Hospital Cost Containment

This report provides an overview of the dimensions of the problem of rising expenditures for hospital care, the reasons for rising hospital costs, general information on methods of controlling hospital costs and specific programs which have been developed, and some of the issues involved.

HOSPITAL COST CONTAINMENT I S S U E BRIEF N U M B E R I B 8 2 0 7 2 AUTHOR: Janet Pernice Lundy Education and Public Welfare Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE M A J O R ISSUES SYSTEM DATE ORIGINATED 06/08/82 DATE UPDATED 01/10/83 FOR ADDITIONAL INFORMATION CALL 287-5700 0111 CRS- 1 ISSUE DEFINITION Expenditures f o r hospital care have been increasing a t double-digit rates f o r years. T h e Health C a r e Financing Administration (HCFA), Department of Health and Human R e s o u r c e s , estimates that the 1 9 8 1 national hospital expenditure level ($118.0 billion) was 17.5% a b o v e that f o r 1980. According t o the American H o s p i t a l Association, community hospital expenses r o s e 17.0% i n 1 9 8 0 and 18.7% in 1981. The rising cost o f hospital care has focused attention in r e c e n t years on various ways of controlling o r a t l e a s t slowing the growth o f hospital expenditures. This i s s u e brief rising expenditures general information programs which h a v e provides a n overview of the dimensions of the problem of for hospital care, the reasons f o r rising hospital costs, on methods of controlling hospital c o s t s and specific been developed, and some o f the issues involved. BACKGROUND AND POLICY ANALYSIS 1. Dimensions of the Problem. Expenditures for hospital care have been increasing a t double-digit rates for many years. The estimate of the 1 9 8 1 national hospital expenditure level, $118.0 billion, is 17.5% above that f o r 1 9 8 0 (see C R S I B 7 7 0 6 6 , Health Care Expenditures and Prices). Hospital expenditures in 1 9 8 1 represented 4.0% of the Gross National Product a n d $504 per capita. Hospital expenditures a r e not only the most rapidly increasing component of total health c a r e expenditures but a r e also the largest c o m p o n e n t , comprising 41.2% o f total national health c a r e expenditures i n 1981. In addition, hospital c o s t s have generally risen more rapidly than consumer prices in t h e economy a s a whole. In 1 9 8 1 , for example, the a n n u a l a v e r a g e increase in the Consumer P r i c e Index (CPI) w a s 10.4% while the increase i n the Hospital Room component of the CPI w a s 14.8%. Three basic f a c t o r s contribute to the level of hospital expenditures: the p r i c e of hospital c a r e , which is affected by general inflation i n the economy a s a whole; the utilization of hospital c a r e , which i s affected by c h a n g e s i n population; population, including changes in size and the aging of the U.S. a n d intensity, which reflects the cature and quantity of services a n d supplies provided to patients in the hospital, as well a s advancements in medical technology. Of the approximate 1 9 % increase i n hospital expenses i n 1981 over 1 9 8 0 , approximately 1 4 % could be attributed to the increase i n the price of hospital c a r e , 1 % to an increase in admissions (a measure o f utilization), a n d 4 % to an increase in intensity. Increasing expenditures f o r hospital care a l s o have implications f o r the Federal budget. In 1 9 8 1 , Federal expenditures for hospital c a r e , under such programs a s M e d i c a r e , M e d i c a i d , the Veterans Administration and the D e f e n s e D e p a r t m e n t , were $48.7 billion, a n increase of 17.9% over the 1980 expenditure l e v e l of $41.3 billion. Although the proportion o f Federal health care d o l l a r s devoted to hospital c a r e has remained the same over the l a s t ten y e a r s (approximately 65%), the proportion of national expenditures f o r hospital services which' a r e paid for with Federal dollars has risen from 34.3% i n 1 9 7 0 t o 41.3% i n 1981. CRS- 2 IB82072 UPDATE-01/10/8$3 2. Theories Explaining Hospital Cost Increases. Several different theories have been suggested to ex?lain the rapid increases in hospital c o s t s 3ver the years. Although no single overall theory totally explains t h e reasons for hospital cost increases, each of the theories mentioned below contribute to a partial understanding of the cost escalation problem. No attempt i s made to assess the validity of the theories presented. Each h a s its proponents, as well as opponents. For example, some have argued that rising costs a r e a t t r i b u t a b l e t o increases in the demand for hospital care and to the response by hospitals t o this demand. Supporters of this view note that third-party payers (i.e., organizations that pay for health expenses, such a s private i n s u r e r s , B l u e Cross/Blue Shield, Medicare, or Medicaid) finance t h e overwhelming proportion of the care rendered in community hospitals. As a r e s u l t , the a c t u a l out-of-pocket o r net costs of hospital care for most patients a r e very small. The patient and his a g e n t , the physician, can therefore elect the most more expensive than they might elect i f t h e expensive care available third-party payment programs did not exist. -- Comprehensive insurance enables hospitals to provide more a m e n i t i e s , m o r e technology and more staff which