated service for both the government and the individual Blue Cross Plan contractors. Because of its prime contract role, the Association has been able to provide a nationwide perspective on operational policies, procedures and contractor performance in the program. This national private sector perspective has been especially useful considering the centralized governmental administration of the program. As BCA contributions have grown, they have come to stand as key elements in maintaining both efficiency and effectiveness in the Medicare program. Here are some of the Association's contributions to the program as prime contractor: - Beginning in 1971 as part of its private business, adapted for Medicare administration as well, the BCA developed a sophisticated, automated cost accounting and budget system called SNAP (Standard National Accounting Program) which is in place in 38 Blue Cross Plan intermediaries and 13 Blue Shield Plan carriers. The Association recognized that substantial changes in Plans' cost accounting systems were necessary to meet Medicare requirements and has encouraged Plans to install SNAP to improve their capabilities. The system is centrally maintained and includes a sub- system to update cost allocation formulas. -- The BCA's tape-to-tape system, developed in fiscal 19GB, is currently used in 37 Blue Cross Plans that process just under 40 percent of the Part A claims volume. It is a component of the Model A system which processes 60 percent of the Blue Cross Plans' Medicare claims volume. It can accept, edit, format and batch hospital, skilled nursing facility and home health inpatient-and outpatient transactions on magnetic tape to be transmitted to the Social Security Administration Bureau of Data Pro- cessing. It reduces data entry effort by the government and results in a more accurate master beneficiary record for faster and more accurate claims payment. The system is also used by Mutual of Omaha, Nationwide Insurance, Travelers, Co-Operative, Oklahoma Social Rehabilitation Services and Hawaii Medical for transmitting Part A bills to the government. -- In 1976, BCA staff issued a self-audit manual for use by Plans to iden- tify areas where efficiency of procedures could be improved and to comply uniformly with program benefit definitions. PAGENO="0950" 942 -- Automated desk review is a computerized program used on a time-sharing basis to perform clerical review of provider cost reports and to re- compute costs after audit adjustments. -- A time reporting system was developed to record contractor time spent on audits, desk reviews, final settlements and other details of provider cost reports. -- A system for factoring provider coat report adjustments, developed in 1969, provides a shorter way to put Medicare provider cost report adjust- ments into effect. The procedure was adopted by the Medicare Bureau in 1971. -- Medicare reimbursement and auditing training programs are three training programs developed, maintained and conducted by the BCA, designed to thoroughly familiarize Medicare program auditors with the act and its regulations. They make possible national uniformity in the implemen- tation of provider cost reimbursement principles by 10,000 providers which have selected the Blue Cross organization as their intermediaries. - The BCA has worked closely with the government in the areas of prior consultation on proposed regulations and program instructions; and on policy development and clarification. Because the Association accu- mulates and consolidates Plan questions and cossnents, as well as cormu- nicating information to all Plans, the processes free the Bureau from having to answer the same question repeatedly, and from having to send information to every intermediary separately. - In its prime contract role, the BCA has devoted considerable effort to containing the cost of benefits and of administering the program. The principal objective has been to assure that payment is made only for reasonable and necessary care. That has been approached by working with the Medicare Bureau and other HEW agencies to formulate practical policies and procedures for medical review of claims, and by working with Plans and the Bureau to assure consistent application of benefit definitions. To assure proper allocation of provider costs to the program, the Asso- ciation has carried out many activities, including development of guide- lines, procedures, policies and forms to solve problems in areas such as the cost of maintaining religious personnel in hospitals affiliated with religious orders, reimbursement and audit of university-related hospitals, recognition of hospital-based physician payment mechanisms and modifi- cation of the required schedules in cost reports. Manuals and booklets have been prepared on such topics as periodic interim payment to pro- viders, modification of existing cost reports to reflect legislative changes, standard desk-review programs, cost report settlement for chain providers, and malpractice insurance. Training programs and cost report review techniques have been developed, as have effective cash management methods, including installation and monitoring of a system to control the amount of money held in Medicare bank accounts and a delayed-draw system to reduce loss of interest on government funds. PAGENO="0951" 943 -- The BCA has developed performance indicator ranges and weighted statis- tical performance indicators to be used as guides or standards of con- tractor performance evaluation. In 1975, the Association developed an effective method of establishing statistical performance ranges. The use of Association materials and documents provides the only management- oriented performance reports in the Medicare program today. The standards are used by the Association to focus attention on any Blue Cross Plans that demonstrate a need for improved performance. The BCA has made significant contributions to the Medicare Bureau's standards development activities through the Performance Standards and Evaluation Technical Advisory Group, made up of both commercial and Blue Cross organization contractor representatives who advise the Bureau on developing standards. As previously noted, the government itself has not yet developed performance standards for Medicare contractors, although such standards have been recommended by outside studies of the program, including the ones by the National Academy of Public Administration Foundation and the Advisory Committee on Medicare Administration, Contracting and Subcontracting; and performance standards were mandated by Public Law 95-142, effective October 1, 1978. This has been a very long discussion of a single section of the proposed bill. However, we felt that at least this much information was necessary to make our viewpoint clear to the members of the subcommittee and to other members of the Congress for their deliberations concerning the proposed complete restructuring of the Medicare intermediary and carrier program. If any further iflformation is needed or desired, or if the subcommittee wishes to see documentation of any of the points made in this discussion, we shall be very glad to provide it, in writing, by oral testimony, or both. Sections 103 and 104: Reimbursement of hospital-based physicians The proposed amendments address reimbursement for hospital-based physician services to inpatient Medicare beneficiaries. Current law allows the physician to bill a professional service to the Part "B" carrier and also to receive payment from the hospital for administrative services which are, in turn, reimbursed as a reasonable cost under Part "A". These payments potentially represent unreasonable costs to the Medicare program and these proposals would encourage combined hospital billing. HEW asserts that such mechanisms would allow the Medicare program to more efficiently and accurately determine reasonable costs for hospital-based physician services. While we are concerned with these problems, we believe the proposed legislation will fail to resolve the issues. Specifically, they may force patient fees to subsidize hospital coats which are legitimately associated with administration of radiology departments (parenthetically, the proposals unfairly identify the physician administering a radiology department. These problems also involve other hospital-based physicians, such as cardiologists, pathologists, neurologists, anesthesiologists, etc.); weaken the hospital's responsibility to assure the competent administration of the departments on behalf of the general welfare of patients; make it difficult to isolate two kinds of services for examination of legitimate costs; and fail to protect the beneficiary from financial liability. PAGENO="0952" 944 Our conclusions are based upon the following: A. While a hospital may be denied reasonable cost reimbursement for the administrative services of a physician who also bills the Part "B" carrier for professional services, it does not prevent the hospital from hiring and/or utilizing another physician or lay administrator to perform these administrative duties. The result may be no savings to the Medicare program. In fact, it may lead to increased costs to Medicare and/or the entire patient population. B. Physicians may not necessarily be induced to sign a blanket assignment agreement. They may, rather, elect to bill the patient directly. If such circumstances occur, the beneficiary would receive artificially reduced benefits by having to pay a co-insurance portion of the charge, when, under existing law, he enjoys 100 percent coverage of reasonable costs. C. These proposals do not address the issue of existing compensation agree- ments, which were developed before innovations, such as computerized tomography, automated blood chemistry analyzers and advances in EEGs and ECGs were made. With these developments, existing reimbursement mechanisms may result in coxnpensation which does not reflect the reasonable reim- bursement of services associated with these technological improvements. We believe, therefore, the administration should address the reasonableness of payment rather than the method of reimbursement. The solution to the problema perceived in current mechanisms should focus upon: 1. What constitutes a personally identifiable professional service? 2. What constitutes a reasonable reimbursement for such services? 3. What constitutes reasonable compensation for a hospital-based physician's full range of services with due consideration of the allocation of his time between administration and patient care activities? The associations would be happy to assist your staff in developing recommenda- tions which would assure reasonable compensation for services rendered by hospital-based physicians, including administrative as well as professional services. Section 105: Elimination of Medicare coverage for chiropractor's services We understand that an evaluation study of this benefit was conducted by the Department of HEW and that the study results are the basis for this recommenda- tion. We have not seen the study and therefore cannot comment on the supporting rationale for this proposed benefit change. Section 106: Increase in psychiatric benefits under Part B The current provision for payment of outpatient psychiatric services has, we bslieve, been too limited to provide a meaningful benefit under the Medicare program. While we know it hasn't been the intent of Medicare legislation to provide coverage for long-term psychiatric care, we believe the increase in the outpatient limitation will improve short-term treatment of other than chronic mental health care. PAGENO="0953" 945 Section 107: Unlimited re-enrollment under Part B This section would eliminate the restriction on enrolling in Part B of the Medicare program more than twice. Currently, a Medicare beneficiary is limited to a single re-enrollment. Experience indicates that very few beneficiaries are affected. However, there may be some concern that elimination of the restriction on the number of times the beneficiary can re-enroll could open the door for beneficiaries to repeatedly sign-up for Part B coverage, then drop- out, i.e., adverse selection of risk. This would increase administrative workloads and would not be fair to beneficiaries who have maintained consistent membership. To limit that, we support a waiting period before Part B re- enrollment coverage becomes effective. If a three-month period were required for coverage after re-enrollment, abuse of the privilege would tend to be held to a minimum. Section 108: Repeal of presumed eligibility provisions for post-hospital extended care and post-hospital home health services We support repeal of presumed periods of coverage for skilled nursing and home health services. Implementation of this provision of Public Law 92-603 has had minimal value and has created confusion among physicians and providers. Section 109: Limitation on reimbursement for services under Part B furnished by or under arrangement with a provider of services or certain other entities (Note: A similar section appears in Section 19.of H.R. 3990, except that section includes the elimination of lower cost or charge reimbursement.) This section would restrict reimbursement for outpatient services to the least of: (1) the cost of outpatient services, (2) the charges for outpatient services, or (3) 80% of the cost of outpatient services, plus 20% of the charges for outpatient services (1/3 is the new provision). The purpose is to eliminate any "profits" generated by the provider because the charges collected from beneficiaries for co-insurance may, in some cases, be greater than 20% of the cost of the services. As currently worded, this section would accomplish its goal. We do not think that this provision should be enacted. Under present methods of reimbursement and present benefit structures, Medicare has one of the lowest ratios of outpatient utilization to inpatient utilization of any third party payer in the nation. Any enactment by Congress should encourage, rather than discourage outpatient care. The provision is not cost effective. Outpatient claims account for $1 billion out of the projected $18 billion annual provider pay- ments. The projected saving of $40 million dollars over the next five years is not real savings in the provision of health care, but a shifting of payment responsibilities from Medicare. Real savings in the industry and the program could be accomplished by providing incentives for a shift towards less costly outpatient care. The legislative proposal discourages outpatient care. Section 110: Shortened Part B termination period for certain individuals whose premiums Medicaid has ceased to pay State buy-in of Part B Medicare coverage is pursuant to state Medicaid require- ments and not the result of a Medicaid recipient's decision to purchase Part B coverage. Therefore, we support this provision. We feel, however, that PAGENO="0954" 946 prospective notification of Medicaid's termination of payment of Part B premiums is necessary if the objective of limiting an individual's liability for premiums is to be met. Section 111: Repeal of plantar warts benefit exclusion We agree with the extension of Medicare coverage to include treatment of plantar warts. They are encapsulated in the plantar region of the foot, can be very painful and are treated by either surgery or chemosurgery. Plantar warts should not be considered a routine foot problem. Section 112: Payment for antigens We agree with this extension of coverage. It does not seem reasonable to deny payment for an antigen except when the "preparer' and the `administrator" are one and the same. Frequently, Medicare beneficiaries relocate, but are still dependent upon antigens prepared by a distant allergist, who incurs costs in their preparation. Reimbursement should be made to the preparer of the antigens where the costs are incurred. Section 113: Payment for certain services when beneficiary has died When a doctor does not accept assignment for a deceased beneficiary's bill, the estate must pay the bill. This requires establishment of a "representative payee" by the Part B carrier and entails cumbersome administrative procedures before payment can be made. The proposed procedure would eliminate the probleus which currently exist by allowing program payment to the individual responsible for the bill, based on an itemized unpaid bill. We support this change. Section 114: Repeal of statutory time limitation on agreements with skilled nursing facilities We support this provision in that it provides latitude in the time for partici- pation agreements with skilled nursing facilities. While it is realized that 12-month limits on such agreements with some skilled nursing facilities will still be appropriate and necessary if the established standards are to be met and enforced, not all skilled nursing facilities require this type of limita- tion. Thus, administrative effort should be focused on facilities where there have been problems, not on those which have consistently met established standards. Section 115: Repeal of provision concerning consultants for skilled nursing facilities We support the repeal of this section of the law on the basis of its non-use since enactment in 1972. Further, we believe the responsibility for meeting the conditions of participation in the Medicare program should rest with the facility wishing to gain or retain its certification status as a participating provider of service. Section 116: Requirement that skilled nursing facilities participate in both Medicare and Medicaid We would support the requirement that skilled nursing facilities participate in both the Medicare and Medicaid programs if the benefit procedures, requirements PAGENO="0955" 947 and reimbursement methods to which they must adhere were uniform. At this time, however, only the conditions of participation are the same. With existing differences in procedural requirements and reimbursement methods, however, we do not feel that participation in only one program should be precluded. To mandate dual participation because of variations in program requirements could result in many skilled nursing facilities deciding not to participate in either program because of administrative complexities of meeting two sets of procedures. The net result could be a decrease in the number of certified skilled nursing beds available to both Medicare and Medicaid beneficiaries. The Department of Health, Education and Welfare has indicated that because a facility participates in only one program, termination of facilities with serious deficiencies has been delayed. We question the correlation between delays in termination and participation in both programs. With the potential loss of certified skilled nursing beds, we suggest that the current option of participating in one or both programs be retained. Section 117: Sanctions against skilled nursing facilities out of compliance with conditions of participation We support the provision of alternatives to decertification in situations where skilled nursing facilities fail to meet the conditions of participation. We do not believe that skilled nursing facilities whose care could endanger or impair the health of patients should continue to minister to them either as Medicare or Medicaid providers of service. Thus, alternatives to decertifica- tion should, we believe, be used only where the health of patients is not jeopardized, should be of short duration and should not be used repeatedly for a facility that fails to correct its cited deficiencies. We suggest that any skilled nursing facility with serious deficiencies be given only one alternative sanction, such as being precluded from continuing to admit Medicare or Medicaid patients, if deficiencies are not corrected as required. Termination of the provider agreement should be the next action. In this way, poor quality providers will not be retained in the programs for extended periods with sanctions other than termination repeatedly being applied. Section 118: Authority of Secretary to determine appropriate Life Safety Code requirements We support modification of existing legislation to allow the Secretary to determine which edition of the Life Safety Code must be met by skilled nursing facilities. We believe, however, that facilities participating in either Medicare or Medicaid at the time that a revised edition of the Life Safety Code is adopted should not be required to make modifications to existing fire safety provisions unless the revised requirements meaningfully contribute to the safety to the institution's residents. We feel this contingency is important so that facilities will not be required to make modifications only to meet minor specification changes frequently made in the updating of the safety code requirements. PAGENO="0956" 948 Title II: Medicaid Section 201: Clarify the Secretary's authority to define `residence" for purposes of Medicaid eligibility We support this proposal to provide a distinct statutory basis for regulations defining "residence" as used to determine eligibility. Applying the definition of "residence" in determining a recipient's eligibility for Medicaid occasionally causes problems for adminstrators of the program and for those seeking medical assistance. In some cases, two states may disagree over which has responsibility for payment of a -particular recipient's medical expenses, resulting in that beneficiary being denied eligibility in both. Section 202: Repeal the requirement that a member of an AFDC family remain employed during the four months of extended Medicaid coverage allowed an AFDC family which loses cash assistance because of increased earnings from employment We support the proposal to remove an eligibility requirement for those who receive four month's continued Medicaid coverage after the loss of AFDC eligi- bility. The current requirement that a member of such a family continue working is very difficult for states to monitor and enforce. Also, the current requirement could result in a gap in Medicaid coverage for a family which needs such assistance. Section 203: Elimination of chiropractic services This is the same proposal as Section 105, and our comments are the same. Section 204: Requirement that skilled nursing facilities participate in both Medicare and Medicaid Our comments on this section are the same as we have made previously on Section 116. Section 205: Sanctions against skilled nursing facilities Our comments on Section 117 apply here. - Section 206: Medical review and professional review of SNP5, et. al. On the whole, we support these proposals to ease the states' administrative burden in ensuring that patients in long-term care facilities are appropriately placed. We question, however, the provision to permit the Secretary to allow review team~ to be headed by a health professional other than a physician or registered nurse. The latitude permitted the Secretary under this provision could conceivably allow these reviews to be performed by a professional who does not have the comprehensive medical training to assess all aspects of patient care. We would be more inclined to support this provision if the type of health care professional allowed to head the review team was specified in the statute, rather than regulation, and was clearly appropriate for this - activity. PAGENO="0957" 949 Section 207: Coordinated audits under Medicare and Medicaid This section would require coordinated audits of hospitals participating in both the Medicare and Medicaid programs. We support the proposal. The concept of common audit is not new and recognition of duplication of functions and potential savings of program dollars has been a concern and has been addressed by Blue Cross Plans since early in the Medicare program. Based on a survey in early 1978, 28 Blue Cross Plans had common audit agree- ments with Medicaid in their respective states. Most of the agreements in- volved hospitals, and varied from state to state as to requirements, degree of participation and percent of cost sharing. The other remaining states either maintain their own audit capability or receive a copy of the Medicare cost report under the Freedom of Information Act. The latter situation has been occurring more in recent years and has resulted in a saving to the Medicaid program since it is not sharing in the cost associated with completion of the cost report. From our experience with common audit, however, we have found that certain criteria are needed to ensure the necessary high quality of audits performed for the health care programs of the Social Security Act. These criteria include: 1. Audits performed by experienced and knowledgeable personnel. 2. Audits conducted under standards of performance set forth by the Secretary, consistent with acceptable professional audit standards. 3. Procedures established to ensure quality control over audit results. The savings of coordinated audit derive from two sources: saving in the administrative cost of performing audits and saving in benefit dollars from audits of higher quality. Generally, a common audit will save administrative dollars, especially where all programs use a common cost report. These savings come from the elimination of duplicate audit work. However, the major contri- butions to be gained from a common audit are the increased quality of the audit, the expanded base of benefit dollars being audited and the resulting saving in benefit dollars. That becomes more apparent when one considers that, in the Medicare Program, administrative cost represents only two percent of program expenditures. A program of common audits, therefore, should produce audits of sufficiently high quality to ensure that the appropriate saving of benefit dollars is achieved. Regardless of how the audit is performed, the Medicare or Medicaid intermediary retains responsibility for ensuring proper program payment. Without the criteria listed above, the quality of the common audit could not be assured. Section 208: Increased Medicare funding in Guam, Puerto Rico and Virgin Islands This is a provision of the proposed bill on which we prefer not to offer any comments. PAGENO="0958" 950 Section 209: Medicare reimbursement to HNOs This section links the definitions of "health maintenance organization", "basic health services" and "supplemental health services" to the provisions of Title XIII of the Public Health Service Act, often referred to as the Federal HNO Act. In addition, it includes a provision that at least half of. the HNO's members must be neither Medicare beneficiaries nor Medicaid recipients. The effect of conforming the definitions is to restrict eligibility of HHOs for Medicaid reimbursement to the ones that are federally qualified under Title XIII of the Public Health Service Act. While this is legislatively convenient, we do not believe it serves the best interests of the nation's Medicaid recipients. Title XIII was enacted in 1973 as a demonstration program and qualification requirements were written as prerequisites for federal grants, loans and loan guarantees. A "dual choice" provision was included to assure that the federally supported HNOs would have reasonable access to the market. Many MMOs which have not been developed with federal funds have become qualified in order to obtain equitable consideration in their competitive marketplace. The result is that about half of the HMOs in the nation have become qualified. However, there are many HMOs which may never seek federal qualification for reasons having nothing to do with either quality of care or financial stability. They are licensed or certified under state statutes and supervised or regulated by one or more state agencies with public accountability. Many contract with the Office of Personnel Management to provide coverage for federal employees. We believe that Medicaid recipients should not be denied access to half of the HMOs in the nation merely because they are not federally qualified under Title XIII. HNOs can be defined without reliance upon Title XIII; the generic definition originally used for Medicare reimbursement was adopted for use in Health Planning regulations. Federal qualification is not a guarantee of financial stability; several federally qualified H1~Os have failed recently. There is probably no reliable substitute for examination of the individual HMO by those responsible for administering the Medicaid program. We recommend that a generic definition of HMO be incorporated in place of reliance upon Title XIII for the purposes of Medicaid reimbursement and that authority and responsibility for approval of individual HMOs be placed with those otherwise responsible for the Medicaid program. In this way, nearly double the number of HMOs could be potentially available to Medicaid recipients. We support the requirement that at least half of the HMO's members be neither Medicare beneficiaries nor medicare recipients. The presence of a majority of privately financed HMO members is a positive influence, we believe, on the quality of care provided and the sensitivity of the HMO to the needs of its members. However, we recommend that an appropriate authority be empowered to waive this requirement for good cause, such as a predominately retired popula- tion in the HMO's service area. We have offered similiar comments and recommendations on H.R. 4444, which deals with changes in Medicare reimbursement to lIMOs. PAGENO="0959" 951 Title III: PSROs Section 301: Fully designated PSROs This section provides for certain changes in the requirements for fully designat- ing a PSRO that limit those requirements to satisfactory conduct of reviews of services provided by or in hospitals. It also gives the Secretary authority to determine for each fully designated PSRO when other services sre to be reviewed and/or to designate other organizations to conduct such reviews. We support the thrust of this provision in that it permits PSROs to focus on hospital reviews and to fully develop their capability in thst ares without the legislative pressure to move into other complex review areas. This will add stability to the PSRO review process. However, we are concerned that the organizations the Secretary designates have the capacity and expertise to perform those functions in a cost-effective way. Therefore, we suggest that the legislation require the Secretary to develop standards and/or criteria that would establish the qualifications of the review organizations. Section 302: Non-physician members of PSROs We support this provision because it is consistent with the concept of peer review and permits increased flexibility for the PSRO in determining its membership. This would permit the PSRO to include non-physician practitioners who provide services that are subject to the standards and criteria established for care of hospital patients. Section 303: PSROs as non-government agencies This provision would designate PSRO5 as non-government agencies for purposes of freedom of information, privacy and related matters. We support appropriate disclosure under freedom of information. We are and have been concerned, however, about the need to insure the confidentiality of medical information related to individuals. However, HEW should be required to develop regulations that provide for public disclosure of essential summary information while protecting individual patient data. Section 304: Abolition of statewide PSRO councils Lacking a base of pertinent information on this particular provision, we decline to comment. Section 305: Adding non-physician personnel to PSRO council Once again, lacking a base of pertinent information on this provision, and having no relevant views regarding it, we prefer not to comment. Section 306: Elimination of PSRO payments through hospitals We support this provision because it should serve to simplify administrative procedures. Section 307: PSRO consultation This section requires PSRO5 to consult with representatives of non-physician health care practitioners and institutional and non-institutional providers. PAGENO="0960" 952 This replaces a requirement to establish advisory groups of those individuals and institutions. We support this provision because it provides more flexi- bility for the PSRO in meeting its needs. While this flexibility is important, the type of consultation required is essential and we urge that procedures be established to assure such consultation where needed. Title IV: Miscellaneous provisions Section 401: Authority to waive requirements of the Social Security Act for purposes of experiments and demonstrations on incentives for economy This section would allow the Secretary to waive any and all requirements of the Social Security Act for any period of time necessary to conduct experiments or projects which demonstrate incentives for economy. The stated purpose is to clarify the Secretary's existing authority granted in the 1967 and 1972 amendments to the Social Security Act. That authority is already broad in scope since it covers all aspects of the program, including methods for determining payment, costs of services rendered, scope of benefits available, institutions allowed to participate in the Medicare program and various ways to provide necessary patient care. In the expansion inherent in the new proposal, Congress would offer the Secretary no guidance in the exercise of the authority to experiment. We can see no reason for such unlimited authority. Excessive experimentation is not desirable, given the uncertainties and discontinuities in program management. Experimentation also needs a focus around clear objectives and an evaluation mechanism that fairly and objectively represents the impact of the experiment. The findings of the General Acco*~nting Office study commissioned by the Congress in PL 95-142 clearly report these concerns and offer a series of cautions that underscore the importance of congressional attention on this matter. With respect to the principal issues we have covered in this testimony, the GAO report has made the following points, summarized in our own language: With respect to competitive bidding, the report supports the technique as a well-established and effective procurement technique. Howaver, it raises the point that itmight not be appropriate for the Medicare program because of the nature of the program and evidence that the technique will seriously affect program goals related to service, contractor performance and containment of benefit costs. In other related areas, the report recommends that the Secretary, in view of the fact that there is not yet enough evidence that competitive bidding might be the ultimate and most desirable goal, should: -- conduct careful evaluation of competitive bid experiments; - conduct experiments with competitive bidding for merged administration of Parts A and B of Medicare; -- conduct experiments with incentive contracting; PAGENO="0961" 953 -- take immediate action to reduce the number of intermediaries and carriers by removing the less efficient performers while realigning the geographical areas and applying performance standards. This recommendation contemplates continuing separate intermediary and carrier contracts while experiments on merged administration are conducted and evaluated. The report recommends that Congress take the following action: -- dive the Secretary standby authority to adopt competitive bidding as the procurement technique, such authority subject to action approval by the congnizant congressional committees if evaluations of competitive experi- ments can be shown to have no measurable negative effects on benefit costs and contractor performance. At the risk of being repetitious, we would like to include some of our earlier comments on the draft of the GAO report. With respect to the finding of too many intermediaries and carriers for efficient administration of Parts A and B, the report relies heavily on estimated cost savings to be achieved by elimination of duplicated fixed costs of contractors and the economies of scale to be obtained by larger claims volumes among the remaining contractors. There a~e countervailing factors that have not been considered, and advantages of cost, service and quality that would be sacrificed in the proposed change. For example, there are cost elements that do not respond at all to volume changes and some that react only insignificantly. There are further consi- derations that have not been addressed, such as the locations of the remaining contractors with respect to the cost and availability of labor. There would also be losses of the savings now realized through administrative costs that are shared between the Medicare and private operations of current contractors. There would be added costs for the remaining contractors, including enlarged communications and service capabilities, added staff travel for provider audits, new machine data links and others. With respect to the need to experiment with having a single contractor process all Medicare workload in a territory, we support a properly structured and evaluated test of the concept but believe the test should not be tied to competitive bidding. There might be opportunities for improved efficiencies in combined administration of Parts A and B by a single contractor using an integrated electronic data processing system, but the counterbalancing factors discussed earlier, in connection with reducing the number contractors, is also relevant here. Furthermore, recognizing the negative effects of competitive bidding on service and quality, we believe consideration should be given to a test which does not include competitive bidding. With respect to the GAO report's questions regarding the advantages of com- petitive fixed-price procurement, we would summarize the points made in our discussion of Section 102 of the Secretary's proposed bill: We believe the fixed-price competitive bid procurement process has limited applicability to the Medicare program because it cannot accommodate the service and quality objectives of the program or the constant need for adjust- ments in administrative practice. We further believe that current contracting 56-071 0 - 80 - 61 PAGENO="0962" 954 methods can be considerably improved by the incorporation of specific goals and standards which permit the Secretary to make changes in intermediaries and carriers on the basis of objective criteria (even when a provider nomination is involved). At any time you wish, we would be very glad to provide further information and documentation on our views regarding either the proposed bill or the GAO report. I thank you for the opportunity to present our views on these vita~lly important matters. PAGENO="0963" 955 ATTACHMENT III STATEMENT OF THE BLUE CROSS AND BLUE SHIELD ASSOCIATIONS on H.R. 4444 MEDICARE REIMBURSEMENT FOR HMOs for the SUBCOMMITTEE ON HEALTH COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES July 13, 1979 PAGENO="0964" 956 On June 18, 1979, our cornents on H.R. 3990 and H.R. 4000, which will amend. certain provisions of the Medicare and Medicaid programs, were presented to this committee by Merritt Jacoby, Acting Senior Vice President of the Government Programs Division of the Blue Cross and Blue Shield Associations. We appreciate this opportunity to supplement those cornents With our thoughts on H.R. 4444, a bill which proposes to change the method of Medicare reimbursement for Health Maintenance Organizations. Blue Cross and Blue Shield Plans serve approximately half of the United States population. We serve 20 million Americans as fiscal agents or intermediaries for the Medicare, Medicaid, and CHAMPLJS programs, and provide privately underwritten coverage for 85 million Americans. The fact that 1,500,000 of that population. is served through 65 }*t0s which are operated by or affiliated with Blue Cross and Blue Shield Plans is pertinent to our interest in H.R. 4444. We support the general intent of H.R. 4444 as necessary and reasonable. We believe that HMO membership can be particularly valuable to Medicare bene- ficiaries, however, very few beneficiaries have enrolled inHMOs because current Medicare reimbursement posed administrative problems for many HMOs. The concepts embodied in H.R. 4444 offer significant improvement. In the interest of brevity, we shall address our corments on this bill to two specific areas which remain of concern to us. These deal with the I-{MO benefits available to enrolled Medicare beneficiaries and with the eligibility of HMOs for Medicare reimbursement. PAGENO="0965" 957 H.R. 4444 specifies a method to measure the expected cost savings from the enrollment of a Medicare beneficiary in an HMO, provides for the retention of a portion of those expected savings by the federal government, and makes the balance available for the purchase of additional HMO benefits beyond what is ordinarily covered by Medicare. The order of priority for purchasing additional HMO benefits with such savings is also specified. We do not believe that establishing this priority through legislation serves the best interest of either Medicare beneficiaries or Hr4Os. We believe that these benefit decisions can best be made by each HMO and the community it serves. Medicare covers about two-thirds of the average HMO's benefits, leaving a gap of about one-third to be filled by benefits purchased with expected cost savings. If the expected cost savings are sufficient to fill the entire gap, Medicare beneficiaries will have benefit equity with non-Medicare HMO members, and the order of priority does not matter. However, the expected cost savings may not be sufficient to cover the entire gap. In that instance, the challenge of matching available monies with new benefits and relating the result to the non-Medicare HMO benefits, can best be done by each individual HMO. These decisions should be made in light of the beneficiary's needs, the cost and benefit of various alternatives and the available resources. H.R. 4444 refines the limitation of HMOs eligible for Medicare reimbursement to those qualified under Title XIII of the Public Health Service Act. While this is legislatively .expedient, we do not believe that it serves the best interests of the nation's Medicare beneficiaries. Title XIII was enacted in 1973 as a demonstration program, and the qualification requirements were written as prerequisites for federal grants, loans and loan guarantees. A PAGENO="0966" 958 `dual choice" provision was included to assure that these federally~ supported HMOs would have reasonable access to market. Many H~3s which were not developed with federal funds have sought qualification to obtain equitable consideration in their competitive marketplace. The result is that about half of the HMOs in the nation have become qualified. There are many HMOs, however, which may never seek federal qualification. Their reasons do not relate to the issues of quality of care or financial stability. These HMOs are licensed or certified under state statutes, and regulated by one or more state agencies. Many contract with the Office of Personnel ~1anagement to provide coverage for federal employees. We believe that Medicare beneficiaries should not be denied access to half of the HMOs in the nation merely because they are not federally qualified under Title XIII. liMOs can be defined without reliance upon Title XIII; the generic definition originally used for Medicare reimbursement was adopted for use in the Health Planning regulations. Federal qualification is not a guarantee of financial stability; in fact, several federally qualified HMOs have not succeeded. We believe that each HMO which would like to enroll Medicare eligibles should be examined and approved by the Medicare administration. We recormi~end that a generic definition of HMO be incorporated in place of reliance upon Title XIII for the purpose of determining eligibility for Medicare reimbursement. The authority and responsibility for approval of individual HMOs should be placed with those otherwise responsible for the Medicare program. Given these provisions the number of lIMOs available to Medicare beneficiaries would be expanded significantly. . Thank you for this opportunity to present our views. We would be pleased to discuss our concerns in more detail at the committee's convenience. PAGENO="0967" 959 ATTACHMENT IV STATEMENT OF THE BLUE CROSS ASSOCIATION THE BLUE SHIELD ASSOCIATION ON H.R. 4281 MANDATORY SECOND OPINION FOR ELECTIVE SURGERY IN FEDERAL EMPLOYEE PROGRAM SUBCOIIMITTEE ON COMPENSATION AND EMPLOYEE BENEFITS COMMITTEE ON POST OFFICE AND CIVIL SERVICES BY Edward S. Mills, Vice President August 13, 1979 PAGENO="0968" 960 Madam Chairwoman, members of the Committee, I am Edward S. Mills, a Vice President of the Blue Cross and Blue Shield Associations. We appreciate this opportunity to offer our views on H.R. 4281, a bill which would amend Section 8902 of Title S to require federal employees, enrolled under service and indemnity health benefit programs, to obtain a second opinion for elective surgical procedures covered under those health benefit programs. Collectively, the 69 Blue Cross and 70 Blue Shield Plans in this country serve almost half the population of the United States. This includes over 5 million participants in the Blue Cross and Blue Shield Government Wide Service Benefit Plan for federal employees. Because federal employees are based in every state, this proposed legislation would affect all of our Member Plans and their subscriber and provider corrm~unities. For the past decade or more, the Blue Cross and Blue Shield Associations and our members have been developing programs of cost containment designed to reduce the cost of health care provided to our subscribers while maintaining or improving the overall quality of the health care services which they receive. We will continue to initiate and support effective programs to achieve those dualgoals. In considering this bill, we should like to offer several comments regarding the cost efficiency of the proposed mandatory second opinion program and its prospective impact on our federal employee subscribers. Although Dr. Eugene McCarthy's pioneering work in quantifying the results of second opinion programs for elective surgical procedures has focused needed attention on the subject, the ultimate effect of such programs is not yet clear. PAGENO="0969" 961 Indeed, examination of Dr. McCarthy's own data, reported in the December 1978 issue of Medical Care, as well as information compiled from four voluntary second opinion programs operated by Blue Cross and Blue Shield Plans, fails to convince us that these programs necessarily "screen potential surplus surgery" to any greater extent than would occur in the absence of a formal second opinion program. Dr. McCarthy identified not-confirmed patients who subsequently had no surgery or medical treatments as "potential surplus surgery" cases, and he emphasized this group of patients in his discussion of the ability of second opinion proyrams to screen potential excess surgery. However, the practice of patients seeking a "second opinion" did not begin in recent years as a cost containment device. Rather, second opinions are a time honored practice in medicine and have historically been employed by patients and physicians as a means to assure high quality medical care. Just as reasonable individuals may disagree on a point of law or economic theory, so too may expert diagnosticians disagree on the optimal treatment for a clinical problem. Dr. McCarthy's work does not adequately investigate the well-established, per- vasive "unofficial" second opinion apparatus which has served patients for decades. To draw reason~ble conclusions regarding the merit of structured second opinion programs, such mechanisms must be shown to be "superior to," "equivalent to" or "inferior to" the existing alternative--the "unofficial" second opinion pro- gram presently in place. In doing so, two essential patient groups must be compared. One group utilizes a formally structured sec'ond opinion program, PAGENO="0970" 962 whether voluntary or mandatory; the second group encompasses those patients who do not have access to a formal program, and who may, or may not, - seek an additional opinion for their own reasons. We believe Dr. McCarthy doesn't adequately compare the first group to the second group. A thorough research protocol must determine the number of patients in the second group who receive surgery recommendations but do not undergo surgery or who go on to secure a second opinion on their own initiative and subsequently decline to undertake surgery. Data for these people should then be compared to the counterpart data for the first group (formal second opinion programs) cohort. This comparison is essential to a proper evaulation of the second opinion program concept if the suggested comparisons of first and second group experience indicate formal programs do not change the probability of-surgery, other things being equal, they are not cost-efficient. In such a case, administrative expenses and second opinion consultation fees would be a dead weight loss to the payer of benefits. In his study of voluntary programs, Dr. McCarthy estimated 10 percent of the eligible population decided to seek second opinions. During the one-year followup period, 55.1 percent of that original 10 percent eventually under- wentsurgery, regardless of a confirming or non-confirming second opinion. We found similar results in analyzing one-year followup ddta from four Blue Shield Plans. We calculated a 50.7 percent probability of surgery regardless of yes or no confirmations. The differences in Dr. McCarthy's analyses and our results are not significant. The absence of data describing the probabilities of surgery for patients who don't participate in voluntary programs and for PAGENO="0971" 963 those who don't have a formal voluntary program makes it impossible to draw definitive conclusions regarding the impact of voluntary second opinion programs. Dr. McCarthy's analyses of mandatory second opinion programs raise other questions. He estimated that in mandatory programs, 80 percent of the popu- lation enrolled had second opinions. Employing Dr. McCarthy's data we calcu- lated the probabilities of surgery and found that 73.8 percent of patients in the mandatory programs had surgery regardless of the confirming or non-confirming second opinion, compared to the 55.1 percent figure for the voluntary programs. In the absence of better and more complete data, Dr. McCarthy's reported results provide surface evidence that mandatory programs increase the probability of surgery vis-a-vis voluntary programs. We do not mean to imply that we have reached a conclusion. Clearly more time is required for the operation of these programs as well as the assembly and analysis of experience data. Importantly, comparisons of the differential impacts of voluntary and mandatory second opinion programs must consider the different mixes of patients in each group. A priori, one would expect the mandatory program group to display higher surgery rates because some patients-- convinced of the necessity of the surgery for personal reasons (e.g., comfort or convenience)--would secure the second opinion only as a step in the larger surgical process, and proceed with the planned treatment. By contrast, those seeking second opinions under a voluntary program are likely to be initially more skeptical or apprehensive about the proposed surgery. As a result, they are more likely to be influenced by the second opinion. This theory is borne PAGENO="0972" 964 out by Dr. McCarthy's finding that 26.9 percent of those patients receiving a confirming second opinion in voluntary programs did not have the recommended surgery within one year. By contrast, only 18.2 percent of mandatory second opinion patients with confirming second opinions did not have surgery. One logical explanation of this difference may be that mandatory programs, by requiring a consultation as a condition of payment for the surgery, generate many consultations which are unlikely to change the outcome, given the subjective element in the decision. The analysis of the relative merits of voluntary and mandatory programs suggests that (a) mandatory programs are more expensive, (b) the overall quality of care may be improved by mandatory programs, but this is uncertain, and (c) we are presently unable to determine whether these costs are absolutely higher or lower than those associated with alternative treatment modes. Until these questions have been fully resolved, these second opinion programs should be minimally obtrusive on the patients right to seek the care he requires. A mandatory program would obviate that right. The mandatory program proposed by this Bill presupposes that a consultants second opinion is the correct opinion. Not only has this simply not been proven, it ignores the subjective quality associated with elective surgery. Patients par- ticipate with the physician in the decision to undergo an elective procedure, based upon their real desire to eliminate pain or restore physical function. By ignoring this element, and making the second opinion consultant the authori- tative decision maker, a mandatory program becomes an inappropriate mechanism PAGENO="0973" 965 to determine the necessity of surgery. The necessity of elective surgery is usually a subjective decision. It involves subjectivity both of the physician and of the patient. We. do not know of any way to reduce those decisions to complete objectivity. Therefore, the most second opinion programs may do is increase the probability that the subjectivity of the first opinion is correct. However, we do know that mandatory programs will introduce certain dissatis- factions on the part of the subscriber. For example, a mandatory program requires carriers to inform all of its subscribers fully of the requirements for compliance and the penalties should such compliance not be fulfilled. Blue Cross and Blue Shield Plans can meet this requirement within reason. Nonetheless, our communications will not be perfect. Those patients who are not aware of the. program requirements would be denied benefits for otherwise covered surgical service and would be burdened with unforeseen financial liabilities. We support, on the other hand, a voluntary approach. More than 30 of our Member Plans provide these voluntary programs when their accounts request them. We believe a voluntary approach would protect the federal employee subscriber from the disadvantages of a mandatory program and would fulfill the objectives of a second opinion program. Madam Chairwoman, the bill poses additional issues. We have already submitted some technical issues to the.subcommittee staff for consideration, so I will only devote a few moments to those which we believe to be critical. PAGENO="0974" 966 Elective Surgery The bill, as written, does not define elective surgery.' Regulations should define elective surgery to avoid instances where the costs of obtaining a second opinion exceed the cost of potential surgery or involve such procedures as surgical obstetrical delivery and voluntary sterilizations which clearly do not benefit from a second opinion. We would expect the Office of Personnel Management to consult with carriers in the formulation of a definition, but we think it important that any legislation provide specifically for reasonable discretion in the regulations. Qualified to Perform Surgery The bill states the second opinion must be "provided by an individual who is qualified to perform the surgery involved." This requirement could limit patient access to non-surgical physician consultants. For example, a patient advised to undergo colon surgery may seek a second opinion. Under this bill, a gastroenterologist would not be qualified to render a second opinion, though he may be the most appropriate specialist to do so. The same would hold true for patients with heart conditions. A cardiologist who may be as qualified as a heart surgeon to render an opinion, and whose ability to weigh non-surgical alternatives may be better, would be ruled out. Demographic Considerations Our experience shows that a number of demographic factors play a large role in determining the structure of these programs. They become especially crucial if a mandatory program is established. For example, such determinants such as subscriber and physician population, specialty distribution, and urban versus rural settings will largely define the necessity of "open" or "closed" consultant PAGENO="0975" 967 panels, referral centers, staffing, and other program characteristics. To illustrate, Blue Cross and Blue Shield of Greater New York's second opinion program has an enrollment exceeding six million subscribers. The majority live and work in a highly urbanized area with a large physician population and an adequate distribution of specialists. These distinguishing traits make possible a program which uses a `closed," multi-specialty, surgical consultant panel and a referral center with a full-time clerical and professional staff. This design, however, may not be practical for an area which has fewer federal employees; a relatively small physician community; and is a predominantly rural location. These qualities suggest that a less rigidly structured program may be more feasible. Use of an "open" panel of consultants and a simpler administrative apparatus may better serve the same objective as the New York City program. Second Opinion Under Service and Indemni~y Benefit Programs The bill proposes a second opinion program only for those federal employee subscribers under service and indemnity benefit programs. We do not believe that such a program, if enacted, should be limited to those enrollees. Rather, if a second opinion program is implemented, it should be made available to all federal employees, regardless of the health benefit program under which they are enrolled. Recommendations Madam Chairwoman, I would like to briefly summarize our recommendations. PAGENO="0976" 968 First, no evidence has been presentedthat clearly demonstrates a mandatory program is any more effective than a voluntary program. In addition, a mandatory approach may result in the federal employees being penalized for unwitting non-compliance. Therefore, we would endorse a voluntary approach in second opinion programs for federal employees, and that this requirement apply to all federal employee health programs. Second, any approach should allow administrative flexibility. FEP subscribers may then be accommodated within the more than 30 experimental programs already in place in Blue Cross and Blue Shield Plans. This will minimize incremental administrative costs. Third, the bill should permit flexible administrative procedures to allow Plans to structure programs which reflect the unique demographic characteristics of their communities. Fourth, until sufficient evidence is available, these programs should be considered experimental, and subject to definitive studies which show the impact of second opinion programs on quality of care, the incidence of surgery and concomitant costs. The staff at the Associations have begun this investigation and we would be happy to cooperate with the Subcommittee staff to further evaluate these critical~ areas. We appreciate this opportunity to present our views and would be pleased to try to answer any questions you may have. PAGENO="0977" 969 TECHNICAL CONSIDERATIONS FOR SECOND OPINION PROGRAMS FOR ELECTIVE SUP.OERY 1. FOR PURPOSES OF SUCH PROGRAMS, HOW SHOuLD "ELECTIVE SURGERY" BE DEFINED? Advisory: The programs' criteria should include both a general definition as well as an outline of specific procedures to be excluded. Plans should consider elective surgery to be "surgery which may be scheduled to be performed at the convenience of the doctor or the patient, is notan emergency, and may be deferred." For purposes of the experiment, inoatient surgical procedures performed by an M.D., DO., D.O.S., and D.P.I1. should be eligible under the study. The following should be excluded: a. Procedures not covered under the subscriber's existing contract (i.e., cosmetic surgery). b. Voluntary sterilization procedures. c. Normal OB and abortions. ODinion: The above definition should be adequate for programs which are implemented as experimental studies. Should these experiments identify procedures which may benefit from second opinions, on-going programs should consider covering only those. This would assure a satisfactory cost-benefit ratio for the programs. Programs should also consider surgical services performed within environments other than the hospital, such as ambulatory care facilities (surgi- centers). 