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S. H rg. 98-1193

HEALTH CARE COSTS AND THEIR EFFECTS. ON,
THE ECONOMY

HEARINGS
BEFORE THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETY-EIGH TH CONGRESS
SECOND SESSION

APRIL 12 AND AUGUST 29, 1984

Printed for use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE
37-264 o




WASHINGTON : 1984

JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Congress)
SENATE
ROGER W. JEPSEN, Iowa, Chairman
WILLIAM V. ROTH, Jr., Delaware
JAMES ABDNOR, South Dakota
STEVEN D. SYMMS, Idaho
MACK MATTINGLY, Georgia
A.LFONSE M. D’AMATO, New York
LLOYD BENTSEN, Texas
WILLIAM PROXMIRE, Wisconsin
EDWARD M. KENNEDY, Massachusetts
PAUL S. SARBANES, Maryland
C harles

H.

Jam es

B

radford,

K.

HOUSE OF REPRESENTATIVES
LEE H. HAMILTON, Indiana,
Vice Chairman
GILLIS W. LONG, Louisiana
PARREN J. MITCHELL, Maryland
AUGUSTUS F. HAWKINS, California
DAVID R. OBEY, Wisconsin
JAMES H. SCHEUER, New York
CHALMERS P. W YLIE, Ohio
MARJORIE S. HOLT, Maryland
DANIEL E. LUNGREN, California
OLYMPIA J. SNOWE, Maine
Acting Executive Director1
Deputy Director

G a l b r a it h ,

1 Mr. Bradford was acting executive director from Mar. 23 to Apr. 29, 1984. Dan
Roberts was appointed as executive director on Apr. 30, 1984.




CONTENTS
WITNESSES AND STATEMENTS
T hursday, April 12, 1984
Jepsen, Hon. Roger W., chairman of the Joint Economic Committee:
Opening statement_______________________________________________________
Califano, Hon. Joseph A., Jr., a director, Chrysler Corp.; chairman,
Chrysler Board of Directors Committee on Health Care; and former
Secretary of Health, Education, and Welfare---------------------------------------Shelton, Jack K., manager, employee insurance department, Ford Motor
Co________________________________________________________________________
White, Mrs. Bert, chairman, Farm Bureau Women’s Committee, Ameri­
can Farm Bureau Federation___________________________________________
Goldbeck, Willis B., president, Washington Business Group on Health—
Hacking, James, assistant legislative counsel, American Association of
Retired Persons, accompanied by Jack Christy, legislative representa­
tive ______________________________________________________________________
Owen, Jack, executive vice president, American Hospital Association-----Nelson, Alan R., M.D., member, board of trustees, American Medical Asso­
ciation, accompanied by Ross Rubin, director, Department of Federal
Legislation, AMA________________________________________________________
Suther, Mary, chief executive officer, Visiting Nurse Association of Dallas,
TX, on behalf of the National Association for Home Care_______________
Dorsch, James A., Washington counsel, Health Insurance Association of
America__________________________________________________________________

Page
1
4
32
58
66
93
127
141
165
178

W ednesday, A ugust 29, 1984
Jepsen, Hon. Roger W., chairman of the Joint Economic Committee:
Opening statement_______________________________________________________
Beckett, Julie, Cedar Rapids, IA __________________________________________
Shipley, James E., president, Iowa Health Care Association, Anamosa, IA_
McLaughlin, James N., Monticello, IA ____________________________________
Pos, Wayne, legislative chairman, Iowa Retired Teachers Association,
Des Moines, IA ___________________________________________________________
Roquette, Denise, Cedar Rapids, IA_______________________________________
Miller, Jodi, Cedar Rapids, IA _____________________________________________
Flanagan, Jean, Cedar Rapids, IA ________________________________________
Swaney, Robert L., M.D., president, Linn County Medical Society, Cedar
Rapids, IA, representing the Iowa Medical Society______________________
Wallace, Samuel T., president, St. Luke’s Hospital, Cedar Rapids, IA _____
Miller, Sara B., administrator, Anamosa Community Hospital, Anamosa,
IA -------------------------------------------------------------------------------------------------------------Levitz, Gary S., assistant to the director, University of Iowa Hospitals
and Clinics, Cedar Rapids, IA, presented on behalf of John W. Colloton,
director of University of Iowa Hospitals and Clinics and assistant to the
university president for Statewide Services____________________________
Tinker, Jim, administrator, Mercy Hospital, Cedar Rapids, IA ___________
Muenchow, Judie, executive director, Visiting Nurse Association, Cedar
Rapids, IA ----------------------------------------------------------------------------------------------- Phillips, Madge, director, Linn County Health Center, Cedar Rapids, IA_
_
Oakley, Brice, senior associate counsel, Blue Cross and Blue Shield of
Iowa, Des Moines, IA ____________________________________________________
Hegwood, Jackie, operations supervisor, Social Security district office,
Cedar Rapids, IA _______________________________________________________




(in)

197
199
201
202
203
205
206
207
209
214
216.

218
222
225
230
234
238

IV
Page

Tilghman, Joe, deputy regional administrator, Health Care Financing
Administration, Kansas City regional office, Kansas City, MO______ .____
Weber, John, medical sales representative, Midwest sales region, HewlettPackard Co., Cedar Rapids, IA--------------------------------------------------------------Snyder, James R., attorney, Simmons, Perrine, Albright & Ellwood, Cedar
Rapids, IA ________________________________________________________________
Knuth, Russell, Pioneer Hi-Bred International, Inc., Johnson, IA _________
Petras, Edward J., acting director, HMO Medical Association, Dubuque,
IA ________________________________________________________ _______________
Grahek, Bernard M., clinical coordinator, Voluntary Hospitals Cooperative
Association of Iowa, Cedar Rapids, IA----------------------------------------------------Johnson, G. Richard, Rockwell International, Cedar Rapids, IA ----------------

239
247
248
253
258
260
262

SUBMISSIONS FOR THE RECORD
T h u r s d a y , A pril

12, 1984

Califano, Hon. Joseph A., J r.: Prepared statement________________________
Dorsch, James A .: Prepared statement_____________________________________
Goldbeck, Willis B .: Prepared statement__________________________________
Hacking, James, et a l.: Prepared statement------------------------------------------------Nelson, Alan R., M.D., et a l.: Prepared statement_________________________
Owen, Jack : Prepared statement__________________________________________
Shelton, Jack K .: Prepared statement______________________________________
Suther, Mary : Prepared statement_________________________________________
White, Mrs. Bert: Prepared statement____________________________________
W

e d n e s d a y

, A ugust

11
180
70
96
145
132
35
170
61

29, 1984

Knuth, Russell: Brochure entitled “The Health Guard Program for Pioneer
Employees” _____________________________________________________________
Oakley, Brice : Prepared statement_________________________________________
Phillips, Madge : Prepared statement_______________________________________
Snyder, James R .: Prepared statement-------------------------------------------------------Swaney, Robert L., M .D .: Prepared statement____________________________
Tilghman, Joe: Prepared statement________________________________________

256
236
233
250
211
242

APPENDIX
Article entitled: “Gripes About Health Care Aired at Congressional Hear­
ing,” by Vanessa Shelton, from the Cedar Rapids Gazette, Aug. 30,1984—
Letters to Senator Jepsen and Senator Grassley from Iowa constituents
regarding high health care costs---------------------------------------------------------------




267
271

HEALTH CARE COSTS AND THEIR EFFECTS ON
THE ECONOMY

TH URSDAY, A P R IL 12, 1984
C ongress of t h e U n it e d S t a te s ,
J o in t E c o n o m ic C o m m it t e e ,

Washington, DC.

The committee met, pursuant to notice, at 9 :40 a.m., in room SD-628,
JDirksen Senate Office Building, Hon. Roger W. Jepsen (chairman of
the committee) presiding.
Present: Senator Jepsen.
Also present: William Finerfrock, legislative assistant to Senator
Jepsen; and Mary E. Eccles, professional staff member.
dE N IN G STATEMENT OF SENATOR JEPSEN, CHAIRMAN

Senator J e p s e n . We now call this hearing to order.
The topic of today’s hearing is health care costs and their effects on
the economy.
First of all, I would like to take this opportunity to thank all of
the witnesses and the guests here this morning for taking the time to
be here. I know that the testimony presented today will make all our
time well spent.
Several months ago, I was talking with a group of Iowans about
health care costs and someone asked the question, “Who’s to blame for
skyrocketing health care costs?” One person in the group offered that
it was the doctors’ fault, another suggested that perhaps the hospitals
were to blame, still another suggested that actually it was neither,
but rather it was the insurance companies that were driving up the
cost of health care. I ’m sure this is familiar and you’ve heard that type
of roundrobin discussion before.
Well, as we discussed the matter further, we came to the conclusion
that it was really unfair to blame just the doctors or the hospitals or
the insurance companies; that indeed, consumers, business, and govern­
ment had to share in the blame as well. I suppose the question, “ Who’s
to blame for skyrocketing health care costs?” can best be answered by
the cartoon character Pogo who once stated, “ We has met the enemy
and it is us.”
Whenever I get into a discussion about health care costs, I am re­
minded of a statement made by a former classmate of mine who, upon
leaving an examination room was asked, “ How were the questions on
the exam? Did you have any trouble?” without hesitating, my friend
replied, “ The questions were easy. It was the answers that I had
trouble with.”




()
l

2
As I get more and more involved in the health care debate, I find
that the vast majority of people are all asking the right questions; it’s
the answers that we are having trouble with right now.
Now I won’t suggest that in one hearing or one series of hearings we
will be able to come up with the answers to the health care cost prob­
lem, but it is my hope that perhaps we will be able to gain a better
understanding of the problems being faced by consumers, businesses,
providers, and insurers so that when we talk about possible solutions
it will be based upon a common understanding of the problem.
As these charts indicate, health care costs have gone from approxi­
mately 5 percent of our gross national product in 1950 to almost 11
percent of our gross national product in 1982. Current estimates are
for this rise to continue throughout the remainder of this decade and
on in to the next century. Now to put this into perspective, health care
costs, as a percentage of our gross national product, are rising faster
than either the defense budget or Social Security.
But rising health care costs are more than just statistics or percent­
ages of the gross national product. Those costs are coming out of the
pockets of hard-working men and women. Those costs are being borne
by elderly citizens who see health care eating more and more into their
retirement income. Those costs are being paid by consumers in in­
creased costs of goods and services.
Lest anyone get the wrong idea, that money isn’t being thrown down
a bottomless hole. We are getting something for those dollars and that
something is the finest quality health care in the world. Overutilization
is not the only reason that health care costs have gone up. If we want
to go back to paying the same for health care that we paid in 1950, then
we must also expect that we will get the same quality of health care we
got in 1950.
For many years, the American people have become accustomed to
hearing debate at the national level on the various policies of the Fed­
eral Government—defense policy, economic policy, tax policy, welfare
policy, and most recently, industrial policy.
Of equal importance but only recently focused upon, is the question
of health policy.
Everyone agrees that health care costs have been a major concern of
consumers, providers, insurers, and government officials for quite some
time. But other than examining health care costs as they affect the
medicare and medicaid programs, little attention has been paid to
health care costs as they affect the rest of the country.
As the chart indicates, health care costs have been skyrocketing for
quite some time.
When I first discussed the idea of conducting a series of Joint
Economic Committee hearings on the problem of health care costs as
they affect the economy, I was met with the question: “Why should the
Joint Economic Committee do this ?”
As everyone knows, the Joint Economic Committee does not have
a legislative mandate, but rather is charged with taking a broad look
at Government policy and attempting to determine the economic
impact of those policies. For this reason, I believe this committee is
uniquely qualified to look at the problems of health care costs because
we are not restrained by the boundaries of the medicare or medicaid




3
programs. Nor are we limited in the kinds of ways we can look at the
effects of health care costs.
As the agenda indicates, today’s hearing will seek to present testi­
mony from a wide variety of witnesses representing some very diver­
gent viewpoints. It was my hope in selecting these witnesses to get
as broad a spectrum of viewpoints as possible. For this reason, we have
witnesses representing business, health providers, and consumers.
1 think that if I had to choose one word to describe the goal we are
all striving for, it would be affordability. That connotes accessibility.
The American people have come to expect affordable health care as a
right. Frankly, I don’t think this is an unreasonable expectation.
As a caring and compassionate society, we must be willing to recog­
nize that adequate and affordable health care is not a luxury but rather
a necessity. As such, we must be prepared to take those steps necessary
to bring this goal about.
As we strive for affordability, however, we cannot overlook the
need to maintain quality.
After all, if it is a relative of yours on the operating table, you want
to know that the physicians and staff performing the surgery are welltrained and qualified to be doing the delicate job.
That quality costs money.
Someone has to pay for the training that went into educating the
doctors and nurses.
Someone has to pay for the research that went into developing the
drugs being administered.
And someone has to pay for the high-tech equipment being used to
diagnose and monitor the patient.
In concluding my remarks, I would refer to the other two charts
we have there and show that used on the basis of 100 in 1970 we find
that whereas medical care has risen as illustrated by the green line,
the Consumer Price Index has risen along with it, but medical care
is rising slightly higher than the Consumer Price Index or inflation.
We find the cost of a hospital room has risen nearly twice as much in
the same period of time. Employer contributions for employee health
insurance from 1950 to 198B—we started out with about $780 million
in contributions and in 1983 it was $70.7 billion.
Interestingly enough, the medicare-medicaid costs were projected
to cost $7 billion by 1990 and it was around $77 billion in 1982. That’s
quite a marked degree of similarity. In any event, it’s a lot of money.
We’ve got some problems.
I would like to once again thank everyone for attending this hearing
and I look forward to hearing the testimony of all of our witnesses.
We are going to have this morning the format that will be divided
into four panels. Each panelist has been asked to summarize his or
her statement with the understanding that the entire statement will
appear in the record as if read. After all the panelists have presented
their oral testimony, then there will be time available for exchange
of ideas as well as questions. Now we have copies of everyone that is
testifying today. I ’d like to remind the panelists that we’re asking
that you summarize the key points, and I ’d also like to mention and
advise that this hearing is being televised by the C-SPAN cable net­
work and as such we may have people watching who are not familiar




4
with some of the terms or the abbreviations that we use around the
Gapitol here and that we kind of take for granted. For instance, many
people don’t know what an HMO is or never heard of PPO, and if
you intend to use those terms excessively I ’d ask you to please explain
these during the question and answer period or as you refer to them.
I ’d like to welcome the first panel: the Honorable Joseph Califano,
former Secretary of Health, Education, and Welfare. Mr. Califano
is presently serving on the board of directors of the Chrysler Corp.
and will be testifying on their behalf. And Mr. Jack Shelton, manager,
employee insurance department for the Ford Motor Co. Mr. Shelton
will be testifying on behalf of Ford.
I thank you—in the jargon of the lingo that they use around the
Capitol here—I thank you gentlemen for taking time out of your
busy schedule to be here on this most beautiful day to share with us
your expertise in this field.
You may proceed, Mr. Califano.
STATEMENT OF HON. JOSEPH A. CALIFANO, JR., A DIRECTOR,
CHRYSLER CORP.; CHAIRMAN, CHRYSLER BOARD OF DIRECTORS
COMMITTEE ON HEALTH CARE; AND FORMER SECRETARY OF
HEALTH, EDUCATION, AND WELFARE

Mr. C a l if a n o . Thank you, Mr. Chairman. I will read some excerpts
from my statement and i appreciate the entire statement being put in
the record.
I appreciate the opportunity to testify on health care costs and
their effects on the economy.
The Chrysler Corp. is deeply concerned about rocketing health care
costs and believes that our Nation must formulate a national health
policy if we are to bring these costs under control.
The persistent, unbridled, inflationary rise in health care costs is
an unfair burden for millions of our citizen-consumers, and for
American business as it seeks to compete with foreign industry. We
must reduce the cost of delivering high quality health care to our
people.
True reductions in costs will come only from fundamental changes
in the way we deliver and pay for health care. Those changes require
concerted action by all the players—employers and unions, the ad­
ministration and the Congress, Federal, State, and local government,
lawyers, insurance companies, and the doctors, hospitals, laboratories,
drug companies, and other suppliers.
Unfortunately, the structure of the health care industry is such
that caps on payments by one purchaser produce largely illusionary
savings. The suppliers simply shift costs to other purchasers or to
other parts of the system.
Controlling health care costs has become the great health care cost
shell game. The Congress puts a cap on medicare payments to hos*
pitals and the hospitals just pass the costs off to the States. The States
put their own caps on medicaid hospital payments and the hospitals
just move the pea to the private insurers and the Blues. The Congress
establishes caps on medical procedures in hospitals and the doctors
move the pea outside the hospital to their offices or clinics.




5
It’s time, Mr. Chairman, to end the shell game and establish a
comprehensive national policy to deal with health care costs.
The statistics regarding health care costs are shocking. I won’t re­
peat what you said, Mr. Chairman, but I would note that this month,
for the first time in the history of our country, Americans are spend­
ing more than $1 billion a day on health care.
These structural characteristics create a Frankenstein health care
payment system, with gargantuan growth on the supply side as we
train more physicians, build more hospital beds and invent more ex­
pensive medical technologies, and with little, if any, resistance on the
demand side.
The creation of this health care cost monster did not spring from
the brain of some demented doctor. We all contributed mightily to
the effort.
American businesses, experiencing high growth in the post-World
War II period, has little concern as they expanded health care bene­
fits. After all, health care seemed a lot less expensive to give employees
than a higher per hour wage.
Unions demanded more health care coverage for their members,
especially since health premiums were tax-free fringe benefits to work­
ers. With each round of bargaining, managers who fought with other
suppliers over the price of each nail or screw and union leaders who
negotiated for each half-cent an hour kept adding health benefits to
contracts without realizing that they were becoming hostage to costs
beyond their control—costs that over the long run endangered jobs
and hobbled profits.
The Government also made its contribution. When the Medicare and
Medicaid Programs were instituted in the 1960’s, the Government
was preoccupied with improving access to health care for the elderly
and the poor. So we paid the political price by simply superimposing
those programs on the existing cost-based, fee-for-service system.
The doctors and hospitals initially resisted these government pro­
grams. But once the Congress legislated the fee-for-service, cost and
cost-plus reimbursement svstem into them, the doctors and hospital
administrators cheerfully joined in the creation of this swollen health
care cost monster.
Lawyers, judges, and juries fed this Frankenstein by malpractice
litigation that established unpredictable and unrealistic standards of
negligence and whopping judgments against doctors and hospitals
who failed to run one test or another.
It’s not a npw problem, Mr. Chairman. In 1968, President Lyndon
Johnson sent Congress a message on “ Health in America” citing three
maior deficiencies with the structure of the health care market:
Health insurance plans—that—encourage doctors and patients to
choose hospitalization even when other, less costly forms of care would
be equally effective;
The fee-for-service system of paying physicians with no strong eco­
nomic incentives to encourage them to avoid providing care that is
unnecessary; and
Hospitals—that—charge on a cost basis which places no penalty
on inefficient operations.




6

President Johnson asked for legislation to test new payment sys­
tems. Congress refused to give him that legislation that year and it
has failed to act decisively since then, despite the repeated entreaties
of every President since Lyndon Johnson.
At Chrysler, as we fought for survival, we had to address the cost
of health care.
It has not been an easy task. In 1984, Chrysler’s health care costs
will exceed $400 million, making the Blues Chrysler’s single largest
supplier. That’s more than $1.1 million each day. This year Chrys­
ler’s total health care bill—which includes Chrysler’s medicare pay­
roll tax and a portion of the health insurance premiums of its sup­
pliers—will exceed $550 for each car we sell. That’s down somewhat
from $600 a car last year—not because inflation in health care costs
has abated, but because we are selling more cars.
The cost of Chrysler’s Health Care Program—which covers em­
ployees, retirees and their dependents—grew from $295 per active em­
ployee in 1964 to some $5,700 per active employee today. Chrysler’s
overall health insurance premium jumped from $81 million in 1970
to $364 million in 1983. This year Chrysler must sell about 70,000 ve­
hicles just to pay for its health care bills.
If something isn’t done to reduce projected increases, Chrysler’s
health care costs could exceed $1 billion in 10 years, or $16,000 per
active worker.
I f we could hold Chrysler’s 1984 projected health care costs to a
growth rate even 50 percent greater than the Consumer Price Index,
we could save $25 million this year. If Chrysler could reduce the rate
of increase in its health care costs just 1 percent, Chrysler could save
more than $400 million over the next 10 years.
Excessive health care costs are eroding America’s ability to com­
pete with foreign companies, a subject you asked us to address, Mr.
Chairman. Mitsubishi Motor Corp., a Japanese car manufacturer in
which Chrysler has an investment, spends only $815 a year for an
employee’s health care costs while each employee pays approximately
$374. Unlike Chrysler, Mitsubishi has no direct cost for retirees or
their surviving spouses because of Japan’s national health coverage.
Chrysler’s comparable cost per active employee is $5,700—400 percent
higher than Mitsubishi’s cost.
That gap may well increase. The Japanese Government is moving
aggressively to control health care utilization by seeking a law to
require a substantial copayment for employees, beginning at 10 per­
cent and rising to 20 percent.
What does Chrysler get for its health care dollar? A health care
industry that is expensive, wasteful, and inefficient. Let me share with
you a few examples of what we are discovering as we analyze our own
health care plan in depth.
Among the Nation’s medicare recipients, one of the top medical pro­
cedures performed is cataract surgery. The procedure takes about 20
minutes and rarely requires a general anesthetic.
The average opthamologist charge for this procedure in the Detroit
area is about $2,000. I f a doctor performed three of these procedures
a day, 4 davs a week, 42 weeks a year, he would earn more than $1
million, for less than 200 hours of actual surgery, and have a 10-week
vacation to boot.




7
Compare this with the typical charge of $1,500 for serious abdominal
surgery lasting 4 to 5 hours.
We asked some doctors to investigate eight Detroit area hospitals
with extraordinarily high percentages of nonsurgical admissions for
low back problems. This study showed that two-thirds of the hospital­
izations—and 2,264 out of 2,677 of the total hospital days, approxi­
mately 85 percent—were inappropriate.
With respect to three of the hospitals audited, none of the admis­
sions were found to be appropriate.
Our physician experts investigated the six Detroit area hospitals
with the highest number of maternity admissions for our insured. In
more than 80 percent of the 618 cases studied, one or more of the hos­
pital days were found to be unnecessary—a total of over 1,000 inappro­
priate days, almost a quarter of the time spent in the hospital.
We have no reason to believe that Chrysler’s experience is unique.
Similar waste and inefficiency exists in almost every health benefit
program in this country. Chrysler’s preliminary investigation sug­
gests that as much as 25 percent of its hospital costs may be due to
waste and inefficiency. For Chrysler, elimination of those costs would
save almost $50 million in 1984.
Other studies have also found substantial evidence of inappropriate
or unnecessary hospitalization. We cite them in the testimony. I f we
reduced the number of hospital days expected in 1984 by 25 percent,
we would save more than $60 billion—without adversely affecting the
quality of care.
Chrysler is not sitting still. In less than 2 years, we have acted to
save nearly $10 million annually.
We set up a screening program for foot surgery, which cut utiliza­
tion 60 percent and saves over $1 million a year.
We began a program to promote generic drugs which saves $250,000
a year.
We mandated second medical opinions before certain elective sur­
geries, which saves $1 million a year.
We instituted programs to encourage outpatient surgery, which save
$2 million a year.
We have started a new program in Michigan to screen hospital
admissions and control lengths of stay for Chrysler’s nonbargaining
unit employees. We project a savings of $2 million in its first year. I f
we could extend this program to Chrysler’s United Auto Worker em­
ployees, which would require union agreement, we estimate we could
save $9 million in the first year.
We mounted an intensive communication program to educate both
employees and health care providers about these new corporation ini­
tiatives and the cost of health care.
These steps are only the beginning. We are currently exploring sev­
eral preferred provider arrangements, including programs for out­
patient psychiatric services, laboratory tests, and prescription drugs.
In short, Chrysler is trying to do everything it can to control health
care costs by eliminating waste and inefficiency. But Chrysler and
American business cannot along control health care costs. We need
help to restructure the financial incentives in America’s health care
industry to eliminate its inefficiencies, and, where possible, to instill
some marketplace discipline and competition.




8
More than 60 percent of the costs of hospital care are paid by Fed­
eral, State, and local government. Unless public expenditures and
Federal and State cost containment measures are part of a national
health policy, it is inevitable that cost shifting will continue to occur.
Sleight of hand tricks do not reduce health care costs. Costs disap­
pearing from the Federal health care budget have a remarkable ability
to reappear elsewhere in the system. In the case of many elderly
patients, for example, the incentive in the medicare DUG cap for early
discharge of hospital patients translates into early admission to nurs­
ing homes. The Federal Government plays this shell game because
medicaid pays for most nursing home care, and the States pay half the
medicaid biil—while the Federal Government gets no State help in
paying the medicare bill.
Another variant of the health care costs shell game is the trend to
ambulatory surgery that has caused an explosion of new investment in
equipment and physical plant for outpatient surgery centers, without
any concomitant reduction in hospital beds. As a result, hospitals con­
tinue to have the same high fixed costs, which must now be spread
over fewer patients.
Rather than reducing the cost of health care by eliminating the ineffi­
ciencies and waste in the system, the Federal Government and the
States have thus far found it easier to refuse to pay their share, grab­
bing credit for reducing budget deficits, when they are only hiding the
actual health care costs under another shell. Rather than attack the
structural defects in the health care financing system, the Congress
and the administration have opted to impose a hidden tax on Ameri­
can business and American citizens. The Federal Government’s savings
are the increased costs for business and individuals.
Just an example or two of what recent Federal policy me^ns to
Chrysler.
In order to stave off bankruptcy in 1979, Chrysler had to shrink its
active work force. Chrysler now pays for health care for nearly as
many retirees and dependents as active employees and their depend­
ents. Moreover, the retirees are aging, averaging almost 69 years and
getting older. We have more than 14,000 retirees age 75 or older; 6,000
are 80 or older.
For its retirees, Chrysler pays for many health care services not paid
by medicare. Therefore, as medicare seeks to ease its own financial crisis
by shifting costs to the individual, if that beneficiary is a Chrysler
retiree, we pick up the cost.
In 1965, a medicare beneficiary had to pay the first $40 of a hospital
stay; today that copayment is $356. Similarly, the daily copayment
for long-term hospital stays has risen from $10 to $89 per day—for
the 60th to the 90th day of an admission. Chrysler absorbs 100 percent
of these increases. The latest increase in the hospital deductible alone
of medicare will cost Chrysler approximately $1 million a year. Our
citizens haven’t saved anything. Our Government has simply hidden
the pea under another shell.
Here is one classic example of how the great health care cost shell
game affects Chrysler: The Tax Equity and Fiscal Responsibility Act
of 1982 [TEFRA] requires the employer’s group health insurance to
provide the primary coverage for employees and their spouses over age
65. That provision does not save our people a single dollar. It simply




9
shifts the pea from medicare to the private sector. The cost to Chrysler
is $1.4 million in 1983 and will increase annually. The cost to all U.S.
businesses is over $1.5 billion.
Some of the proposals for rescuing medicare are outrageous exam­
ples of the health care cost shell game. For example, the proposal by the
Advisory Council on Social Security to delay medicare eligibility from
age 65 to age 67 would cost Chrysler approximately $100 million over
the next 5 years. Over the next 10 years, the delay would cost American
business and citizens some $75 billion. It would shift the cost personally
to citizens not fortunate enough to have such coverage like Chrysler’s.
And it would not eliminate a single dollar of waste or inefficiency in
the health care system.
This Nation cannot afford further delay in establishing a national
policy to address the health care cost crisis. The graying of America
is forcing the issue, with an ever-growing population demanding more
expensive high technology hospital care.
The effect of the aging of our population on health care costs is
sobering. The Congressional Budget Office now projects that Medi­
care’s Hospital Insurance Trust Fund will go bust by the early 1990’s.
Yet, the Hospital Fund crisis is only the tip of the iceberg. Many
thoughtful Americans are deeply concerned about the frightening
levels of unfunded pension liability in our country. The crisis in the
Social Security system is the forerunner of far more serious financial
crises as we face up to unfunded Government and private sector pen­
sion liabilities that many fear approach $1 trillion.
But few Americans have even begun to think about the unfunded
health care liabilities of our Nation. As our health care costs increase
and our population ages, the present, unfunded postemployment
health care cost liability of the Fortune 500 American companies
alone—with about 15 million active employees—approaches $2 tril­
lion. The total assets of those companies was only $1.3 trillion in 1982.
That unfunded liability number alone should make us all realize
that in health care costs we face the greatest financial and social crisis
in this Nation’s history.
Congress must begin to address the costs across the health care
system, and we welcome these hearings in that direction, Mr. Chair­
man.
As a first step, we recommend that the Congress this year enact
legislation to establish a National Commission on Health Care Re­
form, similar to the National Commission on Social Security Reform.
The Commission’s charge should be to develop a national health
policy, and its membership should include representatives of all in­
terested parties—Federal, State, and local governments, business and
labor, senior citizens and junior citizens, lawyers, physicians, hos­
pitals, and health insurers. The Commission can provide a forum to
develop a comprehensive strategy to reduce costs without reducing
care. The Commission should be required to make its report to the
administration, the Congress, and the American people within 1 year,
so that the next Congress can act.
We must create an efficient health care delivery system. We can’t
keep going the way we are. We simply don’t have the money.
That stark fact presages a terrifying triage for the American
people, and a debate over euthanasia more searing than our debate




10
over abortion. In “The Painful Prescription,” a book just published
by Henry Aaron and William Schwartz at Brookings, the authors
argue persuasively that, like Great Britain, we will soon ration health
care in our country.
We always have had rationing, of course, related to individual
economic wealth. But, with medicare, the Government becomes the
rationer of health care for those who use and need the acute care sys­
tem most—the elderly and the disabled. This role is reinforced by the
fact that the Federal Government funds 90 percent of all the basic
biomedical research in America, and, together with State and local
governments, pays most hospital bills.
Bluntly put, Uncle Sam will soon be playing King Solomon with
your father and mother and mine, and with you and me.
We face a frightening specter in our Nation as medical technology
and spiraling costs combine to blur the lines in hospital rooms among
natural death, euthanasia, suicide, and murder.
Without the most energetic pursuit of efficiencies, we will soon face
a world in which there is no kidney dialysis for people over 55, no
hip operations—or artificial hips—for those over 65, a world in which
eligibility for expensive anticancer therapy will be based on statistical
assessments of success, and key organ transplants will be severely
limited to special cases of virtually certain recovery—all as defined
in pages and pages of Government regulations.
What kind o f a vision for the future is that ? It’s not a very pleasant
one. But in Great Britain that future is now. That’s just what they
do today.
We in America are fortunate because we still have time to avoid
that fate. We can learn from Britain’s experience. We have a far more
productive society. We can well afford to provide quality medical care
to all. But we must have a coherent national health policy which will
eliminate inefficiencies and reduce the cost of health care for our society
asa%hole.
These issues, which go to the very sanctity of human life, are what
make these hearings so important and your responsibilities as legis­
lators so special.
[The prepared statement of Mr. Califano follows:]




11
P repared

Mr.

St a t e m e n t

H o n . Joseph

of

A.

C a l i f a n o , Jr.

Chairman and Members of the Committee:

I appreciate

the opportunity

to testify on Health

Care Costs and their effects on the economy.
The Chrysler Corporation is deeply concerned about
rocketing
must

health

formulate

care

costs

a national

and

believes

health policy

that

our

Nation

if we are to bring

these costs under control.
The
health

care

persistent,

costs

citizen-consumers,
compete with

is an

unbridled,
unfair

inflationary

rise

burden for millions

in

of our

and for American business as it seeks to

foreign

industry.

We must

reduce the cost of

delivering high quality health care to our people.
True
damental
care.

changes

Those

players —
Congress,
the

reductions

in costs will

in the way

changes

we

require

deliver

doctors,

action

for health
by

all

the

the Administration and the

state and local

hospitals,

and pay

concerted

employers and unions,
federal,

come only from fun­

government,

laboratories,

drug

lawyers, and
companies

and

other suppliers.
Unfortunately,
industry
produce
shift

is

such

largely

costs

to

that

the
caps

illusionary
other

structure
on

of

payments

savings.

purchasers

or

The
to

the
by

health

one

purchaser

suppliers

other

care

parts

simply
of

the

system.
Controlling health care costs has become the Great
Health

Care

Cost

Shell

Game.

The

Congress

puts

a

cap on

Medicare payments to hospitals and the hospitals just pass




12
the costs off to the states.
on

Medicaid

hospital

The states put their own caps

payments

and

the

hospitals

the pea to the private insurers and the Blues.
establishes

caps on medical

doctors move

the pea

just

move

The Congress

procedures in hospitals and the

outside

the hospital

to their offices

or clinics.
It's

time

comprehensive

to

end

national

the

policy

shell
to

game

deal

and

with

establish
health

a

care

costs.
The

statistics

regarding

health

care

costs

are

shocking.
o

This month, for the first time in
our history, Americans are spending
more than $1 billion a day on health
care.

o

Health care costs rose from $41.7
billion in 1965 to $355 billion in
1983 — an increase of 770 percent.

o

Hospital
costs
jumped from
$13.9
billion in 1965 to $150 billion in
1983 — an increase of 979 percent.

o

Physicians fees increased from $8.5
billion in 1965 to $68.1 billion —
an increase of 700 percent.

o

Over that period, the Consumer Price
Index rose —
but only by 242 per­
cent.

And
sector

of

health

the

care

economy.

is

In

still

1983,

the

the

most

cost

inflationary

of medical

care

rose at a ten percent rate, more than triple the 3.2 percent
increase

in

the

overall

cost of a hospital
almost

$400

per




consumer

price

index.

room rose 12.2 percent,

day.

The

1983 bill

of

The

daily

to an average of

$355

billion was

a

13
levy

of

almost

America.

Last

$1,500
year,

on

every

some

15

man,

cents

woman
of

and

every

child

federal

in
tax

dollar went to the health care industry.
This year

health

care

continues

its

inflationary

assault on the American economy.
There
structural

is

no

longer

much

disagreement

about

the

causes of inflation in the health care industry.

Everyone working in the system is acting in response to the
economic incentives they face.
First, hospitals have generally been reimbursed on
a cost,

or in the case of for-profit hospitals,

basis.

Doctors are paid on a fee for service basis.

the

more

hospitals

received;

have

spent,

the

more

a cost-plus

money

the more services doctors perform,

Thus,

they

have

the more money

they make.
The

new

setting

payments

mies

gall

to

direction.
(DRG)

Medicare
for

bladder
But

system,

prospective

467 health

diagnoses

operations —

even

Medicare

with

this

continues

tures and physician training

payment

is a

step in the

fund

Related

capital

on a cost basis.

right
Group

expendi­

And the DRG

system is part of the Great Health Care Cost Shell Game:
lets

the hospitals

insurers,
hospital

85

It

the pea to the states and private

and it lets the doctors shift the pea out of the
and

into

containment caps.

3 7 -2 6 4 -

shift

—

from appendecto­

Diagnostic
to

system

2




their

offices

where

there

are

no

cost

14
Second

—

and of

critical

importance

as we

think

of the potential for a competitive economy in health care —
the

prevailing

relationship

third

party

between

the

buyer

American buys an automobile,
tiates about model,
ment,

color,

price,

trim.

payment

system

and

the

eliminates

seller.

When

he or she picks a dealer,

any
an

nego­

terms of payment, optional equip­

Then the buyer

picks the car he or she

wants, and pays for it.
But

no

one

enters

a hospital

and

says,

"I would

like an appendectomy today," or "I would like a hysterectomy
tomorrow."
doesn't

Where

even

physician
procedures

ing

an

lots of

pick

does.
and

performed.

hospitalization
the

surgeon

That
picks

is

or

specialist
the

hospital

involved,

the

specialist;
prescribes
at

which

the
the

they

patient
family
medical
will

be

Knowing he is not likely to be sued for conduct­

extra
tests.

test,

the

doctor

has

every

And so does the hospital,

incentive

to

run

since its charges

for tests help pay for the expensive equipment used to con­
duct them.
The doctor

ordering up the medical procedures and

tests doesn't pay the bill.
paying

it.

And the patient has no sense of

More than ninety-four percent of hospital bills

are paid by the government programs like Medicare and Medic­
aid,

private insurers and the Blues.
These structural characteristics create a Franken­

stein health care payment

system, with gargantuan growth on

the supply side as we train more physicians, build more




15
hospital
ogies,

beds

and

and

with

invent

little,

more
if

expensive

any,

medical

resistance

on

technol­

the

demand

side.
The creation of this health care cost monster did
not

spring from the

brain of some demented doctor.

We

all

contributed mightily to the effort.
American
the

post-World

expanded

businesses,

War

health

II

experiencing

period,

care

had

little

benefits.

After

high

growth

concern

all,

as

health

in

they
care

seemed a lot less expensive to give employees than a higher
per hour wage.
Unions
their
free

members,
fringe

demanded
especially

benefits

gaining,

managers who

price

each nail

of

more

health

care

since

health

premiums

to workers.
fought with

or screw,

tage

to

costs

each

other

were

round

suppliers

of

for
taxbar­

over

the

and union leaders who negoti­

ated for each half-cent an hour,
to contracts without

With

coverage

kept adding health benefits

realizing that they were becoming hos­

beyond

their

control

—

costs

that

over

the

long run endangered jobs and hobbled profits.
The
the

Medicare

1960's,

government
and

also made

Medicaid

its

contribution.

programs were

instituted

When
in

the

the government was preoccupied with improving access

to health care for the elderly and the poor.
political

price

by

simply

the existing cost-based,




superimposing

So we paid the

those

fee-for-service system.

programs

on

16
The doctors and hospitals initially resisted these
government

programs.

fee-for-service,
into

them,

fully

the

joined

in

But

cost

and

doctors
the

once

the Congress legislated

the

cost-plus

and

reimbursement

system

hospital

administrators

cheer­

creation

of

this

swollen

health

care

cost monster.
Lawyers,

judges

and

juries

fed

this

Frankenstein

by malpractice litigation that established unpredictable and
unrealistic
against

standards

of

negligence

and whopping

judgments

doctors and hospitals who failed to run one test or

another.
It didn't take long to recognize the dangers.
1968,

President

Lyndon

Johnson

sent

Congress

In

a message

on

“Health In America" citing three major deficiencies with the
structure of the health care market:
o

"Health insurance plans
[that] en ­
courage
doctors
and
patients
to
choose
hospitalization
even
when
other,
less
costly forms of
care
would be equally effective;"

o

The fee-for-service system of paying
physicians "with no strong economic
incentives to encourage them to avoid
providing care that is unnecessary;"
and

o

"Hospitals
[that] charge on a cost
basis which
places no penalty
on
inefficient operations."

President
new

payment

Johnson

systems.

asked

Congress

for

refused

legislation
to

act

And it has failed to act decisively since them,

to

that

test
year.

despite the

repeated entreaties of every President since Lyndon Johnson.




17
The Chrysler Story
For
head

the

of a special

past

two

years,

I have

Committee on Health

been

serving

Care of the Chrysler

Board of Directors created by Chairman Lee lacocca.
the

only

committee

members,
Fraser,

of

its

kind

in addition to Mr.
former

Holland,

head

former

of

American

United

of

the

Auto

This is

business.

lacocca and myself,

the

Chairman

in

as

are Douglas

Workers;

American

Its

Red

Jerome

Cross,

and

William Milliken, former Governor of Michigan.
At Chrysler,

as we fought for

survival,

we had to

address the cost of health care.
It has not been an easy task.

In 1984 Chrysler's

health care costs will exceed $400 million, making the Blues
Chrysler's
million
bill

single

each

(which

portion

of

day.

largest
This

includes

supplier.
year

That's more

Chrysler's

total

Chrysler's Medicare

the health insurance

from $600 a car last year —

$1.1

health

care

payroll

premiums

will exceed $550 for each car we sell.

than

of

tax and

a

its suppliers)

That's down somewhat

not because inflation in health

care costs has abated, but because we are selling more cars.
The cost of Chrysler's health
covers
$295

employees,

per

from

This year

and their

active employee in 1964

employee today.
jumped

retirees

dependents)

to some

grew

from

$5,700 per active

Chrysler's overall health insurance premium

$81 million

Chrysler must

in

1970

sell

pay for its health care bills.




care program (which

to

about

$364

million

in

1983.

70,000 vehicles just to

18
If
increases,

something
Chrysler*s

If we
costs

sumer

Chrysler
care

care

reduce

costs

projected

could

exceed

or $16,000 per active worker.
1984 projected health

rate even 50% greater

than the Con­

Index, we could save $25 million this year.

could

costs

to

could hold Chrysler's

to a growth

Price

done

health

$1 billion in 10 years,

care

isn't

reduce

just

one

the

rate

percent,

of

increase

Chrysler

in

its

If

health

could save more

than

$400 million over the next ten years.
Excessive health

care costs are eroding America's

ability to compete with foreign companies.
Corporation,

a Japanese

has an investment,
health

care

$374.

costs

Unlike

car manufacturer

or

national

health

in which

Chrysler

spends only $815 a year for an employee's
while

Chrysler,

retirees

Mitsubishi Motor

their

each

employee

Mitsubishi

surviving

coverage.

has

spouses

Chrysler's

active employee is $5,700 —

pays
no

approximately

direct

because

cost

of

comparable

for

Japan's
cost

per

four hundred percent higher.

That gap may well

increase.

The Japanese govern­

ment is moving aggressively to control health care utiliza­
tion
for

by

seeking

employees,

a

law

to

beginning

require
at

10

a

substantial

percent

and

co-payment

rising

to

20

percent.
What does Chrysler get for its health care dollar?
A

health

care

inefficient.




industry
Let me

that

is

expensive,

wasteful

and

share with you a few examples of what

19
we are discovering as we analyze our own health care plan in
depth.
o

Among the Nation's Medicare recipi­
ents, a very common medical procedure
is cataract surgery.
The procedure
takes about 20 minutes, and rarely
requires a general anesthetic.
The average opthamologist charge for
this procedure in the Detroit area is
about $2,000.
If a doctor performed three of these
procedures a day, four days a week,
42 weeks a year, he would earn more
than $1 million, for less than 200
hours of actual surgery, and have a
10 week vacation to boot.
Compare this with the typical charge
of $1,500 for serious abdominal sur­
gery lasting four to five hours.

o




We asked some doctors to investigate
eight Detroit
area
hospitals
with
extraordinarily high percentages of
non-surgical admissions for low back
problems.
This study showed that two-thirds of
the hospitalizations — and 2,264 out
of 2,677 of the total hospital days
—
approximately 85 percent —
were
inappropriate.
With respect to three of the hospi­
tals audited, none of the admissions
were found to be appropriate.
In more than 60 percent of the cases,
patients were subjected to electro­
myograms — an invasive and expensive
procedure that is necessary only if
surgery has already been clinically
indicated.
All the test results were
normal.
Had the inappropriate admissions not
occurred Chrysler would have saved
approximately $1 million.

20
o

Our
physician experts
investigated
the six Detroit area hospitals with
the
highest
number
of
maternity
admissions for our insured.
In more
than 80 percent of the 618 cases
studied, one or more of the hospital
days were found to be unnecessary —
a total of over 1,000 inappropriate
days, almost a quarter of the time
spent in the hospital.
If the inappropriate days were elimi­
nated
in only
those 6 hospitals,
Chrysler would have saved $1 million.

We

have

no

experience is unique.
in

almost

every

Chrysler's

inefficiency.

to

believe

that

Chrysler's

Similar waste and inefficiency exists

health

preliminary

as 25 percent

reason

benefit

program

investigation

in

suggests

this

country.

that

as much

of its hospital costs may be due to waste and
For

Chrysler,

elimination

of

those

costs

would save almost $50 million in 1984.
Other studies have also found substantial evidence
of

inappropriate

or

unnecessary

hospitalization.

The

Department of Health and Human Services sponsored a study of
the appropriateness
in 1980.

of hospitalization of Medicare patients

The study sample included 25 hospitals,

rural, from different regions of the country.
20

percent

essary

of

the

or premature.

that 27 percent of
ate.
1984

hospital

admissions

Most importantly,

25 percent,

It found that
either

inappropri­

of hospital days expected in

we would save more than $60 billion —

without adversely affecting the quality of care.




unnec­

the study concluded

hospital days were medically

If we reduced the number
by

were

urban and

21
Chrysler

is not

sitting

still.

In less

than two

years, we have acted to save nearly $10 million annually:
o

We set up a screening program for
foot surgery, which cut utilization
60 percent and saves over $1 million
a year.

o

We began a program to promote generic
drugs which saves $250,000 a year.

o

We mandated second medical opinions
before
certain
elective
surgeries,
which saves $1 million a year.

o

We instituted programs to encourage
outpatient surgery,
which
save
$2
million a year.

o

We have started a new program in
Michigan to screen hospital admis­
sions and control lengths of stay for
Chrysler1s
non-bargaining
unit
employees.
We project a savings of
$2 million in its first year.
If we
could extend this program to Chrys­
l e r 1s United Auto Worker employees,
which would require union agreement,
we estimate we could save $9 million
in the first year.

o

We
offer
financial
incentives
to
encourage our employees to enroll in
Health Maintenance Organizations.

o

Just recently we offered our employ­
ees
in
Indiana
and
Michigan
the
opportunity to participate in Dental
Health
Maintenance
Organizations.
11,000 employees and retirees joined
and this will save us $2 million a
year.

o

We initiated a pilot incentive pro­
gram,
called
"One
Check
Leads
to
Another," to encourage employees and
retirees
to
review
their
medical
bills for accuracy.
Where they find
overcharges, we share the refund with
them.
We hope this program will also
lead to a greater awareness on the
part of our employees of the costs of
their health care services.




22
o

We mounted an intensive communication
program to educate both employees and
health care providers about these new
corporation initiatives and the cost
of health care.

These

steps

are

only

the

beginning.

We

are

currently exploring several preferred provider arrangements,
including

programs

for

outpatient

psychiatric

services,

laboratory tests, and prescription drugs.
In
can

to

short,

control

Chrysler

health

inefficiency.

But

control

care

ture

health

the

industry
ible,

care

costs

Chrysler
costs

financial
to

is trying

and

alone.

We
in

everything

eliminating

American

incentives

eliminate

by

to do

waste

business

it
and

cannot

need help to restruc­
America's

its inefficiencies,

health

and,

care

where

poss­

to instill some marketplace discipline.
More than 60 percent of the costs of hospital care

are

paid

public

by

federal,

expenditures

measures

are

state

and

and

federal

of

a

part

local
and

national

government.

state

cost

health

Unless

containment

policy,

it

is

inevitable that cost shifting will occur.
Sleight
costs.
budget
the

Costs
have

system.

example,
discharge
sion

to

the

a

of

hand tricks

disappearing
remarkable
In

the

of hospital
nursing

ability

case

incentive

from

in

do not
the
to

reduce

health
health

federal
reappear

of

many

elderly

the

Medicare

DRG

care
care

elsewhere
patients,
cap

for

in
for

early

patients translates into early admis­

homes.

The

federal

government

plays

this

shell game because Medicaid pays for most nursing home care,




23
and the states pay half the Medicaid bill

(while the federal

government gets no state help in paying the Medicare b i l l ) .
Another variant of the health care cost shell game
is the trend to ambulatory surgery that has caused an explo­
sion

of

new

outpatient

investment
surgery

tion

in hospital

have

the

same

in equipment

centers,

beds.

high

As

fixed

and physical

without
a

any

result,

costs,

plant for

concomitant

reduc­

hospitals continue

which

must

now

be

to

spread

over fewer patients.
Rather

than

reducing

the

eliminating the inefficiencies
Federal
easier

government
to

reducing

refuse
budget

and
to

pay

health

attack

the structural
the

care

costs

states

Congress

under

and

the

have

share,

when

defects

of

health

care

and waste in the system,

their

deficits,

actual

system,

the

cost

far

grabbing

they

are

another
in the

thus

only

shell.

health

the

found

it

credit

for

hiding

the

Rather

care

Administration

by

than

financing

have

opted

to

impose

a hidden tax on American business and American citi­

zens.

The federal government's

"savings"

are the increased

costs for business and individuals.
Let me

tell you what

recent

federal

policy

means

to Chrysler.
In order to stave off bankruptcy in 1979, Chrysler
had to

shrink

health

care

active
retirees

its active workforce.

for

employees
are




nearly
and

aging,

as

many

their

averaging

Chrysler now pays for

retirees

dependents.
almost

69

and

dependents

Moreoever,
years

and

as
the

getting

24
older.

We

have more

than 14,000

retirees age 75 or older;

6,000 are 80 or older.
For

its

retirees,

care services not paid

Chrysler

by Medicare.

pays

for

many

Therefore,

health

as Medicare

seeks to ease its own financial crisis by shifting costs to
the

individual,

if

that

beneficiary

is a Chrysler

retiree,

we pick up the cost.
In
first

$40

Medicare

the daily

risen from

ninetieth

a

of a hospital

Similarly,
has

1965,

day

an

admission).

of these increases.

tal

deductible

Our

a

alone

year.

government

has

to

pay

the

today that copayment is $356.

$89 per day

cent

$1 million

had

copayment for long term hospital

$10 to
of

stay,

beneficiary

(for the
Chrysler

stays

sixtieth to the
absorbs

100 per

The latest increase in the hospi­
will

Our

cost

citizens

simply

hidden

Chrysler
haven't
the

approximately
saved

pea

anything.

under

another

shell.
Here

are

some

more

examples

of

how

Health Care Cost Shell Game affects Chrysler:
o

Hospitals in Michigan will shift $2
million
in
bad debts to
Chrysler
bills in 1984.
Medicare and Medicaid
do not permit hospitals to shift bad
debts to them.

o

The Michigan State Insurance Commis­
sioner has charged private payers to
help subsidize the costs of insurance
to supplement Medicare coverage of
senior citizens.

o

The Tax Equity and Fiscal Respon­
sibility Act of 1982 (TEFRA) requires
the employer's group health insurance
to provide the primary coverage for




the

Great

25
employees and their spouses over age
sixty-five.
That provision does not
save our people a single dollar.
It
simply shifts the pea from Medicare
to the private sector.
The cost to
Chrysler is $1.4 million in 1983 and
will increase annually.
The cost to
all
U.S.
businesses
is
over
$1.5
billion.
Some

of

the

proposals

for

rescuing

Medicare

outrageous examples of the Health Care Cost Shell Game.
example#

the

proposal

by

the

Advisory

Council

on

are
For

Social

Security to delay Medicare eligibility from age 65 to age 67
would cost Chrysler approximately $100 million over the next
five years.

Over

the next ten years,

American business
shift

the

cost

and citizens

personally

to have such coverage.

to

some

the delay would

$75 billion.

citizens

not

cost

It would

fortunate

enough

And it would not eliminate a single

dollar of waste or inefficiency in the health care system.
This Nation cannot afford further
lishing

a national

crisis.
an

policy

The graying

ever-growing

to

address

of America

population

is

the

delay

care

cost

forcing the issue,

with

demanding

health

in estab­

more

expensive

high

technology hospital care.
In 1940,
was 65 or older.

roughly seven percent

our our population

Today that proportion is about 12 percent.