drive up the costs of hospital care. The costs of care can thus greatly increase without significantly i n c r e a s i n g t h e direct financial burden on patients. This process may even be self-reinforcing: the high cost of care creates pressures f o r even more comprehensive third-party protection, and the expanded c o v e r a g e , i n t u r n , ena5les hospitals to provide even more costly care. A second theory of hospital inflation focuses attention o n the methods currently used by third-party payers to reimburse hospitals f o r care rendered to patients. Third-party reimbursement to hospitals i s generally m a d e e i t h e r on the basis of costs (what the hospital spends to provide g o o d s a n d services) or charges (the amount a hospital bills f o r the goods and s e r v i c e s it provides). If a third-party payer establishes no controls o n the a m o u n t s of costs or charges for which it will reimburse, i~.hehospital will h a v e n o incentive to contain its costs, since any increases a r e simply passed a l o n g to the third-party payer. If a third-party payer d o e s establish l i m i t s o n the amounts it will reimburse, costs may still not be contained because t h e hospital may pass the unreimbursed costs on to other third-party payers that reimburse without limits or to uninsured patients who must pay whatever the hospital charges. Another i s s u e concerns retrospective reimbursements. G e n e r a l l y , payments are made to hospitals for costs incurred, or c h a r g e s billed, f o r s e r v i c e s that have already been provided. Observers have questioned whether c o s t s can be adequately contained without establishing i n a d v a n c e t h e a m o u n t s o r r a t e of reimbursement the hospital will receive (prospective reimbursement) r a t h e r than paying the costs of care after the services h a v e been provided. A third theory of hospital inflation blames wasteful capital expenditures and certain advances in medical technology for escalating costs. Advances i n medical technology have made it possible to treat patients with a n a r r a y o f high-cost therapies (e.g., cobalt t h e r a p y , computerized tomography scanners) not previously available. These advances are costly for a variety of reasons. T h e capital acquisitions, such as new equipment a n d s e r v i c e s , a r e themselves costly and require specialized personnel to staff them. In addition, hospitals i n a single community often d u p l i c a t e these highly specialized and expensive services and equipment, driving costs up if they CRS- 3 A fourth theory singles out labor costs a s a principal pressure inflating hospital costs, although labor expenses as a proportion of total community hospital expenses have remained relatively constant in recent years (approximately 60%). Supporters of this view note t h a t hospitals are employing greater numbers of personnel to produce services f o r patients and that wages for such personnel have increased a t rates a b o v e those received by other workers in the economy a s whole. Advocates of this theory also note that there appear to be few opportunities f o r improved productivity in a highly labor-intensive industry such as the hospital industry. They point out that new capital investment frequently d o e s not lead to a reduction in the hospital labor force. On the contrary, such investment often requires the hiring of even more hospital employees. 3. General information on Methods of Hospital Cost Containment=. In large part, the debate concerning the control of hospital costs h a s focused on ways of reducing hospital operating costs by changing the way hospitals a r e reimbursed or by limiting such reimbursement. There a r e a number of different methods which separately or in combination could be and are used to restrain hospital operating costs. Generally, such methods are known a s hospital rate-setting o r rate review programs. Under such programs, an Blue C r o s s board, or a external authority (such a s a S t a t e commission, a hospital association) reviews o r determines hospital r a t e s , c o s t s , revenues or charges. Usually the rate i s determined i n advance, a n d the hospital is then reimbursed o n the basis of this prospective rate rather than on the basis of the costs actually incurred. Under this m e t h o d , known as prospective payment, the hospital is then a t risk for any difference between the r a t e set and i t s actual costs. T h e prospective payment level may be determined by a budget review m e t h o d , whereby the hospital's budget i s reviewed a n d approved in a d v a n c e u s i n g , for example, a past Year's costs, costs of groupings of similar hospitals, or some normative c o s t standard i n the review. Or the prospective rate could be established using a formula a p p r o a c h , in which a prescribed set of rules is applied to each hospital's costs to arrive a t a n allowable rate. The formula hospital expenditures (using could include, f o r example, a limit o n adjustments for increases in inflation, in volume of p a t i e n t s , o r other groupings of similar factors), or a l i m i t based on the average c o s t s of approach hospitals. Another prospective payment method could be a maxi-cap whereby a hospital's limit is determined by a n allocation from the total resources available f o r all hospitals