2. IN PROGRAMS PROVIDING SUCH BENEFITS, SHOULD THE SECOND OPINION BE REQUIRED OR AT THE OPTION OF THE PATIENT? Advisory: Pilot studies should be voluntary. That is, the employer groups should elect to participate at their option, and the subscriber, whose group has enrolled, should utilize the benefit at his option. Opinion: The intent of the experiments is to determine the viability and effectiveness of two or more opinions regarding a proposed surgery. Patient and physician confidence may be inhibited by mandating that an opinion be sought. This may adversely affect the purpose of the experiments. For this reason, the programs should be voluntary during the experi- mental phase. If the programs improve the quality of surgical care and present cost effective results, then the employer group should be offered the benefit as part of his contract. 56-071 0 - 80 - 62 PAGENO="0978" 970 3. SHOULD BENEFITS BE PROVIDED FOR A SECOND OPINION EVEN IF THE INITIAL PHYSICIANS ADVICE WAS AGAINST SURGERY? Advisory: The second opinion benefit should be available only when a recommendation for surgery is made. If the initial physician does not recommend surgery, the patient may seek additional advice from another physician at his own expense. If that physician dis- agrees with the initial physician and recommends an operation, the patient should then be eliciible to utilize the second opinion benefit. Opinion: The intent of these experiments is to define the degree to which recommendations for surgery are "confirmed" or not confirmed.' The programs, therefore, should necessarily be limited to conditions when a positive surgical recommendation is made. 4. SHOULD BENEFITS BE PAID FOR PERFOP~1ANCE OF COVERED ELECTIVE SURGERY IF THE SECOND OPINION WAS AGAINST SUCH SURGERY? Advisory: Benefits should be provided should the patient elect to undergo surgery regardless of the second opinion consultant's re- commendation. This conforms to the voluntary approach of the pilot study. Opinion: It is the patient's responsibility to make the determination diiB~irgo medical or surgical treatment as recommended by his physician. Blue Shield has traditionally limited its role to providing benefits for covered services which, according to accepted medical criteria and opinion, are deemed necessary and reasonable for the treatment of the patient's condition. Second opinion pilot programs do not determine the "necessity of surgery," that is the province of medical peer review. Rather these programs attempt to "confirm" or `not confirm' a recommendation for one method of treatment (surgery) in light of less traumatic alter- natives. 5. SHOULD BENEFITS FOR A THIRD OPINION BE ALLOWED UNDER SUCH PROGRAMS? Advisory: Benefits for a third opinion should be provided when necessary. Opinion: In some circumstances, when the first and second opinions conffi~t, a third opinion may be warranted. In those instances benefits should be provided. Beyond that, however, the patient should evaluate the recommendations and exercise his discretion to make a decision. PAGENO="0979" 971 6. SHOULD THERE BE ANY RESTRICTIONS ON THE PATIENT'S CHOICE OF SECOND OPINION CONSULTANT: a. BY SPECIALTY. OR OTHER PROFESSIONAL QUALIFICATIONS? (BOARD CERTIFICATION, ETC.) b. IN TERMS OF ECONPMIC RELATIONSHIP TO THE ATTENDING PHYSICIAN? (MEMBER OF THE SAME MEDICAL GROUP, ETC.) c. IN TERMS OF OTHER CRITERIA? Advisory: a. Consultants should be chosen at the option of the local Plan. The panel could consist of university based or private practicing physicians; surgically board certified; or simply any licensed M.D., D.O., D. D.S., or D.P.M. b. The consultant should not be any economic relationship with the initial physician. c. Generally, the list of consultants should be selected at random and on the basis of geographic convenience to the patient. If the patient seeks a third opinion he should select another consultant from the list. d. The consultant could be selected on the basis of similar specialty to the initial physician or on the basis of expertise as it related to the recommended procedure. Opinion: Plans must decide whether to limit panel participation to board certified surgeons, medical specialists, or any practicing physician. Consideration should be given to selecting a panelist for a specific case according to his expertise vis-a-vis the recommended surgical procedure. 7. MAY THE SECOND OPINION CONSULTANT RECOMMED A PHYSICIAN TO PERFORM THE SURGERY IF ASKED BY THE PATIENT, AND SHOULD THE CONSULTANT BE ALLOWED TO PERFORM THE SURGERY IN QUESTION IF IHE INITIAL PHYSICIAN CONSENTS? Advisory: The secord opinion consultant should agree not to per- form the surgery or assume the care of any patient he examines under the program. He should, however, be allowed to recommend an alternative form of treatment or another surgeon to perform the operation, as long as he and that surgeon have no economic re- lationship. The initial physician should be allowed to recommend a colleague for the second opinion as long as that physician is a participating second opinion panelist. PAGENO="0980" 972 Opinion: In order to assure the intenrity of the program and study, the consultants should avoid any conflict of interest in the care of the patient. 8. SHOULD THE SECOND OPINION CONSULTANT ROUTINELY BE INFORMED OF THE IDENTITY OF THE INITIAL PHYSICIAN, AND SHOULD THE INITIAL PHYSICIAN BE ROUTINELY INFORMED OF THE IDENTITY OF THE CONSULTANT? Advisory: The identity of the physician recommending surgery, the second opinion consultants and any medical information maintained by the referral center or Plan should be kept confidential. Knowledge of identitites is not an essential need to know' for effective and efficient use of the prooram. However, the patient obviously has the option of informing the respective physicians of their identities and other pertinent medical information. Opinion: Patients should be encouraged to have the physicians exchange as much medical information as possible. The educational benefits of communication between the consultant and initial physician should be a part of the prooram's objective. Patients are, however, frequently reluctant to inform their initial physician that they are seeking a second opinion. It should be left to the patient's discretion, therefore, as to whether or not the respective physicians are informed of the opposite's identity. 9. WHAT SHOULD BE THE LEPAL RESPONSIBILITY OF THE SECOND OPINION CONSULTANT FOR THE RESULTS OF ANY RECOMMENDATION CONTRARY TO THAT OF THE INITIAL PHYSICIAN? Advisory: The legal responsibility of consultants should not be altered by these proorams. Consultations are a part of the practice of medicine. The consultant's potential liability should be the same regardless of who requested the consult, be it the initial physician or the patient. Opinion: Second opinion programs have not created the concept of seeking a consultation. It is merely a system which removes financial restraints upon the patient to seek another opinion, and a mechanism by which data may be gathered to evaluate the effective- ness of second opinions. 10. ON WHAT BASIS SHOULD CONSULTANTS BE REIMBURSED UNDER SUCH PROGRAMS? (SET FEE, UCR, ETC.) Advisory: Second opinion consultants should be reimbursed one of two ways. It can be according to L'CR allowances for a consultation or upon a set fee. In both cases the consultant. as part of his participation on the panel, should agree to accept the payment as payment-in-full. PAGENO="0981" 973 Opinion: Reimbursement for the consultation should be accepted as payment-in-full. The specific reimbursement methodology should be determined by each program. 11. WHAT ADDITIONAL EXPENSES ATTENDANT TO RENDERING THE SECOND OPINION SHOULD BE REIMBURSED? (DIAGNOSTIC TESTS, ETC.) Advisory: All medically necessary diagnostic tests, performed by the second opinion consultant. should be paid by the program. Opinion: Every effort should be made to have the patient forward all related medical information to the second opinion consultant. This will help to alleviate any duplication of diagnostic testing. As stated earlier, however, we recognize that the pati~nt may not wish to inform his physician that he is seeking a second opinion. In those instances, the patient's riaht to confidentiality must be respected. The diagnostic services performed by the second opinion consultant, including those that may be duplicated, should still be paid by the program. PAGENO="0982" 974 ATTACHMENT V Statement of the BLUE C~1OSS ASSOCIATIO! on H. R. 3990 "1EDICARE~ A~iEf!3i1Ei!TS OF 1979" and H. R. 4000 A BILL TO AIIEI!D THE SOCIAL SECU1~ITY ACT ~!ITH RESPECT TO HEALTH PROGRXIS AUT!ORIZED U!DER IT~ AIID FOR OTHER PURPOSES PRESEi!TED TO SUBCOi~1ITTEE O~! HEALTH C01IITTEE O~I HAYS MD ;~EMs U.S. HOUSE OF REPRESEiITATIVES by 1lerritt H. Jacoby Acting Senior Vice President June 18, 1979 PAGENO="0983" 975 1r. Chairman and lembers of the Committee, I am ierritt U. Jacoby, Acting Senior Vice President of the Government Programs Division of the Blue Cross and Blue Shield Associations. We appreciate the opportunity to comment on H.R. 3990 and H.R. 4000 which will amend certain provisions of the ledicare and ledicaid programs. The Blue Cross and Blue Shield Associations, which operate under a sin- gle Chief Executive and staff, are the national coordinating agencies for the 69 Blue Cross and 70 Blue Shield Plans in this country. These Plans provide privately underwritten health care coverage to about 35 million Americans, and serve almost another 20 million as fiscal agents or inter- mediaries for the ~edicare, edicaid and CHAUPUS programs. Thus, the Plans serve about half the U.S. population. I The Blue Cross Association serves as a nationwide prime contractor to the Department of Health, Education and Welfare for Administration of Part A of the fedicare program. Sixty-eight Blue Cross Plans are Part A subcon- tractors of the Association. In Federal fiscal year 1977 they processed 28.5 million claims representing $14 billion in ledicare benefits. Thirty-two of the 70 Blue Shield Plans which constitute the Blue Shield Association currently serve as ;~edicare Part B carriers. In fiscal 1977, they processed 66 million Part B claims totaling $2.7 billion in benefits. I will address provisions of H.R. 3990 first. PAGENO="0984" 976 Section 2: Home Health Services This section of the bill would, in part, require the Secretary to designate regional agencies or organizations to act as intermediaries for all home health agencies within the region. Section 1816 of the Social Security Act was amended in 1977 (PL 95-142), providing the Secretary with authority to designate regional intermediaries for a class of health care facilities, It was the intent of Congress in passing this recent amendment that the Secretary would exercise this authority only after: (a) application of standards and criteria to current intermediary performance, (b) determination that appointment of a regional intermediary * results in more effective and efficient administration, and (c) provision of explanations to the effected providers and intermediaries with the opportunity to appeal the Secretary's actions. To date, this authority has not been exercised. t!e recommend that rather than enactment of new legislation effecting an entire class of providers, the current authority should be exercised. If the goal of the proposal in the legislation under consideration is to improve program administration, the current authority provides a rational context in which such improvement can take place. Section 3: Waiting Period for Reentitled Disability Beneficiaries We would support a legislative proposal to eliminate a second twenty-four r:onth waiting period for reentitlement to fledicare benefits by reentitled disability beneficiaries. PAGENO="0985" 977 Since an individual entitled to Social Security disability benefits must wait a period of twenty-four months to gain initial entitlement to fledicare benefits, a second waiting period of twenty-four months places an undue burden on a minority of disabled beneficiaries whose disability benefits are terminated, then reinstated. In almost all cases where reentitlement to disability benefits occurs, the disabling condition is the same condition on which initial entitlement was based. Thus, these individuals might be unable to obtain health care coverage or have a waiting period for coverage due to their pre-existing medical condition. Since disability beneficiaries are not gainfully employed, there would be no opportunity to obtain group coverage through employment and it would be unlikely that an individual would maintain full private health insurance benefits during a period of entitlement to Iledicare. Thus, the opportunities for health insurance coverage other than Fledicare would be limited. Finally, a disability beneficiary entitled to Iledicare coverage might attempt to return to work due to an improvement in his medical condition only to become reentitled to disability benefits in a very few months. It would seem that an unsuccessful attempt to work, lasting two or three months, should not require two years of waiting to regain fledicare coverage. Section 4: Coverage of Services Furnished to ~1edicare Beneficiaries Outside th~USA lie question the proposal to authorize the negotiation of reciprocal agreements with other countries in exchange for coverage of health care services to foreign nationals. PAGENO="0986" 978 Eligibility for riedicare benefits by citizens and qualified aliens is based on either qualified quarters of covered employment under Social Security or payment of premiums. Foreign nationals would not have to do either. To preclude fledicare entitlement to a significant number of citizens unless certain eligibility requirements are met, but to extend it to foreign nationals without the same requirements does not seem appropriate. Additionally, foreign nationals residing in the United States have the opportunity to obtain health insurance through the private sector since residency qualifications~are minimal. Section 8: Comprehensive Outpatient Rehabilitation Services The proposed legislation would establish a new type of provider under the iledicare program, the main purpose of which would be to provide rehabilitation services on an outpatient basis. While we support less costly alternatives to the delivery of health care services, we question the need to establish this new type of provider category. Since the definition of comprehensive outpatient rehabilitation services and the type of services which would be required are so similar to those of rehabilitation agencies, we would propose that consideration be given to integrating the concept of comprehensive rehabilitation services with the existing rehabilitation agency concept so that dual systems which might be less efficient and effective are not created. Section 10: Demonstration Projects for Hospice Services We support the proposed legislation which provides demonstration authority for hospice services. PAGENO="0987" 979 With respect to the scope of the demonstration projects, we would suggest considering its expansion to include the following points for the Secretary to evaluate: whether hospice services in various settings represent a duplication of traditional services in selected settings; the comparative cost of hospice services to comparable services available in the traditional health care delivery system; and the identification of which services provided by hospices are already represented as covered services under the iiedicare program and which are not. Additionally, since hospice services are primarily rendered to the terminally ill, the question of providing support services which are custodial in nature should also be considered in the demonstration projects. This is recommended because Iledicare legislation has always excluded custodial care from its scope of coverage; hospice services frequently include a broad range of support services which are custodial in nature. Section 14: Application of Iledicare Standards to Rural Hospitals Section 14 allows some flexibility in the application of ledicare personnel and other certification standards for small rural hospitals. This proposal recognizes that these providers may face problems which are beyond their control in the provision of needed health care services. There may be a shortage of trained personnel in the area or rigid enforcement of some fire and safety requirements may result in unreasonable hardship. We agree with the intent of this proposal as long as there are safeguards which protect the patients. The proposal should not allow situations where there is inadequate staffing to meet the needs of the patients or where staff are allowed to perform services for which they are not properly trained. PAGENO="0988" 980 lie believe that the impact of this legislation will be limited, since currently Medicare certification requirements (except for utilization review) are deemed to have been met by those hospitals which meet the criteria established by the Joint Commission on Accreditation of Hospitals. Therefore, the flexibility legislated by the Medicare program will have the greatest impact if the JCAH also accepts flexibility in the application of standards. Section 19: Payment to Providers of Services This section would eliminate that provision of the law restricting payment to the lesser of cost or charges. This elimination would, in our estimation, serve a meaningful purpose. The provision was originally intended to protect the program from those institutions which operated in an inefficient manner. The program has subsequently developed other methodologies for controlling payments to inefficient or excessively costly providers. Payment on the basis of the lesser of costs or charges through its enforcement, penalized governmental providers and providers which operate on a philan- thropic basis. These providers either by legislative fiat or through intentionally maintaining low charge levels have not been reimbursed the full cost of rendering services to Medicare beneficiaries. Thus, these institutions have subsidized the Medicare trust funds as well as the patients for whom the lower rates were intended, and this was not the intent of this reimbursement technique. In the elimination of lesser of cost or charges reimbursement, the Secretary should be requested to provide means by which the institutions previously penalized can recover their costs without charging their future patients excessive rates. PAGENO="0989" 981 The follot:ing comments address the sections of H.R. 4000 which are of particular interest to us. Section 1: Expanded Nembership of Professional Standards Review Organizations It is important that the Statewide Council Advisory Groups and National Review Council be comprised of as broad a spectrum of health care profes- sionals as is deemed necessary to address the responsibilities of the Professional Standards Review Organizations and to provide direction and advice on area and national issues. Since the Professional Standards Review Organization experience to date has indicated that the advisory groups need expansion to be responsive to the needs of the area PSROs, both individually and in the aggregate, we support the proposed modifications to their composition. Section 5: Hospital Providers of Long Term Care Services (`Swin~-8eds'!J We support the provisions in Section 5 that encourage acute care hospitals providing skilled extended nursing care to utilize facilities fully while appropriately meeting patient care needs. We are pleased to note that this legislation offers the benefits of the program to all hospitals meeting the criteria specified in the bill regardless of size or location. We are particularly pleased with the provision for evaluating the impact of such a change on utilization. ~1e believe the use of an average daily occupancy rate as a measure of eligibility is on effective way of determining excess bed capacity to be used for long term care. The figure of 60% should be evaluated and the report required of the Secretary should include comments on the adequacy of this figure. PAGENO="0990" 982 Since circumstances in different situations will vary, hospitals which do not meet the less than 60% average occupancy criteria may be able to demonstrate excess bed capacity suitable for this program. t!e urge that a second criteria be used on an experimental basis during the initial phase of this program. This criteria should allow hospitals which operated at a daily occupancy which at no time in the specified period exceeded 80% to be eligible. The Secretary should include an evaluation of this criteria in his report to Congress. Section 6: Coordinated Audits Under the Social Security Act We support the proposal for coordinated audits for titles V, XVIII and XIX. The concept of common audit is not new. The recognition of duplication of functions and potential savings of program dollars has been a concern and has been addressed by Blue Cross Plans since early in the Medicare program. Based on a survey in early 1978, 28 Blue Cross Plans had common audit agreements with Medicaid in their respective states. Most of the agreements involved hospitals, and varied from state to state as to requirements, degree of participation and percent of cost sharing. The other remaining states either maintain their own audit capability or receive a copy of the Medicare Cost Report under the Freedom of Information Act. The latter situation has been occurring more in recent years and has resulted In a saving to the Medicaid program since it is not sharing in the cost associated with the finalization of the cost report. From our experience with common audit, however, we have found that certain criteria need to be established to ensure the necessary high quality of audits performed for the health care programs of the Social Security Act. These criteria include: PAGENO="0991" 983 (1) The audit must be performed by experienced and knowledgeable personnel; (2) The audit must be conducted under standards of performance set forth by the Secretary, consistent with acceptable professional audit standards; (3) Procedures must be established to ensure quality control over the results of the audit. I would like to explain the need for these criteria. The savings of the coordinated audits derives from two sources: savings in the administrative cost of performing audits and savings in benefit dollars from audits of higher quality. Generally, a common audit will save administrative dollars, especially where all programs use a common cost report. These savings come from the elirnina- tion of duplicative audit work. However, the major contributions to be gained from a common audit are the increased quality of the audit, the expanded base of benefit dollars being audited and the resultant savings in benefit dollars. This becomes more apparent when one considers that, in the fiedicare program, administrative cost represents only two percent of program expenditures. A program of common audits, therefore, should produce audits of sufficiently high quality to ensure that the savings in benefit dollars are achieved. Regardless of how the audit is performed, the program intermediary retains the responsibility for ensuring proper program payment. Without the criteria listed above, the quality of the common audit could not be assured. Thank you for the opportunity to comment on these legislative initiatives. PAGENO="0992" 984 ATTACHMENT VI A BLUE CROSS ASSOCIATION Statement On REIMBURSEMENT OF PHYSICIANS IN TEACHING HOSPITALS Presented to the SUBCOMMITTEE ON HEALTH COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENATIVES September 16, 1976 Neil Hollander Vice President, Health Care Services PAGENO="0993" 985 This statement is submitted by the Blue Cross Association for the record of the Ways and Means Health Subcommittee's September 16, 1976 hearing on reimbursement of physicians In teaching hospitals. The comments are presented In summary form. We would be pleased to provide more detailed comments at the request of the Committee. The Blue Cross Organization has considerable experience with the problems and Issues surrounding payment for provider based physicians generally and teaching physicians specifically. Our experience, and a review of the legislative history leads us to conclude that program Implementation has departed significantly from the original intent of Congress -- that ls3where the physician is compensated by the hospital, payment for the physician's services would be made through the hospital Insurance trustfund (Part A). Afl other physicians would be made reimbursed through the supplementary medical Insurance trust fund (Part B). We believe that intent was sound. Therefore, It Is our recommendation (presented In detail later) that total medicare payment to physicians who do not have a private patient relationship should be made from one fund, either Part A or Part B. The physIcia~i reimbursement from the Part A or Part B fund should be dependent upon the nature of the contractual arrangement between the hospital and the physician. This recommendation would simplify program administration, minimize the potential for program abuse and provide a basis for review of the reasonableness of 56-071 0 - 60 - 63 PAGENO="0994" 986 physician compensation. Furthermore, it recognizes that, because of the complex nature of reimbursing for physicians services, program changes will need to be incremental in order to avoid complete disruption of the system that has evolved since the inception of Medicare and which, to a great extent, Is still appropriate. In developing our recommendations, we found that the recent study published * by the Institute of Medicine of the National Academy of Sciences (IOWNAS) * provided many Important insights and gudelines for reimbursement of physicians in teaching settings. - The IOM/NAS study promulgated a series of principles against which any physician reimbursement mechanism should be evaluated. We support those principles. The IOM/NAS study recommends tiat the cost basis of reImbusernent method under FL 92-603 with modifications, or the fee basis of reimbursement under FL 92-603, and their own unified payment" method be avilable for physicians on an institution-wide basis. Each of the recommendations, however, falls short of meeting all of the design principles proposed by the IOM. Application of the IOM recommendation would require all physicians in an institution to adopt the same reimbursement method. We question the need for such a requirement. We believe the physician! hospital right to enter into a contractual arrangement must continue to be recognized. The controlling PAGENO="0995" 987 factor in determining the basis of reimbursement should not be the contractual agreement between the physician and the hospital. The focus of the reimburse- ment method must be on the result .(i.e., amount paid under the contract) not on the form of the transaction. The IOM/NAS study proposes the continued availability of the cost method of reimbursement, with certain modifications, on an Institution-wide basis. We generally support that proposal subject to the following modifications: (1) The election of the cost method should be available to any physician within the Institution rather than requiring all physicians In that Institution to make the election. Physicians' services to Institutional patients (patients for which a private patient relationship does not exist) must be reimbursed on a cost basis. (2) Where the áost method applies, the cost of physician services, other than volunteer services, rendered by physicians on the hospital and/or medical school, staff, should be treated on an actual cost basis as any other allowable hospital.cost, subject to the usual cost finding and cost apportionment techniques. (3) The imputed cost of physicians who volunteer their services shOuld continue to be calculated on a per diem basis and settled as a separate computation through th~ cost report. PAGENO="0996" 988 (4) Billing for physician services under the cost method should utilize the hospitals established schedule of charges for those services. This vould eliminate the currently proposed requirement to bill a per diem charge for physician services rendered to Medicare bene- ficiaries. Further, it would not require any revision to either the existing claims processing mechansim or the cost reporting format. Payment to all provider-based physicians who do not have a `Pri- vate Patient Relationship, should be based on the combined billing principle and would be made by the Part A Intermediary, this provision would apply most frequently to radiologists, patholo- gists, cardiologists and emergency room physicians. Splits between the Part A and Part B trust funds could be made at the end of the year based on the provider cost report. In connection with the cost reimbursement approach, IOM/NAS recommended a separate fee reimbursement mechanism for physician services rendered In ~ecial care units. We believe this would be unnecessary under the proposal outlined above. - The laM/bIAS study recommends the availability of a fee for service method of reimbursement as the sole payment method for all physicians In a teaching institution. We disagree with that proposal.. While we recOgnize that such a change would result in payment for physician services from only one trust fund, it would necessitate significant changes in existing physician arrangements and PAGENO="0997" 989 focuses on the process (i.e., fee for service) rather than reasonablenes~ of The result (i.e., amount paid). Furthermore, we believe, such a change would contribute to an Increase In health care costs both for patients and the Medicare Program. We recommend that the fee methodof reimbursement be available only for physicians who have a "Private Patient Relationship" with patients to whom they render services. These physicians may also be compensated by the provider for other services, Including supervisory services. ra these circumstances, the following would apply: (I) The physician would be precluded from billing for any patient care services except those rendered to that physician's private patients, and (II) The hospital and physician would be required to certify that the billing was for services rendered to that physician's private patients. Therefore, the determination of the private patient status would be made jointly by the hospital and the physic1~n. The IOM/NAS study proposed a "Unified Payment Method" which would require that a separate physician organization receive all the compensation for the teaching physicians and certain house officers on a fee basis. PAGENO="0998" 990 This method represents a significant departure from the present organizational structure for training physicians In the hospital setting. Without testing and evaluation, we cannot comment on its appropriateness for physician training. However, we are concerned that this method may result in increased cost for physician services and training both to the patient and tl~e Medicare program. We agree with the IOM/NAS committee recommendation that experimentation should be conducted as to the impact of the `unified and lump sum" payment methods. The concept of negotiated rate under the "lump sum" payment has elements of prospectivity which should be considered with prospective payment experiements for other hospital costs. The entire issue of the "reasonableness" of physicians compensation was not addressed by the IOM/NAS study. Furthermore, `reasonable" physician compensation guidelines have not been promulgated by the Medicare program. We have made specific proposals In connection with the Senate Bill No. 3205 introduced by Senator Talmadge. These proposals provided that payments by providers to physicians should be reviewed for reasonableness. These reviews should: * -- Focus on the total amount paid to the physicians rather than on the type of arrangement, and -- Establish an acceptable level and rate of increase of payment, published in advance for various categories of provider-based physicians. The guidelines would be based on current experience in comparable settings. We appreciate the opportunity to submit our comments on this topic. PAGENO="0999" 991 ATTACHMENT VII STATEMENT OF THE BLUE CROSS ASSOCIATION THE BLUE SHIELD ASSOCIATION ON S. 505 "MEDICARE-MEDICAID ADMINISTRATIVE AND REflIBURSEMENT REFORN ACT OF 1979" SUBCOMMITTEE ON HEALTH COMMITTEE ON FINANCE UNITED STATES SENATE BY LAWRENCE C. NORRIS, SENIOR VICE PRESIDENT MARCH 14, 1979 PAGENO="1000" 992 Mr. Chairman and Members of the Committee, I am Lawrence C. Norris, a Senior Vice President of the Blue Cross Associ- ation and the Blue Shield Association. We appreciate the opportunity to comment on S.505--Nedicare-Nedicaid Administrative and Reimbursement Reform Act of 1979, and on the broader issue of containing national expenditures for health care. The Blue Cross and Blue Shield Associations, which operate under a single Chief Executive and staff, are the national coordinating agencies for the 69 Blue Cross and 70 Blue Shield Plans in this country. These Plans provide privately underwritten health care coverage to about 85 million Americans, and serve almost another 20 million as fiscal agents or intermediaries for the Medicare, Medicaid and CHAMPUS programs. Thus, the Plans serve about half the U.S. population. These Plans, and more importantly, the individual subscribers they serve, would be directly affected by this legislation, as they are by any public or private action which bears on the costs of health care. We share your concern about the levelof health care costs. The problem must be resolved because of its effect on inflation generally, because of its effect on taxes and, most importantly, because of its impact on the ability to assure that people have adequate access to health services. Cost PAGENO="1001" 993 containment reforms are possible and should be made in both Medicare and Medicaid. They should be undertaken selectively and in a manner that does not allow costs to be transferred from government to other payers without containment of total costs. In 1977, because of uncontrolled escalation of costs, the Blue Cross Asso- ciation supported action by government to restrain total hospital costs. Since then, we have joined with major hospital, physician, business, labor and carrier organizations in a major new effort to bring health care costs under control voluntarily. This coalition has adopted specific, quantified goals to reduce health expenditures, with particular emphasis on. its major elements--hospital expenditures and physician charges. This Voluntary Effort and efforts by Medicare and Medicaid to support containment of total health care costs can be mutually supportive. The short-term goals of the Voluntary Effort have been stated clearly and publicly. They include a two percentage point reduction in hospital expenditures in 1978 mmd again in 1979; a one percent reduction in physician charges both in 1979 and in 1980; a stabilization of national hospital bed supply at December 31, 1977 levels, adjusted for any new beds for which certification of need or 1122 approvals were granted before Decem- ber 31, 1977; a deceleration in capital expenditures; and a reduction in the growth of full time equivalent employees per bed. From the beginning, the effort has been made public. Progress toward its goals has been measured and reported periodically to the public, the press, and, by agreement, to the President's Council on Wage and Price Stability. PAGENO="1002" 994 In 1978, p~rformance was impressive. Hospital expenditures fell from a 15.6% rate of increase in 1977 to 12.8% in 1978. Physician charges fell from a 9.3% rate to 8.4%, and also from 127.4% of the CPI (All Services less Nedical Services) to 98% of that rate. Bed supply increased about 1%, which was probably within certificate of need extensions. Data on this last point and on capital expenditures are not yet conclusive. The goal in regard to FTE employees was instituted only a few weeks ago. In the longer term, the Voluntary Effort's goal is to narrow the gap be- tween the rates of acceleration of hospital expenditures and the Gross National Product, and between physician charges and the Consumer Price Index. Fundamentally, it is a manifestation of our commitment to bring about the necessary changes in health delivery and financing while sustain- ing the high quality of care we have come to expect. As we have reported to your Committee in the past, Blue Cross and Blue Shield Plans are committed to cost containment. Our record speaks for itself. We have been pioneers in developing and implementing the basic tools of cost containment: for example, haaltfi planning, utilization review, innovative payment systems, and alternative delivery systems. With the active cooperation of some of the major professional organizations, we have attempted to identify procedures and processes which could be subjected to more stringent tests.of their medical necessity~ In 1977, our two oryaniza- tions jointly developed membership standards which require each Plan to have specified cost containment programs as a condition of membership in the National Associations. These efforts affect costs to.all patients. They will help contain government expenditures for Medicare and Nedicaid PAGENO="1003" 995 patients. We also desire to see that reimbursement arrangements reflect the full costs associated with services to their subscribers or beneficia- ries. In the light of these interests, we have examined the various provi- sions of S. 505. Overall, we believe S. 505 has potential for favorable cost containment effects, and we support many of its individual provisions either on a permanent or on an experimental basis. We shall comment on what we believe are the advantages of the various provisions, and, where appropriate, note provisions that raise problems of administration, cost of implementation, and shifts of costs frorn.one payer to another. Many of our suggestions, we believe, can be treated within the context of the responsibilities of a Health Facilities .Cost Commission which we have supported. Let me share with you now, our comments on the individual sections of S. 505 and the March 7, 1979 Senate Finance Committee Staff Alternatives for Possible Health Care Savings Proposals. Section 2 - Criteria for Determining~ Reasonable Cost of Hospital Services We support the emphasis that S.505 gives to the use of incentive payments to promote hospital efficiency. Peer groups and prospective target levels can be important in determining incentive payments for good performance and penalties for excessive costs. Furthermore, these concepts can be sensi- tive to individual hospital characteristics. Such a system could be fair, PAGENO="1004" 996 and recognize the necessary cost of patient care. We do not believe that there is yet a single best performance-based payment system. We also recognize the problems in the development of an effective cost containment program. We are concerned about some of the specific characteristics of Section 2. Payers covered - We would like to see a provision that discourages shifting of costs from Medicare and Medicaid to other payers, whether by oversight or -intent. - Peer group~ - The bill provides for three major categories: acute general hospitals (8 subgroups by size); hospitals associated with medical schools; and specialty hospitals. There is also a distinction between hospitals lo- cated in rural and urban locations. The classifying system is intended to separate inefficient from efficient hospitals. In the development of penal- ties and incentive payments in this bill, there appears to be an unstated assumption that inefficiency means high cost and efficiency means low cost within each category. Unfortunately, there is no known way to classify hospitals by their efficiency. Various systems are being studied. Some ignore size, but consider affiliation and facility characteristics. No syst~n has yet been adequately evaluated and found completely satisfactory. PAGENO="1005" 997 We support the provision that the Health Facilities Cost Commission examine methods for classifying hospitals. It deserves a high priority~ *Any classification system needs to examine those hospitals which are closely associated with medical schools. The larger medical schools frequently have training programs in many hospitals. If hospitals which now have contractual relationships are classified as other than "primary affiliations," they may be put into peer groups with substantially lower target rates, reducing their income and their ability to provide quality care to all their patients, including Medicare and Medicaid beneficiaries. Target levels - average costs - The bill provides for calculating average costs in each peer group on the basis of the sum of two parts: average personnel costs adjusted for area wage differentials, and average non- personnelcosts. The adjustment for area wage rates seems intended to make the national peer average applicable to an area hospital. A government study of. total hospital costs suggests that wage differentials may not account for all significant variations in cost among hospitals. The adequacy of wage data available for small geographic areas is not yet proven. The provision in the bill that permits comparison of a hospital wage level with an area wage level may be administratively difficult and expensive, even if it is technically feasible. . PAGENO="1006" 998 Another matter of concern is the potential impact of determining a target rate across a wide range of hospitals. Medical practices are different among areas of the country. Specifically, hospitals with low lengths of stay may have higher per diem costs than others in their peer group which are not necessarily attributable to inefficiency. At a minimum, we need to monitor carefully how the target rate approach will affect hospitals, and prepare to make appropriate changes if this approach results in inequities. Monitoring and evaluating could be an important Commission responsibility. To implement this provision of the bill, hospitals would have to maintain personnel costs for routine operating costs separately from personnel costs for ancillary and other operating costs. Such allocations are likely to be arbitrary and self-serving, and are not provided for in existing reporting forms. Incentive payments - Hospitals whose costs are below the average for routine operating costs receive an incentive payment equal to half the difference between their cost level and the target rate, but not more than 5 percent of the target rate. There is no incentive to operate below 90 percent of the target rate. As presently written, there is no incentive to improve perfor- mance unless a hospital is over the target rate plus the fixed allowance. The net.impact of the incentive payment and penalty provisions may be that total costs will increase. The proposed Health Facilities Cost Commission should examine available data and model the likely effects. We support the incentive concept. Our concern is one of effectiveness in achieving desired objectives. PAGENO="1007" 999 Health Facilities Costs Commission We support the creation of a Health Facilities Cost Commission. This i~ particularly important when new methodologies are being introduced while all their impacts are not yet known. One of the responsibilties of the Commission should be to receive data and monitor the impact of the changes set forth in Section 2 and other sections of this bill. Among the specific effects to be monitored are: (1) Impact on quality care. (2) Selective adverse impact on hospitals because of utilization practice (i.e., length of stay) not related to inefficiencies. (3) Inappropriate shift of costs within hospitals to non-routine areas (i.e., ancillary services or outpatient care). (4) Shifts of costs to patients or other third party payers. (5) Impact on hospital costs because of additional *recordkeeping requirements. In addition, the Commission should consider making recommendations with regard to: (1) Appropriateness of peer grouping. (2) Ways to reward hospitals for improving quality of care. (3) Ways to establish more effective incentive arrangements. PAGENO="1008" 1000 Periodically, the Commission should report its findings on these matters to the Congress, with recommendations for appropriate changes. In summary, Section 2 of S. 505 can have cost containment impact. We have attempted to point out some of the potential difficulties, and suggested changes where we think they are necessary. Nost important, we believe that for the system to be effective: 1. It must be continually evaluated and modified as necessary. 2. It must allow for and encourage non-federal, locally developed experimental reimbursement programs. Out of these programs can come modifications in the basic system to improve its effective- ness and efficiency. 3. It must permit the establishment of systems that would reward or penalize hospitals along a continuous range of efficiency and performance levels. We note, however, that much work needs to be done on measuring efficiency in hospitals. This knowledge is needed for the development of an appropriate peer grouping system. These activities should be important responsibilities of the Health Care Facility Cost Commission. The need to know more about several provisions of this section suggests the desirability of controlled demonstrations in selected areas or states before their universal application. PAGENO="1009" 1001 Section 3 - Payments to Promote Closine and Conversion of Underutilized Facilities We support the `transitional allowances" provision for temporary financial support to hospitals which close or convert duplicate and unneeded services and facilities. Because the industry's capital structure is a key deter- minant of costs, this provision (in combination with P.L. 93-641) represents an innovative step in developing appropriate long-term cost containment measures. You may be aware that the Blue Cross and Blue Shield organiza- tions have already began examining the potential of the concept in the private sector. While this provision introduces a novel approach, in need of testing and evaluation, we recommend that the provision be broadened in the following respect: Section 1128(c) (1) and (2) should be modified to allow application to the Hospital Transition Allowance Board before the closure or conversion has started. This would provide hospitals considering qualified conversions another incentive--that of financial assurances before the fact. Section 1128(e) should be broadened to provide for more than 50 hospitals during the test. We suggest a minimum of 100, which would provide a broader base for analysis of the provision's impact and give greater latitude to the Secretary to accelerate application of the program on the basis of favorable test results. 56-071 0 - 80 - 64 PAGENO="1010" 1002 As a technical modification, we recommend that the reimbursement provisions, which aredifferent in the cases of hospitals that close and those that remain open, be dealt with in separate provisions for purposes of clarity. As Section 1128(b)(3) currently reads, several issues are unclear. For instance, in the case of conversions, where the aggregate reimbursement is reduced, would the facility continue to receive any amount of the reduction? If so, does that amount include operating costs or just capital costs such as interest and depreciation? And whereoperating costs increase on an "interim basis," should time limits be specified for the "interim basis?" In the case of complete closure, it appears the facility only receives a transitional allowance for debt obligations. We suggest that operating costs associated with the closure also be included. A major issue in shift of function or closure is employment. Funds in addition to debt retirement should make it possible to retrain personnel and to assist then in obtaining new employment. However, the amount of funds that can be dedicated must be limited. At some point the desirable alternative of closing or correcting beds could become uneconomic. Section 4 - Federal Participation in Capital Expenditures We support the provisions in this section because we believe they will help achieve both a short-and a long-term constraint on rising health care costs through appropt~iate application of the planning process and related reimbursement. PAGENO="1011" 1003 This section attempts to address important aspects of this issue by further linking Medicare and Medicaid reimbursement to P.L. 93-641 and extending Section 1122 penalties to include direct operating costs associated with capital expenditures. We support State Health Planning and Development Agencies' (designated under Section 1521 of P.L. 93-641) serving as Designated Planning Agencies under Section 1122, the re-establishment of funding to State Health Planning and Development Agencies and Health Systems Agencies under Section 1122, and the extension of Section 1122 penalties to include direct operating costs of unapproved projects. With respect to capital expenditures of providers located in inter-state SMSAs, we have several questions and concerns. What happens in an SNSA which infringes upon two or more jurisdictions, one of which is not an 1122 state? Assuming the State Health Planning and Development Agencies will be asked to review proposed capital expenditures in such areas, will the Secretary reimburse the non-1122 state for the cost of a rêviewof a project located in a neighboring 1122 state? If the facility proposing the capital expenditure is located in an SMSA, but in a non-1122 state, can reimbursement be limited to the facility because the non-1122 state SHPDA concurs with a negative finding by a neighboring 1122 state, part of which is also in the SMSA? Is it the intention of this provision to extend 1122 authority to cover facilities in non-1122 states? Finally, .180 days may not be adequate time for multiple state reviews of projects in SMSAs. Even though a provider may be located in an inter-state SNSA, it is very possible that it serves few people residing in the neighboring PAGENO="1012" 1004 state; from an equity standpoint, should such providers be subject fo this provision? Finally, is the interstate SMSA problem of such a mag- nitude that the benefit to the public will outweigh the additional costs and administrative workloads for both states and providers? Section 5 - Agreement to Accept Assignment This section would encourage a physician to accept assignments by giving the physician an option to submit claims on a simplified basis, including multiple listing of patients. Physicians would receive an additional $1 for each such claim submitted, with certain exceptions that limit amounts paid to physicians under this arrangement. We support the intent of this section providing incentives to encourage physicians universally to accept assignments under the Medicare program. For any full payment program to work with consistent predictability, there must be a commitment in advance by the physician. In return, physicians must have confidence that roimbursement for their services will be fair and equitable. Blue Shield Plans have traditionally utilized the participating physician concept. We would welcome the opportunity to consult with the members of this Subcommittee and its staff in this regard. We support the provisions of this section that would reduce paperwork by simplifying claim forms and reimbursing for preparing these claims; but we have doubts that these incentives alone are sufficient to encourage a significant improvement in participation by physicians. PAGENO="1013" 1005 The definition of "participating physicians" should be expanded to include any licensed practitioner who will receive payment under an agreement. Records and charges should be maintained in such a way that information necessary for subsequent audit can be retrieved. The requirement that an additional form be signed by each enrolled patient waiving confidentiality is administratively burdensome. Authorization of release of information could be included on the claim or billing form. Section 6 - Hospital Associated Physicians We agree with the provisions in Section 6 that permit a hospital-associated physician to bill for professional fees for care of patients in situations where the physician is directly associated with the services rendered. Such provisions can provide a basis for realistic evaluation of the costs associated with this important component of health care cost~ We have concerns about the specific provisions limiting physician reim- bursement on the basis of its being a "volume-related" arrangement because: 1. they are based on the form of the transaction rather than on the result* (how much was paid for what services). We believe an arraügement for payment based on volume can produce a result that is a reasonable cost for Medicare to pay. On the other hand, salary or other non-volume arrangements could result in Medicare paying more than under a volume related arrangement. PAGENO="1014" 1006 2. they could result in physiáians entering into direct billing arrangements. Such arrangements, with a separate contract for administrative functions and additional claim volume, could result in increased administrative cost to Medicare. Limitations onrevenue'or cost should not be related to form or process, but should relate to the result. A more appropriate approach would be to develop provisions that attempt to assure that payments and increases in payments to physicians are appropriate. These provisions should: -- focus on the total amount paid for the services provided rather than on the type of arrangement; C -- reflect reasonable payments for the scope of the services being performed, with criteria for evaluation published in advance; -- be consistent with the overall cost containment objectives and the programs adopted to meet thosa objectives. Any changes made in the reimbursement for hospital associated physicians under this legislation should be monitored carefully and evaluated so that the impact is consistent with the intent of the law. Section 7 - Use of Approved Relative Value Schedule This section directs the Secretary to develop a system of procedural terminology including definitions of terms. On the basis of our experience, PAGENO="1015" 1007 this section imposes a substantial and time-consuming responsibility on HCFA. We urge that I-ICFA be authorized to examine and if necessary, build upon the existing systems of procedural terminology. That would save time and reduce cost to the government. We do not understand how the relative value schedule contemplated by this section would be used. If the ultimate purpose is to substitute local or national fee schedules for the customary and prevailing charge method of payment, the proposal can only be evaluated from an understanding of how those fees will be established and what specific program ohje.ctiyes. they are intended to serve. Section 10 - Criteria for Determining Reasonable Charge for Physician's Service This section has two major thrusts. The first is to limit upward movement of the prevailing charge screen in any area of a state relative to the median prevailing charge for that state. The purpose is to encourage move- ment of physicians into under-served areas by minimizing any discentives based on lower Medicare reimbursement patterns. The e~fectiyeness of this approach rests both on an assumption that individual patients in high-charge areas will not be unduly disadvantaged by increasing differences between usual charges and Medicare allowances, and on an assumption that Medicare fees levels are a major factor in many physicians' choices of location. We are not sure that either is true. Physician reimbursement is a means, not an end. This section would distribute a given level of Medicare expenditure more equally across charge PAGENO="1016" 1008 areas. It would maintain the relationship between charges and allowances in low-charge areas and might improve it. It vould be likely to worsen that relationship in high-charge areas. Its effect on individual bene- ficiaries will vary accordingly. The second thrust is to permit Medicare allowances for physicians entering practice in under-served areas to be at the 75th percentile rather than the 50th, to encourage location in these areas. When applied to a physician who has not made a decision abouthis location, and particularly to one in a specialty that deals extensively with the elderly, this provision could be a contributing factor to a decision about location, and would be a worth- while initiative. Section 13 - Hospital Providers of Long-Term Care We support the provisions in Section 13 that encourage acute care hospitals providing skilled extended nursing care to utilize existing facilities fully while appropriately meeting patient care needs. We are particularly pleased with the provision for evaluating the impact of such a change on utilization. We urge that this section be modified to permit greater access to the possible benefits of the program and to provide a broader base for program evaluation. In that conne~tion, we suggest: 1. The bed size limit be set at 100 beds or less. This change will include a number of hospitals and communities which could benefit effectively from this provision. PAGENO="1017" 1009 2. Because this is a change in service, there should be approval by appropriate agencies as mandated under PL 93-641. Section 18 - Repeal of Section 1867 Large public, governmental programs can benefit from considered reactions of advisory panels. Such groups can provide the perspective of the community at large, industry, and others about the policies and operations of that program. This is particularly true in the complex health care delivery and financing environment and in the Medicare program, which directly affects the lives of millions of Americans. We do not want to see the potential of this kind of public advisory group lost. We suggest that the public policy advisory role be assigned to an existing group or to a newly created organization. The activities of any such public advisory group would need to be differentiated from and coor- dinated with those of the Health Facilities Cost Commission. Section 23 - Disclosure of Aggregate Payments to Phjrsicians We believe this prohibition against disclosure of payment data related to physicians is appropriate at this time; much of the information in the news media pertaining to physicians who have been paid large amounts of public funds `for treating Medicare and Medicaid patients has been incorrect or misleading. However, it would be appropriate to use the public advisory panel we suggested in connection with. Section 18 to consider ho~r meaningful information can be made available regarding health care financing and delivery. PAGENO="1018" 1010 Disclosure of financial and other pertinent information is required and useful for many other industries. However, where disclosure through annual reports and SEC filings has been a long standing tradition, debate continues over the extent and definition of the reporting requirements. Similarly, problems exist with respect to what constitutes meaningful disclosurE in the health care industry. Work needs to be done in determining what kind of information can be made available to increase public awareness of key aspects of health care financing and delivery. Section 25 - Rate of Return on New Equity for For-Profit Hospitals Section 25 would allow a higher rate of return on equity capital fo~r for- prof it hospitals. We do not support the provisions in this section. Its economic justification is doubtful. In the past, there has not been a shortage of capital for this industry. Further, the industry is troubled by excess capacity in some areas of thecountry. S. 505 recognizes this con- cern in two major provisions that relate to closing or converting unneeded or excess capacity. The additional return on equity for hospital performance below the target rate would treat hospitals differently because of ownership characteristics. The increase in rate of return proposed for for-profit hospitals based on the target rate may be unfair to hospitals only slightly above the target rate. If the Intent is to encourage efficiency, the provision in Section 2 could be modified to increase the incentive to all hospitals below the PAGENO="1019" 1011 target level, and penalize more severely hospitals above the target levels, thus achieving greater cost containment. Given the complexity of this subject, the Health Cost Facilities Commission should be requested to examine and recommend to the Congress what appropriate incentive arrangements and return on equity provisions should be enacted, based on capital requirements, other needs of the industry, and general market conditions for obtaining capital for the health care industry. Section 29 - Repeal of 3-Day Hospitalization~guirements and 100 Visits Limitation for Home Health Services We support the repeal of the 3-day hospitalization requirement, because it will provide access tO more appropriate care by Nedicare beneficiaries. The elimination of this requirement would reduce the barrier to lower cost care and, thus, promote cost containment. We question the need to liberalize home health benefits which would increase the number of visits by 100 under Parts A and B. Before Congress authorizes this change, we suggest the need for .increased visits per spell of illness (or per year) be analyzed. This analysis should provide information on the extent of current utilization over Ahe existing coverage; the pattern of delivery of the additional utilization and reasons for the need for the extra care. Our expectation would be that if additional coverage is needed, it would not be as extensive as the. proposed 100 percent increase. PAGENO="1020" 1012 Section 31 - Development of Uniform Claims Farms We strongly support the uniform billing concept. Efforts in this area can improve program administration and help reduce provider and program costs. Toward this end, we have played a major role in the development and implementation of current uniform billing demonstrations. We are concerned that the provision which allows for the variability of Medicaid claims forms in a given state could undermine the potential of a uniform billing program. Because participation by the Medicaid component is critical in a uniform billing effort, exceptions should be granted, if at all, on an extremely limited basis. Section 32 - Coordinated Audits under the Social Security Act We support the concept of coordinaTted audits of governmental programs reim- bursed on a cost basis. However, the approach to achieving coordinated audits needs careful consideration in order to obtain the benefits of such a program. The bill, as presently written, is silent on the criteria for deciding on how coordinated audits would be performed. It is important to avoid fragmentation of program administration. The audit function is an integral part of a total program administrative function which includes claims reviews, claims processing, payment, data processing, etc. This total program administrative structure not only facilitates expertise on all aspects of the program, but also provides a single, consistent source of information for providers. The Secretary, in arranging for coordinated audits, should consider these factors. PAGENO="1021" 1013 The Medicare intermediary system has established a distinguished record and gained valuable experience in the conduct of Medicare-only audits and shared Medicare/Medicaid audits. This performance record provides a sound basis for assumption of additional responsibilities for coordinated audits in a responsible, cost effective way. Properly implemented coor- dinated audits can be effective with minimal additional costs. Section 35 - Coverage Under Medicare of Certain Dental Services This section extends Medicare coverage to include services performed by a doctor of dental surgery or of dental medicine which he is legally authorized to perform and which would be reimbursible if performed by a physician. We support this provision, which will correct an inequity. Miscellaneous Provisions While we have not provided detailed comments on every provision of the proposal, we support Section 14 (Reimbursement Rates under Medicaid for Skilled Nursing Facilities and Intermediate Care Facilities) and 33 (Encouragement of Philanthropic Support For Health Care). PAGENO="1022" 1014 March 7, 1979 Senate Finance Corraittee Staff Alternatives for Possible Health Care Savings Proposals 1. Reimbursement for Outpatient Hospital Care The alternative of limiting reimbursement for outpatient hospital care to the level of payment of services provided by an independent practitioner is wrong in principle and difficult to administer. The demands on and the nature of the services performed by the outpatient departments of hospitals and free-standing clinics are more complex and difficult than those imposed in the independent practitioner setting. - The hospital and free-standing clinics provide service twenty- four hours a day, seven days a week. At some hours the volume of service is inadequate to support this service economically. The independent practitioner is open only part of the time. - The hospital or clinic stands ready to provide a range of services from routine to extreme emergencies. They provide a range of specialty services not routinely available in the typical office of an independent practitioner. - A single visit to a hospital or clinic may include a different range of services than would be available in an "equivalent" office visit. Therefore, relating the cost of a hospital outpatient service to the, price of an equivalent (if that could be identified) practitioner service would be difficult at best. PAGENO="1023" 1015 Current Medicare rules related to cost deternination preclude the hospital from pricing many of its outpatient services on a basis which may be in line with equivalent services in independent practitioner settings. The alternative suggested, rather than reducing costs, could have the effect of reducing the sharing of overhead expenses with outpatient care, thus shifting more costs to inpatients. In any event, sharing of over- head should be on soundly based accounting principles. 