When the baby boom ripens into the senior boom in the first
quarter

of the next century,

tion —

about 6 0 million Americans —
And

changing.




In

the

some 20 percent of our popula­

composition

1940,

less

than

of
30

will be 65 or older.
our

older

percent

of

citizens
our

is

senior

26
citizens

were

75

or

older.

By

the

end

of

this

century,

almost 50 percent of those over 65 will be 75 or older.
It's not just that life expectancy is now 72 for a
man

and

78

for

a woman.

Far more

important

is

that

those

who live to be 6 5 now have a life expectancy of 82.
The
health

care

effect
costs

of

is

the

aging

sobering.

of

The

our

population

Congressional

on

Budget

Office now projects that Medicare*s Hospital Insurance Trust
Fund will go bust by the early 1990s.
Yet,
the iceberg.
about

the

the Hospital

face

frightening

forerunner
up

to

crisis

is only

the tip of

Many thoughtful Americans are deeply concerned

in our country.
the

Fund

levels

of unfunded

pension

liability

The crisis in the Social Security system is
of

far

unfunded

more

serious

government

financial

and private

crises
sector

as

we

pension

liabilities that many fear approach $1 trillion.
But

few Americans

the unfunded health
health
present,

care

costs

have even begun to think

care liabilities of our nation.
increase

and

our

population

As our

ages,

the

unfunded post-employment health care cost liability

of the Fortune 500 American companies alone —
million

about

employees

—

approaches

with about 15

$2 trillion.

The

total

assets of those companies was only $1.3 trillion in 1982.
That

unfunded

liability

number

alone

should make

us all realize that in health care costs, we face the great­
est financial and social crisis in this Nation's history.




27
Congress
the

health

care

expenditures,

must

begin

system

but

—

the

to

not

just

the

costs

the

issue

issue

of

eliminate waste

and

fundamental

restructure

the

and

future growth while

contain

address

system to

continuing

of

across
federal

how

we

can

inefficiency

to provide

high

quality care for our citizens.
As

a

first

step,

we

recommend

that

the

Congress

this year enact legislation to establish a National Commis­
sion on Health Care Reform,
sion

on

Social

Security

similar to the National Commis­

Reform.

should be to develop a national
bership

should

parties

—

and

include

state

senior

citizens

can

a forum to develop

be

and

and

hospitals

reduce

costs without

required

Congress

to make

and

health policy,

and local

physicians,
provide

Commission's

representatives

federal,

labor,

The

its

all

insurers.

care.
to

people

interested
business,

citizens,
The

a comprehensive

report

the American

and its mem­

governments,

junior

health

reducing

of

The
the

charge

lawyers,
Commission

strategy

Commission

should

Administration,

within

one

year,

to

so

the
that

the next Congress can act.
We
system.

We

must

create

can't

keep

an efficient
going

the

health

way

we

care

are.

delivery

We

simply

don't have the money.
That
the

American

searing

than

Prescription",




stark

fact

people,
our
a

and

debate
book

presages
a

debate

over

just

a terrifying
over

abortion.

published

by

triage

euthanasia
In

"The

Henry

for
more

Painful

Aaron

and

28
William
sively

Schwartz
that,

at

Brookings,

the

authors

argue

persua­

like Great Britain, we will soon ration health

care in our country.
We
to

always

individual

have

had

economic

rationing,

wealth.

But,

of

course,

with

related

Medicare,

the

government becomes the rationer of health care for those who
use and need the acute care system most.
forced

by

percent
and,

the

of

fact

all

together

that

the

basic

with

the

Federal

biomedical

state

and local

This role is rein­
government

research

funds

in

governments,

90

America,
pays most

hospital bills.
Bluntly

put,

Solomon with your

Uncle Sam will

father

soon be playing King

and mother and mine,

and with you

and me.
We
medical
lines

face

a

technology
in

frightening

and spiraling

hospital

rooms

among

specter
costs

in

our

combine

natural

nation

to blur

death,

as
the

euthanasia,

suicide and murder.
Without
cies, we will
dialysis
cial
for

most

energetic

pursuit

of

efficien­

soon face a world in which there is no kidney

for

hips)

the

people

for

expensive

those

over 55,
over

anti-cancer

no hip operations

65,

a world

therapy will

in which

(or artifi­
eligiblity

be based on

statis­

tical assessments of success, and key organ transplants will
be

severely

recovery —
regulations.




limited

to

special

cases

of virtually

certain

all as defined in pages and pages of government

29
What
It's not

kind

a very

future is now.
We
time

to

well
must

a

vision

pleasant one.

for

But,

the

future

is

that?

in Great Britain,

that

That's just what they do today.

in America are fortunate because we still have

avoid

experience.

of

that

fate.

We

can

learn

from

Britain's

We have a far more productive society.

We can

afford to provide quality medical care to all.

But we

have

eliminate

a

coherent

national

inefficiencies

health

and reduce

policy

which

will

the cost of health care

for our society as a whole.
These
human

life,

issues,

are what

which

make

go

these

to

the

hearings

very
so

sanctity
important

your responsibilities as legislators so special.

3 7 -2 6 4 - 8 5 - 3




of
and

30
Senator J epsen . I thank you, Mr. Califano. Your reputation as a
man who gets things done and gets right at the heart of things cer­
tainly is justified from your testimony, and while it’s a little bit fresh,
if I may, I ’d like to pursue a couple questions and then get some addi­
tional perspective when Mr. Shelton discusses some of the Ford Motor
Co.’s specifics on this.
You point out in Great Britain the rationing system already exists
and suggest this could be the case in this country if we’re not care­
ful. Let me say first off that I hope we never see that day and I am
willing to do everything to see that it doesn’t happen here.
But my question is, do you believe that the rationing approach has
come about in Great Britain because of the excessive government
regulations, specifically the national health insurance system they
have over there, or is it a more fundamental flaw in their health care
delivery system ?
Mr. C a l i f a n o . I think, Mr. Chairman, that it’s come about because
of the explosion of health care costs in Great Britain, which is just a
few years ahead of us in that regard. Every country that’s adopted a
national health plan has basically taken the system as it existed and
simply put the national health plan on top of it.
For example, in Great Britain, the doctors are on the government
payroll and the government owns the hospitals. That happened be­
cause the British plan was put into effect just at the end and right after
World War II and at that point in time the voluntary hospital system
had collapsed in Great Britain. The hospitals were full of war casual­
ties and the government was running all the hospitals and all the doc­
tors were in the military and on the government payroll.
In Germany, when they put in a national health care system, the in­
surance companies were virtually in total control of the German
health care system and their national health care system is run by the
insurance companies. They have severe health care cost problems, but
not as bad as Britain’s.
In our country, when we adopted medicare and medicaid, the orig­
inal proposals were to change the fee-for-service reimbursement sys­
tem and to change the system of a cost-based payments of hospitals,
but it wasn’t possible to pass that legislation and, as you indicated in
your opening statement, our focus was on access to health care. We
were worried about giving elderly people and poor people access to
health care and we didn’t think about costs.
Just as a brief anecdote, I can remember a meeting with President
Johnson and Wilbur Cohen and Larry O’Brien who was then the
President’s liaison to the Congress. The medicare bill was in the House
Ways and Means Committee. We couldn’t get it out. Wilbur Cohen,
who was at HEW then, said—or Larry O’Brien said, “Mr. President,
the only way we can get that out is to accede to the doctors and hos­
pitals and retain the customary and reasonable charge payments and
the fee-for-services and what have you.” The President said, “How
much will that cost?” Wilbur Cohen said, “ About half a billion dollars
a year.” President Johnson said, “ Only $500 million? Get it out.”
And so I think it’s more than that we haven’t done anything to deal
with costs and that Britain hadn’t done anything to deal with costs.
Then the British basically put a cap on it and said, “We will only in­
crease health care payments by x percent.” I don’t know what it is




31
today. When I was Secretary of HEW, it was about 3 percent. And
as a result, this rationing system took place.
And I think costs will drive this country to a rationing system if
we don’t act to make a medical system more efficient.
Senator J ep sen . D o you think it’s accurate to say that our Govern­
ment has taken a very narrow view of health costs and they’ve pretty
much focused in on medicare and medicaid rather than the broad
brush look at it?
Mr. C a l i f a n o . I do, Mr. Chairman. I guess if I had to say that
there’s a central thrust to Chrysler’s view and my experience both in
the Government and now in the private sector, it is that the health
care system is like a pillow. The suppliers have control over where
they will place costs and without competition, if you push down one
part of a pillow, another part of the pillow goes up. And what happens
when you put a cap on medicare is that the hospitals whether they
follow the diagnostic related group limits or the number of medical
procedures covered, they will start—and they have started shifting
costs over to private insurers. That’s why there’s been such a rush—
this year I think the States have passed 300 or 400 laws to deal with
health care costs in one way or another because they are getting
squeezed by costs shifts.
So I think it would be our hope that when the Congress deals with
this and the administration deals with this, they take measures that
will affect the entire health care system and that we have a national
health policy in this country to deal with the cost problem.
Senator Jep sen . Just one quick last question and then we’ll move
directly to Mr. Shelton and then we will come back and the threfc of
us can discuss this in depth after his presentation.
You mentioned that Mitsubishi pays $815 a year approximately for
health costs compared to $5,700 a year that Chrysler pays. Is there
any difference when you look at the benefits? In other words, do we
get what is 400 percent more of the benefits in quality care ?
Mr. C a l i f a n o . No. I think in Japan the health care quality for the
Mitsubishi employees is every bit as—the care and access to care is
every bit as wide and as high quality as it is in the United States.
I think it’s comparable care. The different components in that system
is the employee at Mitsubishi makes a substantial copayment of over
$300 in effect per year. Our employees in the auto industry at Chrysler
certainly essentiaily make no copayments.
Second, in the retirement phase there aren’t these enormous gaps in
coverage and in effect the national health care plan in Japan covers
older people. I don’t mean to imply that Japan is without its cost
problems. They do have health care cost problems. Their costs are
rising. Their hospitalization is rising. But they appear to be moving
aggressively in trying to deal with it and it is part of the tremendous
disadvantage that we have in competing with the Japanese and we
can’t deal with that disadvantage alone. Chrysler alone cannot deal
with the costs it’s paying for its employees. The Government has to act,
too. We are ready to go. We’re ready. We are trying, as Ford is try­
ing—and I ’m sure Mr. Shelton’s testimony will indicate—but we can’t
do this job alone.




32
Senator J ep se n . That’s a good lead-in for our next witness. Chrysler
says they can’t do it alone. Ford Motor Co., Mr. Shelton, you may
proceed Your prepared statement will be entered into the record. You
may proceed in any manner you so desire.
STATEMENT OF JACK K. SHELTON, MANAGER, EMPLOYEE
INSURANCE DEPARTMENT, FORD MOTOR CO.

Mr. S h e l t o n . Thank you, Mr. Chairman.
Ford Motor Co. welcomes the opportunity to provide testimony
before this committee and, as you recommended, will summarize the
prepared statement.
Industry is aware and concerned about the rise in health care costs.
In 1982, health costs as a percentage of GNP rose 10.5 percent, up from
9.8 percent in 1981. This 1-year increase of .07 of a percentage point of
GNP is about the same as the increase for the 5-year period 1975 to
1980, and only slightly less than the increase for the 5-year period
from 1970 to 1975.
It’s estimated that in 1983 health care costs climbed to 10.7 percent
of GNP. For the period 1970 to 1982, business health care costs in­
creased more than twice the overall U.S. rate and well over three times
the increase in GNP.
Health costs have become the fastest rising cost of doing business
in America and business is picking up a larger share of the Nation’s
health expenditures every year.
Health care also has become a major cost of doing business in large
industrial States such as Michigan. From 1966 to 1983, per capita
spending on health care in Michigan increased 550 percent. This seem­
ingly uncontrollable escalation in health costs is a serious problem for
all of us—Federal, State, and local government, business, labor, and
the general public.
For Ford Motor Co., automotive and related operations, health
benefit costs in 1983 was $742 million, up about $250 million over the
past 5 years. Health care costs for our employees, retires and their
eligible dependents added about $300 to the cost of each vehicle Ford
produced in the United States in 1983, well over twice the $130 per
vehicle number just 5 years earlier.
\
While many factors contribute to the high cost of health care in
this Nation, the most significant is the lack of appropriate incentives
for consumers and providers to use health services in a cost-effective
manner.
Getting health care costs under control will require the right in­
centives and more competition between provider groups and major
insurance programs. These actions could include changing the tradi­
tional fee-for-service reimbursement system to one of capitation where
services are provided for a single monthly fee with the provider ac­
cepting the risk for health services utilization and costs.
At Ford, our health care cost containment actions are governed
by a philosophy that competition created bv voluntary, private initia­
tive offers the best opportunity for controlling costs in the long run.
Although under some circumstances there may be a need for Gov­
ernment to motivate private sector efforts, we believe regulatory ap­




33
proaches should be minimized and designed to promote, not impede,
private sector initiatives.
Consistent with this philosophy, Ford has undertaken three ap­
proaches to the health care cost problem.
First, the company promotes changes in health financing that are
designed to increase market competition and create financial incen­
tives to contain costs. Examples include offering alternative health
care delivery systems such as health maintenance organizations, or
HMO’s, inclusion of copayments in benefit programs, financial incen­
tives to promote ambulatory surgery, and increased use of capitationtype and preferred provider arrangements.
Second, the company supports short-term programs designed to
correct utilization problems caused by inappropriate incentives in the
health system. Examples of these types of programs include various
forms of utilization review, the second surgical opinion program,
active support of State and local health planning efforts, improved
administration of company health plans, and participation in business
coalitions.
Third, the company promotes preventive health services designed to
improve employee health status and reduce future demand. We be­
lieve most major improvements in personal health status can be best
achieved through changes in personal lifestyle. Ford therefore pro­
motes preventive and health education programs to minimize em­
ployee health risk factors and promote healthy lifestyles. For ex­
ample, Ford’s employee involvement teams developed and now run a
fully equipped employee fitness center in Dearborn, MI. Aerobics
classes are being test piloted in one of our plants, and other locations
are offering programs such as smoking cessation programs and hyper­
tension screening, substantive youth counseling and so forth.
Recognizing that the cost-inducing incentives of the existing sys­
tem developed over many years, and that several years will.be re­
quired to turn these incentives around, our efforts include a blend of
programs; some are expected to have immediate results while others
are geared to the long term. Where feasible, we promote greater price
competition in the delivery of health services and the development of
appropriate financial incentives for the consumer to demand care, the
hospitals and physicians who provide it, and the insurance companies
who finance it.
Returning to our first approach, promoting changes in health financ­
ing, I’d like to share with you Ford’s experience with health mainte­
nance organizations, HMO’s.
At Ford Motor Co., HMO’s are the cornerstone of our health care
cost containment program. Presently 85 percent of Ford’s employees
are offered the HMO option through 34 HMO plans around the coun­
try. Steady enrollment increases since 1970 show that our employees
are satisfied with the coverage they receive as HMO members.
In 1983, Ford saved an estimated $7 million in premiums through
HMO enrollment of almost 19,000 employees or about 9 percent of
those eligible. During our salaries employee open enrollment last No*
vember, HMO membership increased by 155 percent. Now 20 perceftfc
of salaried eligible employees nationally and 25 percent in Detroit be­
long to HMO’s. This brought total enrollment for both hourly and




34
salary employees to 28,000 in January 1984 or about 13 percent of those
eligible. And I should mention that hourly employees are presently
undergoing their annual open enrollment and we expect their par­
ticipation to increase.
HMO’s have a time-tested and consistent record of success. Most im­
portantly, HMO’s address the root causes of the cost problem. They
reorganize the delivery system and place responsibility for cost con­
tainment with the group having the most control over costs, the
medical provider.
For employers like Ford, with fully paid comprehensive health care
benefits, HMO’s offer immediate savings due to lower premiums. In
1983, Ford HMO premiums averaged about 16 percent below tradi­
tional plans. Those HMO savings and the potential for future savings
are attracting the attention of management around the country.
HMO’s also create cost competition within the health system1 This
.
competition usually takes one of two forms: One, competing providers
and insurers develop their own HMO’s ; or two in an effort to maintain
market share, traditional insurers become more cost conscious and im­
plement needed cost containment programs.
Ford’s involvement with HMO’s is not new. We’ve dealt with them
for over 30 years and our experience has been favorable. We believe
HMO’s favorably influence health costs and that they are an essen­
tial element of any business or community cost containment strategy.
Before concluding, I ’d like to call your attention to one additional
factor contributing to business costs problems and one which is grow­
ing in importance.
Recent Government policies to relieve its costs problems have re­
sulted in shifting public health costs to the business community. Ex­
amples of such policies include making employer plans primary for
certain instage renal disease and primary for health care for employees
working between ages 65 and 69, creating reimbursement shortfalls for
medicare and medicaid prospective payments, and increasing medicare
copayments and premiums.
These policies represent a significant cost penalty to business and
we urge that future payment reiorm avoid further cost shifts.
In summary, the bottom line is that business will be financing a
larger piece of the expanding health cost pie. As a result, it must get
more involved in becoming participating partners in determining
future health policy. We believe voluntary private initiatives offer
more hope for controlling costs in the long term than do regulatory
approaches.
Under those circumstances where legislation becomes necessary to
motivate private sector actions, we believe it should be structured to
promote and not impede voluntary initiatives. We believe in the long
term the best hope for containing health costs lie with programs aimed
at increasing competition in the area of cost, quality, and access between
major health systems and in modifying the demand for health services
by changing the economic incentives of consumers and providers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Shelton follows:]




35

P repared

St a t e m e n t

of

Ja c k

K. S h e l t o n

INTRODUCTION
Mr.
Employee
the

Chairman,

Insurance

financial

programs.

my

name

Department

administration

I

welcome

th e

is

at
of

Jack

Ford
th e

Shelton.

Motor

I

Company

am

C o m p a n y ’s e m p l o y e e

opportunity

to

provide

of

the

responsible

Manager

and

for

health

testimony

insurance

before

th is

in h e a l t h

care

c o m m i t t ee .

HEALTH

CARE

COST

PROBLEM

Industry
costs

--

rising

over

cost

economic
care

the

of

are

The
the

these

past

will

Increased

uncertain,

has

long-term

rise

has

become

From

major

revisions

the

fastest

viewpoint,

our

present

in

the

way

health

financed.

between

today

an d

ever-increasing
years,

changed.

growth

the

care

health

five

difficult

about

America.

some

and

of

last

costs

increasingly

in

difference

trend

the

concerned

years,

force

organized

critical

during

30

and

business

alarming

continued

become

aware

doing

realities

services

while

is

to

past

health

business's
Higher

recover

in

prospects

to

care

that,

costs

marketplace

and

is

costs

ability

health
a

years
care

has

absorb
have

plagued

increasingly

by

intense

competition.

NATIONAL

PICTURE
I

problem,

w o n ’t

but

I would

indicators.
rates

which

burden

First,
to




us

are

like

you
to

overall

w ith
focus

a

of

briefly

health

unacceptable

lot

care
-

1982

numbers

on

a couple

costs

to
of

continue

health

cost

as

dr amatize

the

"bottom-line"
to

increase

a percent

of

at

36
GN P

rose

0.7

percentage

to

five-year
less

the

than
in

twice

larger

the

of

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37
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38
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39
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41
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42
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43
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45
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health

responsibly.

its

strategy

covered

to

and

th e

more

employees

stop-loss.
care

will

cost

to
by
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prompt

employee

sh aring

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to

their

attempting

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through

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1983

appears

changing

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and

would

design.

there

are

providers

of

I

respondents

companies

sharing,

correct

system,

released

general,

employers

care

to

benefit

survey

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years,

cost
the

of

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administration.
many

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part

on

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present

issue

86

that

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health

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premium

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and

the

the

Midwest.

indicate

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of

copayments,

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companies.

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design
in

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evidence

levels

assumption

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employees

plans

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on

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th e

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changing

to

utilization

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1984,

1 million

clearly

ambulatory

80%.

s tructural

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ph ysicians'

require

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hospital

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46
Proponents
utilization
benefit.

care,

the

counter

their

access

to

if

suffer

accordingly.

f or

in

most

medical

conditions,

the

long

term

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more

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number

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vision,

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employees

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and

provider

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specific
package
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for

this

their

mail

at

plan

or

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a

needed

drug,

1984,

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care

with

most

designed

to

in

Motor

salaried

coverage

a maximum

for

annual

hospitalization
increase

competition

a

dental,

Ford

fo r

catastrophic

promote

feature

of

special

each
to

we

are

and

employee

between

payment

means

from

in

drug

July

plan

primarily

prescription
themselves.

our

and

o ther

-

have
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of

on

is

separation

the

closely

of

overall

arrangements

beginning

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investigating

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coverage

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employees

cost

is

costs

features

in

1,

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for

benefits.

example,

with

reduced

of

elements

employees

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and

design

to m a k e

program,

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plan

however,

HMOs.

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order

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of

no
for

decrease,

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sharing

sharing

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or

pocket

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of

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expense

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coverages
in

provides

care

over

later.

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consciousness

services.

offered
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call

addition,

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out

does

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included

example,

new

plan

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what

its

services.

plans,

ha s

In

plans.

employee

cost

delays

curtails

yields

pay

findings

sharing

for

incorporates

out-of-pocket
professional

—

it

tha t

must

levels

hospitalization

Company

implemented

cost

that

care

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introducing

benefits

e mployees.

health

Motor

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and

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people

appropriate

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argue

p urchase

t ha t,

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cost-sharing

restrains

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medical
and

and

of

with
1983,

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it

fi lled

care

providers
th e

basis.

drugs

can

through

offers

of

Company

optional

maintenance

program

health

-

the

greater

47
convenience
cost

to

and

the

incentives
than

lower

to

capitation-type

believe
for

a

offer

to

the

monthly

considerable

fee-for-service

effect

this
have

1982,

dispense

unbundling

vision,

capitation-type

confirms

to

employees

in

arrangements

ca r e ,

single

our

as

the

well

as

Company

lower-cost

r ed uced
began

generic

overall

to

provide

drugs,

rather

drugs.

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foot

to

Earlier,

pharmacies

brand-name

dental,

cost

Company.

to

and

deliver

with

opportunity

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example,
several

our

certain

benefits

all

provider

experience

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dental

million

dollars

as
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are
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compared

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to

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r i sk,

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th e

date

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in

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increased

where

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fo r

is

ot her

arrangements,
fee

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benefits

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arrangements.
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of

usual

certainly

plans

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their

inception.

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system
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as

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years
of

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th e

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fact,
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awareness




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incentives

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in

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activities

health

planning

health

plans,

and

thus

many

system,

around.

local

problem.

health

described

far.

years

and

to

several

recognition

and

developed

efforts,

increase

care

improve

consumer

and

48
MARKET

INTERVENTION
For

government,

example,

and

in

1978,

provider

Ford

interests

legislation

to

reduce

surplus

legislation

was

enacted

in

the

and

public

private

private

interests

system
task,

it

is

reduction

being

Association,

by

th e

Statewide

construction
with

these

responsible
associated

for

of

in

local

Motor

consumer,
planners

review
efforts

of

to

and




underway

been

this

provider

is

and
if

private,

now

or

n early

and

capital

strengthen

50%

committed

working

Michigan's

of
to

the
be

other

planning
also

Company

corporation
expenses
long-term

beds

targeted

reduced.

motivate

We

consistent
the

and

to

projects.

hospital

including

with

financial

develop

are

employees,

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approved

non-profit

displaced

date,

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process,

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th e

Hospital

future

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organizations

a budget

hospital

a

only

and

been

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to

of

of
To

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and

complex

approach

Agencies

within

public

Michigan

plans

of

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and

officials.

the

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approved

capacity

placement

adopt

competing

now

be

establishment

either

Federal

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to

the

Systems

plans.

of

difficult

of

by

passage

costs

example

a

labor,

Michigan.

contain

excellent

uniqueness

and

in

to

address

Health

institutions.

h ave

Ford
labor,

the

capacity

by

business,

development

e ndorsed

facilitate

funding

with

closed

are

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for

removal

for

projects

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closely

reduction

other

pressure

to

the

was

Health

plans.

participated

debt

which

bed

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of

followed

provided

hospital-specific

to

together

with

the

hos pital

sector.

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program,

in

response

working

imbalance.

worked

state

business,

hospitals

approach
are

to

and
th e

supporting

Certificate-Of-Need

law.

49
We
programs
medical
focus

have

to

evaluate

services

review

stay),

e ncouraged

and

the

(evaluation

and

post-payment

review

of

of
to

pro grams

implementation

and

identify

an d

and

concurrent

planned

evaluation

professional

and

efficiency

include

admissions

(after-the-fact

stay),

and

appropriateness,

These

hospital

review

length

development

necessity,

facilities.

retrospective

admissions

the

analyze

of

hospital

r eview

unusual

of
and

length

of

of

(pre-

and

patterns

of

ph y s i c i a n s ’ practice).

IMPROVED

PLAN

ADMINISTRATION

Internally,
of

our

own

coordination

of

computer-based,
has

recently

benefit
more
The

Company

benefits

now

through

the U A W

make

to

legislation

care

claims

will

provide

other

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system

reporting

quality

containment

or

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plans

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a health

by
pays

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laid-off
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key

or

first.

coordination

employment.

implementing

Systems,
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data,

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or

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of
of

status
Company

plant

states

mechanisms.

will

to

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covered

fo r

for

comprehensive,

National

guidelines

Medstat

claims

is

which

retirement

appropriate

through

a

benefits

the

administration
provisions

system.

guidelines

from

Company

of

with

to

these

data

determine

changing

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th e

developing

a

to

due

improve

claims

capabilities

initiatives,

evaluations.

by

resulting

implement

to

revising

coordination

applies

in

summer,

data

its

coverages

to

by

and

worked

coverages

working

steps

medical

insurance

Comm is sioners

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improve

which

to

secondary
is

strengthened

and

taken
plans

benefits

health

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have

care

interactive

provision

group

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health

data

develop
for

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our

a
The

health

new
new

system

care

plans,

information

carrier

cost

health

for

cost

performance

50
Taking
incr eased

consumer

problem,

we

Health

as

We
well

others

Health,
and

headquartered

Economic
about
in

Michigan's

promotion,

Cross

cost

and

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national

OF
I

Ford

in

status

of

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promotion

and

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several

cessation,
four

plants

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boards

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to

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also

sector
effect

health

on

of

changes
are

HMO

and

PPO

various

represented
to

The

organization

planning,

is

contributes

care

Michigan.

long-term

participates

on

Alabama,

health

activities

budget

committees,

and

for

helped

Blue

on

state

and

national

state

LIFESTYLES
to

to

share

promote
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in

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cancer

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you

services.

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area

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is

hypertension

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to

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year
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identification

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the

health

interest

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health

the

abuse

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improve

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drug

feasible

strategy

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cardiovascular

and

screening.
that

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containment

referring

alcohol

demonstrated
in

with
cost

health

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program




a

Alliance

in

on

Group

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capital

and

and

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active

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leaders

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the M i d w e s t

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efforts
Group

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committees,

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and

hospital

preventive

programs

hypertension

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are

have

climate.

employees.

Employee

we

Michigan

like

years

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these

to

seminars.

HEALTHY

recent

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la bor

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containment

PROMOTION

Washington

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health

care

the

by

of

Ford

health

coalition

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business

support

legislation.

and

in

and

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developing

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for

business

of

contribute

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Alliance

80

awareness

to

leader

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sponsored

responsibility

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started.

California.

initiatives

a

helped
th e

ou r

provider

been

as

get

seriously

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have

nationwide.

many

very

early
and

risk

1970s,

intervention,

counseling,
program

practical
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our

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smoking

conducted
to

conduct

follow-up.

in
a

51
Program

evaluation

Michigan

and

While

is

it

believe
these

COST

funded

and

TO

THE

Before
additional
in

private

health

such

working

significant

cost

The
costs

manufacturing
to

working

1970
was
this

and
an

average

ratio

was




to

costs

other
is

to

65 a n d

to

factor

the

University

Blood

cost

of

Institute.

beneficial,

we

supportive

of

highly

long-term

th e

f or

every
on e

close

to

c ost

69

and

savings

with

and

have

are

public

and
in

Examples

of

for

certain

health

creating

care

fo r

reimbursement
and

policies

strongly

which

resulted

primary

payments,

two

increasing

represent

urge

that

a

future

shifts.

continued

maturing
many

of

business

the

industries,

working

person

insured
-

employees
who
for

was
every

For

ratio

of

with
major

of

insured

example,

between

insured

not

concern

workforces
th e

dramatically.

two

one-to-one

we

problem

between

for

a ge ,

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motivating

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plans

of

attention

community.

primary

years

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cost

shift

prospective

increased

to

policies

business

employer

cost

and

call

business

the

business,

aging

ha s

to

premiums.

further

industries.

of

are

government

making

penalty

the

expenses

and

avoid

like

is

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between

e mployees

1978,

I would

Medicare/Medicaid

reforms

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the

an d

are

significant

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disease

copayments

payment

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programs
do.

w ith

SECTOR

include:

from

to

contributing

health

employees

Medicare

health

PRIVATE

renal

shortfalls

thing

programs.

policies

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these

anticipate

importance.

end-stage

cooperation

National

prove

concluding,

public

in

well-being.

factors

growing

t he
to

right

employee

SHIFT

shifting

by

the

programs
to

completed

difficult

they're

respect

was

by

Ford,

there

working.

Last

year,

person

working

there

now

52
is

one

other

coverage

signficant
products

person

even

(and

though

fixed

which

they

cost

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are

burden

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the

dependents)

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employees

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full

ratio
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health

results

make

the

health

business

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Company

costs.

t hat

in

CONCLUSION
The
financing
result,

bottom

a

larger

it

must

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get

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line

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circumstances

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sector

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health
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care

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health-cost
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partner

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in

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systems
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and

economic

53
Senator Jepsen. Thank you, Mr. Shelton.
Referring to your last summary statement with regard to the change
adopted a few years ago which made the employer a payer of first
resort for employees age 65 to 69, is it your contention that despite
the fact that these people remain productive workers for Ford that
Ford should no longer consider them in the same category as other
Ford employees just because they do meet the qualifications for the
medicare program with their health care coverage ?
Mr. S h e l t o n . We estimate that this change added about $3.3 million
to our costs just for the coverage for the people between 65 and 69
and that does not include the medicare taxes that the company has
paid over the active work life of the employee prior to that time.
Senator Jepsen. Well, I appreciate that. I guess I’m just trying to
explore it. Let’s pretend for 1 minute that we have a person who has
become 65 and stays on and works through age 69, a full-time produc­
tive employee. Is it your contention that at age 65 they should go to
the Government provided insurance or rely on that rather than the
company’s insurance, even though they are full-time employees of
the company?
Mr. S h e l t o n . Well, the company prior to the change provided
what’s called complementary or wrap-around coverage. It supple­
mented the medicare program. When employees who continue beyond
age 65 are no longer covered by medicare, that becomes a form in a
sense double taxation to the employer who has been paying the tax
during the working period of the employee and now must continue to
provide full coverage.
Senator Jepsen. I’m not debating it. I just wanted to get your ex­
pression. Do you have any comment, Mr. Califano ?
Mr. C a l i f a n o . Mr. Chairman, I think the point that I would try to
make there is that shifting that cost of covering an employee during
whatever period of time from the Government to a corporation or
from the Government to the employee himself or herself doesn’t
achieve anything in terms of a more efficient health care system. We’re
all still bearing the same burden. Instead of my paying it in taxes to
the Federal Government and having the Federal Government be the
cashier for the health care industry that is wasteful and inefficient,
I’m paying it to the Ford Motor Co. in the price of the car I buy and
the Ford Motor Co. becomes the cashier for the health care industry
turning it over to them.
When we talk to Chrysler about a national health policy, we are
saying that we’ve got to deal with the underlying problems and not
just play the shell game. It’s that part of it that I think we object to,
not the coverage for the employee. The employee should be covered.
The health care benefits should be provided, but we can provide the
kind of health care these employees need at far less cost to all of us.
We’re all paying. The only difference is whether the person that
shovels the money to the hospitals and the doctors and the laboratories
is an intermediary vehicle or somebody in the comptroller’s office in the
Chrysler Corp.
Senator J epsen . Well, we’re working with mirrors. It depends on
who’s holding the mirror.
Mr. C a l i f a n o . That’s right, Mr. Chairman.




54
Senator J ep sen . There’s little argument in the cost shifting you men­
tioned plays a significant role in increasing the cost of health care in the
private sector and that’s something, among many other things, that we
want to make sure that we do get out in the open, so to speak, with some
perspective and understanding.
You talked a lot about the HMO’s, Mr. Shelton. That’s the health
maintenance organizations. You mentioned in your testimony that
Ford has seen significant increase in the number of employees wlio
choose to participate in health maintenance organizations, HMO’s.
To what do you attribute this move to and does this move tend to
fall along generational lines? In other words, we have found that the
younger folks talk about health maintenance and the more senior citi­
zens tend to lean on the more traditional health care delivery proce­
dures, Is this what you’ve found?
Mr. S h e l t o n . Certainly that happens. I think, in addition, HMO’s
are now better understood by employees and more importantly by
their families. Therefore, they are more willing to move into these
programs.
In addition, HMO’s offer employees and their dependents broader
coverage and less out-of-pocket expense than does the traditional feefor-service program.
I think those are the two motivating factors, plus the one you men­
tioned.
Senator J ep se n . N o w as you may or may not know, I have a back­
ground in insurance for a quarter of a century and I ’ve dealt with this
so I have some familiarity with that with a company that did a lot of
work^— ’m no longer with them so there’s no use in advertising, but it
I
was Connecticut General, who is reasonably well-known and respected
in the field.
As one who’s fairly familiar with the way insurance programs work,
I can see where this trend might have a serious impact on the bene­
ficiary pool and how it may ultimately affect rates. Has your com­
pany attempted to determine the changes and breakdown along gen­
erational lines and, if they are, how is it going to alter the rates of
those who live longer and your obligation on out the line who retire?
Something that comes to mind is a little bit of this in the health in­
surance area comes in the front end and comes out and is paid for bene­
fits that turn mover off down at the other end. Has that been a factor?
Is yours self-funded?
Mr. S h e l t o n . Our programs are primarily Blue Cross and Blue
Shield, with the exception of the HMO programs. But because of our
size, we would be very close to being self-funded, although we’re not.
Senator J ep sen . I also note that many of the things that you indi­
cate Ford was doing and other businesses are doing with regard to
health care cost containment by way of getting people to better under­
stand this, both of you referred to the need for education and better
understanding. If they understand it, they appreciate it from the com­
pany standpoint and then you get that extra value, that extra loyaly,
that extra productivity and it can be created by head power and heart
power.
But even more importantly today, I think as we’re here today trying
to. get a better understanding of the total health care picture in the
country and how the various sectors of our economy and parts of our




55
society, whether it be Government, the private sector, or business, the
consumer, providers—where each of them fits into this picture.
Do you have any suggestions ? I ’m interested in knowing whatFord
is doing to eduqate its employees totally in their program and whait
do yon see that, could he done by way of expanding that education
outside into the community and into Washington, DC.
Mr. S h e l t o n . Well, certainly employees and their families educa­
tion is extremely important. I have to confess that we have not done
as good a job of that as we should have done, but we plan to enhance
our efforts in the future. We do have regular storiek that we run in
our employee publications on health issues and we plan to intensity
those activities in the future. We’ve had meetings with our salaried
employees on the new salary health plan and we plan to continue
those meetings in the future.
In addition, we have had some health education efforts with the
employee involvement groups that we formed in the plant areas and
throughout the company. So we are intensifying our employee educa­
tion effort and I agree with you that that is a very important area
and one that we have not worked as hard at in the past as we should
have.
Senator Jepsen. Mr. Califano.
Mr. C a l i f a n o . Chrysler is doing the same thing. I think we have
to recognize that the payoff there is very real and very important.
Probably the worst offender, Mr. Chairman, in terms of allocation
of resources to health promotion and disease prevention is the National
Government. The National Government spends 96 to 98 percent of
the money is spends on health care on care and research, and less
than 4 percent, probably somewhere between 2 and 3 percent now, on
health promotion and disease prevention.
When you think that probably the most significant reasons of why
we’re having the change with respect to males in terms of cardiovas­
cular disease is the fact that men are cutting down smoking, they’re
stopping smoking, there are fewer people smoking, and changing their
eating habits, you can see why what a phenomenal impact that can
have. Alcohol is the No. 4 disease in the United States of America
now, behind cardiovascular disease or cancer and respiratory diseases,
and that’s all a function of what the individual does.
Fifty years ago the problems were dirt and the sewers and sanita­
tion and pasteurizing milk&nd immunizing people. Now the problems
are what we ourselves do to ourselves and I think there the Govern­
ment should make a tremendous investment, as well as Chrysler.
Chrysler stepped up its investment, as I think probably every Ameri­
can company has, but we’ve hardly begun in that area.
Senator Jepsen. That certainly was a hallmark of your term of
duty and service here and I commend you for it. You moved out and
took some steps where others had kind of hesitated to tread before
and that’s much to your credit. It must be somewhat gratifying to
see some of the results and people now are doing things that are
commonplace that at that time was something they shied away from.
Mr. C a l i f a n o . Thank you, Mr. Chairman.
Senator Jepsen. Y o u suggested, Mr. Califano, th at formation of a
national commission on health care reform is a starting point for the




56
development of health policy and you used the National Commission
on Social Security as an analogy.
As I recall, one of the major stumbling blocks that commission had
was coming to an agreement as to the magnitude of the problem. Do
you think it’s feasible to presume we would be able to get some kind
of concrete recommendations out of this type of commission in a 1
year’s length of time or would you expand on your thoughts on this
commission? You talked about the makeup. How long do they need?
What do they need to facilitate the goal ? What can and should the tax
dollar versus the private dollar—what role should it play, a joint one?
Either one of you, I ’d appreciate your comments.
Mr. C a l i f a n o . Mr. Chairman, I guess in terms of that commission,
I think that the reason we need something like that and the reason we
need to have all the players in the private sector involved as well those
who run the health care programs for the Federal Government or the
State governments is because we really are in a system which is just
outside of anything like the regular great American free market
system.
The doctors who order the tests don’t pay the bills. Nobody says I ’d
like to buy an appendectomy today or a hysterectomy tomorrow. The
patients don’t have any sense of paying bills, particularly hospital bills,
because 94 percent of those are paid for by medicare, medicaid, the
Blues, or private insurers, and most doctor bills are not paid by the
third parties. And in the system it’s very easy to shift charges from one
patient to another, one buyer to another, one hospital to another. So
I don’t think there are bad guys and good guys in this problem. I think
everybody is acting just the way the economic incentives are encourag­
ing them to act.
The more services a person is paid on a fee-for-service basis he per­
forms, the more money they’re going to make. The same thing is true
with respect to hospitals, and the cost and cost-plus system.
I think that if you put all these people around the table and I think
they will be able to determine how serious this problem is. One only
has to look at this morning’s newspaper. There’s a story in the Wall
Street Journal about the question with kidney transplants and vital
organ transplants now. It used to be who lives, as the Wall Street
Journal put it this morning. The question used to be in America, if
we needed a vital organ transplant, who lives ? The question today in
these United States is, who pays? And in the Washington Post or the
New York Times there are long stories about a group of distinguished
doctors trying to figure out what the standards should be for physi­
cians and patients in terms of expensive technology care for people
who are very old or terminally ill. So these issues are on the front
burner.
Can it be done in a year? I suggested a year in this testimony be­
cause I think the political realities for health care, like the political
realities for Social Security, are that much sounder legislation will
come out of Congress if the issue is voted on and legislated in a non­
election year. If it’s not acted on in 1985, my instinct is that it won’t
be acted on effectively until 1987.
Now it may take longer because the Social Security crisis was in
some way easier to measure. There have been years and years of agi­
tation on the crisis in Social Security and there may be a lag time here,




57
but I think the problem is so critical that it really behooves all of us
to try and deal with it and to act on it. I think we are all, as you said,
we’ve met the enemy and they are us. Well, everybody that is part of
that problem should be put around that table to deal with it and you
can’t deal with it in the Federal Government alone. We are seeing cost
shifting that I think we’re only beginning to appreciate the impact
of. We could have fantastic increases in private insurance rates at the
end of next year over this year just because the only cap that’s now
in place is the medicare cap on 467 hospital procedures. Now there’s
an attempt in the House to try and freeze the fees for physicians, but
I really think over the long haul, having both been a regulator and un­
regulated, that over the long haul, if we can get the incentives changed
in this system, it will be far more effective.
Senator Jepsen. D o you have any comment, Mr. Shelton?
Mr. S h e l t o n . No.
Senator Jepsen. Well, I thank you both. As you may know, we have
a very aggressive preadmission screening program in Iowa which is
utilized by the private sector as well as the medicare program. Right
now they’re being too aggressive. We’ve seen a tremendous decline in
overutilization in Iowa. We’ve also received a number of complaints
from both doctors and patients that people feel they are not getting
health care, but we’ve had a very remarkable result in that Blue Cross
in Iowa just recently asked for a $24 million rate reduction. This is
the first such request in their history. So the consumer is realizing the
financial benefit from this process and at the same time it is rather
arbitrary and judgmental at this point. In fact, there is less accessi­
bility of quality health care, but the consciousness is being raised or
has been raised in all this and that’s something you’ve been alluding
to today here also, that we need to form the national health policy
on the basis of consensus. We should formulate most or all of our
policy on consensus rather than conflict or rather than the shell game
as you pointed out, and I would expect that we could that.
I think your year recommendation sounds right because I think most
of the motion, and I might add politics, that were involved in the
Social Security repairing job §ort of broke the way, so to speak. The
commission came, it listened, it recommended, it proposed, and the
Congress, because of the bipartisan approach and the people that were
on it, together, both Republicans and Democrats—not everyone liked
everything about it—but they went about the job of doing the things
that needed to be done. I think that bodes well for the health care
policy. I think a lot of the signposts that were set up have pointed in
the right direction as a result of that commission’s work and will now
serve well in what vou recommend here. It’s interesting.
Mr. C a l i f a n o . Mr. Chairman, I was out in Iowa at Des Moines last
year at the Blue Cross-Blue Shield Cost Containment Conference, and
was enormously impressed with the way that organization and lowans
basically generally—they’re ahead of most of the country in your State
on this problem.
Senator Jepsen . I thank you both for coming and look forward
to participation and consultation and recommendations as we move
along.
Now I would call Mrs. Bert White of the American Farm Bureau,
James Hacking, and Willis Goldbeck. Mrs. White is currently serving




58
on the board of directors of the American Farm Bureau Federation
and will be testifying on their behalf. Welcome, Mrs. White. Mr.
Hacking is assistant legal counsel for the American Association of
Retired Persons, and will be testifying on behalf of A A R P; and Willis
Goldbeck, Washington Business Group on Health. Mr. Goldbeck is
executive director of WGBH—not a radio station but the Washington
Business Group on Health, made up of major employers from through­
out the country. Between 200 and 300 companies are active members.
Mrs. White, Mr. Hacking, Mr. Goldbeck, welcome and we will start
with Mrs. White.
STATEMENT OP MRS. BERT WHITE, CHAIRMAN, FARM BUREAU
WOMEN’S COMMITTEE, AMERICAN FARM BUREAU FEDERATION

Mrs. W h i t e . Thank you, Mr. Chairman. I’m here today as chair­
man of the American Farm Bureau Women’s Committee and member
of the AFBF board of directors. My husband and I farm approxi­
mately 500 acres and raise Hereford cattle near Bailey, MS.
I would like to also add that I serve on the local hospital board.
Mr. Chairman, rising health care costs place severe stress on the
pocketbooks of all Americans. No group is more aware of the financial
grip of health insurance than self-employed individuals, particularly
farmers. Together with employees who do not receive employerfinanced health insurance, the Nation’s 7.8 million self-employed busi­
ness people must confront the serious inequity that exists in the use of
income tax deductions to subsidize health insurance for other groups
of workers.
While the Internal Revenue Code permits an employer to deduct
employee health insurance premiums as a business expense—IRC 162—
and treats the premiums as a tax-free fringe benefit to the employees—
IRC 106—this type of tax treatment is not available to the selfemployed worker who gets no writeoff, but who must then buy health
insurance with after-tax dollars. Currently, the only way a selfemployed individual can deduct any amount of health insurance costs
is if the premium is included in an aggregate of itemized medical
expenses constituting more than 5 percent of adjusted gross income.
The denial of a deduction is apparently because health insurance is
considered a personal expense rather than a business expense. Farmers
and ranchers disagree with this shortsighted reasoning. Farmers, like
other self-employed small business people, conduct business activities
both as employers and employees. The work environment of a farmer
is often hazardous and not infrequently presents danger to life and
limb from the use of heavy equipment and chemicals. Insurance is
necessary to cover the costs of unexpected injury and illness stemming
from the farming occupation. It is a cost of doing business that farmers
cannot be without. We believe it is a reasonable request that a selfemployed person be able to deduct his or her insurance premium as a
business expense.
There is also a question of equitable tax treatment among farmers
who have different business organizations for their farming operations.
A farmer, who is a sole proprietor or in a partnership, cannot deduct
the cost of health insurance premiums as a business expense. However,
if the farm is incorporated, the farmer can be classified as an employee




59
of the farming corporation. The corporation, as the employer, can
deduct the cost of health insurance as a business expense, and the
farmer, as the employee, can receive the health insurance tax free.
The committee will be interested in the amount of health insurance
premiums that farmers pay. In Iowa, for example, the 1983 monthly
cost of comprehensive major medical group plan insurance with no
deductible was $84.15 for a single person and $185.27 for a family.
This equals $1,010 and $2,223 on an annual basis. In Michigan, where
age and area ratings apply, the annual family rate premium, zero de­
ductible, was $1,902 in outstate areas for insureds under age 45. The
annual cost jumped to $2,827 for those between 45 and 54 and to $3,117
between 55 and 64. In the farming areas adjacent to Michigan metro­
politan areas, the same coverage was $2,551, under 45 ; $3,790,45 to 55 ;
and $4,180, 55 to 64. Even plans with deductibles are expensive. For
instance, the 1983 family rate in Kansas for insureds aged 40 to 44 with
a $600 deductible was $778.
The rates illustrate the high out-of-pocket cost that farmers pay.
Remember that they take no deduction for this cost although their intown neighbors who work for a business that provides health insurance
can receive the same coverage tax free. Also, bear in mind that the Tax
Equity and Fiscal Responsibility Act eliminated the $150 deduction
for health insurance premiums that all taxpayers could have applied
against the cost of their health insurance premiums.
The farm bureau recognizes that the Joint Economic Committee
has no jurisdiction over specific legislation. However, we draw the
committee’s attention to two bills, H.R. 3487 and S. 2353, that allow
the self-employed to deduct one-half of health insurance premiums as
a business deduction. Farm bureau members across the country are
working hard to gather support for these bills as well as others that
would eliminate the inequity that exists in the tax treatment of health
care insurance.
Mr. Chairman, the farm bureau is also actively supporting changes
in the medicare program. One of the biggest misconceptions the public
now has about medicare is that it covers all of the elderly’s medical
expenditures. This is an illusion. In actuality, medicare covers only
44 percent of the elderly’s costs and only 30 percent of physician costs.
This stems partially from the fact that a physician is free to charge
a medicare patient whatever fee he determines reasonable for the serv­
ice rendered. Medicare, on the other hand, also sets what they deter­
mine to be a reasonable fee. Usually, there is a wide discrepancy be­
tween the two definitions of reasonable. Present law requires a 80-20
copayment between medicare and the patient. This means medicare
pays the physician 80 percent of what medicare believes to be a rea­
sonable fee and the patient is responsible for their remaining 20 per­
cent. The problem then arises as to the difference between what medi­
care determines reasonable and what the physician determines reason­
able. This amount must also be paid by the patient and is the major
reason that only 30 percent of physician’s cost are actually paid fot
by medicare. Often obscured in the medicare debate is the cost shifting
of medicare health benefits to private insurers and individuals. This
should be noted.




60
Congress requires hospitals, nursing homes, and home health agen­
cies to accept medicare reimbursement as payment in full. Farm
bureau supports the idea of requiring physicians to accept assignment
in all cases as a precondition to treating medicare patients. We rec­
ognize the argument that some doctors may choose not to treat medi­
care patients. Due to the fact that the elderly now represent 35 percent
of the average caseload and due to ethical standards, we believe that
most physicians will treat medicare patients. We also recognize that
patients not covered by medicare will be paying higher costs for medi­
cal services as well as higher medicare taxes.
Mr. Chairman, I want to conclude this morning by assuring you
that farm bureau does not feel we can rely solely on the Congress or
the Government to solve our health care problems. We have tried to
develop programs within our own organization to help solve these
problems.
The American Farm Bureau Federation has had a nine-member
rural health advisory committee in existence for the past 3 years. We
also enlist the services of a seven-member professional advisory group.
Twenty-five State farm bureaus will have advisory committees ac­
tively involved in programs by the end of this year, 1984. These com­
mittees give direction to negotiations for health insurance contracts
covering memberships and to programs and activities to increase mem­
ber understanding of health care costs and ways to reduce them.
Volunteer member support is evidenced by the number of programs
and activities in which the members participate at county and State
levels. In the past 2 years, more than 250.000 individuals were tested
for high blood pressure at farm bureau functions. Farm bureau re­
ceived national recognition for the efforts of this program and others.
Mr. Chairman, it’s been a privilege to come here before this distin­
guished group and you and ask for the consideration of your commit­
tee. We assure you that farm bureau will continue to do whatever they
can to eliminate these problems. Thank you very much.
[The prepared statement of Mrs. White follows:]




61
P repared

St a t e m e n t

of

M rs. B ert

W

hite

Mr. Chairman, I am Bert White.
I am here today as Chairman of
the American Farm Bureau Women's Committee and a member of the AFBF
Board of Directors.
My husband and I farm about 500 acres and raise
Hereford cattle near Bailey, Mississippi.
The American Farm Bureau Federation is the nation's largest
general farm organization with a membership of over 3.3 million fami­
lies in 48 states and Puerto Rico. Policies of the American Farm
Bureau Federation are determined annually after-being studied, debated
and approved by a majority vote of its members at county, state, and
national Farm Bureau meetings.
The issue before this Committee is of
great concern to Farm Bureau members.
Mr. Chairman, rising health care costs place severe stress on the
pocketbooks of all Americans.
Much has been written about the
individual, as well as national, crises that have arisen from
expensive health care coverage. While much of the media attention has
been directed toward the exhorbitarit expense of sophisticated medical
technology, fees of health care professionals, and the high cost of
hospitalization, very little has been said about the steadily rising
cost of health insurance. This cost has increased despite the use of
higher deductibles and decreased coverage.
Farm Bureau recognizes that the basic economic problem in rising
health care costs is that the industry has shifted from one in which
the private sector accounted for three-fourths of all health care
costs to one in which the government — federal, state and local —
now accounts for 43 percent of all health care expenditures.
No group is more aware of the financial grip of health insurance
than self-employed individuals, particularly farmers. Together with
employees who do not receive employer-financed health insurance, the
nation's 7.8 million self-employed business people must confront the
serious inequity that exists in the use of income tax deductions to
subsidize health insurance for other groups of workers.
While the Internal Revenue Code permits an employer to deduct
employee health insurance premiums as a business expense (IRC 162)
and treats the premiums as a tax-free fringe benefit to the employees
(IRC 106), this type of tax treatment is not available to the selfemployed worker who gets no write-off, but who must then buy health
insurance with after-tax dollars. Currently, the only way a
self-employed individual can deduct any amount of health insurance
costs is if the premium is included in an aggregate of itemized
medical expenses constituting more than five percent of adjusted gross
income (IRC 213).