within a defined geographic area. Another prospective method i s based on case mix measures, such as diagnostic on the related groups (DRGs), under which hospital reimbursement i s based a average cost of providing hospital services a n d supplies t o patients with specific diagnosis. In addition t o the various general approaches to Controlling hospital operating costs through reimbursement changes or limits a s described above, other methods of controlling hospital costs have been suggested and tried, including: -- health planning and certificate-of-need programs, designed to control capital expenditures and prevent duplication of costly health procedures and f a c i l i t i e s (see C R S IB82023, Health Planning: Issues for the CRS- 4 --- utilization review programs and Professional Standard Z e v i e w Organizations, designed to review the appropriateness of care in health care institutions structural reform of t h e medical c a r e system to encourage system-wide competition (see C R S I B 8 1 0 4 6 , Health Insurance: The Pro-Competition Proposals). 4. Efforts to Moderate Hospital Costs. A number of programs have been established or proposed with the goal of limiting hospital costs. These programs include: a. The Economic Stabilization pro-gram. The Economic Stabilization Program (ESP) w a s a four-phase series o f economy-wide w a g e and price controls which was designed to reduce inflation by a b o u t one-half i n the economy as a in August 1971 whole. The program began with a freeze o n wages and prices (Phase I). T h e f r e e z e was replaced in D e c e m b e r 1 9 7 1 with control programs for each major sector of the economy (Phase 11). For the hospital sector, Phase I1 placed a general ceiling on increases in prices and revenues per inpatient day as well as limits o n increased expenditures f o r new technology, non-wage related expenses, and wage-related expenses. Other health care institutions a n d practitioners were also subject to controls. Phase 111, lasting from J a n u a r y through J u n e of 1 9 7 3 , w a s essentially a n extension of Phase I1 controls. Phase IV controls, h o w e v e r , placed emphasis on the total In a d d i t i o n , Phase IV cost of a hospital stay rather than the price per day. treated increased operating costs due t o c a p i t a l expenditures separately and placed controls o n hospital outpatient services. P h a s e IV lasted from July 1973 to April 1 9 7 4 , when ESP authority e x p i r e d , and the program ended. Before ESP went into effect, the annualized rates of increase i n prices of medical care a n d hospital charges (semi-private room) exceeded those of prices in the economy as a whole. During the various phases of E S P , not only were the rates of increase of medical care a n d hospital c h a r g e s reduced, but the rates of i n c r e a s e dropped below price increases in the economy as a whole. In the post-ESP period, after the controls were l i f t e d , the r a t e s of increase f o r medical care and hospital c h a r g e s rose significantly a n d once again exceeded price increases in the economy a s a whole. b. H o s p i t a l Reimbursement Limits Under Medicare. Section 223 of the 1 9 7 2 amendments to the Social Security Act authorized the Secretary of H e a l t h , Education a n d Welfare (now Health a n d Human S e r v i c e s , HHS) to set prospective l i m i t s o n costs t h a t a r e reimbursed under the Medicare program. The Secretary w a s given broad discretion i n the selection of the institutions and k i n d s of c o s t s to which the limits would be applied a n d in the method of setting the limits. Under this authority, H H S has established limits for the Medicare program o n general routine c o s t s for hospital inpatient care annually from 1 9 7 4 to Sept. 3 0 , 1982. In brief, the calculation of Section 223 limits for hospitals involved: identifying the inpatient general routine operating costs for each hospital, adjusted for certain factors; classifying hospitals into g r o u p s , based on bed size and urban/rural location; calculating t h e mean (average) of the adjusted routine operating costs of the hospitals in each g r o u p ; applying the reimbursement l i m i t (effective Oct. 1 , 1 9 8 1 , the limit is 108%) to the mean to establish a limit for each hospital grouping; a n d making certain CRS- 5 IB82072 UPDATE-01/19/83 adjuszments to the limits when applying :hem z o individual hospltzils. "-1: hospital inpatient routine per diem amounts in excess of the applicable Section 223 limit were nonreimbursable. If the hospital's per diem costs were under the l i m i t , i t was reimbursed 1ts actual costs. + Section 1 0 1 of P.L. 97-248, the T a x Equicy and Fiscal Responsibility Act of 1 9 8 2 (approved o n Sept. 3 , 1982) contains f o u r provisions affecting Medicare reimbursement to hospitals. F i r s t , the existing "Section 223" limits were modified by: extending them t o include ancillary and special care unit operating costs; increasing the limits to 120% in F Y 8 3 , 115% in FY84, and 1 1 0 % in F Y 8 5 and subsequent years; providing for case mix adjustments; and applying the limits o n a per-admission or per-discharge basis. S e c o n d , the l a w establishes a new 3-year ceiling on the allowable annual r a t e i n i n c r e a s e i n operating costs per c a s e for inpatient hospital services, with