2. Disproportionate Medicare-Medicaid Paymemt for Hospital Care The proposed alternative would eliminate the 8½ percent Nursing Service allowance currently in effect and mandate payment of hospital malpractice costs derived only from claims of Medicare beneficiaries. The 8½ percent Nursing Service differential per se was introduced as a result of studies which were accepted as demonstrating that there was, in fact, additional nursing care given. At least one court has held that it should not be changed without a study that proves that the additional pay- ment is in error. To date no such study has been published. We are also opposed to changing to the direct costing approach in malprac-. tice premiums. ~n overall evaluation should be made of the factors affecting malpractice cost in the hospital: how those costs should be allocated to Medicare given the proposed policy; why Medicare patients have dispropor- tionately lower total settlements: likely impact of hospital behavior PAGENO="1024" 1016 relative to Medicare patients; Medicare beneficiary attitude toward possible malpractice situations, if it were known that the government is specifically underwriting its cost. Basically, we support payment of the full economic cost of services rendered to beneficiaries or subscribers of various third party payers. The issue, however, is complex. To resolve it adequately would take an overall evaluation of the total Medicare-Medicaid reimbursement structure. Piece- meal and selective application of the economic cost principle to individual elements of hospital cost is inappropriate. Fragmentation of the institu- tion's costs (particularly given the present state of the art) could lead to a bewildering array of cost determinations, i.e., by age, condition, etc. Importantly, management of the institution could be complicated. This result in management action that results itt increased costs. 3. Prohibit Medicare-Medicaid Payment at Hospital Rates for Patients Medically Determined to Need Lesser Levels of Care The proposed alternative would promote conversion of acute-beds to long term care beds where there is a surplus of acute-beds and would reimburse hospitals at skilled care rate, not acute care rate, for patients in need of long term care. This proposal has merit, but it needs to be considered within an overall strategy of community health care needs and hospital and health care resources. PAGENO="1025" 1017 The "swing bed" projects undertaken by Medicare provide experience on which to structure such a program. Those projects have dealt with the issues of access, payment levels for services received, impact on hospital costs of the new arrangement, and nursing staff training. Currently, Section 13 of S. 505 incorporates into the Medicare program, on a limited, experimental basis, additional "swing bed" sites. The proposed alternative should be undertaken after development of an overall strategy in a community which weighs the need of preventive care, terminal care, and other programs, and evaluates the best settings for such programs. - 4. "Stand-by" Limitation for Medicare-Medicaid on Allowable Increase in Ancillary Hospital Costs The proposed alternative would establish standby limits on reimbursement for ancillary services to become effective if the hospital industry's Voluntary Effort cost containment goal is not met. We believe this provi- sion is unnecessary at this time because of the resources that have been committed tà make the Voluntary Effort work in many areas that affect health care costs. We think the Voluntary Effort approach is wise because it focuses on overall hospital costs and therefore also deals with the issue of hospital ancillary service costs. Another limit for Medicare related to ancillary services would represent additional fragmentation of hospital costs and drive the purchaser further into hospital managem~nt. If both routine and ancillary costs are to be 56-071 0 - 80 - 65 PAGENO="1026" 1018 controlled, a combined limitation might be less comrlex, easier to under- stand, and more acceptable to the parties concerned. Insofar as a hospital operates as a single entitity, it could establish policies and controls over all of its operations, instead of different controls in accordance with legislative language. 6. Competitive Bidding and Negotiated Rates L'nder Medicaid The proposed alternatives would permit states, at their option, to purchase certain limited medical devices and services for Medicaid purposes through competitive bidding or appropriate negotiated arrangements. These include such items as wheelchairs and laboratory services. Stat~s have been prohibited from doing this by judicial interpretation of the Social Security Act's "Freedom of Choice of Provider" provisions, which are designed to allow Medicaid recipients to choose among qualified medical professionals. We believe that the purchase of these items does not interfere materially with the recipients' "freedom of choice" and support these changes so long as appropriate quality or performance stand- ards can be met and monitored. This is consistent with our belief that contractors should be judged on a continuous basis by performance standards. Our experience in programs suëh as- CHA~L~S and Medicaid has demonstrated that without prOper safeguards, competitive bidding can lead to false economies. The lowest administrative price can lead to higher total costs or unacceptable service. PAGENO="1027" 1019 7. Direct Professional Review Toward Avoiding Lnnec ry Routine Hospital Admission Services and Excessive Pre-onerative Stays The proposed alternative would require PSROs to review such "areas" of relatively frequent over-utilization as week-end admissions for elective conditions and elective pre-operative stays of two or more days duration, in order to reduce reimbursement for presumably unnecessary care. Blue Cross and Blue Shield Plans now attempt to achieve savings by paying for only those health care services considered medically necessary. The Ned~cal Necessity Program, including the policy related to routine hospital admission tests, is an example of a program used by the Blue Cross and Blue Shield Plans for dealing with medically unnecessary services. The techniques for dealing with some of these issues are not yet fully developed. We hope that newer PSROs, at least, are permitted to phase into these programs as their staffing, experience and data are more fully developed. One approach is to devote less review time to those hospitals that of f i- cially certify their policies and procedures to be consistent with the program intent. We endorse the intent of this proposal. Our concern is with finding. the most effective and least expensive administrative procedure to achieve the desired goals. PAGENO="1028" 1020 9. Delete Statutory Requirement Spec ifving State Payment of `Reasonable Cost-Related" Reimbursement to Hospitals under Medicaid The proposed alternative would allow States the discretion of determining appropriate Medicaid reimbursement to hospitals without reference to reasonable cost. This nay result in states establishing unreasonably low reimbursement levels related more to state budgeting than to the reason- able cost to the hospital of services provided. Because this proposal could encourage the development of two classes of health care, we cannot support it. Reimbursement for Medicare and Medicaid should be cost related. There is little justification for a government program requiring care at less than cost. Inadequate reimbursement from Medicaid would have the undesirable effect of forcing hospitals to make such choices as refusing Medicaid patients, shifting overhead costs not paid by the state to other payers, or altering its quality of care. This is not sound public policy. 10. Delete Statutory Requirement Specifying State Payment of "Reasonable Cost-Related" Reimbursement to Skilled Nursing and Intermediate Care Facilities. The proposed alternative is similar in intent as to item 9 above, and could have the same consequences. We do not favor states or any other purchaser of care reimbursing at a rate lower than one established on a "Reasonable Cost-Related" basis. PAGENO="1029" 1021 11. Apply `Prudent Buyer" Limit to Purchases by Hospitals of Certain Routine Supplies. The proposed alternative would provide for maximum allowable cost limits for reimbursement purposes of certain frequently purchased medical supplies. We believe that purchasers have the right to insist on prudent business practices by their suppliers. We are concerned that the piecemeal, individual transaction approach proposed here fails to recognize that prudent buying is an attitude and a process. As in the case of utilization review where appropriate processes are approved, Medicare could focus on the providers' processes to accomplish prudent purchasing. Purchasers can also achieve the objective of obtaining hospital services at a cost which reflects prudent buyer practices by focusing on larger units of hospital cost. If the hospital meets the overall tests, purchasers should not be directly involved in the process for the purchase of detailed components. 12. Medicare Payment Liability Secondary Where Payment Can Also be Made Under Accident Insurance Policy This alternative would allow Medicare to collect from the party at fault in any accident that resulted in Medicare reimbursements for patient care. We believe Medicare should pursue such a policy whenever the expected return, on a case-by-case basis, will exceed collection costs. Although this procedure will not reduce medical care costs--it shifts the costs to other parties--it may help to allocate costs and premiums for accident insurance selection and coverage. The alternative is correct in principle. Its implementation requires prudence.. PAGENO="1030" 1022 Mr. CARTER. Do you think that the model legislation developed by the National Association of Insurance Commissioners is suffi- cient to address the medicare problem if all the States were to enact it as of their own legislation? Mr. JACOBY. I would like to take that question back. We have staff at the associations who are studying this area in detail. I would submit a written answer to you. [The following information was received for the record:] We at the Blue Cross and Blue Shield Associations are familiar with the model legislation developed by the National Association of Insurance Commissioners and we believe that the NAIC's model bill does provide state insurance regulators with the tools they need to correct abuses in the sale of Medigap insurance. Mr. CARTER. With regard to the administration's HMO proposal your statement indicates that you recommend a generic definition of "HMO" rather than the definition in title XIII. Specifically what criteria would you propose to define an HMO for purposes of this legislation? Mr. JACOBY. I believe we have submitted in the written state- ment some specific comments which were presented to another committee of the Congress. [The following information was received for the record:] We believe that a more generic definition of HMOs should be used if reimburse- ment under the medicare program becomes law. We suggest that a more desirable definition would be the one recently adopted by Congress for use in the 1979 Health Planning Amendments (Pub. L. 96-79). That definition defines an HMO as: * * a public or private organization, organized under the laws of any state, which- "(A) is a qualified health maintenance organization under section 1310(d); or "(B)(i) provides or otherwise makes available to enrolled participants health care services, including at least the following basic health care services: usual physician services, hospitalization, laboratory, X-ray, emergency and preventive services, and out of area coverage; (ii) is compensated (except for copayments) for the provision of the basic health care services listed in clause (i) to enrolled participants by a payment which is paid on a periodic basis without regard to the date the health care services are provided and which is fixed without regard to the frequency, extent, or kind of health service actually provided; and (iii) provides physicians' services primarily (I) directly through physicians who are either employees or partners of such organization, or (II) through arrangements with individual physi- -~ cians or one or more groups of physicians (organized on a group practice or individu- al practice basis)." (Section 1531, paragraph (8) added to Section 1531 by Section 117(b) for purposes of Certificate of Need coverage of HMOs-Conference Report pps. 31 and 35.) Mr. CARTER. Would you like that to be included for the record? Mr. JACOBY. It is in the package we have submitted. Mr. CARTER. What has been your organization's policy and expe- rience with second medical opinions? Mr. JAc0BY. Generally as I indicated there is a record of improv- ing the quality of care under certain conditions. The difficulties we have found in the experiments that have been conducted, I believe there has been one or two in New York and another one in Massa- chusetts, are the results do not confirm that in net there is a saying in health care cost. In terms of mandating second opinions while there is a logic associated with that course of action there are administrative diffi- culties and difficulties with respect to the service that the health care programs are intending to provide to beneficiaries which we feel at this point argues against a mandate. PAGENO="1031" 1023 We have made studies and to the degree this subcommittee is interested in any of that material we would be glad to submit further detail. Mr. CARTER. Thank you. You suggested expanding the provisions of the philanthropy bill to other providers. Would you elaborate? Mr. JACOBY. I am not qualified in that area either but we would be glad to answer that question later in written submission. [The following information was received for the word:] The legislation removes some of the restrictions in current law and regulations which discourage philanthropic contributions to health care institutions. However, by limiting this legislation to hospitals, the government may discourage philan- thropic contributions to institutions providing health care services in settings which are less costly than the short-term hospital. Encouraging philanthropic contributions only to non-profit hospitals runs con- trary to initiatives in federal health policy which encourage development of health care institutions such as home health agencies, intermediate care and skilled nurs- ing facilities, ambulatory surgery centers, outpatient facilities, and free-standing renal dialysis facilities. The goals of containment of health care costs and develop- ment of quality health care services for the people of this country will be better served by encouraging philanthropic contributions to all non-profit institutions, facilities, organizations and agencies providing health care services, as well as to non-profit hospitals. Mr. CARTER. Thank you, Mr. Chairman. Mr. MAGUIRE. We are going to have to go to the floor for a vote but before we do I notice you have commented on page 8 about second opinions. You say you believe they have a positive impact on the quality of care. Obviously that is of great concern and to the extent that it is true presumably this is something we should take a very careful look at. You go on to say that you seriously question whether second opinions ought to be mandated and apparently if I read that state- ment correctly it is because or at least partly because you do not think there would necessarily be significant cost containment re- sults? Is that the way I should read that sentence? Mr. JACOBY. Yes, sir. Mr. MAGUIRE. If it could be shown that the cost results were of some order of significance would you be willing to revise your opinion on that subject to mandating? Mr. JACOBY. I am sure we would go in the direction of revising the opinion. Mr. MAGUIRE. In other words you are not against mandating per se. You are simply saying it would be important as far as your position is concerned to show cost results that were favorable and if that were possible then you would look at the mandating more favorably? Mr. JACOBY. I think people at the associations who are studying the second opinion effects have concerns other than the issue of cost containment. I believe they are alluded to here. For example why mandate a second opinion in the case of some procedures where there is no medical question to be raised. Another problem would be when we speak of the beneficiaries of the medicare and medicaid programs their very nature is such it is likely there would be a lot of situations where if the second opinion was mandated for one reason or another they would not get one and thereby be denied benefits. PAGENO="1032" 1024 I do not think the issue that would cause us to question mandat- ing is simply a matter of cost containment. Mr. MAGUIRE. You would grant if there were a significant reduc- tion in the amount of surgery that was performed in whatever population group was involved in the second opinion program that it would have a positive impact on costs? Mr. JACOBY. It certainly would. Mr. MAGUIRE. At what point do you question the data and the research that has been done which tends to show there is in fact less surgery and therefore a cost effect that is positive? Mr. JACOBY. As I indicated earlier this is not an area in which I ar~t-an expert but I am aware in the demonstrations that some of 1~he Blue Cross plans have conducted the kinds of conclusions I have presented here were reached. We have staff who are very knowledgeable in detail on these experiments. We would be most happy to share that information with the staff of the subcommittee or answer a set of questions. [The following information was received for the record:] SECOND SURGICAL OPINION PROGRAM For example our Blue Cross Blue Shield Plan in New York City has been conduct- ing since 1976 the largest voluntary second surgical opinion program in the nation. About six million subscribers, whom are covered for their physician care, are eligible to call the second opinion referral center if a surgeon has recommended an elective surgical procedure. Two thousand surgical specialists in New York, each certified by an appropriate specialty board, have volunteered to provide the second opinions for a flat fee, abiding by the strict ground rules of what we call the Program for Elective Surgical Second Opinion, or PRESSO. What we have discovered, after three and one half years of large scale experience, is that surgical second opinions are a far more complex process than we and others may initially have perceived. The simple formulation-that some persons who have been recommended for "unnecessary" surgery will be dissuaded by non-confirming second opinions-isn't wrong, but it is insufficient. In fact, it probably applies validly to only a small percentage of the people who receive surgical second opin- ions. In our first three full years, 1976, 1977, and 1978, approximately three and a half thousand second opinions were furnished under PRESSO. In just over a fourth of them, or nearly one thousand, the consultant surgeons did not agree that immediate surgery was advisable. It is this category that we label "nonconfirmed." It would be wrong to assume, however, that a non-confirming second opinion is necessarily a statement by the consultant that the original surgical recommenda- tion was a mistake. In fact, in about half of the cases, the "non-confirming" second opinion is actually in substantial agreement with the advisability of surgery, but calls for some further non-surgical management first, or for some additional diag- nostic studies, or for a somewhat different surgical approach, for example. Because PRESSO will arrange for confidentiality if the caller does not wish his or her own-surgeon to know about the second opinion, we often cannot know precisely what the original surgeon's recommendation was. We must rely on the patient's recollections of what the doctors say. Those recollections are fequently imprecise and, not uncommonly, are affected by the callers' expressed fears about illness and treatment-or by their justified or unjustified distrust of the first surgeon and his or her judgment. We have therefore come to realize, as we may not have perceived three years ago, that a second opinion that differs from a patient's report of the original surgical recommendation is sometimes not truly inconsistent with what the patient's sur- geon really said. When we and others report, therefore, that about one out of four second opinions do not confirm the recommendation for elective surgery, it should be understood that much of the time, the differences between the two opinions may be quite narrow, or even non-existent. Equally significant, we think, is that nearly half of the patients who received confirming second opinions apparently never underwent the surgery. That is to say, 45% of the PRESSO participants in 1976 and 1977 who were recommended for PAGENO="1033" 1025 surgery, and whose second opinions also recommended the surgery, had not received the surgery as of August 1979. We do not maintain that people who call a voluntary second opinion referral center are representative of all patients who receive recommendations for surgery. No doubt they include a high proportion of consumers who raise discerning ques- tions about their own care, or who have unusual fears and apprehensions about surgery. Nevertheless, we believe it fair to surmise from this experience that any population that receives recommendations for surgery will include a substantial fraction that will not follow the surgeons' advice, for whatever reasons they might have. if 45 percent of the persons who receive confirming second surgical opinions didn't undergo the recommended surgery, how much higher would that proportion have been if there had been no second opinion? in other words, we have come to believe-and are currently gathering and analyzing data in order to prove or disprove-that one of the consequences of our program is to decrease the number of people who do not follow their surgeons' recommendations for surgery. This obviously results in an increase in elective surgical procedures. Is the in- crease of a magnitude that equals or is greater than the decrease that results from non-confirming second opinions? We aren't yet sure, but because there are about three confirming opinions for every non-confirming, and because nearly a quarter of the patients receiving non-confirming second opinions eventually undergo the sur- gery, it seems logical to suppose that the overall impact of the second surgical opinion program is to increase the volume of elective surgery. Our current research is analyzing data to permit reasonable estimates of how large that increase really is. Mr. MAGUIRE. Thank you very much for your testimony. We appreciate it. The subcommittee will resume shortly as soon as we vote on the floor. We will stand in recess for about 10 minutes. [Brief recess.] Mr. MAGUIRE. The subcommittee will resume. The next witness is Kenneth I. Schaner, counsel to the National Council of Community Hospitals. Mr. Schaner. STATEMENT OF KENNETH I. SCHANER COUNSEL, NATIONAL COUNCIL OF COMMUNITY HOSPITALS Mr. SCHANER. I am Kenneth Schaner of the Washington, D.C. law firm of Leva, Hawes, Symington, Martin & Oppenheimer. My testimony is on behalf of the National Council of Community Hos- pitals. I will summarize the testimony and ask that my written testimo- ny be included in the record. [See p. 1028.] My testimony relates solely to H.R. 4106 the Medicare and Med- icaid Fraud and Abuse Amendments of 1979. The intention of this bill is to enhance the enforcement capabilities of HEW in fraud and abuse cases. NCCH opposes H.R. 4106 because of its serious substantive and procedural deficiencies. H.R. 4106 does nothing to correct the seri- ous language deficiencies of Public Law 95-142 which have made hospitals fearful that normal business practices could pursuant to the literal language of that law constitute fraud and abuse. Instead H.R. 4106 would allow the Secretary instead of the courts to determine whether these practices are punishable. Moreover by allowing the Secretary to assess penalties pursuant to her own hearing procedures the bill follows a pattern that has already proven unsatisfactory with respect to medicare claims. PAGENO="1034" 1026 The very idea of subjecting fraud and abuse decisions which are obviously far more damaging to the loser than reimbursement claims to the discretion of the Secretary should be unthinkable. Locating and expeditiously prosecuting fraud and abuse is a goal that NCCH wholeheartedly supports. The health care system should and must be purged of those that would take advantage of a Government financed system for personal gain. What NCCH cannot accept is a method of ferreting out the few that would defraud and abuse the system at the cost of the vast majority that operate within the strict confines of the rules. Mate- rial deficiencies of the language of present law have this effect. Several provisions of the Social Security Act enacted as part of Public Law 95-142 are so broad that literally read they could render unlawful legitimate business practices that Congress obvi- ously had no intention of regulating. As drafted such provisions could prohibit all referrals and all purchasing and leasing where medicare or medicaid payments are made in connection with such activities. Because of the indefiniteness and uncertainties of the law, the vast majority of providers that seek to follow the letter of the law may be forced to curtail business practices that are presumably intended to remain acceptable. To the contrary those that might otherwise be disposed to engage in transactions that are close to the fence or to engage in out and out practices the Congress intends to be unlawful are undoubtedly heartened by the vagueness of current law. H.R. 4106 assumes that current provisions are quite clear and that it is the nature of the sanctions in current law that has created enforcement problems. The analysis of existing law in our written testimony makes it apparent that this is not the case. The language of current fraud and abuse provisions could encom- pass a multitude of transactions which one might ordinarily deter- mine should be allowed. For example the common instance in which a patient in connection with consultation with his regular physician is referred to another physician could be a punishable offense under the current law. Existing provisions also could be applied to a myriad of physician inducement cases where a hospital makes a payment to a physician to induce the physician to locate in the hospital's community or to serve on its medical staff. The reduction in penalty proposed by H.R. 4106 will do nothing to alleviate the statutory deficiencies and indeed may make their practical effect much worse. A clarification of existing law may not be as simple as changing a word here or there and defining the type of payment that is a kickback, bribe, or rebate or other remuneration. Congress must make a fundamental policy decision as to whether to allow or prohibit certain activities which have been commonly engaged in by providers as a means of competing in the market- place. For example it is a common practice for hospitals to build or acquire a physicians' office building attached to or near the hospi- tal building. The physicians' office building serves the purpose for the hospitals of encouraging physicians leasing space in the build- PAGENO="1035" 1027 ing to admit their patients requiring hospitalization to the nearby hospital. In addition the integrated office building also should save costs because it encourages physicians not to buy duplicative equipment that is located in the nearby hospital and it saves physicians and patients expenses because their traveltime and resulting lost work time is reduced. Is it fraud and abuse for the hospital to seek to attract physi- cians to such office building by offering space at less than fair market value? Along the same lines some hospitals make payments to physi- cians for the performance of services that other hospitals might expect to be offered on a voluntary basis. Are such payments fraud and abuse under the statute? These and countless other fact situations are examples of ordi- nary business practices which without regard to Government reim- bursement might be considered good business. Yet these practices could be fraud and abuse under existing law. Congress not the Secretary as is proposed in H.R. 4106 must wrestle with the very serious deficiencies in existing law and then include guidelines in the statutory language. Even if current law were to be substantially clarified we serious- ly question the wisdom of lodging in the Secretary the power to determine whether fraud and abuse exists and to assess penalties. Because of the increasing complexity of health care issues, in- cluding those dealing with fraud and abuse, and because of the general mistrust among providers of according the Secretary broad discretionary powers, NCCH would urge the Congress to establish a health court which would have initial jurisdiction over all claims under the Social Security Act and under all other health care laws. Expedited procedures could be adopted for small monetary claims to cover the problems contemplated by H.R. 4106. Thank you. [Testimony resumes on p. 1042.] [Mr. Schaner's prepared statement follows:] PAGENO="1036" 1028 C~TIONAL COUNCIL OF ~c~c~cut Avenue, NW. COMMUNITY HOSPITALS (202) 338-5994 TESTIMONY OF KENNETH I. SCHANER ON BEHALF OF THE NATIONAL COUNCIL OF COMMUNITY HOSPITALS BEFORE THE HEALTH SUBCOMMITTEE OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE ON H.R. 4106 October 23, 1979 I am Kenneth Schaner of the Washington, D. C. law firm of Leva, Hawes, Symington, Martin & Oppenheimer. My testimony is on behalf of the National Council of Community Hospitals ("NCCH"). NCCH is an organization composed of approximately 100 hospitals in 28 states ranging in size from 40 to 1,000 beds, providing in the aggregate approximately 40,000 acute care beds. My testimony relates solely to H.R. 4106, the Medicare and Medicaid Fraud and Abuse Abendments of 1979. The intention of this bill is to enhance the enforcement capabilities of the Department of Health, Education and Welfare in fraud and abuse cases by granting the Secretary the right pursuant to procedures promulgated by the Secretary herself to assess civil PAGENO="1037" 1029 penalties. Under H.R. 4106 the Secretary could assess such penaltie~ if she concluded that: (1) the person presenting a claim for payment knew or had reason to know that the. medical service for which payment is being claimed was not provided as claimed, (2) the medical service for which payment is being claimed was provided in violation of Federal or State law or regulation, or (3) the medical service for which payment is being claimed was provided in violation of an agreement between the person claiming payment and the United States or a State agency. In particular, ground (2) above would grant the Secretary broad authority. It would, for example, allow the Secretary to assess civil penalties by concluding that a payment constitutes a "kickback, bribe, rebate or other remu- neration" that is subject to criminal sanctions under section 1877(b)(1) of the Social Security Act. This is the section added by the Congress in P.L. 95-142 that was also intended to make fra~x1 and abuse convictions easier to obtain. NCC}1 opposes H.R. 4106 because of its serious substan- tive and procedural deficiencies. H.R. 4106 does nothing to correct the serious language deficiencies in P.L. 95-142, which have made hospitals fearful that normal business practices PAGENO="1038" 1030 could, pursuant to the literal language of that law, constitute fraud and abuse. Instead, H.R. 4106 would allow the Secretary, instead of the courts, to determine whether these practices are punishable. Moreover, by allowing the Secretary to assess penalties pursuant to her own hearing procedures, the bill follows a pattern that has already proven unsatisfactory with respect to medicare claims in which the Secretary frequently overturns the findings of the Provider Reimbursement Review Board. The very idea of subjecting fraud and abuse decisions, which are obvi- ously far more damaging to the loser than reimbursement claims, to the discretion of the Secretary should be unthinkable. Moreover, the hearing procedure adopted in H.R. 4106 is even more flawed than that currently applied in Medicare reimbursement cases because appeals from the Secretaryt S decision to assess civil penalties must be made to the Court of Appeals. In addition to cutting off the Federal District Court as a viable avenue of appeal, since the Court of Appeals is not a trier of fact, the Secretary's conclusions of fact would rema in unchallenged. NCCH's objections to H.R. 4106 and the current state of the law relating to fraud and abuse are illustrated by the following hypotheticals. Let us hypothesize that Congress, in wrestling with the problem of whether or not to allow busing of PAGENO="1039" 1031 school children, determined that it would not and in so doing prohibited the use of all buses as the remedy. Let us imagine that Congress, in proposing legislation to produce a better environment, enacted legislation that prohibited all manufac- turing. Such legislation would, of course, be unthinkable. Yet, the provisions in current law relating to fraud and abuse are not far removed from the above examples. Literally read, the provisions would prohibit ordinary transactions involving leasing and purchasing and a myriad of other transactions in the name of preventing fraud and abuse. Locating and vigorously and expeditiously prosecuting Medicare and Medicaid fraud and abuse is a goal that the NCCH wholeheartedly supports. The health care system should and must be purged of those that would take advantage of a govern- ment financed system for personal gain. What NCCH cannot accept is a method of ferreting out the few that would defraud and abuse the system at the cost of the vast majority that operate within the strict confines of the rules. Material deficiencies of the language of present law have this effect. Several provisions of the Social Security Act enacted as a part of P.L. 95-142 are so broad that liter- ally read they could render unlawful legitimate business practices that Congress obviously had no intention of regulat- ing. As drafted, such provisions could prohibit all referrals, PAGENO="1040" 1032 and all purchasing and leasing where Medicare or Medicaid payments are made in connection with such activities. Because of the indefiniteness of the law, the vast majority of providers that seek to follow the letter of the law may be forced to curtail business practices that are presumably intended to remain acceptable. Examples of such uncertainties are described subsequently herein. To the contrary, those that might otherwise be disposed to engage in transactions that are close to the fence or to engage in out and out practices the Congress intends to be unlawful and subject to the criminal sanctions contained in present law are undoubtedly heartened by the vagueness of current law, which renders enforcement of criminal prosecutions in many instances questionable at best. HEW's failure to issue regulations under P.L. 95-142 may either illustrate HEW's own difficulties in defining the law, or an intentional decision to require providers to adopt the most conservative practices possible in order to stay clear of the sanctions of the law. Ironically, for whatever reason such a policy has been adopted, its effect may be to penalize the honest and to enhance the opportunities for frai.z3 and abuse for the very class Congress sought to regulate under the fra~r~ and abuse provisions. In H.R. 4106 HEW seeks to cure the difficulties of enforcement in fra~ and abuse cases by reducing the severity PAGENO="1041" 1033 of the penalties in certain instances. It provides that the Secretary can, based upon regulations promulgated by HEW assess civil penalties as a result of violations HEW determines exist, includthg explusion for up to two years from the Medicare program. H.R. 4106 does not attempt to clarify the type of transactions that are supposed to be covered under existing law. It merely assumes that current provisions are quite clear and that it is the nature of the sanctions in current law that has created the apparent enforcement problems. An analysis of existing law makes it apparent that this assumption is incor- rect. Section 1877(b)(1) of the Social Security Act is ridiculously broad. Rather than being restricted to a prohibi- tion for kickbacks, bribes or rebates as was intended and defining such payments in a fashion that the courts and those intended to be regulated can understand, the statute applies as follows: "any remuneration (including any kickback, bribe7or rebate) . "(A) in return for referring an indi- vidual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under this title, or "(B) in return for purchasing, leasing, ordering or arranging for or recommending purchasing, leasing or ordering any good, facility, service, or item for which payment may be made in whole or in part under this title 56-071 0 - 80 - 66 PAGENO="1042" 1034 "shall be guilty of a felony and upon con- viction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years or both." (Emphasis supplied) The above provisions apply to both the payor and the recipient. Because of the severity of the sanctions (fines and imprisonment), it must be assumed that Congress meant to apply these provisions to aggregious transactions where devious means are used to exact excessive payments. Yet both subparagraph (A) and (B) could encompass a multitude of transactions which one might ordinarily determine should be allowed or at least would fall into a broad "gray" area, which in the absence of clear statutory language cannot be resolved with any certainty. Subparagraph (A) (quoted above) literally read seems to cover virtually any referral fee. For example, the common instance in which a patient in connection with consultation with his regular physician is referred to another physician and the payment to either physician is covered under Medicare, seems to bea punishable offense under the statutory language and thus could result in the adjudication of a felony. This is so because pursuant to the literal terms of the statute the patient's "remuneration" to the referring physician is paid in return for referring the patient to a person for the furnishing of a service covered under Medicare. While the provision, if artfully drafted, might have limited its application to PAGENO="1043" 1035 referral fees where no medical service is being performed by the person referring, the statute was not so drafted. Indeed drafted as broadly as it is now raises questions about whether any successful enforcement of the statute may be attained. Subparagraph (A) could also be applied to a myriad of physician inducement cases, where a hospital makes a payment to a physician that is not employed by the hospital to induce the physician to locate in the hospital's community or to serve on its medical staff. This is a common practice for rural hos- pitals, where the lures of the quiet country life are often insufficient to attract the required array of medical special- ties. Yet, pursuant to the literal language of current law, such payments might be labelled fraud and abuse because they might be said to be "remuneration" paid to induce the physician to refer his or her patients to the hospital. Indeed, we have been told by HEW representatives that the Department would consider certain of the physician inducement cases fraud and abuse. Subparagraph (B) may raise even more serious interp- retative problems. The section by its terms applies to any person who receives "remuneration . . . in return for pur- chasing, leasing, ordering any good . . .." Under the statuto- ry language, for example, any sale of goods for which reim- bursement is made under Medicare would be subject to criminal PAGENO="1044" 1036 sanctions. Similarly, any lease in which a hospital, for example, is a lessee and for which it subsequently seeks reimbursement under Medicare is also subject to criminal sanction. While the statute contains certain narrow exceptions, by far the majority of transactions that might be encompassed in the literal terms of the statutory language quoted herein, are not covered by the exceptions. We believe that the lack of specificity and the apparent broad coverage of the statute renders realistic enforcement of activities, that might be closer to those that the Congress sought to prohibit, virtually impossible. In order to make effective enforcement possible and to allow those that the statute seeks to affect to understand which of the activities in which it might engage are lawful and which are prohibited, the statutory language must be clarified. The reduction in penalty proposed by H.R. 4106 will no nothing to alleviate the statutory deficiencies and, indeed, may make their practical effect much worse. A clarification of existing law may not be as simple as changing a word here and there and defining the type of payment that is similar to a kickback, bribe or rebate. Congress must make a fundamental policy decision as to whether to allow or prohibit certain activities which have been commonly engaged in PAGENO="1045" 1037 by providers as a means of competing in the market place. For example, it is becoming a common practice for hospitals to build or acquire physicians office building attached to or near the hospital building. The physicians office building serves the purpose for the hospital of encouraging physicians leasing space in the building to admit their patients to the neigh- boring hospital. In addition, the integrated office building also should save costs because it encourages physicians not to buy duplicative equi~nent that is located in the nearby hos- pital and it saves patients expenses because their travel time -- and resulting lost work time -- and expenditure of gasoline from traveling from office to hospital is reduced. Is it fraud and abuse for the hospital to seek to attract physicians to such office building by offering such space at less than fair market value unless the physician reduces his fees to patients? If the answer to this question is yes, a practice that may be productive of overall lower system costs may be prohibited since hospitals in some instances may no longer be able to give initial discounted rentals to encourage an expensive move. Moreover, even if the answer to the above question is yes, does the answer remain the same if, notwithstanding such rental discounts, the physicians office building on an independent accounting basis is a profitable unit of the hospital, thereby possibly subsidizing hospital operations and reducing costs? PAGENO="1046" 1038 Along the same lines, some hospitals make payments to physicians for the performance of services that other hospitals might expect to be offered on a voluntary basis. Are such payments fraud and abuse under the statute because these same physicians may be induced as a result of such payments to order services from the hospital, payment for which services are reimbursed under government programs? These and countless other fact situations are examples of ordinary business practices, which, without regard to government reimbursement under the Medicare and Medicaid programs might be considered "good business." It is good business, for example, to fill up a new office building at its opening by offering discounts to certain tenants who might attract other tenants (for example other doctors, commercial pharmacies and medical supply outlets). It is good business to offer discounts to customers in one product line in order to attract their business in others (in this setting such practice as pointed out previously could save overall system costs). It is good business to offer independent contractors an incentive to use a hospital's services and facilities rather than that of others. Yet, these practices could be fraud and abuse in this setting. Congress, not the Secretary as is proposed in H.R. 4106, must wrestle with these problems and then include speci- fic guidelines in the statutory language to allow the courts or, if need be, the Secretary, to decide. PAGENO="1047" 1039 If a statute that is designed to discourage fraud and abuse is so unclear that its language literally read covers scores of activities which cannot and should not by any stretch of the imagination be considered unlawful, it is defective and must be amended. Moreover, if a statute is supposed to dis- courage activities that previously might have been an accepted part of good business practice in the industry regulated in the statute, but does not cleary delineate those activities that are to be prohibited from others that remain acceptable, it has the effect of weakening the statute, of preventing those entities with honest managers regulated under the statute from engaging in activities that should be acceptable because of their fear of breaking the law, of allowing those persons that would ordinarily seek to take advantage of and flaunt the system a continuing free rein to do so, it should be amended. Therefore, NCCH believes that a discussion of how to speed up the enforcement mechanism as is the intent of H.R. 4106 by according the Secretary the right to determine fraud and abuse and to assess penalties is at best premature until the Congress reexamines the statutory language associated with the fraud and abuse provisions and clarifies their applica- bility to the type of transactions discussed herein and to a myriad of others. PAGENO="1048" 1040 Moreover, even if such provisions were substantially clarified, we seriously question the wisdom of lodging in the Secretary the power to determine whether fraud and abuse exists and to assess penalties. There seems to be an ever growing trend for HEW to request a delegation of powers to the Secretary of HEW. In H.R. 4106, the Secretary would be given the discretionary authority to hear all appeals to the assess- ment of civil penalties, notwithstanding that it was the Secretary that first determined that the penalty should be assessed. Under the proposed statute, appeals from the "ap- peal" to the Secretary are to the U.S. Court of Appeals, a body that does not ordinarily review findings of facts. Accordingly, the Secretary's findings of fact would presumably remain at all times unchallenged. While the existing Provider Reimbursement Review Board might be a logical body to initially hear a broad range of administrative appeals in lieu of the Secretary, the PRRB decisions are too currently subject to the de novo review of the Secretary. Indeed, the Secretary has used this power to reverse more than half of the cases that'~the PRRB initially has concluded at least in part should be determined in favor of the provider, thereby making the PRRB a virtually meaningless body. Because of the increasing complexity of health care issues, including those dealing with fraud and abuse, and PAGENO="1049" 1041 because of the general mistrust among providers of according the Secretary such broad powers, NCCH would urge the Congress to establish a Health Care Court which would have initial jurisdiction over all claims under the Social Security Act (including fraud and abuse and Medicare claims), and under other health care laws, such as any cost containment act ultimately passed. Expedited procedures could be adopted for small monetary claims. Such a court would remove the conflict of interest or appearance of conflict of interest currently lodged in the Secretary of HEW of determining what amounts should be paid under the Social Security Act and then presiding over the principal avenue of challenge to such determinations. Such a court would increase the fairness of and trust in the system. Such a court could develop an understanding of the issues and make the administration of the laws affecting the health care system more predictable and even-handed. And such a court would gain an expertise to handle the complex health care issues that the Federal courts because of the diversity of cases they handle cannot develop. PAGENO="1050" 1042 Mr. MAGUIRE. Thank you very much. Dr. Carter. Mr. CARTER. Thank you, Mr. Chairman. At the present time we have an Inspector General in the Depart- ment of Health, Education, and Welfare. Have you had time to assess his work? Mr. SCHANER. Dr. Carter, I have spoken with the office which was formerly the Office of Integrity. The problem for a noncri- minal lawyer such as myself comes when hospitals ask whether specific transactions would constitute fraud and abuse and we are asked for guidance and really none exists. The Office of Integrity which has a changed name has issued five or six letters on physi- cian inducement cases. The basic premise of these letters seems to be that you can pay the physician for coming to your community if that inducement is not tied to the quantity of services the physi- cian delivers to the hospital. This would seem to render unlawful for example all radiology percentage contracts and indeed I think they have really backed themselves into a hole not because of any malintent but because the statute really contains no guidance as to what sort of reasoning process they should use in determining what fraud and abuse is. Mr. CARTER. As I understand it under the health planning legis- lation which has been considered and passed the House, if a physi- cian or a group of physicians performs inpatient services, such as CAT scanning, using equipment costing more than $150,000, and they perform these services in a facility nearby but outside the hospital, then they must obtain a certificate of need or else they would be violating the planning law. Do you disagree with that? Mr. SCHANER. I am not familiar with that legislation. I would find it hard to believe that the mere fact that a physician has a CAT scanner in an office without other facts and does work for a hospital constitutes fraud and abuse. Mr. CARTER. In some instances we know that this has occurred as a way of circumventing the requirements of the planning law. This has been a source of much abuse, and that is why we amended the law. Mr. SCHANER. I think an improvement in the planning laws that has been considered to include physicians could help a great deal in regulating whether physicians could buy an $800,000 machine and quickly locate it in their office in order to corner the market in a particular area. Mr. CARTER. Yes, and then the hospital would send all its pa- tients over there to that one person and the hospital would avoid having to. get a certificate of need for the equipment. That has happened in~ some cases and that is what this legislation under HSA. would regulate. Let me comment on another issue now. After going over legislation similar to this over a period of time I have come to the opinion that most of our trials should be before judges and that* a fine should not be arbitrarily levied without adequate representation. What kinds of sanctions do you think are most effective? PAGENO="1051" 1043 Mr. SCHANER. I certainly think that the criminal sanctions in the law are quite effective if they were enforcable. The difficulties of the current law is the law is so broad that unless a transaction is just so egregious, I believe a court would be reluctant to find fraud and abuse because, for example, the statute does not draw lines between a lease transaction that is acceptable and a lease trañsac- tion that is not. I might say NCCH does not object to civil penalties. Our main objections are twofold: (1) That there be some sort of guidance so hospitals know what transactions they should and should not engage in; and (2) that the hearing procedure be a fair one, and by this I mean before the courts. Mr. CARTER. Trial by a judge and jury? Mr. SCHANER. I like the trial by judge and jury. Mr. CARTER. You mentioned current statutory deficiencies. Would you give us some specific examples? Mr. SCHANER. I have a copy of the statute with me. I think only reading a small part of it will give you an idea of the problems that lawyers have in interpreting the statute. It says and I am reading specifically from section 1877, "Whoever solicits and receives any remuneration * * *" and I am skipping some words "~ * * in return for purchasing, leasing or ordering is fraud and abuse." There is no specific limitation such as an intent to defraud. There is really no specific guidance. We know the Congress had in mind some very bad transactions. The difficulty is HEW is now left to decide what is bad and what is good. Mr. CARTER. Would you read that back, sir? Mr. SCHANER. "Whoever solicits or receives any remuneration * * `p" it follows with "Including any kickback, bride or rebates." It goes on with "~ * * in return for purchasing, leasing ordering et cetera," and it goes on to say " * * shall be guilty of a felony." Mr. CARTER. The words in the parenthesis are really what it means. Mr. SCHANER. I think the Congress was careful in drafting this statute to make it quite broad. They did not define what a "kick- back" or "rebate" or "bribe" was. They wanted to make' it all encompassing so they said "any remuneration." Obviously rent under a lease is remuneration. Mr. CARTER. It is not meant to include that. Mr. SCHANER. It does include kickback, rebate or bribes. Mr. CARTER. I think that makes it pretty clear. We have a lot of problems. We loss an estimated $7 billion a year in Federal HEW dollars because of fraud and abuse. Something has to be done and this legisation you've mentioned is an effort on our part to do that. It may not be precisely in the language of a Philadelphia lawyer and if it had been possible, certainly, I would have done my part to do that. We leave that to the gentlemen who are lawyers such as my friend on the left. Perhaps we can frame it in a little better language at some time in the future. Mr. SCHANER. Hospitals around the country desperately want the fraud and abuse statute to be enforced, but the difficulty is the language is indefinite and it cannot be enforced. PAGENO="1052" 1044 Mr. MAGUIRE. Mr. Dannemeyer. Mr. DANNEMEYER. I was interested, counsel, in your observation about a health care court. What agency adjudicates these claims now? Mr. SCHANER. We would just go to the Federal court right now, the District Court and the Court of Appeals. There is something called the provider reimbursement review board for medicare claims. The difficulty of that body is it is subject to the de novo review by the~ Secretary and he has reversed most of the decisions that were initially in favor of hospitals. Mr. DANNEMEYER. Before you go into the Federal court system must you first have a hearing within the administrative agency? Mr. SCHANER. On a medicare claim, yes. You cannot get into the Federal courts until you go through the provider reimbursement reviewboard. Mr. DANNEMEYER. Are you experienced with that administrative procedure? Mr. SCHANER. Yes, I am. Mr. DANNEMEYER. You feel that whatever avenue is open after the administrative procedure should be what you call a health care court? Mr. SCHANER. Yes. Mr. DANNEMEYER. It is a magistrate court that we have in most areas in the Federal district courts. Could that not be expanded to provide that type of service? Mr. SCHANER. I think not because as the health laws become more and more complicated I think we are looking at a situation more like the Tax Court which was created to handle very compli- cated cases. The Tax Court as I understand it has an offshoot of itself for small claims. This is what we had in mind. I do not think a magistrate court could handle such very compli- cated cases and so far the provider reimbursement review board is a waste of time because if the hospital wins it is going to get reversed more than half of the time anyway and the case is going