37-264 -

85 -




5

62
The denial of a deduction is apparently because health insurance
is considered a personal expense rather than a business expense.
Farmers and ranchers disagree with this short-sighted reasoning.
Farmers, like other self-employed small businesses people, conduct
business activities both as employers and employees.
The work
environment of a farmer is often hazardous and not infrequently
presents danger to life and limb from the use of heavy equipment
and chemicals.
Insurance is necessary to cover the costs of unex­
pected injury and illness stemming from the farming occupation.
It is
a cost of doing business that farmers cannot be without. We believe
it is a reasonable request that a self-employed person be able to
deduct his or her insurance premium as a business expense.
There is also a question of equitable tax treatment among farmers
who have different business organizations for their farming
operations.
A farmer who is a sole proprietor or in a partnership
cannot deduct the cost of health insurance premiums as a business
expense. However, if the farm is incorporated, the farmer can be
classified as an employee of the farming corporation.
The
corporation, as the employer, can deduct the cost of health insurance
as a business expense, and the ¡farmer, as the employee, can receive
the health insurance tax-free./
The vast majority of farms in this country are operated as sole
proprietorships.
The 1978 Census of Agriculture indicated that 88
percent of all farms with sales of $2,500 or more were sole pro­
prietorships, 10 percent were organized as partnerships, and 2 percent
were incorporated.
These figures translate into approximately 2.14
million sole proprietorships operated by farmers.
The Committee will be interested in the amount of health
insurance premiums that farmers pay.
In Iowa the 1983 monthly cost of
comprehensive major medical group plan insurance with no deductible
was $84.15 for a single person and $185.27 for a family. This equals
$1,010 and $2,223 on an annual basis.
In Michigan where age and area
ratings apply, the annual family rate premium ($0 deductible) was
$1,902 in outstate areas for insureds under age 45. The annual cost
jumped to $2,827 for those between 45-54 and to $3,117 between 55-64.
In the farming areas adjacent to Michigan metropolitan areas, the same
coverage was $2,551 (under 45), $3,790 (45-55), and $4,180 (55-64).
Even plans with deductibles are expensive. For instance, the 1983
family rate in Kansas for insureds age 40-44 with a $600 deductible
was $778.
The rates illustrate the high out-of-pocket costs that farmers
pay. Remember that they take no deduction for this cost although their
in-town neighbors who work'for a business that provides health
insurance can receive the same coverage tax-free. Also, bear in mind
that the Tax Equity and Fiscal Responsibility Act eliminated the $150
deduction for health insurance premiums that all taxpayers could have
applied against the cost of their health insurance premiums.
We believe that the following arguments support a legislative
remedy to this problem:




63
\ quity
e

As previously mentioned, the federal government is subsidizing
health insurance for taxpayers receiving employer-financed health
insurance at the expense of two other groups of taxpayers who cannot
tax advantage of current tax code provisions:
(1) Self-employed
taxpayers such as farmers and, (2) Employees who must buy their own
coverage.
Even if Congress restricts the current tax-free status of
employer-financed health insurance, the inequity will remain. Those
employees currently receiving such benefit will continue to receive a
certain level of coverage tax-free since all or a portion of the
coverage will fall below the tax threshold amount of $840 per indivi­
dual or $2,100 per family as proposed by the Administration.
PRECEDENT

The Social Security Act amendments of 1983 took a step to help
achieve equity between employers and the self-employed in Social
Security tax treatment.
The new law provides t-hat self-employed
individuals will be able to take a tax credit for 1984-1989 against
the self-employment tax that they must pay. After 1990, a new system
of income tax deductions will be available to self-employed taxpayers.
The deduction will be equal to one half of the amount of
self-employment taxes paid for the taxable year.
A deduction or credit for the cost of health insurance premiums
could be patterned after the credits/deductions enacted in the Social
Security legislation.
RISING HEALTH CARE COSTS
Much has been said about the issue of health care insurance for
the unemployed.
The employed, as well as the unemployed, are hurt by
rising health care costs, particularly those in hazardous occupations
such as farming who may pay higher premiums because of higher risks.
HIGHER TAXES COMPOUND CASH FLOW PROBLEMS FOR FARMERS —
INSURANCE DEDUCTION COULD HELP EASE THE PROBLEM

HEALTH

Farmers have been hit recently with higher Social Security taxes,
gasoline taxes, and excise taxes. Such a deduction would ease the
increasing tax burden on self-employed people, help compensate for
direct, out of pocket expenses for health insurance, and lead to more
equitable tax treatment of health care coverage.^
Farm Bureau recognizes that.the Joint Economic Committee has no
jurisdiction over specific legislation./ However, we draw the
Committee's attention to two bills, H.R. 3487 (Latta; R, Ohio) and
S. 2353 (Grassley; R, Iowa), that would allow the self-employed to
deduct one half of health insurance premiums as a business deduction.
Farm Bureau members across the country are working hard to gather
support for these bills as well as others that would eliminate the
inequity that exists in the tax treatment of health care insurance.




64
Mr. Chairman, Farm Bureau is also actively supporting changes in
the Medicare program.
One of the biggest misconceptions the public
now has about Medicare is that it covers all of the elderly1s medical
expenditures.
This is an illusion.
In actuality, Medicare covers
only 44 percent of the elderly's costs and only 30 percent of
physician costs.
This stems partially from the fact that a physician
is free to charge a Medicare patient whatever fee he determines
reasonable for the service rendered.
Medicare on the other hand,
also sets what they determine to be a reasonable fee. Usually,
there is a wide discrepancy between the two definitions of reasonable.
Present law requires a 80-20 copayment between Medicare and the
patient. This means Medicare pays the physician 80 percent of what
Medicare believes to be a reasonable fee and the patient is responsible
for their remaining 20 percent.
The problem then arises as to the
difference between what Medicare determines reasonable and what the
physician determines reasonable. This amount must also be paid by the
patient and is the major reason that only 30 percent of physician's
cost are actually paid for by Medicare.
Often obscured in the
Medicare debate is the cost shifting of Medicare health benefits
(costs) to private insurers and individuals. •
(I should point out that only 52 percent of physicians are willing
_
to accept Medicare payment as payment in full, and only 20 percent of
the physicians nationwide, accept assignment in all cases. Thirtyfive percent of the nation's physicians never accept assignment under
any circumstances. The refusal by such a large number of physicians
to accept Medicare reimbursement rates as payment in full has resulted
in elderly patients being required to make large out-of-pocket
payments for health care.^
Congress requires hospitals, nursing homes, and home health
agencies to accept Medicare reimbursement as payment in full. Farm
Bureau supports the idea of requiring physicians to accept assignment
in all cases as a precondition to treating Medicare patients. We
recognize the argument that some doctors may choose not to treat
Medicare patients.
Due to the fact that the elderly now represent 35
percent of the average case load and due to ethical standards, we
believe that most physicians will treat Medicare patients. We also
recognize that patients not covered by Medicare will be paying higher
costs for medical services as well as higher Medicare taxes.
Mr. Chairman, I want to finish this morning by assuring you that
Farm Bureau does not feel we can rely solely on the Congress or the
government to solve our health care problems. We have tried to
develop programs and activities within Farm Bureau to help solve
these problems.
The American Farm Bureau Federation has had a nine member rural
health advisory committee in existence for^the past three years. We
also enlist the services of a seven-member professional advisory
group. Twenty-five state Farm Bureaus will have advisory committees
actively involved in programs by the end of 1984. These committees
give direction to negotiations for health insurance contracts covering
memberships and to programs and activities to increase member under­
standing of health care costs and ways to reduce them.




65
Volunteer member support is evidenced by the number of programs
and activities in which the members participate at county and state
levels.
In the past two years, more than 250,000 individuals were
tested for high blood pressure at Farm Bureau functions. Farm Bureau
received national recognition for the efforts of this program. Farm
Bureau has also participated in health fairs, exhibits, joint meetings
with health care officials, seminars, conferences at state annual
meetings and direction for emergency medical technician continuing
education.
Safety activities have also been redefined as preventive
medicine with economic proof of the savings in claims.
This includes
training in farm accident prevention, extrication for EMT’s, developing
a nationwide training program for farm operations and families in
first care programs, education in training in the use of farm chemi­
cals, a national symposium on nutrition, and a national conference on
health issues.
Mr. Chairman, we appreciate the opportunity testify this morning.




66
Senator J ep se n . Thank you, Mrs. White.
Mr. Goldbeck.
STATEMENT OF WILLIS B. GOLDBECK, PRESIDENT, WASHINGTON
BUSINESS GROUP ON HEALTH

Mr. G o ld b e c k . Thank you, sir. I am Willis Goldbeck, the president
of the Washington Business Group on Health. As you heard some
very clear specific examples from Ford and Chrysler, I will try to
ive you an overview of the business circumstances in the United
tates today and where we think some major corrective procedures
are needed.
You have a chart there that suggests that the total expenditure by
business is going to be $70-plus billion. It is important we recognize
that that is only a portion, indeed not even half, of what business
spends on medical care in America today. That’s only what is re­
flected in group insurance premiums. That does not include work­
men’s compensation. That does not include disability. That does not
include rehabilitation. That does not include self-paid programs.
That does not include a lot of the self-funded programs in small
businesses that have no reporting responsibilities to the Government.
It does not include corporate medical departments, occupational
safety and health programs, ad nauseum.
So, when you hear thè giant numbers that are put on the table
even now, they are in fact small compared to the total numbers with
which the Congress must come to grips.
Waste and excess threatens not only the companies you hear from
such as Chrysler and Ford, but threatens the medical industry itself
because it will not be able to continue to be a healthy industry as it
is being attacked from all sides with the necessity of change. The same
waste and excess threatens quality and access to care as well.
I think Congress is going to have to recognize that we will deal
with rationing in America. The question is, how well we will deal
with it, not whether we will deal with it. In many cases, the private
sector will be involved more onerously than anything the Govern­
ment has yet suggested.
I just offer one example. The most successful heart transplant
program in America, at Stanford, is in large part successful not just
because of their surgeons’ skills but because they have two very good
rules; nobody over the age of 50 and nobody who has other kinds
of complicating medical problems. That’s a rational kind of rationing
from the standpoint of that particular unit of care delivery. It also
raises many issues for the Government to consider.
We need an effective new definition of what we consider to be a
success. Efficiency rather than excess; self-reliance rather than sub­
servience to experts, and prevention more than cure. Success must be
measured by how little care we need and by the outcome of the care
that we must receive.
We have paid too much attention to whether or not particular kinds
of cost shifting were justified on the merits of the individual instance.
Cost shifting: is simply a matter of taxation without having to vote.
The shift of costs by Government does not equate to savings. The
Congress or the administration can suggest that they have saved the

f




67
Nation money, when in fact that will not be the case unless there’s been
the kind of systemic change that Mr. Califano and Mr. Shelton were
talking about.
We have also been hearing in the last few weeks and months that
business ought to just look out for itself. We’ve heard this from some
Members of Congress. We’ve heard it from some members of the ad­
ministration. Well, I want it to be clearly on the record that our organi­
zation and its members do not believe that business should only take
care of itself as though it was isolated from the rest of the economic
and medical care circumstances of this Nation. To do so would abso­
lutely bankrupt most community medical practices and facilities.
Many companies could do just that today and it’s very pleasant to
note that they chose not look out only for themselves.
Everybody is following the economic incentives placed in front of
them. I think it is reasonable to expect that as we change the economic
incentives people will continue to comply with the economic impera­
tive. Doing so raises at least a couple of what we call myths that the
Congress will have to grapple with. Individual companies have grap­
pled with them as they changed their own plans. Benefit plans that
now and in the future may restrict the choice of the providers to whom
the individual employees and their families may go, is an issue very
much in the forefront of medicare and medicaid considerations as well.
There is no such thing as freedom of choice that has any meaning
absent real information upon which to make choice. Our public today,
including you and I as individuals, has no ability to discern among
providers on the basis of publicly available information, comparing
price, quality, and service. In fact, we are often told that there is no
real way to measure medical quality.
Well, if there’s no way to measure medical quality, then nobody
should have any complaints about who the giver is of the medical pro­
cedure. We believe very strongly that there must be systems to measure
medical quality, as complex as that may be. We have to recognize that
there are no real markets unless there is a free and open flow of market
information so that the buyer is on a parity basis with the seller in
the purchase and sale of medical care. In that sense we are not dealing
with anything any different than anv other product.
If we do not do something soon about the waste, then the ultimate
availability of health care will be threatened. Your own State of Iowa
has taken a lead' by the passage of the data access bill. This movement
was led by a group of employers in Iowa. I f the rest of the States do
not do something similar, we will be forced into the worst kind of ra­
tioning.
With the ri^ht kind of publicly available information, we can ration
intelligently. We can discern who are the efficient, high quality pro­
viders and design the economic incentives to reward them for what
they do well, leaving the others to either improve or fall by the way­
side through other normal economic competition.
It’s considerably preferable to have this kind of rationing than to
having a congressional committee or a Government agency determin­
ing who on the basis of age or wealth ought to receive specific services.
The other question that is often raised is whether or not, because one
begins to manage costs, quality must automatically be reduced. We
see no evidence of that in any of the programs that are available now.




68
Companies that we’ve worked with around the country can exhibit
savings of 20 to 40 percent if they will become aggressive about cost
management. There is no reason why medicare or any other program
couldn’t do as well and therefore reverse the pressure of economic in­
centives.
The excess in medical testing documented in journals—the excess in
length of stay? the amount of medical procedures that are done in inap­
propriate settings by inappropriate level of providers—all leave ample
opportunity for us to make corrective measures and improve quality,
not reduce it. Excess hospitalization is not a benefit. It is an unhealthy
burden.
You asked in your letter about cost. I suspect we are heading toward
15 percent of GNP by around the year 2000. If you look at the trends
in aging and the technology and other factors that are exogenous to the
health care system, that is a highly likely direction, if not finite num­
ber. I would caution you that following the historical trends and the
statistical norms is a very shaky business because they are predicated
on all the waste in the system.
If we really want to exercise good surgery on the medical care sys­
tem and its costs, we must develop cost management strategies that
involve the public and private sector working in tandem and are predi­
cated on four basic principles: Rewarding efficiency, investing in pre­
vention, defining outcome standards, and guaranteeing access to in­
formation so consumers at both the individual and the aggregate level,
corporations, unions, governments, and association, have the ability
to discern among competing providers.
Now I would like to suggest to you that there are a variety of steps
that can be taken by Congress to facilitate these changes, both in 1984
and subsequently from 1985 to 1995 or thereabouts. A number of those
are identified in the testimony and I will not review them all, but
merely point out one or two that are on your agenda right now.
The PRO, professional review organization, regulations are coming
out stipulating that nobody is supposed to have access to physicians’
specific information, obviously a device designed to protect not the
consumer, not the Congress, not the Federal budget, and surely not
Ford and Chrysler.
The Social HMO program, the first major experimental effort de­
signed to provide cost efficient lon^-term care in America, the result
of private investment with cooperation of HCFA, is being put on hold
by OMB. You can correct these problems.
The list is lengthy. In the years to come, we can eliminate the prob­
lem of defensive medical practices, which is understandable given
the current malpractice situation, by establishing either on a nation­
wide basis or a State-by-State basis—a medical malpractice arbitra­
tion system that will remove the issue from the tort system. This is
working in at least two places infinitely better than the Nation as a
whole, in Hawaii and Wisconsin.
Other actions include removal of State barriers to negotiating care
arrangements which many companies are now exercising, and not
including any extra percentage increases in DRG rates for technology
which is supposed to be cost efficient to begin with. These would oe
simple steps that could be taken in the very near future and contribute
to the total cost management.




69
Finally, Congress should begin a process—and it may very well be
through Joe Califano’s commission or some other structural meth­
odology that seems appropriate—to consider the changes in medicare
benefits that would be at least as dramatic as the changes last year
in medicare financing. If one was to start today and design a pro­
gram to serve the elderly, we would not end up with medicare. That
was designed to serve the providers and help the elderly. If it’s to
serve the elderly, it ought to deal with chronic care and long-term care.
It ought not to exclude the custodial benefits which are the greater part
of the care given at hospitals yet are unreimbursable when given at
home in cost efficient and humane settings. We already hear threats
about removing or reducing the hospice program before it hardly has
a chance to get started.
Mental health care is rarely reimbursed in those subacute facilities
which are more cost effective and not at all worse from a quality stand­
point, based on some 20 years of comparative studies.
We could bring about a long-term care IRA, we could start a pre­
vention program for the elderly for whom there is absolutely no bio­
logical reason to fall apart at age 65.
I would hope as you look ahead you really look ahead, not just to
1984, not just to the next election, but to the future years. After all,
we are still tinkering with the results of the decisions made in 1965.
The decisions made in 1984 and 1985 will have a long, long life. They
ought to recognize that the society which we will be serving will not
be the family of today, will not be the classic nuclear family, and will
not have a family doctor. We will be dealing with entire new types of
medicine, entire types of new medical technology. The hospital will
be the minority care giver, not the majority care giver.
All of these things suggest that those who emerge as real leaders in
Congress will be those who are willing to take a more future-oriented
perspective than is the norm.
In closing, your task requires seeking a balance between competition
and regulation. Making market forces work is often a process of also
making regulation work. You would not have full disclosure in Iowa,
for example, were it not for a new law. Seeking balance between med­
icine and health. We are kidding ourselves if we continue the absurd
imbalance that Joe Califano referred to with 96 percent of our medical
dollars going to care after the fact and 4 percent going to prevent the
probem. That is a problem we can correct today.
We must also seek the balance between public and private respon­
sibility, not by fiat or by cross-shifting, but by a rational process of
policy development.
Finally, we cannot avoid the difficult and often gut-wrenching but
essential process of seeking balance between economics and ethics.
When we talk about rationing, we’re talking about the values of a
society, not just the economics of the health industry. And just as busi­
nesses look at their bottom line with great scrutiny and increased care
these days, we, too, must also recognize that the only way in America
to make profits in the future is to have communities that are physically
and emotionally healthy and economically viable. We need a total
perspective of working together. Thank you very much.
[The prepared statement of Mr. Goldbeck follows:]




70
P bepabed S t a t e m e n t of W il l is B . G oldbeck
HEALTH CARE AND TKS ECONOMY

You are to be commended for calling this hearing so that,
may ponder a true dilemma:

the economic problems caused

of our most economically successful industry.
very

together, we
by the growth

How ironic that, at the

time when our nation's economic problems and industrial

decline

are the focus of world attention, we find ourselves convened to devise
strategies

for

slowing

standard

of

success.

Unfortunately,

economic

one of our few growth industries.
growth,

By

every

the health care industry is a

raging

that success has been based on a whole series

of faulty economic principles,

ignorance,

and myths.

Further, we must

change our definition of success or else the failures of the past will
preclude achievement of the wonderful future we all want to share.

As President of the Washington Business
responsibility
the

very

stagger
nearly
would
care

to

large employer.
the

wrong

economic

management
mutuality

on

Health,

it

is my

Our members purchase care in amounts

vs
of

p o ssible.




employees,

retirees and dependents.

to proceed under the assumption that,
debate,

there

need

be

public

labor; provider vs consumer.
our

long

term

vs

However,
in the

private

of
that

imagination as their benefit plans annually provide

50,000,000
be

Group

examine health in America from the perspective

for
it

health
sector;

Only by recognizing

interest will responsible programs

the
be

71
Progress is not served when the federal government claims savings that
in

fact

are

nothing

more

in

poverty

for

increases

than shifts in cost to other
which

future

Congresses

payers

will

be

or
held

financially accountable.

Progress is not served if large employers
year's

bottom

line

and

forget

that

act

only

their

to

protect this

profits are ultimately

dependent upon communities that are economically viable as a whole.

Progress

is

not

served

by tax policies which

reward

companies for adding to rich benefits and also reward

the

largest

small employers

for not providing benefits at all.

Progress is not served by unions that fight
benefits,

which

we

know

today

are

for

the

preservation of

poorly designed,

economically

wasteful and popular only because of the misconception that there is a
positive

relationship

between the most expensive hospital

care

and

high quality care.

Progress is not served when providers pretend

they

are the only ones

with a right to comparative information or that somehow their industry
should

not

be

subject

to

the

same

requirements of both economic

competition and government regulation as the rest
sectors.




of

our

industrial

72
Myths

Employers who have exhibited leadership in cost management have had to
struggle

with

several myths that to this day impede the progress

of

many others in the public as well as private sectors.

Foremost among the myths is the concept of "freedom of choice."
true

that we have this legal freedom to go to any doctor or

we want.

However,

psychic succor.
quality

or

sellers

the

true

with

denied any

information upon which to make a comparison

freedom to select is more rhetoric than value.

among

This

any product and the medical industry is no exception.

yourselves,
hospital

for most of us this freedom offers little more than

When the buyer of a product or service is

price

It is

hospital

right

infection

mortality

here

in

rates,

Washington,
iatrogenic

if you have ready access
disease

rates, morbidity

rates per diagnosis or even price per procedure.

Where

is
Ask
to
or
do

you get the physician specific information that would be comparable to
what

you

would demand from the seller of any other product?

know which hospitals in the area do the volume of open
that

results

in

the

heart

the least unnecessary lab tests

rather

it

is

to

upon real knowledge;




most

which do

. . . the list is endless.

The point here is not to suggest that quality

dependent

or

you

surgery

best outcomes; or which hospital has the

medically appropriate lengths of stay for normal births;

understood,

Do

state

clearly

is

easily

measured or

that real freedom

real markets are dependent

upon

is
open

73
access to meaningful information.

For

you

as policy makers and we as purchasers

quality
the

the

availability

standards and measures has another vital function:

impact

on

health

and

access

to

care

of

assessing

of our cost management

strategies.

Predictably,

the more government and private

purchasers

payers

become demanding

the more the providers are going to resist.

Everyone

has

been responding logically to their economic incentives and there is no
reason to expect this to changé.

Typically,

those of us who

aggressive cost management are charged with not having
quality.

This

is

the second myth:

must be reduced.

Not true.

care

in

they

need

appropriate
efficient.
expensive
benefit,
habit,

There
care

know

is

Cost management means getting
most

appropriate

setting,

based on an economic system
no

positive

and the best care.

ignorance,
We

other

an interest in

to have costs controlled

correlation

economic

from

that

imperatives

or

done

would

be

less

due

a
to
are

when

and better for the

patient.

We need not accept the wide diversity in physician
when we have evidence of efficient practices with




not

defensive medicine

costly

the
most

is

need not spend billions on hospital expansion
settings

most

the

patterns

medical results.

the

rewards

between

Lab tests

quality

people the

Extra hospitalization

it is a distinctly unhealthy risk.

unforgivable.
we

the

provider

advocate

practice
excellent

74
No, cost management is not the biggest threat
reverse

is

resource
and/or

true

for

consumption
wealth.

if
we

Faced

to

quality.

Quite the

we do not adopt a conservative pattern
will

with

rush into explicit rationing

these

two

choices,

by

responsible

of
age
cost

management must be viewed as a protection of quality and access.

Cost Projections

Projecting costs is an exercise usually predicated
of past consumption patterns.

upon

the analysis

In the case of medicine, I believe this

will prove to be a fruitless exercise.

Virtually none of the factors which have contributed
level

to

our

of expenditures will be present five years from now.

current
Actually,

most are already gone or at least their altered state is recognizable.
Ten examples:

1.

the change from retrospective to prospective pricing of
Medicare.

2.

private purchasers —

employers ana unions —

replacing an era

characterized by the passive payment of insurance

claims with

'the aggressive negotiation for medical services.

3.

the

public




interest

in

fitness,

stress

control,

reduced

75
smoking, self-care, and general health enhancement.

4.

aging: without a supporting youth generation

5.

technology: through the

space

program,

genetic engineering,

parts replacement and regeneration

6.

replacement of the hospital as the primary focus of medical
care

7.

information that enables

the

public

to

shop for care based

upon comparative quality, service and price measures.

8.

economic incentives, from

both

the

supply and demand sides,

that foster competition

9.

an increase in economic constraints from factors exogenous to
health

10.

greatly increased pressures to control and clean up
environmental hazards.

All

of L these

projections.
technology
combine

to




examples
My

and
make

best
the

simply
guess

absence

costs

demonstrate
is

that

the

the

fragility

pressures

of

from

aging,

of major investment in prevention

continue to increase until we

are

any

will

spending

76
nearly 15 percent of our G N P ,

We should reach this level

before

the

year 2000.

Interestingly,

this need not be a morbid

prediction.

amounts on human health is not the worst thing of
be

accused.

The real issue will be whether or not

getting an increased return on our investment.
marred

by

absence

waste.

Excess

Spending

large

which a country can
we

feel

Today,

our

are

system is

is driven by economic incentives

of either progressive market forces or workable

we

and

the

regulations.

Increasingly, we see the staggering cost of care that is inappropriate
in

terms of location or provider,

fraudulent.
a

In this climate,

desire

reinforced

industrial

realignment

familiar.
private
adopting
and

a

duplicative

there is a national desire

the

issues

overall
with

deficit,

which

this

can

reduce

their

outlays

constraints

in

which

sermon

the

Committee

by

and
is

so

Nearly any major
20-30 percent

efficient

by

controls

providers

are

Walt McClure has been preaching

for years just as John Knowles preached about prevention

to overfed audiences of smokers impatient for the cocktail
challenge

even

to cut back,

strategy of reimbursement redesign, utilization

This is not a new concept.

and

unemployment

reductions are certainly achievable.

employer

capacity

rewarded.
this

And,

by

unnecessary,

is

not to find new knowledge,

rather it

is

to

hour.

The

have

the

political will to do what we know can work.

Between 1985-1995
effective

actions,




will
there

be the difficult period.
will be a lag time before

Even if we take
the

excess

is

77
reduced,

before

- responsible
mdre

physicians

practice patterns change to comply

national standards, before the public is educated

prudent

both

in

with
to

be

their life style and in their consumption

of

medical resources, before there is an appropriate mix of providers and
institutions

competing

openly on the basis of quality,

service

and

price.

Action - 1984

Realistically, this is not going to be a year
drama
year

of

fast action or high

in federal health legislation or regulation.
need

not

be wasted.

Nonetheless,

the

There are several steps the Congress

can

take immediately that address the basic principals of:

A.

increasing

market

forces

by identifying

and - rewarding -

efficient providers

B.

improving our ability, as a nation,

to

assure

access to

the appropriate care for all in need

C.

sustaining the excellence of our medical system while, for
the

first

prevention.

37-264 -




85 -

6

time,

making

a

balanced

investment

in

78
In no special order,

1.

Require

Congress should:

that all states

within

three

years,

have

a

full

disclosure law at least as strong as the Iowa model.

2.

Prevent

the

regulation,

Professional
being

Review

released

for

Organization

comment

this

program

week,

from

protecting the release of physician-specific price and quality
information
supplier
prices
no

under

the

guise

of

to the government is

confidentiality.

allowed

to

hide

its

No other
costs,

and measures of quality effectiveness and their exists

special

reason

to extend this unhealthy and economically

unsound protection to physicians.

3.

Support the start of the
now

being

Social HMO long term care experiment

held up by OMB despite years of investment by

the

private sector and the support of D H H S .

4.

Clarify that the recent

1RS

spending

end the

accounts

creative
choice,

5.

benefit

not

designs

memo

Section

125

flexible

development

which encourage consumer

of

multiple

self-responsibility and prudent purchasing.

Renew the Educational Assistance
style worksite wellness programs.
effective




on

progressive

investment

that

Program

which included life

These are the kinds of cost

the 1RS, after years of analysis,

79
determined,

in

1983,

it was appropriate to support.

Neither

the analysis nor the effectiveness nor the need for prevention
have changed

6.

. . . let's renew the support.

Pass an FTC reauthorization
exemption
make

a

bill

for the professions.
mockery

of

which

does not provide any

To do otherwise would

the Congress'

be

to

avowed concern for medical

care costs or competitive markets.

7.

Establish a new health planning
of

the

next

ten

years.

considerable

state

restructuring

of

that meets the needs

Such

a

local

and

control;

the delivery

dependent upon the hospital;
rewards

program

program

system

needs
a

as

to

focus

it

have

on

the

becomes

less

and a participatory process which

the improvement of health

not

just

the

denial

of

construction.

8.

If the Congress gives serious

consideration

to

a cap on the

amount of insurance provided as an employee benefit
tax

deductible,

provided

by

departments
. signal
health

that
of

management

then

employers
should

is

and

unions

be exempt.

or

corporate

To do so would send

medical
a

clear

the government places a high value on the future
our
must

residents and recognizes that long term
involve

that capability exists.




which

the life style and prevention programs

the
Taking

cost

prevention of illness whenever
this

step

would

be no more

80
radical,

and no less dramatic

original

decision

to

use tax

in

its

influence,

deductions

as

than

the

means

a

for

encouraging the spread of medical insurance itself.

9.

Eliminate all government subsidies for tobacco growing and
production.

10.

Provide the Prospective
budget

Payment

Assessment Commission with a

adequate to meet its mandate.

have a quality,

That organization

must

depth and duration commensurate with the scale

of the investment it seeks to protect.

Action - 1985-1990

Starting next year, we enter the final four

years in which it will be

possible to act before Medicare self-destructs.

It will be to all our

advantage if Congress will view this as a block of
four

separate

years.

Components

of

time

rather

a legislative strategy

than
should

include.

1.

Increasingly

strong

incentives

for

competition and efficient providers.




the

states

to

foster

81
2.

Establishment of medical
systems

in

all

liability

the states and

at

(malpractice) arbitration
the

federal

level

for

Medicare.

3.

Removal of state barriers to negotiated care arrangements.

4.

Chartering of a public-private technology assessment
institute.

5.

Conduct

a review of all

state

medical

practice

acts

that

impede competition.

6.

Incorporating capital into the DRGs.

7.

Avoiding

any

percentage

technology.

Advances

their

cycle.

life

increase

must

be

in

DRG

economically

rates

for

efficient

new
over

No other industry receives a future price

increase guarantee for technology, and medicine should

not be

an exception.

8.

While we do not need another

commission

Medicare

do need to make

has

problems,

we

. Medicare' benefits the focus of a national
makes

no

sense,

either

economically

to

investigate
the

effort.
or

from

reform

of




the

elderly

of

It

simply

a

health

perspective, to continue a program which pretends to meet
needs

why

the

while it blatantly ignores their most

82
pressing

needs:

services.

We

principles

than

in

Medicare but have

to

the

term

care

changing

not

made

and
the

the

social
economic

concomitant

benefits so they suit user needs

provider demands.

nothing,

long

have made progress

of

adjustments

chronic care,

Medicare

today,

while

rather

better

is a cruel hoax for many of the elderly.

than

A hoax

we

can no longer afford.

Corrective action must recognize that
single group.
there
the

are

least three categories:
(65-75) ,

and

categories are arbitrary.
the

the aged

program

No matter.

to

are not a

the young-old (55-65),
(75

and

beyond) .

The

Some note that the over 84 group is

segment that, proportionately,

resources.

elderly

As the most creative gerontologists have noted,

at

elderly

the

The point

consumes the most Medicare
is

we

must

redesign

the

fit the population of the '90s and beyond or else

we guarantee that we will remain
expectations,

mired

in

a morass of false

financial waste and reduced access.

In

sum,

it

should be a simple choice.

8.a.

Combine Medicare parts A and B

8.b.

Combine Medicare and Medicaid

8.c.

After holding harmless




all

those

test Medicare for those with an

over 55, means

income

over

the

83
same

level

as

that

used

for

Social

Security

taxation.

8.c.l.

Move

the eligibility

age

back

financial and health conditions

to

reflect

prevalent

the

in the

1990s, as opposed to those presumed present in the
early 1960s.
future

Set the age

needs

not

past

based

on

norms

analysis

nor

of

Bismarkian

allegiance to a biologically meaningless number.

8.d.

Establish a health and
designated

kinship

medical

access

care

IRA

provision

with a
for

the

payment of medical expenses after a selected age.

8.e.

Develop a prevention
begins

ten

eligibility

years

package
before

and is cost shared

for

Medicare

normal
by

that

Medicare

participants,

employers and the g o v e r n m ent.

8.f.




The
needs

entire mental health
to

be

redesigned

component

of

to encourage

Medicare
sub-acute

facilities, coping skills and direct reimbursement
for

non-physician

providers

utilization review standards.

who

comply

with

84
9.

Sponsor a national program to increase the use of living

wi1Is .

10.

Do not renege on the
program

should

new

hospice

program.

In

fact,

that

be increased to further encourage the at-home

option and respite care for kinship support.

11. Greatly increase support

for

research

to establish chemical

safety standards.

2000 and Beyond

Your

efforts

laudable

and

to

strike a balance between expenditures
necessary

as

characteristics of our society,
world

are

they

are,

will

our technology and

given due consideration.

long term needs.

However,

fail
our

access,

unless
place

I appreciate how hard it

adjust political thinking with its two, four and
to

and

six

the

in the
is

to

year boundaries

that is the dilemma from which

leaders

emerge.

The year 2000 is no further away than a new b a b y ’s junior year in high
school,

i.e.,

less than three terms in the U.S.

major global health issues of water,

Senate.

food distribution,

By

nutrition,

environment and hazardous waste will be far more significant
U.S.

than they are today.




then

for

the
the
the

85
Our world will have expanded considerably beyond our earth with untold
health

consequences.

heavily

Few if any domestic social issues

impacted by our incursions into space as will

This hearing is being held on a day when U.S.
teams

are

foremost

hard

at

commercial

subsequently
predicated

of
upon

work

hundreds

and

peaceful

space

be

human

Soviet

as

health.

scientific

of miles above this planet.
use

stations,

otherwise

and

will

of

is

unattainable

the

The

space shuttle,

pharmaceutical
chemical

and

development

separations

and

interactions.

One of the reasons we have today's cost problems is that, in the past,
we tried to treat medical care as though it was isolated from the rest
of

our

social

dispassionate,
done

so,

and

economic

comprehensive

research

into

the

needs.

Rarely

have

we ever taken

view of our medical needs.
prevention

If

we

and cure of cardiovascular

problems would receive approximately ten times the resources
devoted to cancer, yet the reverse is true because

the

as those

cancer

lobby

has been more effective than their heart disease counterparts.
had

If

done so, mental health, dealing as it does with humankind's

intricate

and vital instrument, would not be the financially

element of medical care.

If we had done so, we would

Medicare on an acute care hospital model,
the rapidly growing older population.




a
had

not

we
most

weakest

have based

much less been surprised at

86
A strategy for the future cannot
world

issues

structure

or
no

is

the

longer

doctor is a rarity;

lessons

afford to ignore either these larger
from

our

domestic past.

the nuclear stereotype;

Our family

the classic

family

everyone will have access to their medical records

and massive banks of self-care data via telecommunication

. . .

home;

the

medical professionals will have instant access

techniques,
records

best research,

may

be located;

to

total medical history regardless

of

at

latest
where

diagnosis will be increasingly dependent

on

electronic implants that warn of pending problems as well as correctly
pinpointing

the

cause of crises;

compliance with drug regimens

not be an issue as time release capacity is extended to
beyond.

These

factors,

will

12 months and

combined with parts replacement,

elimination

or control of many emotional disorders and the as yet largely untapped
potential
world
the

of

that
work

diet and psychological control of disease, represent
we

we

will not avoid yet are ill prepared to enter.
do

to

address

medical

care

costs

a

Unless

in 1984 at least

considers the future we can guarantee only one result:

more expensive

problems that could have been avoided or ameliorated.

Impact On Industry

Throughout

the

nation,

the cost of providing

captured the attention of business leaders.

medical

Recognition

benefits
grew

has

in the

1970s that employers and unions must accept responsibility for benefit




87
designs

and

lax

management

which

contributed

utilization and uncontrolled cost increases.

to

excess

Between 1980

major employers have initiated unprecedented efforts to

medical

and today,

correct their

share of the problem and bring direct pressure on the other components
of

the

years,

medical
more

regional,

care

than

state

financing

and

In these

few

new purchaser groups have been formed at

100

the

local

and delivery system.

levels;

wellness programs are the

widely supported new employee benefit;
become
modify

common

reversing

utilization

a

through

most

increases in cost sharing

have

30 year trend;
second

financial

opinion,

incentives

pre-certification,

ambulatory surgery, utilization review, hospice care,
HMOs
plans,

have become basic components of
primary

designated

care

gatekeepers

(preferred)

providers

plan

and

home

design;

can

contribution

is

do

better

needed

for

with

care

unwarranted

rather

expansion;

with

traditional

ask

than

and

choice

plans

are rapidly replacing

less

care

multiple

negotiated

insurance policies; hospital trustees are learning to
institutions

to

how

how^

their

large

business

a
is

politically active across the country from Massachusetts to California
where

seemingly opposite approaches merely substantiate that

Fortune

500 type companies may think nationally but they act locally.

All of this activity is completely
the stakes involved.

understandable

For many of our members,

when

one looks at

costs have escalated at

rates ranging from 15 to more than 40 percent in each of the past five
years despite no increases in benefits,
management.

fewer employees and more

cost

The medical benefit has become a major component of total




88
compensation.
medical

No longer something to be given away and forgotten, the

benefit

is

now

seen

as an asset to be jointly managed

by

employee and employer.

Not surprisingly, these problems have been
manufacturing,

industries.

acute

in the older,

For them, medical care cost

most

inflation has

simply exacerbated an already complex and dramatic period

of decline.

The ability to compete internationally has been hurt by excess medical
expenditures.

Equally important has been the impact of cost increases

on firms that build everything from tractors to the space shuttle.
the past year, for the first time, I have heard management
relative

cost

of

place

medical care into the equation by which they

In
the
will

select future plant locations.

Small businesses find the cost of insurance
do not provide this benefit . . .

so

high that nearly half

a cost avoidance

which

government budgets and uncompensated care costs which

shows up on

are

shifted to

large employers!

For your purposes, these points are worth highlighting:

1.

Solving the medical

cost

problem

will

troubled U.S. industry, but not

care

solving

the

not save any
problem

inevitably add companies to the list of casualties.




will

89
2.

Shifting costs from public to private payers does not reduce
the nation's medical bill.

3.

New government regulations

should

emphasize

maximum state

and local flexibility.

4.

Those in government who
out

urge

major companies to "look

for themselves," fail to recognize the havoc this would

cause

in

countless

employers
their

could

local

hire

communities.

In

themselves.

number

Happily,
On

of

with, the

the

the

the

protect

we

see

contrary,

local

little
our

towns,
buy

current
its

government

to

the

do

economic

and

business

community

human

of

this

and an increasing

line
so.

on

indigent

system
and

shrinks.

needs

no

the

Business

must

reminders

from

But, that bottom line includes

health of our communities.
that

care,

employment problem that will arise

hospital

bottom

evidence

Group

groups are starting projects to work

rest of their community

"uriinsurables," and

the

We need

is progressively agressive

cost management, not regressively protectionist.




many

their own specialists, build or

own facilities and leave the rest of the community to

emerging.

as

now

a

about

90
I

began by saying we needed a new definition

have

a

critical

information
rather

role

which

to

will

play

success.

Employers

build that new definition around

experts,

rehabilitation

around

rather

prevention

than

care

than

to

Success must

cure,

around

around

institutionalization,

education rather than medical ignorance.
little

rather

the

efficiency

than excess, around self-reliance rather than subservience

so-called

how

of

in gathering and disseminating

health

be measured by

we need and by the outcomes from that

we

receive.

That would be a system we could all afford.

Conclusion: A Search for Balance

During the months ahead there will

be

many

temptations

fast solutions, to embrace the rhetoric of impassioned
leave political courage for the next generation.

to grab for

advocates,

to

We would all be well

advised to take a different course, to have a larger vision predicated
upon

a

search

regulation,

for

for
we

balance.

will

never

Balance

between

competition

and

be a society of only one direction.

Neither represents perfection, each benefits from the stimulous of the
other.

Wise regulations can make competition work just

as

surely as

the opposite is also true.

Balanced investment between medicine
able

to

afford

our

medical

and

miracles

health,

for we will not be

unless we reduce

demand

inculcating persons of all ages with the credo of health promotion.




by

91
Balance

in

the division of responsibility

private sectors.

between

the

public

Employers need to understand that they

the costs of care and that all trends in global economics,
and

domestic

politics

responsibility
does

not

shifting

for

improve
costs,

are

increasing

social services.

the

scope

the

demography

of

corporate

Government, on the other

the overall economy or even medical
increasing

number

of

and

cannot avoid

hand,

economics

by

persons without program

eligibility or decreasing our already meager commitment to health care
services research.

Balance between the exigencies of economic pressures and the ethics by
which
the

the

true value of a society is measured.

arcane

dignity,

province

organ

technology

are

of

academics

and

No longer is

philosophers.

ethics

Death

acquisition, right-to-life and the rationing
now

with

of

the language of daily headlines and high

new

school

discussions.

The economic resources we now waste on medical
the

competitive

viability
and

of

care threaten not just

our members, nor only the budgets

countless

state

threatens

the destruction of the very industry it now supports.

local governments.

that destruction would come an end to
of

medical

excellence;

a

drastic

Significantly,

this

America’s pre-eminent
reduction

of

waste
With

position

in the employment

millions of minority and female workers; greatly increased rationing




of

92
by wealth;

and no chance for the investment in prevention

that

holds

such promise for future generations.

We

must

work

destruction.

together

to

prevent

this unwanted

We can have a competitive system which

of efficient excellence and protects,

unwarranted

rewards

through appropriate

the right of access to needed care for all Americans.




and

centers

regulation,,

93
Senator J ep sen . Thank you, Mr. Goldbeck.
Mr. Hacking.
STATEMENT OP JAMES HACKING, ASSISTANT LEGISLATIVE COUN­
SEL, AMERICAN ASSOCIATION OP RETIRED PERSONS, ACCOMPA­
NIED BY JACK CHRISTY, LEGISLATIVE REPRESENTATIVE

Mr. H a c k in g . Thank you, Mr. Chairman. On my left and accom­
panying me is Mr. Jack Christy, who is one of A ARP’s legislative
representatives.
We are here representing the nearly 16 million member Association
of Retired Persons. With the statement included in the record, I will
try to keep my remarks to a minimum.
AARP is deeply concerned about what is happening in the health
care sector of the economy. If the health care costs, especially hospital
costs, continue to escalate at double digit rates as they have for so
long, accessible and affordable health care services will cease to be
available to millions of Americans—not just the poor and the elderly,
but also many of the workers and their dependents.
The health care industry is one of the Nation’s largest and fastest
growing economic sectors. In 1982, medical health expenditures
totaled $322.4 billion. That, as your chart indicates, was roughly 10.5
percent of the Nation’s gross national product.
The rapid growth in health expenditures has occurred because
inflation in the health care sector has significantly outpaced general
inflation in the economy for quite some time. Hospital costs are the
leading factor in the health care cost spiral.
As you can see from our first chart, since 1967, the CPI has
increased by roughly 198 percent, whereas hospital room rates
increased by 520 percent over the same period.
Hospital expenditures are not only rapidly increasing, they are
also the largest component—now approximately 47 percent—of per­
sonal health care expenditures.
The tremendous growth in health care expenditures is expected to
continue on into the future. By 1990, total health spending is ex­
pected to reach some $758 billion, more than double where it is today.
The health care cost escalation trend has serious consequences for the
Federal budget. In 1982, the Federal Government spent $93.2 billion
on health. That was $9.5 billion more than the year before and $88
billion more than in 1965. Clearly the trend in Federal spending for
health care is creating great upward pressure on the Federal budget
deficits and crowding out other budget priorities.
The most important factor fueling the growth in the health indus­
try has been the expansion of cost-based, third-party reimbursement
through the third party payment system.
The third party payment system, including both public and private
components, has become the primary mechanism for financing the
high cost of hospital care. The party payments now account for about
90 percent of all hospital expenditures and almost two-thirds of the
expenditures for physician services.
Cost-based third party payment procedures are inherently inflation­
ary. Hospitals are generally paid either on the basis of costs or
charges. Similarly, physicians are paid according to the charges they
37-264 -




85 -

7

94
establish for the services they provide. Therefore, the more services
physicians render, the more compensation they receive. Thus, pro­
viders are rewarded with more and more income for giving more
and more care and for requiring more and more costly, technically
sophisticated plant and equipment.
In addition, because third party reimbursement structure favors
institutional care, physicians tend to utilize hospitals which are the
most expensive component of medical care.
Last year Congress passed legislation changing the way medicare
pays for hospital care. While medicare’s move to prospective payment,
or so-called diagnostic-related groupings system, is a step in the right
direction, AARP does not believe it will be effective in controlling sys­
temwide escalation in health care costs. Because the DRG system ap­
plies only to medicare, hospitals can and will shift imrecovered costs to
private payers. Therefore, there will be no or very little net effect com­
pared to the systemwide cost escalation.
Because medicare is patterned after the structure of the health care
industry in general, rapid escalation in health care costs, particularly
hospital costs, is driving up the costs of the medicare program. Over
the last 5 years, medicare expenditures have increased at an average
annual rate of about 18 percent.
As our chart 2 indicates, nearly three-quarters of medicare expendi­
tures represent payments to hospitals. The extraordinary rate of in­
crease in hospital costs is rapidly driving the hospital insurance fund
toward insolvency. The fund trustees project that the reserves will be
exhausted by 1991. By 1995, the fund is projected to accumulate a
$162.5 billion deficit.
Expenditures are also rapidly rising in the supplementary medical
insurance or medicare part B program. Expenditures for part B were
up to $18 billion in 1983. Three-quarters of that amount came from
general revenues. The Congressional Budget Office projects that the
share of this Government’s general revenues necessary to finance the
part B program which pays physicians will increase from 3.1 percent
in 1982 to 5.7 percent of general revenues by 1988.
Congress and the administration have acted to reduce medicare ex­
penditures over the past few years primarily through the introduction
of higher premiums, deductibles and coinsurance. But these efforts
merely shift costs to the elderly and disabled program beneficiaries and
these efforts do not really address the underlying cost escalation prob­
lem. Financial remedies that are specific to medicare will not and can­
not solve medicare’s problems over the long run, nor contribute to a
less cost escalating health care delivery system.
The most important step in moderating the rate of growth in medi­
care and total health care expenditures is to control the rate of growth
in hospital costs. The only other options are to shift more costs to bene­
ficiaries and over time deny more people access to these services, or
raise taxes. AARP rejects these two options.
Medicare today provides about 45 percent of the health care ex­
penditures of the elderly. On a per capita basis, the elderly are ex­
pected to spend $1,550 out of pocket this year and that would equal 15
percent of their per capita income which would roughly be $10,600.
That 15 percent is the same percentage that the elderly paid for health
care before medicare was implemented. By the year 2000, assuming no




95
further cutbacks in medicare are enacted, the elderly will have to al­
locate nearly 20 percent of their per capita income to meet health care
costs.
To deal with the cost escalation problem, AARP recommends that
the rate of increase in hospital expenditures be limited to a fixed per­
centage that is reasonably in line with the general inflation rate. The
limit once established should apply to all third party payments to
hospitals. Some six statements have had some measure of success in
limiting hospital cost escalation by utilizing mandatory prospective
budgeting or rate review programs. It should be clear from our last
chart.
In 1982, these mandatory review States limited increases in hospital
costs to 10.8 percent, while in all other unregulated States hospital
costs increased 16.3 percent.
Now given this experience, AARP supports the enactment of
Federal legislation which would encourage or force the State to estab­
lish mandatory hospital rate review commissions to assure that in­
creases in payments to hospitals do not exceed the national limit.
As for physicians, AARP favors a prospective pricing approach to
physician payments. We support timely enactment of this concept with
actual implementation occurring after adequate consideration of the
appropriate prospective payment methodology.
In addition to controlling hospital and physician expenditures,
AARP believes that limits must be established to control excessive
growth of medical facilities and technology and health professionals.
Over the long run, AARP believes that regulation should gradually
give way to the development of more market-oriented health care
delivery systems. Competing forms of care delivery such as health
maintenance and preferred provider organizations, small clinics, and
ambulatory health care facilities of all kinds should be encouraged
to the extent possible. Again, I must emphasize, in the short term, that
across-the-board approach that limits the rate of increase in both hos­
pital and physician expenditures for all third-party payers is required
to slow the rate of growth in hospital costs and ensure a more stable,
affordable health care delivery system.
That concludes my remarks, Mr. Chairman. Thank you.
[The prepared statement of Mr. Hacking follows:]




96
P repahed S t a t e m e n t o f J a m e s H a c k i n g

Thank you, Mr. Chairman, for the opportunity to share with this
Committee the American Association of Retired Persons'

(AARP) deep

concern about what is happening in the health care sector of the
economy.

The persistence of double-digit cost-escalation in the

health care marketplace has placed an increasing burden on health care
consumers, both young and old alike.

The Medicare program is in

jeopardy as well as comprehensive coverage under private insurance
plans.

Because health care cost escalation is not a new phenomenon,

some have become anesthetized to the short and long range consequences
of this trend.

AARP has not; we recognize that if health care costs,

especially hospital costs, continue to escalate as they have,
accessible and affordable health care services will cease to be
available to millions of Americans— not just the poor, but the elderly
and millions of workers and their dependents, too.
AARP commends this Committee's leadership in exploring this
difficult and politically sensitive issue.

The Association's

testimony today will consider four principal issue areas:
1.

the growing problem in the health care marketplace;

2.

the impact of cost escalation on Medicare and private health
insurance;

3.

the high out-of-pocket costs the elderly must pay for health
care; and

4.

AARP's policy proposals to fashion a more rational, less cost
escalating health care system over the short and long term.




97
GROWTH IN THE HEALTH CARE SECTOR
The health care industry is one of the nation's largest and
fastest growing economic sectors.

Between 1967 and 1982, total

national health expenditures increased sevenfold from $51.3 billion to
$322.4 billion— that is a spending rate of over $1 billion per day.
Health care spending has also been taking a larger share of the
nation's total resources— rising from 6.4% of GNP in 1967 to 10.5% in
1982.
This rapid growth in health expenditures has occurred because
inflation in the health care sector has significantly outpaced general
inflation in the economy for quite some time.
leading factor in the health care cost spiral.

Hospital costs are the
Since 1967, the

general (all items) CPI has increased by 198%, whereas hospital room
rates have increased by 520 percent, about two and one-half times
greater than the increase in the general CPI (Chart 1).