to end up in Federal court anyway. It is really a costly procedure for no gain. You are just required to do it. I think if we are looking to improve and streamline the system we should set up something along the lines of the Tax Court. Mr. DANNEMEYER. Would you envision we would have one of these health care courts every place we had a Federal District Court? Mr. SCHANER. I think it would sit very much like the tax court in Washington, but would go on circuit. The Tax Court is located here in Washington but tries cases in various places. Mr. DANNEMEYER. Thank you, Mr. Chairman. Mr. MAGUIRE. Thank you, Mr. Schaner, for your testimony. I have a short statement which I would like to make at this point. I am happy to have with us today witnesses who are here to testify concerning the importance of second opinions for elective surgical procedures. With over 20 million operations being per- formed per year we each have a 1 in 11 chance of undergoing an operation. The vast majority of these operations involve elective PAGENO="1053" 1045 surgery. Various estimates place elective surgery as up to as high as 86 percent of all surgery. This is where each individual since it is elective could have time to assess whether an operation is really necessary or not. At previous hearings of the Subcommittee on Oversight and Investigations of the full Interstate and Foreign Commerce Com- mittee it was stated by expert witnesses that there were approxi- mately 2 million unnecessary surgical procedures that cost over $4 billion and over 10,000 lives in 1977. Even if these estimates are not entirely accurate they certainly suggest something of the possi- ble magnitude of both the dollars and the lives that are involved in this question. Many of these operations were paid for by medicare and medic- aid and many others were paid for by private third party carriers. In either of these instances citizens either through tax dollars or through increased tax premiums ended up paying for unnecessary and sometimes dangerous procedures. In addition citizens may be ill-informed and unaware that there might be a less costly and less extreme and sometimes less painful way to deal with their illnesses rather than undergoing a surgical procedure. For example individuals with gall stones are often unaware that there is now a viable alternative to cholecystectomy which is the operative procedure that removes gall stones. An alternative which continues to be tested nationally in various designated medical centers involves taking a medication called chinodeoxycholic acid. This medication has been found to be effective in dissolving almost all cholesterol gallstones which account for approximately 80 per- cent of all gall stones in patients in the United States. With this kind of an example it seems to me that quality of care, cost effectiveness and the elimination of hospitalization points toward the use of medication rather than surgery whenever medi- cally indicated. With the mandatory second opinion program the chance of indi- viduals being presented the alternative of other effective treat- ments increases. With a voluntary program an individual who is experiencing pain and discomfort who is offered an operation as a way to relieve the pain may well choose the operative surgery without seeking a second opinion-even though a second opinion might be advisable-if the person believes the surgery will allevi- ate their painful condition in the shortest possible period of time. H.R. 3854 and H.R. 3855 which I have introduced with some cosponsors, the Quality Surgical Care Act of 1977, would amend the current Social Security Act to require second opinion as a condition for payment to medicare and medicaid recipients for elective surgi- cal procedures as defined by the Secretary of HEW. Financial incentives in the form of a Federal matching percent- age would be provided to the States to help cover the cost of the program. The first witness on our panel on this subject today is Dr. Eugene McCarthy from Cornell University Medical College. Ms. Finkel who works closely with Dr. McCarthy and who was sup- posed to be here is ill and therefore is unable to be here today although we hope to benefit from her expertise in another forum at another time. PAGENO="1054" 1046 Dr. McCarthy has done extensive research involving the area of second surgical opinions and he has also shared his expertise with HEW and has been in the forefront of setting up some of their demonstration projects. Also on the panel we have Daniel E. Nickelson who is Director of the Office of Program Policy Coordination, Health Standards and Quality Bureau of HEW. He will talk about the national voluntary program for second surgical opinions. We also have Bruce J. Steinhardt who is Director of the Evalua- tive Studies Staff, Office of Demonstrations and Evaluations, Office of Research Demonstrations and Statistics, Health Care Financing Administration of the Department of Health, Education, and Wel- fare. Mr. Steinhardt will discuss the research and demonstration projects that are currently taking place. Gentlemen, would you take your places at the table please. We will begin with Dr. McCarthy. STATEMENTS OF EUGENE G. McCARTHY~ M.D., M.P.H., CORNELL UNIVERSITY MEDICAL COLLEGE; BRUCE J. STEINHARDT, DI- RECTOR, OFFICE OF DEMONSTRATIONS AND EVALUATIONS, HEALTH CARE FINANCING ADMINISTRATION, PUBLIC HEALTH SERVICE, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE; AND DANIEL NICKELSON, DIRECTOR, OFFICE OF PROGRAM DEVELOPMENT AND COORDINATION, HEALTH STANDARDS AND QUALITY BUREAU (HCFA) Dr. MCCARTHY. Mr. Chairman, I have submitted a rather lengthy statement [see p. 1051] which really is an update of our research of the second opinion program-both voluntary and mandatory pro- grams-in the greater New York area and also in the Detroit area where a voluntary program is available to members of the three motor companies and the UAW. With your indulgence, this testimony is an update of the materi- als I had presented to the committee 1 year ago which in turn was a followup of my original presentation presented 2 years back. Basically, we have found in the evolution of our research over the last 8 years that with 10,000 consultations we have a wealth of experience with the program. I think we can make some tentative conclusions and also raise some provocative questions and possible research avenues for the future. I think we don't really know have to explain why surgery has risen so rapidly particularly, among several elective procedures. In my testimony on appendixes A, B, and D you will find an extensive breakdown of the leading surgical procedures most of which are elective. There has been a substantial increase, particularly in the last 7 years. The overall problem in a public health sense is that the United States, having maintained a close relationship with the growth of elective surgical procedures through the 1940's and 1950's and 1960's, has experienced an explosion in surgical procedures in the 1970's to the point that now between 1971 and 1977 we have had approximately a 35-percent increase in the number of inhospital surgical procedures with approximately a 5-percent rise in popula- tion. PAGENO="1055" 1047 Prior to that the rate of surgery stayed quite constant with the rise in population. We are talking about a rise of approximately three or four times faster each year than the rate of rise in the population. As you look at certain of the procedures, you can see more dramatic in- creases. The other area of interest is we have developed a number of second opinion programs. I believe we have 14 different groups now offering a second opinion program and are composed of socioeco- nomic groups in the New York City and New Jersey area. One of the groups recently has developed a mandatory program in your own district, the heavy laborers group as well as the teamsters' group. We have teamsters and printers. We have building services and store workers. We have State employees, city employees, port au- thority employees. All of these groups have had a variety of volun- tary programs and many, after the experience of 2 or 3 years, have established a mandatory program. I think it is important to define the word "mandatory" because it means different things to different people. Prudential has a differ- ent definition. The medicaid programs have their own definition. "Mandatory" in the Cornell-New York hospital program means all that is required is the second opinion consultation. The patient is at liberty at any time to develop or execute the course of action based on the advice of the first physician or the second physician. There is no penalty incurred whatsoever in terms of the reimburse- ment. All that is required is the consultation itself. Mr. MAGUIRE. Let me clarify that. There is no penalty with respect to which decision you make once you have the two consul- tations. Presumably you are not permitted not to have the second consultation. Dr. MCCARTHY. The penalty in our various Taft-Hartley pro- grams is you would lose benefits if you did not have the consulta- tion. Mr. MAGUIRE. That is the same kind of penalty that is included in my bill. Dr. MCCARTHY. In our program and in your bill as I read it you do not make any comment or any penalty or let's say a diminution of reimbursement if for instance the second consultation did not confirm the first consultation. There is some ambiguity about this at the present time. Mr. MAGUIRE. Correct. Our bill does not prejudice anyone with respect to what either of the doctors say or with respect to what the person themselves decide to do once they get the information. You do not get reimbursed unless you have both opinions. Dr. MCCARTHY. I think Congresswoman Spellman's comments succinctly sum up what our experience has been in the last 8 years on the mandatory program. We find the mandatory program is viewed as a new benefit. I think that is extremely important to dwell on for a moment. It is a benefit in the sense that the consumer patient has the opportunity without deductibles or coinsurance to obtain a second opinion and quite candidly they enjoy the opportunity of, if you PAGENO="1056" 1048 will, placing the responsibility for a second opinion on the shoul- ders of their respective fund. It is very difficult. We have been puzzled by the poor response in the voluntary program. I think we have two insights in the research we have done to date. We have done an extensive survey of the Chrysler, Ford, and General Motors program in Detroit. We found after 18 months of operation approximately 80 percent of the recipients were not aware of the existence of the program at all despite publicity. The second feature which I think goes to the psychological prob- lem, if you will, is that patients are hesitant to suggest to their own surgeon that they would like a second opinion because in some respects as many patients have told us it reflects or could reflect or could be misinterpreted as having something to do with their rela- tive confidence in the judgment of that particular doctor. I think Dr. Francis Moore who is the professor of surgery at Harvard succinctly summed it up that any surgeon that takes that point of view obviously is a surgeon that you should not be dealing with. There is that reality. I think there is no question it explains particularly the poor response in the voluntary programs. In the mandatory programs it is quite easy for the patient to say the fund insists I have a second opinion consultation; therefore there seems to be a neutrality in terms of this whole issue. What are our results? In the mandatory program we have con- sistently found that 18 percent of the second opinions are not confirmed by the second opinion consultant. That is nothing more than a difference of opinion between two surgeons or in most cases with a surgeon and an internist. What we have done with the help of HCFA and HEW for the last 4 years and prior to that with social security's assistance is we have followed these individuals to see what the outcome has been. Approximately two-thirds of those in our mandatory program who we have followed quite closely both from claims review and phone interviews on a 6-month basis have not had surgery 6 months from their consultation. It is interesting to take a different perspective of this. Two of our most prominent surgeons, Dr. William Grafe who heads ambula- tory surgery at New York Hospital and Dr. Charles McSherry who is the chief and professor of surgery at Beth Israel Hospital, looked at 350 cases that they had examined. I think it was important because their analysis had a decided influence on the American College of Surgeons and the American Surgical Association when they presented their findings. They found in general surgery that in approximately 38 percent of the cases which were not confirmed for surgery, there was no pathol- ogy in the patients they saw as second opinion consultants. In a broad sense the other 60 percent fell into alternative medical care as being the more optimal course of action to follow. We have done the same thing in gynocology and the same thing in orthopedics and we find more conservative treatment was the major reason for the nonconfirmation on the part of the surgeon. PAGENO="1057" 1049 In closing you could say for every 100 individuals in our manda- tory program we have 12 or 13 that do not have surgery. I think it is quite well documented. We find also a very intriguing phenomenon which is from the cost point of view even more significant than actually those that are permanently deferred. In every one of our programs, the build- ing service and the carpenters, and the teamsters, and the store workers programs, and the meatcutters, et cetera, in every one of those programs that we have developed a mandatory program in the first year of the program we conduct a before and after study. We literally log the number of inhospital surgical claims for a few years before the program and look at those claims after the pro- gram commences. We have had a 10- to 15-percent drop in the number of claims submitted. Obviously there is an interaction that goes on there. We can only speculate that when the patient presents the fact to the doctor that his fund demands a second opinion there is a change in the opinion of what the next step in therapeutic care will be. We found that consistently approximately 3 to 5 percent depend- ing on the group where surgery is confirmed but it can be per- formed in an ambulatory setting. I think this is important particu- larly with surgi-centers and other types of ambulatory surgery that is developing. I think in terms of addressing some points in reflection on your bill, Congressman Maguire. One question I think that should be studied in this mandatory program both for medicaid and medicare is whether or not there should be a selection of specific procedures rather than an across-the-board program. In many parts of the country it would be impossible to develop a panel that would be sufficient in numbers and in depth of subspe- cialties to handle a total mandatory program. I am encouraged that the initiative for the program is coming from the private sector and in some cases from the various States.~ Michigan has just mandated through legislation on their appropri~ ations bill a mandatory program which I hope will be underway for their medicaid program in the 1980's. I know quite candidly my colleagues from HEW have been hesis- tant if not negative on the concept of mandatory programs. I am delighted to say there is interest in mandatory programs. At the International Foundation of employer-employee health benefits programs, which had their annual meeting recently in New York, we ran a special session on this whole area. There are literally sprouting around the country several mandatory programs for various Taft-Hartley groups. The question of structuring panels has been a difficult one. We have insisted on board certified surgeons which I think is a sound principle in the vast majority of the country. Certain compromises would have to be made in rural areas of the country in order to cover adequately the number of consultations that might develop. I would suggest a study be undertaken to investigate the ques- tion of targeting. Particularly in our study we find five or six diagnostic categories that are quite higher in their nonconfirma- tion rate then the overall general number of surgical procedures. 56-071 0 - 80 - 67 PAGENO="1058" 1050 I ~r~U1d also indicate it would be important to emphasize some demonstration mandatory programs particularly in areas where there are more than ample surgical surgeons on panels. You may not be aware but I know the Defense Department has been thinking about programs for their CHAMPUS group in the Florida, San Diego, and Texas area. There are many opportunities. We have two demonstration projects now, both of those are in the Northeast. I would, in digesting what you have proposed, recommend a two- step proposal namely where we would look at some significant mandatory demonstration programs particularly in areas where there is more than ample availability of surgeons for a panel. [Testimony resumes on p. 1079.] [Dr. McCarthy's and Ms. Finkel's prepared statement follows:] PAGENO="1059" 1051 EIGHT YEARS' EXPERIENCE WITH SECOND OPINION PROGRAMS Submitted by: Eugene G. McCarthy, M.D., M.P.H. and Madelon Lubin Finkel, M.P.A. The incidence of surgery .in the United States has been the subject of intense review and study. during the past decade.* What has become apparent is that surgical utilization has increased annually at an unprecedented rate, particularly during the years 1971 - 1977. Indeed, until the early 1970's, the rate was fairly stable and consistent with population growth. Since 1971, however, it has increased steadily. Whereas the rate per 100,000 for all operations was 7735 in 1965 and 7805.3 in 1971, in 1973 it increased to 8951.8, in 1975 it was 9585, and by 1977, the rate was 9972.1. In 1971, there were 15.8 million operations performed, and in 1977, 21.2 million procedures were per- formed (see Appendix A). The increase in the number of procedures performed from one year to the next was roughly 900,000; however, from 1975 to 1976, the number of operations performed inexplicably increased only by 46,000. Moreover, for the. first time since 1968, the rate of surgery actually dipped (9585/100,000 in 1975 to 9538.7/ 100,000 in 1976). In 1977, the number of operations performed resumed the upward trend (the number of procedures in 1977 increased by 1.1 million from 1976) and the rate per 100,000 increased from 9538.7 in 1976 to 9972.1 in 1977. Evidently the plateau of 1976 was an aberration. The increase in the rate of surgery has been especially striking for several procedures. Hysterectomies, one of the most frequently performed operations in the U.S., increased almost 40 percent from 1965 to 1977. Cataract surgery has increased 146.5 percent during this time period, knee surgery has increased 133.8 percent and prostate surgery has increased 56.5 percent. Appendectomies, used as an estimate of emergency surgery, decreased by almost 10 percent from 1965 to 1977. Appendix B shows the trend from 1965 through 1977 PAGENO="1060" 1052 for fifteen of the mast commonly performed surgical procedures. While the reasons for the rapid increase in surgical utilization are elusive at best, there have been a number of explanations offered. It has been suggested that accessibility to medical care is an important factor contributing to the rise in surgery. Moreover, recent studies have purportedly shown that patient admissions for surgery expanded to fill beds, operating suites, and surgeons' time. There are those who feel that the increase in surgical utilization is determined by the patient while others feel that it is determined by the physicidn. The growth of "third party" payment is thought to be a contributing factor. In addition both the payment mechanism and the organizational structure (fee-for-service, prepaid, etc.) have been suggested as contributing to the rise. Prepaid group plans, in general, have been shown to have lower surgical rates than other plans, for exarple. Manpower studies possibly suggest that too many doctors are performing surgery apd the statistics indicate the need to reduce the number of surgical residency positions offered. Indeed, there may be too many surgeons for the - needs of the population and this situation may lead to excessive surgery being performed. In 1970, for example, roughly 92,600 of the 272,000 physicians in active practice indicat~d that they perform surgery and it was estimated that there were 42 surgeons per 100,000 population. By 1976, the number of practicing surgeons increased to 98,667 and there were 46 surgeons per 100,000 population. In summary, it is generally agreed that many factors contribute to the increased utilization of surgical services and no one explanation is sufficient to account for the rise. Moreover, it is not clear whether a high rate of surgery indicates that too many procedures are being performed or that a com- paratively. low rate indicates that not enough surgery is being performed. Indeed, PAGENO="1061" 1053 Roos et al. in their study of surgical rates in Manitoba, challenge the assumption that high elective surgery rates indicate lowered standards of practice. Others feel that one must not make implicit value judgments on the lower rates of surgical care in making policy decisions without careful study of the criteria used and variables examined. Given the increasing rate of surgery as well as the real possibility * that some surgical procedures have probably been performed without medical justification, particularly in some subspecialties, it seems appropriate that a review of the necessity of recommended elective surgery be encouraged before the operation is performed. In the past, tissue review committees, medical audits, and peer review mechanisms were implemented to quantify surgical necessity. Yet, these review processes are carried out after the operation has taken place. One program, second opinion elective surgery programs, is designed to screen patients before they undergo surgery. Sec~nd surgical opinion programs are designed to reduce the incidence of inappropriate surgery and thereby stem the costs of such surgery. These programs are consumer-oriented and designed to screen those elective operations which otherwise might be deferred or prevented without jeopardizing the general health and well-being of the individual. They provide for a consultation with a Board certified specialist for patients previously recommended for* elective surgery.* *Elective surgery is defined as operations or surgical procedures which are not considered to be emergency or life threatening and are subject *to the choice or decision of the patient and physician. specifically excluded are surgeries required as a result of trauma, normal vaginal deliveries, and elective abortions. Both inpatient and outpatient surgery is included in the program. PAGENO="1062" 1054 It should be stressed that the second opinion program is not designed to measure reliability between physicians nor is it designed to measure differences of opinion. Indeed, the difficulties inherent in such studieshave been well documented. Second opinion programs are intended to help the patient make a more informed decision regarding previously recommended surgery. The program which has been in existence the longest period of time, and is the only one to have accumulated any meaningful statistics, is conducted by Cornell University Medical College- The New York Hospital in conjunction with several Taft-Hartley security welfare funds in the greater New York City area. The Cornell program is prospective in design and has been in existence since 1972. There are two types of second opinion plans in the Cornell program: voluntary and mandatory. The former relies on the individual's initiative to take advantage of the program. Only B to 10 percent of those eligible do so and those who do, usually are faced with major surgery. For a variety of reasons, these individuals may question the efficacy or the outcome of the surgery, or may have decided not to have surgery performed and are seeking reassurance that no surgery is the best course of action. Conversely, patients are likely not to get a second opinion when they see no reason to doubt the first physician's judgment. In the mandatory plan there is no exercise of patient judgment; i.e., the patient is required to seek a consultation in order to have basic hospitali- zation on and physician coverage for the elective procedure paid for by the welfare fund, however, the individuals are always free to accept the consultants or the original physician's recommendation in order to receive their benefits. In the mand- atory programs roughly 85 percent of the eligible surgery is screened, hence a more PAGENO="1063" 1055 accurate sampling of surgical procedures is achieved. The mandatory program provides for one "foregiveness" for each member and dependent. That is, benefits will be paid if the surgery is performed without a consultation first being arranged; however, if the same individual undergoes surgery again and fails to first have a second opinion consultation, benefits will not be paid~ In both programs, however, the decision to have surgery is made by the individual. The Cornell study population consists of several security welfare plans in the greater New York City area representing approximately 660,000 individuals (se) Appendix C). The New York City Employees District Council 37 of the American Federation of State, County, and Municipal Workers (250,000 insured) was one of the first welfare plans to offer a voluntary second opinion benefit to its members and dependents. Since 1972, several other security welfare plans have instituted voluntary second opinion programs: Typo League senefit Fund (20,900 insured); and the New York State and County Employees (Westchester, Nassau and Suffolk) (200,000 insured). The Storeworkers' Welfare Fund (18,000 insured) was the first security welfare plan to provide a mandatory second, opinion benefit for its members and dependents. Three other security plans have since instituted a mandatory program: New York City District Council of Carpenters Welfare Fund (60,000 insured); Local 325-J of the suilding Service Workers (120,000 insured); Local 814 of the Teamsters (12,000 insured); and the Jewelers Welfare Fund (1,800 insured). The carpenters and Local 32B-J both initially offered a voluntary *The individual is warned in writing and in a telephone conversation that a second opinion consultation must be scheduled in the future. PAGENO="1064" 1056 program but instituted a mandatory program after a one or two year trial period. In both the voluntary and mandatory programs, the cost of the second opinion consultation ($50.) and all ancillary tests required to complete the examination (averaging $8./consultation) are paid for by the participating security welfare funds. A listing of those surgical procedures included in the, Cornell study are found in Appendix D. More that 550 Board certified surgeons, representing all of the surgical subspecialties, are program consultants. The panel consultants are geographically located in New York City and the surrounding counties in the Tn-State area. On the basis of the examination, the consultant either confirms the need for surgery or does not confirm the need for surgery; i.e., agrees that surgery should be performed, or recommends that surgery should not be performed. In the latter case the consultant may feel that the first diagnosis of the patient's condition is incorrect or that the diagnosis is correct but that medical treatment, not surgery, is warranted. The recommendation of medical treatment does not, of course, preclude the possibility of surgery at a later date. The decision to undergo surgery rests with the individual regardless of the consultant's recommendation. A third opinion could be arranged if so requested. The funds will pay for the hospitalization and surgery should the patient decide to have the operation regardless of the consultant' s recommenda- tion; however, the consultant is not permitted to perform the surgery. This safeguard prevents potential abuses of the program and helps to reassure the patient that a recommendation of surgery is made in his or her best interest. Since 1972, 10,082 consultations have been scheduled (5055 in the volun- tary group and 5027 in the mandatory group). Table 1 shows that of this total, 26.0 percent were not confirmed for surgery by the Board certified second PAGENO="1065" 1057 opinion consultant. Within the voluntary group, 33.4 percent were not confirmed for surgery and 18.5 percent were not confirmed in the mandatory group. Within both groups, there were more females who sought a consultafion than males (61.4% in the voluntary group and 55.8% in the mandatory group). The majority within both groups were between the ages of 45 and 64 (54.0% in the voluntary group and 51.6% in the mandatory group). Roughly one-quarter within both groups were between the ages of 25 and 44. Table 2 shows the distribution of those not confirmed for surgery analyzed by selected diagnostic categories. Within the voluntary group, half of those recommended for knee surgery were not confirmed by the consulting orthopedist and 46.8 percent were not confirmed for a bunionectomy. Forty-one percent of those initially recommended for a hysterectomy and a prostatectomy, respectively, were not confirmed by the panel consultant. Within the mandatory group, roughly 31 percent of those initially recommended for a hysterectomy and a pro~tatectomy, respectively, were not confirmed for the surgery; 29.1 percent of those initially recommended for a bunionectomy were not confirmed; and 27.2 percent of those recommended for knee surgery were not confirmed. Table 3 shows the breakdown of those not confirmed for surgery analyzed by consultant specialty. Within the voluntary group, 46.3 percent of the consulting orthopedists did not confirm the need for surgery and almost 40 percentof the consulting gynecologists did not confirm the need for surgery. Within the mandatory group, one-third of the consulting orthopedists did not confirm the need for surgery and 26.2 percent of the consulting gynecologists did not feel that the initially recommended surgical procedure need be performed. PAGENO="1066" 1058 In order to acertain how many of these individuals who had a second opinion consultation decided to undergo/forego surgery, a follow-up evaluation study was instituted. This study was initially funded by the Social Security Administration and is presently funded by the Health Care Financing Administration (HCFA). The HCFA contract seeks to evaluate the utilization of the program as well as the costs (direct and indirect) and benefits of the Cornell second opinion program. Cost findings will be made available by mid-1980. Each not confirmed for surgery case and an equal number of randomly selected individuals confi~med for surgery are followed for two years from the date of their second opinion consultation. Four telephone interviews, voluntarily completed by the respondent, are administered at six month intervals Diagram 1 shows the stages of the follow up phase of the second opinion program. The initial questionnaire for those who report that they had the surgery performed elicits information on the date of the operation, the name of the operation performed, why the operation was performed, and the nature and type of other medical treatment. Subsequent calls inquire about general health, the incidence of additional surgery (related to the condition for which a second opinion was sought), and the nature and type of other medical treatment received. For those who report that they did not have surgery performed, the initial questionnaire elicits information on why the operation was not performed. Sub- sequent calls inquire about general health, whether surgery for which a second opinion was sought has been performed, and the nature and type of medical treatment received. Regardless of the individual's surgical status, if the respondent reports that he/she did not receive any medical treatment (for the condition which precipitatmd a second opinion consultation) for two consecutive six month PAGENO="1067" 1059 follow up periods, he/she is considered to be asymptomatic and is no longer followed in the evaluation phase of the study. Therefore, an individual may have as few as two interviews or as many as four, depending on the incidence of medical treatisent. Medical treatment is defined as follows: 1. if the individual sees, a doctor in the office or in a clinic and is administered any medication, therapy, cast or brace, or has any tests performed, medical treatment has been received. 2. if the individual has had surgery and saw the doc4- in the office or in a clinic more than once for an examination on1~, provided that the' visits continue for more than one month (four weeks) following the consult- ation or release from the hospital medical treatment has been received. As of April, 1979, 2712 individuals in the voluntary group and 1236 individuals in the mandatory group received their first follow up interview (conducted 6 months from the date of their consultation). Since the interview is volunt~ry, not all of those had a second opinion are necessarily in the follow up evaluation (the response rate is roughly 90 percent in the voluntary group and 96 percent in the mandatory group). In addition, those who received a second opinion consultation fairly recently would not be included in the statistics because the six month waiting period would not have' elapsed. Table q shows that of those not confirmed for surgery, 83.6 percent in the voluntary group and 67.7 percent in the mandatory group reported that they have not had the surgery performed. In both the voluntary and mandatory groups, the most frequently mentioned reason for not having the operation was that the second opinion consultant advised against the surgery (83.6% and 79.4%, respectively). The majority of those who were not confirmed for surgery who decided to PAGENO="1068" 1060 have the operation performed did so within 90 days from the date of their coqgultatjon. The most frequently stated reason was that their condition persisted or becameworse (patient judgment). Of those who were not confirmed for surgery who did not have the operation performed, 59.5 percent within the voluntary group and 65.0 percent within the mandatory group reported receiving no medical treatment. Table ~ shows the distribution of those confirmed for surgery analyzed by surgical status. Although the overwhelming majority did have the surgery performed, one third withih the voluntary group and 12.4 percent within the mandatory group had not had the operation performed six months from the date of their consultation. The plurality within both groups stated that they felt that the surgery could be postponed. Roughly 18 percent in the voluntary group and 16 percent in the mandatory group stated that they were following the advice of another physician (neither the initial diagnosing physician.nor the second opinion consultant). Of those who were confirmed for surgery who had not had the operation performed,63.3 percent in the voluntary group and 67.5 percent in the mandatory group reported receiving no medical treatment. As of June, 1979, over 2300 individuals have received a second follow up interview (conducted 12 months from the date of their consultation). The response rate was 90 percent within the voluntary group and 96 percent within the mandatory group. Table 6 shows that of those who were originally not confirmed for surgery, 80.3 percent within the voluntary group and 62.5 percent with the mandatory group had not had the surgery performed. There were 27 individuals with both the voluntary and the mandatory groups who decided to have the operation performed since we last spoke with them. The most frequent reason for having the surgery was that their condition became worse (patient judgment). PAGENO="1069" 1061 There were 253 individuals within the voluntary group and 116 within the mandatory group who were not confirmed for surgery who neither had the operation nor reported receiving any medical treatment at the first and second follow up interview. These individuals are considered to by asyrnptorsatic and exit the study. They represent 40.9 percent of the total number in the voluntary group and 49.4 percent in the mandatory group who were not confirmed for surgery who had not had surgery performed (the remainder reported receiving medical treatment either at the first or second interview). This group represents potential surplus surgery in our opinion. Since neither surgery was performed nor medical treatment repo~ted from the time of the consultation up to the time of the second interview, we legitimately question why surgery had been recommended in the first place. Table 7 shows that of those individuals who were originally confirmed for surgery, 26.4 percent within the voluntary group and 10.2 percent within the mandatory group have not had the operation one year from the date of their consultation. Of the 582 individuals within the voluntary group who had surgery, 48 (8.2%) did have the surgery performed between 6 and 12 months from the date of consultation. Within the mandatory group, 14 (4.2%) had surgery performed since the first follow up. The overwhelming majority in both groups ha~~ the surgery because their symptoms or condition became worse (patient judgement).~ There were 88 individuals within the voluntary group who had been con- firmed for surgery who neither had the operation nor reported receiving medical treatment at the first and second interviews. These individuals represent 42.1 percent of the total number of individuals who were confirmed for surgerywho did not have the operation. Within the mandatory group, 19 individuals who were confirmed for surgery neither had the operation nor any medical treatment since PAGENO="1070" 1062 their consultation (50% of the total who were confirmed who had not had surgery performed). These individuals exit the study. These findings are disturbing in that these individuals could be jeopardizing or compromising their health and well-being by refusing to have surgery performed. Surgery is a highly effective means of treating many conditions. By denying the fact that surgery should be performed, these patients are doing themselves a great disservice. Because the subspecialties of gynecology, orthopedics, ophthonology, and urology have the highest non-confirmation rates, it was deemed important to ascertain why the consultants did not recosrnend surgery. A pilot study was undertaken by two general surgeons, Drs. William Grafe of Cornell University Medical College's Department of Surgery and Charles McSherry, Chief of Surgery at Beth Israel Medical Center in New York City. The surgeons reviewed the medical charts of 318 patients they had examined in their capacity as second opinion consultant. They both have been panel members since 1972. Of the 318 cases, 48 (15%) were not confirmed for surgery. The reasons for not endorsing the proposed surgery fell into six categories: no pathology demonstrated (37.5%);medical treatment was preferable to surgery (31%); surgery should be deferred pending results of medical treatment (10%); surgery ap- proved on an ambulatory basis only (8%); and surgery was contraindicated (2%). This pilot study was expanded and applied to all not confirmed cases in the sub-specialties of gynecology and orthopedics. Because gynecology and orthopedics were the two specialties with the highest non-confirmation rates and because the overwhelming majority of the respondents in the study follow the advice of the second opinion consultant, it was deemed important to look at the consultant's reasons for non-confirmation. PAGENO="1071" 1063 The findings show that often a second opinion consultant can recommend a more conservative course of treatment which would not jeopardize the patient's health. The fact that the majority of those not confirmed in both the gynecology and orthopedic groups did not have the surgery performed on the basis of the consultant's recommendation strengthens the argument for encouraging a second opinion when elective surgery is recommended. There were 380 cases which were not confirmed for gynecological surgery for whom medical records could be obtained (86% of total 442 gynecology cases which were not confirmed)., Over half (51%) had been not confirmed for dilation and curettage. The distribution of reasons for the consultant's non-confirma- tion is listed in Table 8 . In roughly half of the cases (49.8%), the con- sultants felt that the symptoms did not warrant surgery. There were 239 cases not confirmed for orthopedic surgery for which medical records were obtained (71.8% of the total 333 cases not confirmed for othopedic surgery). Table 9 lists the reasons for non-confirmation. By and large, the orthopedic consultants recommended against surgery in favor of more conservative treatment. That is, the consultants felt that use of a cast, brace or corrective footwear or a trial of physical therapy/exercises was preferable to surgery in 46 percent of the cases. In one fifth of the cases, the symptoms did not warrant surgery. While the physician's recommendation for surgery should be based on his or her consideration of the advantage and disadvantages of such a course of treatment, it is ultimately up to the patient to decide whether to have the operation or not. An objective of the second opinion program is to help the individual recommended for elective surgery make a more informed decision. PAGENO="1072" 1064 Among those "not confirmed for surgery," the overwhelming majority have not had the operation. While it is unclear how many of these individuals would not have had surgery in the absence of the second opinion program, findings do indicate that in the majority of cases, the surgery was deferred on the basis of the consultant's recommendation. The findings presented from the second follow-up study also indicate the ability of the second opinion program to screen, in part, potential surplus surgery. That is, those cases that were `not confirmed for surgery" in which neither surgery not any medical treatment was reported. The cost containment potential of the prgram is such that savings accrued from surgery foregone can be utilized in more productive ways; i.e., used to establish--other benefit programs or channeled into existing programs. While the majority of those who were confirmed for surgery did indeed have the operation, usually within three months from the date of the consultation, one fifth of the sample had not had surgery one year since they saw the consul- tant. It is this confirmed, no surgery group which could be labeled the popula- tion at risk. Surgery represents one of medicine's most effective tools. The denial of warranted surgery could mean that these individuals could incur serious complications or could be placing their health and well-being in jeopardy. While several procedures which had been recommended by two physicians are not immediately life-threatening, other procedures should probably be performed; e.g., breast surgery and surgery to remove cancerous growths (usually found among those undergoing surgery of soft tissue masses, cysts, lesions and surgery on the prostate gland). In addition to the program's potential effectiveness to screen surplus surgery, there is also an economic component to the program. The ability to affect the number of surgical claims received by the security funds has been PAGENO="1073" 1065 quite impressive. We have labeled this drop in the rate of in-hospital surgical claims the "Sentinel Effect". The United Store-workers' mandatory second opinion program showed a nine percent decreas~ in surgical claims in a before and after study (1971-72 and 1974-75). When the first 24 months of operation of the Building Service Workers' Fund's (Local 32B-J) mandatory program were compared to the preceeding 24 Bonths' experience, a 12 percent decline in surgical claims was noted. Moreover, the Blue Cross costs for the Fund for calendar years 1977 and 1978 were $4 million less than projected, or 21 percent. Savings are also realized among those who are not confirmed for surgery who do not have the operation performed. Using the findings from our second interview, conducted one year from the date of the consultation, for the mandatory group (since this group is more representative that the voluntary group), we have shown that of the 18.5 percent not confirmed for surgery, roughly 63 percent do not have the operation. That is~ roughly 12 of every 100 second opinion consultations do not go on for surgery. An additional savings are also realized by having the surgery performed on an ambulatory basis. Some of the elective procedures such as dilation and curettage and removal of cysts or lesions of the skin~ can be done on an out- patient basis. In the Cornell study, roughly 2 percent of the surgeries performed are done on an ambulatory basis. We are presently funded by the Health Care Financing Administration (HCFA) - DHEW to calculate the costs (direct and indirect) and benefits of our mandatory second opinion program. The findings will be made available by June, 1980. Although most of the second opinion programs in existence are voluntary 56-071 0 - 80 - 68 PAGENO="1074" 1066 programs, it is the mandatory second opinion program that can offer the most in terms of reducing potential surplus surgery and costs. As was stated previously, the utilization of most voluntary programs is low; therefore, findings from such programs cannot be considered representative of the sponsor's population as a whole. Moreover, the routine tonsillectomies/ adenocdentomies, hernia repairs, or cholecystectomies are not seen as frequently in voluntary second opinion programs. In mandatory programs, however, a more representative proportion of the eligible surgery is screened. Since there is no exercise of patient judgment, i.e., the patient is required to seek a consultation in order to have basic hospitalization and physician coverage for the elective procedure paid. Some individuals do not want to seek a second opinion (as evidenced by the low rate of those voluntarily seeking a second opinion), but if an organiza- tion has a mandatory program and publicizes that payments will be withheld unless a second opinion consultation is obtained, the individual will see another doctor. In essence, the sponsoring organization is fostering a change in behavior toward medical care and treatment among its membership. Some patients fear that their doctor would be insulted or upset if a second opinion is sought voluntarily. Many times a patient will specifically request that the initial diagnosing physician not be told about the second opinion consultation. However, with a mandatory program, the patient can aluays explain to the physician that the union/corporation/government is mandating that a second opinion be scheduled thereby placing the blame on the third party. In our mandatory program, we cover the full gamut of elective surgical procedures. As we view other programs across the country, however, we recognize that selecting certain procedures, six or eight of the most frequently PAGENO="1075" 1067 performed procedures, for example, would be preferable for a mandatory second opinion program. The principal reason for selecting certain procedures relates to the size of the beneficiaries in a given area. Utilization statistics as well as cost savings would be more beneficial for a selective mandatory second opinion program. As a point of fact, we have requested an additional year of funding to our existing contract from HEW-HCFA to analyze the procedure-specific cost savings from our mandatory second opinion program. We feel that this is a very important research effort in the evolution of an effective second opinion consultation program. The cost data for specific procedures would be available in June, 1981. This unique research opportunity would yield invaluable information for such large beneficiary groups such as the federal employees (10 million insured), the Steel Workers, the Auto Workers, etc. Our research over the past eight years clearly shows the benefits o~ second opinion programs in terms of reducing potential surplus surgery and containing costs. Our research findings to date present strong arguments for advocating a mandatory second opinion program. Medicine has nothing to fear from an informed patient/consumer who can actively participate in decision making concerning his/her health care. Our studies to date document that a second opinion program for elective surgery substantially increases a patient/consumer's effective participation in his or her health care. Given that the rate of surgery is increasing four times faster than population growth and that health care costs, particulary hospital costs continue to sky~rocket, even organized medicine concedes that there is not a discernable medical justification for the explosive growth in elective surgery. We feel that second opinion programs, particularly mandatory programs, can serve to screen inappropriate surgery and contain costs. Yet an intelligent degree of patience must be excercised in evaluating the results of a second opinion program. The concept of a patient formally requested to seek an additional consultation prior to deciding on a medical course of action is sociologically a new phenomenon. Behavior patterns do not change overnight. What we have noticed, however, is a growing awareness and appreciation of the benefit on behalf of the beneficiaries. The consumer views the program not as a hindrance, but as an assistance in his search for high quality medical care. PAGENO="1076" TABLE I Confirmed/Not Confirmed Status of Study Population By Voluntary and Mandatory Groups, February, 1972 - .April, 1979 __________ Mandatory Total N N Confirmed for Surgery 3369 66.6 4095 Not Confirmed for Surgery 1686 33.4 Total 5055 100.0 TABLE 2 8l~5 7464 74.0 932 18.5 2618 26.0 5027 100.0 10082 100.0 Selected Diagnostic Categories of Those Not Confirmed for S~~aer~ By Voluntary and Mandatory Groups. February, 1972 -~ April, 1979 1068 Voluntary N `6 Voluntary Selected Diagnostic Categories Bun ione ctomy Cholecys tectomy Dilation & Curettage Deviated Septum Hernia Repair Hysterectomy Knee Surgery Mandator~' Total Hot Confirmed Total Not Confirmed N N 47 22 215 25 144 45 92 31 300 42 543 224 189 96 `6 H N 46.8 86 25 11.6 196 16 31.3 368 70 33.7 130 34 14.0 442 28 41.3 308 95 50.8 92 25 28.2 280 46 41.0 68 21 29.4 212 34 28.9 238 19 Mastectomy & Other Operations of Breast 298 84 Prostatectomy 161 66 Removal of Cataract 204 60 Tonsillectomy &/or Adenoidectomy 114 33 Varicose Vein Excision & Ligation `6 29.1 8.2 19.0 26.2 6.3 30.8 27.2 16.4 30.9 16.0 8.0 104 34 32.7 159 25 15.7 PAGENO="1077" 1069. TABLE 3 Consultant's Surgical Specialty of Those Not Confirmed for Suraery by Voluntary and Mandatory Groups, February, 1972 April, 1979 Specialty General Surgery Gynecology Orthopedics Otola ryngo logy Urology C~thalmology Cardiovasculai Man da tory Not Confirmed N 212 11.4 249 26.2 173 33.1 108 16.2 59~ 18.5 94 19.6 12 23.1 TABLE 4 First Follow Up Data, Individuals Not Confirmed for Surgery Analyzed by Surgery Performed or Not Performed, February, 1972 - April, 1979 Volun tan Manda tory Total N % N % N % Surgery Performed 220 , .16.4 Surgery Not Perforrrzd 1119 83.6 194 32.3 414 21.3 407 67.7 1526 78.7 601 100.0 1940 100.0 Voluntary Total Not Confirmed N N 1514 351 23.2 987 394 39.9 794 368 46.3 5s8 159 29.0 370 131 35.4 383 121 31.6 175 60 34.3 Total N 1867 952 522 665 319 479 52 Total 1339 100.0 PAGENO="1078" 1070 TABLE 5 First Follow Up Data: Individuals Confirmed for Surgery Analyzed by Surgery Performed or Not Performed, February, 1972 - April, 1979 Voluntary Mandatory Total N % N % N % Surgery Performed 960 69.9 556 87.6 1516 75.5 Surgery Not Performed 413 30.1 79 12.4 492 24.5 Total 1373 100.0 635 100.0 2008 100.0 TABLE 6 Second Follow Up Data' Individuals Not Confirmed for Surgery Analyzed by Surgery Performed or Not Performed, February, 1972 - June, 1979 Voluntary Mandatory Total N S N S N S Surgery Performed 152 * 141 37.5 293 25.5 Surgery Not Performed 619 80.3 235 62.5 854 74.5 Total 771 100.0 376 100.0 1147 100.0 PAGENO="1079" 1071 TABLE 7 Second Follow Up Data: Individuals Confirmed for Surgery Analyzed by Surgery Performed or Not Performed February: 1972 - June 1979 Voluntary Mandatory Total N N N Surgery Performed 392 73.6 333 89.8 915 78*7 Performed 209 26.4 3B 10.2 247 21.3 Total 791 100.0 371 100.0 1162 100.0 TABLE 8 Reasons for Non Confirmation by the Gynecological Consultants: 1972-1978 Reason Number Percent Symptoms not severe enough to warrant surgery 126 33.2 Further evaluation is needed * 81 21.3 No pathology evident 63 16.6 Medical treatment preferable 41 10.8 Alternate procedure * recommended 38 10.0 Surgery deferred pendina medical tests 30 7.9 Other 1 0.3 Total 380 100.1 PAGENO="1080" 1072 TABLE 9 Reasons for Non Confirmation by the Orthopedic Consultants, 1972-1978 Reason Number Percent Cast, brace or footwear preferable 56 23.~ Physical therapy/exercise preferable 54 22.6 Symptoms not severe enough to warrant surgery 49 20.5 Nedica]. treatment preferable 37 15.5 Further evaluation needed 19 7.9 Surgery deferred pending medical tests 10 4.2 `dternate procedure recommended 9 3.8 No pat1ology evident 5 2.1 Total 239 100.0 PAGENO="1081" 1073 APPEN~IX A Number and Rate of Operations Performed for Inpatients Discharged from Short Stay Hospitals, by Year. Year ft in 1000's Rate per 100,000 1965 - all operations 14679 7735 operations excluding 13866 7306 obstetrics 1968 - all operations 14624 7487 operations excluding 13888 7110 obstetrics 1971 - all operations 15774 7805.3 operations excluding. 14802 7324.2 obstetrics 1973 - all operations 18426 8951.8 operations excluding 17349 8428.1 obstetrics 1974 - all operations 19258 9291 operations excluding 18099 8727 obstetrics 1975 - all operations 20040 9585 operations excluding 18786 8985 obstetrics 1976 - all operations 20086 9538.7 operations excluding 18804 8930 obstetrics 1977 - all operations 21159 9972.1 Operations excluding obstetrics 19748 9307.0 Source: National Center for Health Statistics, Hospital Discharge Survey. PAGENO="1082" APPENDIX B 0 0 0~ o N `U H A o cm `A `5 `SD )-~ m o s o 5)0 Procedure Appendectoiy Cardiac catheterization Cesarean Section Cholecystectomy Dilatation & Curettage, Diagnostic Dilation of Urethra Extraction of Lens Hernaorrhaphy Hysterectomy Ligation Division of Fallopian Tubes, Bilateral Oophorectomy; Salpingo-oophorectomy Pros tatectomy Surgery of the Back Surgery of the Knee T&A 1965 1971 1975 1976 1977 in thousands 379 318 319 306 342 44 98 189 232 278 174 194 328 378 455 355 373 442 442 446 775 769 977 983 995 96 167 25D 243 247 142 243 333 322 350 517 692 788 723 749 505 570 725 679 706 69 213 368 420 346 291 327 471 452 458 191 207 266 269 299 78 123 149 168 166 71 101 154 152 166 1215 967 685 629 617 28.4 157.3 146.5 44.9 39.8 401.4 62.4 5.8 1.6 3.6 4.0 -17.6 % change 1965-77 % ;hange 1971-77 I chacge 1976-77 -9.8 7.5 11.5 531.8 183.7 19.8 161.5 134.5 20.4 25.6 19.6 0.9 29.4 47.9 44.0 23.9 57.4 1 56.5 , 40.1 44.4 1.3 11.2 112.8 35.0 -1.2 133.8 54.6 9.2 -49.2 -36.2 -1.0 *Estinated number of appendectomies excluding those performed incidental to other abdominal surgery. Source: Ranofaky, Abraham L. `Surgical Operations in Short-Stay Hospitals, United States, 1975'. Vital and Health Statistics Series 13, Data from the National Health Survey; No. 34. 011KW Publication No. (PuS) 73-1785, April 1978. 1976-1977 figures supplied by the UCIIS, personal cormunication. PAGENO="1083" 1075 APPENDIX C Listing of Participating Security Welfare Funds in The Cornell Second Opinion Elective Surgery Program Voluntary Programs District Council 37 Health & Security Plan* New York State Department of Civil Service Silk and Rayon Printers and Dyers Association5 Trucking Employees of North Jersey* Typo-League Benefit Plan5 Type-Publishers Newspaper Welfare Fund* Allied Tex. le Printers Corp.5 Teamsters Local Union 707 (going mandatory as of 7/1/80) Mandatory Procrams Building Service 32B-J Health Fund New York City District Council of Carpenters Welfare Fund Storeworkers Fecurity Plan Teamsters Local Union 814 jewelers Welfare Fund Amalgamated Heat Cutters (Commencing 11/1/79) 5No longer processing data for these funds PAGENO="1084" 1076 APPENDIX D Listing of Surgical Procedures and ICOA code: Cornell Second Opinion Elective Surgery Program PROCEDURE Heart Surgery Cholecystectomy GI (Upper and Lower) Hernnrrhoidectomy Incision, excision, suture for mass cyst, lesion of skin Mastotomy, Mastectomy, and other operations of the breast Repair of hernia, inguinofemoral Thyroidectomy Varicose Vein, excision and ligation Other mass, cyst, or lesion Dilation and Curettage Hysterectomy Removal of Cataract Other Eye Bunionectomy Other foot surgery Excision of Intervertebral Disc Other Vertebral Column Hand Surgery Hip Surgery Mass, cysts, lesions on any organ of body except skin ICDA CODE + 29.0 - 29.9; 30.2 - 30.7 43.5 47.0 - 47.9; 48.0 48.9 51.3 92.0, 92.1, 92.4, 92.5, 92.9, 93.0 65.0 -65.9 38.2- 38.5 22.0-22.3 24.4 70.3 68.0-69.7 14.0 6.0 - 14.9 inclusive 80.4 87.2 86.4 87.4 89.1-89.9 82.0-82.9 ÷ Eighth Revision PAGENO="1085" PROCEDURE Knee Surgery Other operations on bones and joints Other operations on fascia, tendons, muscles Deviated Septum Ear Surgery Tonsillectomy with/without Adenoidectomy Operations on Kidney Operations on Bladder Prostatectomy ~Except 80.4, 86.4, 86.5 ICDA CODE 86.5 80.0 - 84.9; 86.0 - 87.9~ 88.0 - 89.9 19.0- 19.9 16.0 - 10.5; 17.0 - 17.9; 18.0- 18.9 21.1, 21.2 54.0-54.9 56.0-56.9 58.1, 58.2, 58.3 1077 PAGENO="1086" 1078 Diagram 1.: Follow Up Survey Flow Chart, Cornell Second Opinion Elective Surgery Program. - TeSyphpoe CaP So Mooths Cost Coosu at-os Had Sagesy Pd ltd Ha-c Sagey Dote et Stacy io~Ydt Teatenl 2 Suecat Ptpcodue 2 ha He SuaHy 3 Medcat T,e~tc,tt 3 Atttudes ~t P~ 4 Vhy Sugey Doe Sue-cat Sco~o-e~ 5. dot~d~ 0! P0 . 4 ~e Medcat Catet Soy-cat Sceesg Sugety 5 Qttyt Medcat Catet Sugey 1 Yea Post Cotsuttatcn Fottys Up - 1 Veat Pp~t Cosutat-oc Fptps Up DO Not Haag Swaey I Otto Heath 2 Med-cat Teat-test 1 2 s Pott Coosttato Fattys Up lad Suocy Pd Not Hoe Sugty I Dot c-I Sttc'~ I Ce-teat Heath 2. Pug-cat Pocettue 2. Medcat Tceatget 3 led-cat Teateet 4 d/tty Sugt'y Dcc 5. dtt'tt~ ct Fe- 6 Oth~ teOcat Cae Sugey 2 Yeas Pctt Cotsutaton Foto-ac Up Ftp-i Scaccy Pd Ntt Ha-c Sugey I Otto ct Soco 1 Cocoa! totS 2 So c~t P50, 2. Med-cat iceatneet 5. At-sOot c ~o- 6 0 `i-ctCae Syty - I C-coat ItoaTt Had Sucey 2- Medcat Teatnent -_ -- 1. Da!ootSucpoea- 2 Pug-cat Pectdue 3 ltedcat leot-et ~ SaSs Suqoy Doe I 2Y FtC F ~: td 1. CaetatHescYh 2. ItnOcat Treat-tent 2 Yeas Post ~nsutta5un Potty-a Up 1. (TonetatHoath 2. Med:cat Treat-tent PAGENO="1087" 1079 Mr. MAGUIRE. Thank you very much. Mr. Steinhardt. STATEMENT OF BRUCE J. STEINHARDT Mr. STEINHARDT. I am pleased to appear before the subcommittee today to present the demonstration and research which the Health Care Financing Administration has been conducting since we began our very fruitful relationship with Dr. McCarthy or our predecessor organization I should say in 1975. These are attempts to better understand the impact of second surgical opinion pro- grams on the health care costs and quality for beneficiaries of the program as well as for the American public. I am going to summarize from the prepared remarks and ask that they be included in their entirety. The Office of Demonstrations and Evaluations in HCFA is cur- rently engaged in two medicare second opinion demonstrations. It is also evaluating five different second surgical opinion programs. Under our 4½-year $2.5 million contract we are evaluating the medicare demonstrations taking place in the greater New York City and greater Detroit areas which offer voluntary no-cost second opinions to medicare beneficiaries~ We are also evaluating the HEW nationwide second opinion program open to all persons and the mandatory medicaid second surgical opinion program in Massachusetts. In addition as I mentioned before we have been supporting Dr. McCarthy in his research and have very little to add to what he said about his programs except to point out that in some of the programs which are mandatory the patient is given one forgiveness or it is actually one forgiveness per family. If they go ahead and have the surgery without having had the presurgical consultation they get a warning but no member of the family can go get another surgery without first getting a second opinion. In each of our programs that we are studying whether it is a mandatory or voluntary program the choice of whether to have surgery or not is entirely up to the patient. It is our hope that by enabling the patient to come to a better understanding of the risks and benefits involved in surgery or its alternatives that patients will make better informed choices about their own personal health care. There are obviously several major questions for public policy which we are trying to answer through our demonstrations and research activities. Are second opinion programs cost effective? That is when one adds up the cost of running a program and the cost of the consulta- tions and extra laboratory tests and the costs of the alternative treatments which may include postponed surgery is this total cost less than the cost of the surgeries in the present time? This is a difficult question to answer given the kind of inflation we have been experiencing in health care over recent years. A second major question would be whether second surgical opin- ions are cost-effective for certain specific procedures. Dr. McCarthy alluded to this point. It is particularly relevant to a mandatory program. PAGENO="1088" 1080 If rates of nonconfirmation are low for some procedures then a mandatory program across the board might not be cost effective whereas a targeted program might be. The final major question which we hope to answer is do second surgical opinion programs impact negatively or positively on health status? Ideally we would want to support programs in which we see patients are better off or at least not worse off from having had a second surgical opinion. In addition we are trying to learn from the variety of experiences in these programs what features are most effective. I will describe these programs and try to present some preliminary information on their initial impact. Our medicare demonstrations have their roots in the 1975 hear- ings on unnecessary surgery held by the Subcommittee on Over- sight and Investigations. The committee recommended HEW imple- ment and carefully evaluate second surgical opinion programs for medicare and medicaid. At that time there was no evidence that the nonconfirmation rate observed under the voluntary Cornell program would be gen- eralize to the poor and elderly populations in our programs. Fur- thermore mandatory second opinions appeared to be infeasible in demonstrations for legal reasons. Therefore it was decided to con- duct a well designed. program that would demonstrate voluntary second opinions and that this would be responsive to the congres- sional concerns as a first step. - A request for proposals was issued in the spring of 1977 for demonstrations for medicare and/or medicaid beneficiaries. We re- ceived no proposals for medicaid second opinion programs and awarded in September 1977 demonstration funds to Blue Cross and Blue Shield plans of greater New York and Michigan to design and implement second opinion programs for the medicare beneficiaries residing in those areas. Shortly. after the awards were made the Subcommittee on Over- sight and Investigations called new hearings on the subject. Former Undersecretary Hale Champion appeared at these hearings and responded to the committee's concerns by announcing HCFA would initiate a major effort to encourage the American public and especially our beneficiaries to seek'second opinions. Dan Nickelson who is my colleague will be telling more about this program when I conclude with my testimony. Our demonstration projects differ in several ways from the na- tional program. The medicare enrollees residing in the demonstra- tion areas benefit from an experimental waiver of medicare, coin- surance, and deductible requirements under part B when they obtain a second opinion through the demonstration. The consultants who are all board-certified surgeons have agreed to bill on assignment which insures that the beneficiary will incur no out-of-pocket costs. There are additional differences between the demonstration pro- grams and the national program such as a structured intake proc- ess and we hope to examine how the differences between the programs affect the cost and manageability. Let me briefly describe how these demonstrations operate. The New York program became operational in May 1978. It covers PAGENO="1089" 1081 approximately 1.5 million medicare beneficiaries living in the 17 counties of downstate New York. The Michigan program became operational in August 1978 and covers about one-third of a million medicare beneficiaries living in the three counties in and around Detroit. Both programs will continue for 3 years. New York and Michi- gan both operate referral centers that have panels of board certi- fied surgeons who have agreed to render the second opinions and have also agreed not to operate on or treat the patients who are sent to them for consultation. The demonstration extends second opinion coverage to benefici- aries whose first physician has recommended against surgery or has discussed surgery as well as those patients who have been actually recommended for surgery. While the New York program stipulates that the first opinion must have come from a surgeon the Michigan program extends second opinions when surgery has been recommended or discussed by any physician. Both programs conduct public information cam- paigns to encourage eligible beneficiaries to utilize them. Turning to the initial operating results, in the first 14 months of the New York program 1,910 consultations were rendered. This represents approximately 2 percent of the beneficiaries who under- went elective surgery during the same period of time. Approxi- mately 30 percent of the consultations resulted in a nonconfirma- tion of the need for surgery. The most frequent reason for nonconfirmation thus far has been a recommendation for a trial of medical management. This may or may not be followed by surgery. In addition there have been non- confirmations for reasons of no pathology or for further diagnostic testing to determine whether surgery or a particular type of sur- gery is required. The nonconfirmation rates vary considerably by type of proce- dure running from zero percent up to 60 percent. Thus far we do not know how many of the nonconfirmed patients have decided against having surgery. This information will become available to us over the next half year to a year. The average cost of the medical care services for second opinion consultation is $53.57. The total cost of the second opinion when we include the operating cost of the program and its advertising is about $185. The Michigan program in its first year provided 108 consulta- tions and had a similar nonconfirmation rate of 33 percent. In this program the referral analysts make the appointment for the pa- tient and arrange for transfer of medical records to the consultant if the patient is willing. Consultation completion rates in Michigan are running at 90 percent compared to 68 percent in New York which does not offer the service. On the other hand we have been disappointed by the utilization of the program in Michigan as compared with New York. One factor in this seems to be that in New York there is considerable publicity for other private programs as well as for the demonstra- tion program. 56-071 0 - 80 - 69 PAGENO="1090" 1082 To counteract the low Michigan usage we have recently made more demonstration funds available for a mass media campaign and have seen some recent improvements in the rate of requests for consultation. Let me turn now to the Massachusetts mandatory medicaid pro- gram which began with passage of enabling legislation in July of 1976. The program covers all medicaid enrollees except those who have other third party coverage such as medicare. It covers only eight specific surgical procedures and these were selected because they were high frequency use and other data suggested one would find high nonconfirmation rates for these procedures. There are certain exemptions for patients who would have undue hardship in obtaining a second opinion. The program requires a person to have a second opinion consul- tation and if it nonconfirms the need for surgery they may have a third and then the patient may decide. In any case it is up to the patient to decide whether to have surgery or not. There are really two programs used in Massachusetts. One begins with a desk audit where a nurse using preset criteria will review information supplied by the recommending physician. If she does not find the criteria to be met the patient is referred for a second opinion. In the remaining areas of the State the patient goes directly to a consultant. Based on data that has been collected on the program we would expect where patients go directly to a consultant about 9 percent of the recommended surgery has been deferred. In the areas using a desk audit only about 2 percent of proposed surgery has been avoided. Under a grant from HCFA Massachusetts is conducting a short- term evaluation to determine what proportion of patients actually did have surgery. The research will also determine whether the program has a sentinel effect which influences surgeons to be more conservative in recommending surgery when they know their rec- ommendation will be reviewed. A report is due in about 2 months on this subject and we would be pleased to make it available to the committee. At this point we know very little about the long-term quality of care and cost benefit outcomes of second opinion programs. Dr. McCarthy is about to complete some cost benefit analyses and I believe they are due in the spring and we will certainly make those available to the committee as well. The studies being conducted by Abt Associates will be following patients who have been through the programs that I have men- tioned as well as the national program which Mr. Nickelson will talk about to find out how many eventually have surgery and whether the surgery has been deferred or avoided without adverse health effects and whether the programs seem to be cost effective. These results will help answer some of the difficult questions in public policy such as whether second opinion programs should be voluntary, mandatory or mandatory oniy for selected procedures and whether second surgical opinions should be at no cost to pa- tients. PAGENO="1091" 1083 Other questions are which types of physicians should serve on consultant panels and whether they are willing to cooperate in large scale mandatory programs and I do not believe we will be able to answer this but certainly a question that should be raised is how can mandatory programs be monitored to avoid rubber stamp- ing. We will attempt to answer the question of whether patients will accept mandatory programs and identify whether face to face con- sultations are more effective than PSRO type presurgical review model. At this point it would be speculative at best to try to answer these questions I have raised. Our experience in these programs and other private programs which are developing rapidly as we follow them over the next few years should help answer these questions. [Testimony resumes on p. 1095.] [Mr. Steinhardt's prepared statement follows:] PAGENO="1092" 1084 RRUCE 3. STEIMHARDT, DIRECTOR, OFFICE OF DEMONSTRATIONS AND EVALUATIONS, }tEALTH CARE FINANCING ADMINISTRATION I am pleased to apprir before the subcommittee today to discuss the demonstration und research which the Health Care Financing Administration has been conducting since 1975 to batter understand the impact of cecond surgical opinion programs on health care costs arid quality. Tue Office of J)crnonstrations and Evaluations in tb~ Health Care Financing Anmiruistration is currently engaged in two Medicare Second Surgical Opinion demonstrations. it is also evaluating five different Second Surgical Opinions and hopes to learn from these what works best. Under a ~ 1/2 year $2.5 million competitive awarded contract with Abt As~ociates of Cambridge, Nossachusett;s, we are evaluating the demonstration programs in the Greater New York City area and the Greater Detroit area which offer voluntary, no-cost second opinions to Medicare beneficiaries, the HEM Nationwide second opinion program open to all persons, and the mandatory Medicaid Second Surgical Opinion Program in Massachusetts. In addition, HCFA has supported Dr. Eugene McCarthy of Cornell Medical College in his research on the Cornell Pie-Surgical Screening Program. Since Dr. McCarthy will be testifying later, I will defer discussion of the Cornell program. Ihch of these second surgical opinion programs, whether mandatory or voluntary, allows the patient the choice of whether to have or not have surgery. PAGENO="1093" 1085 There are several major quentions for pubU a policy which we hope to answer through our demonstrations and evaluations~ * Are second ourg:Lcal opinion programs coot-affective? That is, when one adds up all the costs of running a Second surgical opinion program, the costs of the consultations and extra laboratory tesl;s, and the costs of the alternative * treatments, including postponed surgery, is this total less than the cost of the surgeries that have been avoided through the program. * Are second surgical opinions cost-effective for specific surgical procedures? This question is particularly relevant to mandatory programs. The rates of non-confirmation and deferral of surgery for seine procedures may be so low that an across-the-board mandatory second surgical opinion program would not be cost-effective whereas a targeted program night be. PAGENO="1094" 1086 * Do Second Surgical Opini on Programs impact negatively or positively on health status? In other words, are patients better off or, at least, not worse off having had a second surgical opinion? In add! tion, we are trying to learn free the programs what features arc most effectIve. kor example, what arc the effects of advertising, of a program making appointments for patients, of no cost second opinions? Full answers to these and other important questions are a few years off. I will describe each of tine second surgIcal opinion programs being studied and present preliminary information on the impact they arc having. Our Medicare demonstrations have their roots in the 1975 hearings on unnecessary surgery held by the Subcommittee on Oversight and InvestigatIons of the Conmittce on Interstate and Foreign Commerce which led to the recommendation that HEW impiem~nt and carefully evaluate second surgical opinion programs for Mcdi care and Mcdl cald. PAGENO="1095" 1087 At that time, there was no evidence that the 30 percent non-confirmation rate for surgical procedures experienced under the voluntary Cornell program for New York City unions would generalize to poor and elderly populations. Furthermore, mandatory second opinions appeared infeasible since a New York court had just prevented implementation of a program in that State which conditioned reimbursement for surgery on an affirmative second opinion and since it would be extremely difficult to obtain informed consent required from beneficiaries placed at risk in experiments. Therefore, HCFA decided that a carefully designed voluntary demonstration program would be an appropriate first step in response to Congressional recommendations. A request for proposals was issued in the Spring 1977 soliciting offers to develop and/or implement second surgical opinion demonstrations for Medicare and/br Medicaid beneficiaries. No offers were received to develop programs for Medicaid. Proposals for Mcdi care demons t rat ions were reviewed and in September 1977 awards were made to the Blue Cress and Blue Shield Plans of Greater New York and Michigan to design and implement second opinion programs for Medicare beneficiaries. Shortly after these awards were made, the Subcommittee on Oversight and Investigations called new hearings en the cost and quality of surgical care at which NEW was asked to testify. At those hearings, former Undqr Secretary PAGENO="1096" 1088 Hale ChampIon announced that HCFA would Initiate a major effort to encourage the American public and eapecial ly our own beneficiaries to seek second opInions. lou will be hearIng/have heard more about the development and implementation of this program from my colleague Dan Nicholson Howevar, no additional program funds were appropriated to operate the National Second Surgical Opinion Program or to collect the data necessary to properly evaluate the fmpect the second opinions. Thus, a crucial purpose of the demonstration became to provide quality data in eefffciont detail te evaluate the impact of second opinion programs on surgery rates, costs and quality of care. The demonstrations differ from the national program in severs] ways. Hedicsre enrollees residing in the demonstration areas benefit from am experimental waiver of kedicare Part B coinsuranmce and deductible requirements when they obtain a second opinion through the demonstration. The consultants have agreed to bill on assignment, which ensures that the beneficiary will incur no out-of-pocket coats. There are some addftfonml d~Efotemces in the organization of the second opinion demonstratIon programs cempared wIth the national program, such as a structured Intake process, which are to he assessed to determine how they effect the cost and manageability of the programs. PAGENO="1097" 1089 Let me now briefly describe to you how these demonstrations operate. The Ncw York program, which became operational in May 1978, covers approximat:ely 1.5 million Medicare beneficiaries living in 17 counties of downstate New York. The Michigan program, which became operational in August 1978, covers about 365,000 Medicare beneficiaries residing in Wayne,. Oakland, and Macomb counties of Greater Detroit. loth programs will continue for 3 years. New York and Michigan operate referral centers and have panel of board- certified surgeons who have agreed to reader second opinions and have agreed not to operate on or treat patients who are sent to them for this service. The demonstrations also extend second opinion coverage to beneficiaries whose first physicians recommended against surgery. While the New York program stipulates that the first opinion must be a surgeon's opinion, Michigan willpay for second opinions on surgery recommended by a physician or surgeon. Both programs are conducting public infornation campaigns to encourage eligible beneficiaries to utilize the benefit. In the first 14 months of operation of the New York program, 1910 consultations were rendered. This represents approximately 2 percent of those beneficiaries who underwent elective surgery during the same period. Just over 30 percent of PAGENO="1098" 1090 the coitsultalions resulted in a non-conf~ root ion of the need for eurgery. The most frequent reason for non-confirnat.ion thus far has been a rtconrendatl on for a trial of mcdi cal management. Non-confi mat ion rates vary by typo of procedure from zero percent up to sixty percent. Thus far we do not know how many of the non-confirmed patients decided agalnut having surge ry. The ave rage cost of mcdl cal ca ro services per consultation is $53.57. Total cost including operation of the program and advertising is approximately $185. The Michigan program in its first year provided 108 consultations, and had a non-confIrmation rate of 33 percent. In this program, the referral analysts make the appointment for the patient and arrange for transfer of medical records to the consultant ~if the patient is agreeable. ConsultatIon completion rates arm running at 90 percent versus New York which does not offer this service and has a 68 percent completion rate. We have been disappointed at the lack of utilization of second opinion benefits in Detroit, Michigan as compard with New York City. One factor in the higher New York use rate seems to be the extensive publicity of private as well as the Medicare Second Surgical Opinion Programs. To counteract the low Michigan usages, we have recently made more demonstration funds available for mass media advertising and have seen some recent inprovemen.t in the rate of requests for consultations. PAGENO="1099" 1091 The Massachusetts mandatory Medicaid program began with the passage of enabling legislation in July 3976. It covers all Medicaid enrollees with no other third party coverage * The program requires a second opinion for eight surgical procedures: tonsillectomyladenoidectomy; nenisectomy; hysterectomy; cholecystectomy;submucous resection; spinal fusion/disc surgery; hemorrhoidectomy; and excision of varicose veins. These procedures were selected for two reasons: previous data indicated they were frequently performed on Massachusetts Medicaid enrollees; and other second opinion program data showed non-confirmation in 10 to 20 percent of cases. Payment to the surgeon for *surgery is conditioned on confirmation by the first consultant, or a second consultation if the first denies the need for surgery. After the second consultation, the decision to have surgery is up to the patient whether or not the surgery was confirmed in the ~econd consultation. Patients are exempt from the program in emergency situations or where waivers arc granted due to medical necessity or travel hardship. The Department of Public Welfare has contracted with five Health Care Foundations to recruit and enroll consultants for the program and to. makepatient referrals. All consultants are board-certified or eligible physicians with the majority of.them being surgeons. PAGENO="1100" 1092 Two program models are in operation. In the Bay State, Central Massachusetts and Charles River Health Care Foundation areas, persons proposed for surgery are referred directly to a consultant. In the Western and Southeastern areas, a desk audit is performed by a nurse using pro-set medical criteria. The proposing surgeon submits a form to the foundation indicating the patient's condition. If the appropriate criteria are met, the patient is approved for surgery. If not, the Foundation arranges a consultation for the patient. The program was implemented in various regions of the State over a 14 month period starting in March 1977. Program results for the first year's operation in the Bay State and Central Massachusetts Health Care Foundation areas, which account for approximately 60 percent of all Massachusetts Medicaid hospital surgical admissions, show 2,490 referrals for second opinions. Hysterectomy and tonsillectomy/adonoidectomy accounted for over 65 percent of the second opinions sought. Second opinions were given to 83 percent of those referred, with the remainder being granted special consideration or dropping out. Of these obtaining a second opinion, 14 percent were non-confirmed. Hysterectomy had the highest non-confirmation rate at 22 percent. About half of the people non-confirmed sought a third opinion and of these two-thirds were confirmed for surgery. Based on these figures, we would expect only 9 percent of the recommended surgery was deferred. PAGENO="1101" 1093 In the two regions using desk audits, there were 2,108 referrals for review and 14 percent were non-confirmed. Most of the non-confirmed patients received a second opinion consultation, with about 20 percent receiving a non-confirmation. Over half of these patients requested a third opinion, resulting in over half being confirmed. Based on these results we would expect about 2 percent of the proposed surgery was avoided. Under a grant from HCFA, Massachusetts is conducting a short-term evaluation to determine what proportion of these patients actually had surgery. The research will also examine whether the program has a "sentinel effect" whIch influences surgeons to be more conservative in recommending surgery when they know their recommendations will be reviewed. These results will be available in about two months. At this point in time little is known about the long term quality of care and cost-benefit outcomes of second opinion programs. The studies being conducted by Abt Associates will be following same of the patients who have been through these programs and the National program to find out how many patients eventually have surgery, whether surgery has been deferred or avoided without adverse health effects, and whether, In the 1~ng run, such programs are coat-effective. PAGENO="1102" 1094 In addition the study will assess how variations in program design affect the efficiency and effectiveness of second surgical opinion programs. The results will help answer difficult questions in public policy such as: Should second surgical opinions be voluntary, mandatory or required only for-selected procedures? Should second surgical opinions be at no cost to patients? Which types of physicians should serve on consultant panels? Will they cooperate in large scale mandatory programs? How can mandatory programs be monitored to avoid rubber stamping? Will patients accept mandatory programs? Are face-to-face consultations more effective than PSRO type pre-surgical desk audits? Should second surgical opinIon programs arrange appointments? What can be done to encourage participation in volua~ary `second surgical opinion programs? It would be speculative, at `best, to try and answer these questions now. As our experience in these and other private programs grows over the next several years, many of the answors.to the publIc policy questions will emerge. PAGENO="1103" 1095 Mr. WAXMAN. Thank you very much. Mr. Nickelson. STATEMENT OF DANIEL NICKELSON Mr. NICKELSON. Thank you very much. I am also happy to be here today and share with you what little light I can on this subject. After the commentary you have had from the last two speakers I do not think I can add a lot to the questions you have to consider so I intend to summarize for you essentially what we are doing with our national voluntary program today so you have some sense as to what that is about. We started it approximately 1 year ago September. It is a rela- tively simple straight forward program. Its basic elements consist of a public information campaign to try to get people to be aware of it; a national hotline number which is toll free so people can call in if they have questions about where and how to get a second opinion and then a series of local referral centers around the country which our hotline then refers them to for names of physi- cians and where they might go in their area to get a second opinion. That in a nutshell is what our national program is all about. I will give you a few of the details on it so you have some flavor for its variety and complexion. We have approximately 160 local referral centers around the country today. They vary from being individuals in a small area where you simply do not have an organization present to handle things to medical societies to medicare carriers to PSRO's. I believe the statistics are we have approximately 63 medical societies acting as referral centers for us and 31 PSRO's and 43 medicare carriers. When we have the PSRO doing it or the medicare carrier doing it they are doing it as a part of their general responsibilities under the medicare/medicaid programs. We are not reimbursing them in any additional sense for the functions they perform. If a local medical society is doing it they are doing it on a voluntary basis. What these local organizations have done is they have gone out to the physicians in their area and they have written them letters and made telephone calls and they have drawn up lists of physi- cians to use for referrals when they receive calls. The media campaign that we had this past year included devel- opment of a brochure. We have distributed over the past year approximately 5 million brochures from this program. We devel- oped radio spots. We developed TV slides. We also developed some national articles that could be used for going out to speaker groups as well as appearing in magazines to try to publicize the program. That overall effort cost us around $75,000. In addition the nation- al hotline which we established cost us approximately $75,000 this past year. The national hotline usage was approximately 1,000 calls a month over the past year. The local referral centers received ap- proximately 500 calls each month. There was a drop off from what we had at a national level to what actually were calls at a local referral center. PAGENO="1104" 1096 We do know the amount of use of these facilities that we estab- lished depended greatly on the publicity that was used at the time. When the program first started we had a burst where there were a lot of calls partly due I think to the national publicity surrounding it and getting it off the ground. It leveled off at a very modest level and then this spring in June we had a mailing to all social security beneficiaries encouraging them to seek a second opinion if they were considering elective surgery. The use of the national hotline the month following that publica- tion to the Soc al securit~ benefic aries was £`oui times ~`e had 4,000 calls the month following. We have not had data following that month to know how badly it is coming down again but we expect the line to be sloping back down as people begin to forget about what they heard through that media. We have had other examples of where there has been some local publicity efforts on the part of either the referral organization or our Federal regional offices where there has been usage increased simply by the attention given to letting people know it is available. We had this happen in San Francisco where usage went up. We also had it happen in the New England region where a concerted effort was made to publicize the availability of second opinions. In the coming year we hope to make some changes to the pro- gram to further strengthen it. One of the basic problems we have had and it is alluded to in the legislation you are considering is how to get effective second opinions in rural areas or underserved areas where you do not have physicians available. We do not have an answer for that. We do intend to concentrate our voluntary program much more in the urbanized areas where there is a sufficient physician popula- tion available to be able to make up panels so you can get a legitimate second opinion and also where there is sufficient popula- tion that you can reach to get them to utilize the services that are available without having to travel great distances to utilize those services for this kind of benefit. The other thing we intend to do this year is have much wore selection of a nedia campaign not just the national materials that we usually go through but we also are beginning to generate data and I think you are probably familiar with it that shows great variations in surgical rates around the country not only by diagno- sis but also by area of the country. What we hope to do is publicize where we have identified very high surgical rates in a given community and we do not see any apparent explanations for why that is the case. We hope to target our publicity in those local areas on some of these specific proce- dures not in the sense that they are wrong necessarily but slmply that there are a lot of them being done there and if you are considering that type of procedure it would be prudent to seek a second opinion. We are working to try to tailor the program more to try to make it much more effective. We hope to double the utilization of the system over this coming year through these more selective and targeted ways of trying to address the issues we have. Along that line I would say the other use that we are dealing with on the same question is the flip side of the question we are PAGENO="1105" 1097 talking about. Second opinions has in large part been consumer oriented and patient oriented as a way of getting additional infor- mation for the patient to make a decision: As you know we have another program that we administer which we also are using to address this identical problem. That is the PSRO program. In the past year we began an effort to focus PSRO reviews on where we have identified problems that need to be addressed. We are using PSRO's to try to develop explicit stand- ards of care that physicians may use to review the appropriateness of admissions as well as the appropriateness of the care being provided once admitted. In addition the PSRO has available to it several techniques it can use to help also address this question. If it identifies a particu- lar procedure that seems to be abused in its area it can institute a preadmission review program which in many ways is much like a second opinion except it is coming through the physician channels rather than a patient channel. We also have the ability to focus that preadmission review not only diagnosis but also on a physician where you can identify a particular physician whose practice appears to be aberrant. We think we have other tools that we can use that are also going to help address this problem and would help on the professional side to address it on a systematic objective way over time. In summary we come down at this point when we consider an uniform mandatory program from our perspective would be prema- ture. We cannot answer a lot of the questions these gentlemen have raised. it seems to. me that before we would want to do that across the board we would want to have some better answers to those questions than we do. We know that surgical rates vary greatly. We know that the problems in this country that we are trying to address vary greatly from area to area. Those we think need a more adaptable way of addressing than a national mandatory program. At this time our real desire is to continue the demonstration projects we have underway to try to learn more about what works and what does not and to build that into making these programs more effective and to continue our voluntary program to try to increase utilization of that and use our PSRO program as still another way of trying to get at the question of unnecessary utiliza- tion. Thank you very much. [Mr. Nickeison's prepared statement follows:] TESTIMONY OF DANIEL NICKELSON, DIRECTOR, OFFICE OF PROGRAM DEVELOPMENT AND COORDINATION, HEALTH STANDARDS AND QUALITY BUREAU, HEALTH CARE FINANC- ING ADMINISTRATION I am pleased to appear before the subcommittee today to discuss the Department of Health, Eduction, and Welfare's second opinion program. I will be describing the national voluntary program and my colleague, Bruce Steinhardt, will discuss the research and demonstration efforts. The National Second Surgical Opinion Program is designed to encourage Ameri- can citizens to seek a second medical opinion whenever non-emergency elective surgery is being considered, and to provide a means for citizens to acquire a physician to give them that second opinion. The national program consists of a national hotline and a network of referral centers. The national hotline is a tollfree number (800-638-6833, in Maryland 800- 56-071 0 - 80 - 70 PAGENO="1106" 1098 492-6603) which people may call to obtain the name of a referral center in their area. The referral centers are local organizations, Medical Societies (63), Professional Standards Review Organizations (31), or Medicare Carriers (43), who have agreed to provide physicians' names to people who call requesting a referral for a second opinion. Utilization The national hotline receives about 1,000 calls a month. Referral centers receive approximately 500 calls each month. A TV show in San Francisco last week produced a flurry of calls to the Hotline. Local publicity in Boston increased calls to referral centers in Region I. A mailing to all Social Security beneficiaries increased hotline calls to 5,000 in the month follow- ing the mailing. Calls to the hotline and referral centers are very dependent upon the availability of these numbers to the consumer. Plans In the coming year, we intend to intensify public information efforts. TV and radio public service announcements are being developed in English and Spanish. A new brochure, which will be available in local shopping areas, and through the Consumer Information Center, in Pueblo, Cob, is being developed. The hotline has been redesigned to provide more personalized service. We have also identified those areas of the country where Medicare patients are undergoing certain operations at a much greater rate than the rest of the medicare population. A special public information campaign will be targeted in these cities. PSRO's in these areas are endeavoring to identify the reasons for these differences. In closing, let me add that the National Program provides a referral mechanism for those consumers who are unable, for one reason or another, to find medical advice about nonemergency surgery on their own. We provided this voluntary service to approximately 15,000 consumers last year and we anticipate that that number will double this year in response to an intensified public information campaign. Departmental policy regarding a mandatory program At present the department has no evidence that a mandatory program which forces all patients to seek a second opinion would really work any better than a first rate voluntary program. In addition, a mandatory program creates a variety of administrative, legal, and human problems. It is costly to run and poses serious risk that patients will be penalized simply for failing to understand the rules. In a nationwide program, it is likely that finding a second physician in some medically underserved rural areas would be difficult, if not impossible, so an exception process will need to be developed. Even something so apparently simple as the definition of "elective" surgery can be extraordinarily difficult. We do not know what the long term effects are of a mandatory program. We do not, for example, know how many patients eventually come to surgery anyway. We also do not know how to avoid completely harmful outcome resulting from the delay in or avoidance of surgery. Finally, a mandatory program would be expensive, both in administrative costs and in additional physician's fees. Voluntary programs are easier and more economical to run; we have no evidence at present regarding the increased benefits to be purchased with the increased costs of a mandatory program. Mr. WAXMAN. Thank you very much. In your voluntary program are you looking oniy at the areas with a large amount of surgery for people on medicare and medic- aid programs or are you looking at the amount of surgery overall? Mr. NICKELSON. Medicare and medicaid. Mr. WAXMAN. Do you think that would be a good indication of an area that. has a lot of surgery for all people who are getting medical care? Mr. NICKELSON. I doubt it because the medicare population being the elderly population could be quite different from the population at large. Medicaid on the other hand is with a lot of children and you miss that workforce area that is right in the middle of them, from 18 to 65. I would guess those two populations are quite differ- ent from the balance. PAGENO="1107" 1099 Mr. WAXMAN. You are looking at both? Mr. NICKELSON. Yes. Mr. WAXMAN. How would you think that relates to the rest of the population that would not be covered by medicare or medicaid? Mr. NICKELSON. If we could integrate the data and my suspicion is we could probably do some work on this perhaps in conjunction with HSA's and we might have some dynamite information about what is going on in the community as a whole. We do not have that today because as you know the PSRO's are dealing just with the medicare/medicaid population. Mr. WAXMAN. In your more focused advertisements are you sug- gesting to people that in their area there seems to be a larger amount of surgery than in other areas? Mr. NICKELSON. That is what we intend to do. We intend to do it not in the pejorative sense because we do not know what the reason is behind it in many cases and we do not want to slur the physician population that they are unnecessarily cutting. For ex- ample cataract procedures is one where we have developed some extensive data on. We know the rate varies considerably over the country from around 5 per 100,000 to 15 to 100,000 in given areas. There is no particular good explanation as to why the rate varies so much. We are doing two things with the information. We are going to the PSRO's and saying you have very high use rates on this proce- dure in your area for the population you have, what is going on? Try to find out what is going on and if you do identify problems we expect the data to be shared with us and the PSRO's to institute procedures to address that through their system. In addition to that we are going to use the second opinion pro- gram to publicize it to the larger population to say you have very high use rates in this area and if you are considering such a procedure or if it has been recommended we would strongly en- courage you to get a second opinion. We are really trying to come at it from two sides. Mr. WAXMAN. Let me ask this of Dr. McCarthy or Mr. Stein- hardt. The American Medical Association claims it would be unfair to have a mandatory second opinion for only the medicaid/medi- care population when it is not required of the rest of the popula- tion. How do you respond to that concern? Dr. MCCARTHY. I have discussed this with Dr. Sammons of the AMA. I have heard his comments. I think specifically before I answer that question I would like to comment on your previous remark. There is a wealth of data in terms of a number of studies that date back several years on the level of surgery and some very intriguing variables such as the density of surgeons in an area and so forth. There is a good deal of information and I am not talking just about the national versus European rates of surgery but also within States and in certain regions within the States. The other factor is we have noticed in a particular study we are doing for the motor companies and the UAW in the Detroit area that when we talk about the rate of surgery rising nationally during the 1970's at approximately 35 percent in this area during that same 6 year period there was a 75 to 90 percent increase. We PAGENO="1108" 1100 find in several plans in the New York area also that the more generous the reimbursement the higher the rate of surgery. That has also been correlated by other studies that have been done before. From your State as you know is the position of HMO's and their rates of surgery versus fee for service surgery. In the private sector in the working population there is quite a number of studies that indicates there are very intriguing variables to correlate to surgical areas. Mr. WAXMAN. Would you conclude that in areas with a high density of surgeons and in which people have private insurance that the rate of what might be considered unnecessary surgery would be higher in those with private insurance programs than those on publicly financed programs? Dr. MCCARTHY. I would venture to say that would be the case. The National Center for Health Statistics, Dorothy Rice's group, does a study every year in terms of surgery in various parts of the country. That is still by region. I think in the early 1980's that will be by State. We do have a very intriguing phenomenon. The midwest shows 15 percent higher than the east, and the south is again 15 to 20 percent less than the national figure. Even more intriguing is the fact that the hysterectomy rates in the northeast are 50 percent less than they are in the midwest, the Detroit to Chicago area. Mr. WAXMAN. Why do you think that is? Dr. MCCARTHY. We do not know. I think the question is that they vary very significantly. I think the testimony about beginning to target particularly to regional or areas of demonstrated high surgi- cal rates is very worthwhile. That follows that when you look at some of these groups that their patient days per thousand are much higher. Mr. WAXMAN. Do you think a report by a PSRO of a high usage rate among the medicare/medicaid population would be an indica- tion for an area of high usage? Dr. MCCARTHY. It might be but I do not think it would necessar- ily follow. Mr. WAXMAN. Perhaps Mr. Nickelson ought to reevaluate how he selects his target areas. Dr. MCCARTHY. The rates of surgery are quite different. Over 65 surgery is not as important a factor in total care as it is under the age of 65. That is where the bulk of elective surgery is, in the working population up through the age of 65. The medicaid rates of surgery have if I am correct been substan- tially higher than the private sector or the medicare population. They may in some areas of the country be twice as high. That to my mind from a public policy point of view puts priority on devel- oping medicaid programs that are statewide and well structured. I look with a great deal of promise to the Michigan program. Massa- chusetts has had a tremendous problem in terms of in the concep- tion and execution or its program. Mr. WAXMAN. I would like to return to my original question. I would like your response to a comment by the representative from the American Medical Association who said this provision if en- acted would, by its very nature, establish different levels of care for PAGENO="1109" 1101 participants in Federal programs and an additional barrier to care would be established for these participants which does not exist for the rest of the population. Dr. MCCARTHY. I think the succinct answer and I am sure this has come to mind with several others is the Federal Government has a particular responsibility to these recipients. There is no question medicare and medicaid is a responsibility of the Federal Government and the State governments and therefore I do not find it a nonsequester for the Federal Government to develop programs that target these particular programs. My component would be an expansion in the private sector of second opinion programs. They are moving very rapidly. Mr. WAXMAN. Mr. Dannemeyer? Mr. DANNEMEYER. Dr. McCarthy, you said as I recall there was a 17 to 18 percent difference on second referrals but I did not hear you say what portion of those on the second consultation were advised not to have the surgery and elected not to have it. Dr. MCCARTHY. Eighteen out of one hundred are told they do not need surgery on the second consultation. We find it rather remark- able that approximately 85 percent of those individuals accept that judgment and do not go forward for surgery. They accept the second opinion judgment in place or over if you will of the first referring physician. This comes as a surprise to us because of the so-called patient- physician relationship and confidence. It also speaks to another argument that was advanced a few years ago by the AMA that there was a large group of individuals who were looking for sur- gery. In other words the rate of surgery particularly related to hysterectomies was caused by the patients literally forcing us to do it, in other words patient preference. We do not find that to be the case at all. We have in our research study looked at a match sample of those that are confirmed, people who had a double recommendation for surgery both from their own physician and from the second opinion and we find it quite disturbing that approximately 12 percent of those individuals with two recommendations do not have surgery. You would think these are the hernias and the hemorrhoids. They are not. In the vast majority of cases they are very serious surgical problems mostly related around cancer. We have a group which is rather significant in the sense that they obviously are foregoing a very effective treatment and post- poning something that could be deleterious to their health. Mr. DANNEMEYER. These 85 percent of the 18 percent elect not to have surgery. Have you gone on to follow whether or not it has adversely affected their health not to have had the surgery? Dr. MCCARTHY. That is a very difficult question. What we have done has been to follow those individuals for at least 2 years and we follow them by phone interviews every 6 months as well as in three of our big programs claim controls. We are watching their claims come in. That is where we get the outcome results namely that two-thirds of them never have surgery after that 2-year period. PAGENO="1110" 1102 If they are going to have surgery, the third that do have surgery, better than 80 percent of those have it within 120 days. They have the surgery very promptly. Short of literally laying hands on or bringing those patients back in to see independent physicians on a periodic basis once a year after their consultation for the second year and possibly a third year, to make statements as to their quality of care and their total quality of care as a result of not having surgery is not feasible at least with the tools that we have such as claims control and inter- view systems. Mr. DANNEMEYER. Thank you. Mr. Steinhardt, you used 30 per- cent on the second consultation that recommended no surgery. What portion of that 30 percent elected not to have the surgery? Mr. STEINHARDT. The data on that is not in yet. I should point out we do observe a fairly consistent difference between programs that are voluntary and programs that are mandatory in that people who seek second opinions in a voluntary program seem to have the sense they have been told to have surgery when in fact it is not necessary and there are other alternatives. There is some suspicion that we are seeing people who probably should have surgery as Dr. McCarthy points out and do not want to have it and they are trying to get somebody to tell them they really do not need it. Mr. DANNEMEYER. Has there developed in the people that are covered by plans and essentially those under 65 in the work force some type of medical plan that such a person has to obtain or is urged to obtain or say it is mandatory for a second consultation before surgery takes place? Is that developed in the medical care system? Dr. MCCARTHY. In essence that is the substance of the mandatory program. In about six of our programs that have about 300,000 people insured they literally are required to have a second opinion. They are allowed one forgiveness in most cases and it is per indi- vidual or per family. We found in our experience that it takes a long time for people to know their benefits to make any reading a year or 2-years after the introduction of a benefit is foolhardy because the rank and file or the insured population do not know that the benefit exists particularly if you are dealing with a pre- dominantly male membership because actually the wife and mother control the medical care system within the family unit. If she is not aware of the second opinion program it just does not get mobilized for herself or for her husband or for the children. We give them a warning in the forgiveness program where when their claim comes in for an elective surgical hospital episode they are notified this is their forgiveness and henceforth they stand liable. That has worked very well because as you can see it answers the question on the political sensitive question, I never heard about the benefit and I never saw the brochure, or the letter, or the poster, or anything else. In essence each family unit or each member has been notified. Mr. DANNEMEYER. This procedure must have developed because it was perceived to be cost effective. Dr. MCCARTHY. In our experience the only reason it is promul- gated to be quite candid is it is fueled by very significant cost PAGENO="1111" 1103 effectiveness in the groups we have been following in the New York area. Mr. DANNEMEYER. Is such a feature of a plan for a member in the work force fairly uniform in our society? Dr. MCCARTHY. It is in all the groups we have had. We have ~en religious in maintaining the identical standards across the board whether it is dealing with building services or carpenters or team- sters or printers or civil servants and so forth. Mr. DANNEMEYER. Did I hear correctly in your statement, Dr. McCarthy, in response to one of the questions of Mr. Waxman, our chairman, that the incidence of surgery by members of the medi- care population or the medicaid population was higher? Dr. MCCARTHY. Medicaid populations have been consistently much higher in their surgical rates. There may be good reason for this. Let me give you an example, let's say there is a choice of a hysterectomy versus hormonal treatment that would require a series of visits to a clinic or to a physician's office. In many cases the medicaid population one has to judge and meaning a physician has to judge and make the judgment what is the probability of this patient literally following through with these number of visits that may be protracted over a period of months versus surgery. In essence there is quite a bit of good sound medical justification for some higher rates of surgery with populations that may be migratory or difficult to maintain contact with. The rate is almost doubled from what it usually is. Mr. WAXMAN. Mr. Maguire. Mr. MAGUIRE. Thank you, Mr. Chairman. Mr. Steinhardt, you say on page 4 of your testimony that there is no evidence that the 30 percent nonconfirmation rate for surgical procedures experienced in the voluntary Cornell program for work- ing people would generalize to poor and elderly populations. Do you have any evidence that it would not? Mr. STEINHARDT. This seems to be the rate that we are now finding with our two demonstration programs for medicare benefi- ciaries, about 30 percent are nonconfirmed. The statement was at that time which was 1975 we did not know whether it was general- ized. One of the reasons for the demonstration was to find out whether it would or would not. We do know that the procedures that medicare patients come into the second opinion program for tend to differ from those in an employed population. Mr. MAGUIRE. I understand. I am not interested in necessarily breaking it down at this point to specific things. What we are talking about is whether there is in fact generalizable or independ- ently confirming data that for the things that are appropriate and usual with respect to surgical procedures for those population groups. Is there in fact a nonconfirmation rate that achieves some level of significance. You would say there is, based on your evidence. Is that correct? Mr. STEINHARDT. That is correct. Mr. MAGUIRE. In view of that do we really need on page 2 of your statement to be stuck back, kind of as if we had no data, information or ability to make judgments. On the basis of the data that you have just alluded to and the data Dr. McCarthy has PAGENO="1112" 1104 developed and spent pages telling us it seems it is cost effective and the savings are realized and it is repeated in experiment after experiment. Are we really stuck on page 2 with your questions such as are second opinion programs cost effective and are they cost effective for specific surgical procedures? We are not really stuck there are we? We do know what the answers are to some degree; do we not have answers to those questions you have stated on page 2? Mr. STEINHARDT. There are things that we do know and others that we do not know. Let me give you the case of cataracts. This is the most common surgical procedure among the medicare population. We have seen a very large increase in the cataract surgery rate in recent years. What seems to be happening here is that patients come in earlier for surgery. Cataracts are a progressive disease. The person gradu- ally loses vision until he has none left and at some point the patient should be operated on if he is a decent surgical risk. If we have a second surgical opinion given for a person with cataracts the decision is either to operate now or to postpone it but eventually the person unless he dies before that time comes will need the operation. Mr. MAGUIRE. You can equally well point to a number of other procedures. There are procedures which might not have that par- ticular characteristic where once a decision was made some alter- native or more conservative strategy would be undertaken. There might be some number of patients that would have to ultimately have surgery; there might be a significant number that would not. There would be as many procedures that you could name that would differ from the cataract problem, would there not be, as would be similar to it? Mr. STEINHARDT. I think I would like to defer to a medical judgment on this. Dr. MCCARTHY. The cataract problem is very complicated. We have given these grand rounds at various major hospitals. I will share with the committee my impression of the dialog that comes out from these discussions. There is a cleavage between the younger and the older opthalmo- logist on this and it is quite remarkable. There is no question there is quite a bit of criticism of the prematurity of doing cataract operations and it is not all down hill. Cataracts do plateau. It is a question with one eye that is still good versus one that has some impairment but the degree of the impairment gets into a value judgment. I have found it was intriguing that there is quite a discrepancy as the evidence would point out to cataract operations in various parts of the country. The opinion and the density of age and perspectus has a lot to do with it. I wish I could be more specific, Congressman. Mr. MAGUIRE. I do not really want to discuss at great length all the individual things that might happen to people. What I am trying to get a grip on here with your help is where we are on this issue as a basis for whether or not there should be some legislative steps taken. PAGENO="1113" 1105 Let me refer to your statement, Mr. Steinhardt. You say on page 10 that at this point in time little is known about the long-term quality of care and cost benefit outcomes of second opinion pro- grams. I am concerned about the qualifying language that creeps into these sort of justifying statements that we get from HEW on not being willing to look at any further legislative issues. Mr. Nickelson makes what I think is an appalling statement that at present the Department has no evidence that a mandatory- program which forces all patients to seek a second opinion when people are talking about targeting and there is a concensus on that and this becomes a strawman-would really work any better than a first rate voluntary program. We have no evidence at present regarding the increased benefits to be purchased with the increased costs of a mandatory program. Gentlemen, is that really where we are? Would you defend that first statement, Mr. Nickelson, and tell us whether in fact you think if we had an uniform approach to this that we might have reason to believe we could select out as Massachusetts has a number of things that show up on the 10 to 20 percent index of nonconfirmations and say at least with certain categories of the population and maybe even in certain parts of the country that we ought to target in? Would you not say we would know and have a reasonable basis on the data that we have before us to expect that we would have rates of nonconfirmation that would lead to cost savings and save lives and have people get higher quality care? Can we no~ really say that? Mr. Nrc~i~soN. I think that is what we are trying to do with the targeting in both the voluntary program as weil as the use of the PSRO's. Mr. MAGUIRE. I am sorry but you have done almost nothing with the voluntary program. You are going up from 15,000 to 30,000 consumers and we have 17 million elective surgeries per year. You are at something below 0.2 percent. The data that you have shows there are nonconfirmation rates even with that small sample. Every bit of data that we have shows there are significant nonconfirmation rates everywhere that it has been done. Is there a place where it has been done where we do not have significant nonconfirmation rates? Can anybody tell me one place? Mr. Nickeison, can you? Mr. NIcKELS0N. No. Mr. MAGUIRE. Mr. Steinhardt, can you? Mr. STEINHARDT. We do not have the data in yet. Mr. MAGUIRE. There will always be data that is not in. I am asking you if you have data which now shows that in some popula- tion group with respect to some significant group of procedures where second opinions have been tried that we have data that shows that there is not a significant level of nonconfirmation. Does anybody have such data? Mr. STEINHARDT. Thus far we have information on several pro- grams in New York City and on a program in Massachusetts and PAGENO="1114" 1106 Detroit. We do not know how these programs would work in the rest of the country. Mr. MAGUIRE. We know they are working where they are now? Mr. STEINHARDT. We know there are people who believe they work. Mr. MAGUIRE. We have data that shows they work. Mr. STEINHARDT. I am not sure specifically which data you are referring to, sir. Mr. MAGUIRE. I have just invited you to give me any data that you have which shows we do not have significant nonconfirmation rates. You have not done that. By the process of elimination all the data I have ever seen from any project anybody has ever done shows that in fact we have significant levels of nonconfirmation and you could translate those into dollars and cents in terms of surgeries not performed when people do exercise their choice not to go ahead. These are wonderful sorts of mealymouth statements if I may suggest that would be a basis for this committee not to proceed for the