Although not

quite as dramatic as the rate of hospital cost increases, physicians'
fees have also significantly outpaced the increase in the general CPI.
Since 1967, the physician fee CPI has increased by 252%.
Hospital expenditures are not only rapidly increasing, they are
also the largest component of personal health care expenditures.
Hospital expenditures have grown from $13.9 billion in 1965, equalling
39% of all personal health care expenditures that year to $135.5







CHART 1

SOARING HOSPITAL COSTS

Percent
Increase

Year
Source: U S. Bureau of la b o r Statistics

99
billion in 1983, equalling 47% of personal health care expenditures.
Despite the sharp decline in inflation since January 1983, health
care costs have continued to escalate at unacceptable rates.

In 1983,

general prices increased by only 3.2% whereas medical prices increased
by 8.7% or more than twice as fast.

Hospital room rates continued to

be the leading factor in health care inflation.

In 1983, hospital

room rates rose 11.3%, a rate of increase more than three times
greater than the increase in the general CPI.
The tremendous growth in health care expenditures is expected to
continue in the future.

Unless the current health care financing and

delivery system is changed, by 1990, total health spending will reach
$757.9 billion, more than double what it is today.

Even with the

enactment of the Medicare prospective payment system, hospital outlays
under Medicare Part A will increase by 11.5% a year between 1985 and
1995.

Of this projected increase, 7% is attributed to the increasing

price of hospital care, 2% is attributed to increased admissions, 1.5%
is attributed to changes in medical practice, and only 1% is
attributed to the increase in the size of the eligible population.
The health care inflationary trend has serious consequences for
the federal budget.

In 1982, the federal government spent $93.2

billion on health, $9.5 billion more than the year before, and $87.7
billion more than in 1965.

Federal health expenditures

(tied as they

are to private sector prices for health care services), if left
unchecked, will continue to escalate to over $231.6 billion in 1990,
equalling more than 30% of all expenditures for health care in that
year.

Clearly, the trend in federal spending for health care is

creating upward pressure on federal budget deficits and crowding out




100
other budgetary priorities.

FACTORS CAUSING RAPID GROWTH IN THE HEALTH CARE SECTOR
The most important factor fueling the growth in the health
industry has been the expansion of cost-based, third-party
reimbursement.

The third party payment system had its inception

during the Depression.
reimburse

for

At that time insurance plans were developed to

hospital charges.

Plans were designed in this manner

to enable hospitals to remain financially solvent during times when
increasing unemplyment and decreasing wages made it difficult for
workers to pay for unexpected hospital stays.

The provision of health

insurance protection, patterned after these early hospital insurance
plans, grew during the 1940s and 1950s in response to several factors,
including:
1.

the exclusion of health insurance from World War II wage
controls;

2.

the inclusion of health insurance benefits as compensation in

3.

the favorable tax treatment of employer-paid health insurance

the collective bargaining process; and

premiums.




101
Consequently, third-party reimbursement became the widespread
mechanism to finance the high cost of hospital care.
Even before Medicare, hospital costs had demonstrated a
pronounced tendency to rise at rates higher than prices in general.
Between 1950 and 1965, the CPI showed an increase in the costs of
semi-private hospital rooms of 2 1/2 times, whereas the general level
of prices rose over the same period only by one-third.

The adoption

of third-party payment procedures by the government through Medicare
and Medicaid only made matters worse.
Third-party payments now account for over two-thirds of all
personal health care expenditures, about 90% of all hospital
expenditures, and almost two-thirds of the expenditures for physician
services.
Cost-based, third-party payment procedures are inherently
inflationary.

Hospitals are generally paid either on the basis of

costs (what the hospital spends to provide goods and services) or
charges (the amount a hospital bills for the goods and services it
provides).

As a result, there is no incentive to restrain spending

since more spending means greater revenues.

Similarly, physicians are

paid according to the charges they establish for provided services.
Therefore, the more services physicians render, the more compensation
they receive.

Moreover, unlike purchasing other goods and services,

physicians, rather than consumers, determine both the quantity and
prices of services rendered, including the necessity of a hospital
admission and where it will take place.
no role in this process.

The consumer plays virtually

Instead, providers are rewarded with more

and more income for giving more and more care, and for acquiring more




102
and more costly, technically sophisticated plant and equipment,
whether or not such activities are necessary or beneficial.

In

addition, because reimbursement favors institutional care, physicians
overutilize hospitals, the most expensive component of medical care.
In 1983, Congress passed legislation to change the way Medicare
pays for hospital care in an attempt to alter inflationary incentives
inherent in traditional third-party payment procedures.
newly created DRG payment system, Medicare will pay
pre-determined price for each hospital stay.

Under the

hospitals a

While Medicare's move to

prospective payment is a step in the right direction, AARP seriously
questions its effectiveness in controlling system-wide escalation in
health care costs.

Because the DRG system applies only to Medicare,

hospitals can charge higher rates to private payors in order to regain
lost Medicare revenues.

Total costs remain the same; the burden of

paying these costs is just shifted among payors.

In addition, the

yearly rate of increase in DRG payments remains tied to a system-wide
measure of hospital inflation.

To the extent that system-wide costs

are not constrained, the system-wide measure of hospital inflation
remains inflated, driving up Medicare costs beyond what they would be
if there were system-wide constraints on hospital costs.

Finally, the

DRG payment system does not address other factors which contribute
significantly to hospital costs such as increased utilization.




103
Government has encouraged the growth of the third-party
reimbursement through its tax laws.

Both employer and employee health
Revenue

insurance premium payments are excluded from taxable income.

lost to the U.S. Treasury as a result of this exclusion totaled
approximately $16.6 billion in FY 1982.

In addition to this health

insurance subsidy, Blue Cross/Blue Shield plans have been tax-exempt
in most states.
Government subsidies to increase the supply of medical services
have also influenced the rate of growth in health spending.

Hospital

expansion has been stimulated by the Hill-Burton program, the tax
exemption of hospital construction bonds, and the greatly liberalized
business depreciation schedules contained in the 1981 Economic
Recovery Tax Act.

Construction expenditures for medical facilitiies

which totaled $7.5 billion in 1981 are expected to reach $11.5 billion
in 1985 and $17 billion in 1990.

The supply of health professionals

has been stimulated by billions of dollars in federal spending for
health education and training.
Advances in medical technology have also created pressures which
increase costs.

New technology and high-cost therapies often require

captial acquisitions which are in and of themselves costly.

New

technologies also require the addition of highly specialized
personnel.

In addition, hospitals in a single community often

duplicate these high specialized and expensive services, leading to
underutilization and inefficiency.




104
THE IMPACT OF RISING HEALTH CARE COSTS ON MEDICARE ARE PRIVATE HEALTH

INSURANCE
The most important health care program serving the elderly is
Medicare.

There is no doubt that the enactment of Medicare in 1965

has greatly increased the access of the elderly to health care.
However, continued high rates of health care inflation threaten to
defeat the access originally gained.
Because Medicare is patterned after the structure of the health
care industry in general, rapid escalation in health care costs,
particularly

hospital costs, is driving up the costs of Medicare.

Over the last five years, Medicare expenditures have increased at an
average rate of 18% per year.

In FY 1983, Medicare expenditures

totaled $56.9 billion, up 12.7% since FY 1982.
With nearly three quarters of Medicare expenditures spent on
hospital care (Chart 2), rising hospital costs, combined with other
adverse economic circumstances, are taking their toll on the Hospital
Insurance (HI) Trust Fund (Part A), the main social security trust
fund financing Medicare.

The HI Fund's Trustees project that the

Fund's reserves will be exhausted by 1991 and that the fund will never
regain solvency over the entire 25 year projection period.

By 1995,

the (HI) Fund is projected to accumulate a $162.5 billion deficit.
(This assumes that the rate of increase in DRG payments will remain at







CHART

2

How the Medicare Dollar Is Spent
1982 Total Medicare Expenditures:
!
$50.5 Billion

72% Hospitals

23% Physicians

4% Other
1% Nurs. Homes
>
Source: Health Care Financing Administration

106
hospital market basket plus one percentage point after October 1, 1985
even though that amount of increase is only mandated by law through
1985.

After October 1, 1985, the Secretary of Health and Human

Services has the discretion to determine the yearly rate of increase
in DRG payments.)
Although the crux of the Medicare shortfall is in the HI fund,
expenditures are also rapidly rising in the Supplementary Medical
Insurance (SMI) Fund (Part B).

Since 1967, fiscal year expenditures

for Part B have increased from less than $1 billion to more than $18
billion in 1983.

Because three-fourths of Part B is financed by

general revenues, it is not in danger of bankruptcy.

However, the

projected growth of SMI is significantly higher than the growth in
general revenues.

The Congressional Budget Office projects that

general revenue contributions to SMI must increase about 17% per year
to finance growth in the Part B program.

To meet Part B's anticipated

demand, CBO projects that the share of general revenues necessary to
finance the SMI Trust Fund will increase from 3.1% to 5.7% between
1982 and 1988.
Rising health costs are a serious problem, not just for
government health programs like Medicare, but also for the private
sector.

Since 1965, there has been significant growth in private

expenditures for health insurance coverage.

Growth in premium income

of all private insuring organizations has been particularly rapid
since 1975.

In 1975, premiums paid for private health insurance

totalled $36.9 billion.

By 1981, this amount had grown to $84.8

billion, a 130% increase in just six years.

Most of these

expenditures represent employer-paid health insurance premiums.




The

107
rising costs of this coverage can lower wages for workers, and/or
cause higher prices for goods and services.

For example, Chrysler

recently estimated that its $373 million annual health insurance bill
for its workers is adding $600 to the price of every car it
manufactures.
Anxious to reduce the rate of increase in spending for Medicare,
Congress and the Administration have drastically cut Medicare
expenditures over the past three fiscal years, cutting $26 billion
through FY 1986.

This year Congress and the Administration are again

seeking between $4 and $9 billion in additional Medicare cuts.

This

incremental dismantling of Medicare through the introduction of higher
premiums, deductibles and similar measures that merely shift costs to
beneficiaries does not address the underlying problems in the program
and therefore has little impact on the escalation of costs in Medicare
or in the health care sector.

It should be clearly understood that

extraordinary inflation in the health care delivery system is the root
cause of Medicare financial difficulties, not vice versa.

Financial

remedies that are specific to Medicare will not and cannot solve
Medicare's problems over the long run, nor contribute to a healthier
delivery system in general.
The most important step in moderating Medicare and total health
expenditures is to control the rate of growth in hospital costs.
Without stable hospital costs:




108
♦National health expenditures will continue to escalate beyond
reason;

*the HI Trust Fund will continue to deteriorate;
♦employers will be required to pay higher health insurance
premiums which will, in time, be passed backward onto workers
in the form of lower wage gains or passed forward to consumers
in the form of higher prices for goods and services; and
*all health care consumers, including the elderly, will pay
higher out-of-pocket costs for health care.

THE ELDERLY ARE THE MOST COST CONSCIOUS HEALTH CARE CONSUMERS IN THIS
COUNTRY
Most of the current proposals to reduce spending in Medicare are
based on the notion that the elderly are not health cost conscious—
that they are somehow insulated by Medicare from the "true" cost of
health care.

Because of this insulation, so the theory goes, the

elderly misuse or overuse the system and thereby increase Medicare
costs.

AARP rejects this theory.

The elderly are the most cost conscious health care consumers in
this country.

They have to be.

Medicare's contribution, as a

percentage of the total health care expenditures of the elderly, only
equals about 45%.

The sad reality is: the higher the cost of

Medicare, the less beneficiaries are getting from it.
Out-of-pocket payments borne by aged Medicare beneficiaries have
outpaced the growth in elderly incomes.

As a result, the elderly have

been spending an increasing share of their mean per capita income in
order to meet their health needs.




Persons aged 65 and over paid

109
roughly $700 out-of-pocket per capita for medical expenses in 1977.
By 1984, according to conservative estimates, this amount is expected
to increase by over 120% to $1550 per capita, equalling 15% of the
annual mean per capita income of the aged ($10,615), the same
percentage as the elderly paid for health care before Medicare was
fully implemented.

This deterioration in Medicare's protection is

expected to continue.

By the year 2000, assuming no further cutbacks

in Medicare are enacted, almost 20% of elderly per capita income is
projected to be consumed by health care expenditures (Chart 3).

BENEFICIARY OUT-OF-POCKET COSTS
Personal liability for the cost of health care provided to the
elderly derives from a number of sources, all of which have been
subject to significant increases over the past several years.

The

elderly pay directly for the following:

1.

D eductibles ..under-Pacts

and-Bi

The Part A deductible has increased from $104.00 in 1976 to
$356.00 in 1984, an increase of 242% over the past eight
years.

The annual Part B deductible has increased from

$60.00 in 1980 to $75.00 in 1983, an increase of 25%.

2.

Cginsurance (Pact B );
Actual per capita coinsurance charges borne personally by

37-264 - 8 5 - 8







CHART 3

ANNUAL HEALTH CARE PAYMENTS
MADE BY THE AGED
Per Aged
Person

Payments as a
Percent of Income
----------------- v

1966 (Pre-Medicare)

!

$300

1977

$698

1981

$1198

15%

|

12%

!

|
|

Ì
Ì
f
"

i

14%
t

1984

$1550

1989

$2208

16%

1993

$2892

17%

2000

$4637

19%

^
|

.15%
•

|
i
|
|

\
1

jo u h u

lUiiilll i ( tuo t Mk iik iih j A tlm inisliulloii. A m e rican Assrx:iolion o l li’oliiocJ I'm sons

I ll
2.

Coinsurance (Part BIj.
Actual per capita coinsurance charges borne personally by
the elderly increased by 345% between 1972 and 1982.

3.

Cost-sharing (Parts...A....and. BLi
In 1981, out-of-pockets payments for deductible and
coinsurance liability associated with both parts of
Medicare totalled $5.6 billion, a 166% increase in such
out-of-pocket payments since 1976.

4.

Charge reductions on unassianed claims (i.e., the difference
between the Medicare "allowed" charge and the actual charge
by the physician for which the beneficiary is personally
liable):
Between 1977 and 1982, the total dollar amount of "charge
reductions" passed on to elderly Medicare beneficiaries
jumped from £|93* million to $2 billion, an increase of 198%
over a five-year period.

Approximately 46 percent of all

Part B claims submitted to Medicare for reimbursement at
this time are "unassigned," compared to an over-50% non
assignment rate in 1977.

Nevertheless, beneficiary lia

bility for "unassigned" claims has increased dramatically
over the past five years even though the number of claims
paid on assignment has increased during the same period.

Aged Medicare beneficiaries are personally liable for a
significant number of critical non-covered services and
products— including dental services, dentures, prescription
drugs, eye glasses, hearing aids, etc.— for which they paid




112
about $7 billion out-of-pocket in 1981/ a 79% increase in
their out-of-pocket liability for such products and services
since 1977.

6.

CQi n.sur anee . fox .£ k U l e .a-.n.u.rsin.g .frame.,

a n tichax.ge.s-f.ox

Approximately half of all nursing home expenditures made on
on behalf of the aged in 1981 were financed directly by outof-pocket payments.

As HCFA researchers have noted:

"Even

if other sources comprised half of the total payments, the
average out-of-pocket expenditure for private-paying
patients would still be over $100 per week."

7.

SHI....(p,a,r_fc B)..., p.r eroi urns;
Out-of-pocket premium payments by the elderly for Medicare
Part B coverage totalled $86.40 annually in 1977 as compared
with a current annual figure of $175.20, a 103% increase in
SMI premium payments by the elderly over the past seven
years.

8.

£r.i3g&fc£-iie.al.th... I ns uran.ce_- Premiums;
Approximately two-thirds of aged Medicare beneficiaries are




113
sufficiently concerned about the gaps in Medicare coverage
to purchase private health insurance policies designed to
supplement medical expenses.

Currently, low option private

insurance plans cost aged Medicare beneficiaries approxi­
mately $230 per year, while high option plans can exceed
$800 per year.

These figures compare with an annual private

insurance premium rate of $90 just five years ago.

Finally,

there is evidence to suggest that fewer and fewer of the
elderly are financially able to retain such supplemental
policies once they are purchased.

Blue Cross/Blue Shield of

Florida has recently pointed out that the "persistency rate"
(i.e., the percentage of those aged beneficiaries who had
coverage at the beginning of the year and continue to have
coverage at the end of the year) has dropped from 93.3% in
1978 to 86.9% in 1982.

A NATIONAL COST CONTAINMENT STRATEGY
AARP advocates a system-wide approach to restrain the rate of
increase in total health care spending.

Cost containment proposals

limited solely to Medicare (e.g., benefit reductions or changes in
Medicare's reimbursement method, such as the newly enacted DRG payment
system) encourage providers to shift costs to non-Medicare, private
pay patients and therefore do little to reduce the overall rate of
increase in hospital and health care costs.

Such "solutions" accept

the rapid increases in hospital and health care costs as a given and
merely shift the cost burden among payors.

Channeling ever more

resources into a cost-inflated system, either by requiring Medicare




114
beneficiaries to pay more or by adding more revenue raised through
taxes, will not solve the problem of rapidly rising health care costs.
In the short term, AARP recommends that the rate of increase in
hospital expenditures be limited to a fixed percentage that is
reasonably in line with the general inflation rate.

The limit once

established should apply to all third party payments to hospitals.
Six states (Massachusetts, Connecticut, New York, New Jersey, Maryland
and Washington) have had some measure of success in limiting hospital
cost escalation by utilizing mandatory prospective budgeting and/or
rate review programs.

As a result, increases in hospital

costs in these six states have consistently averaged three to four
percentage points less each year than in other states.

In 1982, the

mandatory review states limited increases in hospital costs to 10.8%,
while all other states experienced hospital cost increases of
16.3% (Chart 4).
The experience in these six states demonstrates that hospital
costs can be significantly restrained by regulatory action.

The

Association supports the enactment of federal legislation that would
encourage or force the states to establish mandatory hospital rate
review commissions to assure that increases in payments to hospitals
do not exceed the national limit and also to control the growth and
expansion of hospital facilities.







I CHART 4

HOSPITAL EXPENDITURES UNDER MANDATORY RATE
REVIEW SYSTEMS
(1982- 1983)
ifililli Regulated States

Percent
Increase in
Hospital
Expenditures

S o u ic o A m u iica n Hospital A ssociation

I

h Non-Regulated States

cn

116
As for physicians, they have steadily increased their fees at rates in
excess of the general rate of inflation for years, thus demonstrating
an ability to maintain targeted income levels.

Physicians, like

hospitals, must begin to share more of the financial risk created by
modern, high technology medicine.

Thus, policy makers must seriously

consider a prospective pricing approach to physician payments.

AARP

is not committed at this time to any particular method of establishing
a prospective payment system for physician.

We support timely

enactment of the concept with actual implementation occuring after
adequate consideration of the appropriate prospective payment
methodology.
In addition to controlling hospital and physician expenditures,
AARP believes that limits must be established to control excessive
growth of medical facilities and health professionals.

To help remove

the economic incentives which have caused explosive growth in the
supply of medical services, the Association recommends the following
steps:
1.

limit tax breaks that promote the excessive expansion of con­
ventional medical facilities, particularly hospitals, such as
over-generous depreciation deductions when hospitals/nursing
homes are sold;

2.

change tax laws to cause employers and private third-party
payors to resist health provider cost escalation;

3.

make health/medical insurance corporations subject to the
antitrust laws by repealing any state or federal antitrust
exemptions; and




117
4.

subsidize the training of only those health professionals who
agree to work in medically underserved areas, and provide
incentive grants to health profession schools to encourage
training and curriculum development in geriatrics.

Over the long run, AARP believes that regulation should gradually
give way to the development of more market-oriented health care
delivery systems.

Health care delivery should be restructured to

expand the supply of needed services that represent less costly
alternatives to hospitals and nursing homes.

Competing forms of care

delivery such as health maintenance and preferred provider
organization (HMOs and PPOs), small clinics, and ambulatory health
care facilities of all kinds should be encouraged to the extent
possible.

Greater use should also be made of paramedical personnel

(for example, geriatric nurse practitioners and physician assistants)
especially in underserved rural and inner-city areas, and in such
neglected institutional settings as nursing homes.

CONCLUSION
Health care cost containment is the most important domestic
policy issue facing this nation.

An across-the-board approach that

limits the rate of increase in both hospital and physician
expenditures for all third-party payors is required to slow costs and
ensure a stable, affordable health care delivery system.




118
Senator J ep se n . Thank you. I thank all three of you for very excel­
lent testimony and I would like to start off by asking a common ques­
tion and have all three of you respond.
How do you feel about the proposal that was made here earlier
this morning during Mr. Caliiano’s testimony with regard to the
formation oi a National Commission on Health Policy?
Mr. H a c k in g . Mr. Chairman, AARP does not favor the idea of a
commission, given our experience with the Social Security Commis­
sion. While I know that the package that the Social Security Commis­
sion assembled and delivered to Congress last year was haned as a bi­
partisan compromise, our organization did not feel then nor do we
feel now that what the Commission presented to the Congress and
what the Congress enacted represented the best possible solution to
the problems in the Social Security cash benefit area.
What was worse was that much of that package that was put to­
gether by the Commission was fashioned by a small group of Com­
mission members acting in private and out of the public view with­
out any access given to outside groups that had an interest, such
as our own organization.
However, we felt that once the package was assembled and then
was introduced into the legislative process here, there would at least
be an opportunity for us as an organization to try to influence the
package, get some significant changes made in order to improve it.
What we were hoping was that, on balance, we would be able to say
that we could support it. What we found instead was that in the legis­
lative process on Capitol Hill there was no opportunity to make any
changes whatsoever in that package. No changes were going to be
allowed and we were told that time and again and we went from office
to office on the House side and the Senate side.
So from our organization’s point of view, the Congress abdicated
its responsibility to shape public policy and delegated that responsi­
bility to a small group of people, some of whom are not even elected
members of this body, and that we do not think the way public policy
should be shaped.
We would hope that in dealing with the medicare problem and the
more general problem of cost escalation, that the Congress would face
up to the problem itself and handle the issue. After all, much of the
problem has to do with the way the Government has structured the
incentives in the health care marketplace through the tax laws and
through direct and indirect subsidies to promote the growth and ex­
pansion of third-party payment system and promote the expansion of
the supply of hospital facilities and medical personnel.
Senator J ep sen . Mr. Goldbeck.
Mr. G o ld b e c k . I think there’s good reason to be concerned about
whether or not a commission would produce a viable solution and
if it was looked to from the standpoint of go away for a year and
come back with the answer, I think that would be a mistake both
in practical and political terms as well.
The rate of change in health care systems today suggests that
there’s more going on than can probably be grappled with within a
year and also suggests that there isn’t a simplistic list of sort of
policy oriented answers that somebody is going to come up with to
resolve all our health care problems in this country.




119
On the other hand, providing a national forum for an ongoing
focus on health policy issues could be a very beneficial step, as long
as we weren’t too overly anticipating the finality of the outcome.
And in that sense, we could certainly support the creation of such
an endeavor.
I think that what he was referring to in terms of a commission to
help develop a national health policy is an interesting set of termi­
nology because, of course, health policy is not a law nor does a policy
equate necessarily to legislative response. Witness the fact that we
have one social service oriented national policy in America, which
is in the housing area, where we have had since 1949 and then reiter­
ated—and I ’m sorry to tell you I can’t remember—in either 1968 or
1969, a national housing policy that said that every American is
entitled to housing in the following condition and it specifies it right
down to toilets. It is a brief, yet rather detailed specification of what
our housing policy is.
Yet only 26 percent of the people in the United States who are
eligible for public housing are receiving public housing. The fact
that there was a policy had virtually no impact on the subsequent
legislation or private sector endeavors. So the mere creation of a
policy doesn’t produce a solution, but the exercise, I would posit to
you, could be very valuable.
Senator Jepsen. Mrs. White.
Mrs. W h i t e . As you know, I speak for a conservative organization
and when I speak this morning to give you that particular answer
it will be more personal. I think all of us understand that commis­
sions and studies can be quite expensive and again speaking from the
grassroots organization, we do not feel that there’s any better place
to get the answer, to provide the study, to get the information or
whatever is needed, than through and from our Congressmen and
Senators who we elect and send to Washington. We feel that they
are more concerned about the individuals, all of their constituents,
regardless of their age and regardless of their physical and financial
conditions, and we would be prone to continue to lean in that direction.
Again, as I say, not only are we conservative, but we are willing
to cooperate and compromise in whatever is best for the people. And
we recognize that there’s no bigger issue right now facing the Ameri­
can public than that of the health problems that we see in the future
and in the immediate future, as these gentlemen have stated and
whose who preceded us, so we would do whatever we could to support
any cause that would help to eliminate any of these problems and
work toward a more positive health program. Thank you.
Senator J epsen . Thank you. There’s no question about where any
one of the three of you stand on that issue. I appreciate that.
Mr. Hacking, we heard testimony earlier which indicated that in at
least one country health care is being rationed with respect to the
elderly. Great Britain certainly denies certain procedures simply be­
cause they have gotten older. A bit closer to home, we’ve heard state­
ments to the effect that the elderlv have a responsibility for certain
types of medical care. Frankly, I find this thinking disturbing and I
wonder if you could tell us what, in terms of your association, you think
about this development.




120
Mr. H a c k in g . Well, Mr. Chairman, care in this country today is
already being rationed and I guess our organization is very much
afraid that as the medicaid prices build and the Congress proceeds to
deal with it, Congress may end up dealing with it by making very large
shifts of costs onto medicaid beneficiaries, shifts so large that a very
large increasing share of the elderly population will simply be pre­
cluded from entering hospitals and other medical facilities.
Therefore, it will be the poor and the relatively low income who over
time, if our system continues as is, who will be precluded from access
to care. So in that sense the rationing which has already begun will
just continue and we will end up at some point in the future—in the
not too distant future—with a highly technically sophisticated medi­
cal system that is able to provide care only for the well-to-do or those
who have very expensive insurance, and that is not going to be the
elderly population generally.
Senator Jep sen . Well, you’re advocating greater regulation in the
medical area.
Mr. H a c k in g . In the short term.
Senator J ep sen . Well, it seems there are some who believe that the
regulation of Great Britain has had has contributed to some of the
problems in the rationing of health care. If you remove any incentive
on the part of the providers, do you discourage people from entering
the field and you also discourage improvements in technology, and
wouldn’t it be better, as some of the witnesses suggested, to rely more
on the market to control the costs rather than regulations so we don’t
lose the drive for research and improvements in the area?
Mr. H a c k in g . As I said in my statement, over the long term, the
association does support a move away from regulation and toward
these kinds of market-oriented approaches for delivering care. We
think that the health maintenance organizations have a great deal of
promise, as do preferred provider organizations.
The problem is that the cost escalation problem is at hand now.
Medicare’s impending insolvency is not too far down the road. We have
to do something that is going to be effective now to dampen the rate
of escalation of hospital costs and the only thing that we can reach
for in the short term is strict across-the-board regulatory mechanism
that applies to all third-party payers. If we don’t get some relief from
hospital cost escalation, we’re never going to get to the point of seeing
enough resources channeled to promote these kinds of more marketoriented means of delivering care that could in the long term have the
same cost-dampening effect that regulation in the short term should
have.
So we are not saying that we want regulation and that should be it
forever.
Senator Jep sen . OK. Do you feel that hospital cost containment is
singularly the most important factor that we must get at immediately?
Mr. H a c k in g . I ’m a fr a id so. In the short term, yes.
Senator J epsen . Thank you. Do you have any comment on that, Mr.
Goldbeck ?
Mr. G o ld b e c k . Yes. I think that the concerns you just heard ex­
pressed are very legitimate. I think you do need to recognize that there
are choices that we can make very quickly, should we decide to do so
or have the will to do so. If we believe the record that a capitated




121
system can (a) provide care of at least comparable quality and (b)
have a more cost efficient system and (c) are most cost efficient because
of the economic incentives in a capitated process, we could decide,
instead of spending the past 8 years wondering whether or not medi­
care should be allowed to have anybody using an HMO, we could
decide that medicare will use HMO’s, in which case there would be
a plethora of HMO’s overnight. 1 mean, there’s no concern about
whether or not there are enough capitated systems. If the Government
is going to pay for care in capitated systems, there will be capitated
systems in one hell of a hurry.
I single medicare out because that’s the program over which you have
authority. The same is true with employers. Employers can decide that
instead of having 10 percent, after 9 years, of their population being
in HMO’s, that they’re going to have negotiated care systems, prepaid
systems, for 80 percent of their population and reap the benefits.
So we know a lot more than we act upon. The same is certainly true
with prevention. I would want to comment on one of the things that
you said about Great Britain and that is that in Great Britain you’re
dealing with a very different cultural orientation toward many of these
things as well. It’s not strictly a matter of regulation or even whether
or not their costs have gone up in the past few years. A great many
people in Great Britain are very comfortable with the rationing
process. It’s not something which has the public marching through
the halls of Parliament begging to change and when it was imposed
there was no whimper, public or otherwise.
So it’s tough to simply say that x takes place in Great Britain, there­
fore it will or won’t produce a comparable reaction here. Right now
Great Britain is going through a meandering privatization of their
health insurance system, not with anybody suggesting that the Public
National Health Service should go away, but rather that there could
be more balance brought in by having more of a movement of the
British United Providence Association or the private insurance sys­
tems brought in as a companion pro*n*am.
So there are certain interesting things going on, and we are moving
toward a more unified approach and other countries with unified ap­
proaches are moving more toward diversified approaches. And it’s a
little hard to tell whose model vou’re supposed to follow.
You asked a question of the first panel about what was happening
to insurance and whether or not some of these plans in the private
sector would cause increases for certain insured persons, and you
didn’t get a complete answer. The answer is ves, lots.
We are seeing, in effect, in large group circumstances, the end of
traditional insurance. Virtually no companies now are going out and
signing new group indemnity plans. They are either self-funding or
they’re self-administered or both, and they are negotiating packages
of care and they are bringing in capitated systems. They are not, in
effect, spreading the risks the way traditional insurance is designed
and the way your former company made its mark and so forth.
That’s a part of history, not the future, and it brings with it a great
deal more positive economic incentives, a great deal more consumer
awareness, a great deal more choices which are very positive. Also, we
have not figured out how to begin to deal with the people who have
no choice but to get the very most expensive care—the adverse selec­




122
tion issue—and it’s going to be an issue in the public program just as
it is in the private program. There’s no point in kidding ourselves,
though, that it’s going to happen. It’s already happening.
Senator J ep sen . Mrs. White, do you have any comment?
Mrs. W h i t e . Yes, sir. You talk about cost containment and we really
can’t limit that to medical care and hospitals in any form. Really, cost
containment should be applied to all of us, and this is the thing we talk
about in the light of inflation. And I think every one of us in this room
and m America today is concerned about inflation because it affects
everything. So when we refer to hospital costs, we have to realize that
everything that goes into that hospital is inflated from the bath towels,
the bed sheets, to the cost of sophisticated equipment which they use.
So this is an overall picture which you, as Members of Congress, have
an opportunity to look at, to compare, and to see how you best think
it should be done.
We in farm bureau would like less government and what we say with
that is we like the ones we have elected to use their good judgment
through the expertise that’s able and provided to them, and then they,
working with the private sector and the individuals back in the areas
they represent—and I cannot emphasize that enough, sir, that work­
ing with the people that you represent—and this gets all areas, all
segments, all ages, all professions and businesses—and we believe you,
working together with these individuals, that you will be working for
the good of the people you represent and likewise for the good of all
America.
Senator J ep se n . Thank you.
Just by way of summary, I gathered here from the first panel’s re­
sponse that there was a feeling on behalf of industry, as Mr. Califano
said, that there was sort of a shell game, a transferring of costs, that
the costs didn’t go away, and that there is concern on their part that
maybe one of the reasons that they were rather receptive to and in fact
advocated a national commission was that when these costs were trans­
ferred there was a tendency of Government to push them off on the
private sector and they in the private sector had to pay for them, and
that if they had a national commission they felt that they would have
a chance to have some input there and maybe they could neutralize this
or at least put into better perspective.
Now, Mr. Hacking, to a little bit of the same degree but with a
different result, feels that there may be transfer from the Govern­
ment to the individual and therefore that in this instance the indi­
viduals you represent are on fixed incomes, the great majority of
them, but they can’t adjust and they don’t sell cars and make up—
one of them said $350 and the other one said they got $550 and that
we need to turn up another 30 to pay the cost and the consumer
ultimately pays. You don’t have consumers in your organization—
I mean, they are consumers, but they have fixed incomes and they
are in the retirement years of their lives. So the end result affects
your association and your members and the people you represent
differently. They have to pay for it, or do without, and the latter
is, I think, one of the things you put quotation marks around. Is
that correct? Is this analysis correct?




123
M r. H a c k in g . That’s correct. The businesses in this cou n try, as
they incur higher premiums for the group health insurance they pro­
vide for their workers, pass those premiums—either pass them back­
ward on to their workers in the form of lower wages or they pass
them forward to the consumers in the form of high prices for the
gdods and services that those manufacturers produce. That’s the way
things are being handled today.
The problem that the business community is running into now is
that it’s becoming a little more difficult for them to shift those costs
either backward to the workers or forward to the consumers because
they are meeting with resistance. Therefore, in the future, what em­
ployers may end up having to do is what we are already seeing
happening m medicaid ; that is, cut back the extent of the protection
that that group health insurance provides for those workers and those
workers’ dependents through things like the introduction of deducti­
bles, coinsurance—the same thing that the Congress has been doing
over the last several years in the medicare projects. And eventually,
you will see happening in the private group insurance area what we
are now seeing happening in medicare, and that is, as the cost is
shifted to the individuals, more and more individuals are going to
be precluded from access to care.
Senator Jepsen. Mr. Goldbeck.
Mr. G o ld b e c k . Certainly that is a correct characterization of the
fact that business is always in a situation of passing the costs on to
somebody else. This is in effect a middle person in that regard. That
somebody also includes millions of shareholders and the whole fabric
of the economic part of this Nation.
I think it underscores the fact that there is no payer out there in
the final analysis to pass something on to, which is why we need to
stop kidding ourselves that moving it around or moving Joe’s pea
around, which is what it is, gets you anywhere. Businesses can only
pay that which relates to the revenues that they generate from their
products. Congress can only pay that which relates to the taxes that
their receive. The rest of us can only pay that which relates to the
revenues that we receive from wages or inheritance or some other
source.
We are, in effect, a collective payer in that regard. So whether or
not one group at one period of time is more successful than another
in getting out of paying doesn’t lessen the national burden. It won’t
change. What your job is and our job is collectively is to change those
lines, to bend the curve, not to try to get another color up there for a
different payer because then the curve goes the same way. That’s the
difference.
What we don’t see yet in the private sector among the big com­
panies—I stress that that is all I ’m talking about is the big com­
panies—is a trend toward cutting back on any protection that means
anything that is in any way essential. I would stress that there is no
reason in the world why we can’t have all the medical care that is
truly needed in the appropriate settings for the amount of money
that we spend.
The problem is that we spend a great deal that doesn’t get us any­
where from the health standpoint and is a total waste from an economic
standpoint.




124
Senator J ep se n . Well, third payer being the culprit here, according
to everybody, has caused a lot of these increases in costs; at the same
time the third payer is very much always going to be, for your associa­
tion, the AARP, the third payer in this instance is a combination of
the private insurance and Government—but when you talk about the
third payer, the private sector and the insurance business over the
years has had to develop and create things to try to have cost control
and try to make things meet. In group insurance for years—I think
it’s Still true—but in the years that you said are now gone, Mr. Goldbeck, I remember all we used to talk about was if we handled money
everybody would breathe easy and shake hands and congratulate each
other if you broke even at the end of the year and you had thousands
and thousands of people putting money in and since it’s not an exact
science like life insurance and so on, if you broke even it was a great
success. But when the experience shows that there are some things on
the market, then the private sector insurance company had to address
that, whether they started with maybe a 10-percent coinsurance or a
$20 deductible or they put some limitations on it, but they did that.
But the third payer, when it comes to Government, where for years
it seemed as though we had some kind of a reciprocal pump and it just
kept providing dollars, and another thing I take issue with in what
you said about Congress spending the money they have taken in—
Congress always spends all the revenues that they take in plus all
the additional money that we could get by with.
So in the hospital cost containment and the runaway health costs, I
think if we can sit down honestly and discuss long enough about try­
ing to understand the problem very generally, you could say that one
of the third payer folks here is the Government and they seem to use
the third payer more removed than most and the doctor, the hospital,
the patient—whoever else might be involved—have the Government
involved because they come in Friday and they could go home Friday
but stay until Monday and say that as long as the Government is pay­
ing for it it really doesn’t cost anybody anything. That’s not true with
a private insurance company, but it doesn’t cost anybody anything be­
cause the Government is paying for it, and without any bad intentions
in their heart or any conspiracy involved or any prior planning, the
retention of the occupancy in the hospital is going up, and why not
stay over the weekend because it doesn’t cost anybody anything. The
doctor is going to be there anyway and the patient doesn’t have to—
I’m exaggerating a little bit to make a point, but it happens, accord­
ing to all the hearings—the few hearings we’ve had here, when you
examine the file, you find case after case and you could probably multi­
ply it by hundreds of thousands where this did happen, that there are
3 or 4 extra days as long as nobody was getting hurt because the Gov­
ernment is paying for it. As Senator Dirksen said, “A million here and
a million there, it adds up to some real money after a while,” and that’s
I think maybe why that hospital room red line is one of the reasons
why the third payer—Government probably the most far removed
third payer, most invisible, and it really doesn’t cost anybody.
But to summarize what I’m saying, there is some of the same prin­
ciples that have been developed in the private sector for trying on
an approved business basis to control health costs, some of which are
caused by just people being people, just human nature, and you have




125
to apply some business principle and they’re going to have to be ap­
plied, but when you get to people on fixed incomes, we’ve got a lack
of flexibility, a little different situation.
I guess my question is, without this commission—and I ’m not de­
bating that—evidently you weren’t represented in that last commis­
sion, Mr. Hacking, is that correct?
Mr. H a c k in g . Well, there was no AARP representative on this
commission.
Senator J ep sen . Well, what way, other than bringing people who
represent all facets and phases and parts of this whole problem to­
gether and sitting down on a consensus people pounding things out—
how would you expect to get this total overview. Could Congress do it ?
That’s what Mrs. White was saying.
Mr. H a c k in g . We would rather see it done in the Congress and in
the public forum. As I indicated in my comments on the commission
I gave earlier, our problem with the Social Security Commission was
that what was fashioned was fashioned in private out of the public
view. Now we had commissions before that, but generally other com­
missions have just simply put something together and sent it up to
Congress and then what was sent up was considered in the ordinary
process. We just had the Social Security Policy Council send up to
Capitol Hill its recommendations for the Medicare Program. Unfor­
tunately, the Social Security Policy Council, their recommendations
took a look only at this problem and we think you need to take a sys­
temwide approach to this problem.
So if the commission you’re talking about, Mr. Chairman, is going
to be in the public, that’s going to hear the views of taxpayers, work­
ers, business, the elderly, as well as the insurance companies and
providers of care, then fine. What we don’t want to see happen is
what happened last year with the Social Security Commission.
Mr. G o ld b e c k . Whether fortunately or unfortunately, the reality
of the life of the commission and their impact is that those that get
something done get it done because it did it in private, and those
that just produced a report in public have produced very few out­
comes. Again, without suggesting whether that’s good or bad, you
can look through subject after subject over a 50-year period and that
is exactly what has taken place. And so that is why I said in part
whether or not a commission is a viable concept has a lot to do with
what the expectations are for the outcome of that commission.
Senator J ep se n . D o you have a comment, Mrs. White?
Mrs. W h i t e . Well, the group you’ve had here this morning:, you
could take us all coming in representing the different people and
maybe individuals and if we all sat down together I dare say we
couldn’t come up with anything better that would better meet the
needs of your people in your home State than you could yourself.
You say you get the opportunity to bring people in for discussions,
to meet with the groups, to meet with the commission or whatever—
you would, but you would not always get the working people and you
would not always get the elderly and you would not always get the
people who are going to be concerned with your decision.
I just don’t think there’s any better way to get anything that I
want through Congress—and now I ’m being personal—than going to
my own Representatives and my own Senators and having them know
3 7 -2 6 4 -

85 -




9

126
about my cause because I believe they, like you and the other Mem­
bers of Congress, are more concerned about the total group than any­
one else on any commission anywhere.
Senator J ep sen . Well, I thank you. I would say to you, Mrs. White,
that you have raised some valid arguments for allowing farmers and
self-employed business men or women to deduct at least half the cost
of their health insurance and I am a cosponsor of that in the Senate,
and across the board I think there’s some hope for that.
I would ask if there are any closing statements or any statements on
the record you would like to make before we go on to the next panel?
Mr. H a c k in g . Yes, Mr. Chairman. I ’d like you to look again at this
chart. This is where the medicare dollar goes. Medicare, especially
medicare part A, is a program that pays hospitals and as you can
see from what is happening in terms of hospital room rates relative
to what is happening to the Consumer Price Index, it is the cause of
the escalation in hospital costs that is impacting on the medicaid
program and driving that program very rapidly toward insolvency.
Until something is done about hospital cost escalation, the crisis
in medicare cannot be avoided. It can be deferred. You can raise taxes
on workers and consumers, but it cannot be avoided. The deficit will
simply build over time and the Congress will have to over time trans­
fer more and more private and public wealth into the Medicare Pro­
gram to continue to pay hospitals.
Senator J ep sen . Mr. Goldbeck.
Mr. G o ld b e c k . I would certainly agree with that. I think that our
message would be that there is not an advantage to the economy of this
country, basically the jurisdiction of this committee, to segment this
economic problem into one that is medicare only or medicaid only or
State only or business only, but rather one which is a total economic
problem that will indeed respond to economic change and economic
incentives.
The problems that we have now are a response to a set of economic
circumstances that we wrote collectively. If we wish to bring about
changes in those trend lines, if we want to change the pie, then we
have to change the rules. That means we are overtly restructuring one
of the most ironically economically successful industries in America to­
day and we have to be willing to do that and not pretend that we’re
talking about a little bit of benefit here or a little bit of eligibility
there. We’re talking about restructuring the economics of a major
industry and decide that that warrants national attention. We think
it does and we think this committee is to be commended for helping
move in that direction.
Senator J ep sen . Mrs. White.
Mrs. W h i t e . I would like to say the same thing. You do need to be
committed. I think Congress is working at this. All of us recognize the
fact it’s costs everywhere to every individual, regardless of what sta­
tion in life they are. Is the concern about the cost of Government, the
cost of living wherever they are. Talk about running out of money, it’s
like the little boy who said to his mother, “Don’t worry about losing
your billfold, it was just money.” Well, it used to be just money, but
it isn’t so any more. The Government has no money, the people have
nd money. So we are concerned in general about the conditions of this
country.




127
So I will repeat what I said already several times, I don’t think any­
body can solve these problems any better than Congress working with
the people, and I do say you are working at it the best you can with
the problems you have and the people you have out there showing the
interest, and I would like to encourage more people who are concerned
about everything we’ve discussed this morning to get involved and let
you hear from them, rather than waiting until the time for criticism,
So we appreciate it and any way farm bureau can work with you we
would be glad to. Thank you.
Senator J ep sen . I might say that you’re three of the most dynamic
witnesses I have ever had appear. I appreciate it and I mean that very
sincerely. You presented a lot of food for thought and you have told
it like it is and I appreciate that. Thank you for coming and we look
forward to your input as we move along. It is something we will ad­
dress because we must this year and hopefullv we can do it with a little
more of a broad brush rather than just focusing in on the medicare and
medicaid programs. It is much broader than just that and your sug­
gestions and your observations have contributed to that. Thank yov
very much.
I would call the next panel: Mary Suther, Dr. Nelson, and Jack
Owen. Mary Suther is executive officer of the YNA of Dallas, TX, and
will be testifying on behalf of the National Association for Home
Care, the largest representative of home health care agencies. I think
it’s very appropriate and very interesting that we have just had quite
a dramatic exchange here and discussion on hospital cost containment
and I didn’t hear anything said about maybe we ought to do things
different. Maybe it’s the home health care that can alleviate some of
this. We will now hear about that I ’m sure.
Dr. Nelson will be testifying on behalf of the American Medical
Association, and Jack Owen will be representing the hospital
community.
At this point in time I ’m going to go vote and so I will declare a
5-minute recess and you can all rest and get better acquainted and 1
will be back in about 5 minutes. We will recess for that time.
fA short recess was taken.!
Senator Jep sen . I will call this hearing to order.
Mary Suther, executive officer of the VNA of Dallas, TX. Mary wil]
testify on behalf of the National Association for Home Care, the larg­
est representative of home healthcare agencies. Dr. Alan Nelson, board
of trustees, American Medical Association, will be testifying on behalf
of the AMA and will give the view of physicians ; and Mr. Jack Owen,
executive vice president, American Hospital Association.
We’ll start from my left and go right and, Mr. Owen, you may pro­
ceed. Your prepared statement will be entered into the record and
you may proceed in any way you so desire.
STATEMENT OP JACK OWEN, EXECUTIVE VICE PRESIDENT,
AMERICAN HOSPITAL ASSOCIATION

Mr. O w e n . Thank you, Mr. Chairman. I am Jack Owen, executive
vice j>i*esident of the American Hospital Association, and I am going
to refer to my testimony but I’m going to summarize it and keep it
rather short.




128
I’d like to start off by just commenting On a couple of things that
came up in previous panels if I might. I heard Mr. Califano talking
about the problems and I think one thing he did say, that I would cer­
tainly agree with him on that during the 1960’s the whole emphasis on
health care was access, one level of care, the best care, the highest qual­
ity, and everybody was supposed to get that high level of care. And I
guess we did too good a job because that’s what drove costs up as much
as anything else.
The incentive was to provide care for anybody who came and, as
you said, the Government paid for it, and those are the rules with
which we played for almost 20 years.
Now we are faced with a completely different set of circumstances.
We know we can’t afford to provide care for everybody. There’s just
not enough money there, so the hospitals were asked that we turn
around and do a different approach and I’m pleased today to be able
to report that I think we are making progress in the year’s time that
Congress has had to change the incentive system.
I would like to just point out what’s happened in the last year and
why we believe the incentive system is starting to work, regardless of
what you see. I have to again refer to Mr. Hacking pointing to the red
line, the hospital room line, and he said that was driving up the
medicare costs. I would remind you, Mr. Chairman, that medicare does
not pay hospital room rates, never has, and that the room rates that
are there are set by hospitals but with 94 percent of the people being
third party paid for, very few of them ever pay the room rates and
it’s a figure that shows up constantly which really has very little mean­
ing when it comes to whether inflation and hospital costs have in­
creased or not. I think we have to keep that in mind. Blue Cross doesn’t
pay room rates. Some insurance companies do. Medicare and medicaid
don’t.
I think we have to also, if I could comment just a minute on the
shifting, because there seems to be an awf"l lot of concern—both the
gentlemen from Ford and Chrysler and Mr. Goldbeck from the Busi­
ness Council talked about the shifting of costs.
First of all, I’d have to say that hospitals don’t shift costs. They
shift where they get their revenue from. If we have three patients in
the hospital and Dr. Nelson is a full payer and this gentleman isn’t
and I’m a medicare patient and this gentleman doesn’t pay anything,
his costs are going to be the same as our costs, but we have to get some
revenue to pay for that. And the real issue is, where does the hospital
get the money to take care of the people who aren’t going to pay?
The implication this morning was that medicare was the culprit
that was shifting the costs to the private sector. I don’t believe that. I
don’t think any statistics so far are showing that medicare is the cul­
prit. Medicaid, however, is. Medicaid, which is being cut back by
States across this country, are leaving a lot of people who are poor
and needy uncovered and they’re not being covered by the Ford Motor
Co., or the Chryslers or any of the business groups, and the AARP
and other groups don’t want to pay for them either, but when that dis­
advantaged person comes into the hospital for that appendicitis or
broken leg, the hospital takes care of him. The hospital doesn’t say,
“I’m sorry, we can’t take care of you because we’ve got to shift where
we get the revenue from, because we’re going to have to pay for food,




129
we’re going to have to pay for people to take care of you and pay for
the drugs.” Nobody is giving those supplies to us. So that somebody, no
matter what kind of a system we talk about, we’re going to have some
poor, disadvantaged people and there will be some revenue shift.
There’s got to be. There is in every business.
So with that, I would just like to point out very quickly if I could
what we see happening in regard to the incentive system that is now
underway with medicare and why we think it’s going to have some
powerful incentives on the rest of the private sector as well.
During 1983, the rate of increase in total hospital expenses slowed
from about 15.8 percent in 1982 to 10.2 percent in 1983. So we had
about a 5-percent decrease or slowing down in the hospital expenses.
The reduction in the rate of increase in inpatient expenses has been
even greater, from 15.6 percent in 1982 to 9.6 percent in 1983. We are
now down below the double digit inflation.
This substantial reduction cannot be explained solely on the basis
of demand or marketplace pressures. As trends in hospital employ­
ment and length of stay indicate, a substantial part of the industry’s
performance in 1983 is due to improvements in hospital efficiency in
both the production and use of hospital services. That’s what this sys­
tem was designed to do, to increase production and efficiency.
During the past several years, a trend toward slower growth of
hospital employment has been established. The increase in hospital
employment was dramatically lower in 1983 than in 1982. Total em­
ployment rose 1.4 percent in 1983 compared to a 3.7-percent increase
in 1982. The increase in staffing ratios was also smaller in 1983 than in
1982, indicating that the slower growth of employment was not entirely
due to slower demand growth.
Slower growth in the volume of hospital services also has moder­
ated historical trends in hospital expenses, contrary to what many of
our critics are saying that this line is just going up out of sight. Total
admissions declined a half of 1 percent during 1983 after remaining
stable in 1982.
Now if you think about that for 1 minute, admissions of patients
65 years oi age and older increased 4.7 percent against about 5 percent
during the historical trend each year because of the number of people
who are turning over into the age 65 group. The length of stay for
patients 65 years of age and older was down sharply, 4.5 percent, result­
ing in almost no net increase in total patient days for patients in this
category. In other words, even though the increase in the trend of
admissions is going up slightly, because we were able to cut the length
of stay, the total days for medicare in 1983 remained stable and there
was no increase for the first time. These annual trends were even more
apparent in the fourth quarter of 1983. We just started the DUG pro­
gram on October 1,1983, so that was the fourth quarter. Admissions of
patients 65 years of age and older increased by less than 1 percent in
that quarter, while the average length of stay fell 5.5 percent. So
something has happened out there and the incentive under the DUG
system is starting to work.
Slower growth of utilization was not limited to the over-65 popu­
lation. I think this is important from the standpoint of what these
panels are talking about. They seemed to think the only thing happen­
ing has to do with medicare. Admissions for patients under the age




130
of 65 was down sharply during 1983, 2.8 percent. Thus, we had a 2.8
percent decline in the rate of admissions of those under 65, which
means that the people that are on Blue Cross and commercial insur­
ance and so forth that are not a part of medicare are actually using
hospital care less. And that trend is continuing in the first quarter
of this year.
Now the significance of these trends is readily apparent. First,
hospitals are responding to the incentives created by both prospective
pricing and the system of per case payment establishment. Medicare
length of stay is down, the increase in hospital staffing levels is slow­
ing, and the overall increase in hospital costs is moderating. Second,
because real changes are occurring in hospital performance, savings
are being generated not only for the medicare program but also for
other payers as well. This has been achieved without a monolithic
system of payments covering all third parties and patients, and with­
out a burdensome regulatory apparatus. It is critical that hospitals
have the opportunity to continue their response to incentives created
by prospective pricing and that the system not be manipulated to
produce arbitrary, short-term reductions in Federal outlays.
I don’t quite understand Mr. Hacking’s point that we’re only going
to have regulations for a short time. I just don’t see how you can
have regulations for a short time and then take regulations away.
I think other countries have shown that that doesn’t work.
Now just in summary of what else is happening, I would say that,
in addition to the medicare program which we’re all concerned about,
we have seen the advent of PPO’s. These are preferred provider
organizations which now there are some 84 hospitals that are involved
in these, and in a recent survey that we’ve just completed, over 700
hospitals are now anticipating and investigating participation in
these preferred provider organizations.
Now these are organizations in which business and industry nego­
tiate with the hospital to take care of their employees at a particular
rate. It’s a very competitive approach and it’s working. It’s a big
advantage to the employee groups.
We have seen some technological advancement and these both in­
crease and decrease costs and we have to recognize that. But many
times, they enhance the ability to treat patients. The CAT scan would
be the most famous piece of equipment that we’ve discussed over the
past few years. The ability to look inside a person’s body without
having invasion through surgery was a great step forward in diag­
nostic treatment of the diagnostic procedures for a patient and with­
out the technological advances we wouldn’t have that. So that’s there.
But I think we have got to be careful as we talk about we’re going
to save money and we’re going to cut the costs. We can’t forget the
accessibility, and you referred to it very briefly when talking with
Mr. Califano and the gentleman from Ford when you said the problem
that you’re reaching and seeing in Iowa as you cut back is that people
are beginning to say, “Hey, wait 1 minute. We can’t get the care we
want,” and they’re beginning to complain. Because we will continue to
keep the quality, we can do that, but we may have a problem keeping
accessibility that we’ve known in the past if no one wants to pick up
their share of those who can’t pay.