next 20 years. Mr. STEINHARDT. I believe we should have answers for you well before then, sir. Mr. MAGUIRE. What I am trying to say is I think we have some answers now with respect to what good judgment would lead us to conclude based on all of the data that we have. Let's ask if I may Mr. Chairman, you are leaning forward in the most ominous manner. Let us say we agree that we ought to target. Each of you has talked about that. Let's say that some sort of a selection ought to be made where the data are most clear with respect to population groups. It is pretty obvious that we have voluntary programs~ where no significant percentage of people par- ticipate and you may learn something which reaffirms what we already know and that is nice but why would we not at this point on the basis of the data that we have move to a selectively targeted mandatory program since all of the data points in the direction of that being cost effective and helpful and there is no data that shows it is not. Why should we not do that as a matter of policy? Mr. Nickelson. Mr. NICKELSON. I think you have overgeneralized some. I do not think all of the data points to it being cost effective. I think from the studies as Mr. Steinhardt has tried to say we have some studies underway that we do not know from yet. Mr. MAGUIRE. It is a different thing to say there are studies underway which we do not have answers for yet than it is to say we have completed studies which show that it is not cost effective. Does anybody have a study in hand which shows it is not cost effective in any population group with respect to any kinds of procedures? I take it the answer is no. Mr. NICKELSON. I think that is the question Mr. Steinhardt is trying to get at with some of his research. It does deal with some of these issues such as is it cost effective or not. Mr. MAGUIRE. Would you agree that all of the data we have in place now points to its cost effectiveness? Mr. NICKELSON. No, not all of the data. PAGENO="1115" 1107 Mr. MAGUIRE. Mr. Steinhardt, would you? Mr. STEINHARDT. No, I would not. Mr. MAGUIRE. Dr. McCarthy, would you? Dr. MCCARTHY. Yes, I would. I think the data base is too narrow in terms of what has been described. I think the most telling example is if Prudential is willing to go out and sell a policy of mandatory second opinion they obviously have some insight as to whether it is cost effective because they are willing to reduce their premium by 6 percent. There is a myriad of companies that can be brought forward such as Motorola and I can go on with a number of the steel companies that are studying a mandatory program. IBM is an- other. Many of these programs are in the private sector and I think the evidence is more attainable there and more regional. To answer your question I differ here. I feel from our studies and the ones we have been told about they are extremely cost effective. I do not think there would be the motivation to be expanded or sold unless the programs were cost effective. Mr. MAGUIRE. We have a case in New York in which the wit- nesses have referred to where the court said you cannot do this. I wonder if Congress should not seek authority to conduct demon- stration projects under the PSRO Act so that the problem that we face in New York will not continue to plague us. Does everybody agree that would be useful? Mr. NICKELSON. We do. Mr. MAGUIRE. Let the record note all three heads are nodding affirmatively. Thank you very much. Mr. WAXMAN. Dr. Carter? Mr. CARTER. Thank you, Mr. Chairman. I noticed, Doctor, you said the increase in excessive surgery has taken place in the past few years and that up until a certain time it remained down. What is that percentage of increase compared to the population increase? Dr. MCCARTHY. In 6 years, 35 percent compared with a popula- tion increase of about 5½ percent. Mr. CARTER. To what do you attribute that? Dr. MCCARTHY. There really is no cause and effect answer. Mr. CARTER. How long have we had the CAT scanner? Dr. MCCARTHY. In terms of its operations, in the 1970's. Mr. CARTER. It was not widely used except for the past 5 years. Would that account for more surgery in the past 5 to 7 years? Dr. MCCARTHY. No. Mr. CARTER. I would think it would be an important factor. We are diagnosing brain tumors with it and other tumors that we could not before. Dr. MCCARTHY. You asked if that was the cause for the rise in surgery and a 34-percent increase in surgery accounted for 5 mil- lion procedures a year. Mr. CARTER. I would not claim that it accounts for all of the increase in surgery but it certainly would account for some of it as I see it. What is the cost per year of a union member's medical bill at UAW? PAGENO="1116" 1108 Dr. MCCARTHY. I think the total health benefits are somewhere in the neighborhood of between $2,000 and $2,400 depending on the company. Mr. CARTER. I think it is about $2,400 or $2,500. Do they ask for second opinions? Dr. MCCARTHY. Only in the Detroit area on a voluntary basis. Mr. CARTER. In that area with second opinions we would look for a decrease in the cost if the rate of surgery had gone down would we not? Dr. MCCARTHY. We would. That is part of our research. Mr. CARTER. Has this occurred? Dr. MCCARTHY. That is one of the questions we have been asked to study. Mr. CARTER. It appears that their costs have gone up anyway. I believe you said that 18 percent did not concur after a second opinion. Is that correct? Dr. MCCARTHY. That is right. Mr. CARTER. Of that 18 percent two-thirds did not have surgery. Dr. MCCARTHY. That is right. Mr. CARTER. What happened to the other third? Dr. MCCARTHY. The other third went on and had surgery. Mr. CARTER. What about the surgery on that 6 percent? Was it found to be necessary or not? Dr. MCCARTHY. On the third that went on to have surgery? Mr. CARTER. Yes, sir, in spite of the second opinion. Dr. MCCARTHY. We presume there are two components to it. Mr. CARTER. I do not want a presumption. I want a fact. Did the 6 percent show pathology or not? Dr. MCCARTHY. I cannot answer that. I do not know. Mr. CARTER. Gentlemen, this is quite a problem. Personally as a physician I do not object to second opinions myself but I think they can be extremely expensive as you have noted. A mandatory pro- gram would be expensive both in administrative costs and addition- al physician fees. I believe you stated you had 63 voluntary programs in this country today. Is that correct? Mr. NICKELSON. We have approximately 160 voluntary organiza- tions around the country. It is PSRO's, insurance carriers and medical societies. Mr. CARTER. Let me congratulate you. I think that is wonderful that you have gone that far with a voluntary effort. Thank you, gentlemen. Mr. WAXMAN. Thank you very much for your testimony. We appreciate your sharing that information with us. We would now like to call Ms. Glenda Price, who is president of the American Society for Medical Technology. She will be accompa- nied by Nick Kauffman, director of the Washington office, and Steve Lawton-no stranger to our subcommittee-who is counsel to the American Society for Medical Technology. We welcome you. PAGENO="1117" 1109 STATEMENT OF GLENDA PRICE, PRESIDENT, AMERICAN SOCI- ETY FOR MEDICAL TECHNOLOGY, ACCOMPANIED BY NICK KAUFFMAN, DIRECTOR, WASHINGTON OFFICE; AND STEVE LAWTON, COUNSEL Dr. PRICE. Mr. Chairman, I thank you so much. I am Glenda Price, associate professor of medical technology at Temple Univer- sity in Philadelphia and currently serving as the president of the American Society for Medical Technology. We certainly appreciate the opportunity to come before you and present testimony. As you are well aware accompanying me is Mr. Nick Kauffman from the Washington office of the society and Mr. Steve Lawton who is acting as our counsel. We are presenting testimony primarily in relation to House bill 4894, the Clinical Laboratory Improvement Act of 1979. As request- ed our comments will be brief and they will be confined to issues raised by title II of that legislation. We know that you are very well aware of the fact that ASMT enthusiastically supports the entire legislation-H.R. 4894-and we look forward to having the opportunity of presenting more exten- sive legislation at some future date when this committee chooses to have hearings on the Clinical Laboratory Improvement Act. You are aware also that AMST is the largest professional organi- zation representing clinical laboratory personnel in this country. We have a large variety and large number of members who are involved in all aspects of clinical laboratory services. Our member- ship represents a wide cross section of nonphysician categories of laboratory personnel. We include clinical laboratory scientists- technologists-administrators, supervisors, educators, and support- ive laboratory personnel. In addition, the society's membership includes such specialists as microbiologists, clinical chemists, hema- tologists, immunohematologists, cytotechnologists, histotechnolo- gists, and nuclear medicine technologists. ASMT members work in a wide variety of health facilities including hospitals, independent laboratories, physician offices, clinics-private and governmental- and research and industrial laboratories. Approximately 75 percent of our membership hold degrees at or above the baccalaureate level while another 10 percent hold associate degrees. The remainder of the membership is composed of individuals who fall in specified categories such as students. As health care professionals we are very concerned with the spiraling health care costs and applaud reasonable efforts to reduce these costs. We condemn financial abuses associated with the provi- sion of clinical laboratory services and fully support legislative efforts designed to curb unwarranted billing practices in the medi- care and medicaid programs. Thus we support the provisions of title II of H.R. 4894 although we wish some provisions were a bit stronger. In relation to this legislation I have five points that I would like to address. First is section 201 of this legislation. Section 201(a) would pro- hibit the use of Federal funds to pay any portion of a reimburse- ment amount for clinical services which represents a commission or finders fee. PAGENO="1118" 1110 In addition this section would deny reimbursement for rental of a facility which is unrelated to the fair market value of the facility or which is based on a flat percent of the charge for a laboratory service. These provisions would serve to prohibit several types of well documented arrangements between independent laboratories and providers that constitute little more than very sophisticated kick- backs and result in payments that are quite excessive to the Feder- al Government for laboratory services. For example such common kickbacks as rental of a very small space within a medical clinic at a price exceeding the cost of the entire building would be specifically prohibited by law if section 201(a) were enacted. We wholeheartedly support the provision of this section. Mr. Chairman, this subcommittee is well aware of the staggering increases in hospital costs that have occurred over the past few years. Given this reality ASMT strongly recommends that any attempt at controlling the costs of laboratory services be made applicable to all clinical laboratories. For this reason we question the advisability of exempting clinical laboratories located in hospi- tals from section 201(a). The second point I would like to make deals with section 201(b). This section would require independent clinical laboratories to permit examination of records to determine whether physicians have billed for services performed by the laboratory and the amount charged for the services. This section which would provide the Secretary of HEW with information necessary in order to determine whether excessive markups are occurring has ASMT's support. The third area is section 202(a). This section addresses the prob- lem of unwarranted markups of bills for laboratory services sub- mitted under medicare. In particular it seeks to prohibit inflated charges in instances in which a bill is submitted by the physician but the laboratory services are not performed by him. It imposes meaningful disclosure requirements and reimburse- ment principles which should serve as powerful incentives to reduce excessive markups. We find these disclosure requirements and reimbursement prin- ciples to be reasonable and consistent with ASMT's overall concern for the high cost of health care services. ASMT supports section 202(a). We urge the adoption of section 205 which would provide for a report of the impact of the amendments made by section 202(a). The fourth point, Mr. Chairman, deals with section 203. As you know section 203 would for the first time authorize States to pur- chase laboratory services for its medicaid population through com- petitive bidding or other arrangements which would limit the number of laboratories eligible to receive medicaid payments. Because competitive bidding is an untested policy under the medicaid law the legislation limits the time period during which States may purchase laboratory services through these arrange- ments to 3 years. Mr. Chairman, the intent of this provision, substantial savings of scarce medicaid dollars, is laudatory and we support the amend- PAGENO="1119" 1111 ment proposed by section 203. Frankly we would be more comfort- able with this provision if the committee were to assure that all laboratories eligible for competitive bidding were required to meet personnel standards more stringent than those recently proposed by HEW (FR Oct. 12, 1979) and also to meet specific quality insur- ance requirements. During the 95th Congress in its report on an identical provision included in H.R. 10909, the Interstate and Foreign Commerce Com- mittee expressed concern that the provision would result in the purchase of laboratory services under the medicaid program from a single provider in an area. The committee report indicated that such a monopolistic situa- tion in a large health care delivery area was not intended and that States should generally not make arrangements that would have such a result. We hope that if the competitive bidding provision is agreed to by this committee comparable language would likewise appear in the appropriate committee report. Since the competitive bidding con- cept is an untested one, we also believe that its limitation to a 3- year demonstration program with an evaluation of experience prior to expiration of the 3-year period is a wise precaution. The fifth and final point deals with section 204. Section 204 calls for a study and subsequent report to the Congress concerning financial arrangements made by hospitals for clinical laboratory services under medicare/medicaid. The study is to include an ex- amination of percentage arrangements between hospitals and pro- viders of laboratory services; leasing arrangements for facilities and equipment and salary arrangements made by hospitals for providers of laboratory services. Mr. Chairman, we share the concerns expressed by the drafters of section 204 but believe that some of the practices being studied should simply be outlawed at this time. For example we believe that sufficient information presently exists to support a prohibition on all percentage arrangements with respect to clinical laboratory services no matter what the setting. In this regard we note that legislation submitted by Mr. Leland which is H.R. 4754 includes this blanket prohibition. In conclusion, Mr. Chairman, ASMT is generally supportive of title II of H.R. 4894. We support reimbursement mechanisms which fairly compensate personnel based upon their personal professional effort and the amount of time spent in the performance of specified functions. In this time of escalating health care costs we do not believe the interest of the American public is best served by any other approach. Mr. Chairman, this concludes our prepared testimony. We would be very happy to answer any questions which the committee may have. Mr. WAXMAN. Thank you very much. Do either of you gentlemen have additional comments? [No response.] Mr. WAXMAN. Let me commend you for your testimony. I think it is very helpful to us and we appreciate the support for the legislation. We will keep in mind all of the points you have raised as we look at the issue beyond the legislation that is before us. PAGENO="1120" 1112 Dr. Carter. Mr. CARTER. I agree with the chairman. Mr. WAXMAN. Thank you. We would now like to call forward Mrs. Marilyn Erickson, who is president of the National Association for Hospital Development. She who will be accompanied by Dr. John Grupenhoff and Mr. Kenneth Schaner, who is counsel to the National Association for Hospital Development. STATEMENT OF MARILYN ERICKSON, PRESIDENT, NATIONAL ASSOCIATION FOR HOSPITAL DEVELOPMENT, ACCOMPANIED BY JOHN GRUPENHOFF, M.D., WASHINGTON REPRESENTA- TIVE; AND KENNETH SCIIANER, COUNSEL Mrs. ERIcKsoN. Thank you, Mr. Chairman. We want to thank you for the opportunity to present testimony in support of H.R. 2445 which provides for the protection of philan- thropic giving and volunteerism in hospitals and medical centers. I have a long statement and I am sure you will not be sorry to hear that while I request that be a part of the record the hour is late and we shall just summarize at this time our support for the bill. As I told Dr. Carter earlier we are delighted to see him back at work in Congress. He has been a real champion of philanthropy and voluntarism and everywhere we go in both Houses of Congress whenever we mention philanthropy and hospitals his efforts are recognized and we are grateful. H.R. 2445 was introduced in February of this year and it already has over 50 cosponsors in the House. We are very grateful that the principles of this bill have already been agreed to in the cost containment legislation reported out of this committee. That is protection for philanthropic giving in cost containment activities by both the Federal Government and the State governments now written into this committee's bill. They are also written into the bill of the Ways and Means Committee and the bill soon to be reported out of the Senate Human Resources Committee. At least in cost containment legislation our concerns for the protection of philanthropic giving are in the legislation. H.R. 2445's principles are the same as those already adopted by this committee in cost containment legislation but are applicable generally to medicare/medicaid reimbursement programs as well as other Federal payment programs for hospital services. They are also applicable to State programs of reimbursement whether tied to cost containment or not. Mr. Chairman, there is only one reason for this bill and that is to protect philanthropy to hospitals and to preserve the spirit of voluntarism. All the provisions of this bill speak to one issue. We want to make sure that the philanthropic gifts are not used by the Federal Government or State governments to reduce the proper reimbursement funds for hospital costs under those programs. In other words substituting the philanthropic dollar for the Federal dollar. If that would happen not only would funds already given be used up by such improper means but also it is certain that it will not be PAGENO="1121" 1113 long before donors understand their donations are merely being used to subsidize Government programs and citizens will cease to give their time and their money to hospitals. The committee will be interested to know that Americans gave $5.4 billion in 1978 for hospitals and health causes. Millions of Americans donated their time and efforts in volunteering in a number of capacities for not for profit hospitals. We are asking that this committee continue to support those voluntary efforts. Whatever is given in philanthropy, if philanthropy were re- moved, would have to be made up by third party payments or by Federal or State funds and the loss of voluntary hours would have to be replaced by paid workers. We believe philanthropy and volun- tarism then is an excellent cost containment program as volunteer work and gift dollars make the patient dollars and the Federal dollars go further. Simply put there are four parts to this bill. Section 1132(a) establishes that it is the policy of the United States that philan- thropic support for health care be encouraged and expanded. Upon consideration we are hopeful that the subcommittee will add the following language at the end of section 1132(a). Except as specifically provided in this act nothing in the act shall be construed so as to discourage philanthropic support or otherwise hinder the use of such support for purposes determined by the donors and the hospitals to be in the best interest of the patients served. The NAHD believes that the addition of such language would both clarify and strengthen the intent of the bill by placing a specific statement in the Social Security Act that would result in the drafters of regulations being required to consider the effect of such regulations on philanthropy before promulgating them. The NAHD supports the new section 1132(b) which would amend current medicare regulations which have the effect of discouraging philanthropy. Current medicare regulations provide that costs in- curred by a hospital that are otherwise reimbursable are reduced by gifts designated for operating purposes. It is our experience that virtually every donor that is aware of this provision would not designate the gift for operating purposes and therefore this regulation only serves as an unfair trap for the unwary donor who is not familiar with this policy. This section would also eliminate the unnecessary provision in current medicare regulations which deals with commingled funds. This highly technical matter is explained in our written testimony. It is sufficient to say here that this medicare regulation is being interpreted differently in various areas of the country. Sections 1132 (c) and (d) would preclude the inclusion in Federal and State cost containment laws or like laws of provisions which seek to reduce reimbursable costs by controlling philanthropic dol- lars or offsetting such giving against costs or revenues otherwise allowable. This is an important provision. It is more general than those provisions in the cost containment bill and such provisions are necessary to protect philanthropic giving in Federal and State laws. 56-071 0 - 80 - 71 PAGENO="1122" 1114 I would be pleased to go into any more details on any of the sections of the bill and my colleagues and I would be happy to answer any questions. Thank you. [Testimony resumes on p. 1122.] [Mrs. Erickson's prepared statement follows:] PAGENO="1123" 1115 TESTIMONY OF THE NATIONAL ASSOCIATION FOR HOSPITAL DEVELOPMENT ON H.R.2445 BEFORE THE SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT U.S. HOUSE OF REPRESENTATIVES Mr. Chairman and members of the Committee. My name is Marilyn Erickson, and I am the Director of Development at Children's Medical Center in Dayton, Ohio. As an elected volunteer, I also serve as President of the National Association for Hospital Development, and it is on behalf of the Association that I am here today. With me are Mr. Ken Schaner, our Counsel, and Dr. John Grupenhoff, whom many of you know, who serves as our Washington representative. The NAHD is the professional association of hospital and health care executives in the United States involved in directing and managing development programs and fund raisi,ng activities. CUrrent membership is 1,080 individuals and institutions. I am deeply grateful that~we have been asked to testify on H.R.2445, which would provide for long term protection for philanthropy in hospitals. Several members of this Committee are co-sponsors of this legislation, originally introduced by Dr. Tim Lee Carter. May I say how very pleased we are to see Dr. Carter return from his recent illness. For several years now he has been among those who have led the fight to protect philanthropy in relation to hospitals and the health care field in general. It is a mark of his excellent work that whenever we meet with representatives and senators on this issue, they are becoming increasingly aware and interested in it. PAGENO="1124" 1116 Mr. Chairman, there is only one reason for this bill, and that is to protect philanthropy to hospitals, and preserve the spirit of voluntarism. All the provisions of the bill speak to one issue: we want to make sure that philanthropic gifts are not used by the federal government, or state govern- ments, to reduce the proper reimbursement funds for hospital costs under those programs; in other words, substituting the philanthropic dollar for the government dollar. Not only will those funds already given be used up by such improper means, but also it is certain that it will not be long before donors understand that their donations are merely being used to subsidize government programs, and citizens will cease to give their money, and also their time, to hospitals. The NAHD believes that, if polled, the Congress would be vir- tually unanimous in its belief that private philanthropy to hospitals and the voluntary support that it engenders is a great strength of the not-for-profit health care system.in the United States. During 1978, americans give $5.4 billion to hospitals and health causes. Moreover, millions of M~ericans donated their time and efforts to volunteering in a number of capacities for not-for-profit hospitals. Donations during 1978 aided hospitals in providing better service to their communities and assisted in replacing worn out equipment. Historical cost depreciation is woefully inadequate to provide the necessary funds for such needed replacement items. PAGENO="1125" 1117 For example, at my own hospital, Children's Medical Center in Dayton, we were able to purchase a Cavitron Inf ant Transport System. This critically important piece of equipment allows us to transport new borns in distress from the hospital where they are delivered to our special infant care nursery. This $14,000 system was purchased solely with gift dollars. Again, at my own hospital, without philanthropic support we would not have been able to replace an important piece of equipment for our laboratory that was beyond further repair. This was a blood gas apparatus, the cost of which was $17,000. Donations allowed hospitals during 1978 to engage in medical research to preserve and enhance the quality of human life. Donations of time during 1978 allowed hospitals to improve the quality of health care, to improve the comforts of the sick and their families, and to provide hospitals with excellent managerial guidance from community leaders. Indeed, the spirit of voluntary giving, the willingness of ~mericans to donate their time ana money to not-for-profit hospitals may be the best cost containment measure yet conceived. The voluntary work and gift dollars make the patient's dollar, and the federal dollar go further. It is an indication of the greatest strength in our health care system and indeed in our entire country. And, we must preserve it. PAGENO="1126" 1118 H.R.2445 provides a low cost means of sending a message to the American public that the Congress agrees that the spirit and good work of philanthropy in the health care field must be preserved. Certain measures currently exist in federal and state law which needlessly impede the task of hospitals carrying on successful fundraising activities. H.R.2445 would eliminate some of the most short-sighted of these measures in current law and would prevent future measures of this sort from being promulgated. The NAHD strongly supports the statement of policy contained in new section 1132(a). The statement of policy, we believe, will establish a framework pursuant to which all federal administrative agencies will be required to adopt regulations. Under such a policy, for example, the Secretary of HEW could not promulgate regulations which would substitute philanthropic funds for federal reimbursement dollars, which should be paid to hospitals for costs incurred and properly reimbursed under federal law. While the NAHD strongly supports this provision, we believe that its intent could be clarified and materially strengthened by adding the following language at the end of section 1132 (a): "Except as specifically provided in this Act, (referring in this context to the Social Security Act), nothing in the Act PAGENO="1127" 1119 shall be construed so as to discourage philanthropic support or otherwise hinder the use of such support for purposes determined by the donors and the hospitals to be in the best interests of the patients served." The NAHD believes that the addition of such language would both clarify and strengthen t~he intent of the bill by placing a specific statement in the Social Security Act that would result in the drafters of regulations being required to consider the effect of such regulations on philanthropy before promulgating them. If such regulations, would have the effect of hindering philanthropic support to hospitals, they would be prohibited. The NAHD also strongly supports the new section 1132(b), as proposed in the bill. This new provision would have the effect of rendering a nullity two provisions of current Medicare regulations which accomplish no reasonable purpose, serve as a trap for the unwary, and have the effect of discouraging charity. Under 42 C.F.R. §405.423(a) of current Medicare regulations, costs incurred by a hospital that are otherwise reimbursable are reduced by gifts designated for operating purposes. It is the~ NAHD' s experience that virtually every donor that is aware of this provision will not designate his or her gift for operating purposes. Thus, the provision merely stands PAGENO="1128" 112O~ as an unfair trap for the unwary donor who is not familiar with this policy. Moreover, purely as a theoretical matter, NAHD can see no reason why, once governr~ent has committed itself to paying the reasonable costs of providing care for Medicare beneficiaries, that charitable donations should be used to reduce this commitment. Charitable donations are virtually the only source of discretionary funds available to not-for-profit hospitals, and short-sighted regulations should not be allowed to diminish these funds. Proposed section 1132(b) would also eliminate the unnecessary provision currently contained in 42 C.F.R. ~4O5.4l9(b) (2) (iii) of Medicare regulations. Under this provision, necessary interest expenses incurred by hospitals must be offset by investment income from gifts and grants except where such income is not "commingled" with other funds. While the policy espoused by the provision is not objectionable, it, too, can be administered as a trap for the unwary. The term "commingled" is not defined in the regulation; while the term has frequently been interpreted as requiring separation only on the books and records of the hospital, literally read it requires a physical separation of funds. Thus, under such an interpretation, for example, if a hospital had $7,000 investment income from gifts and grants and $3,000 from other sources, it could not acquire a $10,000 certificate of deposit because this would be "comming- ling." Such an interpretation is impractical and needlessly reduces the flexibility of a hospital's use of its own funds. While an interpretation of these regulations as requiring physical separation appears to be the minority view, we have been told by some of our hospitals that this provision has been PAGENO="1129" 1121 literally interpreted by some intermediaries and Medicare auditors as requiring physical separation of funds. The NAHD can perceive of no valid reason for offsetting necessary interest expense with income from gifts or grants in any case. Since hospitals are otherwise required by various federal and state laws, including the Social Security Act itself, to maintain books and records which adequately identify the source of these funds, proposed section 1132(b) eliminates this needless and unclear commingling requirement. The NAHD also emphatically supports new sections 1132(c) and (d) contained in the bill. These sections would preclude the inclusion in both federal and state cost containment laws, or the like, of provisions which seek to reduce reimbursable costs by controlling philanthropic giving or offsetting such giving against costs or revenues otherwise allowable. Under provisions that are in existence or have been proposed in some states, charitable donations to hospitals could be used to reduce allowable revenues. As I said earlier, under such provisions, it would not be long before donors learn that their donations were merely being used to subsidize govern- ment programs and begin channeling their donations to other worthy charities. The NAHD decries the short-sightedness of these types of provisions, which would seek to obtain short-run savings at the cost of what ultimately could be the long range destruction of hospital voluntarism in the United States. PAGENO="1130" 1122 Proposed sections 1132(c) and (d) would eliminate this potential. H.R.2445 is a breath of fresh air for the hospital field. Without the need for another massive bureacracy imposing a further burden of controversial regulation, and without any material cost, it adds needed strength to the philanthropic programs of voluntary not-for-profit hospitals. We respectfully support HR.2445 and ask that this Subcommittee approve it. Mr. WAXMAN. Thank you very much. I certainly do not want to affect adversely philanthropy to hospi- tals. I am trying to understand why we would change what has been the status quo under medicare and medicaid for reimburse- ments when I have heard no evidence that the policy we have had since those two programs were enacted has diminished philanthro- py by having an offset. Can you give me any evidence to indicate we have had a bad experience and that philanthropy has in fact been discouraged? Mrs. ERICKSON. In my own hospital I would reply on that basis and all of my gifts are restricted basically and do not get involved in the reimbursement programs. In my hospital that has not been a problem but there have been hospitals that my colleagues have spoken to me about where this has become a problem if those contributed dollars have had to be a part of the reimbursement program. Therefore it does affect the payback. Mr. Schaner is here to respond on a brOader basis. Mr. WAXMAN. I understood the potential problem of the hospital cost-containment bill not having that provision in it and so we put that provision in our committee's bill. I was wondering why we would want to change the status quo on reimbursement under medicare and medicaid because I really have not heard any evidence from any hospitals that there is a problem where philanthropy is being discouraged by that offset. Mr. SCHANER. Congressman, as Mrs. Erickson has said in her testimony there are two provisions in terms of the medicare regula- tions to take care of what we consider to be technical defects in the regulations that do discourage charity, the comingling problem and the offset of gifts designated for operating purposes. We believe these are problems. It is difficult to find out how much charity they discourage. We believe they do. Mr. WAXMAN. If they do discourage charity then they have not discouraged charity since 1965. Mr. SCHANER. You are correct that Americans have been quite generous in giving more and more to hospitals but nevertheless you cannot tell how much more they would have given had these provisions not been in. PAGENO="1131" 1123 Mr. WAXMAN. Suppose that we end up adopting this provision so that we have the taxpayers not take that offset and so that we pay more through the medicare and medicaid programs. What if we then find there is no increase in charity at all. All that will remain in effect is the taxpayers will pay a little bit more money. Mr. SCHANER. That may be correct. We believe the donor was giving for a purpose that was not to subsidize the Government program and if that is the case we believe it is a correct result. We are seeing the beginning of a trend where hospital cost containment on a Federal and State level is becoming a popular issue and probably for a good reason. We are concerned that the type of provision that is in the Maryland program which is being used as a model around the country may be used. The Maryland program has an offset and it does have the effect we fear. Mrs. ERICKSON. The National Association for Hospital Develop- ment has 1,080 members. When I joined it 8 years ago it had perhaps 200 members. The hospital development field, that is pro- fessional executives working for the fund raising activities of their hospital has really become a larger industry in the past 6 years. Most of us are in the habit of educating our donors and working with our donors and making sure the large gifts and the gifts we get in support of our hospitals, in other words they would not have affected the program at this point because we are working on an one to one basis with a lot of our donors or in programs or asking for moneys to be restricted to a certain issue so they would not go into the offset. When a hospital is having problems making its payments to its vendors and I am sure they would want the moneys to go into operating and it still would not be a problem because that charity then would have been helpful to the hospital. If it has to be used in an offset for reimbursement programs I think it could be a very serious problem for hospitals. Mr. WAXMAN. Thank you very much. I appreciate your testimo- ny. Mr. CARTER. I want to compliment you on your testimony. As you know I support this legislation and the amendment which you mentioned also. Thank you. Mrs. ERICKSON. Thank you, Dr. Carter and Mr. Chairman. Mr. WAXMAN. Thank you. That concludes our meeting. The sub- * committee is adjourned. [The following statements were submitted for the record:] PAGENO="1132" 1124 AAIMC SA1EMENI OF 1l~ ATERICAN ASSOCIATION OF FOTJNDATIC~S FOR MEDICAL CARE FOR ThE SUBC(X~ITIEE CN HEALTh AND ThE ENVIRCgMENI, OCtOBER 16, 19, 22, 1979 The ?~nerican Association of Foundations for Medical Care (AAF7~t~) supports the provision in HR. 4444 which would amend the provisions of the Medicare law to make Hbfls of all types more attractive and beneficial to Medicare patients, and we agree with the general rationale of the Administration in supporting the change. There are, however, certain relatively minor changes which we believe should be made in the provision. First, we believe that BiiJs should continue to have the option of receiving reimbursanent on the basis of reasonable costs incurred or under the risk provision. Virtually no Independent Practice Association (IRA) type H~Ds -- the kind our Association represents -- now enrolls Medicare patients. We hope that many will in the future, since it is scmehow not right for the federally supported HI~t) program not to produce organiza- tions which will serve patients insured under the public systan. However, given the lack of experience in insuring Medicare patients, we can visualize situations in which an IRA/Ify~ might want to gain a few years experience on a cost basis before moving to a risk basis. We urge the Ccxrrnittee to amend the provision as we suggest. Second, we agree wholeheartedly with the Administration's position that the difference between what the H~1D would receive in payment and 957~ of the cost under the outside systan should be made available to beneficiaries. However, we do not agree that H~Ds should follow govermoent rules in deciding what form the value of that difference should take. We believe that the individual IPID is in the right position to decide whether the savings should be provided in the form of increased benefits (such as drugs or preventive care) or reduction or elimination of deductibles and coinsurance. Sane HMOs may respond one way, others another, but this will maximize the choices made available to beneficiaries and will be more responsive to their perceived needs. We appreciate this oportunity to make our views knoc~n to the Subcaunittee on this important subj ect. PAGENO="1133" 1125 ~ ~ AMERICAN ASSOCIATION OF PROFESSIONAL STANDARDS REVIEW ORGANIZATIONS 11325 SEVEN LOCKS ROAD SUITE 214 POTOMAC, MARYLAND 20854 301/983-0404 H.~ySW.k~M.D. STATEMENT OF THE AMERICAN ASSOCIATION OF PROFESSIONAL STANDAROS Ch~O,,W.RVi~i~ REVIEW ORGANIZATIONS FOR THE SUBCOMMITTEE ON HEALTH AND THE ~ ENVIRONMENT, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, NOVEMBER 7, 1979. ~ The American Association of Professional Standards Review M~,EI~d, Organizations appreciates the opportunity to present a statement of our position on the question of confidentiality of information on individual patients and physicians held or developed by PSROs. JDhD8~s~MD. In following the Congressional mandate to assure appropriate use and quality of health care services furnished to Medicare and DIRECTORS Medicaid patients, PSRO5 must collect extremely sensitive information about the health status of patients and about health care services N~*YDkN,*VDk furnished to them. These data are then analyzed in a variety of ways to determine whether any single provider is misutilizing services or providing unacceptable quality of care or particular patients are receiving inappropriate amounts or kinds of health care services. When the data analyzed so indicates, the PSRO takes action to see JDDPSO.~kD.M.D. that the problem is corrected, or failing correction, imposes sanctions on the provider. Three examples of how this works may be helpful. In New York, based on a complete analysis of the data collected on patient care J1DDiDSDSTDk.~MD furnished in a particular hospital, serious quality of care problems S~IRL.k.Ciy,U.h were identified. The hospital was unwilling or unable to correct ~ those problems and was ultimately closed down. This closure occurred L~DS,RDDNDRhC.~DS~ as a direct result of PSRO review of the data on patient care furnished in that hospital. DD~9IDW~OhDft.M.O: In California, a PSRO found that one of the neurosurgeons in its area was performing surgery even though there were insufficient indications for that surgery The PSRO has prepared a sanction report, under the procedure set out in Section 1160 of the Social K,~,thP,R.M.D. Security Act, which will be sent soon to the Secretary of HEW through the Statewide Professional Standards Review Council recommending VDSp,~kDtth~HD~ that this physician no longer be able to receive reimbursement under Medicare, Medicaid, or the Maternal and Child Health and Crippled Children Program. In another PSRO, analysis of the data and review of selected cases revealed that seven physicians were admitting patients to hospitals when appropriate services could have been provided at a lesser level of care. These physicians have been placed on pre-admission PAGENO="1134" 1126 Statement of the American Association of Professional Standards Review Organizations for the Subcommittee on Health and the Environment, Committee on Interstate and Foreign Coeuiierce, November 7, 1979. Page 2 certification; that is, they cannot admit any non-emergency patient to the hospital unless the patient has already been certified by the PSRO as requiring hospital care. In addition, a physician consultant, specified by the PSRO, must examine all cases of proposed non-elective surgery with the physician before the patient can be admitted for surgery. PSRO5, therefore, are using the information they collect to carry out the Congressional mandate. The ability of PSROs to carry out these sorts of analyses and reviews, as well as its continuing efforts to improve the quality of care generally through continuing education of physicians and the conduct of medical care evaluation studies, has been put in serious jeopardy by a decision in Federal district court in the District of Columbia in April, 1978. That decision held that for purposes of the Freedom of Information Act the PSRO is an agency of the federal government and subject to the requirements for disclosure if no appropriate exemptions from that Act are found. In addition, the court indicated that exemption 3 of the FOl Act, which exempts an agency from disclosing data where statute specifically requires non-disclosure, was not epplicable. Our position is quite simple - we believe that the Congress, in setting forth specific provisions for confidentiality of PSRO held data in the statute (section 1166 of the Social Security Act), clearly intended those provisions to govern the release of such data and not the FOl Act. The court arrived at the decision on the basis that a PSRO is an agency of the Federal government -- a conclusion with which we vehemently disagree. In its opinion, incidentally, the court seemed to suggest that while it had to conclude as it did, the problems with that policy were recognized and Congressional correction of the problem was invited. We urge the Committee in the strongest possible terms to make clear that PSRO's data should be made public only under regulations issued under the provisions in the Social Security Act. This procedure, with more than adequate opportunity for public comment and discussion, will yield uniform policies balancing the public's right to know with the need for individual privacy. If the present court decision stands, the result will be that individual courts around the country will make decisions about what information will be made public in a non-uniform, sporadic manner. PAGENO="1135" 1127 Statement of the American Association of Professional Standards Review Organizations for the Subcommittee on Health and the Environment, Committee on Interstate and Foreign Commerce, November 7, 1979. Page3 Frankly, Mr. Chairman, many physicians who are active in PSROs, leading effective movements for improvement in the quality of patient care, will have to give up participation if the data which they use can be printed in the local newspaper without medical analysis or review. As one of our members put it to me, "I thought we were to perform a good peer review process, not a newspaper review process". Those who assert that physicians will not leave the PSRO program are uninformed and acting irresponsibly. At our Association's Annual Meeting on October 5, 1979, with physicians attending from nearly all the PSROs in the United States, the Association resolved to seek immediate remedies to the PSROs compromised position as a result of the recent court decision. The physicians were unanimous that if this breach of confidentiality protection is not resolved, it will effectively halt objective pro- fessional peer review. Clearly, there are data which the PSRO5 should make public. For example, the sanction report on the neurosurgeon being prepared by the PSRO mentioned earlier should be made public by HEW. But, if the PSRO had been forced to release all the data on this physician before it was analyzed and reviewed with the physician, PSRO action to recommend sanction would have been delayed or stopped altogether, as well as raised serious questions about fair process with respect to the physician involved. Our members feel so strongly about this case that to let it stand could very well destroy the program - an opinion shared by HEW, which also actively supports the change we seek. We appreciate this opportunity to make our views known to the Subcommittee on this important subject. PAGENO="1136" 1128 STATEI'ENT OF THE AMERICAN HEALTH CARE ASSOCIATION PRESENTED BEFORE THE SUBCOMMITTEE ON HEALTH AND THE ENVIRONMENT COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE October, 1979 Mr. Chairman and Members of the Subcommittee: The American Health Care Association, the nation's largest trade association of licensed providers of long term care with a membership of over 7,000 facilities, is pleased to submit its comments on health care legislation being considered by the Subcoir~ittee on Health. We will limit our remarks to those issues of particular significance to the long term care industry, which have previously been approved by the House Ways and Means Subcommittee on Health and the Senate Finance Committee. PAGENO="1137" 1129 Authority of HEW to Impose Intermediate Sanctions AHCA supports the Ways and Means Health Subcommittee intermediate sanctions provision in preference to. the provision adopted by the Senate Finance Committee in H.R. 93k, but would limit Federal sanctions only to Title XVIII certified facilities. Under these provisions, the Secretary of HEW could impose sanctions against nursing homes which are in violation of Federal standards. The Ways and Means provision would authorize the Secretary of HEW to deny reimbursement for up to atwelve month period for services furnished by a skilled nursing facility (SNF) to Medicare and Medicaid beneficiaries, admitted after a date set by the Secretary, until such time as a facility corrects its deficiencies. Benefits would continue to be paid on behalf of beneficiaries admitted to the facility prior to the designated date. The Secretary would be required to provide a hearing for the facility prior to imposition of the sanction. The Senate Finance proposal would permit the Secretary to reduce overall per diem reimbursement (in effect impose a fine) or restrict the number or kinds of patients admitted to a SNF or Intermediate Care Facilitjy (ICF), until deficiencies are corrected. The Secretary would be required to hold a hearing within 30 days after imposttion of the sanction. AHCA concurs that there is a need for an intermediate sanction authority for HEW with respect to Medicare certified facilities. However, with respect to Medicaid, a matching Federal and State program, primary responsibility for assuring compliance with conditions of participation should reside in the state licensing and inspection agency, not HEW. Many states have implemented intermediate sanctions provisions in their licensure laws, laws which must comply with HEW conditions of participation. An additional Federal intrusion would weaken a state's authority to manage its Medicaid program, which runs counter to the proposed amendment to Section 2~49 in the Senate Finance proposals. 56-071 0 - 80 - 72 PAGENO="1138" 1130 AHCA maintains that the-hearing and- -sanction-procedures adopted by the Ways and Means Subcommittee are inherently more fair to medical assistance recipients and providers, and easier to administer, than the Senate Finance provision. By permitting a hearing before imposing a sanction, the Ways and Means version assures due process for providers and `facility residents alike, and prevents unwarranted confiscation of provider property. Moreover, the Ways and Means Committee sanction would not penalize residents as night the overall reduction in reimbursement proposed by the Senate Finance Committee. In the former, the facility would continue to receive direct reimburse- ment for the medical assistance recipients it served prior to imposition of the sanction and the facility would be obligated to maintain services at a level commensurate with those prior to imposition of the sanction. In the latter case, the overall reduction of reimbursement for costs already incurred might so impair the economic viability of a facility as' to bring about unavoidable - reduction im the quality of care delivered. With- respect to HEW's authority to administer intermediate sanctions, the Ways and Means version would not conflict with Section l39F(b) of Title ~42 of the United States Code, which requires that the amount of reimbursement paid to any provider of services under the Medicare Act will be the lesser of the reasonable cost of the services provided, or the customary charges for such services~ nor would it contradict Section 2149, which requires the standard of reimbursement under the Medicaid program to be "reasonably cost-related". The Senate Finance Sanction which would further reduce reimbursement below these standards, creating a fundamental conflict between the sanctions authority and the-statutory requirements relating to standards of reimbursement. In addition, the relative- simplicity of the Ways and Means sanction would appear to be easier to administer and less subject to legal challenge than the Senate version. 2. Authority of HEW to Impose Civil Fines The Ways and Means Subcommittee adopted a provision that the Secretary have the authority to impose a civil fine up to $2,000 for each fraudulent Medicare or Medicaid claim, plus an additional fine of twice the amount of the claim. Adversely affected providers could seek redress in the Court of Appeals following an administrative hearing, but such proceedings would be restricted to those introduced in the prior administrative hearing. Reportedly, HEW is seeking this sanction because the Department of Justice has been dilatory in prosecuting cases of privider fraud. PAGENO="1139" 1131 AECA opposes this provision because it is extessive and unnecessary. The anti-fraud and abuse measures passed by the 9.5thCongress and ~he efforts.ofthe HEW Inspector General.are only now beginning to take effect. The sustained effort of the new HEW Inspector. General's Office and the anti-fraud and abuse units created in each state should curb provider wrongdoing. The civil fine authority created by this act would create a drastic penalty provision in the law which would not be protected by full due process such as jury trial and unrestricted evidentiary inquiry. AHCA does not believe that the rights of providers should be cast aside so that HEW can supplant the Department of Justice in anti- fraud enforcement. 3. Hospital "Swing Beds" for Long Term Care Patients AHCA has supported limited application of the "swing beds" concept in small rural hospitals in areas which do not have sufficient long term care beds to satisfy the need for such services. The swing bed provision recently adopted by the Ways and Means Health Subcommittee exceeds the liberal provision adopted by the House last year, which would have permitted hospitals with a daily occupancy rate of under 60%, Certificate of Need authority, and meeting requirements applicable to SNFs~to convert acute care beds to lopg term care use and back again. The new Ways and Means Subcommittee's provision, reportedly advocate~d by HEW, would eliminate any reference to occupancy as long as the hospital has an agreement with the Secretary of HEW to convert swing beds or, absent an agreemeflt with HEW, a daily occupancy level of 80% or less. Moreover, it would limit the SNF conditions of participation required of the hospital to (1) social service functions; (2) a qualified social worker; and (3) discharge planning. AHCA opposes the Ways and Means Subcommittee provision because it will: . 1. Limit rights and services available to long term care patients in swing beds in comparison with residents in free-standing long term care facilities. 2. Create unfair competitive advantages for hospitals. 3. Lead to higher utiliza~ton and program costs in Medicare and Medicaid. PAGENO="1140" 1132 0 Currently, hospitals are not obligated to comply with the following conditions of participation required of SNFs: - Patient's rights requirements - Services rehabilitation services patient dining rooms patient activity programs and activity rooms - Staffing nurses trained in rehabilitation staff training related to care for the aged All of the above are conducive to the ~onvalOscence and quality of life of long term residents.. The patient! resident in a swing bed is not acutely ill. He should not spend his day in bed. He does not need the constant vigilance of the nursing and medical staff. The long term care patient occupying a swing bed needs rehabilitation, activity, and social interchange. We believe that exempting hospitals from having congregate patient dining and a -comprehensive activity and recreation program would be a disservice to swing bed patients. If a hospital is to become, in part, a long term care facility, it should meet all standards that have been developed for these facilities. Moreover, most hospitals that have deemed status under JCAH are not subjected to state health and life safety inspections. Apart from an audit required by HEW, which is limited to a handful of facilities annually, deemed status facilities are exempt from government inspectors for all deficiencies. We do not believe that the JCAH hospitals surveys would be the equivalent to the rigorous series of surveys conducted in licensed long term care facilities. Failing to require similar conditions of participation of hospitals Will not only deprive patients in swing beds, but will give hospitals an unfair competitive advantage over free-standing long term care facilities. This imbalance is particularly acute in those hospitals which have relatively high occupancy levels (in the 7O-8O7~ range) which will be able to care for long term care patients with little additional costs to themselves, since they will riot have to provide additional specialized staff under the liberal terms of the Ways and i4eans Subcommittee provision. PAGENO="1141" 1133 Moreover, the influence of urban~ hospitals gives them significant advantages over the protests of SNFs and ICFs when the former seek approval for swing beds through Certificate of Need. 0 The liberalized conditions and political realities described above will lead to many hospitals seeking and receiving Certificate of Need for swing beds. Many hospital administrators will use this authority to retain patients in the hospital once medical review or PSRO has downgraded their level of care to skilled or intermediate care. Higher occupancy hospitals whose costs for maintaining a swing bed population are marginal, will reap a windfall in swing bed revenues, Ultimately, these pressures will lead to overutilization and increased Medicare and Medicaid program costs. AHCA would seek limitation of swing bed authority to rural hospi~.tals at reasonable occupancy levels. t. Authority of HEW to Determine Appropriate Life Safety Code Requirenents - AHCA does not believe the Secretary of HEW should have statutory authority to specify the applicable edition of the Life Safety Code as adopted by the House Ways and Means Subcommittee. We believe that decision should remain with the Congress. A change in the applicable edition of the Life Safety Code raises several important policy considerations. First, the measurable protection of patients' lives and safety to be gained from such a change must be evaluated. Second, consideration must be given to the ultimate cost of any benefits to be derived and whether funds are to be authorized to compensate for the costs of compliance. Third, the technical and professional sophistication, or lack thereof, of surveyors and others to use concurrently separate editions of the Life Safety Code must be determined. Answers to these questions require a broad perspective. Experience has demonstrated that Congress has that perspective and can act responsibly in this area in answering these relevant considerations. Moreover, Congress is more sensitive to the need for assuring that facilities in compliance with earlier editions of the Code, with any acceptable waivers, do not lose certification status due to any changes in a new edition of the Code because it must deal with the cost considerations. PAGENO="1142" 1134 It is. also our view that any facility found in compliance with earlier editions of the Code with acceptable waivers should not be required to meet any new edition of the Code or requirement of that Code, unless the new requirement has been demonstrated to be absolutely necessary for the protection of the resident's life and safety, and that judgrnenttoo, should be left to Congress forthe reasons set forth above. 5. Dual Participation in Titles XVIII and XIX AHCA applauds the action taken by both the House Ways and Means Subcommittee and Senate Finance Committee in rejecting HEW's proposal to mandate nursing home participation in Titles XVIII and XIX, for facilities enrolled in one or the other, and requiring instead a study to examine problems impeding dual participation. 6. Judicial Review of Medicare Reimbursement AHCA supports the provision adopted by the House Ways and Means Subcommittee on Health which would authorize the Provider Reimbursement Review Board (PRRB) to make a preliminary deternination whether or not it has jurisdiction over a provider's challenge to a Medicare reimbursement decisionand if it determines that it does not have jurisdiction, the provider's challenge will have standing in Federal District Court. This measure would streamline the workings of the PRRB, allowing the Board to quickly determine those challenges over which it has jurisdiction and those over which it does not. The latter would be cleared for filing in District Court by the affected provider, without undergoing long procedural delays, which now sometimes exceed two years. 