131
I would just conclude by saying that the medicare pricing policy,
which right now is a fair policy, is going to work to hold down total
medicare costs of health care and it’s going to help the rest of the
economy as well, but the price has got to be fair. When the price isn’t
fair, then we’re going to see a shifting of hospitals needing to get reve­
nues from other patients. The shifting that’s taking place now, the
kinds of shifting that Ford Motor Co. represented—and you asked
him a very pertinent question and that is, why are those people 65 to
69 up, if they’re working there, why should they be part of the medi­
care program ? That’s a good question. It’s those kind of shifts which
nobody wants to take that are going to be worse if the price to the hos­
pitals are below what the fixed costs are and we must continue to de­
liver the care.
Mr. Hacking and AARP and everybody else is saying more care
and more care, but where’s the money ? I think you have to be very
careful to watch what happens to accessibility and I think we have to
be very careful as we watch medicare what happens to medicaid. The
two have been tied together for so long, if States pull out of the medic­
aid program, it becomes more difficult for hospitals to take care of the
poor and needy.
With that, I would conclude my statement, Mr. Chairman.
[The prepared statement of Mr. Owen follows:]




132
P e e p ab e d S t a t e m e n t o f J a c k O w e n

Mr. Chairman, I am Jack Owen, Executive Vice President of the American
Hospital Association (AHA).

The AHA, which represents over 6,100 member

hospitals and health care institutions, as well as more than 38,000 personal
members, is pleased to have this opportunity to present its views on health
care cost issues to the Joint Economic Committee«

INTRODUCTION

I am particularly pleased to be here today, as this hearing provides an
opportunity to report on the substantial progress that has been made by the
hospital industry in reducing the rate of increase in hospital costs over the
past year.

This hearing is also an opportunity to discuss the significant

changes that are occurring in the hospital Industry in response to changing
demands by both public and private payers.

These changes offer the best

opportunity for ensuring that costs are consistent with consumer needs and
expectations.

For several years the American Hospital Association has advocated the use of
incentives to bring about hospital cost containment.




The incentives-based

133
approach stimulates the industry to develop new ways of delivering services at
lower cost, and encourages hospital managers to be responsive to both consumer
and payer demands.

The private sector has adopted elements of this approach,

with substantial activity occurring in the development of private sector
prospective pricing systems, preferred provider organizations and selected
provider contracting, and innovative health insurance packages.

Medicare’s

prospective pricing system provides an example of how powerful the incentives
approach can be when adopted by a major payer.

In addition, it provides an

illustration of the issues that must be resolved if the incentives-based
approach is to be successful.

The AHA continues to believe that the incentives approach is superior to the
use of regulation to control costs.

A reliance on regulation will discourage

innovation that is essential if high quality health care is to continue to be
made available to the public at a cost that the public is willing and able to
pay.

Regulatory approaches, particularly when applied across the board,

inhibit the ability of providers to respond to the unique needs and
expectations of specific consumer groups and employers.

1983 PERFORMANCE

During 1983, the rate of increase in total hospital expenses slowed from 15.8
percent, in 1982, to 10.2 percent, in 1983.

The reduction in the rate of

increase in inpatient expenses has been even greater:
1982 to 9.6 percent in 1983.




from 15.6 percent in

This substantial reduction cannot be explained

134
on the basis of demand or marketbasket pressures.

As trends in hospital

employment and length of stay indicate, a substantial part of the industry’s
performance in 1983 is due to improvements in hospital efficiency in both the
production and use of hospital services.

During the past several years, a trend toward slower growth of hospital
employment has been established.

The increase in hospital employment was

dramatically lower in 1983 than in 1982.

Total employment rose 1.4 percent in

1983 compared to a 3.7 percent increase in 1982.

The increase in staffing

ratios was also smaller in 1983 than in 1982, indicating that the slower
growth of employment was not entirely due to slower demand growth.

Slower growth in the volume of hospital services also has moderated historical
trends in hospital expenses.

Total admissions declined 1/2 of 1 percent

during 1983, after remaining stable in 1982.

Admissions of patients 65 years

of age and older increased 4.7 percent during 1983, slightly below the
historical trend.

Length of stay for patients 65 years of age and older was

down sharply^-4.5 percent— resulting in almost no net increase in total
patient days for patients in this category.

These annual trends were even

more apparent in the fourth quarter of 1983, with admissions of patients 65
years of age and older increasing by less than 1 percent, while the average
length of stay for these patients fell 5.5 percent.

Slower growth of utilization was not limited to the over-65 population.
Admissions for patients under the age of 65 was down sharply during 1983— 2.8
percent— thus, continuing trends established In 1982.




135
The significance of these trends is readily apparent.

First, hospitals are

responding to the incentives created by both prospective pricing and the
system of per case payment established by the Tax Equity and Fiscal
Responsibility Act.

Medicare length of stay is down, the increase in hospital

staffing levels is slowing, and the overall increase in hospital costs is
moderating.

Second, because real changes are occurring in hospital

performance, savings are being generated not only for the Medicare program but
also for other payers as well.

This has been achieved without a monolithic

system of payment covering all third parties and patients, and without a
burdensome regulatory apparatus.

It is critical that hospitals have the

opportunity to continue their response to the incentives created by
prospective pricing and that the system not be manipulated to produce
arbitrary, short-term reductions in federal outlays.

PRIVATE SECTOR DEVELOPMENTS

Although adoption of prospective pricing by Medicare is the most dramatic
change in the hospital industry, other changes are taking place as well.
After Medicare, possibly the most widely discussed new idea in health care is
that of preferred provider organizations (PPOs). A survey conducted by the
American Hospital Association and sponsored by the Health West Foundation in
late 1982 and early 1983 identified 84 hospitals involved in a preferred
provider organization and more than 700 hospitals that were considering
involvement in a PPO.

A follow-up survey conducted in July of 1983 identified

40 operational PPOs, most of which involved two or more hospitals.




The key

136
characteristic of these organizations is their use of unique combinations of
features to meet the particular needs and demands of an employee group.

Both

the services covered and the ways of delivering those services vary from plan
to plan, which ensures a high degree of responsiveness to the particular
groups involved.

With increased emphasis on health care costs, many employers are re-examining
their health insurance coverage to explore alternative ways of providing
financial protection to their employees while encouraging the cost-effective
use of hospital and other health care services.
substantial interest in the PPO concept.

Employers also have shown

Many employers are actively pursuing

the development of PPOs as an alternative to more conventional health
insurance.

In addition, employer/provider coalitions continue to be one

promising means of bringing about the effective collaboration of providers,
employers, and organized labor in an effort to contain health care costs.

The

Community Programs for Affordable Health Care project, sponsored by the Robert
Wood Johnson Foundation, is providing examples of innovative efforts to
develop local health care financing and delivery systems that are responsive
to community needs and resources.

LONG TERM ISSUES

The 1983 trends clearly indicate that hospitals are responding to new
incentives.

It is important to recognize, however, that financing systems

have purposes other than simply containing costs.




In recent years, attention

137
has drifted away from a concern with access to care and toward an exclusive
focus on budgetary issues.

Although important, budgetary issues should not

dominate the formulation of health policy by the federal government, state
government, or by the private sector.

It is unrealistic to expect that

improvements in efficiency can be used to "fund" technological advances.
Efforts to do so inevitably result in significant changes in the services
available to both public and private patients.

Technological advances can both Increase and decrease costs.

Many

technological advances increase the demand for care as they enhance the
ability of medicine to treat illness and extend the quality and length of
life.

Since the enactment of the Medicare program, there has been a steady

increase in the life expectancy of the elderly that has tended to parallel the
increase in the cost of the Medicare program.

The U.S. Office of Technology

Assessment has identified neonatal intensive care as a technological advance
that has improved the chances of survival for premature and high risk
infants.

Similarly, five-year survival rates for childhood leukemia victims

have improved tremendously in recent years.

In examining hospital

departmental staffing trends, we find that the fastest growing departments
have been those using more advanced technology and higher-paid therapeutic and
diagnostic services.

Providing these services raises total costs, but at the

same time improves patient outcomes and health status.

The implementation of the Medicare prospective pricing system provides an
opportunity to examine the relationship among the objectives of




138
cost-containment, quality of care, and access to services.

If the new system

is manipulated to simply produce short-term budget savings, the inevitable
result will be reduced access to services by the elderly.

A successful

Medicare payment system requires prices that are adequate— only adequate
prices will enable the program to meet its objective of containing costs
without adversely affecting the ability of the Medicare population to receive
necessary high-quality services.

In addition, to be successful, Medicare's prospective pricing system also must
establish prices that are fair.

If it does not, hospitals may well be

penalized for providing technologically advanced services or developing
regional referral networks.

The AHA has urged both the Department of Health

and Human Services and the Congress to carefully examine the equity of the
Medicare prospective pricing system, and identify any potentially adverse
consequences of moving quickly to uniform national rates of payment.

Problems

already have been identified for certain rural hospitals that function as
referral centers and offer a comprehensive range of services.

Although these

hospitals offer services that are comparable to those found in most cities,
their payment often ranges from $700 to $900 per case less than their urban
counterparts.

In an effort to address equity problems, the American Hospital Association has
urged Congress to study the concept of setting Medicare prices unique to each
DBG based on a combination of a uniform national rate of payment and a
hospital-specific rate of payment.




For those DRGs that describe a uniform

139
group of patients, the price will reflect the national average.

The prices of

those DRGs exhibiting substantial variation in costs, and in which severity of
illness is likely to play a major role in determining the cost of treatment,
would be heavily weighted toward a hospital-specific rate.

We believe this

approach has great potential for improving the equity of the Medicare
prospective pricing system, while preserving its incentives, until such time
as the DRG system on which prospective pricing is based is adequately refined.

We have identified a number of other problems, including deficiencies in the
wage index used to adjust prices for regional variations in the cost of labor
and have urged Congress to make necessary statutory modifications to prevent
undesirable changes in the hospital industry that will be necessary if
hospitals are to avoid unjustified financial shortfalls in the short-term.

CONCLUSION

The Medicare prospective pricing system is demonstrating the effectiveness of
the incentIves-based approach to containing health care costs.

Experience to

date suggests that a Medicare-only system can work to contain both Medicare
expenditures and total costs.

The Medicare system also is providing an

opportunity to examine the complexities encountered in trying to change the
incentives that influence both hospital and patient behavior while providing
adequate and fair rates of payment.

In evaluating the performance of the Medicare system, the American Hospital
Association urges members of Congress to keep in mind the issues of costs and




140
of the kind of Medicare system that will be available to meet the needs of the
elderly now and in the future*

If the Medicare system is implemented with a

firm commitment to establishing prices that are both adequate and equitable,
the AHA believes that both the public and the providers will be well served.
In the private sector, the AHA urges Congress to give providers, insurers, and
employers the time needed to work out the innovative methods of providing a
range of services that are responsive to the needs of particular groups at a
cost that those groups are willing to pay.




141
Senator Jepsen. I thank you, Mr. Owen.
Dr. Nelson.
STATEMENT OP ALAN R. NELSON, M.D., MEMBER, BOARD OP
TRUSTEES, AMERICAN MEDICAL ASSOCIATION, ACCOMPANIED
BY ROSS RUBIN, DIRECTOR, DEPARTMENT OP FEDERAL LEGIS­
LATION, AMA

Dr. N e ls o n . Thank you, Mr. Chairman. My name is Alan Nelson.
I’m a private practitioner in internal medicine in Salt Lake City. I’m
also on the AMA board of trustees and with me is Mr. Ross Rubin
from the department of legislation of the AMA .
The health care sector has become a major component of the Ameri­
can economy. In addition to the frequently cited figure of 10 percent
of the gross national product, you also have to remember that some
7 million people are employed in health care, 5.2 million full-time
equivalent positions. As a matter of fact, the health care industry
ranks second among the Nation’s industries behind retail trade. Each
office-based physician employs an average of 2.1 full-time equivalent
nonphysician personnel.
In the not too distant past, public policy in the health area was
geared toward expansion of the health care system and promoting
higher quality health care and wider public access to health services.
Through efforts in both the public and private sector our Nation
has developed a medical care system that is a benchmark against which
other medical systems throughout the world are measured. Health
status in the United States, as a matter of fact, improved to the point
where now we’re increasingly worried about the cost of health care, in
addition to the more fundamental concerns of quality and access.
But it’s important in any discussion about the impact of health costs
to talk about what that investment by our society has purchased.
The life expectancy of Americans has increased from 69.7 years in
1960 to 74.5 years in 1982. Infant mortality has been reduced to a
record low of 11.2 per 1,000 live births, less than half the figure in 1960.
Since 1970, deaths from heart disease have declined by 25 percent
and deaths from stroke have declined by 40 percent. These advances
have come through major technological advances as well as through
improved access to care and changes in lifestyles.
Medical advances have greatly increased the quality of health care
available to Americans and the quality and length of their lives.
Furthermore, a healthier population is more productive with less work­
days lost to illness and with reductions in percentage of individuals
who are disabled from certain chronic conditions.
Mr. Chairman, many individuals now appear concerned that ex­
penditures for health care exceed 10 percent of gross national product
and while this is a substantial portion of our total national product, it
must be remembered that consumer expenditures for alcohol and
tobacco were 3.8 percent of consumer expenditures in 1981 and that
recreation accounted for 6.4 percent. Taxes accounted for 20.48 per­
cent of gross personal income. It must be recognized also that 10 per­
cent of gross national product for health care is not a magic figure
and could justifiably increase over the years as medical care provides
hew benefits to our aging population.
3 7 -2 6 4 -




85 -

10

142
If we take the curve of gross national product and eliminate all the
unnecessary care—that is, we eliminate on a one-time basis all over­
utilization—we rationalize the demand and we eliminate all the fat
that it’s possible to eliminate—we would have a one-time aberration in
the curve. Perhaps it would be slanted like this [indicating], or flat or
perhaps even go down. But then, as our technological capability
resumes and continues as it has in the past, then presumably that curve
would again follow the same line.
As a matter of fact, if we want to find the culprit for the curve that
describes our health care costs, perhaps the single most responsible
individual would be Dr. Fleming, who discovered penicillin, or Mr.
John Crapper, who invented the flush toilet, because prior to the anti­
biotic era and the area of sanitation people died in infancy or as chil­
dren or they died at home because there was very little we could do for
them in the hospital, and it didn’t cost anybody anything. As we live
longer, as our technological capabilities improve, as a consequence,
costs go up.
I had the chairman of the board of one of our major mutual insurers
tell me that the health care costs for two children in the neonatal in­
tensive care unit were several hundreds of thousands of dollars for two
children. He demanded to know what we were going to do about that.
1 had to ask him what he wanted us to do, did he want us to let 2-pound
babies die ? If the answer is no, if we want l^ -to 2-pound babies to
live, then we can’t criticize the health care system for providing the
__
technological capability that permits that.
We have to make conscious decisions about priority, and as"l con­
clude my remarks, I will return to the comments of former Secretary
Califano who called for a national health policy.
We don’t provide the same care now that we did in 1950.1 received
a phone call yesterday morning at 7 a.m. from a young woman patient
who said that her insulin pump for her diabetes had lost its program
and she wanted to know how to reinstitute the program that permits
her to have her insulin around the clock in small doses with larger
doses prior to each meal. Now my patient also had laser treatment so
her eyesight is good, her diabetes management control is much better
than it has ever been and she’s substantially better off than her sister
who’s also a patient of mine who is blind, has diabetes, and is await­
ing renal dialysis and a transplant. Unfortunately, some of our tech­
nological capability didn’t come along early enough for her sister,
but we can’t deny that most of the services that I provide as an in­
ternist weren’t available 19 years ago when I started practicing. Most
of the drugs that I prescribe, most of the tests that I order, weren’t
available. Of course, the cost will be different because the product is
different.
We also have to remember that health care costs aren’t immune from
outside market forces and general inflation. Hospitals and other health
care settings are labor intensive. Therefore, inflation in wages and other
general expenditures also contribute to the increasing costs.
Finally, it’s staggering to observe that between 1983 and 2025 the
growth of the population will be 30 percent. In that same timeframe,
the growth of the population over 65 will be 200 percent^ and the
growth of those over 85 will be 300 percent. As we’ve already ob­
served, the elderly have more health problems, and consume more




143
health resources. Unless we decide to ration care, health costs will
go up.
Last month the AMA sent a letter to every physician in this coun­
try, whether they were AMA members or not, and urged each to
voluntarily freeze his or her fees for a 1-year period and to continue
to take into account the financial circumstances of our patients and
to accept reduced fees when warranted and be considerate of the needs
of our patients to avoid increasing the financial burden, particularly
of the unemployed, the uninsured, and those under medicare.
And I have to be proud of the response from the State medical
societies with the medical associations of Alabama, Arkansas, Cali­
fornia, Delaware, Florida, Georgia, Iowa, Kansas, Kentucky, Lou­
isiana, Massachusetts, Mississippi, Oklahoma, Texas, Utah, Vermont,
Washington, New York, Virginia, and Wisconsin, just in the short
period of time since we called for a freeze, having ratified that call
and pledged their cooperation. National medical specialty societies
have also adopted the freeze, including the American Academy of
Neurology, the College of American Pathologists, the American
Society of Internal Medicine, and several other specialty societies.
We believe that the great advances in health status of the Ameri­
can people has occurred because this country has devoted necessary
resources to the health care sector and has kept inappropriate Gov­
ernment intrusion into the medical marketplace to a minimum. And
we believe this policy should continue.
We also believe that great strides can be made by encouraging the
American public to prevent illness through adoption of healthier
lifestyles, such as improved diets, reduce smoking, and exercise.
The Federal Government can play a valuable role in encouraging
such activity.
It should be remembered that a significant reduction in health care
costs could have severe economic effects through decreased employ­
ment and the spinoff spending generated by health care income. As
a matter of fact, since prospective pricing went into place there have
been reports of hospitals initiating significant layoffs of personnel
causing great concern within our communities, particularly in the
relatively small communities.
America’s physicians stand ready to cooperate in our Nation’s con­
tinuing commitment to ensure the highest possible level of health care
for all people and we urge you to keep in mind, while expenditures
for health care have increased greatly over the past 30 years, the
Nation and the economy as a whole have received sisTiificant benefits
from these expenditures. These benefits relate to improved health
status, longer life expectancy, and improved quality of life. Produc­
tivity also increases when absenteeism from illness is reduced and
when chronic conditions can be controlled with workers continuing
in their jobs.
The American Medical Association is spending $3 million and has
been at work for over a year and will complete by the end of 1985
its health policy agenda for the American people. The project brings
together representatives from 150 groups, including Government,
labor, business, hospitals, medical specialties, consumers, insurers, in
the development of a national health policy which will be not the
property of the AMA. The AMA is the facilitator and we are paying




144
for the work to take place and staffing it, but the output of the health
policy project will be a rational and coherent national health policy.
This project has already completed the work on the basic principles,
160-some-odd basic principles that cover the range of issues from
medical education and scientific inquiry on one end to payment for
services on the other.
The work groups are now in the process of defining specific policy
issues within each of these basic principles and out of this will come
some kind of consensus, at least a framework, so that in the future our
health policy decisions are not made in a haphazard, isolated way, but
through some coherent framework.
Much of the policy agenda, principles, and issues, will be sup­
ported by the AMA and become policy of the AMA. Much already is
policy. Some, undoubtedly, will not be acceptable to the AMA since
it represents a consensus of all groups participating.
I would think that Mr. Califano’s expectations for a national health
policy to be developed within 1 year is overly optimistic based on our
experience.
In either event, the AMA is committed to the development of a
health policy agenda that, among other things, will address that ques­
tion that I raised about the curve after we’ve eliminated all the fat, and
what can be done then and what should be done so that society can
serve its health and other obligations to feed and clothe and house our
citizens. The work of that project will be the property of the American
people. It will be our contribution to assisting and solving some of
these difficult questions.
Thank you.
[The prepared statement of Dr. Nelson follows:]




145
P rep ared S t a t e m e n t o f A l a n R . N e l s o n , M .IX

Mr. Chairman and Members of the Committee:
My name is Alan R. Nelson, M.D.

I am a physician in the practice of

Internal Medicine in Salt Lake City, Utah, and I am a member of the Board
of Trustees of the American Medical Association.

With me today is Ross

Rubin, Director of AMA’s Department of Federal Legislation.

The American

Medical Association is pleased to have the opportunity of presenting its
views on the subject of health care and its effect on the economy.
Mr. Chairman, the health care sector has become a major component of
the

American

health
Product,

care

economy.
income

In addition

contributing

to

to

the

over

the health services industry is




37-264

2C4

frequently
10%

of

the

responsible

cited
Gross

figure

of

National

for employing

5.2

146
million

full

nation’s

time

industries

employs an average

equivalent
behind
of

2.1

expenditures

balance

of

and

retail

trade.

ranks

Each

second

among

office-based

for 1982 hospital care accounted

physicians

expenditures

and

the

physician

full-time equivalent non-physician personnel.

In the health care sector,
total

positions

consists

services
of

accounted

nursing

home

care

for 42% of

for

19%.

(8.5%),

The
drugs

(6.9%), dentists services (6%), research and construction (4.4%), program
administration and
eyeglasses

and

insurance

other

(3.9%),

appliances

other
(1.9%),

professional
government

services
public

(2%),
health

activities (2.6%),.and other health services (2.3%).
The health care sector of the economy also represents a growing part
of our economy.

This sector is highly labor intensive and in 1982 showed

a 4.3% increase in total private employment and a 4.8% increase in growth
work hours.
to 4.5%.

Unemployment in the health care sector in 1982 was limited

Hospitals and other providers of health care services are major

sources of employment and income for the local economy.
Health
public

care

policy

issues

impact

debates.

to a greater

Federal

and

state

and

greater

governments

degree
confront

in

our

health

issues directly through funding for and administration of the Medicare,
Medicaid,

other

health

benefit

programs,

and

other

public

health

activities and indirectly through a concern for the general economy as a
whole.

Medicare costs are now perceived as a major problem threatening

the stability of the program.
Corporations

are

also

becoming

more

concerned

with

achieving

economies in health care payment and delivery systems in light of their
commitment

to

provide




comprehensive

health

benefits

coverage

to

their

147
employees.

Some

industry

is

now

concerned

that

fringe

benefit

costs

place American business at a disadvantage with foreign competitors having
lower total labor costs.

Clearly,

the health area is viewed as a sector

of the economy that is causing problems with cost concerns becoming the
paramount

issue

in

the

health

debate

in

both

the

public

and

private

past,

public

sector.
This was not always the case.

In the not

too distant

policy in the health area was geared toward expansion of the health care
system and promoting higher quality health care and wider public access
to health services.
hospital
insurance
designed

The federal government sponsored grants

construction
was
to

through

promoted

subsidize

the

through

health

or ameliorating dreaded diseases.
to

train

health

various

insurance

private sector established major

capacity

Hill-Burton

program.

provisions
purchases.

research

programs

to promote

Private
the

of

health

tax

Government

laws

and

the

aimed at eradicating

Programs were established to increase

professionals.

The

economic

signals

of

the

sixties and seventies were directed toward expansion of the health care
system and increased resources to provide more and better services.
Through these efforts our nation has developed a medical system that
is a benchmark against which other medical systems are measured.

Health

status in the U.S. has, in fact, improved to the point that allows us* to
have

the relative luxury of worrying about the cost of health

care in

addition to the more fundamental concerns of quality and access.
Advances in Health Care

*

.Mr. Chairman, it is important that in any discussion about the impact
of

health

care




costs

on

the

economy

we

not

lose

sight

of

the

great

148
advances that have characterized our nation's health care system and the
benefits that have been provided to our society.
The
1960

life

expectancy of

74.5

years

to

in

Americans

1982.

has

increased from

Infant mortality

record low of 11.2 per 1000 live births,

has

69.7 years

been

reduced

less than half

the

in '

to a

figure in

1960.
Today,

through

the

development

of

and

widespread

availability

of

vaccines, polio has been virtually eliminated, the incidence of mumps has
fallen from over 150,000 cases as recently as 1968 to 3,285 last year,
and cases of measles have declined from 481,530 in 1962 to 1,436 in 1983.
Since 1970, deaths from heart disease have declined by 25% and deaths
from stroke have declined by 40%.
technological
drugs,

and

exercise

advanc.es

greater

and

diet.

including

public
While

These advances have come through major
open-heart

consciousness
cancer

remains

of

surgery,
the

pacemakers,

importance

a major threat,

living longer after treatment and many forms of cancer,

of

new

proper

patients

are

formerly viewed

as inevitably leading to death, are now curable.
The modern miracle of

transplant surgery provides life and hope to

people otherwise facing death, prolonged hospitalization or deteriorating
quality of life.

New hearts are transplanted into 100 Americans per year

and 5000 people receive transplanted kidneys.
cornea

«
transplants

returning

sight

to

In 1983 there were 23,000

those whose vision was

severely

impaired.
Artificial organs are being developed for use when human organs are
unavailable.

Artificial kidneys are being developed as well as artifical

pancreases.

Of




course,

we

all

became

dramatically

aware

of

the

149
artificial
Artifical

heart
hip

which

kept

Dr.

joints have become

Barney
almost

Clark
routine

alive

for

relieving

112
over

days.
65,000

patients of chronic pain last year.
New diagnostic devices such as CAT scanners, ultrasound,

and nuclear

magenetic resonance have greatly enhanced our ability to make rapid and
more accurate diagnoses.

These technologies also obviate the need to use

more risky invasive diagnostic procedures.
These medical advances have greatly increased the quality of health
care

available

Furthermore,

to Americans

a healthier

and

the

population

quality
is more

and

length

of

productive

with

our

lives.

less

work

days lost to illness and with reductions in percentage of individuals who
are disabled from certain chronic conditions.
The 10% of GNP Threshhold
Many

individuals

now appear

care exceed 10% of GNP.
national

product,

concerned

that

expenditures

for health

While this is a substantial portion of our total

it must be

remembered

that

consumer

expenditures

on

alcohol and tobacco were 3.8% of consumer expenditures in 1981 and that
"recreation" accounted for 6.4% of consumer expenditures in that year and
that

taxes

medical

accounted

for

20.48%

of

gross

personal

income.

care represented 10.6% of consumer expenditures.)

(In

1981

It must also

be recognized that 10% of GNP for health care is not a magic figure.and
could

justifiably increase over the years as medical care provides new

benefits to our aging population.
Mr.

Chairman, we all. often hear people speak fondly of "the good old

days" with regard to the construction of our cars, houses,
our schools and teachers,




etc.

the state of

We often hear contrasts between health

150
care costs in the ’50s and ’60s compared to current costs.

We hear that

spending on health care has increased from $27 billion in 1960 to $356
billion last year— from 5% of the Gross Natonal Product to over 10%.
are

told

that

the

inflation rate.

cost

of medical

care has

increased

faster

We

than

the

In such simplistic comparisons is the connotation that

today’s health care is the same as in those past decades and that costs
have

gone up

because of waste

and

irresponsibility in

the

health

care

industry.
Such is not the case.

We could turn back the clock and provide 1950

and 1960 health care to the American public.
certainly reduce costs,

the consequences

public would be dramatic.

While this approach would

to the health of

the American

Without kidney dialysis and transplants,

tens

of thousands of Americans who are alive tcday, leading productive lives,
would

be

lost.

If

we

went

back

to

the

'50s

and

’60s

technology,

thousands more who have been cured of cancer would not be alive
Without

coronary

bypass

surgery,

arteries would either be disabled or

individuals
subject

with

blocked

to a higher

today.
cardiac

frequency

of

strokes and heart attacks.
I point these facts out today not to say that all increases in health
care

costs

are

justified

but

to

highlight

the

fallacy

of

using

comparisons to another era as a basis for criticizing today's system.
The
cost.
to

remarkable

achievements

in medical

care

have not

come

without

I have already mentioned the financial strains that our commitment

quality health

sector alike.

care

for all

In addition,




are

placing

on government

medical advances have

created

and

private

profound

new

151
moral dilemmas for which we still grope for answers.

Our new ability to

keep terminally-ill patients alive for indefinite periods of time and our
ability to maintain life in severely-handicapped infants are issues that
will

cause

ahead.

much

societal

and

individual

soul-searching

the

years

The moral and economic consequences of these advances in medical

technology are profound and must be addressed.
addressed

within

an

atmosphere

considering all elements
within

in

the

context

of

However,

they should be

policy

determinations

reasoned

of society’s obligations

only

of

economic

crisis

and

to

its

budget

members,
cuts

or

not
an

arbitrary percentage of gross national product.
Worldwide Cost Increases Noted
In addition, it is important to point out that the United States is
in no way unique in the amount

of resources

allocated

to health care.

Available data show that the average annual rate of increase for health
care

expenditures

experienced

in

seen in many western nations.

the

United

States was

The average annual

less

rate of

than that

increase for

total health care expenditures in the United States from 1978 to 1980 was
14.7%.

However, this figure was higher in the United Kingdom (20.8%) and

France

(16.6%).

Also,

the analysis

of national health

expenditures

in

nine countries indicates that the percentage share of GNP for health care
expenditures in the United States
other countries.
1976,

expenditures




that of -the

While the share of GNP in the United States was 8.7% in

Netherlands,

expenditures

is not out of line with

West Germany,

greater than 8.2%;
greater

than

7%;

France,

and

Sweden all had

Australia,

Finland,

and

the

only

and

United

percentage

Canada all
Kingdom

had

had
an

152
expenditure

that was less than 6%.

It must also be remembered

that

in

Great Britain the government has made a direct policy decision to ration
care and inadequately fund capital expenditures in the health care area.
We point out these national health care expenditure figures for other
countries
assure

show

that

the

increases

the improved health of

States.
a

to

in

health

care

expenditures

the nation are not unique to

to

the United

We believe that increased resources dedicated to health care is

reflection

emphasis

of

a maturing

and

humane

society

on the protection of its vulnerable

that

places

population,

increased

including

the

ill and injured.
Inflation and Aging Factors
Health care costs are also not immune to outside market forces.
significant

percentage

of

health

care

cost

increases

A

is

attributable

directly to the severe inflation that has beset our economy.

As a matter

of fact, the element contributing the most to the growth in expenditures
for

health

care

from

inflation affecting
the

March

inflation

1983

the

period

1971

the economy.

issue

"accounted

of
for

to

1981

has

been

According to an article

HCFA's

Health

approximately

Care
57%

Financing
of

the

the

general

published

in

Review, general

increase

in

total

systems costs (personal health care costs) for the period 1971 to 1981."
In

addition,

specifically

approximately
attributable

to

8%

of

the

growth

in

expenditures

the

aggregate population growth over

is
that

period of time.
An additional
aging

of

our

responsibility

reason for increased health

population.
for




health

Health
care

care

coverage

care expenditures

expenditures

and

the

through Medicare will

is

the

federal
increase

153
over

time

increases.
grow by

as

the

population

and

Between 1983 and 2025,

almost

30 percent,

with

elderly

population

in

particular

the total population is projected to
the

elderly

population

doubling

total of 58 million or 19.4 percent of the total population.
elderly,

to a

Among the

the group over age 75 will also experience substantial growth:

40 percent of the elderly are now older than age 75, and this figure will
increase to 45 percent in 2025;

and

the

over age

85 group will

triple

from the current 2.5 million people to 7.6 million people in 2025.

This

substantial increase in the elderly population is particularly important
as the elderly have historically utilized a greater proportion of health
care resources.
In

1978,

the

average

Medicare-eligible

per

individuals

capita
was

expenditure

¿2,026.

The

for

health

significance

figure is illustrated by the fact

that average per capita

individuals

between

19

and

64

individuals

under

figure

was

$286.

indicate

that

the

age

ages

19

individuals

the
over

of

the

age

hospitalized than those under that age;
hospitalization;
practitioners
clear:

as

and

more
the

they visit
frequently.

population

of

totalled

65

The

are

of

¿764,

for

and

statistics

more

likely

by

this

spending

for
also

to

be

they use more hospital days per

their

physician

and

other

The

importance

of

these

ages,

care

demands

for

health

health
figures

care

care
is

services

correspondingly increase and the total cost for providing those services
increase.
The AMA recognizes that health care services should be examined for
their cost-effectiveness.

We have been taking positive actions to review

the delivery of health care services and to eliminate those health care




154
costs

that

are

inappropriate

ard

are

not

benefiting

the

public.

(Attached to this statement is an appendix indicating AMA activities to
promote the cost-effective delivery of all health care services.)

AMA's Call for Voluntary Physician Fee Freeze
Last month,
physician in
fees

the American Medical Association sent a letter to every

the country urging each to voluntarily

for a one-year

financial
uninsured,
warranted.

circumstances
and

those

account

the

of each patient— especially the unemployed,

the

under

and

to

continue

Medicare— and

to

to

take

accept

into

or her

reduced

fees

when

In a November 1, 1983, letter to all members of the House of

Representatives,
passing

period

freeze his

the AMA has pledged to ask physicians to refrain from

on additional costs

to their elderly patients

and

to urge all

physicians to be considerate of the needs of their patients and to avoid
increasing the financial burdens of their patients.
In
fees,

calling

for

an

across-the-board

voluntary

freeze

of

physician

the AMA is asking physicians to contribute to a resolution of the

economic

problems

facing

our

health

care

system.

While

physicians

services account for only 19% of health expenditures, physicians are now
taking

a positive

step to arrest

year freeze in their fees.

this

trend

through the voluntary one

With the overall economy as a whole in far

better shape tpday than it was even one year ago and with inflation no
longer
that

continuing

to grow annually

a vast majority

freeze their fees.




of

in double digits,

physicians will

heed

the

the

call

AMA believes

to voluntarily

155
The voluntary free.ze proposed by the AMA applies

to all physicians

and includes charges to all physicians' patients including those that are
covered

by

Medicare.

helpful

in

easing

government,

We

the

believe

current

that

deficit

this

step

problems

will

be

facing

especially
the

federal

as the action taken by the AMA is in line with a one-year

freeze of Medicare payments to physicians as proposed by the President in
his budgetand as provided in various legislative proosals in both Houses
of Congress.
AMA Consumer Choice Principles
The

evolution

of

our

system

of

payment

for

health

care

has

workplace-based health insurance emerging as the primary means
most

Americans

pay for health care

services

they receive.

seen

by which

The nearly

universal coverage of medical expenses by health insurance or Government
health programs has insulated most Americans
cost of medical services.

from consideration

of

the

Many economists have said that this is partly

responsible for the continuing rise in medical care costs.
Typical government responses

to this

limits on the supply of medical services
health planning program.
should also be addressed.

situation have

been

such as through the

to impose
ill-fated

It has been AMA policy that demand for services
Thus competition and individual choice should

be enhanced as alternatives to regulation.
To help assess and guide federal legislative proposals impacting upon
the nation's health insurance system, the AMA has developed the following
principles.

These

principles

should

be

considered

as

a

whole.

They

spell out a policy for greater individual choice and for incentives for




156
prudent behavior by individuals.
appropriate policy,

While the principles may singly state

it is intended that all principles be considered in

reviewing consumer choice/competition legislation.

1.

Employment-Based Health Insurance.
The growth of
group health insurance for employees and their
continue to be encouraged through tax incentives.

2.

Adequate Benefits.
Each health insurance plan offered to employees
should contain adequate benefits, including catastrophic coverage.
Plans which do not have adequate benefits should not qualify for tax
deduction as a business expense for the employer.

3.

Multiple Choice of Plans.
Health insurance plan options, with
varying levels of coinsurance and deductibles, should be available to
employees; accordingly employers, through tax incentives, should be
encouraged (but not required) to offer employees a choice of several
health insurance plans.
Multiple options will better meet individual
and family needs and encourage greater individual responsibility, in
utilization of medical care services.

4.

Equal Contributions.
Equal employer contributions should be made for
health benefit plans, regardless of the plan selected by the employee.

5-

Limitation on
Tax Deductibility of Excessive
Health
Insurance
Premium. A limit should be placed on the amount of health insurance
premiums paid by an employer that would be tax exempt income to the
employee, as with life insurance.
This amount should be high enough
to provide for adequate benefits and should be adjusted
for
inflation. In order to discourage over-insurance and "first-dollar
coverage" which can cause increased demand for care, amounts paid by
the employer in excess of the limit would be taxable income to
employees.

6.

Rebate to Employees.
In order to stimulate prudent selection of
health insurance by employees, employees may receive non-taxable
rebates when choosing an insurance policy where the premium cost is
less than the amount of the employer contribution.

7.

Quality of Care.
Employer health insurance plans should assure
employees the free choice of sources of medical care services.
Services should be of high quality. Plans should provide comparable
benefits for treatment of physical and mental illness.




employment-based
families should

157
CONCLUSION
Mr. Chairman, the AMA urges this Committee and Congress to act to
help assure access
provided

by

our

to and
health

the continued
care

high level of quality care

system.

We

believe

that

the

great

advances in the American people’s health status has occurred because
this country has devoted necessary resources to the health care sector
and

has

kept

improper

government

intrusion

into

the

medical

marketplace to a minimum.

We believe this policy should continue.

also

strides

believe

American

that

public

to

great

prevent

can

illness

be

made

through

by

We

encouraging

adoption

of

the

healthier

lifestyles such as improved diets, reduced smoking and exercise.
federal

government

can

play

a

valuable

role

in

encouraging

The
such

activity.
America’s

physicians

stand

ready

to

cooperate

in

our

nation’s

continuing commitment to assure the highest possible level of health
care

to

all

Americans.

We

urge

you

to

keep

in

mind,

while

expenditures for health care have greatly increased over the past 30
years, the nation and its economy as a whole has received significant
benefits

from these expenditures.

health status,

These benefits

relate to improved

longer life expectancy, and improved quality of life.

Productivity also increases when absenteeism from illness is reduced
and when chronic conditions can be controlled with workers continuing
in their jobs.
It

should

also

be

remembered

that

a

significant

reduction

in

health care costs could have severe economic effects through decreased
employment and the spin-off spending generated by health care income.

3 7 -2 6 4 -

85 -




11

158
For example, since the federal government’s new hospital reimbursement
system

for

hospitals

Medicare

initiating

went

into

significant

effect,
lay-offs

there

have

been

of personnel

reports

causing

of

great

concern within their communities.
Mr.

Chairman,

at this time I would be pleased to respond to any

questions the Committee may have.




159
COST-EFFECTIVENESS ACTIVITIES OF THE AMERICAN MEDICAL ASSOCIATION
National Commission on the Cost of Medical Care
The American Medical Association has taken an active role in issues
relating

to the cost of health care.

The AMA was

instrumental

in the

development and operation of the National Commission on the Cost of Medi­
cal Care,

and

has

been working

to

implement

recommendations

Commission relating to strengthening price consciousness,
cost

containment

initiatives,

cost

containment

measures

supply and
and

distribution

consumer

Commission’s
within

and

through

within medical

of health

patient

report

working

care

information.

emphasized

the

the

practice,

providers,
An

of

private sector

regulatory
issues

process,

relating

to

research guidelines,

important

importance

from this

element

changing

of

this

incentives

the health care delivery system to enhance competition.

The 48

recommendations of the Commission on the Cost of Medical Care, issued in
1978, have served as a starting point for AMA activity related to costeffectiveness.

Cost-Effectiveness Publications
For the past four years, the AMA has published an annual Cost Effec­
tiveness
efforts

Plan.

The

1984

Plan

documents

the

Association's

to stem inappropriate growth of medical care costs.

on-going
This Plan

details numerous activities of the AMA to meet its commitments concerning
limiting health care costs that are found to be inappropriate.




160
The American Medical

Association fully recognizes

that an important

element in the growth of cost effectiveness activities is the publication
of information about on-going efforts
care.

To this end,

Cost Effectiveness

to

deliver cost

effective health

the AMA is in its third year of publishing the AMA
Bulletin.

This Bulletin is designed to provide cost

effectiveness information to state medical associations, metropolitan and
county medical societies,
addition,

this

associations,
information

Bulletin
and

on

and national medical
is

other

AMA

generally

interested

cost

available
parties.

effectiveness

specialty societies.
to
The

activities

hospitals,
Bulletin
and

In

hospital

publicizes

also

publishes

information related to the activities of other organized groups working
to this end.
Cost-Effectiveness Network
One of

the more

promising

activities

that

the

AMA

is

involved

in

concerning cost effectiveness is the recently formulated cost effective­
ness network.
the

American

pitals.
tors

This network is sponsored by the AMA in cooperation with
Hospital

Association

and

the

Federation

of

American

Hos­

It is aimed at involving hospital medical staff and administra­

in collaborative

sists of more

cost effectiveness

than 85 hospitals

activities.

throughout

the

The

country

program con­

that will

take

part in experiments to evaluate a variety of cost effectiveness projects*
The first project implemented within this network was a protocol for
holding

economic

grand

rounds.

(An

implementation

guide

grand rounds has been published and is generally available.)
of

this

program was




to enhance

for

economic

The purpose

physician awareness of the cost

of the

161
services

they order

by use of

the

grand

rounds

teaching

forum.

This

program had essentially four operational goals:
o

to encourage practicing physicians to reflect
on their practice patterns in the context of
cost effectiveness issues;

o

to reinforce clinical behavior which is direc­
ted toward the cost effective delivery of high
quality medical care;

o

to change physician behavior where appropriate
to reflect more cost effective delivery of
high quality care;

o

to stimulate additional subsequent activities
geared to foster the cost effective delivery
of medical care.

As this program and other programs developed through the cost effective­
ness network prove beneficial,

it is hoped that similar programs can be

launched in other hospitals and that a major impact will be felt through­
out

the health care delivery system.

analyzed

through

A new program that

is now being

the cost effectiveness network is a study designed to

improve the efficiency of the utilization of respiratory care services.
Health Care Coalitions
The AMA has recognized the fact that medicine by itself cannot act to
hold down rising health care costs.

For

this

reason,

the AMA started

working with state and county medical societies in 1979 in the develop­
ment of community-based health care coalitions.
bring

together physicians,

business and labor

These coalitions work to
representatives,

hospital

management, and insurors to provide local forums to seek ways to contain
costs while maintaining accessibility and high standards of heath care.




162
Health care coalitions have had success in such diverse activities as
case management and utilization review,
knowledge
signing

about

employee

limitations

corporate benefits

system,

most

equitable

and

effective

supporting

and

legislation

in

to

physician and employer

particular

to encourage more

the health care delivery
cost

expanding

work

cost effective ways

increasing opportunities
forms

reform

of

provider

medical

health education programs in the workplace,

places,

to use

to develop

payments,

liability

rede­

laws,

the

drafting

developing

collecting and analyzing data

on the utilization of services, and community health planning.

Conferences on Costs
The AMA has undertaken other activities to emphasize the importance
of cost

effectiveness.

ference

on

In 1982,

Utilization

Association

and

the

of

Blue

the AHA cosponsored the National

Health . Services

with

Cross

Shield

and

Blue

the

American

Con­

Hospital

Associations.

This

program focused on improving the efficient use of health services through
early discharge programs,
utilization review.

alternatives to inpatient care,

Because of the success of this conference,

has expanded its program on utilization of health services.
sponsors

an

annual

and effective

conference,

the

National

Medical

the AKA

The AMA also

Specialty

Society

Cost Effectiveness Conference, to aid medical specialty societies in the
development of cost effectiveness projects
memberships.

that are geared to their own

*

Medical Education and Practice
The

groundwork

medical school.




for

cost

effective

medical

practice

must

begin ' in

To this end, a recommendation from the National Commis­

163
sion on the Cost of Medical Care was that medical, dental and osteopathic
schools should expose students to the economics of the care they deliver.
Since this recommendation was adopted by the AMA House of Delegates in
1978, most medical schools have integrated cost containment as an element
of medical education.

As of 1981,

the subject of cost

containment was

taught in 93 of the 124 United States medical schools, and the issue was
taught in almost every state.
In addition to stressing the value of cost effectiveness in medical
education,

the

AMA

is

also

stressing

the

value

of

prevention

in

all

aspects of medical care as a means to achieve cost effective health care
delivery in this country.
curtailing health care

Aside from organized activities geared toward

costs,

the single most

important means by which

American physicians work to hold the line on health care costs is in the
development of a physician/patient relationship.

Through this relation­

ship,

styles

physicians work

to

promote

healthier

life

and

their patients to prevent disease and injury from occurring.
have been leaders

to educate
Physicians

in anti-smoking campaigns and in educating the public

on issues such as moderation in

the use

of

alcohol,

the

use of child

passenger restraints in automobiles, and drug abuse.
Health Policy Agenda
The American Medical Association realizes that Congress needs assis­
tance from the public in making any future determinations on how health
care services should be delivered in this country in the future.

To this

end, the American Medical Association has taken the first step by initi­
ating a project to create a future health policy agenda for the American




164
people.

This project is designed to develop a philosophical and concep­

tual framework as the basis for specific action plans and proposals that
are

to

be

responsive

to

the

particular

social,

economic,

scientific,

educational and political circumstances facing health care decisions.
develop a series of policy principles and action plans,

To

six work groups

have been organized to develop policy principles and action plans in the
following areas:
resources;

medical science;

health care

health professions

delivery mechanisms;

education;

evaluation,

control; and payment for health care services.

health

assessment

and

The AMA expects that the

Health Policy Agenda project will look to the cost of providing health
care services.
The first phase of this project,
now nearing completion,

and

the development

of principles,

the work groups are now in the

process

is
of

identifying issues as the next step to developing action plans to carry
out the principles.

This activity involves

tions including representatives of medicine,
business,

the hospital industry,

the public,

approximately

150 organiza­

government, nursing, labor,
and health care insurors.

By this broadbased organizational body, we hope

to be able

to present

Congress with viable principles and working programs for the development
of a future health policy agenda

that will

assure

the

high quality health care services for the American people.




availability

of

165
Senator J ep se n . Thank you.
Mrs. Suther.
STATEMENT OP MARY SUTHER, CHIEF EXECUTIVE OFFICER,
VISITING NURSE ASSOCIATION OF DALLAS, TX, ON BEHALF OF
THE NATIONAL ASSOCIATION FOR HOME CARE

Mrs. S u t h e r . Thank you, Mr. Chairman. I tried to alter my testi­
mony summary so I don’t repeat anything that’s previously been said.
I am Mary Suther. I am the chief executive officer of the Visiting
Nurse Association of Dallas, the second largest home care agency in
this country and the largest home hospice program in this country. We
do serve a caseload of over 4,000 persons a day in their homes with the
use of paid staff as well as over 3,000 volunteers which we think does
decrease health care costs.
I also serve on the Government Affairs Committee of the National
Association for Home Care, the Nation’s largest professional associa­
tion representing home care, home health, hospice, and homemaker/
home health aide providers, and it’s in that capacity that I will testify
today.
This organization is not only interested in testifying as to this diffi­
cult matter, but we also have an interest as an employer because we
too are employers and we are 80-percent labor-intensive and we, too,
are interested in the escalation of health care costs as it relates to the
cost of our product.
On behalf of these organizations I want to commend you for hold­
ing this hearing to focus on how we can contain escalating health care
costs. The thrust of my testimony will be on the need to increase use
of home care and other noninstitutional care to help contain both
governmental and private business health care costs.
The preceding witnesses have detailed the rising costs of health care,
but let me briefly cite some key figures. The 82-percent increase in hos­
pital costs, as identified by CBO, and Government funding of medical
care has been focused on institutional care. In fiscal year 1982, 95 per­
cent of medicare part 3, a total of $33.3 billion expenditure, has been
on inpatient hospital care, and only 3.5 percent for home care. Under
medicaid, in fiscal vear 1982, over 30 percent of the $33 billion expendi­
ture went to semiskilled nursing facilities and extended care facilities,
26 percent inpatient hospital care and only 1.7 percent to home care.
As many of the preceding witnesses have testified, the home care
industry is an employer and in our business alone—and I thought about
this while I was sitting back there and it’s a rough estimate—but $80
of every patient’s bill from home care is also health care costs and
sometimes we, as health care professionals, neglect to include our own
henHh. care costs and what that does to increase the cost of our own
product.
Some have talked about the cost of health care in terms of the
direct costs of health care on American business, but no one has
alluded to—I believe one of the preceding witnesses today alluded
to the opportunity costs, and in our business, the opportunity costs
of a fractured wrist of a nurse is $36,000.




166
The question is, What do we do about this? Let us look at the
private sector first. Our association believes that our Nation has had
a dependence on institutional care for too many years. However, only
since the Second World War, and business and labor are just now
realizing the need to institute new programs emphasizing prehos­
pitalization screening, utilization review and use of home care and
other ambulatory care services. Business management is concerned
about the cost of health care in terms of accelerating expenditures
and labor increasingly is faced with contract negotiations where they
must choose between wages and benefits, often due to the pressure of
health benefit costs on employers for current employees and retirees.
The awareness is all around us. The U.S. Chamber of Commerce
reports 150 employer coalitions to contain health care costs. The con­
sulting firm of William Mercer found in a recent survey of 1,420
companies that 42 percent of the respondents with 10,000 employees
or more have plans to develop health care management strategies.
The Midwest Business Group on Health in March 1984 found in
a survey of 64 companies representing over 1 million employees in
an 8-State area: 52 companies have implemented extended care facil­
ity benefits, 10 of these with no requirement for prior hospital stay;
49 have implemented or planned home care; 18 more are considering
it; 71 percent have expanded outpatient surgery benefits and 38 per­
cent implemented greater reimbursement than available as an in­
patient; 16 have or will be paying for birthing centers, a relatively
new concept; 35 others have interest. Incidentally, I have had some
experience in that in Atlanta, GA, and there was a tremendous
decrease in cost of a combination of the use of birthing centers and
home health care.
Hospice care has already been implemented by about 25 percent
of those responding; and nearly half expressed interests.
Both the Blue Cross/Blue Shield Association of America and the
Health Insurance Association of America have reported an increased
trend in the addition of home care and hospice benefits to group health
plans.
The AFL-CIO and the National Governors’ Conference both
recently held special conferences on health care cost containment
strategy. And the AFL-CIO Service Emnlovees International Union,
and other labor groups have contacted the National Association for
Home Care to explore use of home care to reduce health care costs.
And State governments are encouraging this trend. A March 1984
report bv the intergovernmental health policy project at George Wash­
ington University found 15 States have laws which require insurers
to either provide or make available private health insurance benefits
for home health care services.
^
Hospitals themselves are even realizing the need to utilize noninstitutional services. A 1983 survey of 149 hospital administrators
found that 74 percent of the hospitals offer alternative services and 15
percent plan to do so. More specific to home care, 25 percent of the
hospitals provide home care and 33 percent plan to do so by Julv 1984.
And in the medicare program there has been a boom in hospital and
skilled nursing facility-based home health care asre^cies. Hosm’talbased agencies have grown from 319 in 1978 to 566 at the end of 1983.




167
Skilled nursing facility-based agencies have grown from 8 in 1978 to
129 at the end of 1983.
Incidentally, a proliferation of home health agencies increases costs
in many instances, primarily due to the fact that when patients are
served in their home or their place of residence, the more agencies
there are, the further the patients to come, the greater the geographic
distance between the patients, thus an increase in cost for the care
because transportation costs are much of the costs of the delivery of
home care.
Let’s look specifically at some cost-savings results related to home
care and other noninstitutional services. Here are a few examples.
The American Association for Respiratory Therapy issued a report
in February 1984 finding the average cost of care for ventilatordependent persons to be $270,830 a year per person in a hospital com­
pared to $21,192 per person per year at home.
Blue Cross/Blue Shield of Maryland has reported a savings of
$1.2 million in 1982 from its Coordinated Home Care Program, largely
by reducing the average subscriber’s inpatient-day stays by 8.9 days.
Since 1973, the Blue Cross program has reported a net savings of $6.3
million for the program.
Aetna Life and Casualty has reported a $78,000 per case savings
from its Individual Care Management Program by using home care
for victims of catastrophic accidents.
At least a dozen Blue Cross and Blue Shield plans now offer pro­
grams to encourage early maternity discharges to home care. Blue
Cross estimates that if only one-half day were cut from the average 3day normal delivery stay there would be a $40 to $50 million annual
savings in hospital costs.
In addition to these and other studies, I can cite numerous case
examples from my own agency where we have saved money while pro­
viding quality care either by facilitating early hospital or nursing
home discharges or by postponing or avoiding entry of clients to a
hospital or intensive care facilities or nursing home, or preventing
readmission to hospitals. The National Association for Home Care can
cite countless examples nationwide.
In addition to the delivery of care in our agency, as I said, many of
the home care agencies do provide volunteer services that account for
a large number of services provided.
As I noted earlier, hospitals themselves realize the trend and the
necessity of utilizing: home care. Thev also realize that under the new
medicare DRG svstem the prudent use of home care can allow them
under many diagnoses to provide a safe and earlv discharge of patients
and often give them a profit margin on specific PRG ’s.
As an aside, I must sympathize with the hospital industry in that
now they have 465 product lines to manage and we as health care pro­
viders have not been known as product managers in the past and have
very little experience in doing so, and it’s a shame that our friends from
the automotive industry aren’t still here—they have far fewer product
lines to manage in the^ national corporate entities than do hospitals
with their 465 product lines that they now have to manage. Of course,
the people that did the research on DRG’s had no experience in prod­
uct line costing either.




168
If only the Federal Government had a similar view of home care
as a cost containment measure as private industry. We implore you as
leaders of Congress and those business leaders here to urge the cur­
rent administration to take a more reasoned view in this area.

We have approached the Health Care Financing Administration
to help rectify some current inconsistencies in their fiscal intermedi­
aries’ application of the “intermittent care,” “homebound,” and
“skilled nursing” criteria. I will not belabor you with these technical­
ities. Suffice it to say that Health Care Financing Administration has
not been responsive to our requests to stabilize the current home care
benefit.
The big problem with this is that patients being discharged from
hospitals earlier now need high technology services, and while there’s
been no change in the medicare statutes nor changes in the regulations,
interpretation of these regulations denies home care under the medi­
care benefit and the medicaid benefit to many beneficiaries that now
need this service in a greater way than they have in the past.
We have not advocated the expansion of the number of home care
agencies, though there is a strong evidence to expand it for cost-sav­
ing purposes to respiratory care, nutritional care, and pediatric home
care. Instead, we have asked HCFA to rationally administer the cur­
rent benefits so that they will complement the DRG system and our
overall health care system. Under the DRG’s, a failure to have a ra­
tional and adequate home care benefit will only result in more hospital
réadmissions—something which will increase hospital costs and de­
feat the cost savings goal of DRG’s.
The response that we have received from HCFA is that it doesn’t
make sense costwise. HCFA asserts that the medicare home health
benefit is the fastest growing portion of the medicare budget and, as
such, must be limited. They take this view even though home health
represents only 3.5 percent of the overall medicare budget and their
own data shows only a 2.5-percent rate of overutilization. They refuse
to recognize that the growth in home care has been facilitated by the
growth in the elderly population, the growth in the number of home
health agencies into previously under or unserved areas, people’s pref­
erence for home care over institutional care and the growth of technol­
ogy which now enables more procedures to be performed at home that
previously were exclusively done in institutions. Furthermore, the
Government never has attempted to quantify the cost of institutional
care without home care.
In addition to not recognizing the cost-effective benefits of a ration­
ally designed home care benefit, the Government has failed in several
other ways. First, in devising the DRG system they did no analysis of
the potential impact on home care providers, beneficiaries, and other
parts of the health care system. This analysis will be done ex post facto,
if at all. We believe it is ill-advised to think that by tinkering with
one part of the system—that is, hospital inpatient services, physician
services under medicare—if you tinker with one part of the system,
you will make a difference without dealing simultaneously with the
rest of the system. And I think other people have mentioned this in
their testimony today.




169
Personally, I think that we have failed to utilize the engineering
approaches and the systems approach to the development of health
care systems in the country. We probably need to start from scratch
instead of trying to redesign what we have.
The Government also has failed to assess the impact of its excessive
regulatory and paperwork burden on health care providers. Despite
alleged efforts to reduce paperwork, many regulations are promul­
gated without a valid and reliable cost impact assessment, as witnessed
by the recent ODR phaseout regulations, the final hospice regulations,
which incidentally will make care to rural and small communities
virtually impossible due to the effect of having a small number of
clients. Actuarially, it’s impossible to provide hospice under the regula­
tions in the rural and small communities. DRG regulations themselves
also reflect that.
My agency and others have done studies which indicate that the
opportunity cost for completing unnecessary, duplicative paperwork
required by medicare and other governmental programs—and this is
not just for medicare beneficiaries. We are required to provide this to
all home care patients, whether third party payers are governmental
or not. This adds 30 percent to the cost to every unit of service that we
provide, and I ’ve done studies and reported these studies many times
to the Senate Finance Committee’s Subcommittee on Aging and other
bodies in this Senate.
By opportunity costs, of course, I mean the value of revenue or
service that we forego as a result of having to comply with excessive
Government regulations.
We need the same leadership on this issue in Congress that we’ve had
in the private business, labor, and health insurance industry. We no
longer can continue our institutional care bias. It costs too much money
and, in acute care situations, doesn’t necessarily provide better quality
care. We hope you will join us in our efforts to open the eyes of Con­
gress and the administration tp the need to reverse this ill-conceived
policy.
Of course, we do recognize the fact that institutions are necessary
and appropriate in many instances and we would by no means say
that home care should take the place of institutional care.
I’d like to respond to one question that you asked earlier about
the analysis of HMO users. I have personally done some analysis of
our own HMO users and find that there are two cohorts. One cohort
is the sicker employees and the ones that tend to have more health
care problems. The other cohort is the prevention-oriented cohort.
We found two separate cohorts. And also, the mobile employees, the
ones who do not already have a family care physician when they
come to work for us.
Thank you very much.
[The prepared statement of Mrs. Slither follows:]




170
P repared S ta t e m e n t of M a r t S u t h e r
Mr. Chairman and Members of the Committee:
My name is Mary S u th er.
A s s o c ia t io n o f D a l l a s . I
N a tio n a l A s s o c i a t i o n fo r
a s s o c ia t io n r e p r e s e n tin g
p rovid ers.

I am the Chief E xecutive O ffic e r of the Visiting Nurse
also serve on the Government A ffa ir s Committee o f the
H om e C are (N A H C ) - the n a tion 's la rg e st p rofession a l
hom e h e a lth , h o s p ic e and hom em aker/hom e health aide

On b e h a lf o f t h e s e o r g a n iz a tio n s I want to commend you for holding this hearing
to fo c u s on how we can c o n t a in escalatin g health care c o s t s . The thrust of my
t e s t i m o n y w i l l b e on th e n e e d t o i n c r e a s e u s e o f h om e c a r e and other
n o n -in s t it u t io n a l c a r e to h elp c o n ta in b o th g o v e rn m e n ta l and p rivate bu siness
health care c o s t s .
The p r e c e e d in g w itnesses have detailed the risin g costs of health care, but let me
b r ie fly cite some key fig u r e s .
(1)

The n a t i o n 's h e a lth c a r e expenditures have grown by an annual average rate
o f 13.2 p e r c e n t from 1971 - 1981 and are p ro je cted to grow by 11-12 p ercent
from 1981 - 1990. (so u rce : H ealth-C are .F inan cing R eview , March 1983)

(2)

Per c a p ita h e a lth c a r « expenditures have grown from ¿394 in 1971 to ¿1,225
in 1981 - and are p r o je c t e d to i n c r e a s e to n e a rly ¿3,000 by 1990. (sou rce:
Health Care F inancing R eview . March 1983)

(3)

On F e b r u a r y 21, 19 83, the C ongressional Budget O ff ic e (CBO) estim ated that
10.8 p e r c e n t (or 82 percent) of the total 13.2 p ercen t annual growth in health
care c o sts is attributable to hospital c o s ts .

(4)

CBO and others p ro je ct that the M edicare tru st fund w ill be bankrupt by 1988
- 1990 i f sig n ifica n t statutory changes are not made in the fu n d 's incom e and
expenditure p o lic ie s .

(5)

G o v e rn m e n t fu n d in g o f h e a lth c a r e through M edicare and M edicaid has been
f o c u s e d on in s tit u t io n a l ca re . In fis c a l year 1982, 95 p ercen t (¿32.7 billion )
o f M e d ic a r e P art A 's to ta l ¿3 4 .3 b i l l i o n e x p e n d it u r e s w en t to in p a t ie n t
h o s p it a l c a r e and o n ly 3.5 percent (¿1.2 b illio n ) to home health care. Under
M e d ica id in FY 1982, o v er 30 p e r c e n t (¿ 9 .2 b i l l io n ) o f a ll ¿30 b illio n in
e x p e n d it u r e s w ent to SN Fs and IC F s , 26 p e rc e n t (¿7.8 b illion ) to inpatient
hospital care and only 1.7 percent (¿496 m illion ) to home health.

(6)

In the p r iv a t e s e c t o r , the U.S. Chamber o f Commerce r ecen tly reported that
the a v e r a g e em ployer spends ¿2,228 a year per employee on health care coss
or 11 .5 p e r c e n t o f p a y r o l l .
H ealth b e n e f i t s are ab ou t 25 p r c e n t o f all
em p lo y e e b e n e fit s and e m p lo y e e b e n e f i t s r o s e 183 p ercen t between 1971 1982 while wages rose only at 139 p e rce n t.




171
The question is what to do about this.
Let u s lo o k at the private sector f ir s t . Our A ssocia tion believes that our nation
has had a dependence on in stitu tion al care for too many years. And business and
la b o r are j u s t now r e a liz in g the n eed to in s t i t u t e new program s em phasizing
p r e - h o s p it a liz a t io n s c r e e n in g , u t iliz a tio n review and u se of home care and other
am bu latory c a r e s e r v i c e s . B u s in e s s management is concerned about the co st of
h e a lth c a r e in term s o f acceleratin g expenditures and labor increasin gly is fa ced
w ith c o n t r a c t n e g o t ia t io n s w h ere they m ust c h o s e betw een wages and ben efits,
o f t e n d u e to the p r e s s u r e o f h e a lth b e n e f i t c o s t s on e m p loy ers fo r c u r r e n t
employees and r e tir e e s .
The awareness is all around us:
(1)

The U .S . Chamber o f
health care c o s ts .

C om m erce r e p o r t s

150 em ployer coalition s to contain

(2)

T he c o n s u lt in g fir m o f W illiam M. M ercer, In c. found in a recen t survey of
1,420 co m p a n ie s that 42 percent of the respondents with 10,000 employees or
more have plans to develop health care management stra teg ies.

(3)

The M id w e s t B u s in e s s G rou p on H ealth in March 1984 found in a survey of
s i x t y - f o u r co m p a n ie s r e p r e s e n tin g ov er 1 m illio n em ployees in an 8 state
area:
*

52 co m p a n ie s have implemented extended care fa cility ben efits, 10 of
these with no requirem ent for prior hospital stay.

*

49 have implemented or planned home care; 18 ate considering it.

*

72% have expa n d ed out-patient surgery b en efits and 38% implemented
greater reimbursement than available as an in -p a tien t.

*

16 have or w ill be p ayin g fo r b ir th in g
concept; 35 have in te r e st.

*

H o s p ic e c a r e has a lrea d y been im p lem en ted by about 25% of those
responding; nearly half expressed in te r e s t.

c e n t e r s , a r e la t iv e ly new

(4)

Both the B lue C r o s s /B l u e S h ield A s s o c ia t io n o f A m e r ic a and the H ea lth
I n s u r a n c e o f A sso cia tio n o f Am erica have reported an in creased trend in the
addition of home care and hospice b e n e fits to group health plans.

(5)

T he A F L -C IO and the N a tio n a l G o v e r n o r 's C o n f e r e n c e both r e cen tly held
s p e c ia l c o n f e r e n c e s on h e a lth c a r e c o s t c o n ta in m e n t s t r a t e g y .
And the
A F L -C IO , S e r v ic e Employees International Union, and other labor groups have
contacted NAHC to explore u se o f home care to reduce health care c o s ts .




172
And S ta te g o v e rn m e n ts are e n c o u ra g in g this tren d, A M arch 1984 report by the
In te r g o v e r m e n ta l Health P o licy P roject (at G eorge Washington U niversity) found 15
sta te s have law s which require in su rers to either provide or make available private
health insurance b e n e fits fo r home health care se rv ice s«
H o s p ita ls th e m s e lv e s are even r e a liz in g the n e e d to u t i l i z e n o n -in s t it u t io n a l
s e r v i c e s . A 1983 su rv e y o f 149 h o s p it a l a d m in is t r a to r s (by National R esearch
C o r p ., L incoln, Nebraska) found that 74 percent o f the h ospitals o ffe r "altern ative"
(n o n -in p a tie n t) s e r v i c e s and 15 p e rc e n t plan t o . More s p e c ific to home care, 25
p e r c e n t o f the h o s p it a ls p r o v id e home care and 33 percent plan to by July 1984.
And in the M e d ic a r e p rog ram th e re has b e e n a boom in hospital and SNF-based
hom e c a r e a g e n c i e s . H ospital-based agencies have grown from 319 in 1978 to 566
at the end o f 1983; S N F -b a se d have g row n fr o m 8 in 1978 to 129 at the end of
1983.
But l e t 's lo o k s p e c i f i c a l l y at some c o st-sa v in g s resu lts related to home care and
other n on -in stitu tion al s e r v ice s . Here are a fe w examples:
(1)

The A m erican A sso cia tio n fo r R espiratory Therapy isued a report in February
19 84 fin d in g the average c o s t of care fo r ventilator-dependent p ersons to be
¿2 7 0 ,8 3 0 a y ea r per p erson in a hospital compared to ¿21,192 per person per
year at home.

(2)

Blue C r o s s /B l u e Shield o f Maryland has reported a savings of ¿1.2 m illion in
19 82 fr o m it s C o o r d in a te d Home C are P ro g ra m , la r g e ly by r e d u cin g the
a v e ra g e s u b s c i b e r 's in p a t ie n t day s ta y s by 8.9 d a y s . Since 1973 the Blue
C ross program has reported a net savings o f ¿6.3 m illion fo r the program .

(3)

A e tn a L i f e and C a s u a lty has r e p o r t e d a ¿78,000 per ca se savings from its
I n d iv id u a l C are M anagem en t P rogram by u s in g hom e c a r e fo r v ic t im s o f
catastrophic a ccid en ts.

(4)

A t l e a s t a d o z e n B lu e C r o s s and B lu e S h ie ld Plans now o ffe r programs to
e n c o u r a g e e a r ly m a te r n ity d is c h a r g e s to hom e ca re. Blue Cross estim ates
that i f o n ly o n e - h a lf day w ere cu t fr o m the average 3-day normal delivery
stay there would be a ¿40 - ¿50 m illion annual savings in hospital c o s ts .

In addition to these and other studies, I can c ite numerous ca se examples from my
own ag e n cy w h ere we h ave sav ed m oney w h ile p r o v id in g qu ality care either by
fa c il i t a t i n g e a r ly h o s p it a l/n u r s in g hom e disch arges or by postponing or avoiding
en try o f c l i e n t s to a h o s p it a l, IC F or n u r s in g hom e. And NAHC can cite you
countless examples nationw ide.
As I n o te d e a r l i e r , h o s p it a ls th e m se lv e s r e a l i z e the trend and the n e ce ssity of
u t iliz in g hom e c a r e . T hey also realize that under the new M edicare DRG system
the p ru d e n t u s e o f home c a r e can allow them under many diagnoses to provide a
s a fe and $ £ r ly d is c h a r g e o f p a t ie n ts and o ft e n g iv e them a p r o f i t m argin on
s p e c ific D R G s.




173
I f on ly the F ed eral government had a sim ilar view of home care as a co st
containm ent measure* We implore you as leaders of Congress and those business
lead ers here to urge the current Administration to take a more reasoned view in
this area.
We have approached the Health Care Financing A dm inistration (HCFA) to help
r e c t ify some current inconsistencies in their fiscal interemediaries' application of
the "interm ittent care", "homebound", and "sk ille d nursing" criteria. I will not
belabor you with technicalities. Suffice it to sayt HCFA has not been responsive
to our requests to stabilize the current home care benefit.
We have not advocated the expansion of home care - though there is strong
eviden ce to expand it for co st-sa v in g s purposes to respiratory care, nutritional
c a r e , and p e d ia tr ic home c a r e . Instead we have asked HCFA to ration aly
adm inister the current benefit so that it will complement the DRG system and our
overall health care system . Under the D R G s, a fa ilu re to have a rational and
adequate home care b e n e fit w ill only re su lt in more h ospital réadmissions —
something which w ill in cre a se hospital costs and defeat the cost savings goal of
DRGs.
The response we have received is that it doesn't make sense cost-w ise. HCFA
asserts that the Medicare home health benefit is the fastest growing portion of the
M edicare budget and, as such, must be limited. They take this view even though
home health represen ts only 3.5 percent of the overall Medicare budget and their
own d ata show s on ly a 2.5 percent rate o f o v e r u tilz a tio n . They r e fu s e to
r e co g n ize that the growth in home care has been facilitated by the growth in the
e ld e r ly p o p u la tio n , the growth in the number o f home health agen cies in to
p r e v io u s ly under or unserved areas, p e o p le 's p re fe r e n c e for home care over
institutional care and the growth of technology which now enables more procedures
to be perform ed at home that p re v io u sly were ex clu sively done in institutions.
F u rth e rm o re , the gov ern m en t n ev er has attempted to qu an tify the c o s t of
institutional care without home care.
In addition to not recognizing the co st-e ffe ctiv e benefits of a rationally-designed
home care b e n e fit, the government has fa ile d in several other ways. First, in
devising the DRG system they did no analysis of the potential impact on home care
p rov id ers, b en eficiaries and other parts of the health care system. This analysis
w ill be done ex-post-facto, if at all. We believe it is ill-advised to think that by
tinkering with one part of the system (i.e ., hospital inpatient serv ices under
M edicare) you will make a difference without dealing simultaneously with the rest
of the system — SNFs, ICFs, home care, HMOs, and physicians.
The government also has fa iled to assess the impact of its excessive regulatory
and paperwork burden on health care providers. Despite alleged efforts to reduce
paperwork, many regulations are prom ulgated w ithout a valid and reliable cost
im pact assessm ent — as w itnessed by the recent ODR phaseout regulations, the
fin a l hospice regu lation s, and the DRG regulations themselves. My agency and
others have*Vone studies which indicate that the "opportunity cost" for completing
various form s and other regulatory requirements is 30 percent of our costs. By

3 7 -2 6 4 -

85 -




12

174
" o p p o r tu n ity c o st" I mean the value of revenue or service we fo r g o as a result of
having to comply with e x ce ssiv e government regulations*
We need the sam e l e a d e r s h ip on this is s u e in C o n g r e ss that w e 'v e had in the
p riv a te b u s i n e s s , labor and health insurance industry. We no longer can continue
our in stitu tion al care b ia s . It c o sts too much money and, in acute care situations,
d o e s n 't n e c e s s a r i l y p ro v id e b e t te r q u a lity c a r e . We hope y o u 'll jo in us in our
e f f o r t s to open the e y es o f C o n g r e ss and the A d m in is tr a tio n t o the n eed to
reverse this ill-c o n c e iv e d p o licy .
Thank you.




175
Senator Jepsen. Thank you.
Dr. Nelson, it’s been suggested that while there’s presently a short­
age of physicians in many parts of the country, within a few years
we may have a tremendous oversupply of physicians.
What does the American Medical Association see happening in
this area and are we going to have an oversupply of doctors in the
not too distant future, do you think?
Dr. N e ls o n . There is no question that there is a rapid increasingly
supply of physicians. That can be counted fairly accurately. The
problems come in accurately projecting what the needs will be. There
are some full-fledged specialties now with busy physicians doing
procedures that weren’t even contemplated 20 years ago. Who could
have foreseen the amount of coronary artery surgery that’s being
done by thoracic surgeons, for instance, today? The imagary tech­
niques in radiology, who could have foreseen that ?
The difficulty comes in understanding what the needs will be. The
American Medical Association has a position that market forces will
eventually deal with the problem of increasing physician supply, if
indeed there is an oversupply, and already we see some validation
of that concept. Last year, for the first time, there was a decrease in
the number of entering first-year medical students, for instance.
Senator Jepsen. Mr. Owen, many hospitals in Iowa and many other
parts of the country are experiencing significant declines in the patient
population. It’s not unusual to see a hospital that has 60 or 50 per­
cent occupancy.
What are hospitals doing about this decline and are we going to
see hospitals start closing their doors or wings of the hospital? Of
course, it’s obvious that in my constituency I ’m deeply concerned
about this and its primarily rural nature in the rural areas where
this problem seems to be particularly serious. What is the association
doing or planning to do about this ?
Mr. O w e n . Y o u are right, Mr. Chairman, there is a drop in oc­
cupancy and it’s occurring across the country. I think what needs to
be done is one of the things that’s coming out of your leadership and
Senator Grassley’s, and that is some allowing of swing beds which
allows the hospital that has the drop in occupancy to use those beds
for long-term care patients.
We have a serious shortage of long-term care beds and, as Dr.
Nelson pointed out, if we look and see what’s going to happen a few
years from now with the aged population, we haven’t even addressed
the problem of how we are going to take care of many of these people
in skilled nursing facilities and long-term care units.
We’ve had some crazy regulations and rules that says that the
hospital can’t use its beds for long-term care unless there’s some
legislation that allows for swing. It doesn’t make any sense that a
physician, medical staff, nurses who take care of patients with brain
surgery and open heart surgery, can’t take care of a patient who
needs some skilled nursing care. It just doesn’t make any sense.
So I feel very strongly that those empty beds that are out there in
Iowa and other parts of our country could be utilized very effectively
in a long-term care situation and I suspect—and I think I’m correct
in this—but Iowa has a very large percentage of over-65. I’ve forgotten
where you rank as a State, but it’s within the top five States, almost




176
next to Florida. And I suspect that, although we’re seeing this drop
in occupancy occur right now because of the DRG svst^m and what
have you, we will see with the aging and the growth of the population
that those beds will be needed again. And to close hospitals down and
run out of business doesn’t make any sense when they could be used
for long-term care and other kinds of health care.
Senator J ep sen . Thank you, Mr. Owen.
Mrs. Suther, as you may know, I’ve long been an advocate of in­
creased utilization of home care to contain costs. One of the arguments
I run into quite often with the people here in Washington is what I
call the woodwork problem. You may call it something different, but
what this refers to is the assumption that expanding home care pro­
grams will be making services available to people who otherwise would
not be utilizing the health care network and so even though the individ­
ual cost of home care may be less expensive, the aggregate costs of
health care will increase because people will be using the services.
Would you care to comment and take a moment to respond to the
so-called woodwork argument ?
Mrs. S u t h e r . I think it’s an invalid argument. Certainly, there
would be a few people that might access the system that would not
normally access that system, but I think that you’re aware that the
gatekeepers of home heath service are the physicians and the hos­
pitals and we do not receive referrals unless they are already under
medical supervision in home care. We must have physician referral.
So the person is already receiving medical services of some kind.
The greatest portion of our referrals come directly from hospitals
and these people are already in the health care system. We are not ad­
vocating opening the gates totally. Of course, I guess this is one of
the things that makes home care a little different in the competitive
force because the consumer is not the patient or the end user of the
service. The consumer is the go-between or the intermediary because
all of the services for home care are controlled by the physician.
Senator Jep se n . Any comment on that, Dr. Nelson?
Dr. N e ls o n . Well, first of all, I’m a big fan of the appropriate use
of home health services, but it’s indisputable that the patient who
has been informed of the availability of home health services and
who requests of their physician that those services be made available,
the physician will comply with the patient’s wishes because, after all,
that’s his job. He’s the patient’s advocate. He’s not the rationer of care.
He’s the provider of care. And unless there is some component of the
care that’s harmful to the patient, the patient’s physician will accede
to their wishes and that’s the way it ought to be.
It gets back to the point I made about the demand for care. Patient
initiated demand is something we don’t pay very much attention to.
I f a new drug for arthritis hits the late press, I can expect a whole
host of phone calls the next day from my patients who want to ask
about that. And as we publicize the availability of home health services
in a community, we will have more and more people who will ask for
that, and it may be totally appropriate. As a matter of fact, perhaps
that’s where we ought to make our investment. Perhaps society wants
the advantages that come with good home health care. I personally
do. But I don’t think that we can apriori assume that that will decrease
their costs.




177
Mrs. S u t h e r . Primarily, only if home care is used in lieu of other
services, more costly services, that’s the way costs could be decreased,
not if it’s used in addition to the normal usage pattern.
Mr. O w e n . If I could just comment for a second on that and other
things related to it, it seems that in most studies that we have seen that
where the patients themselves participates and then has a choice to
make, if a third party payer is paying for the patient, he’s not so apt
to choose what’s the most appropriate place to go. If he has the choice
between paying the hospital bill or paying for home health care and
it’s coming out of his pocket or he has some relationship to that, he
more than likely will choose home health care because it’s less expen­
sive, and he probably should. If, however, somebody else is paying the
bill, the chances of him using it are slim.
A good example. I recall in the case in New Jersey where there was
a rate review for Blue Cross and I happened to be at the hospital associ­
ation up there at the time and a union steward in a shop in New
Brunswick was talking to me about their Blue Cross coverage for the
workers in that particular plant, and in one case One of the workers
needed a berium enema. And he said, “If he goes to the doctor and gets
that it’s going to cost him $50 and he loses a day’s work. If he’s admit­
ted to a hospital, he will be there 3 days, his work will be paid for, and
Blue Cross will pick up the total cost.”
Now the shop steward says, “What am I going to say to that
worker?” And you know what he would say and probably most of us
would say.
So the whole system has been designed to overutilize. I think that’s
what makes the difference when we look at what is the most appro­
priate care when people have to make that selection.
Senator Jepsen. If you could and would give me a one-liner as to
your opinion of the national commission studying and developing
health care policy in this country that was talked about earlier this
morning, Mr. Owen ?
Mr. O w e n . I think we would like to see—although we have no strong
objection to a commission, we don’t think there’s going to be a whole
lot accomplished by that. We would rather see things left alone for
at least a year and see what happens in medicare and see what effect
the DUG system has on the rest of the payers, and then after that
year is up—because we are seeing some remarkable things happen,
and now to change something before we’ve had a chance to try it out,
it seems premature.
Senator Jepsen. Dr. Nelson.
Dr. N e ls o n . We would prefer to see that kind of activity which is
largely factfinding and advisory done within the private sector and
then let our elected Representatives in Congress do their job based
on all of the needs.
Senator Jepsen, Mrs. Suther.
Mrs. S u t h e r . Our association hasn’t taken a position on it, but
personally I feel that that commission probably would not be any
more beneficial than some of the others in the past have been, and
I also prefer to have on factfinding groups people with pragmatic
attitudes toward health care delivery as a business look at this whole
problem.




178
Senator J ep sen . D o any of you have a closing statement for the
record ?
Mr. O w e n . I’d just like to thank you, Senator, because I think this
was a good hearing and it was well done and needed to be done.
Dr. N e ls o n . The AMA went through a very laborious exercise with
the Cost Management Commission on Cost of Health Care who pub­
lished its finding in 1976 or 1977. Many of those findings have sub­
sequently been implemented. Some are yet to be implemented. We
would be happy to send you a copy of that.
Senator J ep sen . I thank you.
Mrs. S u t h e r . I thank you very much for inviting us today.
Senator Jep sen . Thank you for coming. Thank you all.
^Now we will go to panel 4. The last witness will be the representa­
tive of the Health Insurance Association of America [HIAA1. The
health insurance industry does not fall into the category of either
consumer or provider so it was not included on our earlier panels.
It also has a perspective on health care costs different from that of
individual businesses. Consequently, it was felt that HIAA, the
Health Insurance Association of America, might try to wrap up the
hearing and bring it all into perspective.
Mr. James Dorsch.
STATEMENT OF JAMES A. DORSCH, WASHINGTON COUNSEL,
HEALTH INSURANCE ASSOCIATION OF AMERICA

Mr. D o r s c h . I do appreciate being here and it’s a real honor to be
the last panel. You have had a very excellent hearing. You’ve had
extensive and exhaustive comments, remarks, facts, and figures from
employers, and the consumers, particularly on the extent of the prob­
lems caused by the rising cost of health care. I will not try and repeat
or replicate that.
I will say, however, that I do not believe they in any wav over­
estimate the problem. It is a real problem and the rising cost of health
care is the major concern of the Health Insurance Association of
America.
With that, I think I would prefer just to have my full statement
entered in the record, if that’s all right, give you a very brief sum­
mary, and then go on and take questions and see if I can be of help.
The HIAA is pleased that you are raising the issue of the rising
cost of health care so soon after the passage of H.R. 1900, the Social
Security Amendments of 1983.
The change in payment basis under medicare would probably not
have been proposed were it not for persistent, rapid increases in health
care costs in recent years.
We have supported prospective pricing for years and we apnkud
the passage of H.R. 1900 last year. However, these increases and their
effects on Government programs are just as applicable to the insurance
coverage purchased by emplover for their employees, by individuals
for themselves, and by the self-insured. As a result, when combined
with medicare underpayments, which we call cost shifting, health in­
surance premiums are increasing annually at rates which range from
15 to 30 percent depending on the size and location of the business. In
some cases, even more. These increases are ultimately shared by the




179
employers, employees, and consumers and adversely affect the health
of American industry.
We’ve had solutions for it which emphasize State programs for cost
containment based on Federal criteria. We particularly commend the
Congress for its recognition of qualified State programs as an alterna­
tive method of medicare payment under the Social Security Amend­
ments of 1983. We urge von now to adopt positive incentives to States
to develop their own qualified programs for all patients.
One such incentive would be a medicaid reward for those States
which enact qualified programs, similar to the reward in present law
for States which had hospital cost-containment programs in place
on July 1, 1981, but which would provide no reward for any State
tha t put in the program after that date.
We further urge the Congress to take the next step on prospective
pricing—that is, to enact legislation extending a hospital prospective
pricing system to all payers, not just medicare, to take effect 4 years
after the date of enactment in any State which has not enacted a quali­
fied State program of its own. Such legislation would give every State
time to enact legislation suitable to its own particular needs and yet
guarantees that all of our citizens o-et the protection they deserve.
What we would like to see, Mr. Chairman, is a level playing field for
all third party payers, including medicare and medicaid. When medi­
care pays less, private payers pay more—in effect, constituting a hidden
tax on nongovernment patients which is expected to be $8.8 billion in
1 9 8 4 ‘

We would like to do more ourselves by way of negotiation with hos­
pitals to contain costs, but individually, the commercial health insur­
ance companies are too economically dispersed to have sufficient lever­
age to be effective in those negotiations. Collectively, they are pro­
hibited by Federal law.
We would like to change that and specifically request congressional
authority to share data and engage in joint cost-containment activities
such as negotiating with health providers and the development of
phvsician profiles and patterns of care.
We support, therefore, S. 2051, introduced by Senator Arlen Specter,
which would give insurers that authority.
On the other side of the cost-containment coin, Mr. Chairman, the
administration has asked Congress to levy a tax on employee health
plans as part of its fiscal year 1985 legislative program.
The health insurance industry opposes this proposal as discrimina­
tory, unfair, and one that will do nothing to stop health care cost in­
flation.
A prospective all-patients system will force cost-saving incentives
into the structure of hospital payments and operations and will have
many times the impact of the Band-Aid approach of taxing workers’
health insurance premiums.
We very much appreciate this opportunity to present our views and
I would be very happy to take any questions.
[The prepared statement of Mr. Dorsch follows:]




180
P repared St a t e m e n t of J a m e s A . D oesch

M . name is James A. Dorsch, Washington Counsel of the Health Insurance
y
Association of America.

The HIAA is a trade association of approximately 325

companies which together write over 8536'of the country's commercial healtn
insurance.

We appear today on their behalf.

We are pleased that you are raising the issue of rising health costs

:

shortly after the passage of K.R. 1900, the Social Security Amendments of 1983.

The recently enacted law serves as a good starting point for discussion
of the issues.

It changes Medicare's hospital payment for the present

retrospective determination of incurred costs to a system of prospectively
determined prices.
desirable.

We agree that this change in incentives is highly

In fact, prospective payment may be our last chance for a

competitive-solution to rising hospital.costs.
pricing system applies only to Medicare.

However, the new prospective

Any system that does net apply to

all patients wiii not proGucs the desirec cnanges in hospital behavior.

The change in payment basis under Medicare would probably not have been
proposed were it not for persistent, rapid increases in health care costs in
recent years.

These increases and their effects on government programs are

just as applicable to the insurance coverage purchased by employers for their
employees, by individuals for themselves, and by the self-insured.

As a

result, annual health insurance premiums are currently increasing at rates




181
which range from 15 to 30 depending on the size and location of the business,
ihese increases are ultimately snared by the employers, employees and
consumers and adversely affect the health of American industry.

A prospective pricing system which applies only to Medicare will
admittedly hold down Medicare outlays, but hospitals could simply shift to
other payers.

If the change to a prospective system provides the right

incentives to hospitals to voluntarily control health care expenses, and we
agree that it does, such a change is equally needed by those who are not
eligible for Medicare.

The existence of qost shifting has become well-documented since our
industry publicly identified the problem a couple of years ago.
*
totalled $5.8 billion in 1982.

Cost shifting

According'to our latest estimates-, the cost

snift will grow to $8.8 billion in 1984.

As a logical business practice, hospitals recoup reductions in.Medicare
and Medicaid reimoursement by inflating charges to private patients.
who are insured faced higher premiums.

Those

Those who are not - such as laid-off

workers who have lost their insurance - are faced with a ruinous hidden tax
exacted at a time when they are least able to pay - a tax on their already
sky-rocketing .hospital charges.

Without government action on an all-payer -

system; all private patients remain vulnerable to an unprecedented and
financially intolerable level of cost shifting.




182
In theory, prospective payment leads to cost containment because
hospitals will work with physicians to voluntarily reduce length of stay and
ancillary services.

The incentive for such behavorial changes is profit;

hospitals will finally be able to get more money for doing less.
hospitals say such changes take time and substantial effort.

But

In practice,

hospitals will find it far easier to cost shift than to cost contain.

We support federal legislation that effectively protects private patients
from additional cost shifts.

Such protection could take the form of a

residual prospective payment system for all-payers.

While such a system would

provide cost containment incentives, it need not produce savings to the
private sector in the short-run.

Furthermore, an all-payer system would not

necessarily require that all-payers initially pay the same price for hospital
services.

But discounts ought to be justified by savings to the hospital and

be available to all hospitals.
would be appropriate.
this principle.

For example, discounts for prompt payment

Government patients in Maryland are an expeption to

While sharing in all costs to the hospital including

uncompensated care, they are eligible for an additional allowance in order to
stay within the aggregate federal cap required under the Medicare waiver.

I would like to shed some light on arguments against an all-payer
system.

The Administration says that we private insurers will piggyback on

the Medicare DRG prices once we recognize that we are paying too much for
hospital care.

Mr. Chairman, we already know we are paying too much but we

are unable to pay less under a combination of current federal policies that
generate cost shifting while prohibiting joint negotiation by insurers.

We

are caught between the competitive forces in the insurance market and the
failures in the non-competitive hospital industry.




Current comprehensive

183
benefit contracts with employers would prohibit us from limiting our payments
to -hospitals to the Medicare rate because hospitals would bill employees for
the difference.

Employers and employees have made a conscious decision to

elect comprehensive medical benefits in 90% of our group business.

If, in the future, an individual insurance company only offered to sell
plans which limit benefits to the Medicare DRG rates, employers would again
exercise their option in the free market to buy comprehensive benefits from
'another insurance company.

What if the federal government intervened in the

competitive health insurance market and prohibited the selling of
.comprehensive medical benefits; would you then indirectly succeed in
controlling hospital costs?

No, hospitals would charge patients all that the

market would bear above the indemnity amounts.

Many hospitals would soon finí

their solvency threatened as bad debts amounted.

- You may ask whether we negotiate with hospitals to accept less than their
charges as full payment.

Hospitals have agreed to such requests to

voluntarily reduce their revenues only where an employer or insurer has
sufficient volume to force acceptance.

Some Blue Cross plans so dominate

their local areas as to be successful in obtaining such volume discounts.

For

the vast majority of the country, however, neither the insurance company nor
- the employer has sufficient local volume to negotiate charges and thereby
prevent cost shifting.

To drive home the point, the Prudential, which is the'

single largest private health insurer in the country, has only 4 6 of the
9
. private health insurance market', and..that is spread over 5 0 states.
.

We are

toó dispersed to negotiate individually and we are prohibited by antitrust
laws from negotiating jointly.




184
Experience validates our frustrations over cost shifting.

Experience has

also shown that second-opinion surgery, ambulatory benefits and other coverage
designed to reduce utilization are successful but alone have limited impact.
Finally, experience with State prospective payment systems demonstrates their
effectiveness in containing aggregate health care costs.

This is a developing area and no one yet can claim to have all the
answers to the questions of a single hospital payment reform system.

In fact,

two of the oldest and most effective systems, the Maryland and New Jersey
programs, operate quite differently.

HHS recently granted waivers to New York

and Massachusetts, two of the nation's high cost states.

In both of these

states, all parties with a direct stake in hospital payment change— providers,
employers, unions and insurers— actively participated in designing a
solution.

Both are implementing approaches different from those in Maryland

and New Jersey.

We believe all of these different approaches will lower costs

and produce useful comparisons.

The federal government's past role as a catalyst has helped encourage
variety and innovation.

We believe this is the prime role for the federal

.government, and should be continued.

We applaud and commend the Congress for

its recognition of qualified state programs as an alternative method of
Medicare payment under the Social Security Amendments of 1983.

We urge you

now to adopt positive incentives to States to develop their own qualified
programs for all patients.




185
One such incentive would be a Medicaid reward for those States which
enact qualified programs similar to the reward in present law for States which
had hospital cost containment programs in place on Ouly 1, 1981.

A modest

Medicaid reward would be most appropriate for those States which are moving
ahead to help solve a national-problem-health cost-Inflation.

It would be a

fitting way to attack a national problem at the State level without a new
Federal bureaucracy.

It would be a fitting reward to those States which, by

holding down rising health costs, are taking action to hold down the number of
citizens forced into Medicaid and other public assistance programs by health
care inflation.

Such a proposal need not, in fact, should not,- require the

States to set-up hospital rate setting commissions.

It need not, and should

not, require any* particular type of program, rate-setting, DRG, or otherwise,
as long as the State program meets the criteria set forth in the Social
Security Amendments of 1983.

y We further urge the Congress to take the next step on prospective pricing
- to enact legislation extending a hospital prospective pricing system to all
payers, not just Medicare, to take effect four yeais after enactment in any
State which has not enacted a qualified State program.

Such legislation would

give every State time to enact legislation suitable to its own particular
needs and yet guarantee that all our citizens get the protection theydeserve*

It would also provide, a stimulus to those who pelieve our problems

are best solved at the State level to move ahead and get the job done so there
will be no need for a Federal all-payer-program,.

We also recognize that any over-all solution to the problem of rising 5
health costs requires a reconciliation of the vital interests of a number of




186
important segments of our society.

Therefore we continue to support the

appointment of a Presidential Commission, upon which all of these interests,
providers, insurers, employers, and unions, among others, can be represented
and which can be charged with the constructive resolution of the conflicts
which make this problem so intractable.

Mr. Chairman, the health insurance business shares your strong commitment
to cost containment.

There is more we would like to do ourselves.

Nevertheless, we find that we must struggle under some formidable handicaps.
The field on which we compete is strewn with regulatory and economic obstacles
that significantly interfere both with our ability to serve our customers and
with efforts to improve the efficiency of the health care financing and
delivery system as a whole.

Put another way, what would the insurance industry like to do and what
are the barriers to their doing it?

Let us first identify these handicaps, all of which are externally
imposed upon us.

Then we will return to a discussion of each of them.

Unlike

■
the noninsured plans with which we compete, we are subject to stringent state
régulation.

Our product design creativety is also stifled by a range of

provider protection laws.

Unlike our chief competitors in many instances, we

pay state premium taxes and federal income taxes on the earnings on our
reserves.

In addition, the highly competitive nature of our business and the

antitrust laws preclude us from collaborating effectively for cost containment
purposes.




187
If the eficiency of our health care system is ever going to be improved
tnrougn more meaningful patient participation, we must first make certain that
tne choices available to consumers are not economically biased because of
governmental constraints.

When individuals or employers choose a third party

payment mechanism, the choice should be among realistic alternatives.

This is

not fully possible today.

What we would like to see is a "level playing field" for all third party
payers, including Medicare and Medicaid.

When Medicare pays less, private

payors pay more— in effect constituting a hidden tax on non-government
patients which is expected to be $8-8 billion in 1984.

This cost shift severely impedes the ability of private payors to compete
witn government programs under Medicare voucher system such as that proposed
by tne Administration.

we want Medicare to pay on the same basis as other payors.

The provision

in the recently-enacted Social Security Amendments providing for Medicare
recognition of qualified state hospital payment programs is a major step in
•the right direction.

Another -possibility would be to require Medicare-approved hospitals to
allocate equally among all private patients that portion of their budgets not
reimbursed by Medicare or Medicaid.




-

'

.

188
Second, as with the Medicare cost shift, state regulation does not apply
evenly to various classes of payors.

Employers that self-insure employee

welfare benefit plans are exempted from state regulation by the preemption
clause in Section 514(c) of ERISA.

Such noninsured plans are not subject to

the myriad legislative and regulatory requirements imposed upon insured
plans.

These requirements, which vary considerably from state to state,

typically include a wide range of mandated benefits, free choice of provider
provisions, and continuation of coverage and conversion options which are.
often quite costly.

Employers may avoid these obligations as well as the

necessity of maintaining reserves and paying premium taxes simply by not
insuring their plans.

In order to nurture competition in the health care field, we should
assure that all competitors are subject to the same rules.

Insurance laws and regulations serve a beneficial purpose in protecting
the insured public.

However, ERISA now precludes the states from regulating

the affairs of noninsured health plans, but at the same time the federal
government has failed to regulate these health plans.

It is also a very real impediment to innovative plan design by insurers.

We recommend that Congress require that state taxation and regulation
apply equally to all funding mechanisms.
of federal for state regulation.

We are not proposing a substitution

However, our business does support, for

example, Section 3605(a)(ii)(I) of S.1541 (the Retirement Income Incentives




189
and Administrative Simplification Act, introduced by 5enator Nickles) which
would amend ERISA to preempt state mandated benefit laws for insured as well
as for non-insured employee benefit plans.

This simple change would be a

first step along the way to more equitable competition and more rational
benefit design.

We would like to set up programs in every state, as we have done in
Connecticut, to guarantee the availaoility of health insurance to all
individuals.

However, again, ERISA is a major barrier to our seeking state

laws setting up tnese programs.

We feel strongly that all competitors In the

employee healtn benefit market should share proportionately in any program
losses.

However, ERISA preempts state laws to the extent those laws require

self-insured plans to participate in these state programs.

Tnus, self-insured

plans are effectively shielded from the economic burden of the guaranteed
availability programs, a burden which falls on an ever-decreasing base caused
by existing legal barriers to equitable competition.

The program could be

solved either by an amendment to ERISA or oy legislation authorizing insurers
to set u such pools and requiring all employee health benefit plan funding
p.
mechanisms to participate in such a pool as a condition of income tax
deductibility or by otherwise requiring self-insured employers to participate
in such programs.

In a similar vein, there are any number of state laws enacted to protectthe interests of different classes of providers.

These laws often operate to

prevent the establishment of preferred provider plans by insurers and stand in
the way of negotiations between insurers andproviders.v They essentially

37-264 -

85 -




13

190
preclude any insurer from restricting in any way any beneficiary's "freedom to
choose" any health provider the insured wishes.

An interesting experiment is

beginning on this subject in California; and we should know before too long
whether competition among providers will be enhanced by California's new law
allowing an insurer to negotiate with providers.

Note, the California law

still does not allow more than one insurer to jointly negotiate.

Last, we would like to share data and engage in joint cost containment
activities, such as negotiating with health providers, the development of
physician profiles and patterns of care, and other such activities.
Specifically:

1.

Insurers should be authorized jointly to collect, analyze and use

information on the quality, cost, or utilization of health care services,
including the development of reasonable, or preferred utilization
practices as guides for insurance reimbursements to providers.

In other

words, commercial insurers should be able to join together to assemble
data.

2.

Insurers should also be empowered collectively to negotiate with

health care providers to develop utilization standards.

It should

further be possible for insurers jointly to contract with review
organizations to provide peer review and concurrent hospital review for
private patients and to provide data to such organizations.

For that reason the Health Insurance Association strongly supports
S. 2051, introduced Dy Senator Arlen Specter.




191
Senator Specter's bill will, for the first time, allow insurance
companies to cooperate in collecting, sharing and using important health care
data to analyze costs and quality.

That data, in turn, can be given to

consumers and employers, thus helping them make more educated health care
decisions.

And finally, the bill will give those who pay for hospital care

the ability to join together to'negotiate for better rates and care without
violating federal law.

Most significantly, the bill satisfies two important criteria in the
nation's fight to control rising costs:- First, it creates competition among
hospitals, and second, it is a private sector initiative requiring no taxes,
no government intervention and no additional burden to patients, consumers or
employers.

Employee Health Tax -

*

£

On the other side of the cost containment coin, Mr. Chairman, the
•Administration has asked Congress to levy a tax on employee health plans as
part of its F.V. 1985 legislative program.

The health insurance industry opposes this proposal as discriminatory,
unfair, and one that will do nothing to stop health-care-cost inflation, nor
will it raise the revenue suggested as labor-management negotiations rearrange
the employee benefit package.




192
Among the arguments against such a tax are a following:

It penalizes older workers. Elderly groups tend to use health care more
frequently than younger, healthier workers.

Hence, the cost of health

insurance for a group which includes more than the average number of
older workers not only will be higher but could discourage many employers
from hiring the older worker.

Under the Administration porposal, these

groups will be adversely affected by a cap, while younger groups with
similar coverage may not be taxed.

It penalizes those in hazardous, high-risk occupations. Some groups,
such as iron workers or coal miners, are usually considered a higher
"risk," and are typically charged higher health insurane premiums.

These

groups could be unfairly taxed while other groups with similar
coverage— such as clerical workers— would be unaffected.

It is a form of "double taxation."

The Health Insurance Association of

America estimates that Medicare and Medicaid payment practices will
result in $8.8 billion being shifted to patients covered by private
health insurance in 1984 to make up for government underpayments to
hospitals.

For the government to shift these costs to the private sector

and then put a tax on the resulting higher insurance premiums is patently
unfair.

It unfairly affects certain geographic areas. Tne cost of health care is
higher in some areas, such as large metropolitan cities.

A single

national tax cap does not take geographic differences into account, and




193
thus would particularly penalize those in high-cost areas.

Conversely,

it would allow the tax-free purchase of much more generous benefit plans
by those in low-cost areas.

*

It coulo result in reduced coverage for preventive care services. As
employees scramble to reduce their overall premium rates, essential
preventive care services such as dental care, vision care, mental health
benefits, and alcohol and drug abuse services may be dropped.
from benefit
plans.

Dropping .these benefits does nothing to reduce hospital costs,

and in the end may.have the opposite effect.

-

- Mr. Chairman, all of those in the private sector who have the most to

gain'from effective hospital cost containment - the employers, the unions, the
insurers - in essence, all of those in the private sector on the paying side
of the equation - say the employee health tax will be ineffective in curbing
rising costs and are opposed to its enactment.

It is a fact that the medical expense people fear most is hospital
expense, and It is hospitalization.insurance that will be the last, and least,
effected by this proposal.




194
The most sensible approach to keeping hospital costs under control is
prospective payment reform that applies to all patients, not just Medicare
patients.

Rising costs are not just a Medicare-Medicaid problem but a

national health care problem as well.

A prospective all-patients system will

force cost-saving incentives into the structure of hospital payments and
operations and will have many times the impact of the band-aid approach of
taxing workers' health insurance premiums.

We are beginning to see that prospective payment systems that include
all-payers, including Medicare, now in place in four states, can work.