7. Medicaid Reimbursement for Long Term Care Services The Senate Finance Committee has approved a proposal which would modify Section 2~49 of Public Law 92-603 which requires that Medicaid payments to nursing hones be established on a reasonable cost-related basis. AHCA agrees with the proponents of the proposal who argue that the complex and long-delayed Federal regulations implementing PAGENO="1143" 1135 Section 2149 have unduly restrained state's adninistrative and fiscal discretion and that the Federal approval process has forced states to rely heavily on Medicare principles of reimbursement. These consequences have been a significant burden on long tern care providers On the other hand, it must be acknowledged that the fund- anental requirements of Section 2149 have led to nore rational state reinbursenent systens that more reasonably reflect the costs necessary to provide quality nursing home services. AHCA believes that any change in Section 2149 must be directed at removing the restrictive HEW role and providing a sufficient framework to assure that long term care providers are properly reimbursed and services are made available to the beneficiaries requiring then. The Finance Committee's proposal is a positive step in correcting existing deficiencies.~ We believe it establishes a proper balance between Federal and state responsibilities and shifts the emphasis from cost-finding procedures to assurances of quality of care. We can support the concept of state flexibility in developing reimbursement rates but only if the resultant rates meet appropriate tests and protections against arbitrarily low payment rates are provided. The Senate Finance Committee proposal requires that payments to nursing homes be determined in accordance with methods and standards developed by the States. Further, in establishing rates, States must meet specific standards. They must find and assure that the rates are reasonable and adequate (a) to meet the costs which must be incurred by facilities which are efficiently and economically operated in order to provide care and services in conformity with applicable State and Federal laws and regulations, and (b) to assure the reasonable availability of long term care services so that eligible persons can receive such services. These standards focus on meeting the needs of the elderly population - rates which assure sufficient availability of services and services which meet Federal and state requirements. Under current Section 249 requirements the focus is on the methods and standards which States are to use in developing payment systems. In implementing this current statutory requirement, HEW has issued detailed and complex regulations for determining whether a State's methods and standards satisfy ~he "reasonable cost-related reimbursement" requirement. This review of States' methodologies has proven to be cumbersome and overly inhibitive of State's flexibility in establishing PAGENO="1144" 1136 payment rates to nursing homes. As a result, much of the dissatisfaction with the Department surrounds its overly restrictive review of the State's methods and standards; Under the Finance Committee proposal, HEW would not be precluded from determining whether States satisfy the requirement that rates are adequate to (a) meet the costs of economically operated facilities, and (b) assure the reasonable availability of long tern care services. HEW would not be responsible for reviewing States' methods and standards in establishing rates. That is,. the Department would be concerned with the outcomes and results of the rates rather than the methodologies used to extablish them. HEW would continue to have the authority (Section 1902(a)(30))amd responsibility to take appropriate action against those States which failed to satisfy the statutory standards set forth in the proposed amendment. 8. Transfer of Assets to Became Hedicaid Eligable AHCA supports the Senate Finance Committee's provision that would allow states to deny Medicaid eligibility for individuals who divest themselves of assets by giving them away or selling then for less than fair market value, in order to establish Medicaid eligibility. AHCA maintains that the duration of the penalty should be related to the amount of the funds divested, i.e. to the costs which would be bo~rne by the taxpayer if Medicaid eligibility were granted. In place of the 12 month limit adopted by the Senate Finance Committee, we favor a graduated aenalty similar to that contained in the Ways and Means Committee Report on H.R. 49O~, the Social Welfare Reform Amendments of 1979 (See pg. 160 of the Report) PAGENO="1145" 1137 STATEMENT of American Chiropractic Association 2200 Grand Avenue Des Moines, Iowa 50312 and International Chiropractors Association 1901 L Street, N.W. Washington, D.C. 20036 submitted to the Subcommittee on Health and Environment Committee on Interstate and. Foreign Commerce U.S. House of Representatives on Proposals ix Amend Medicare and Medicaid October 30, 1979 * *.* * * *~* * * * * * * * The nation's two national chiropractic associations, the American Chiropractic Association and the International Chiro- practors Association, appreciate the opportunity to submit a statement for the hearing record, in connection with the Subcom- mittee's hearings on Medicare and Medicaid amendments. The principal amendments to Medicare which are of interest to the chiropractic profession and its patients at this time appear in H.R. 1644 (sponsored and co-sponsored by 182 members PAGENO="1146" 1138 of the House of Representatives), and in Section 20 of H.R 3990, was favorably reported, as amended, by the House Ways and Means Committee on October 30, 1979. H.R. 1644 would provide for the following changes in th~ current Medicare law: 1. elimination of the mandatory requirement that each Medicare beneficiary must undergo an x-ray in order to be reimbursed for chiropractic health care, regardless of the need for or wisdom of such K-ray, and 2. reimbursement to the Medicare beneficiary for such x-rays as are taken and for physical examination and routine laboratory tests. On September 20, 1979 the Subcommittee on Health of the House Committee on Ways ~and ~Means unanimously adopted and reported an amendment by Congressman Corman which would eliminate the mandatory x-ray requirement and make reimbursement to the bene- ficiaries. Today, October 30, 1979, the full House Committee on Ways and Means concurred and adopted its Subcommittee's recommendation. The two chiropractic associations submitting this state- ment have not heretofore appeared before this Subcommittee on this subject because of our understanding that this Subcommittee had ceded jurisdiction to the Ways and Means Committee over H.R. 3990. However, in view of derogatory testimony presented to the Subcommittee on October 22, 1979 by the American Medical Associa- tion, we believe that this present statement is necessary for the record. The AMA supported Sections 105 and 203 of H.R. 4475, PAGENO="1147" 1139 the Administration's bill, which would eliminate chiropractic services from Medicare and medicaid, and relied on a June 27, 1979 statement from HEW to that effect. AMA has concealed from this Committee that the Administra- tion itself has since, repudiated both its proposal and HEW'S June 27, 1979 testimony, and that the Congress has in varIous ways also repudiated that proposal. specifically, the facts are as follows: Congressional Rejection of AMA's Proposal 1. The Administration's proposal to eliminate chiropractic from Medicare and medicaid appeared in the President's Budget Message of January 1979. Despite the fact that this proposal was camouflaged as a means of saving money, the Congressional Budget Resolution rejected the proposal by refusing to consider it as a valid or desirable one. 2. The House Ways and Means Committee, in approving S20 of H.R. 3990, as amended, likewise rejected the proposal and went in exactly the opposite direction by expanding the chiropractic benefits available under Medicare. 3. In introducing his proposed national health insurance bill, H.R. 5191, the distinguished chairman of this `Subcommittee like- wise rejected the proposal by proposing that no change be made in the current Medicare provisions applicable to chiropractic. Administration's Rejection of Proposal Although the Budget Message made the "gutting" proposal on which HEW testified on June 27, 1979, as quoted by the AMA, PAGENO="1148" 1140 that anti-chiropractic position has since been repudiated by the President himself. In his proposed national health plan, H.R. 5400, introduced in september 1979, the President specifically included chiropractic health services. (This was four months after the HEW testimony referred to by the AMA.) Section 1801(a) (10) authorized "chiropractors services", although under circumstances which the chiropractic profession and its patients regard as totally unacceptable. (More on that at another and more appropriate occasion.) For the present purpose, however, it is clear that the Administration has repudiated its earlier anti-chiropractic posture which AMA mistakenly quotes as still relevant. The fact is that the President himself, in H.R. 5400, has repudiated the position which AMA quotes in its testimony. The Administration's present program accepts chiropractic as a valid form of health care and abandons its prior proposal to eliminate chiropractic. There may also be a question whether AMA's testimony before this subcommittee correctly reflects its present or developing posture relevant to chiropractic. We two chiropractic associations have been meeting with the AMA, for the first time, to discuss matters of mutual concern, and further future discussions are planned. In addition, the AMA has unilaterally repudiated its prior position which forbade medical doctors to refer cases to and accept referrals from chiropractic doctors. Chiropractic as a Valid Health-Care Service Up to this point, we have dealt with the now repudiated position on which the AMA's testimony relied. But much more PAGENO="1149" 1141 important is the fact that chiropractic is a valid health-care service for the American people. Health-wise - Chiropractic is 9ood health care Chiropractic ~5 officially licensed by all 50 States and is recognized by the Federal government in a wide variety of programs such as Medicare and medicaid, vocational rehabilitation, Federal employee workers' compensation, Federal employee health benefits, Internal Revenue Code as a "medical" deduction, Civil Service law as justification for employee illness, G. I. Bill of Rights for chiropractic colleges. o Chiropractic is officially recognized by the U.S. Office of Education foraccreditatlonof chiropractic colleges (just~as medicine and law, for example). o In the present Congress 209 Senators and Congressmen have co-sponsored a bill for an expansion of reimbursement for chiro- practic benefits, as a cost-saving and health-service measure. o Chiropractic is included in the private health insurance policies of virtually all major commercial health insurance companies. 0 Major~ntarnatioflal., national and local unions include chiro- practic in their health and welfare plans. Inflation - Chiropractic health care is anti-inflationary This committee has dealt. long and carefully with the inflationary aspects of medical and health care. In this regard, it is important to recognize the anti-inflationary role which chiropractic health care can perform: PAGENO="1150" 1142 O Chiropractic is an out-patient method of treatment. Therefore, it saves the cost of hospitalization, which is the bipgest expense in Medicare and medicaid and relieves the pressure on the ever-soaring costs of hospitalization. O Chiropractic has been shown by studies of workers' compensa- tion to save costs in accomplishing desired results. o Chiropractic keeps people more productive and off welfare rolls by keeping patients ambulatory and getting workers back on the job sooner. o Elimination of chiropractic services will not eliminate the illness. Instead it forces patients to go to higher-cost health-care providers. The American Chiropractic Association and the International Chiropractors Association appreciate the opportunity to set the record straight. We respectfully suggest that the AMA's testimony before this Subcommittee on chiropractic is contrary to the best interests of the American people and that it conceals the fact that an earlier Administration position on which it relies has been repudiated by the President himself. We respectfully suggest to this Committee that it is in the public interest to protect the right of ailing Americans to choose chiropractic health care as a nationally recognized and accredited health serivce when it is appropriate to their needs. Chiropractic should be an accepted and independent standard health service in all present and future Federal health programs just as it now is in all 50 States and in Federal and State workers compensation programs. PAGENO="1151" 1143 For the Committee's information, we attach a Fact Sheet on Chiropractic which describes, among other things, the present programs sponsored by the Federal government which authorize chiro- practic participation. We respectfully request that this statement and its attachtt~ent be incorporated in the record of the Subcommittee's hearings on Medicare-medicaid amendments. PAGENO="1152" 1144 FACT SHEET ON CHIROPRACTIC This Fact Sheet `briefly, describes the position of chiro- practic in the health-care delivex~y system of the `United States. State ~icensing and Authorization a. All 50 States, plus the District of Columbia and Puerto Rico, license and officially, recognize chiropractic as a health profession.~ .. . b. All 50 States authorize chiropractic services as part of their workmen's compensation program. c. Over three-fifths of the states, representing some 70% of - the nation's population,' require inclusi9rl of chiropractic services under all commercial health and accident policies written in those states. d. The National Conference of Insurance Legislators adopted a model, bill' fox~ State health insurance programs, which defines "physiciafl to include doctor of chiropractic. ix. Federal Authorization' `abd' Recognition A. For all Americans - ` ` - a. Nedicare b. `Nedicaid c. Vocational rehabilitation program d. Under the Internal Revenue Code, chiropractic health care is a "medical~ deduction - B. Specifically for Federal employees a. in Federal employee health b!nefit programs, b. in Federal employee workrnen3 compen~:atiOn, c. in -leave approvals for-civil service excuse of illness. c. Chiropractic Education a. The U.S. Office of Education, HEW, of ficially recognized a chiropractic accrediting agency for chiropractic colleges. b. To obtain~.h- diploma-as a Doctor of chiropractic,~~a~.Caar didate must have two years of pre-professional college education and 4 years of resident instruction at a chiropractic college. c. In almost three-fifths of the States, candidates for a chiropractic license must qualify under the, same basic science exams as required for ND's. - PAGENO="1153" 1145 D. SpecifiCa1l)~ for Veterans GI Bill of Rights covers education in chiropractic college~ Research J~s a result of congressional action and funding of researc in chiropractic, the National Institute Ofl Neurological Disease and Stroke held a Workshopon `The Research Status of Spinal Manipulative Therapy," February 2-4, 1975, opene by Dr. Donald B. Tower, Director of MINDS, and directed by Dr. Murray Goldstein, Director, Extramural Programs and ~ssociate Director of MINDS. Papers were read by leading ND's, DO's, DC'S and Ph.D'S. F. Miscellaneous a. Under the immigration law, aliens are admitted as stud- ents in order to study in chiropractic colleges. b. The U.S. Public Health Service i. classifies doctors of chiropractic aisong "medical specialists and practitioners," and ii. includes DC's in its Health Manpower Source Book. III. Private Sector a. Virtually all major commercial health insurance carriers include chiropractic in their private policies. b Major industrial employers, such as General Motors, have included chiropractic in the health plan for all their own employees. c. Substantial numbers of major international, national and local unions include chiropractic in their own health and welfare plans (including the railroad and rubber unions, for example). March 28, 1979 56-071 0 - 80 - 73 PAGENO="1154" 1146 STATEMENT OF THE AMERICAN CLINICAL LABORATORY ASSOCIATION Introduction The American Clinical Laboratory Association (ACLA) is an organization of federally regulated, for-profit independent clinical laboratories that provide services to patients in every state in the country. ACLA submits this statement on Title II of H.R. 4894, the Clinical Laboratory Improvement Act of 1979. ACLA strongly opposes section 201 of H.R. 4894 in its entirety, and urges that it be dropped from the bill. With respect to certain other provisions of H.R. 4894, ACLA reconments changes which, if adopted, would improve the bill with its proposed amendments to the Social Security Act. ACLA's qualifications to comment on Title II of CLIA `79 stem from the fact that each of its members is certified pursuant to the Medicare Conditions for Coverage of Services of Independent Laboratories and has dealt with the Medi- care program for a number of years. Additionally, nearly all ACLA members participate in the Medicaid program. ACLA's recommendations with regard to Title II of H.R. 4894 are the following: Section 201(a): Commissions, Finder's Fees, Certain Rental or Lease Arrangements Section 201(a) of H.R. 4984 proposes to add a new Section 1132 to the Social Security Act which would place certain limita- tions on Medicare and Medicaid reimbursement for clinical labora- tory services. This proposal is flawed in its design, extremely ambiguous in its wording, and would prove to be unadministrable. At best, the proposal is redundant since the patterns of fraud and abuse at which it is aimed are already the target of H.R. 3, PAGENO="1155" 1147 the Medicare-Medicaid Anti-Fraud and Abuse Amendments of 1977, Pub. L. No. 95-142. In fact, this provision is likely to place an unnecessary damper on innovative and cost-saving arrangements for the provision of laboratory services. ACLA is strongly op- posed to this provision and urges that it be dropped from the bill. The proposed Section 1132 reads in full as follows: Sec. 1132. In determining the amount of any payment for a clinical laboratory service (other than such a service which is provided by a clinical laboratory which is located in a hospital and which provides services primarily in connection with the furnishing by the hospital of other inpatient or outpatient services) furnished under title XVIII, under a program established pursuant to title V, or under a State plan for medical assistance approved under title XIX, no reimbursement will be available for any element of the cost or charge for such service to the extent that such element is -- (1) a commission (other than a commission paid to an employee of a clinical laboratory in the course of its usual and customary business) or finder's fee, or (2) an amount payable for any facility (or part or activity thereof) under any rental or lease arrangement, which such amount (A) is unrelated or disproportionate to the market value of the facility (or part thereof), or (B) is, directly or indirectly, determined, wholly or in part, as a per centuin, fraction, or portion of the charge or cost attributed to the laboratory service. This language would generally deny Medicare/Medicaid reimburse- ment for clinical laboratory services, subject to certain excep- tions, to the extent that any part of the charge or cost of the services is: (1) a commission; (2) a finder's fee; or (3) an amount payable for a facility under a rental or lease arrangement where the amount is unrelated or disproportionate to the market value of the facility or is, directly or indirectly, determined, wholly or in part, as a per centum, fraction, or portion of the charge or cost of the laboratory services. PAGENO="1156" 1148 Stated simply, the prohibition is objectionable because it is overbroad in scope and is bound to create uncertainty as to what activity would trigger the ban. The language of subsection (2) is particularly confusing and objectionable. As applied to certain rental/lease arrangements, for example, denial of reim- bursement would be called for where an amount payable under such an arrangement "is unrelated or disproportionate to the mar- ket value of the facility (or part thereof)." Yet, such standards are so vague as to be clearly unworkable. For example, if a pay- ment is less than market value is it to be deemed "unrelated" to the market value of the facility? Conversely, if a payment is greater than market value, is it automatically similarly reached by the prohibition? How is the market value of the facility to be determined? And, ACLA wonders, how much in excess of market value -- twice market value, 150% of such value, 110% of such value -- warrants reimbursement denial? Finally, what amount of the laboratory cost or change is to be deducted in such event? The term "disproportionate" is equally incomprehensible. What does it mean to say that a rental payment for a facility is disproportionate to its market value? Any price for an item Is some proportion of the item's market price and hence bears some proportionate relationship to the market price. This is equally true of an underpriced item (e.g., one-half market price) or of an over-priced item (e.g., one and one-half times market price). The vagueness of the words "unrelated" and "dispropor- tionate" in proposed Section 1132 are, ACLA contends, merely symptoms of the unworkability that lies at the heart of this provision. Its drafters appear to be taking aim at rental/lease arrangements which result in excessive payments. The difficulty, PAGENO="1157" 1149 of course, lies in determining what is excessive. This task would fall upon the shoulders of Medicare carriers and inter- mediaries who, as the proposal now reads, would wholly lack the guidance Of standards in trying to implement this provision. Carriers and intermediaries are not presently equipped, nor would they be by proposed Section 1132, to determine what are excessive rental payments and to put a stop to them. The vague language would give a license both to government officials and to carrier reimbursement clerks to assert unbridled regulatory authority without any ability on the part of well-meaning, re- sponsible laboratory organizations to defend against unwarranted reimbursement actions. The Subcommittee, and the Congress, should be content instead with the criminal prohibitions against rebates, kickbacks, and other forms of remuneration designed to induce medical referrals, that already provide the Medicare! Medicaid programs with ample tools to protect against excessive and abusive rental arrangements. At least those prohibitions can be understood. Moreover, ACLJA is simply at a loss to understand, let alone explain, the flat denial of reimbursement for arrangements where the rental/lease payment is determined as a percent, fraction, or portion of the charge or cost of a laboratory service. ACLA can only surmise that the drafters of this provision had in mind certain abusive percentage-based or volume-based rental arrange- ments between laboratories and physicians which have been the subject of publicity and well-justified condemnation in recent years. But the ban extends as well to other non-physician commer- cial lessors that have no power to refer specimens for testing, and that have no direct involvement in the health delivery system. PAGENO="1158" 1150 Where then is the logic or justice in going from a prohibition aimed at the few abusive arrangements to a flat reimbursement ban on all percentage-based arrangements? Clearly, all percentage- based laboratory rental arrangements by themselves have not proved. themselves to be so iniquitous, and so without redeeming value, that they deserve to be proscribed across the board -- let alone prohibited by this broad, ill-defined and ambiguous language. The provision appears to prohibit reimbursement for a rental payment which is determined in part as a portion of the cost of the laboratory service. But what rental payment, in any sector in the economy, is not determined at least in part as a portion of the cost of goods and/or services? At bottom, it is unclear precisely what this language means, though it appears to prohibit many customary business practices both within and outside the hospital. This Committee is certainly aware of the frequency of legitimate commercial leases, negotiated either on a percentage basis, or on a square foot basis against a percentage. To permit the reimbursement system to get involved in upsetting or endangering existing commercial practices, without a showing of abuse, represents a particularly unwise extension of bureaucratic authority. Moreover, one can expect countless regulations to appear in an attempt to construe what is presently and impermis- sibly vague language. With respect to subsection (1), the provision relating to finder's fees and commissions, the language as drafted could also create a conflict in interpretation with the provisions of H.R. 3. The anti-fraud and abuse amendments, and their legislative his- tory, recognize and leave unchallenged normal compensation ar- rangements used by laboratories to compensate bona fide sales PAGENO="1159" 1151 representatives, whether or not the the sales representative is an employee or an independent contractor. Yet, the ban on com- missions, together with an exception couched in different terms from that of H.R. 3, creates unwarranted ambiguities that do not presently exist as to the normal compensation arrangements with all bona fide sales representatives, whether paid on salary or commission. Finally, the fact that a glaring exception to this general reimbursement prohibition is written-in for hospital-located laboratories underscores the flawed nature of Section 1132. The proposed ban on commissions, finder's fees, and a vast array of rental and lease arrangements does not apply in the case of a laboratory (a) which is located in a hospital and (b) whose primary business is servicing the hospital's inpatients and out patients. Why the exception is available for hospital-located laboratories, and not for independent laboratories or for those laboratories which are located in physicians' offices, is not made clear. What is it about hospital-located laboratories that earns them the special right, for example, to engage in rental arrangements that are determined by reference to any percentage or proportion of the charges or costs of laboratory tests? Why should they be allowed to participate in arrangements that are excessive in relationship to market value -- if percentage rentals and disproportionate-to-market value payments are deemed to be a vice? Are hospital-located laboratories uniquely innocent of the patterns of fraud and abuse ~t which proposed Section 1132 appears to be aimed? If so, this point has not been stated or justified by the drafters of this provision. Similarly, if hospital arrangements are to enjoy special status, PAGENO="1160" 1152 why is the exception limited to laboratories serving the hospital patients that are physically located in the hospital, and not extended to the many independent laboratories that provide ser- vices to hospitals and their patients -- frequently on a lower cost basis -- but are not within the hospitals walls. The excep- tion, as well as the underlying provision to which it attaches, is arbitrary, ill-conceived, and unfair. In sum, for all of the reasons cited above, ACLA strongly urges that proposed Section 1132 be dropped from H.P. 4894. Section 201(b): Disclosure of Laboratory Charges to Physicians Section 201(b) of H.P. 4894 would require an independent clinical laboratory to: - furnish such information and access to its records as the Secretary may require to determine whether and in what amounts the laboratory has charged a physician for laboratory services performed by the labora- tory. This language would give the Federal Government a roving commis- sion to gather up sensitive, commercial information from profit- seeking laboratories. It is also unprecedented, unwise, and should be deleted from H.P. 4894. To begin with, this language, which would be added to Section 1124 of the Social Security Act, would be mislocated. Section 1124 imposes on numerous health care entities which participate in Medicare and Medicaid broad requirements that ownership and related information be disclosed. Yet the pro- posed language would deal, not with ownership information, but with specific commercial transactions between laboratories and physicians. Further, it is only fair to ask why, out of all PAGENO="1161" 1153 the "disclosing entities" -- e.g., hospitals, skilled nursing facilities, renal disease facilities, HMOs, Medicare carriers and intermediaries, Medicaid fiscal agents, etc. -- which face ownership disclosure requirements under Section 1124, labora- tories, and laboratories alone, should be singled out for the extra commercial disclosures which would be required by the proposed language. Most importantly, the proposed language is objectionable because it would require a for-profit laboratory to reveal sensitive information about its commercial pricing practices in a setting where the confidentiality of this information cannot be assured. The information would go to HEW or perhaps to its designated agents, for example, carriers and inter- mediaries. There is a strong possibility that, through Freedom of Information Act requests or other means, this information will become public and known to the laboratory's competitors, to its detriment in the marketplace. Symptomatic of the problems with this proposal is the fact that the required disclosure is ill-defined, and without limit. Government officials acting under the authority of this language would not be limited to situations where, for example, there are already grounds to suspect fraud and abuse; rather, they could seek "such information and access to its records as the Secretary may determine," a particularly broad and objectionable standard. At present, the information in question can always be obtained through the exercise of subpoena power, subject to the important safeguard to the citizenry of a showing of probable cause. In short, the proposed language does not impose sufficient re- straints and standards on Government investigators to prevent PAGENO="1162" 1154 unwarranted and burdensome fishing expeditions without a suff i- cient showing of cause. For all of these reasons, the proposed amendment to Section 1124(a)(1) of the Social Security Act in Section 201(b) of H.R. 4894 should be deleted from the bill. Section 202(a): Limitations on Physician Reimbursement for Laboratory Services Section 202(a) of H.R. 4894 would add to the Social Security Act a set of limitations on Medicare reimbursement for laboratory tests which are billed by Medicare. The particular limitations which would apply would depend on such factors as whether the test was performed in the physician's office or by an independent laboratory, whether the bill indicates where the test was per- formed, and whether, if performed by an independent laboratory, the physician's bill indicates the laboratory which performed the test and its price to the physician. ACLA believes that these limitations are designed to combat the problem of unjustifiably large physician markups of indepen- dent laboratory prices, a problem which apparently has plagued the Medicare and Medicaid programs for some time. Yet ACLA notes that HCFA, the governmental agency which most directly feels the financial burden of any unwarranted physician markups, and the agency which has the most day-to-day experience with actual financial practices by physicians and laboratories, has already set out a detailed set of reimbursement limitations on laboratory services billed by physicians. See Section 5114 and, in particular, Section 5114.2 of the Medicare Carriers Manual (HIM 14-3). Medicare already requires, for example, that when a PAGENO="1163" 1155 physician bills for a test performed by an independent labora- tory, reimbursement will be based on the lowest of: a. the physician's billed charge; or b. the physician's customary charge; or c. the prevailing charge in the locality in which the physician is located; or d. a carrierwide `Laboratory to Physician Charge Screen" set at the carrierwide 75th percentile of the charges made for the test by independent laboratories to physicians. This last factor is comparable in purpose to the intention of Section 202(a) of H.R. 4894 in preventing unreasonable markups. Medicare's limits in this area have been in effect for less than a year. Yet they reflect the considered judgment of the federal agency which is most directly concerned with the physi- cian markup problem. Therefore, ACLA believes that a legislative approach to this problem is inappropriate at the present time. ACLA urges instead that Medicare be given a chance to determine whether its policy, as set out in the MediOare Carriers Manual, is effective. To underline the seriousness of the problem, and to provide Congress with an improved basis of information for future action, ACLA recommends that HEW be required to study the effectiveness of its current approach and to make a report to Congress, with recommendations, in two years. In short, ACLA recommends that Section 202(a) of H.R. 4894 be eliminated, and that the report called for in Section 205 be changed so that HEW will report to Congress in two years on Medicare's experience in applying its own reimbursement limita- tions (as set out, for example, in Section 5114 of the Carriers Manual) when laboratory services are billed by physicians. PAGENO="1164" 1156 Section 203: Competitive Bidding ACLA has offered its views on this subject in the past. If the Subcommittee wants to go forward with the goal of deleting the freedom of choice provisions of the Medicaid program as related to laboratory testing, ACLA strongly urges that the competitive bidding proposal be implemented on a very limited, 1/ experimental basis before it is adopted wholesale. Specifically, ACLA recommends that the first eight lines of subsection 203(a) (1) of H.R. 4894 be amended as follows: Section 1902(a) (23) of the Social Security Act is amended by inserting "(A)" before "has entered into" and by inserting before the semicolon at the end the following: ", or (B) has made arrangements through a competitive bidding process or otherwise on an experimental basis limited to the first fiscal year following the enactment of this section for the purchase of laboratory services referred to in section 1905(a)(3) . ACLA further recommends that the following sentence be added at the end of subsection 203(a)(1) of H.R. 4894: At the end of the first fiscal year following ei~actment of this section, each state that has entered into such experi mental arrangements must report to the Committee on Human Resources of the Senate and the Committee on Interstate and Foreign Commerce of the House of Representatives concerning the results of these experi mental arrangements. ACLA believes that this experimental approach will supply Congress and the Department of Health, Education and Welfare An enumeration of the pros and cons of this provision can be found at pages 218 through 220 of the Hearings on H.R. 11341 before the Subcommittee on Health and the Environment of the Committee on Interstate and Foreign Commerce, House of Representatives, 94th Congress, Second Session. PAGENO="1165" 1157 with sufficient knowledge to determine whether such arrangements are desirable in the long run for both the program and the patient. Section 203(c): Medicaid Lowest Charge Reimbursement ACLA suggests that Section 203(c) of H.R. 4894 be amended by adding the phrase "for comparable services by the provider of such services" at the beginning of line 9 on page 51 of H.R. 4894. We recommend this clarifying amendment because a labora- tory may perform identical tests and at the same time provide varying levels of service that justify different prices for these tests. For example, a laboratory provides a different service when it draws a specimen for analysis than it does when the physician ordering the test draws a specimen. The labora- tory ought to be able to charge different prices for identical tests when the drawing services it provides are not comparable, without experiencing disallowance of its claims under Section 203(c). We believe that the amendatory language we have pro- posed takes cognizance of the fact that laboratory tests and services differ. In addition, ACLA's suggestion here would bring Section 203(c) into line with Section 203(a)(1) of the bill. Section 203(a)(1) already contains the phrase "for comparable services by the provider of such services" and appears to recognize the fact that laboratory services vary as do the prices for such services. Section 203(c), if amended as ACLA suggests,would read as follows: Section 1902(a) (30) of such Act is amended by inserting before the semicolon the following: "and, in the case of laboratory services PAGENO="1166" 1158 referred to in section 1905(a) (3), such pay- ments do not exceed the lowest amount charged (determined without regard to administrative costs which are related solely to the method of reimbursement for such services) for compar able services by the provider of such services to any person or entity for such services by that provider of laboratory services." ACLA is also concerned about the parenthetical phrase "(determined without regard to administrative costs which are related solely to the method of reimbursement for such services)" which appears both in Section 203(a)(1) and Section 203(c). This language is ambiguous and, at the very least, should be redrafted so that its import is clear. PAGENO="1167" 1159 Statement of The American Society of Internal Medicine to the Subcommittee on Health and Environment Committee on Interstate and Foreign Commerce United States House of Representatives on HR 934: Medicare/Medicaid Administrative and Reimbursement Reform Act of 1979 HR 1821: Medicare amendment with respect to reimbursement of physician services in teaching hospitals HR 3854: Quality of Surgical Care Act of 1979 HR 3990: The Medicare Amendments of 1979 HR 4475: The Medicare and Medicaid Amendments of 1979 HR 4894: The Clinical Laboratory Improvement Act of 1979 (provisions to amend Medicare and Medicaid) November 1979 1 The American Society of Internal Medicine takes this opportunity to comment on 2 the above-noted bills which contain various amendments to the Medicare, Medicaid, 3 and PSRO laws. / We commend the Subcommittee for undertaking this review of various 4 aspects of the current law and attempting to rectify identified problems. 5 Our comments are limited to selected provisions in the proposed bills--some in 6 support and some in opposition. The lack of comment on a particular provision 7 is not an indication of support or opposition. Because different bills contain 8 similar provisions, we have cross-referenced our comments for purposes of 9 clarity. 10 HR 934 11 MEDICARE/MEDICAID ADMINISTRATIVE AND REIMBURSEMENT REFORM ACT OF 1979 12 Agreement by physicians to accept assignments 13 This provision would create a new category of "participating physicians" under 14 Medicare. A "participating physician' would be one who has agreed to accept 15 assignment on all services provided to Medicare beneficiaries. To encourage PAGENO="1168" 1160 1 physicians to become participating physicians,~ the Secretary would be autho- 2 rized to establish appropriate procedures and forms to simplify and give priority 3 to the processing of their claims. 4 ASIM is aware of widespread concern over the reluctance of many physicians to 5 accept assignment for all Medicare patients. We do not believe, however, that 6 offering increasedincentives only to participating physicians will be effective 7 in attracting more physicians to accept assignment. First, the disparity between 8 Medicare payment and physician charges in many cases is so great that we do not 9 think the incentives offered would convince many physicians to accept assignment 10 on all patients and thereby give up their right to bill patients directly. 11 Second, if the objective is to save administrative time and cost by increasing 12 acceptance of assignment, we believe offering incentives to all physicians to 13 accept assignment on their patients would accomplish much more. 14 For example, if it is cost effective to offer the physician a multiple billing 15 option to encourage assignment, it should be offered to all physicians who have 16 some assignment patients. If multiple billing would save taxpayers money by 17 itself, regardless of whether or not assignment is accepted, then we believe 18 that it should be put into effect immediately under the current billing and pay- 19 ment procedures so that all physicians could su~nit multiple claims for all 20 Medicare patients. 21 Use of approved relative value schedules 22 This section would direct the Secretary to establish a system for defining 23 medical services and procedures under Medicare and Medicaid. This system and 24 corresponding set of relative values would be developed by the Health Care 25 Financing Administration (HCFA) with the advice of professional groups and other 26 interested parties. ASIM opposes this provision. PAGENO="1169" 1161 1 For a procedural teniiinology system to be meaningful and equitable, we believe 2 it must accurately describe the way medicine is actually being practiced. Such 3 a system exists ir Current Procedural Terminology, Fourth Edition (CPT-4).~ We 4 support its adoption as a nationwide uniform system to define physician ser- 5 vices and procedures. 6 We believe the medical profession is in the best position to describe most 7 accurately what it does. The American Medical Association, with the active 8 participation of ASIM and other specialty societies, has worked long and hard 9 since 1960 to develop precise definitions of medical services and a correspond- 10 ing coding system. First published in 1966, CPT is more widely accepted than 11 any other system. Its use is endorsed by the Health Insurance Association of 12 America and at least 36 state medical associations and 16 national specialty 13 societies. CPT has been adopted as the preferred system for the CHAMPUS program 14 and is accepted under Medicare and Medicaid. 15 Directing HCFA to develop another system would be duplicative, require the 16 expenditure of unnecessary effort and waste government funds. 17 Teaching physicians 18 This provision would change the effective date of Section 227 of Public Law 19 92-603. 20 ASIM views delaying the implementation of Section 227 as a step in the right 21 direction but would prefer outright repeal. As we have argued in the past 22 Section 227--when implemented--will create inappropriate distinctions between 23 Medicare beneficiaries and other patients. It was the intent of Congress not 24 to create a situation where services provided to Medicare patients would 25 differ from private patients. Section 227 is clearly contrary to this intent. 56-071 0 - 80 - 74 PAGENO="1170" 1162 1 Furthermore, we believe that Section 227 could adversely affect medical educa- 2 tion by exacerbating the financial pressures many of our teaching programs are 3 already facing. 4 It has been seven years since Section 227 was enacted, and satisfactory regula- 5 tions to implenent it have not been forthcoming. This, in itself, is evidence 6 of the inappropriateness of Section 227. We urge its repeal now. 7 Criteria for determining reasonable charges for physician services 8 This section of the bill would add an additional limitation on the determina- 9 tion of reasonable charges for physician services under Medicare. The 10 Secretary would be required to determine statewide prevailing charge levels 11 for each state. Statewide prevailing charge levels would be set at the 50th 12 percentile of the customary charges made for similar services by all physi- 13 cians in the state. No local prevailing charge levels would be permitted to 14 exceed the statewide level by more than one-third. 15 The intent of the original Medicare legislation was to reimburse beneficiaries 16 based on the usual, customary, and reasonable (UCR) concept. Subsequent 17 amendments and regulations eroded and distorted the original UCR concept and 18 have caused a widening disparity between program reimbursement and physician 19 charges. This accounts for most of the increased out-of-pocket expenditures 20 by beneficiaries and the declining rate of assignment acceptance by physicians. 21 imposition of a statewide prevailing charge level may further increase this 22 disparity. While ASIM concurs with the goal of attracting more physicians into 23 rural areas, it does not believe reducing reimbursement differentials 24 between patients of urban and rural physicians in this manner will accomplish PAGENO="1171" 1163 1 this goal. Cutbacks in patient reimbursement for the services of urban physi- 2 cians is more likely to result. Imposition of statewide prevailing charges 3 will not encourage physicians to move into rural areas. ASIM recommends that 4 this provision be deleted. 5 Disclosure of aggregate payments to physicians 6 This section would prohibit the release of names of physicians who have been 7 paid large amounts for treating Medicare and Medicaid patients, except as 8 required by other laws, i.e., the Freedom of Information Act. We interpret 9 this to mean that the Secretary cannot routinely provide such lists but still 10 must comply with requests under the Freedom of Information Act. 11 Although we applaud this provision, we urge you to extend it to prohibit 12 the release of physicians Medicare program payments. Past experi- 13 ence indicates that little is accomplished by such lists other than unfairly 14 implying wrongdoings by many honest physicians. 15 f~yment for certain antigens under Part B of Medicare 16 This provision would amend current law to permit payment under Medicare for 17 an allergist's preparation of a reasonable supply of antigens for his own 18 patients or for administration by another qualified physician. 19 This amendment will provide payment for these needed services to many 20 Medicare beneficiaries when they have previously been arbitrarily denied. 21 We support this provision. 22 ~yment on behalf of deceased individuals 23 Under present law, Medicare can only pay a claim on behalf of a deceased 24 beneficiary when the physician accepts assignment or the family has already 25 paid the bill. This provision would amend the law to allow Medicare to pay PAGENO="1172" 1164 1 the family (or legal representative) of a deceased Medicare beneficiary on 2 an unpaid bill. ASIM supports this provision. 3 Ambulance service 4 This provision would extend Medicare coverage for ambulance service to other 5 than the nearest hospital if the nearest hospital is not adequately equipped 6 or staffed to provide the neceis~ry treatment. 7 This addresses only part of the identified problem. While it fills the obvious 8 need for adequate facilities, it ignores the desirability of having the patient 9 treated by his personal physician and would perpetuate this problem in many 10 cases. 11 It is recognized that there are instances which preclude taking a patient to 12 a hospital where his physician has privileges (i.e., when there is unreasonable 13 distance to travel or when there is an emergency requiring prompt treatment). 14 However, it is often unreasonble to deny a patient treatment by his personal 15 physician in the absence of such conditions. When treatment is provided by 16 another physician, unnecessary repetition of tests and longer hospital stays 17 often result, adversely affecting the cost of medical care. We urge that 18 this provision be amended to provide ambulance service to a hospital within 19 a reasonable distance where the patients physician has privileges. 20 Chiropractic services 21 See our comments on chiropractic services under HR 4475. 22 Confidentiality of PSRO data 23 This section would place strict restrictions on the release of PSRO data 24 which identifies an individual patient, practitioner, provider, supplier, or 25 reviewer. The confidentiality of PSRO data is essential to the success of PAGENO="1173" 1165 1 peer review. In light of recent court actions, this provision is necessary 2 to prevent the disclosure of confidential PSRO information under the Freedom 3 of Information Act. ASIM supports this provision. 4 Development of uniform claim forms for usein health care programs 5 This provision would require the adoption, to the extent feasible, of standardized 6 claim forms for Medicare and Medicaid within two years of enactment. 7 ASIM supports the use of a uniform national Medicare/Medicaid claim form. 8 We would like to point out, however, that the American Medical Association 9 has developed a standardized claim form which has been endorsed by Blue Cross! 10 Blue Shield, the Health Insurance Association of America, ASIM and many other 11 medical societies, and which is accepted by Medicare and Medicaid in many 12 states 13 We believe that it is unnecessary and wasteful for the federal government to 14 develop a different standardized form when the AMA model form is already 15 available, used, and accepted. 16 HR 1821 17 MEDICARE AMENDMENT WITH RESPECT TO REIMBURSEMENT FOR PHYSICIAN SERVICES IN 18 TEACHING HOSPITALS 19 See our comments under HR 934 on the subject of reimbursement for Teaching 20 physicians.' PAGENO="1174" 1166 1 HR 3854 2 QUALITY OF SURGICAL CARE ACT OF 1979 3 This bill would require Medicare and Medicaid patients to obtain a second 4 surgical opinion on `elective surgical procedures" in order to receive pro- 5 gram payments. Furthermore, a PSRO--for purposes of program payment--could 6 not determine that elective surgical procedures are "medically necessary 7 and appropriate" without confirming written opinions from two "qualified" 8 physicians. A "qualified" physician is defined as a board certified specialist 9 or other physician meeting criteria established by the Secretary who is not 10 going to perform the surgical procedure for which the opinion is sought. 11 ASIM supports the patient's right to seek an additionalopinion from another 12 physician on any matter concerning his or her diagnosis and treatment. As 13 an organization of internists, we do not profess to be experts on the subject 14 of mandatory second surgical opinion programs. However, we are unaware of 15 hard evidence showing that the benefits of such a program--preventing unnecessary 16 surgery and the resulting cost savings--will exceed the cost of alternate 17 medical treatment and the program costs for paying for the second opinions. 18 If a mandatory program is adopted, we believe that internists should be consid- 19 ered one of the prime providers of second surgical opinions. Internists--either 20 those who are board certified or those who have completed three years of approved 21 training in internal medicine--are fully qualified to render second opinions PAGENO="1175" 1167 1 on the necessity of many elective surgical cases, and internal medicine con- 2 sultation in some instances may be even more appropriate and valuable than 3 th&.t of another surgeon. Our position has the support of HCFA, the Blue 4 Cross/Blue Shield Association of America, and the Health Insurance Association 5 of America. In the event that a mandatory second opinion program is enacted, 6 we strongly urge Congress to make it clear that qualified' physicians are 7 not limited to board certified surgical specialists. 8 HR 3990 9 THE MEDICARE AMENDMENTS OF 1979 (AS RECOMMENDED BY THE SUBCOMMITTEE ON HEALTH 10 OF THE WAYS AND MEANS COMMITTEE) 11 Antigens 12 See our comments on this subject under HR 934. 13 f4yment for physician services where a beneficiary has died 14 See our comments on this subject under HR 934. 15 Chiropractic services 16 See our comments on this subject under HR 4475. 17 ~yments to radiologists and pathologists 13 A 1967 amendment to the Medicare program provided 100-percent reimbursement 19 to radiologists and pathologists for services provided to hospital patients. 20 This provision would limit the 100-percent reimbursement to those physicians 21 who agree to accept assignment for all inpatient services. Under this provision, 22 Medicare beneficiaries would receive different levels of coverage based on their 23 physician's willingness to accept assignment. This is unfair to both patients 24 and physicians, and we do not believe that this provision should be enacted. PAGENO="1176" 1168 1 HR4475 2 THE MEDICARE AND MEDICAID AMENDMENTS OF 1979 3 Limitations on payments to radiologists and pathologists (Section 104) 4 See our comments under HR 3990 on "Payments to radiologists and pathologists. 5 Elimination of Medicare and Medicaid coverage for chiropractic services 6 (Section 105) 7 This provision would eliminate Medicare coverage for chiropractic services. 8. We strongly support the Administrations recommendation in this regard. 9 Professional Standards Review Organizations not to be treated as government 10 agencies or advisory committees (Section 303) 11 For the same reasons expressed in our cormoents under HR 934 on Confidentiality 12 of PSRO data,' we support this provisior. 13 HR 4894 14 THE CLINICAL LABORATORY IMPROVEMENT ACT OF 1979 (PROVISIOUS TO AMEND 15 MEDICARE AND MEDICAID) 16 Medicare reimbursement for laboratory services (Section 202) 17 This section sets forth billing and reimbursement requirements for laboratory 18 services. If a physician bills for a laboratory test he has performed or 19 supervised in his office, payment would be the reasonable charge for the test. 20 If the physician bills for a test performed by an outside laboratory, and the 21 bill identifies both the laboratory and how much it charged the physician for 22 the test, payment would be the lesser of 1) the laboratory's reasonable charge 23 (i.e., the charge allowed if the laboratory billed the patient directly); or 24 2) the amount the laboratory billed the physician. The physician would be 25 allowed a "nominal" fee to cover the cost of collecting and handling the sample 26 on which the test was performed. PAGENO="1177" 1169 1 We do not object to the billing requirements in this section, i.e., that the 2 site where the test was performed be identified and, if performed by an outside 3 laboratory, that its charge to the physician also be identified. However, we 4 must object to limiting reimbursement for collecting and handling the specimen 5 sent to an outside laboratory to a `nominal" fee. In most physicians' offices 6 this fee must cover a technician's time spent in collecting and handling the 7 specimen; any special preparation of the specimen; costs of labeling, including 8 providing information about the patient, physician, diagnosis, and the Medicare 9 number; the office space required for all this; billing costs; bad debt expense; 10 and, for many Medicare patients, extra attention and assistance from the recep- 11 tionist and/or the nurse. We are concerned that use of the term nominal' could 12 lead to a reimbursement level which does not cover a physician's cost to provide 13 this service. If that happens, one of two things would result. The physician 14 may choose not to accept assignment on patients requiring outside laboratory 15 seryicés or to send the patient to the outside lab to have the sample taken, 16 causing an added inconvenience to tledicare patients. 17 We recommend that the language in this section be reworded to provide a 18 `reasonable fe&' for this service. 19 Competitive bidding (Section 203) 20 This section would permit.states to purchase laboratory services for Medicaid 21 recipients through a competitive bidding process. We foresee this creating 22 several problems that negate, in our opinion, any cost savings that might 23 accrue through competitive bidding. 24 Because the services provided by different laboratories are rarely comparable, 25 it would be difficult--if not impossible--to develop criteria for awarding bids 26 to the lab that offers the best quality service at the lowest price. Instead, PAGENO="1178" 1170 1 because of overriding cbst considerations, we believe bids would be awarded 2 to labs offering inferior services and Medicaid patients would receive lower 3 quality care. As ASIM noted in previous testimony on this issue, this under- 4 cut-s the very objective of the Medicaid law by establishing a separate system 5 of laboratory service delivery to the poor. 6 Contracting with a limited number of laboratories would also unduly restrict 7 access of Medicaid patients to lab services. Because physicians office labs 8 would be unlikely to win contracts through the competitive bidding process, 9 physicians would be unable to perform lab tests for their Medicaid patients. 10 If they continue to collect specimens for sending to the lab under contract, 11 some patients would be required to make a return trip to the office to learn 12 of the results and prescribed treathent. Such return trips would be unnecessary 13 if the test was provided in the office at the time the specimen was collected. 14 Moreover, because Medicaid payment for collecting specimens often makes it 15 uneconomical to do this alone, some physicians would be forced to send patients 16 to independent or hospital labs to have specimens collected. Medicaid patients, 17 who are generally less mobile than the rest of the population, would often be 18 required to travel farther distances to find a lab under contract. 19 Emergencies and other situations sometimes require that test results be obtained 20 imediately, and this would not always be possible from a lab under contract. 21 Regulations would probably have to be issued allowing for reimbursement to 22 noncontract labs under certain circumstances, thus further complicating both 23 reimbursement and claims review. 24 Collectively, independent labs already represent one of the most competitive 25 components of the medical care system. This competition results in improved 26 services and fairly stable prices. However, under competitive bidding most PAGENO="1179" 1171 1 contracts would presumably go to high volume, automated labs. And, physi- 2 cians forced to send specimens for Medicaid patient to these labs will find 3 it convenient to use the same lab for non-Medicaid patients. This would force 4 many small labs out of business, destroy the competitive balance, and ultimately 5 result in higher prices and fewer incentives to develop new processes. 6 We believe that physicians are in the best position to select the laboratory 7 that will provide the best services to each patient. To mandate separate 8 laboratory services for Medicaid patients can only serve to further remove 9 them from the mainstream of medical care delivery, making them second class 10 patients. 