There

is no reason why the Congress should try the untested theory of taxing health
insurance premiums— and every reason why it should not.

Again, HIAA and its member companies share this Committee's concern over
rising health costs.

We appreciate the opportunity to present our views.

will be pleased to respond to questions.




I

195
Senator J epsen . Would you support the idea of a national health
policy commission which was recommended by Mr. Califano earlier
today ?
Mr. D o r s c h . Yes, we would. We have suggested in that past a
Presidential commission composed of all the parties at interest, feel­
ing that you need the expertise of hospitals, doctors, insurers, consum­
ers, employers—all these as a practical matter that have political clout
need to be part of the negotiations.
On the other hand, we also think that this is an immediate problem
and it’s such a large problem that there is no one way answer and we
would hate to see such a commission delay implementation of other
cost needed legislation such as we have already suggested.
Senator J e p s e n . A s more and more people move to the health main­
tenance organizations or the preferred provider organization systems
providing health care, what does this mean to the traditional health
insurance companies ?
Mr. D o r s c h . Well, they’ve responded in a number of ways and it’s
been a very interesting phenomenon.
First, the insurance companies, and the H I A A in particular, have
supported HMO legislation in the past and companies individually
have invested in HMO’s, both owning and operating HMO’s, or
financing them or lending them money. So they see it as a good com­
petitor. They see it as another way of helping to hold down costs.
One the other hand, while HMO’s have increased their membership
substantially, I ’m not sure that they have taken a large share of the
market as yet. In other words, we started with Kaiser right after the
Second World War, and it hasn’t been such a fantastic idea for every­
body that they have yet taken over the world. I think they may be 8
percent of the market at this point. So that in any particular area,
they have not been a real problem to insurers. It may be a problem as
younger people in any particular company switch to HMO’s, and it is
usually, we have observed, primarily younger, more mobile workers
that are more likely to join HMO’s. Older workers with higher health
costs may in fact stay with the traditional indemnity plans, assuming
the employer has a multiple choice plan.
This doesn’t present any real problem as long as the employer is
paying the entire cost of the health plan. If he’s paying both, there is
no real problem. I f there is a substantial employee contribution, how­
ever, you may in fact get some adverse selection, which means that
because the cost to the older workers go up and the cost to the younger
workers go down and you start creating economic problems within
the plan which the actuaries have to cope with.

Senator J e p s e n . D o you have any closing statement for the record?
I appreciate your testimony. It was terse and right to the point and
a good wrap-up and good creative ideas. Do you have any additional
statement ?
Mr. D o r s c h . Well, I think you’ve had an excellent spread of wit­
nesses here, many good things to say, and I think it is a problem that
does have to be faced by the Congress. I want to commend you for
taking hold of it, sir, and inviting us to be here.
Senator Jepsen. I thank you.




196
The purpose of today’s hearing was to take a broad brush look at
the health care costs and, in closing, I ’d like to try to summarize
what I consider some of the key points in this hearing.
First of all, I think all the witnesses presented some very thought­
ful testimony which will give Congress a great deal to think about.
I think we had an interesting cross-section of viewpoints that have
been beneficial. Clearly, there is a great deal of debate over the ques­
tion of whether we need to rely more on market solutions to the health
care cost problem or whether we should turn to greater regulation.
The problems we face are serious and, as was pointed out, the costs
are only going to continue to rise and the longer we wait to get at
the problem, the harder it’s going to be to make these changes.
I ’d like to mention that this is only the first in what I expect will be
a series of hearings on this topic. I think the fact that there was so
much interest in this topic is testimony in and of itself to the serious­
ness of the subject matter.
Going into today’s hearing I did not expect to be able to walk away
with the answers, but I think we’ve had some very interesting ideas
placed before us for consideration.
So I would like to take this opportunity to thank those people who
have been watching this hearing here and at home and let you know
that the committee welcomes your comments as well. I f you have any
ideas on how to get at or how to get health care costs under control
and you would like to bring them to the attention of this committee,
you can write to this committee, to Senator Roger W. Jepsen, chair­
man of the Joint Economic Committee, Dirksen Senate Office Build­
ing, Washington, DC. The ZIP Code is 20510.
1 thank all the witnesses for taking the time to be with us today and
I look forward to the continuing dialog in the days and months ahead.
I will ask that the record of this hearing remain open so that any
witnesses who wish to do so may submit additional material before
we close the record.
This hearing is now adjourned and subject to the call of the Chair.
IWhereupon, at 1 :35 p.m., the committee adjourned, subject to the
call of the Chair.]




HEALTH CARE COSTS AND THEIR EFFECTS ON
THE ECONOMY

W EDNESDAY, AUGUST 29, 1984
C on gress of t h e U n it e d S t a t e s ,
J o i n t E c o n o m ic s C o m m i t t e e ,

Washington, DC.

The committee met, pursuant to notice, at 1 :20 p.m., at St. Luke’s
Student Residence Auditorium, Cedar Rapids, IA, Hon. Roger W.
Jepsen (chairman of the committee) presiding.
Present: Senator Jepsen.
Also present: William Finerfrock, legislative assistant to Senator
Jepsen.
OPENING STATEMENT OF SENATOR JEPSEN, CHAIRMAN

Senator J e p s e n . This meeting will come to order. We should never
start anything by making an apology. Also they say if you have time
to spare, go by air, and that’s what happened in this case, but we are
glad to be here and thank all of you for taking time out of your sched­
ules, busy schedules for being here today. I would like to thank also
St. Luke’s Hospital for allowing the Joint Economic Committee to
use this facility. To our witnesses and guests, I say welcome and I
hope you find today’s proceedings both informative as well as enjoy­
able. From the looks of our agenda, we have a busy day ahead and I
will not take a great deal of time with my opening statement.
I would like to point out that this is the second in a series of hear­
ings I have asked the Joint Economic Committee to conduct on health
care costs. The first hearing was in Washington, DC, on April 12,
1984. The committee heard testimony from a wide variety of witnesses
at that time representing providers, consumers, and the health insur­
ance industry. Today’s hearing will be similar in nature except that
our witnesses will look at health care from an Iowa perspective rather
than a national perspective.
I do believe the Federal Government can learn a great deal from
Iowa. Our State has a great deal to be proud of in the area of health
care and it is my hope that this forum will provide us with an oppor­
tunity to look at some of the things that make Iowa so unique.
In many ways, the health care debate in Washington is much like
the weather, a lot of people are talking about it but nobody is doing
anything about it.
There is no question that health costs are rapidly getting out of
hand. It has now been estimated that the American people are spending
approximately $1 billion each and every day on health care costs.

(lp f
37-264 - 85 - 14




198
Several months ago, during a discussion on health care with a num­
ber of Iowans, someone raised the question: “Who’s to blame for sky­
rocketing health care costs ?”
One person in the group offered that it was the doctor’s fault, an­
other suggested that perhaps the hospitals were to blame. Still an­
other suggested that actually it was neither, but rather it was the
insurance companies that were driving up the cost of health care. I ’m
sure this is familiar and you’ve heard this type of roundrobin discus­
sion before.
But as we discussed the matter further, we came to the conclusion
that it was really unfair to blame just the doctors or the hospitals or
the insurance companies; that indeed consumers, business, and Govern­
ment were to share, if there was blame to spread around, were to share
in it as well.
I suppose the question, “Who’s to blame for skyrocketing health
care costs?” can best be answered by the cartoon character Pogo who
once stated, “ We has met the enemy and it was us.”
During today’s hearing we will be listening to the people who make
up that “ us”—doctors, lawyers, hospital administrators, nurses, busi­
ness, Government, and consumers.
As everyone in this room knows, however, rising health care costs
are more than just statistics or dollars. Health care means people. For
many years now it has been the policy of the Federal Government to
try and see that health care in this country is a right, not a privilege.
It was this obligation which led to the creation of the Medicare and
Medicaid Programs. And it is this commitment that has led to some
of the changes being made in our health care system today.
But up until now, we have tended to only look at the results of sky­
rocketing health care and not the causes. We have never had a clearly
spelled out health care policy in this country but rather depended upon
a variety of programs to come together and become a policy.
Congress and the administration now appear ready to tackle this
major undertaking with joint cooperation and working together on it.
Your insights and observations will be a key to helping us develop
an intelligent health care policy for this country. Let us learn from
your experience and make improvements for the future.
Someone once described Washington as 14 sauare miles surrounded
by reality. Well, I can’t think of a better place to get a taste of reality
than right here in Cedar Rapids, IA.
I welcome you all to this hearing and I look forward to your
testimony.
We have four panels. One is a consumer panel, the first one, the
second is provider perspectives, and the third is funding sources and
the fourth is future planning. So as you see, our witnesses today do
represent a wide variety of interests. We have individuals representing
the Iowa Retired Teachers Association, the Iowa Medical Society,
nursing homes, urban and rural hospitals, home health care, attorneys,
insurance, Government, not to mention individuals testifying from
their own experience from personal viewpoint as well as from busir
ness perspective. We will start right out with the consumer panel, and
I would like to welcome at this time Julie Beckett from Cedar Rapids,
who will be addressing a long-term care and home health needs; Jim
Shipley, chairman, State Nursing Home Association, and next to him




190
is Wayne Pos, the gentleman in the center, in the middle, with the
yellow and blue tie and the blue jacket. Wayne Pos is a legislative rep­
resentative for the Retired Teachers Association. And Denise, how do
you pronounce that?

Ms. R o q u e t t e . Denise.
Senator J e p s e n . Denise. It would help if I get the name right. Denise
Roquette, Cedar Rapids; Jean Flanagan, Cedar Rapids; and Jim
McLaughlin from Monticello. We will start with Julie Beckett, Cedar
Rapids.
STATEMENT OP JULIE BECKETT, CEDAR RAPIDS, IA

Ms. B e c k e t t . I am supposed to speak on long-term care this after­
noon mainly because my daughter was involved in a long-term care
institution at St. Luke’s for a long period of time. I am also involved
in an organization which is helping to alleviate some of the problems
that long-term care parents are having.
There are so many things to discuss when talking about long-term
care. I often wonder where to begin, but of course I have to begin with
Katie, for she is the reason I ’m here at all.
Katie’s history of being a long-term patient started 5 years ago after
a bout with viral encephalitis which left her comatose, totally para­
lyzed and progressed her to become ventilator dependent. It seems hard
to believe it’s been 5 years, but when I watched her last Thursday put
on her uniform and gather up her school things, I couldn’t believe the
day had finally come for first grade. For here was a child that a little
over 2 years ago was strapped in the confines of the pediatric intensive
care unit in this very hospital, limiting her exposure to other children,
to a loving family, to a loving community beyond St. Luke’s Hospital.
We had reached a point in which Katie’s life had become stagnant.
There was nothing more for them to do, but maintain Katie’s care at
its current level. The nurses and therapist had taught Mark and I all
about taking care of Katie’s needs, and it was proposed Katie should
go home, ventilator and all. It was a beautiful day, thinking Katie
was finally coming home after 3 years of running to the hospital three
and four times a day. You don’t have much of a family life in an in­
stitution, even with one as caring as St. Luke’s Hospital. But shortly
after the joy of thinking about having Katie home, reality set in and
dashed our hopes for a “normal” family life.
Money, “ the almightly dollar,” was going to keep us away from our
little girl. Katie had incurred such expenses in her long struggle for
life, far beyond what our insurance would pay, and had been placed on
the Medicaid roles 7 months prior to her discharge. Medicaid rules
had been allowed to apply to Katie because she was an individual and
not living under our income. When Katie left the institution her status
would again come under our dependency and we earned too much
r
money to allow Medicaid to help with further health care expenses,
even though we could never earn enough to pay for her in-house and
in-home hospital costs. We were caught in the typical “ Catch 22.” We
went through the normal channels to try and get an “ exception to
policy” from the Department of Health and Human Services. We had
to review the brushes with death that had occurred throughout Katie’s
life. We gathered statistics to show the cost effectiveness in home
health care. We did everything we could to convince them that this




200
was going to be so much better for Katie and her family if they could
allow her to come home on Medicaid status.
After a very frustrating spring, summer and fall, we received a
rejection to our “ exception of policy” plea. But, we had one person
in our corner who had taken the time to listen to Mark and I, and to
meet Katie. His name is Tom Tauke. Congressman Tauke had sup­
ported the idea of filing for an “exception to policy” and had even gone
so far as to have a staff person work with Health and Human Services
to gather statistics to show the cost-effectiveness. In late October, it
was Tom’s office that had received the rejection first. The Congressman
then took matters into his own hands by going directly to the VicePresident who was heading the Regulatory Reform Commission. Here
was a perfect example of where Government failed the common man.
The rest is history. The President learned from the Vice-President
and in a news conference on November 10, 1981, used Katie as an
example of how “hidebound regulation” forced Government to be
inhuman.
I ’m very proud to say that since then, many persons have been
allowed to receive a waiver to allow them to leave institutions and
thrive in the environment of a caring, loving home. What we have seen
from this is the prognosis improves dramatically. With Katie alone,
one area affected—her speech—has improved so much so, that she no
longer needs sign language and can be mainstreamed in a first grade
classroom where other children can learn about life of a “ disabled”
person.
Katie has been set as an example for home health care. She has
improved so much, that the ventilator which was needed 16 hours a
day when she first came home, is now only approximately 7 or 8 hours
a day. We don’t refer to her as ventilator dependent, but ventila­
tor assisted.
She still needs a daily regime ofactivity to keep her status quo and
Mark and I perform that as a part of our daily routine. It’s not with­
out worry and strain, but is all worthwhile and we would not and could
not go back to life before home health care. Everyone in this com­
munity has been affected by Katie’s progress. Everyone takes pride
in what “ we” have all done for her.
When Katie first left the hospital, all contacts had been made with
speech therapist, physical therapist, occupational therapist, vendors,
suppliers, all to meet the needs Katie had Over the years these needs
have had to be revised, but they are still in actuality. Her care plan has
been flexible enough for growth and because of that she has succeeded
to become the active participant in our society, not a burden to our
society.
What about other cases in Iowa? Well, without the coordination of
services, families cannot take on the added needs of technically assisted
children at home. We are verv lucky in Iowa to have many of those
services already in place, but it is connecting the child up to the ap­
propriate persons that does not always happen. I felt up until last
Thanksgiving that things were going fairly well, but then I learned
of a family with the same problems we had with Katie, struggling to
make it through the systems. I realized then that family support, infor­
mational resources and education of parents and professionals about
home health care needs was an absolute to successful home care plan­




201
ning in our State. Since then I have organized a SKIP chapter for the
State. SKIP means Sick Kids Need Involved People. I have worked on
the Federal level by identifying needs families are having all over the
country. I have worked to encourage other States to develop waiver
programs for all persons, and I have worked with our own State
crippled children services to establish a regionalized plan for home
health care for children with chronic long-term illness. I am hoping
with this health care plan, services will be united, working together
to help families meet the needs of their children while communities
grow in the pride of helping one another and share in the successes
as these children nurture to become responsible dedicated citizens.
Thank you.
Senator J e p s e n . Thank you, Julie. Now, Mr. Jim Shipley on the
concerns of the elderly population. I would advise the members of the
panel that your prepared statements will be entered into the record,
and you may therefore summarize or proceed in any way you may
desire, but please know that your statements will be entered into the
record, and then you can do what you want. Mr. Shipley..
STATEMENT OF JAMES E. SHIPLEY, PRESIDENT, IOWA HEALTH
CARE ASSOCIATION, ANAMOSA, IA

Mr. S h i p l e y . Senator Jepsen, ladies and gentlemen, I appreciate the
opportunity to address you today and present my thoughts and obser­
vations on the concerns our elderly population have in regard to their
current and future health needs. In my day-to-day activities as presi­
dent of the Iowa Health Care Association and as a provider of long­
term care services to many Eastern Iowa elderly and handicapped
citizens, I feel adequately prepared to present their concerns to you.
It will probably come as no surprise to you that financial security
and health are the top concerns of our senior citizens, and not neces­
sarily in that order of importance. I find that a high percentage of
our elderly are very well aware of the problem of high costs associated
with our current health delivery system. They understand that the
system will need to be changed in the future but they are apprehensive
and have questions such as:
First: What' will be the availability of future services and where
will the resources come from to pay for them ?
Second: Do we view quality health care as a right or a privilege ?
Third: Will we be able to maintain our independence in making
decisions relating to when and where we may seek services ?
Fourth: Will we in rural Iowa have access to quality and high tech
services in our home areas or will we have to relocate to say urban
areas to receive such care %
Fifth: What about quality of life? We are aware that the ability
to sustain life through the use of technology outstrips our ability to
make prudent decisions regarding when to sustain life.
These are but a few of the questions our elderly citizens are asking
but they are perplexing ones that need to be addressed in the near
future. The problem of affordable quality health care for the elderly
will only intensify in the future. Inasmuch as personal health services
are rendered to individual people, the demographic characteristics of
Iowa and the nation are basic to understanding changes in the delivery




202
of health services now taking place. This understanding is even more
crucial to planning for future delivery resources to meet future popu­
lation characteristics.
The State of Iowa is in the midst of profound demographic and so­
cial changes. These changes will alter individual and household be­
havior and directly impact the demand for health care services for our
elderly. While the population for the entire State of Iowa grew 3 per­
cent during the last decade, the number of people 65 and older in­
creased 11 percent and now represent a total of 13 percent of the State’s
total population. The younger people are moving out of the State in
significant numbers and those over 65 tend to remain in their place of
residence. Iowa now ranks fourth in the Nation in terms of percentage
of population over 65; these are the citizens whose needs for health
care will increase since statistics demonstrate repeatedly that older
people tend to need health services at least twice as often as the
younger population.
The Center for Hospital Finance and Management at John Hopkins
University commissioned a report which shows that with life ex­
pectancies increasing at their current rate, the numbers of persons
over 85 years of age will increase by 75 percent during the next 20
years for the Nation as a whole. In Iowa the population 85 and older
is expected to double by the year 2020.
With these demographics in mind, it becomes obvious that one of
the most important problems for us to solve in the next two decades is
how to balance the health care needs of a growing elderly population
against the diminishing ability of the working population to pay for
it.
What is so obviously needed is long range planning on both the
national and State levels. Within the present system it is possible
that very few services would be available to the elderly and poor
Iowans in the future as the health care expenses of our elderly are
very largely paid by Medicare, Medicaid and other Government pro­
grams. Shortages of funds for these programs will cause the Gov­
ernment to respond to the crisis. A better approach is to recognize
the problems now and develop a plan to solve the problem in a rational
way rather than to plan by default.
No one entity will be able to respond to the problem of assuring
affordable quality health care for our deserving senior citizens. It
is a societal problem which must be approached by every segment of
society. But we need a leader in these efforts and I certainly hope
our United States Senator, will assume this role. Thank you.
Senator J e p s e n . Thank you, Jim. As long as we got the microphone
down there, put it on Jim McLaughlin. James McLaughlin, emerg­
ency health care, from Monticello. Jim, please proceed.
STATEMENT OP JAMES N. McLAUGHLIN, MONTICELLO, IA
M r . M c L a u g h li n . Senator, can you put a price on the unnecessary
loss of a human life ? To the Government it may be the loss of several
thousand dollars in taxes annually. To the local merchant it could
mean products not purchased. But to the family it is a tragedy of epic
proportions—whether it be the father, not saved from a heart attack,
a mother or child lost in an automobile accident, or a badly burned fire
victim arriving too late for treatment.




203
The big news is that the air ambulance saves time and it saves
lives—and it does it day after day, year after year.
It is the chain that ties the small hospital to the larger, better
equipped city hospital. It is the reason that I am visiting with you
today, after nearly dying of a heart attack approximately 2 years ago.
Yes, I can personally testify to the speed of the bird, the dedication
and efficiency of the personnel, and the comfort that comes from
knowing that you are in competent hands and that everything is
being done for your well-being that it is possible to do.
In no way do I want to belittle the role of the local ambulances or
the local hospitals. They all form vital links in the safety chain, but
the big bird is like Superman, able to leap the tallest buildings and
ignore the busy highways below. Whenever there is an emergency,
and time is of the essence, the lifeguard ambulance needs to be avail­
able.
Traveling on the lifeguard is not something that you fear, the
attendants had me prepared and ready to depart in a matter of
minutes. I am told that it takes approximately 15 minutes to travel
from the Monticello Hospital to St. Luke’s where I was treated. I did
not time it, nor did I worry, as I had complete confidence in the men
and in their life-sustaining equipment.
In a very short period of time I was hooked to the monitoring sys­
tems of the hospital and had all their lifesaving techniques at my
disposal. But this is not about the hospital, it concerns the men and the
whirly bird who are ready to quickly transfer accident victims and
all who are in medical need to the areas of special lifesaving equip­
ment.
We have always been told that a chain is as strong as its weakest
link. The lifeguard plane is the secure link that may have saved my life
yesterday and may save yours tomorrow.
Emergencies do not announce their coming in advance. Not one of
you in this audience today can guarantee that tomorrow or in the near
future you will not be the one needing quick transportation to an
emergencv facility. I live on a farm west of Monticello and we often
see the helicopter as it passes near our farm. Two of our immediate
neighbors have also had this lifesaving ride.
I f you are asked to contribute to the air ambulance, in order that it
will always be able to fly, do so. I f taxes are needed, I can think of
no better place to use them. I f a government grant is needed, let us
urge our leaders to support it. Let us put our energies and our dollars
to a positive purpose—that of saving lives. I, for one, can endorse
that program.
Senator Jepsen. Thank you, J im . Wayne Pos, legislative representa­
tive of the Retired Teachers Association.
STATEMENT OF WAYNE POS. LEGISLATIVE CHAIRMAN, IOWA
RETIRED TEACHERS ASSOCIATION, DES MOINES, IA

Mr. Pos. Thank you. Senator, members of the panel, and friends.
Probably some of the ideas which I will proceed to give will answer
some of the questions Mr. Shipley raised and maybe some of the ques­
tions which were raised by two of the previous speakers.




204
However, all the answers aren’t here. All the questions haven’t been
asked. As a senior citizen, I feel that I have some right to speak as a
senior citizen for senior citizens. The health care industry is one of
the largest and fastest growing sectors of the U.S. economy. I just
about changed that spelling to specter. Since 1967, heath spending has
increased on average over 12 percent per year while the economy as
a whole has grown at only 9 percent per year. Health care spending
has taken a larger share of the Nation’s total resources—rising from
6.4 percent of GNP in 1967 to 10.5 percent in 1982.
In 1982 hospitals continued to receive the largest share—47 per­
cent—of the $287 billion, more than I can comprehend, spent for per­
sonal health care services. Moreover, hospital costs and revenue con­
tinued to increase at double digit rates. Over the past 5 years, hospital
room rates have increased at 2y2 times the general rate of inflation.
Over the past 3 years, Congress has enacted approximately $25 bil­
lion in Medicare spending reductions. To date, these spending reduc­
tions have been achieved through increases in beneficiary cost-shar­
ing—that is, increases in part A and B deductibles and coinsurance—
which increase their direct out-of-pocket payments for health care
services and through limitations in the amounts which Medicare pays
to hospitals and physicians. Here are just a few of the ideas I would
like to have you consider. To restrain the rate of increase in total health
care spending, the following cost containment strategy should be pur­
sued : First, the rate of increase in hospital expenditures should be lim­
ited to a fixed percentage rate that is reasonably in line with the gener­
al inflation rates. The limit once established should apply to all thirdparty payments to hospitals. Second, the economic incentives that are
causing excessive expanion of conventional medical facilities, particu­
larly hospitals, should be removed: For example, by imposing limits
on depreciation deductions when hospital/nursing homes are sold.
Third, health care service delivery should be restructured away from
acute-care institutional settings, with greater emphasis placed on pre­
ventative, community-and-home-based services, "Fourth, Government
regulatory programs with the potential to yield significant savings
should be promoted along with effective measures to promote competi­
tion in the health care industry.
Over the long run, health care delivery should be restructured to
expand the supply of needed services that represent less costly al­
ternatives to hospitals and nursing homes. Competing forms of care
delivery such as health maintenance and preferred provider organiza­
tions, small clinics, and ambulatory health care facilities of all kinds
should be encouraged to the extent possible. Greater use should also
be made of paramedical personnel—for example, geriatric nurse prac­
titioners and physician assistants—especially in under-served rural
and inner-city areas and in such neglected institutional settings as
nursing homes. For the elderly, this kind of restructuring would mean
better access not only to conventional medical care but also to a variety
of needed nonmedical, social services, like homemaker/chore main­
tenance services and nutrition counseling services.
As part of the Social Security Amendments of 1983, Congress has
enacted a prospective payment plan to compensate hospitals for serv­
ices they render to Medicare inpatients. The Medicare prospective pay­
ment system uses a case mix approach, DUG, diagnostic related




205
groups, to determine the amount of payment a hospital will receive
with respect to any particular patient case. The amount of payment
is based on rates calculated for each DRG. I f a hospital spends more
than its DRG rate for a specific diagnosis, it loses money. I f it is able
to treat the patient for less, the hospital keeps the savings. This is a
good step in the right direction.
However, hospitals will attempt to shift any unrecovered costs they
incur with respect to Medicare inpatients to non-Medicare inpatients
and their private third-party payors. This could mean that the DRG
system will have little or no impact on aggregate hospital cost escala­
tion—at least until the DRG, prospective payment plan is made ap­
plicable—as it should be—to all third-party payors.
We believe that hospitals can contain costs, deliver high quality
care and earn a surplus sufficient to maintain viability while receiving
less revenue than otherwise under the cost-plus reimbursement
method.
Physician charges are the major out-of-pocket health care expense
for the elderly. Sixty percent of physician charges are paid directly
out-of-pocket.
To help stem the elderlies’ rapidly rising out-of-pocket expenses,
gaps in Medicare benefits should be closed. An effective cost contain­
ment program, along with a substantial reduction in provider fraud
and abuse, could help pay for the extension of Medicare benefits to
include some of the currently noncovered items, and services or services
that are subject to durational limitations.
The elderly—I can speak very forcefully about this—are major
consumers of prescription and over-the-counter drugs and therefore
have a keen interest in legislation affecting drugs, especially drug
prices. Drug manufacturers are supporting legislation to extend the
term of patient protection for prescription drugs. We strongly oppose
legislation to increase the term of patient protection for prescription
drugs.
We oppose deregulating the Nursing Home Industry.
The last paragraph summarizes it all. All of us are well aware of
the rising cost of long-term care. However, that problem is associated
with the aging of the population and the cost escalating factors unique
to the health sector of the economy. It should be viewed not as a prob­
lem for the individual or the individual’s family, but as a problem for
society as a whole. Thank you.
Senator J e p s e n . Thank you. And now Denise Roquette, Cedar
Rapids, proceed.
STATEMENT OP DENISE ROQUETTE, CEDAR RAPIDS, IA

Ms. R o q u e t t e . Thank you, Senator Jepsen. My name is Denise
Roquette. I am fulltime, single, working mother with two children
ages 11 and 4. My monthly salary is $428.00. Out of that $428.00 comes
food, utilities, rent, clothing, child care; and other necessities. I hardly
have enough to meet those expenses, not to mention medical expenses.
An office call is anywhere from $18 to $25. The office call does not
include prescription if it is needed which can be as high as another
$20 to $30.




206
Just recently my daughter was very ill. Since it was after doctors’
hours, I had no choice but to go to the emergency room not once, but
twice, as well as her family doctor the next dav at a cost of $300. As
you can see, that is well over half of my monthly salary.
Physicians now require payment due with each visit. For myself,
this is almost impossible.
I ’m sure that I ’m not the only person in this situation and do not
want to quit my job to qualify for title X IX . It would seem to me for
people who are trying to maintain a job and take care of a home and
children too, there should be some kind of guidelines or a sliding scale
on what we can afford to pay. As you know, you have no choice when
you or someone in your family becomes ill, you have to go to a doctor.
I ’m not asking for a handout, as I ’m sure other people facing the
same dilemma as I am are not. However, the fact remains medical ex­
penses are and have been on the rise. Myself and others like me could
use some help. Thank you.
Senator J e p s e n . Thank you, Denise. Jodi Miller, Cedar Rapids.
STATEMENT

OF JODI MILLER, CEDAR RAPIDS, IA

Ms. J o d i M i l l e r . Thank you, Senator Jepsen. From March, 1979,
until February, 1980, I was employed by Fleetway Stores, Inc. My
hourly wage was $3.15 per hour and I worked 37y9 hours per week.
j
This was my only source of income other than $25 per week that I
was supposed to receive for child support. In a 4-week month my total
gross income—including child support, which I sometimes did not
receive—was approximately $573.
My health insurance was fully paid by the company, but my
daughter’s was not. The only additional coverage I could purchase
through the company was a family plan which would have cost an
additional $63 per month. So, I purchase a separate Bine Cross/Blue
Shield 80/20 plan policy for mv daughter which cost $40 per month.
My monthly expenses of which rent, utilities, and telephone were
shared were: $195 rent, $12 electricity, $15 telephone. My cost for
baby-sitter was $120, $120 for gas to transport mv daughter to the
baby-sitter and get me to work, $65 auto payment, $32 auto insurance
and $40 health insurance. Total monthly expenses were approximately
$599. After paying my half of the rent, utilities and telephone, I had
approximately $83.50 to purchase food and cover our medical ex­
penses, which at that time amounted to approximately $50 per month.
In addition, if I did not receive my child support for 1 or more weeks
that month, I couldn’t even cover food or additional medical expenses.
I called Social Services and filled out an application for A.D.C.
and food stamps while I was still working. I was denied any help be­
cause my income was too high. So, I felt that my only alternative was
to quit work and to go on A.D.C. My share of the expenses were then
reduced to $208.50 per month. I did not have the cost of babv-sitter
nor transportation. I received $292 per month A.D.C. and $77 per
month in food stamps. Most important though was title X I X which
covered almost any medical expense I incurred.
I would like to add that since the beginning of the year, mv family
physician cost $377, my daughter’s pediatrician has cost $177. Between
the two of us, we had four different specialists, a neurologist, Dr. Risk,




207
which cost $460; Dr. Boatman and Dr. Devine which cost $270 and
$250; and Dr. Zoler, $185. This amounts for about $1,700 since the
beginning of the year, which had I been working, I would have never
been able to pay for, and it’s been all covered from title X IX . Thank
you.
Senator J e p s e n . Thank you, Jodi. And now, Jean Flanagan.
STATEMENT OF JEAN FLANAGAN, CEDAR RAPIDS, IA

Ms. F l a n a g a n . Senator Jepsen, ladies and gentlemen, I have been
listening to the other people speak, and I have gone through an experi­
ence with my father, who was a senior citizen, passed away July 23.
I am afraid my report is a little different than some of these, because
of the situation which prevailed with us. I am here to report my per­
sonal experience with the illness and death of my father, Cleo Fahrney.
He was admitted to the hospital April 2,1984 and died in an extended
skilled care facility July 23, 1984. I realize there are reputable care
facilities with qualified employees, but my experience was a very bad
one. This care center is for veterans on extended care, private pay
people, and patients who cannot stay in the hospital due to changes
in the Medicare Program.
My father was admitted to the hospital and diagnosed as a cancer
patient. He was 86 years of age, still employed at the time he became ill
and had worked the morning he went to the hospital. I sat with him
12 or 13 hours a day every day until his death. He was allowed to stay
in the hospital 30 days, then we were told we had 3 days to take him
somewhere else, even though he couldn’t walk anymore and had lost
20 pounds. Many mistakes had been made, but the ordeal changed
from terrible to pitiful.
The following are some of the complaints I registered with the State
Department of Health: The food was of poor quality and prepared
very bad. The day the State investigated, they had people there from
the home office and a good meal was served. Medications were not given
correctly. Due to my father’s difficulty in swallowing, his pills were to
be mashed and given in applesauce. Charts are not referred to many
times, and I would have to tell them this had to be done or he would
choke.
One day when I arrived, he was trying to eat his breakfast and
they had put his teeth in upside down. There was a great misuse o f
enemas, laxatives, and suppositories. People were given them and left
to go in the bed or left in the bathroom for a long time. When we first
arrived, my father was left in a bathroom for 2 hours in the middle
of the night. He called for help until he was hoarse. When it was re­
ported, a rude response was given back that he should have turned on
the light. I checked the light and found the cord was broken. I felt
it had been that way some time because the cord was frayed. He also
was left on bedpans for long periods and given enemas and left with
the result in his bed. He never complained, but he would ask me for
help. After it was discovered he was allergic to the suppositories used,
his doctor gave orders never to use them again. During the night, not
once, but on two different occasions, he was given a suppository. He
went through terrible suffering from this. They either didn’t check
the chart or ignored the doctor’s order. One of the aides told me she




208
was so sorry and she had begged them not to do this because she had
seen it on his chart.
I have observed many instances of what I consider abuse and will
leave this information for you. My feelings in this are not only per­
sonal for a terrible ordeal by my father which he had to endure, but I
have lost two fine husbands in war, fighting for this country and what
it stands for, and something is wrong that we are letting our sick and
elderly people and ailing veterans go through this kind of treatment.
The door is open for unscrupulous people to use the life savings of
people who need care but instead are receiving misery or even death.
The State Department of Health does investigate complaints and
requests correction. However, this course of action would not be neces­
sary if they were more closely monitored. It is correct Medicare has
been misused, but there must be some other way to correct the situa­
tion other than what is happening now. Compassionate health care for
our sick and elderly must not only be a goal, but a commitment.
Senator J e p s e n . Thank you. Ms. Beckett, every time I hear Katie’s
story, it reinforces my belief that one of the great things about this
country is that one person can make a difference. And so often we be­
come cynical and begin to believe that unless we are part of a large
organization or some big movement, we can’t change. But your story
reminds us all that with dedication and determination, you can make
a difference, and it also reinforces the fact of regardless of what a per­
son’s lot in life is or his responsibility is, his or hers, or what title they
may have, that people are, the bottom line, for the most part, are very
caring and compassionate and do whatever they can. The organization
you mentioned, the SKIP, which is Sick Kids Need Involved People,
is that established nationwide now or have you got this local ?
Ms. B e c k e t t . It’s a national chapter, but it’s only established at this
time in 14 different States and there are three chapters in—
Senator J e p s e n . What’s its primary funding source?
Ms. B e c k e t t . Well, at this time, it’s working through a couple of
demonstration grant projects, mainly through the Department of
Health and Human Services but it has also received Federal funding
grants, from various private funders from the private sector.
Senator J e p s e n . I suppose the last question I could ask is what
should the Government be doing to be more responsive to the needs
of the future Katie Becketts ?
Ms. B e c k e t t . I think at this time the Government is working very
closely—I think there are people, at least that I am working with, are
able to listen to the parents that are out there in terms of home health
care. What we need to do on a State by State basis, and that’s why it’s
been established that way, is to allow the parents that are in those
States to express the problems that are going on and get the answers
to those questions, to get the professional with the family so that the
problems—for instance, one of the problems that we found here was
with a vendor-supplier that one of our families had, and in the middle
of the night the little girl needed oxygen—well, she needed to be suctioned. She could breathe, but she needed to be suctioned to clear
herself.




209
And the machine broke down in the middle of the night and the
mother called the vendor and said my suction machine is broken, I
need a suction machine, and he said I am not a 24-hour vendor so 1
am not coming out. And she was—you know, she basically didn’t know
what to do. So she called me and I said take her back to the hospital.
I mean there is nothing else this girl could have done at the time. The
suction machine was broken, the girl cannot make it through the night
without being suctioned several times, and yet the promise was made
by the vendor that he was a 24-hour dealer. Well, that’s not right and
those kinds of situations have to be resolved. The families them­
selves have to realize who are the appropriate people that they need
to get out here, and so that’s what SKIP is mainly doing, is working
as informational and referral for a lot of the parents, as a family
support, and also to educate parents and professionals that home
health care can work as long as the services are out there and those—
the needs that these people have can be met. I mean in Iowa especially
there are so many services already out there, but it’s just connecting
the person with the service. Does that help answer your question ?
Senator J e p s e n . D o you want to make any comments,-Mr. Shipley,
on any-----Mr. S h i p l e y . I have no further comments.
Senator J e p s e n . All right. Well, I thank all of you for your testi­
mony. The way we do form policy and change things is through the
collection of both people’s experiences and their expertise, and as these
things build up and are researched and reviewed, that’s the way that
ideas come for making changes, and there may be some that may come
out of meetings such as this today. Collectively here I think we have
got on a consumer base which is quite a dramatic cross section of
information. I thank all of you for coming, and you are now excused,
and have a safe trip home.
Is there anyone that has any closing statement? I should ask you
that.
I now ask Dr. Swaney, Linn County Medical Society; Samuel
Wallace, president, St. Luke’s Hospital; Sally Miller, adminiwStrator,
Anamosa Communitv Hospital; Gary Levitz, assistant director,
University of Iowa Hospital and Clinic: Jim Tinker, administrator,
Mercy Hospital. Cedar Rapids; and Judith Muenchow, executive di­
rector, Public Health Nursing Association.
I welcome you to the panel and advise you that your prepared state­
ments will be entered into the record, and you may summarize or
proceed in anv manner you so desire. We will start with Dr. Swaney,
Linn County Medical Society.
STATEMENT OF ROBERT L. SWANEY, M,D., PRESIDENT, LINN
COUNTY MEDICAL SOCIETY, CEDAR RAPIDS, IA, REPRESENT­
ING THE IOWA MEDICAL SOCIETY

Dr. S w a n e y . Senator Jepsen, I am currently president of the Linn
County Medical Society and am here today representing over 3,200
members of the Iowa Medical Society.

Senator Jepsen, the Iowa Medical Society welcomes the opportunity
to participate in today’s forum for health care issues.




210
There is no question that the health care system has become a major
component of the American economy. In addition to the frequently
cited figure of health care income contributing to over 10 percent of
the gross national product, we note the health services industry is re­
sponsible for employing 5.2 million full-time equivalent positions and
ranks second among the Nation’s industries behind retail trade. In
Iowa, hospitals and other providers of health care services may be the
major source of employment and income for the local community. We
must recognize also that a high quality health care system is needed
locally to attract and keep business and industry.
We believe there is merit in asking whether the devotion of 10 per­
cent of the GNP to health care services is too much. The purchase of
alcohol and tobacco accounts for 3.8 percent of the GNP and recrea­
tion accounts for 6.4 percent. Taxes account for over 20 percent of the
GNP.
It is important to recognize in any discussion about the impact of
health care costs on the economy that we not lose sight of the great
advances that have characterized our Nation’s health care system and
the benefits that have been provided to our society. For example, the
life expectancy of Americans has increased significantly in recent
years.
Many childhood diseases have been virtually eliminated. Since 1970,
deaths from heart disease have declined by 25 percent and deaths from
stroke have declined by 40 percent. While cancer remains a major
threat, patients are living longer after treatment and many forms of
cancer, formally viewed as inevitably leading to death, are now cur­
able.
The modern miracle of transplant surgery provides life and hope to
people otherwise facing death prolonged hospitalization or a deterio­
rating quality of life. Artificial hip ioints have become almost routine,
relieving over 65.000 patients of chronic pain last year alone.
New technologies also obviate the need to use more risky invasive
diagnostic procedures.
Senator Jepsen, the United States has developed a medical care
system that is a benchmark against which others are measured. We
believe that increased resources dedicated to health care is a reflection
of a maturing and humane society that places increased emphasis on
the protection of its vulnerable population, including the ill and
injured.
We recognize the need to restrain increases in the cost of health care.
But we must also recognize an inevitable increase in the demand for
health care services in coming years. Mr. Shipley has given some
statistics concerning the increasing number of elderly. As the popula­
tion ages, demands for health care services correspondingly increase,
and the total cost for providing those services increases.
There are no simple solutions to solving the health care cost
dilemma.
One solution not acceptable to the Towa Medical Society is the ra­
tioning of care or caps on expenditures to achieve arbitrary reductions
in health care expenditures. We also recognize, however, that health
care services should be examined for their cost effectiveness. We have
been taking positive actions to review the delivery of health care
services and to eliminate those health care costs that are inappropriate
and are not benefiting the public.




211
For example, the efforts of the Iowa Foundation for Medical Care,
the physician organization responsible for reviewing hospital utiliza­
tion in Iowa, have resulted in significant reductions in hospital utiliza­
tion for patients covered by private insurers, Medicare and Medicaid
alike.
This spring the Iowa Medical Society endorsed a call by the Ameri­
can Medical Association for all phyicians to voluntarily freeze their
fees for a 1-year period and to continue to take into account the finan­
cial circumstances of each patient, particularly the unemployed, the
uninsured and those under Medicare—and to accept reduced fees when
warranted.
We believe cost savings can be accomplished without unnecessary
Federal regulation. A key element of current health problems is nearly
universal coverage of medical expenses by health insurance or govern­
ment health programs which has insulated most Americans from con­
sideration of the cost of medical services. Many economists have said
that this partially is responsible for the continuing rise in medical
care costs.
To help assess and guide Federal legislative proposals impacting
on the Nation’s health insurance system, the AMA has developed a
set of principles which spell out a policy for greater individual choice
and for incentives for prudent behavior by individuals. These prin­
ciples are attached to my prepared statement.
Senator Jepsen, we realized that Congress needs assistance from
the public in making any determination on how health care services
should be delivered in this country in the future. To this end, the
American Medical Association has taken the first step by initiating
a project to create a future health policy agenda for the American
people. This project is designed to develop a philosophical and con­
ceptual framework as a basis for particular action plans and proposals
that are responsible to the particular social, economic, scientific, edu­
cational, and political circumstances facing health care decisions. Some
details of this project are included in my prepared statement.
In summary, Iowa is a State with a high proportion of elderly and
rurnl residents. Government policy must assure that more, not less,
health care services are available to serve our increasingly aging pop­
ulation. and that access to health care in rural Iowa is maintained,
not reduced. The personal and economic health of Iowans depends
on it.
We recognize the responsibility of physicians not only to maintain
access to high quality health care, but to deliver it in a cost-effective
manner. We hope to accomplish this with business, labor, Govern­
ment, and other interested groups through our individual efforts,
through the Linn County and Iowa Medical Society, and through
the American Medical Association.
[The prepared statement of Dr. Swaney follows:]
Prepared S t a t e m e n t of R o b e r t

L.

Swaney,

M.D.

I am Robert Swanev, a medical doctor in familv practice here in Cedar Rapids.
I am currently president of the Linn County Medical Society and am here today
representing over 2.200 members of the Iowa Medical Society.
Senator Jepsen, the Towa Medical Society welcomes the opportunity to partici­
pate in today’s forum for health care issues. We note with you the proportion of
the gross national product being devoted to health care services now exceeds 10




212
percent. We also see with you the initiation of efforts to limit further the expan­
sion of the health care delivery system.
There is no question that the health care system has become a major compo­
nent of the American economy. In addition to the frequently cited figure of
health care income contributing to over 10 percent of the gross national product,
we note the health services industry is responsible for employing 5.2 million full
time equivalent positions and ranks second among the nation’s industries behind
retail trade. In Iowa, hospitals and other providers of health care services may
be the major source of employment and income for the local community. We must
recognize also that a high quality health care system is needed locally to attract
and keep business and industry.
We believe there is merit in asking whether the devotion of 10 percent of the
GNP to health care services is too much. The purchase of alcohol and tobacco
accounts for 3.8 percent of the GNP and recreation accounts for 6.4 percent. Taxes
account for over 20 percent of the GNP.
It is important to recognize in any discussion about the impact of health care
costs on the economy that we do not lose sight of the great advances that have
characterized our nation’s health care system and the benefits that have been
provided to our society. For example, the life expectancy of Americans has in­
creased from 69.7 years in 1960 to 74.5 years in 1982. Infant mortality has been
reduced to a record low of 11.2 per 1,000 live births, less than half the figure in
1960.
Through the development of and widespread availability of vaccines, polio
has been virtually eliminated, the incidence of mumps has fallen from over
150,000 cases as recently as 1968 to 3,285 last year, the cases of measles has de­
clined from 481,530 in 196.2 to 1,436 in 1983.
Since 1970, deaths from heart disease have declined by 25 percent and deaths
from stroke have declined by 40 percent. These advances have come through
major technological advances including open-heart surgery, pacemakers, new
drugs, and greater public consciousness of the importance of proper exercise and
diet. While cancer remains a major threat, patients are living longer after treat­
ment and many forms of cancer, formally viewed as inevitably leading to death,
are now curable.
The modern miracle of transplant surgery provides life and hope to people
otherwise facing death, prolonged hospitalization, or a deteriorating quality of
life. New hearts are transplanted into 100 Americans per year and 5,000 people
receive transplanted kidneys. In 1983 there were 23,000 cornea transplants re­
turning sight to those whose vision was severely impaired. Artificial hip joints
have become almost routine, relieving over 65,000 patients of chronic pain last
year alone.
New diagnostic devices such as CAT scanners, ultrasound, and nuclear mag­
netic resonance have greatly enhanced our ability to make rapid and more
accurate diagnoses. New technologies also obviate the need to use more risky
invasive diagnostic procedures.
Senator Jepsen, because of past public policy geared toward the expansion of
our health care system and the greater availability of health care to more Ameri­
cans, the United States has developed a medical care system that is a benchmark
against which others are measured. We believe that increased resources dedicated
to health care is a reflection of a maturing and humane society that places in­
creased emphasis on the protection of its vulnerable population, including the ill
and injured.
We recognize the need to restrain increases in the cost of health care. But we
must also recognize an inevitable increase in the demand for health care services
in coming years. We cannot afford to ignore the fact that between 3983 and 2025
the total population is projected to grow by almost 30 percent, with the elderly
population doubling to a total of 58 million or 39.4 percent of the total population.
Among the elderly, the group over age 75 will also experience substantial growth ;
40 percent of the elderly are now older than age 75: and this figure will in­
crease to 45 percent in 2025. The over age 85 group will triple from the current
2.5 million people to 7.6 million people in 2025. This substantial increase in the
elderly population, which will be particularly significant in the State of Iowa,
will result in a greater utilization of health care resources. Statistics indicate
that individuals over age 65 are more likely to be hospitalized than those under
that age. They also use more hospital days per hospitalization and they visit their
physician and other health care practitioners more frequently. The importance
of these figures is clear. As the population ages, demands for health care services
correspondingly increase, and the total cost for providing those services increases.




245
PHYSICIAN PARTICIPATION INCLUDE THE PUBLICATION OF DIRECTORIES OF
PARTICIPATING PHYSICIANS WHICH WILL BE AVAILABLE AT SOCIAL SECURITY
AND CARRIER OFFICES AND AT SENIOR CITIZENS' ORGANIZATIONS.

W e WILL

ALSO INFORM MEDICARE BENEFICIARIES OF THE PUBLICATION OF THIS
DIRECTORY.

In ADDITION, TOLL-FREE TELEPHONE LINES WILL BE _MA INTAI NED

TO DISSEMINATE THIS SAME INFORMATION.

No n p a r t i c i p a t i n g
a c a s e - b y -c a s e
not

to

accept

physicians

basis.

Ho w e v e r ,

a s s i g n m e n t , they

can
in

a re

continue

those

to

accept

instances

forbidden

to

where

increase

assignment
they

on

choose

their

CHARGES TO MEDICARE PATIENTS ABOVE THEIR ACTUAL PATTERN OF CHARGES
FOR THE THIRD QUARTER OF FISCAL YEAR 1984.

IF PHYSICIANS FAIL TO

ABIDE BY THIS PROVISION, THEY CAN BE SUBJECT TO CIVIL MONEY PENALTIES
OR TO DEBARRMENT FROM MEDICARE FOR UP TO FIVE YEARS OR BOTH.

I AM

SURE YOU WILL AGREE THAT BY FREEZING PHYSICIANS' FEES AND BY
PROVIDING INCENTIVES FOR THEM TO ACCEPT ASSIGNMENT FOR ALL SERVICES,
WE WILL BE SAVING MONEY FOR THE MEDICARE BENEFICIARIES AND THE
TAXPAYERS.

PAYMENT FOR LABORATORY TESTS
Pr i o r

to

the

De f i c i t Re d u c t i o n Ac t ,

we

paid

hospitals

for

OUTPATIENT LABORATORY SERVICES IN MUCH THE SAME WAY THAT WE FORMERLY
PAID FOR HOSPITAL SERVICES, THAT IS, WE ESSENTIALLY REIMBURSED
LABORATORIES ON THE BASIS OF THEIR COSTS.

ALL OTHER OUTPATIENT

LABORATORY SERVICES, THAT IS, THOSE FURNISHED BY INDEPENDENT
LABORATORIES AND PHYSICIANS, WERE PAYED FOR ON THE BASIS OF
REASONABLE CHARGES.

37-264 -

85 -




17

1HESE LABS AND PHYSICIANS WERE ALSO ABLE TO

246
ACCEPT ASSIGNMENT ON A CASE-BY-CASE BASIS,

BUT WITH THE ENACTMENT OF

P.L. PR-359, WE NOW HAVE THE AUTHORITY TO ESTABLISH FEE SCHEDULES FOR
OUTPATIENT LABORATORY SERVICES.

B y ESTABLISHING THESE RATES OF

PAYMENT IN ADVANCE, WE WILL ALSO BE ENCOURAGING THE SAME EFFICIENT
BEHAVIOR IN THE PROVISION OF OUTPATIENT LAB SERVICES THAT WE ARE WITH
HOSPITAL INPATIENT SERVICES.

FURTHERMORE, P.L. 98-359 ALSO MODIFIED

THE ASSIGNMENT OPTION SO THAT NOW ALL INDEPENDENT AND HOSPITAL LABS
ARE REQUIRED TO ACCEPT ASSIGNMENT, FORMERLY ONLY A REQUIREMENT FOR
HOSPITAL LABORATORIES.

In THESE CASES, REIMBURSEMENT AT THE FEE

.SCHEDULE LEVEL WILL CONSTITUTE FULL REIMBURSEMENT, AND NO COINSURANCE
OR DEDUCTIBLE WILL BE REQUIRED OF THE BENEFICIARY.

THIS OFFERS

PROTECTION AGAINST RISING OUT-OF-POCKET COSTS FOR THE MEDICARE
POPULATION.

CONCLUSION
I HAVE JUST DESCRIBED THREE OF THE MORE RECENT SIGNIFICANT
CHANGES TO MEDICARE.

WE ARE OPTIMISTIC THAT THESE CHANGES WILL HAVE

A POSITIVE IMPACT ON THE MEDICARE PROGRAM BY ALTERING REIMBURSEMENT
SYSTEMS TO ENCOURAGE EFFICIENCY IN THE PROVISION OF CARE AND ON THE
Medicare

beneficiary

by

our

continued

commitment

to

high

quality

care

AND BY THE PROTECTION PROVIDED AGAINST INCREASED OUT-OF-POCKET COSTS.

I WILL BE GLAD TO ANSWER ANY QUESTIONS YOU MAY HAVE.




247
Senator J e p s e n . I thank you, Joe. The Chair would advise the panel
that I am going to ask Bill Finerfrock to finish the chairing of this
hearing as we build this record. This is very important, the establish­
ment of trying to find an answer for some of the things we have been
talking about today. We are all partly to blame for the current cost
problem. We all need to be involved in coming up with solutions and
in gathering information and records as these hearings do, they are
very key in providing direction and guidance toward a policy that
will fill the bill. One of my colleagues in the Senate, Senator Durenberger from Minnesota, recently noted we really don’t have a health
policy in this country but we do have a sick policy. The only program
we currently have in place deals with people who are already sick
rather than healthy, and I know that some of the things that are
coming up are going to be talking about this and so on. I am sorry to
miss them.
Bill Finerfrock is the chief of staff coordinating these programs for
the Joint Economic Committee. He is my senior saff member and he
was with Senator Brooke prior to coming with me, and this is his
field of specialty. Those of you who have gotten to know him know. I
think objectively I can say he is probably one of the better informed
people in the entire Congress in all these areas, so I will ask him to
finish, and I thank you for coming, and I know we have run a little
longer than we all planned on. Mr. Snyder, I think you are kind of
anxious to get going. I can kind of sense that. We need to get moving.
Thank you very much.
Mr. F i n e r f r o c k . Mr. Weber, do you want to begin ?
STATEMENT OF JOHN WEBER, MEDICAL SALES REPRESENTATIVE,
MIDWEST SALES REGION, HEWLETT-PACKARD CO., CEDAR
RAPIDS, IA

Mr. W e b e r . Certainly all of us at Hewlett-Packard want to thank
you for the opportunity to share with you our medical technology, and
just as the medical community is being influenced by the Government
programs, obviously so has our marketing and research with the
decrease in revenue. We have to address the lack of money availability,
and so we are addressing the needs and the costs of medical equipment
by trying to prevent product lines and technology that are designed
to function as productivity tools for the medical community.
For instance, the Hospital Information System, which is a large
computer system, centralizes and processes and aids the health care
delivery team by automating the collection and processing the patient
data. Both clinical and administrative computerized needs can be com­
bined and coordinated through this one central system.
The data management capabilities used in conjunction with the
patient bedside monitor, and this is a very small computer, very inex­
pensive computer that fits in with the bedside monitor, it will collect
and calculate cardiac, renal and respiration data. The data can be
reviewed by physician at any bedside or central station and can be
printed out and put in the patient chart, thus alleviating valuable
nursing time to do all of their charting and writing, and therefore
our hope is to allow more patient-staff interaction rather than admin­
istrative duties. All billing, pharmacy and lab requirements can be




248
handled from each nursing unit also, thereby maybe alleviating mischarges, those sorts of things, creating more revenue.
We have introduced a wide range of products in the last few years.
Last year—we usually introduced about four or five new products a
year. Last year we introduced 14 new products. Part of the reasons
for this are the Government programs, and we have introduced a
much wider product range. This will allow the smallest and the largest
hospitals, hopefully, to provide the product that is right for their
needs, thus avoiding overspending for a product that could be too
sophisticated.
Creative financing is also available for any institution interested in
low payments that can be expensed for tax purposes. The option to
lease equipment over an arranged length of time and then purchase it
at 10 percent at the end of the lease or the payment period, and this is
ideal for any institutions, particularly in Iowa, where we have a lot
of smaller hospitals.
We are also trying to provide local services in as many offices as
possible. As small and rural as Iowa is, we have three central offices
across the State with two engineers in each office providing repair and
avoiding down time and avoiding prolonging the patient’s stay.
And protection from technical obsolescence is certainly important to
protect the investment of the medical equipment. And one of our
philosophies is to manufacture products that will interface with prod­
ucts of future generations, and we have a commitment to be compatible
with all of our other equipment, and the best way to make an analogy
is that the first monitor systems that we have put out in the field in
the 1960’s are compatible with the system that we are manufacturing
today, thus avoiding hospitals having to update their units by replac­
ing every bedside unit. They can start one bedside at a time and it will
interface with existing equipment.
We also have—we realize that the latest and greatest technology may
not be used if it’s not affordable, and we have dedicated ourselves by
the end of the decade that we will be the lowest priced and most reliable
vendor on the market, and I don’t think this philosophy is probably
unique to our company, but certainly the philosophy being adopted
by the other medical vendors. Thank you.
Mr. F i n e r f r o c k . Thank you. Now, Mr. Snyder.
STATEMENT OF JAMES R. SNYDER, ATTORNEY, SIMMONS, PERRINE,
ALBRIGHT & ELLW00D, CEDAR RAPIDS, IA

Mr. S n y d e r . I am an attorney in Cedar Eapids, but like Dr. Swaney,
who stated that he was representing the interests of the medical group,
I do not think I can say that I am here representing the legal profes­
sion. In my 27 years of practice, I have not on one occasion sat on the
plaintiff’s side of the table in a medical malpractice case. On the other
hand, I would say 80 percent of my practice is in the medical mal­
practice field in defending the hospitals and physicians. So I think
the plaintiffs’ bar would argue with me vociferously if I were to repre­
sent here today that I represent their interests.
Historically you probably all recognize that the so-called medical
malpractice crisis started in the early 1970’s. Whether this is con­
sidered a crisis or not is a matter of opinion. The plaintiffs’ bar and




249
patients might take the position that it is a crisis. Perhaps the defense
bar and the insurance carriers might take an opposite view, but in fact
the figures would indicate that approximately 2.5 percent of the total
health care cost is attributable to medical malpractice claims.
I, in my prepared statement, have set out many statistics, facts, and
figures which would serve no purpose to repeat those at this time.
But out of curiosity, I asked my secretary before coming here today
to find out just how many medical malpractice lawsuits I was defend­
ing at the present time. And she came up with a figure of 27. Now, you
understand that within a week or two I might be closing a file because
of settlement or concluding the litigation, but for every file I close,
I will be opening a new one. This means that any time I look at my
records I can probably come up with approximately 27 medical mal­
practice lawsuits that I am defending at any given time. This is a
community of approximately 100,000 people.
Now, our law firm represents only one of three major malpractice
carriers. If the other two law firms are defending the same number of
lawsuits as I am defending, we are talking about approximately 75
pending lawsuits in Cedar Rapids at the present time that are being
defended. Now, again whether this is of crisis proportion or not
depends upon individual opinions.
What is the impact on the cost of health care born by medical mal­
practice? I think we can talk in terms of a direct impact which means
money. It’s going to be paid either by way of premiums, which by
the way we are led to believe by the insurers will substantially increase
next year and probably in the years to come. So the health care pro­
vider will be paying by way of either premiums, or if they are selfinsured, they will be paying the judgment or claims out of their own
pocket. This obviously, as we all know, will be passed on to the con­
sumer. So that’s the direct impact of the medical malpractice problem.
What are the indirect aspects of the problem ? I would suggest that
perhaps it could lead to a defensive practice of medicine. In other
words, the more lawsuits against a physician or hospital, the more the
tendencies might be to practice defensive medicine. In other words,
perhaps more hospitalization, more testing, the higher costs of the
medical care. This would be an indirect cost to the health care
profession.
Also we should consider the cost in time and energy of the physician
and hospital administrators, because it’s not an easy proposition to
defend a medical malpractice case. It takes much time on the part of
the physician, it takes much time on the part of the hospital personnel
to work with the defense lawyer in preparation for the trial of that
lawsuit. This takes its toll not only in money, time they could be well
spending on something else, but emotions. It’s not an easy thing on
emotions for a physician to have to defend himself, nor a hospital.
This again would be an incorrect impact on health care costs.
There has been much said today, and I am not about to belabor the
point, about DRG’s, diagnostic related group. There has also been
reference to Utilization Review Programs. Now, this might be all well
and good insofar as attempting to hold down the costs of medical care,
but I would suggest that it’s counterproductive if we have what we
refer to as a medical malpractice crisis. I would suggest that the more
DRG’s the more Utilization Review Programs, the higher that per­




250
centage is going to be of medical malpractice claim, and the higher
the cost as a result of medical malpractice. I do not consider myself
an expert on DRG’s or utilization review, but I know that basically
what we are attempting to do is either keep people out of the hospital
to begin with or minimize the stay period once they are in the hospital.
Now, how does this affect medical malpractice ?
A good many of my lawsuits have to do with failing to diagnose
an injury or an illness. In other words, the plaintiff is alleging that
the physician should have diagnosed his problem sooner and as a
result of that he would not be having the residuals he is claiming to
have had in the lawsuit. How do we diagnose? We diagnose by testing.
This ordinarily is done in the hospital. So if the physician decides not
to hospitalize a patient and do proper testing, the more chance that
there is going to be error in that diagnosis. So although when we are
talking about the cost of health care, it might be proper to talk in
terms of Government programs, DUG, utilization review, when we
are talking in terms of quality of care, I think it can be counterpro­
ductive, and I would suggest that if we insist on this type of program,
our medical malpractice is going to become a crisis, if it is not already
there. Thank you very much.
[The prepared statement of Mr. Snyder follows:]
Prepared

Statement

of

James

R.

Snyder

Increasing litigation and rising jury awards are undoubtedly two of many
factors affecting the cost of hospital and medical care throughout the country.
Whether the claim or award is paid “out of pocket” or by a malpractice insurance
carrier, it is a substantial cost in doing business as a health care provider.
Insurers contend that the continued and alarming escalation of the number
and cost of physicians and hospitals professional liability claims will result
in significant rate increases this year and the following years. One insurer
reports that since 1979 the frequency of claims on a calendar year basis has
increased more than 63 percent— from 3.3 claims per 100 physicians in 1979 to
5.4 in 1983. This translates into 5,870 reported claims, 2,757 more than in 1979.
During the same period of time, the claims against hospitals have risen from 1.8
claims per 100 beds in 1979 to 3.1 claims per 100 beds in 1983.
The average payment per physician claim has risen from $27,400 in 1979 to
$53,500 in 1983. For hospitals during the same period of time, the average pay­
ment for each hospital claim as risen from $11,700 in 1979 to $23,900 in 1983.
The total premium dollars paid in 1979 for medical malpractice insurance was
1.4 billion dollars as compared to two billion dollars in 1983. The average cost of
malpractice insurance for a physician is 3.5 percent, or $3,500 for each $100,000
in insurance coverage. Malpractice insurance premiums account for approxi­
mately 1 to 3 percent of the total health care cost.
Jury Verdict Research, Inc. reports that average jury awards in medical mal­
practice cases increased five times from 1976 to 1982 from. 192,344 to 962,258. The
same research company reports that malpractice verdicts over one million dollars
increased from four in 1976 to 45 in 1982. They further report that out of court
settlements are growing at a corresponding rate.
The response of the health care providers to increased rates might be varied,
with alternatives to insurance coverage coming about in different forms. It has
been suggested by experts in the field that there is a move toward greater risk
assumption by health care providers. In the case of physicians, there has been an
emergence of physician owned professional liability insurance companies. In
addition, some physicians have resorted to practicing without professional lia­
bility coverage. Hospitals are moving toward a greater assumption of risk by
the hospital itself, either in the form of partial or total self insurance.
To some extent efforts are being made to have the government, whether it be
state or federal, intervene in the medical malpractice problem. On the federal
level, H.R. 5400 has been introduced and referred to the Committee on Ways and
Means. It would amend the Medicare law to establish an alternative system for




251
settlement of medical malpractice claims in the case of injuries allegedly arising
from health care services provided under federal funding. Under the bill, an
injured person would be foreclosed from bringing any civil action against a
provider if the provider gives a written tender to pay compensation benefits (as
defined in the the bill) with respect to such injury. Several states have similar
legislation pending, which would if enacted accomplish the same purpose on a
state level.
Remedies are also being sought by the health care providers by way of better
health care training and education in risk management techniques. No single
remedy will solve the medical malpractice dilemma. It will take a combined effort
on the part of physicians, hospital administrators and the legal profession to
bring about a workable solution.

Mr. F in e r f r o c k . Thank you, Mr. Snyder. In your prepared state­
ment, you referred to a bill, H.R. 5400. Do you support that legisla­
tion and could you give a brief explanation of what that would do ?
Mr. S n y d e r . N o , first of all I do not support this legislation. It is a
Federal bill whereby a patient would be prohibited from bringing a
lawsuit if the health care center or the physician would come forward
and make what we refer to as an offer of settlement. In other words,
the health care provider could come forward, acknowledge that mal­
practice had been committed, and make an offer to the injured patient.
Under H.R. 5400 this would prohibit that patient from starting a
lawsuit, at least until that so-called administrative function was con­
cluded. I for one do not go along with any such program. Some States
have attempted, and I think the State of Florida is one, that has made
a similar effort on a State level.
The Federal program would only have to do where Federal f unding
was involved, such as Medicaid or Medicare. It would not apply where
a private insurance company were paying the loss, for example. As
I have stated, several States have attempted to do the same thing. In
my limited practice, I feel that these type programs only increase
the problem and not solve it. I think those States that have attempted
to come out with administrative remedies as opposed to judicial have
found that perhaps it only adds to the cost and delays justice. In that
in many States it’s been unconstitutional to take away access to the
courts, so if we have administrative procedure it merely serves as a
delaying tactic in finally ending up in the court procedure.
I do not think it has worked too well, I am not an expert in what
these States have found in relation to their programs, but no, I would
not be in favor of such a program.
Mr. F in e r f r o c k . Thank you, Mr. Tilghman, we heard a lot of talk
here today about the patient end of things, and we have noted that
there have been significant reductions in the average length of stay
and decreases in the amount of hospital admissions, and we know that
transfers into increased costs, but what assurances are we getting that
there is not a corresponding decrease in the quality of care ?
Mr. T i l g h m a n . I f I may go to my testimony, have basically three
actions that we are focusing on to assure there is no drop in quality of
care because of the DRG application. Probably the bulk of that focus
is by the peer review organizations. We are contracting with these. We
have one in Iowa, PSRO—Iowa Foundation for Medical Care and it’s
going to be the responsibility of the PRO’s to monitor a number of
aspects in connection with the DRG’s. One is where they have a trans­
fer to another hospital, there is a look at those, to make sure there is an
appropriate transfer. In general a very intensive focus on hospital in­




252
patient care, more so than it was under the PSRO program, to make
sure there is no tendency to push patients out before they are medically
ready to be out of the hospital. We expect that to work pretty well. It’s
a brand-new program, both for DRG’s and for PRO’s, and we will be
monitoring those pretty closely to make sure there is no drop in quality
of care. That is a major concern, both in Congress that they expressed
when they passed the bill and also by our agency to make sure there is
no drop in quality.
Mr. F in e r f r o c k . What provisions are there in analyzing the cost
reductions which DRG’s may bring about in Medicare to make sure
that those are not simply just cost shifting, just going from the Medi­
care program over to a private pay program %
Mr. T i l g h m a n . That with any major change in a large program
like Medicare, that we have certain thoughts in mind when we first im­
plement the program. We use the reimbursement system as a lever to
bring about changes that we like to bring about in the health care in­
dustry. We can usually forecast what the first and second level tier
effects of that change are going to be. Sometimes it’s very difficult to
project what the third and fourth level changes will be, and it may take
years to determine maybe the most significant changes that resulted
from the official level we applied. We aren’t real sure what’s going to
happen as far as the shifting of costs from Medicare patients to pri­
vate pay patients.
What we have seen, Iowa is a good example of this, is that a lot of
your other third-party insurers, such as the State Medicaid programs
and your major Blue Cross and Blue Shield and the mutuals, like
that, are bringing about changes in their own reimbursement mecha­
nism to preclude something like that happening. They are moving to
similar type prospective system, so I think there is this—because of
the lever that medicare is applying under the system, we are seeing
these third and fourth year effects that we didn’t really plan or anti­
cipate. We just wanted to save medicare money, knowing it was going
to bring about some other changes in the way other people may pay
for third-party care, and here in Iowa, for example, the Medicare
program is on our prospective system, and both the Sioux City and
Des Moines plans have also gone on a prospective system, their private
lines of business. As far as how we in the Medicare Program would
monitor that possible cost shifting, we don’t have any specific plans
in mind as to how to do that, but it looks like we don’t have to because
the other third-party payers are doing that on their money.
Mr. F in e r f r o c k . Mr. Oakley, in your prepared statement, and this
relates to what Mr. Tilghman was just saying, one of the proposals
that’s been mentioned was a way to avoid cost shifting, to go to all­
payers system, and I believe in your prepared statement you indicated
that you opposed an all-payers system. Could you explain why ?
Mr. O a k l e y . First of all, we would be concerned going to—we would
be concerned going to an all-payers system without the kind of study
of that very question as to whether, one, it takes place, who does it
adversely affect, and three, would that work out as a matter of com­
petitive marketplace as opposed to imposing regulation. Regulation
generally falls far short of its initial expectations of success when
dealing with a large problem such as this. So history alone shows us
that regulation doesn’t work very well, and that is pure and simple
regulation.




253
Second, however, the initiatives that have been already started in
one study, and second, dealing with the overall cost problems in gen­
eral, seem to be working. An all-payer system, it seems at this point,
would be an anomaly, at least in Iowa. I can only speak to Iowa. And
fourth, what ought to be of some concern to—and this I will put on my
Blue Cross-Blue Shield hat and take off the industry hat, if you will—
is that in many States where all-payers systems have been adopted,
they have legislated the differential that Blue Cross and Blue Shield
enjoys in those States right in their all-payers regulation. They get a
6 percent or 10 percent or 12 percent statutory discount off of what
everybody else is charged. That differential is very small and on a
selective basis. And that’s why the Iowa marketplace is, frankly, so
competitive. So one, we should study it, two, those who advocate it
ought to look at what has occurred in other States where it has oc­
curred, New Jersey and others as to what has really been the effect of
it. I might say at this point that H.P.C.I. the legislature, ourselves,
and others in our health data commission, which is now just getting up
and running, will go a long ways to finding out what is happening
with those costs and what it’s generating, but I think in Iowa it’s in­
appropriate at this point to consider an all-payer system and that’s
why I oppose it.
Mr. F in e r f r o c k . Thank you very much. On behalf of Senator Jepsen, I would like to thank all the panelists for appearing today, and
as has been mentioned, your prepared statements for those of you who
summarized will appear in their entirety in the hearing record. Thank

y°uThe last panel is Russell Knuth, Pioneer Hi-Bred International;
Edward Petras, acting director, Medical Association, HM O: Bernard
Grahek, clinical coordinator, Voluntary Hospitals of Iowa; Dick John­
son, Rockwell International.
Mr. Knuth, you may proceed. As we mentioned earlier, your state­
ment will be introduced to the record in its entirety. You may give
your name or you may proceed however you wish to proceed.
STATEMENT OP RUSSELL KNUTH, PIONEER HI-BRED INTERNA­
TIONAL, INC., JOHNSON, IA

Mr. K n u t h . Thank you, Bill. I represent industry. We are funda­
mentally Central United States based, producing our hi-bred seeds.
We have about 8,000 employees, and we are located and have locations
and employees in 30-some States. About 6 years ago our health care
costs nearly doubled. When we looked at that as management and
projected that if this continued at the same rate, that possibly in a few
year we wouldn’t be able to provide health care coverage for our em­
ployees, obviously that would create quite a problem. What we did was
to analyze what we could do, and what we came up with was one that’s
been alluded to here a preventative medicine type approach, one where
we would identify problems at the early stages and treat them, so there
would be less traumatic event for the employee and their families and
obviously less cost. And here is what we came up with.
We provide full blood chemistries for our employees and their
spouses that are over the age of 40 annually, and the vitals, which of
course include blood pressure, height, weight, pulse and the urinalysis.




254
Initially all employees received this, and for those employees under
tiie age oi 40—ana we cJtiose tne age 01 40 because it seemed that the
first ^0,000 miles go on relatively easy and alter tliat you need more
maintenance. JtT tiiose under tne age oi 40 we provide the basics
or
again wincii provides Dlood pressure ciieck tor eariy detection of hy­
pertension, still one of the major killers in the world, particularly the
United States. We also provide a urinalysis which tlien would also
address the number three killer in the world, or at least a detection of
glucose spillover for diabetes. So No. 1 and No. 3 are addressed by
under age 40. This is done annually and it is done in the workplace.
1 think it’s important to bring medicine into the workplace and we
understand it the best we can as lay people. It’s done on company
time and it is company paid for. Breakfast is furnished for those of
us that need to fast our 8 hours, and I think that’s an important ele­
ment in the employee relations. It’s a time to talk about our health
problems together.
And in that same vein, every aspect of it is completely confidential
and private. The only thing as the corporate administrator of this
program, the only thing I provide to the company are statistics and
trends so that we can analyze and provide more funding for an even
complete and better program. What really turns out is it becomes very
public, because once the results come back to the employee, and it is
mailed to their home along with an explanation, a lay person explana­
tion of all tests that were taken, what happens is that those that have
elevated tryglycerides are usually in one corner of the break room,
and the diabetics are in another, and the elevated cholesterol and blood
pressure in another, talking over what they are doing and what their
doctor prescribed, and it makes a very supportive group for each of
those, two of which I am a part, and it’s a very satisfying feeling.
Now, I want to emphasize this is provided for employees and their
spouses, because we provide health care for the family. We have—it’s
voluntary and company-paid-for as I indicated. We have 97 percent
voluntary participation by our employees and 70 percent participation
by our spouses.
In addition to the testing I have told you about, we try to do an
additional test each year that is of concern to the medical community.
Some of those that we have done so far are the hemoccult, Titmus eye
test, audiometric, pulmonary function, and so in the sequence of 4, 5
years we have exposed employees and their spouses to some medical
functions that they can do on their own with their own physician to
have a more complete and more aware type health program.
We also have two incentive programs called COP and TOTE. COP,
or cut out puffing, and we all know that two pack a person shortens
life expectancy on the average of about 7 years, and obviously their
health care costs are higher. We pay employees $150 to quit smoking
for 1 year. I f they continue to quit smoking the 2d year, they receive
another $75.1 think if you wanted to—I think it’s one of the most cost
effective things that we can do immediately. Obviously with the to­
bacco industry spending about $2 billion a year to encourage you to
smoke, it’s a tough program to promote, telling it like it really is.
On our TOTE Program, trim off the excess, much more successful.
You have automatic media support. Every magazine, newspaper, and
television tells you how healthy it is to be slim1and trim, and fast, and




255
walk, and trot, and ride bike, and swim, and whatever. We are no
different than the national averages. About 39 percent of our em­
ployees did smoke and 30 percent of our employees were overweight to
the tune of 29 pounds. That’s about national average. Both of those are
cost-effective programs. What’s happened in those? I would like to
share some bottom line things now.
What’s happened, the first year that we did our health testing, 6
percent of all our employees had at least one significant abnormality,
one that needed immediate medical attention. Today, 6 years later,
six-tenths of 1 percent are in that category, and I suspect half of that
are new employees and spouses coming on board. I don’t know that. I
suspect that. Which tells us there has been significant lifestyle changes
of employees and spouses, and/or they are on proper medication. Now,
to industry that’s bottom line, those are dollars.
For incentive programs, 15 percent of our employees have quit
smoking, and we have lost over 4 tons of waste. Now, I think there is
another issue along with the dollars. That most of the life expectancy
lost through overweight and smoking is not through the productive
years. Just watch the obituary columns and they will tell you they
usually happen between 66 and 69 years of age. Meaning that after
working 30, 40 years, you are going to die 2y2 years after you retire.
So this program not only helps the productive years, I think, and
it’s in line with Pioneer’s philosophy of staying with the family and
wanting the employee to enjoy the well-earned twilight years or what­
ever we would like to call them.
We feel that this program—we believe in it, and regardless of how
indepth program that any company would have, I think any endeavor,
whether it be blood pressure clinic, an awareness, a poster campaign,
they are all winners, and I would support and encourage every in­
dustry to become involved in this, and help themselves. Bottom line
dollars are that 6 years ago our costs were $980 per employee. Six
years later we are looking at $1,130 per employee. At the normal
rate of inflation I think it’s reasonable to believe that we would be
looking at $2,500 per employee today without preventative medicine,
which is in the tune of $2 million a year, and might be why we affirm
and believe in the programs so strongly. And probably the most
important thing is that our employees look at our health screening
program as one of their most important benefits, and that is what it
w really designed to do. Thank you.
^as
[The Pioneer Hi-Bred brochure referred to follows:]







Health Guard
Incentive
Programs
In addition to the Health Guard program, two
incentive programs are available for those that
qualify.
T.O.T.E. - TRIM OFF THE EXCESS
On the average, life expectancy is shortened one
year for each 10 pounds o f excess weight.
We will be using a weight chart based on height
and skeletal structure recommended by Blue CrossBlue Shield to determine those eligible for the
T.O.T.E. program. $5.00 will be paid for each pound
lost down to the desired weight.
For maintaining the desired weight for an
additional year a $75.00 gift o f your choice will
be offered.
C.O.P. - CUT OUT PUFFING
Two packs per day on the average shortens life
expectancy by 6 years.
Quit smoking for one year and you will receive a
$150.00 cash award.
Abstain for another year and you’ll receive a
$75.00 gift o f your choice.
For information regarding the Health Guard
program contact your Division Health Guard Co­
ordinator or the Employee Relations Department.

TH E
HEALTH GUARD
PROGRAM
FOR
PIONEER EMPLOYEES
It is becoming
more and more evident
that medicine and technology alone cannot
adequately prevent or treat the major diseases o f
modern society. Instead, we should recognize that how
we live can determine how long we live.
Therefore, Pioneer Hi-Bred International, Inc.
has initiated a voluntary, cost-free health screening program
for employees, to assist in identifying and treating
potential health-related problems.
Over the years, Pioneer has added many programs
to help employees and their families cope with
the financial problems caused by serious illness.
At the same time, we recognize that helping prevent
serious health problems can be an even greater benefit.
Early detection o f potential problems can make this possible.
And that’s what Health Guard is all about.

PIONEER HI-BRED INTERNATIONAL, INC.







Health Guard . * . — - ——
—
. . . a program to spot the signs
of illness before it’s too late.
The Health Guard program
consists o f the following tests:
Health History Review'
A questionnaire on your medical history
Physical Data
. Height
Weight
Pulse
Blood Pressure
Temperature
Urinalysis
Albumin
Glucose
Ph
Occulut Blood
Specific Gravity
Hematology Survey
White Blood Count
Red Blood Count
Hematocrit
Hemoglobin
MCH
MCHC
MCV

Blood Chemistry Screen
Phosphorus
Calcium
Glucose
Blood Urea Nitrogen
Bilirubin, Total
Cholesterol
Albumin
Total Protein
Alkaline Phosphatase
SGOT
LDH
Uric Acid
Bun/Creative Ratio
SGPT
Total Lipid
Bflirubin, Direct
Try glycerides
Iron
Sodium
Potassium
Chloride
A/G Ratio

PMI Physical Measurements Inc.
has been selected to gather the necessary data
and samples for this program. Data collected
will be coordinated with laboratory analysis and
sent to an authorized physician for review
and interpretation.
A complete report o f the tests will be mailed
to your home.
If the need arises, other tests may be added
to the program.
Health Guard is not meant to replace
your present health care program,
only to be an extension thereof.
If an abnormality should be discovered in
your tests, we recommend you seek the advice o f
, your family doctor immediately.




258
Mr.

F in e r fr o c k .

Thank you very much. Mr. Petras, please proceed.

STATEMENT OF EDWARD J. PETRAS, ACTING DIRECTOR, HMO
MEDICAL ASSOCIATION, DUBUQUE, IA

Mr. P e t r a s . Thank you. Prepaid health plans or health maintenance
organizations (HMO’s), as they have come to be known, offer a viable
alternative to modifying the growing cost spiral of health care costs.
As an alternative HMO’s do not provide ultimate and complete solu­
tion to the cost/benefit dilemma, however, do make significant changes
in health care delivery systems where key elements exist which make
them feasible.
These key elements are:
First: High benefited employer groups with large first dollar cov­
ered health insurance plans complimented with low employee contri­
bution levels for monthly premiums.
Second: Benefit programs which attempt to avoid unnecessary and
routine health care expenses by requiring an inpatient setting for
reimbursement.
Third: An over-supplied seller base—hospitals and physicians—
developed in an unorganized fashion so that the delivery system is
nonexistent in a structure format.
Fourth: A long-established population base of a minimum of 60,000
to 100,000 to convert patients into plan members in the insurance struc­
tured prepaid plans contracting with local physicians, and a minimum
of 300,000 persons in a transient population to establish a staff model,
salaried physician plan.
The HMO has a number of key elements which distinguish it from1
the traditional fee-for-service reimbursement arrangement.
First: Prepayment of services on a monthly basis with a premium
similar to an insurance plan.
Second: Medical and hospital utilization goals which are lower than
the average for the community and require behavior modification for
medical practitioners, hospitals and plan members to avoid excessive
over-utilization of services.
Third: A voluntarily enrolled member base which is committed to
the program for a 12-month period in order to maintain the revenue
base and actuarial soundness of the plan.
Fourth: A financial risk/reward relationship with physicians and
hospitals to develop ownership in the fiscal and utilization goals es­
tablished by the plan.
Fifth: A predetermined set of benefits which attempt to assist in the
modification of physician/patient habits while developing an attrac­
tive benefit alternative.
Sixth: A statistical base of data to measure programs against plan
utilization objectives while providing information on a day-to-day
plan management.
Seventh: A patient education program which seeks to stimulate
interest in habits concerning nutrition, exercise, smoking and alcohol
which significantly contribute to eventual health deterioration.
HMO’s have proven that in the ri^ht setting they can reduce costs
by shifting care to an outpatient setting from the traditional hospital




259
based care without jeopardizing the quality of service provided.
This was documented by a Johns Hopkins University study com­
pleted in the mid-1970’s which indicated that the quality of care is
maintained while reducing inpatient costs some 15 percent to 20
percent.
In the past 6 months, a major study prepared by Rand Corp.
has added further proof to this data base using a long-established
prepaid program in Seattle, WA.
This does not mean that the HMO’s are flawless in their success
rate. The late 1970’s were marked with a number of plan failures
similar in cause to company failures in other industries.
Most were undercapitalized, ill-managed, inappropriately struc­
tured, or conclusively unfeasible from the start. As mentioned earlier,
there are certain ingredients which are necessary to enable them to
survive.
These elements of failure are not the sole proprietorship of the
HMO industry. However, feasible, well-capitalized, and well-man­
aged HMO’s can make a significant contribution in bringing a com­
petitive element to the health financing marketplace and bring struc­
ture to the delivery system by organizing providers and hospitals
into a formal structure.
The significant presence of HMO’s can spawn further reaction
from the marketplace by other HMO’s sponsored by Blue Cross or
insurance companies, Preferred Provider Organizations (PPO’s),
plans which offer price discounts and quality assurance review similar
to the foundations for medical care of the late 1960’s. Also, a signifi­
cant HMO presence can develop direct provider contracting with
buyers such as employers, the Health Care Financing Administration
(HCFA) and the State Welfare Department to innovate change in
both private and public financing arenas.
The future of HMO’s will require adaptation and flexibility in
the marketplace. The concept itself thrives on efficiently competing
within the health care marketplace, which perhaps has become some­
what margin fat through the years of constantly feeding by a costplus reimbursement system. Just as reliable as the laws of nature,
competition in a “ real marketplace” has always caused sellers to
carefully consider duplication of services and inefficient operation
and growth in quest of a competitive price.
This likewise will remove the inefficient HMO’s as the level of serv­
ice and financing becomes more efficiently balanced.
No one can foresee how long before that turn-around takes place;
however, the marketplace pressures of HMO’s, PPO’s, DRG’s, direct
contract relationshps. self-insured employer trusts, accentuated by
over-supply of providers and facilities may certainly accelerate the
process.
A major underlying question remains as the elements of cost con­
tainment collide over the next few years and that is, while costs may
begin to level, when will one know where the quality threshold has
been jeopardized.
Mr. F i n e r f r o c k . Mr. Grahek, please proceed.




260
STATEMENT OP BERNARD M. GRAHEK, CLINICAL COORDINATOR,
VOLUNTARY HOSPITALS COOPERATIVE ASSOCIATION OF IOWA,
CEDAR RAPIDS, IA
M r . G r a h e k . Thank you. Voluntary Hospitals Cooperative Associa­
tion of Iowa, known as VHi, is a group of 14 hospitals located in
central and eastern Iowa, which has been looking to the future to
assist in the preserving the health care delivery system in rural Iowa
by creating a system of local not-for-profit hospitals that meet stated
criteria which strengthen and expand voluntarism in the health care
field by improving the efficiency and effectiveness of each member hos­
pital and increasing their competitive position in the health care sys­
tem and by sharing their efforts to provide the best possible care
through large system advantages while maintaining local initiatives
and direction. VHi is a multi-hospital system. It is a system which
takes advantage of the national multi-hospital system, The Voluntary
Hospitals of America. This is made possible through the membership
of our “anchor” hospital, St. Luke’s Hospital, Cedar Rapids, IA.
Through shared efforts, the members take advantage of the regional
multi-hospital system whereby local hospitals in both rural and urban
Iowa share similar goals and work toward the common good, that is
to givo the patents they serve the best possible care by the most eco­
nomical means.
The VHi is a partnership—all members have equal voice and vote.
Local control is preserved, and all members are encouraged to use the
system and utilize its programs. We are in existence to preserve vol­
untarism at the expense of the for-profit sector. Our goal is to maintain
local autonomy and control.
The VHi hospital is a strong, not-for-profit, voluntary hospital. It
is independent of any other system or group, with strong, enlightened
leadership, and compatible in goals, marketing, and patient care phi­
losophy with other members of the VHi organization.
This partnership is an innovative program offering services and re­
sources enjoyed by the shareholders, as I stated earlier, of the Volun­
tary Hospitals of America. The Voluntary Hospitals of America is the
largest hospital system representing voluntarism, whose members are
all very prestigious not-for-profit hospitals located throughout tho
United States.
Economies of scale savings are obtained through group purchasing.
Purchasing contracts negotiated by VHA, in pharmacy, capital equip­
ment, medical/surgical supplies, reference laboratory, and forms pur­
chasing. In addition, VHi has negotiated 15 local contracts ranging
from food purchasing to linen purchasing.
Technical services are being studied and established to provide the
rural hospitals with technology not financially feasible for them to
provide “in house.” VHi has recently placed a mobile echocardiology
unit at the disposal of nine hospitals in rural Iowa, eliminating the
need for the patient to travel, keeping the patient in his community
while being given the latest in technology and professional expertise.
Other technology is in the planning stage and will be made available
in the future to the same rural hospitals.




261
As you have heard earlier in the testimony by Sally Miller of Anamosa Community Hospital, so many times that hospital is the focal
point of the community, the only center of health care services, and by
and large the largest employer of the given community, and therefore
these kinds of things will make it continue to be a viable part of the
rural community.
Sharing, eliminating duplication in marketing efforts, community
relations, and other disciplines are goals of the VHi. Sharing profes­
sional personnel and expertise is obtainable through a multihospital
system.
Pharmacists at St. Luke’s Hospital, for example, can certainly act
as consultants to the pharmacists of the rural hospitals that are mem­
bers. These are the types of things happening which virtually elim­
inate the high cost of consultation work. The VHi system is designed
to have the financial benefits go to its members and in turn, the patient,
and not to a corporate profit.
Productivity and efficiency is paramount in the hospital industry
today. VHi is actively engaged now in development of a program for
its member hospitals, with a meaningful data base, to establish needed
parameters in producing units of service that can be compared, and
that the members can assist one another, if they have a better mouse­
trap, so to speak, than another member, then they can share with one
another to do a better job.
We have been in existence only a year. Many dollars are being saved
by the members of the VHi. Many more will be saved in the future be­
cause of the members’ commitment to the system and to one another.
Sharing for the common good is paramount.
Providing community health care services through voluntary, notfor-profit organizations has a rich and very successful tradition in the
United States. In most cases, not-for-profit hospitals were established
to meet needs identified as important to the community, but not amen­
able to private, for-profit or governmental solutions. Not-for-profit
hospitals have been responsive to community needs, funded through
local community efforts, and have traditionally reflected community
control in their organizational purpose and design.
It would behoove the Government to harness the bureaucracy that
they have established and the many, many regulations that have been
forthcoming from the bureaucracies, because only through this has
high cost continued to go about. As Senator Jepsen indicated, that the
Senator from Minnesota stated we did not have a health policy but a
sick policy. ! would suggest that the sick policy is in the bureaucracy of
the Federal Government and that the people of this country would be
well served if the Congress of the United States would indeed harness
that bureaucracy. Pioneer, you heard just a moment ago, they have a
health policy, they know what it’s about, they are working toward a
goal. I am certain the Government did not come in and establish their
regulations and rules by which they are operating.
VHi is committed to preserve the quality of life for all Iowans by
having its members effective to meet the challenge now and in the
future. Thank you.
Mr. F i n e r f r o c k . Thank you very much, Mr. Grahek. Mr. Johnson,
please proceed.

37-264 - 85 - 18




262
STATEMENT OP G. RICHARD JOHNSON, ROCKWELL INTERNA­
TIONAL, CEDAR RAPIDS, IA

Mr. J o h n s o n . Thank you, Bill. I have been asked to comment today
on what Rockwell International here in Cedar Rapids has done to
address health care cost containment and also our observations on what
is needed here in this community of Cedar Rapids.
The health care system in Iowa and this Nation is undergoing a
transformation, changing the way we receive and pay for health care.
These changes are occurring because private citizens and leaders in
business, labor, government, medical care and other groups have
learned an expensive and valuable lesson: In the health care arena,
business as usual is not always good business. At a time when corporate
and personal budgets are tight, the purchasers of health care, such as
businesses, unions and individuals, expect purchasers of health care
such as businesses, unions and individuals, expect purchasers of health
care, such as businesses, unions and individual, expect efficiency in the
use of their health care dollars. This requires the health care delivery
system to use its financial, material and human resources as cost effec­
tively as possible.
Cost of health care has had a more dramatic impact on corporate
costs in recent years. As an example, Rockwell’s health care expendi­
tures for its Cedar Rapids-based employees have increased an average
of 15 percent each year for the past 5 years. This cost escalation di­
rectly affects our overhead cost and in turn, the cost of our product.
If left unchallenged, this rate escalation would price us out of our
highly competitive marketplace.
To respond to this issue, Rockwell, like many industries around the
country today, has undertaken a variety of activities geared to level
the escalation of health care costs.
Since 1981, Rockwell has been involved in health care management
activities that include but certainly are not limited to the following:
In January of 1981, Rockwell implemented an in-house pharmacy
for its employees and dependents. Currently, our pharmacy fills ap­
proximately 120,000 prescriptions each year and has saved several
hundreds of thousands of dollars.
Since July of 1981, Rockwell has been very active in both the state­
wide health coalition, the Iowa Business Labor Coalition on Health,
and the local Cedar Rapids coalition, the Employer’s Health Associa­
tion. These coalitions are important in that their membership is com­
prised of business, labor, government and health care providers. This
public-private partnership has been instrumental in conducting on­
going steps to better manage our health care costs such as:
Transforming the State’s Health Planning Agency into the Health
Policy Corp. of Iowa.
Stimulating cooperative dialogue between purchasers and provid­
ers of health care.
Recommending changes by employers from “first dollar” benefit
plans to cost sharing plans that include incentives.
Supporting the creation of the Iowa Health Data Commission to
make information on hospital and physician charges available to aid
individuals in their health care decisions.




263
Developing public education efforts to increase the awareness of the
health care cost problems.
In 1982, Rockwell implemented several revisions to its health benefit
plan to decrease overutilization of medical services and to eliminate
unnecessary care. The plan provisions include the following:
Implementation of an up-front deductible for all medical serviced
of $100 per person, $200 per family.
Establishment of a 10-percent employee copayment after the
deductible.
The addition of an incentive which provides 100 percent coverage
rather than 90 percent coverage after the deductible for the services
that could be handled in less costly settings such as:
Ambulatory surgery, second surgical opinions, extended care/skilled
nursing facilities, home health care, maternity/birthing centers.
As an ongoing effort in the last 3 years, we have been providing
material and information to our employee/dependent population on
the cost of health care. Wise and prudent buyers utilize delivery
system properly and also the options that are available for an im­
proved, healthier lifestyle. This education and awareness effort has
been conducted through employee meetings, internal publications
and letters to the individual home.
To further impact our health cost containment activities and to
improve our education programs, we have been working with our
insurance carriers on proper health care management. These ongoing
activities center primarily on:
Improving carrier administration of our benefit contracts relative
to coordination of benefits, subrogation and ineligible payment
enforcement.
In addition, to develop specific health cost management reports
that will assist us in identifying specific problem areas, either in the
purchase or delivery of care, and in identifying further needs for
employee education and awareness.
While these activities are necessary and have provided results,
additional action is still required. Each element of the health care
delivery system has unknowingly made a contribution to this health
care cost problem. It will take commitment on the part of all the
parties to resolve the problem. If any one segment responds with
change independently of the other segments, negative impact can
result in the form of cost shifting or a decrease in quality of care
for certain individuals. The Government is the one segment that has
most visibly made changes through the DRG, prospective payment
process recently implemented. It is frequently argued, and has been
argued here earlier today, that these changes potentially have ap­
peared as cost shifting and also a decrease in quality care.
Therefore, all segments of the health care spectrum must work
together to objectively develop a means to down-size a massive health
care system that has cost inefficiencies, and at the same time maintain
the present status of high quality. If effectively accomplished, the
potential for negative impact can be lessened.
The health care delivery segments in Cedar Rapids are diligently
addressing the issues to arrive at workable solutions. In January of
1984, the Community Advisory Council, an arm of the local coali­
tion comprised of members from business, labor, physicians, dentists,




264
and hospitals jointly initiated a project to develop innovative ideas
and concepts on how the community as a whole can cooperatively work
together to improve the efficiency of our health care delivery system.
The initial phase of gathering thoughts and ideas has been completed.
The second phase of procuring a consultant to evaluate and analyze
this information for the purpose of developing a community-wide
health strategy is currently in process. This type of activity is critical
to this community as it has the clear potential of becoming a model of
success in proving that private sector initiatives can achieve a resolu­
tion to the health care cost problems and do so in the best interests of
the community. The emphasis must continue to be centered upon joint
health care planning in this community. Thank you very much.
Mr. F i n e r f r o c k . Thank you, Mr. Johnson.
At the hearing in Washington, one of the points that was made by
Chrysler Motor Co. was similar to what both you and Mr. Knuth have
mentioned here, that there is a direct cost in their product as a result
of health costs. Chrysler, for example, has estimated that $500 in costs
of every car they put out is directly attributable to the costs of health
care they provide for their employees, and a number of companies are
doing some of the things that you are doing. Do either of you, both
you, Mr. Johnson, Mr. Knuth, believe there is applicability of some
of the things that you are doing with regard to the Federal level
programs ?
Mr. J o h n s o n . Oh, I certainly think there are. I believe that some of
the initiatives that private industry has taken may have applicability
to the Federal Government and some of the programs that exist there.
I also think that, to expand on your question a little bit, that we can
learn a lot from each other in what’s going on within this whole health
care movement, and we certainly exchange information with other in­
dustries and across the nation. And I think if we can work in com­
municating this issue and try to have us all better understand the
elements and to make sure that all people understand that it’s not one
piece of pie that’s at fault, that if we can work this from a cooperative
standpoint, we all have a lot to learn and a lot to gain from it.
Mr. F i n e r f r o c k . Thank you. Mr. Knuth.
Mr. K n u t h . Yes, I agree, but I would like to make a comment and
accept some responsibility as industry that over the years we become
somewhat maternalistic, provide full care and therefore eliminate the
incentive of employees to look at better ways to contain costs and
better ways to implement health care, and that on a 50-50 basis we
probably were more like 28 in not providing those incentives, and it
could be that’s why we as industry then have taken a vertical approach
and turned around a^d went the other way. I think we do need to
accept that responsibility.
Mr. F i n e r f r o c k . At Rockwell, and I believe at Pioneer also, you
mentioned you have an information insert program where you peri­
odically provide your employees with information, and I believe Pio­
neer has a similar program, if I am not mistaken, where you have in­
serts that go into paychecks on health care ?
Mr. K n u t h . That is correct, and w e have quarterly mailings to our
employees, plus we have a newspaper for each of our 22 divisions and
one section is devoted to wellness in each issue.




265
Mr. F i n e r f r o c k . One of the—I have seen some of the. inserts that
you put in and it struck me that many of those would be beneficial for
many of the medicare beneficiaries, and seeing as most of those people
are receiving Social Security checks, we could very easily put similar
types of inserts into Social Security checks. Is that a very costly pro­
gram for you ?
Mr. J o h n s o n . Not really. Once you begin to print these, the costs of
printing these becomes very, very small. And we also take advantage
of these publications that are available from other sources, HCPI, or
Blue Cross-Blue Shield or Metropolitan, or other people that provide
good information in this area. We don’t hesitate to use their informa­
tion if it’s meaningful and supports what we are trying to accomplish.
Mr. F i n e r f r o c k . H o w many—Mr. Grahek, how many Iowa hos­
pitals are members of the Voluntary Hospital Association ?
Mr. G r a h e k . As I said, 14 presently.
Mr. F i n e r f r o c k . And they are all affiliated through St. Luke’s?
Mr. G r a h e k . All affiliated through the anchor hospital, St. Luke’s,
and the reason for that, as I said, is the member or the shareholder in
the Voluntary Hospitals of America, and all those services, assistance
and developments can come only from the voluntary hospitals because
of that St. Luke’s tie in.
Mr. F i n e r f r o c k . Are these primarily rural hospitals then or is there
a mixture ?
Mr. G r a h e k . It’s a mixture of rural-urban, and as I said in my testi­
mony, what we are striving to do is to keep a health system intact in
the State of Iowa. We are a rural State and I think those people in
rural Iowa need as good a quality of care as we get in the urban areas,
and so in our situation we have Burlington, Davenport, Clinton, Du­
buque, Cedar Rapids, Waterloo, which we have now Manchester, Maquoketa, Henry County in Mount Pleasant, Fairfield, and Boone
County, and Fort Dodge as the hospitals that are represented in our
group. In addition to that, we have Anamosa, John McDonald in
Monticello, Vinton, VA Gay Hospital, that are all affiliated with
St. Luke’s in a management situation, so they too benefit from the
programs at both VHA and VHi. This country is going to see by
1990, 25 such systems such as Voluntary Hospitals of America, and
your for-profits, Health Care Corporation of America and so forth.
That will be the survival mechanism for the hospitals in this coun­
try, one of the survival mechanisms. Hospitals will not be able to
stand on their own and survive, whether they be urban or rural.
Mr. F i n e r f r o c k . Y o u have a similar situation with HMO’s, don’t
you, where a lot of them are having to become affiliated or in some
way affiliated with one another so that it’s not just that you need HMO
in a particular community but as part of that system ?
Mr. P e t r a s . Well, the concern you have is that you don’t recreate
Blue Cross and Blue Shield. We firmly believe that what we want to
do is maintain local control because that’s where you get the most re­
sponsive change to utilization. However, as the final commitment is
drawn, and I think this gentleman is correct, bigness will be the word,
networking with the oversupply, there will be relationships where we




266
may even have—next will be physician groups going together to pro­
vide services on a direct contract basis with major local services.
Mr. F i n e r f r o c k . Does anyone have any additional comments they
would care to make in closing? Thank you all for coming today.
If there isn’t anything else then, the committee now stands
adjourned.
[Whereupon, at 4:50 p.m., the committee adjourned, subject to the
call of the Chair.]




APPENDIX
(From the Cedar Rapids Gazette, Aug. 30, 1984)

Gripes about
health care aired
at congressional
hearing
By Vanessa Shelton
Gazette staff writer

Spiraling costs are making health care unaffordable,
according to testimony Wednesday during a congres­
sional forum on health care issues in Cedar Rapids.
Parents faced with obtaining proper medical care for
their children, hospital administrators strapped with
budgetary restrictions, ar.i* industrial representatives
who’ve struggled with providing medical insurance to
employees were among those making presentations at
the U.S. Congress Joint Economic Committee hearing.
About 100 people attended the four-hour hearing in
the nursing auditorium of St. Luke's Hospital. It was
conducted by Sen. Roger Jepsen, R-Iowa, who chairs
the committee.
According to a Jepsen aide, the information
submitted Wednesday will be included in a report to
members of Congress and congressional committees
addressing health-related issues.
Opening the hearing, Jepsen said the health care
dilemma "is much like the weather. It gets talked about
but nothing is done.” Over $1 billion a day is spent on
health care in the U.S., he said.




(267)




Gazette photo by John Mclvor

Sen. Roger Jepsen makes a point at a health care hearing Wednesday In Cedar Rapids

269
Jepsen told the audience that Congress and the
president "now seem ready" to establish a national
policy on health care.
Testimony from members of four panels making
presentations during the meeting here, the second of
two forums held in the country, can play an important
'oie in developing the policy, he said. The first forum
was held earlier this year in Washington, D.C.
Discussions by the 23 panelists included the
following:
• Economic conditions of hospitals are having "a
profound impact on patients,” pointed out Mercy
Hospital Administrator Jim Tinker. As hospitals
reluctantly cut staff to reduce operational expenses due
to revenue losses. Tinker has detected "mounting
resentment among patients."
This resentment has surfaced with a new method of
paying hospitals for care of federal Medicare patients.
The method, using Diagnostic Related Groups, or
DRGs, establishes'set amounts to be paid the hospitals
for each type of medical care.
Consequently, elderly people and others have been
released within a day of having cataracts removed from
their eyes with no regard given for the assistance they’ll
have available at home, Tinker complained.
• Julie Beckett, whose young daughter Katie made
headlines in 1981 in an example of federal red tape
thwarting financially efficient alternatives to hospital
care (in Beckett’s case, care at home instead of in the
hospital), told of her daughter’s case and those of other
families with similar circumstances. She urged coopera­
tion between government agencies and health care
officials to get proper assistance to families.
• Jodi Miller of 126 Harbet Ave. NW quit her job
after almost a year of employment because her $573
monthly wages weren't enough to pay health insurance
premiums, medical bills, babysitting costs for her young
child and other living expenses amounting to about
$599 a month.
After quitting her job, Miller and her child became
eligible for Aid to Families with Dependent Children,
food stamps and Medicaid medical care paid by the
state and federal governments. With fewer expenses (a
babysitter is no longer needed), Miller said she now has
about $80 left after paying her bills.
• Representatives of urban and rural hospitals
complained about the difficulty of providing quality
care with revenue limitations imposed with the
Medicare DRGs.




270
Hospital officials are looking to partnerships between
hospitals and with government and industiy as possible
cost-cutting measures, according to the president of St.
Luke's Hospital, Sam Wallace. However, federal
antitrust laws loom as possible barriers to networks
between hospitals and in-home nursing agencies, he
added.
• Defending medical malpractice lawsuits is an
added expense for hospitals and physicians today, the
costs of which are passed on to consumers, according to
Cedar Rapids attorney James Snyder.
/
More malpractice claims could arise with the DRG
method, he said, because errors in diagnosis could
become more frequent with restrictions on keeping
patients in hospitals for examinations.
• Industry is taking steps to reduce the need for
medical care in an effort to curtail the cost of providing
employee health insurance coverage.
Six years after offering a preventative program that
includes medical screenings and incentives to employ­
ees to be health conscious, Russell Knuth of Pioneer
Hy-Bred International Inc. told the committee his
company is saving about $1,370 a year on each
employee's insurance coverage.




271

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