11 We urge that this competitive bidding provision not be enacted. PAGENO="1180" 1172 AMERiCAN COLLEGE OF PHYSICIANS 4200 Pine Street, Philadelphia, PA 19104 Phone: (215) 243-1200 STATEMENT ON SECTION 227, P.L. 92-603 The issue of the payment of faculty physicians for professional services in the teaching setting has been a matter of serious debate for at least ten years. Concern that the faculty physicians in some institutions were being paid a professional fee for services provided by residents, with little or no involvement of faculty physicians, led Congress to enact Section 227 of Public Law 92-603 on October 30, 1972. This amendment to the Social Security Act established payment provisions for physician services provided to Medicare beneficiaries in teaching hospitals. The initial promulgation of proposed regula- tions to implement Section 227 appeared to entail serious problems. Medical schools and teaching hospitals, represented by the Association of American Medical Colleges, expressed profound concern that the proposed regulations would create major problems for aca- demic medical centers, teaching hospitals, and those they serve. The proposed regulations were construed as seriously discriminatory against teaching physicians and teaching hospitals, and could significantly impair an already difficult faculty recruitment and retention problem. Further, it was believed that these regulations would tend to discourage part-time faculty physicians from admitting patients to teaching hospitals; this would limit the patient's choice and, at the same time, deprive teaching hospitals of patients vitally needed for the conduct of appropriate clinical educational programs. It was believed that the proposed regulations would seriously impair recent progress toward a "one-class" system of medical care in many teaching hospitals. Under the proposed regulations, it is conceivable that many medical schools and teaching hospitals, already under severe financial strain, would be placed in real financial distress and require additional public resources for survival. These poten- tial consequences seemed so starkly to overshadow what appeared to be a modest objective in the original legislation, that major concern was expressed by the academic community throughout the nation. As a result of these concerns, implementation of Section 227 was postponed to allow time for study of its impact by the Institute of Medicine. This report was completed in March, 1976. The Institute's report set forth a number of options to be pursued, and further draft regulations were developed by the Health Care Financing Administration and released on July 17, 1978. These proposed regulations, while somewhat improved, continue to justify the serious concerns expressed earlier. PAGENO="1181" 1173 The reactions of the academic community are well outlined in a Section 227 workshop notebook by the Association of American Medical Colleges, under the date of December 1, 1978. This workshop identified a number of critical issues contained within the proposed regulations. This statement will be concerned with three of the most critical issues. Critical Issue #1: Private Patient Test Under this proposal, no in-patient may be considered a private patient unless at least 85% of all in-patients at the teaching hospital are provided with personal and identifiable services by faculty physicians. This regulation could deny access to the private standards of care, since no fee-for-service payments would be made for individual patients and hospitals not meeting the required percentage of physician- patient relationships. There is no mention of a presumptive test, such as the 85% rule in the law, and the effects of this proposal would be contrary to the law and Congressional intent. The American College of Physicians advises that physicians should be able to bill patients based on the definable services rendered by the physician and in accordance with the physician's actual relationship with the patient. It is unreasonable to subject reimbursement for the delivery of a service to a test consisting of an arbitrary percentage of the overall patient mix of a hospital. Critical Issue #2: Fiscal Test for Fee Level Once it is determined that 85% or more of all patients at a teaching hospital are private patients, then a further test would be imposed to determine the level of allowable fees. If at least 50% of a physician's non-Medicare patients paid less than 80% of their bills, then Medicare would reduce its fee to the gross collection rate (e.g., if 50% of the patients paid 75% of their bills, then Medicare would also pay only 75%). If the majority of non-Medicare patients pay 80% or more of the billed fees, then Medicare would pay physician fees based on usual and customary fees. This proposal would establish new and significantly different procedures for physicians in teaching hospitals. In non-teaching hospitals, physicians' allowable fees would continue to be based on previous bills for similar services, without regard to actual collection experiences. Token charges for charity patients and reduced charges for welfare and other low income patients would also continue to be excluded in determining customary charges, but only in non-teaching hospitals. The proposed regulations would, thus, establish onerous and discriminatory requirements for teaching physi- cians only. The implication of this proposed regulation is that since a certain percentage of bills are uncollectable, the government should be able to discount its bills to the overall average payment rate. The American College of Physicians firmly believes that Medicare fees should not depend on the lowest common denominator for an insti- tution, but should be based on prevailing rates for a region or a community. PAGENO="1182" 1174 Critical Issue #3: Supervision of Residents The proposed regulations to implement Section 227 would require that: "An attending physician who is supervising residents and interns must personally carry out several additional responsibilities in order for his services to be reim- bursed on a charge basis. These include personally examining the patient on a regular basis, reviewing the diagnosis, and determining the course of treatment. The attending physician must be viewed by the patient as his personal physician and must be ready to perform those services that a personal physician would perform in a non-teaching setting if the need arises." Medicare would not authorize payment on a charge basis for the services of an attending physician if the services were provided by a resident, unless the presence of the attending physician was necessary because the resident could not be expected to perform the service without supervision. It is asserted that since Medicare would already be paying for professional services under Medicare Part B, a teaching physician, who is paid a supervisory salary by the hospital, could be receiving a duplicate payment if he were also reimbursed on a fee-for- service basis. The American College of Physicians is opposed to Medicare abuse, and in no way condones efforts to obtain duplicative payments for the same service. The educational function and the medical function often overlap in teaching hospitals. However, where specific educa- tional administrative functions in connection with graduate training programs can be identified and separated from patient management, there should be separate reimbursement. Separate payments should be made for supervisory, administrative, and teaching functions when those functions are identifiable and separate in time from profes- sional service activities for which a fee is billed. The Medicare Program must recognize the additional cost for providing medical education in teaching hospitals, and has from its inception reimbursed expenses which are of legitimate cost to providing quality medical care. This sound public policy should not be eliminated, nor should the majority of dedicated teaching physicians be penalized, because of the alleged abuses of a few. In summary, the American College of Physicians is convinced that the results of the proposed regulations would be discriminatory to teaching physicians and teaching hospitals. Teaching hospitals and medical school faculties have made substantial progress toward achieving a single standard of care. The proposed regulations could impair this effort and expose students and trainees to a "two-class" system of care on a hospital-by-hospital basis. Practicing physicians in the com- munity, serving as part-time clinical faculty, would be discouraged from admitting their patients to teaching hospitals, thereby impairing their patientst access to teaching hospitals, their patientst choice of hospitals, and restricting the clinical educational programs of the teaching hospitals. Finally, a discriminatory approach to these regulations could have a significant effect upon the financial viability of teaching hospitals and medical schools and upon the recruitment and retention of able, full time faculty. The American College of Physicians strongly recommends that these untoward consequences for medical education, teaching hospitals, and the public interest be avoided. PAGENO="1183" 1175 Statement of the American College of Surgeons on Second Surgical Opinion Programs Submitted to the Subcommittee on Health and the Environment Committee on Interstate and Foreign Commerce U.S. House of Representatives November 1, 1979 This statement is submitted in behalf of the American College of Surgeons con- cerning second surgical opinion programs for Committee consideration of H.R. 3854, the Quality of Surgical Care Act of 1979. Representing 42,000 board certified surgeons, the American College of Surgeons is a voluntary, scientific and educational organization devoted to improving care of the surgical patient. Our College has worked since 1913 to improve the quality of surgical care in America ana throughout the world. We began the hospital accreditation program in 1918 and carried this work on single-handedly for 34 years until it was taken over by the Joint Commission on Accreditation of Hospitals, a body on which we continue to serve. We also initiated auditing of professional practice and have been active in the Commission on Professional and Hospital Activities (CPHA), an organization in Ann Arbor, Michigan that maintains the largest bank of data on hospital practice In the world. As a College we have always approved of consultation as a common and desirable part of good surgical practice. If the physician or the patient has doubts as to the necessity of any operation, the American College of Surgeons recommends that an additional opinion be secured from a qualified specialist In the appropriate field of surgery. We recognize that others have advocated PAGENO="1184" 1176 the use of any physician to provide the second opinion, and if there are no adequately trained, genuine surgeons available in the geographic area, such a substitute for a surgical second opinion might be necessary. But we deplore the practice, in some insurance plans, of allowing non-physicians to provide surgical consultation. Thus, we feel strongly that a second opinion program related to surgical operations should ideally have both the first and second opinions provided by genuine surgeons. In that respect we are simply following our strongly maintained standards over 66 years that surgical operations themselves should be performed by real surgeons, adequately educated for years in the fundamentals as well as the techniques of surgery, and with specific qualifications approved by their peers, such as certification by the appropriate surgical board or Fellowship in the American College of Surgeons or its equivalent. Much of the crtticism about so-called unnecessary surgery, which second opinion programs are designed to minimize, arises from advice for operations provided by inadequately trained physicians who do some surgical operations as an incidental part of their practice, or from advice by non-physician practitioners with inferior qualifications. Do second surgical opinion programs reduce the number of unnecessary operations? Adequate and convincing data on this point are difficult to get, especially when it is so hard to define simply an unnecessary operation. But many of those who believe that second opinions reduce unwarranted surgical operations, base their belief on the assumption that a disagreement between physicians on the need for an elective operation is somehow proof that the operation is unnecessary. This assumption is questionable on two counts. First, the second opinion is inherently no more "correct" than the first, given equivalent background and expertise of the physicians involved. Second, physicians often disagree in their diagnosis or in recorrmiended treatment. PAGENO="1185" 1177 Koran1 has shown that pairs of physicians disagreed in between 10 and 20 percent of cases reviewed. This is not inconsistent with the well publicized 17% disagreement rate reported by McCarthy2 for a mandatory New York union second surgical opinion program. The fallacy lies in equating this rate of disagreement with a rate of "unnecessary" surgery. Previous Congressional hearings have widely publicized this misconception. Without joining in an unproductive discussion of "unnecessary" versus `unjustified", "unconfirmed," or similar terms, I must stress the importance of-:the patient's attitude in decisions -for or- against operation..-. By this. .1:. mean the "quality of life" as influenced by successful treatment. Relief of pain in certain ailments may mean the difference between a happy, productive life and suicide; in that sense, relief of symptoms and prolongation-of-life, are joined together. But many successful surgical operations may not extend life by so much as a day, though the quality of life without the nagging discomfort of:chronic gallstone disease or withoijt~a:truss for. hernia may be as-different as day and night. Ultimately, it is the patient who decides whether to have an operation or not. A patient may be.advised:by.two or even three surgeons to have -an operation, and the relatives and children may all agree, but if he is strongly opposed to operation because of fear or any of a dozen other reasons, there will be-no operation~ Regardless-of n~di-ca1 or surgical opinion, -the patient properly has the right to decide on the management of his own body, assuming he Is mentally competent. The -College- believes -there should be-open conisunication between :.t~ surgeons- rendering the first and second opinions. Denying physicians the opportunity to share opinions about a patient could result in increased costs for duplicating tests, 56-071 0 - 80 - 75 PAGENO="1186" 1178 would interrupt continuity of care by not drawing upon the initial physician's knowledge of the patient's medical history, and anonymity could promote a feeling among surgeons of being adversaries rather than colleagues. The patient is scarcely well served by generating such attitudes. Feedback from the second surgeon is especially critical for physician education in cases where the first physician has prematurely or inappropriately recom~nended an operation or misdiagnosed a condition. While we realize that some insurance plans favor or allow the second opinion to be provided without the knowledge of the first physician, presumably to spare the patient embarrassment, we feel this does not provide ideal care, nor is it really a consultation in the appropriate sense of the term. Also, as a matter of proper relationship between physicians, as well as to minimize the possibility of bias, the provider of the second opinion should not be eligible to perform the operation. This should be made clear to the patient and to the physician in advance of the referral for opinion. The College opposes mandatory second opinion programs, because they inappropriately limit freedom of the patient, may not raise the standard of care, and may complicate patient management as well as increasing rather than lowering the cost of care. However we favor availability of reimbursement by third party payors for additional opinions if the patient so desires. We seriously question whether patients are better informed or educated about their condition by way of second opinion programs. There is no single way for most individuals, especially a highly worried patient, to decide whether the second or third opinion is more reliable than the first, assuming equivalent training and expertise in the physicfans giving the opinions. Ultimately, as we have noted above, the patient must choose which course he will follow, and he is free to reject the opinions of all his medical advisors. 1Koran, Lorrin H., M.D.: The Reliability of Clinical Methods, Data and Judgments, New England Journal of Medicine 293:642-646 and 695-701, September 1975. 2McCarthy, Eugene G., M.D. and Geraldine W. Widmer: Effects of Screening by Consultants on Reconinended Elective Surgical Procedures. New England Journal of Medicine 291 :1331-1335, 1974. PAGENO="1187" 1179 STATEMENT OF THE HEALTH INSURANCE ASSOCIATION OF AMERICA This statement is filed on behalf of the Health Insurance Association of America. The companies we represent provide health insurance protection for over 100 million Americans. Our comments are on H.R. 4475, the Medicare and Medicaid Amendments of 1979. Section 101 Employers and employees pay a health insurance tax for Medicare coverage during the working lifetime of the employee. Enactment of Section 101 will subject employers and employees to double payments since they will remain liable for payment of the health insurance tax for Medicare benefit payments which the employee will not be eligible to receive. In addition, they will be liable for the continued, and increased, premium for the employers group insurance plan. We believe this is inherently unfair both to employers and their employees. The final interpretative guidelines to the Age Discrimination in Employment Act (ADEA), published in the Federal Register on May 25. state, in discussing how the change in mandatory retirement age from 65 to 70 affects health insurance, that "a carve-out approach, under which regular health plan benefits are directly offset by benefits paid under Medicare, is clearly permitted." The guidelines go on to state that Medicare supplements which bring total coverage for persons over age 65 up to the sane level as younger persons are also acceptable. Employers are specifically urged to advise their employees of the availability of Parts A and B PAGENO="1188" 1180 of Medicare and are even required to contribute towards the individual's cost to Part B under certain circumstances. In effect, the Department of Labor and the Equal Employment Opportunity Commission have already gone a long way towards implementing a program (under ADEA) where Medicare is primary and the employer's coverage is supplemental. The provisions of ADEA became effective January 1, 1979; and we have every reason to believe that employers and insurers have already made substantial efforts to comply. In such an atmosphere, Section 101(b) (1) of H.R. 4475 will only serve to create chaos. Finally, there are implications in Section 101(b) (1) which go well beyond the "working aged". It is conceivable that an employer's plan could be determined primary in a number of other situations - for example, a disabled person who is now eligible for Medicare coverage and who is also eligible for continuation of health insurance protection under his former employer's plan. The order of coverage could conceivably be reversed and, if such is the case, current premium rates for the insurance plans' benefits (which are designed to be supplemental to Medicare) would be woefully inadequate. During a period when everyone is properly concerned with the rising costs of goods and services, enactment of this legislation shifting more of the costs of government programs to the private sector will further exacerbate the rising cost of health care services for private sector patients. Section 102 We have grave concerns about the provisions of this PAGENO="1189" 1181 section. Most observers of the operation of the Medicare Program over the years have felt that Medicare generally has operated fairly smoothly within its existing administrative structure; in fact, much more so than other governmental health programs such as Medicaid and CHAMPUS. Under existing legislation, the Department of Health, Education, and Welfare has the authority to engage in experimental programs of contracting for the administration of Medicare on a basis other than cost reimburse- ment. None of the existing experiments with competitive fixed price bidding for Medicare administration have been in existence long enough for an appropriate evaluation of the results. It, therefore, does not seem prudent to make such a drastic change in the contracting for Medicare administration as is proposed in this section. It is proposed that all contracts eventually would be subject to the same competitive requirements as are other Federal contracts. There is a significant difference between procurement of manufactured products and the procurement of claims processing services. The "product", namely, the processing of claims, is not subject to the standards that would be imposed on the manufacture of goods. In fact, the functions to be performed in the processing of claims are difficult to define on a standard basis because the processing needs for appropriate handling of claims varies from one geographic area of the country to another. Too many people believe claims processing involves on the entry and processing of information through electronic data processing equipment. PAGENO="1190" 1182 It is much more than that. Sone of the variables which are significantly different from one area to another are as follows: 1. The number of claims per one thousand Medicare beneficiaries varies from state to state and nay even vary within a state. This significantly affects the workload of the contractor. 2. The number of physicians accepting assignments of benefits varies not only state by state but sometimes varies within a state, e.g., urban versus rural. Generally, unassigned claims are more difficult to process and, therefore, the assignment ratio is a significant factor in the claims processing workload. 3. The needs for communication with beneficiaries and providers varies from area to area and this requires a personal service beyond the normal claims processing functions. 4. Medical practice varies from area to area thereby presenting different problems in the review of medical necessity of the utilization of health care services but, again, this is a personal function that must be performed by trained personnel, including professionals. 5. The problems of determining the appropriate charge for health care services varies from area to area PAGENO="1191" 1183 according to established medical practices applying to that area's total population. All these variables, and others, combine to produce the difficulty mentioned above of arriving at a standard definition of the Medicare claims processing function which would seem to be necessary in order to obtain bids that are appropriate to the needs of the beneficiaries, the health care providers and the government. Also, functions such as listed above can be performed best by those organizations with experience in the health insurance field. While competitive fixed price bidding on the surface would seem to have some appeal as a means of reducing government costs, it should be kept in mind that the administrative costs under the Medicare Program amount to about 3~ of the total government expenditures for Medicare. Under the existing cost reimbursement contracts, the administrative cost per claim over the years has continued to decrease despite inflation, increased attention to utilization controls, and other intensification of rules and regulations. This would seem to refute the allegation that cost reimbursement contracts deter operational innovations and efficient program administration. On the other hand, there are inherent dangers in competitive fixed price bidding. Although the fixed price may appear to be lower than the unit claim cost under the present contracts, the lower price may be achieved only through a decrease in services provided to beneficiaries and providers, or through lax controls PAGENO="1192" 1184 on benefit payments both as to individual fees and the medical necessity of utilization of health care services. Certainly, a deterioration of services to the beneficiaries does not meet the intent of the Congress when it enacted this program. Furthermore, the relaxation of controls on fees and utilization of services could seriously increase total program costs. The latest experimental procurement on a competitive bidding basis (upper New York State) produced an astounding result. The winning bid was approximately 60% below the current administrative cost per claim of the then current administrator and this amount is guaranteed over a three-year period during which it seems certain that there will be a continuing escalation of inflation. It would seem impossible for the contractor to survive fiscally without serious consequences in terms of beneficiary and provider services. The contracts entered into under existing law permit the government to negotiate for payment only if the reasonable costs of the contractor and, at the same time, permit the government to retain flexibility in its administration of the program to adequately satisfy the needs of the beneficiaries and to provide appropriate control of total program costs. These benefits could also be retained by the government in a cost plus incentive fee contract arrangement. The General Accounting Office has recommended to the Secretary of HEW that additional experiments should be conducted with incentive type contracts. In either case, the government has full authority to terminate contracts in which the costs are not reasonable PAGENO="1193" 1185 or the service performed does not meet governmental standards. In consideration of the best interests of the Medicare beneficiaries and of total program administration, it would seem prudent not to accept the amendment proposed in this section because: 1. The final results, with respect to the impact on service and programs costs of the experimental programs, are not yet available. 2. There are inherent dangers in moving too rapidly to adopt competitive fixed price bidding as the sole means of procurement of Medicare contractors. 3. There are advantages to the government under the present contracting arrangements. Finally, it is evident that the General Accounting Office shares our concerns about moving too rapidly to legislate competitive fixed price contracting as the sole means of awarding contracts for the administration of Medicare. On page 68 of the Comptroller General's ~eport to the Congress, dated June 29, 1979, the following statement appears: `Before a broad change to competitive fixed price contracting is legislatively authorized for Medicare, we believe that HEW's experiments require further evaluation. HEW should determine.whether performance and beneficiary and provider services will suffer during and after contractor changeover, whether the Government is willing to accept the problems of contractor turnover in exchange for PAGENO="1194" 1186 lower administrative costs, if past poor performers under cost contracts can significantly lower costs and improve performance under competitive procure- ment, whether program payments (which account for 97 percent of total program costs) will be adequately controlled, and whether the selection process and contract design used in the experiments are sufficient to guarantee a smooth procurement system. In consideration of all the above, we urge you not to adopt Section 102. Section 401 While it is understandable that the Secretary needs broad authority in order to conduct meaningful experiments or demonstration projects, the proposed amendments in this section appear to be too broad in granting such authority. It would seem more appropriate to limit the experimentation and demonstra- tions as to the number of them to be performed and to establish some cut-off date. In the absence of such limitations, the Secretary could, in effect, `legislate' changes to the Social Security Act by changing the entire Medicare program in the name of experimentation for an indefinite period of time. In closing, Mr. Chairman, we want to thank you and the Subcommittee for the opportunity to present our comments on H.R. 4475. Also, we offer the Subcommittee and its staff the continued cooperation of the Health Insurance Association of America if you should desire further information or comments. PAGENO="1195" 1187 STATE~NT OF LESTER M. ALBERTHAL, JR. VICE PRESIDENT ELECTRONIC DATA SYSTEMS CORPORATION Electronic Data Systems Corporation (EDS) is a Dallas- based company that provides a full range of administrative ser- vices for various health programs through contracts with private and public entities. One aspect of EDS' operations has been our involvement with Medicare and Medicaid since the programs' inception in the mid-sixties. As a Medicaid claims processor, for example, we presently process 82 million claims annually. The services we offer cover a wide range of the total health care spectrum: auditing and reimbursement adjustments, medical policy-making and education, consumer outreach services and the most sophisticated claims processing systems available on today's market. Given our substantial involvement in health care, we believe our experiences and perspectives on many of today's important health issues will be quite useful, if not imperative, to health policy-making. We have closely followed the work of the subcommittee with heartened respect and appreciate this opportunity to present our views on several Medicaid bills pend- ing before this subcommittee. We have limited our comments to those provisions of specific bills that relate to our operations most directly. PAGENO="1196" 1188 H.R. 4106 represents a constructive step towards elininating the abuse of Medicare and Medicaid through es- tablishing civil penalties that can be imposed by HEW on those providers who abuse the prograns. This bill provides alternative and more flexible sanctions on abuse than the present system. EDS wholeheartedly supports responsible efforts to control and penalize this abuse. However, the specifications of what constitutes abuse, beyond specifying that providers who seek reimbursement for services not pro- vided is an abuse, are not sufficiently defined in the bill. For example, inappropriately applying cost accounting princi- ples in a provider cost report could be considered an abuse and be the cause of civil penalties under the terms of this bill when it could be simply the result of a careless account- ing error. Although we generally support the bill, much more. work is necessary on identifying and defining the types of abuse that this bill is intended to address. Most recently, the Health Subcommitteeof'the House Ways and Means Committee referred to this subcommittee several interrelated Medicare and Medicaid proposals as reported in H.R. 4000. We generally support the efforts expressed in these bills to simplify and coordinate the administration of Medicare and Medicaid. Most specifically, we applaud the provision that calls for the coordination of provider audits for health PAGENO="1197" 1189 programs authorized by the Social Security Act. One of the major weak spots in our health system is the lack of inte- gration among various health programs amd this bill goes far in addressing this problem. Further, EDS endorses this bill's emphasis on dealing with health services other than inpatient care because it has proven to be the areas in which the govern- ment and fiscal agent has the least knowledge and control. In this light, we think it is wise to examine why skilled nurs- ing facilities often only serve the Medicaid population while so many elderly are in dire need of this service. There are several provisions under consideration that would modify and generally expand the utilization review of Medicaid services. EDS believes that a strong program of utilization review is imperative but only if it is in a cost- effective manner. H.R. 3854 requires a second opinion by a physician before elective surgery can be reimbursed by Medicare and Medicaid. Always requiring a second opinion needlessly in- volves this second physician when it has not been shown to be always necessary. EDS would prefer to give the secretary of HEW the descretion to require a second opinion if individual PSROs identify certain elective procedures that are vulnerable to abuse. PAGENO="1198" 1190 H.R. 4475 instructs states who provide medical assistance for inpatient mental health services and skilled nursing care to review the appropriateness of the care at least annually and to establish a written plan of care for each patient. EDS fully recognizes that there is great disparity in quality of care among these facilities; that these facilities often are an overlooked aspect of the health care system and that the professional review of these ser- vices is necessary. We urge the subcommittee to agree to a program that focuses on achieving the proper utilization and quality of care. But, to leap haphazardly into a com- prehensive review of these services will be very costly with- out any knowledge of the potential returns. We recommend that the subcommittee instruct HEW to give enough lead tine, tech- nical support and medical criteria to the states so that they can most effectively achieve the goals of this subcommittee. A final proposal pertaining to utilization review before this subcommittee is H.R. 5458. This bill gives states more flexibility in meeting the requirements specified by HEW in the area of utilization review. Making these reviews less stringent is unwise in a time when the inappropriate use of medical services is becoming more and more apparent. The movement should be toward constructing tighter controls on these programs. EDS does not see the present requirements as overly rigid and would hope that this subcommittee will continue to take the lead role in strengthening the review of the Medic- aid program. PAGENO="1199" 1191 Our company has followed quite closely this sub- committee's workings regarding child health proposals. One section of a proposal (Section 13, H.R. 2159) addresses a major problem concerning the eligibility requirements of federal programs. This section, sponsored by the subcom- mittee's ranking minority member -- Rep. Carter -- guarantees Medicaid coverage to those determined to be eligible even when their income rises due to increases in payments from other federally-run assistance programs. While supporting this change, we would additionally like to make this panel aware of the growing complexity of questions regarding program eli- gibility that are emanating from the present structure of assistance programs and furthered by many of the bills you are considering today. Given this situation, we hope that the subcommittee would consider measures that would consolidate eligibility criteria into one central automated system so that these continual and necessary changes will have a quite minor impact on administration. Presently, a change such as the one contemplated requires informing and educating hundreds of peo- ple about a new policy; if an automated eligibility system were in place, only a fraction of the people need be involved. Thus, while the policy change is sound, we hope that the sub- committee would give more consideration to the administrative impact of these types of proposals. PAGENO="1200" 1192 Before this subcommittee is H.R. 4894 or the Clinical Laboratory Improvement Act of 1979. This is a comprehensive proposal to regulate the operation of clinical labs, also mak- ing some changes in Medicare and Medicaid reimbursement. We would like to limit our comments to one aspect of reimbursement. This bill gives physicians a mandate to charge a `nominal fee for the handling and collecting of clinical laboratory claims. It is our feeling that by specifying the availability of this reimbursement when it is not always requested by the physician, a floodgate of more costly claims is opened. It is our opinion that legislating this concept may turn out to cost more than it is supposed to contain. The last bill on which we would like to comment is H.R. 934 -- amendments reported by the Senate Finance Committee. Although EDS generally supports all of the provisions in this bill, we feel it is important to point out to the subcommittee some of the administrative ramifications of these provisions. This bill directs HEW to develop uniform national Medicare/Medicaid claims forms and to implement them two years after the bill's enactment. Although HEW has been asked to pursue this in the past, the disparity among claim forms is still extreme. One of the problems resulting from this in- volves "crossover" claims, or a claim that is payable through both Medicare and Medicaid. When the claim form varies sig- nificantly between the Medicare intermediary and the Medicaid fiscal agent, the processing time for these claims increases PAGENO="1201" 1193 causing delays in payments to the public. Crossover claims are typically one of the most difficult claims to process. This provision will result in significant savings of administrative costs to the taxpayer -- EDS wholeheartedly supports it. However, we would like to point out two reserva- tions: -- Mandating a uniform claim form should not be a constraint on the developmemt of more advanced and efficient claim forms such as ones that can be scanned and "read" by a computer system. -- It is not necessarily appropriate to mandate a uniform claim form for all present claim types. For instance, it would make little sense to always use the same form for a drug claim and a hospital claim because drug claims often re- quire far less and different information. Thus, we endorse this uniformity except for some diverse ser- vices that have proven to require different types and quantities. A second provision authorizes HEW to approve the use of relative value schedules (RVS) by physicians for billing Medi- care and Medicaid. There has been much discussion and contro- versy surrounding the use of RVS, so our comments will be par- ticularly brief. We support the use of RVS but only when it is impossible to compute the usual, customary and reasonable (UCI~) scales used in Medicare because there is not a large enough sample of physician charges available to determine usual and 56-071 0 - 80 - 76 PAGENO="1202" 1194 customary. We believe that UCR has shown its merits and should be employed over RVS. As a "one-shot'T attempt to reduce Medicaid expendi- tures, the Senate Finance Committee agreed to a provision that eliminates the gap between the tine states draw on federal Medicaid funds and the time when they are actually needed for payment. Our comment here is simply a plea that this provision will not cause delays in payments to recipients and providers. A major and important section of H.R. 934 prohibits Medicare/Medicaid reimbursement to providers for percentage arrangements. Often a provider subcontracts to an organization whose remuneration is based on a percent of profits or revenues of that provider. This provision eliminates two problems that we have observed with these percentage arrangements. First, when attempting to compute the reasonable costs of providers for reimbursement purposes, it is extremely difficult to deter- mine the reasonableness of these subcontract arrangements be- cause common units of measures, like the number of services provided by the subcontractor, are not used in computing a pro- vider's payments to the subcontractor. Additionally, a sub- contractor supplies services and receives increased remuneration directly proportionate to increases in billing revenue without regard to whether the subcontractor's costs of supplying the services has increased. For these reasons, we applaud the Con- gress for recognizing and eliminating this situation. PAGENO="1203" 1195 With regard to the provision pernitting states to obtain laboratory services, eyeglasses, hearing aids and similar itens through conpetitive bidding and negotiated rate arrangenents, EDS believes that the key consideration is that these procedures nay adversely affect the availability of equipnent and the participation of providers. EDS' experience is that limiting reimbursenent to a low enough percentile of the prevailing charges for this equipnent effectively controls progran costs and does not reduce availability of equipment or provider participation. Thus, in our view, the purchase of these items through negotiated fees should be optional and only if the states can provide for the dispensing of the equipment without negatively affecting service. Finally, EDS endorses the proposal that permits states to develop their own Medicaid reimbursement system for skilled nursing facilities and intermediate care facilities. It is our belief that states are better qualified to monitor cost and determine an equitable rate system because of their inti- mate knowledge of the conditions in their area. We highly en- dorse the mandate given to incentive rates that are related to efficient and quality performance. It has been proven many tines that the private sector responds more favorably when there are incentives provided; this proposal recognizes this and we urge its passage. Again, EDS compliments the subcommittee for its fine work. We hope that our comments have been useful to your deliberation. We appreciate this opportunity and will be more than happy to expand on any points discussed here. PAGENO="1204" 1196 Testimony Submitted by Beverlee A. Myers Di rector Department of Health Services State of California Mr. Chairman, I am respectfully submitting this testimony for inclusion in the record of the Subcommittees hearings on HR 4000 and related bills. The California Department of Health Services urges favorable consideration of this legislation, but would like to suggest some improving amendments. I will first summarize the proposed changes and then provide further detail in my subsequent remarks. I am also attaching proposed language effecting these changes in order to facilitate the Subcommittees consideration. During previous testimony before the Ways end Means Health Subcommittee in support of HR 4000, the Department proposed a number of amendments. One of these amendments, which required the study of differences in PSROs' medical criteria and length-of-stay norms, has now been incorporated into the bill. However, two other proposed amendments have not yet been incorporated into the bill. These proposed amendments pertain to: * the application of the results of State agency's monitoring of utilization review programs * consumer representation on PSRO boards of directors. With regard to the latter, we have modified our amendment at the request of the staff of the House Ways and Means Subcommittee on Health to specify the definition of consumer and the method of board member selection. In addition to these amendments, this letter presents four other amendments for consideration, including: * extension of the `swing-bed" concept for long-term care to rural hospitals with less than 50 beds; * establishment of demonstration projects for a single coordinated appeal hearing; * extension of federal funding for the inspections of skilled nursing facilities; and, * provision of incentives to HMO5 for expansion of beneficiary enrollment. We believe these changes will significantly strengthen the bill. PAGENO="1205" 1197 ~~~~ency's Monitorino Results The Department of Health Services strongly urges the Cong~ess to ~êncourage the prudent testing of the PSP,0 concept. Currently, the Secretary has the authority to approve a State agency's monitoring plan~ However, the Secretary retains the authority to determine the reasonableness of the State agency's documentation on a case by case basis. We believe, that the Secretary should be required to accept a State agency's monitoring results as reasonable documentation of a PSRO's performance if those results are generated in accordance with the plan approved by the Secretary. Suggested language for Section 1171 (d), is attached (Attachment 1) for your consideration. This amendment would not preclude the Secretary's acceptance of evidence and information from other parties (e.g., PSRO, Wedicare monitoring results, etc.) during an appeals process. Furthermore, this does not remove the Secretary's authority to make a final administrative decision. However, it does delete the extraordinary prohibition against States' seeking judicial redress. In addition, the amendment would eliminate the required linkage between cost and appropriateness of care when requesting suspension of a P3RD. We do not believe that a PSRO which is having unreasonable and detrimental impact on quality of care, regardless of the PSRO's impact on costs, should be allowed to continue operation. Therefore, we are recommending that the required linkage be deleted and the language be changed from `and' to "and/or". PSRO Boards of Directors (Section 1-4) California is supportive of efforts in HR 4009 to expand the role of health care practitioners other than physicians (HCPOTPs) in PSRO activities. However, we believe there is also a role for increased consumer input into PSRO activities. The current dilemma over rapidly rising health care costs is a critical consumer issue. Since PSROs are purported to be partners in health care cost containment efforts, we believe consumers should be allowed an increased oversight role regardingPSROs. Therefore, we recommend an improvement upon former Department of Health Services' recommendations to the Ways and Weans Committee incorporating the following provisions: 1. PSRO Boards of Directors shall be composed of physicians, HCPQTPs, and consumers. 2. Since HR 4000 provides that the ~Iational PSRO Council shall include one Dentist, one Registered Nurse, and one other HCPOTP, the Statewide PSRO Councils (assuming that they are retained) should also have HCPOTPs in some of their policy-making positions rather than being relegated to an advisory group status. PAGENO="1206" 1198 3. To prevent the appearance of the PSRQ's ability to exercise undue influence by the Board of Directors over the selection of consumer representation, appointment of the consumer representative by the Governor is recommended in lieu of election of the consumer repre- sentative by a PSROs Board. In addition, the Governor of the State is recommended as the appointing authority in lieu of ~oca1 officials because 25 States are single-PSRO areas and only ten States have five or more PSRO areas. The requirement that the consumer representative should be a beneficiary was ruled out because of the problems with on-again, off-again eligibility. Therefore, Title XIX beneficiary representation is already provided for in the requirement that States have Medicaid Advisory Committees. Finally,. it was concluded that consumer representatives should not be restricted to beneficiaries if PSROs assume that utilization review function under a national health insurance program. Specific language embodying these recommendations as new language for Section 1152 (b)(l) of the Social Security Act is attached (Attachment 2). "Swing-Beds" in Long Term Care Facilities (Section 5) Thebasic premise of the long term care provisions of this legislation is consistent with the priorities and philosophy of the Department, except that the proposed legislation would extend the `swing-bed concept to all hospitals. The Department would recommend limitation of this concept to rural hospitals with less than 50 beds for the following reasons: a additional data on the impact of "swing-beds" on the health care systems should be obtained before extending the concept to urban hospitals; * there are insufficient State anency staff to administer and monitor adequately the "swing-bed" concept if applied to all hospitals; and, ~ the most critical need for long term care beds currently is in rural areas. Me also recommend that the State agency under special circumstances may exempt hospitals from meeting long term care requirements if such exemption would not jeopardize the health and safety of long term care patients. Specific language amending Section 1882 is attached for your consideration (Attachment 3). Single Coordinated aHea~iflg (Section 6) The post payment adjustment process of Title XI has three parts: the cost report audit, the appeal, and the collection. Section 6 of HP. 4000 represents an attempt to eliminate Medicare/~edicaid duplication in only one of the three. Although it would be a major improvement, the process would then bifurcate at the ~~aring/appeal level. There would still be two appeals regarding the same facts. Quite conceivably such appeals would not produce PAGENO="1207" 1199 the same resolution - a dilemma we have experienced in the past. Following the hearings (or one if consolidated) , there would then be two collection processes generated from a single audit and/or appeal. Attachment 4 is our amendment proposal adding a new Section 1128 tO the Social Security Act that would address this duplication problem in a more comprehensive way. It is intentionally described as a demonstration rather than a permanent program in order to promote flexibility and evaluation. The third step of a common collection for these audits/hearings may be too radical for adoption and therefore, is included as a study only. Federal Funding for Inspection of Long Term Care Facilities An amendment is needed to extend the 100 percent FFP for the compensation and training ofpersonnel surveying long term care facilities. The inspection of long term care facilities has been an activity that has been 100 percent federally funded since 1972. Section 249 B of the Social Security Amendments of 1972 authorized the 100 percent federal share of the cost of certifying and inspecting skilled nursing homes under the Medicaid system until July 1, 1974. FL 93-368 amended Section 249 B to extend the 100 percent FFP to June 20, 1977 and FL 95-83 later extended the 100 percent FFP to September 30, 1980. Unless the expiration date is again amended, federal support will be reduced and States will have to cut back their surveying activities. He believe that HR 4000 should be amended to extend the authorization for 100 percent federal funding for this activity. Expansion of HMO Enrollment The Department of Health Services also strongly supports the Administration's proposal to reform HMO reimbursement mechanisms under the fledicare program. We endorse this mechanism for encouraging Medicare beneficiaries to enroll in these more economical delivery systems and for promoting health maintenance organizations through provision of a more attractive basis for prospectively contracting with Medicare. We believe, however, that it may be preferable to require an HMO to waive co-insurance and deductible costs first and then provide additional preventive aad other benefits up to the 95% limit. We believe that waiver of co-insurance and deductibles represent the strongest incentive for beneficiary enrollment and also provides the added benefit of reducing State expenditures for dual Medicaid and Medicare beneficiaries. We support the Administration's decision to remove Medicaid from its former proposal. Characteristics of the ~edicare and Medicaid programs vary widely, at least with respect to HMO enrollment. Obviously, co-insurance or deductibles are irrelevant to the ledicaid program. In Oddition, extension of extra PAGENO="1208" 1200 benefits to beneficiaries would be difficult to irplersent in States like California that provide a broad schethile ~f benefits. In addition, problems imposed by intermittent eligibility distinguish the ~edicaid enviroiiment from that of Medicare. While imposition of the reimbursement approach proposed in HR 4000 on State Medicaid programs is inappropriate, we would strongly support legislation granting the States greater latitude in developing innovative rate structures that would encourage increased Medicaid beneficiary enrollment and promote the expansion of organized delivery systems. We in California have developed some approaches to rate setting that incorporate incentives for liMOs to enhance their marketing to our beneficiary population. We would welcome the opportunity to work with the Subcommittee to develop legislation permitting federal financial participation in this and other innovative rate setting approaches which can specifically address the varied incentive structures that have impeded HMO contracting in the States. Thank you for this opportunity to comment on this legislation. We would be pleased to provide any further information that would be of assistance to the Committee. PAGENO="1209" 1201 Attachment 1 States Agency Monitoring Results o Section 1171(d) (1) Each State agency may monitor the performance of review responsibilities by PSROs located within the State, in accordance with a state monitorino plan which is developed after review and comment by such organizations and is approved by the Secretary. ~ results 9enerated in accordance with a p~g~ approved ~ the Se-~ar~ shall constitute ~g~~ppable documentation ofaPSROs performance. The costs of activT~ of the State agency under and in accordance with such plan are reimbursable as an expense of the State agency under Section 1903(a). * (2)! A monitoring plan developed and approved under paragraph (1) may include a specification of performance criteria for judging the effectiveness of the review performance of the PSROs. If the state agency and the PSRO cannot reach agreement regarding such criteria, *the Secretary shall assist the agency and organizations in resolving the matters in dispute. If the Secretary chooses to invoke the MOO waiver py~j~o~~of (a)(2)(B) oTti~1s section because ofth~~sp~fhe Secretary shall clearly demonstrate the udreasonableness ~fk~SE~fe * agencysreq~. (3) (A) Whenever a State agency monitoring the performance of review responsibilities by a PSRO under a plan developed and approved under paragraph (1) submits to the Secretary $~~37,d ~Ø~//Ø~I monitoring results indica~jr~j that the review determinations of such organization have caused an unreasonable and detrimental impact on total state expenditures under Title XIX and/or on the appropriateness of care received by individuals under the STate's plan approved under such title, and requests the Secretary to act, the Secretary shall, within 30 days from the receipt of the ØØ~~ØyS moni.to~jj~g results, make a determination as to ;t}id tdØ~7d~ ~f )~}Id $J~Ø Ø~t~ØI~ ~ ~ $~dtd ~ whether the State~pg~ generated the monitoring results in accordance with the approved monitoring plan. If the Secretary determines that the )Ldy~/~fJ ~ 1i~jSj~~f ~IJ~1 y il//id //Ø~/d /}l i~/ Ø/~/~/7 /i/////i ~L/~/ iyi//f ,l/1/ XJX 0/ /}1/ 4/i0/Y////// 01 0/00 tO//i/dO 11./i /i/0~/J/ /00/f /110 ~ *~j ~Ø/~I /J//i/% ~g~jtorin results were generated in accordance with the approved monitori~g~j~ unless the Secretary determines that the organization has taken appropriate corrective action in accordance with the State aqency's recommendations, he shall immediately suspend s ho inT~To~'s authority in whole or in part under Section 1158(c) to make conclusive determinations for purposes of payment under Title XIX (and he may suspend such authority for purposes of payment under Title XVIII) until he (i) reevaluates such organizations performance of the responsibilities involved and determines that such performance does not have an unreasonable and detrimental impact, or (ii) determines that the organization has taken appropriate corrective action. ~ 0/00/0/1/0/ /i//Ø /// ~0Otd/0rg /00//i /11/0 /0110//i/O/i//h /110/i/ 13/ 1/00/ /00 /0/ /013/00/ L0 i//U/i//i 00//i//I I~o~ State ~ shafl have an active role in the reevaluation of a PSRO and in the determination of whether an organization has taken appropriate corrective action. PAGENO="1210" 1202 Attachment 2 Consumer Representation on PSR() Boards of Directors Section 1152 (b) for purposes of subsection (a), the term qualified organizatThn means ______ (1) when used in connection with any area _______ (A) an organization. (i) which is a nonprofit professional association (or a component organization thereof), (ii) which is composed of licensed doctors of medicine or osteopathy engaged in the practice of medicine or surgery in such area, (iii) the membership of which includes a substantial proportion of all such physicians in such area, (iv) which is organized in a manner which makes avail- able professional competence to review health care services of the types and kinds with respect to which PSROs have review responsibilities under this part, (v) The membership of which is voluntary and open to all doctors of medicine or osteopathy licensed to engage in the practice of medicine or surgery in such area without requirement of membership in or payment of dues to any organized medical society or association, ~1Ø (vi) which does not restrict the eligibility of any member for service as an officer of the PSRO or eligibility for and assignment of duties to such PSRO, or subject to subsection (c)(l), and (vii) which includes health care practitioners other than physicians and nonprovider health consumers on the organizations governin~ board. (B) The representativ~~~~ !fl~ricp!!!ymf!~ public referred ~gj~ 1bT(VYCA)(vii) of this section shall bea consumer whose occup~o~ former occupa~o~l~ (i) neither the administration of health activities, (ii) nor the performance of health services, (iii) nor based on a license to provide health services PAGENO="1211" 1203 Consumer Representation on PSRO Boards of Directors (cont'd) (C) The consumer representative shell (i) no_fiduciary obliqation end heve no immediate family member who has fiduciary obliqation to a (ii) have no financial interest in the renderinq Of health -..-- --.-- services (iii) be appOinted by the Governor of the $tatë in which the PSRO is located (iv) not serve more than two consecuti~e terms - (D) At least 90 days prior to the expiration of a consUmer re~presentatives term on aPSROBOard, the PSRO shäiTpubiish a notice in sufficient newspapers of-general circulation to cover the PSROs area. The noticeshaji - Ci) solicit consumer .représentative nOminations for the Governor to consider, (ii) inditate that respondents should include dTinancial disctosure statements of the nominees to assure viable consideration, (iii) include instructions that res ondents should send nominations to t e Governor s office the address must be included in the notice) by a specified :date which shall be no laE~F~4 4~ys prior to the expiration of the consumer representaIF~j's term. CE) The consumer representative's position shall be a position reimbursed by the PSRO for participation and actual expenses incurred, not to exceed federal guidelines, while att~p~Jn Board functions. (F) such other public, nonprofit private, or other agency or organi-- zation, which the Secretary determines, in accordance with criteria prescribed by him in regulations, to be of professional competence and otherwise suitable; and (2) An organization which the Secretary, on the basis of his examination and evaluation of a formal plan which shall be developed and submitted by the association, agency, or organization in accordance with subsection (h) (as well as on the basis of other relevant data and information), finds to be willing to perform and capable of performing, in an effective, timely, and objective manner and at reasonable cost, the duties, functions, and activities of a PSR0 required by or pursuant to this part. PAGENO="1212" 1204 Attachment 3 "Swing-Beds" in Long Term Care Facilities `SECTION 1882: (a)(l),(b)(2) and (f)(l) are amended to read: SECTION 1882. (a)(T) Any 9~.O~~a1 acute care hospital which is located outstde a Standard Metropolitan Statistical Are~~iS~T~ at least 50 miles or. 2 hours~~ ground transportation from a commup~~* whose ~ pitals p~q~ide: suppl emental hospital services for life threateninq condition~T~Ther than a hospital which has in effec a waiver of the requirement imposed by section l86l(e)(5) which has an agreement under section 1866, and meets one or more of the ~p]~pwi~9~ (a) has a service area with a pppulation of.15,000 or less;TPJ has a medical staff of 10 or fewer physicians who practice full time in the ~~uni~y~ (~JWThe sole con nuni~y provider of general acute care hospital services; andTa) has 50 or fewer iic~p~4 acute hospital beds; may (~i5Ject to subsection (BT enter into an agreement with the Secretary under which its inpatient hospital facilities may be used for the furnishing of services of the type which, if furnished by a skilled nursing facility, would constitute post-hospital extended care services. SECTION 1882. (f) "(1) provi~jpg~ that the health and ~ of patients is not jeopardized, the hospital ~~i$7Jmay be ~ d emedby~~ State agency f~nii~Fãil the requirements of this Act that a skilled nursing facility would be required to meet with respect to the furnishing of such services, and PAGENO="1213" 1205 Attachment 4 Single Coordinated Appeal Hearing Section 8(a) Title XI of the Social Security Act is amended by inserting after Section 1127 the following new Section: COORDINATED APPEAL HEARINGS Section 1128 For such entities who provide services on a cost-related basis under two or more of Titles V, XVIII, and XIX and whose administrative costs are audited through a coordinated procedure as specified in Section 1127, the Secretary shall establish one or more demonstration projects with the objective of creating a single coordinated appeal hearing to adjudicate those administrative cost items in the audit report which are disputed and appealed by the provider. (b) The Secretary is specifically authorized to waive for the purpose of such demonstration projects other statutory provisions which would either prevent, retain duplicative activities, or cause an unnecessary administrative burden in achieving the objective specified in Section 1128. (c) The Secretary shall report to the Congress not later than April 1, 1982 on actions taken to implement such coordinated appeal projects, the reactions of all entities involved and the results including estimates of the reduction of duplicative activity. The Secretary shall also include in such report recommendations for such legislation deemed appropriate to insure the maximum feasible coordination of such appeal hearings. (d) The Secretary shall also cause to be reviewed the feasibility of a single coordinated collection of overpayisent process for those cases processed under Section 1128 which are decided against the provider. The Secretary shall report to the Congress not later than April 1, 1981 with recommendations. [Whereupon, at 4:10 p.m. the subcommittee adjourned.] 0 PAGENO="1214"