incentive payments to hospitals that k e e p their costs below (47 FR their targets. On Sept. 30, 1 9 8 2 , H H S issued rules and regulations 4 3 2 8 2 and 43296) implementing the "Section 223" reimbursement limit changes and the rate of increase limits, effective for hospital c o s t reporting periods beginning o n o r after Oct. 1 , 1982. T h i r d , the l a w requires that HHS d e v e l o p legislative proposals for t h e prospective reimbursement of hospitals (and other providers) by Medicare to be reported to the Committees on F i n a n c e and Ways a n d Means n o later t h a n Dec. 3 1 , 1982. T h i s report, entitled Report to Congress: Hospital Prospective Payment f o r Medicare, h a s been submitted to Congress. The important features of this proposal are: -- T h e unit of payment would be the c a s e , o r discharge. Patients would be classified using the diagnosis related g r o u p (DRG) classification system. Hospitals would be paid a predetermined rate for each case within a given DRG. D R G prices would be payment in f u l l , which means that hospitals would not be allowed to bill Meeicare beneficiaries for any differences between the rates and their a c t u a l costs. Rates f o r each DRG would be adjusted to account for variations in local wage levels. Certain c o s t s would not be included in the payment r a t e , but would be reimbursed o n a reasonable cost basis, including direct capital c o s t s , direct medical education costs, a n d outpatient care. D R G prices would be updated annually to account for such factors a s inflation, improved industry productivity, and changes i n technology. Efficient hospitals that incur costs l e s s than the payment r a t e would be a l l o w e d to k e e p the savings. P s y c h i a t r i c , long term c a r e , tuberculosis, and pediatric hospitals would be excluded from the prospective payment system. - Additional payment would be provided f o r less than o n e percent of a l l cases identified as a t y p i c a l long stays. F o u r t h , the l a w authorizes the H H S Secretary to reimburse hospitals in a State according to the State's hospital reimbursement control system rather than according to Medicare's reimbursement methods if the State requests t h i s (1) determines that the State's system will apply change and if H H S substantially to a l l nonFedera1 a c u t e c a r e hospitals i n the S t a t e and to a t least 75% of a l l revenues or expenses i n the S t a t e for inpatient hospital ---- --- -- --- CRS- 6 IB82072 lJ?~~TE-C1,'10/83 services and to a c leasc - 5 % sf revenues 3r expenses for snz5 serviens ander the State's Medicaid program; (2j is assured thac there will S e equitable treatment under t h e State's system of all p a y e r s , hospital employees, and 3-year periods, payments nospital patients; and ( 3 ) is assured t h a t , over made by Medicare according to the S t a t e ' s system will not exceed the payments which would have been made according to Medicare's method of reimbursement. No regulations h a v e a s yet been issued implementing this provision. However, changes the requirements which H H S . h a s issued a statement of policy which States must meet i n order to obtain waivers under previously existing authority to c o n d u c t hospital reimbursement demonstrations (See item d., Federal Demonstrations and Experiments, below). c. S t a t e Programs to Limit Hospital Reimbursement. Programs to limit hospital c o s t s have been initiated in several States by State governments, Blue C r o s s plans, hospital a s s o c i a t i o n s , or a combination of these. Many of t h e s e State s y s t e m s resulted from the Department of Health and Human S e r v i c e s 7 program of experiments a n d demonstrations in alternative hospital reimbursement methods, a s described below in section 4d. Other programs were initiated by S t a t e s in order to control State Medicaid reimbursement t o hospitals. More States have initiated such activity in r e c e n t years because of rising hospital costs and strained State budgets, and more recently b e c a u s e the Omnibus Budget Reconciliation Act of 1981 (P.L.. 97-35) allowed S t a t e s more flexibility in their reimbursement to hospitals under Medicaid. S t a t e programs to control hospital costs vary considerably as to the administrative body responsible for the program (for example, a State commission, S t a t e insurance d e p a r t m e n t , S t a t e department of health, Blue Cross/Blue Shield p l a n , a State hospital association); extent of program (mandatory or voluntary); extent of controls (regulatory or advisory); payers covered (for e x a m p l e , Medicaid, Medicare, Blue Cross, private insurers, private payers); program methodology (budget r e v i e w , f o r m u l a , etc.); method of Control (total r e v e n u e s , revenue per c a s e , cost-based, limit on c h a r g e s , etc.); and the u n i t o f payment (charges, per d i e m , cost per c a s e , annual percentage of t o t a l budget). Mandatory programs (i.e., programs requiring hospitals both to participate and comply) h a v e been established in a number of States, including Connecticut, M a r y l a n d , Massachusetts, New J e r s e y , New Y o r k , Rhode Island, Washington and Wisconsin. Approximately 20 other States have voluntary programs. d. F e d e r a l Demonstrations and Experiments. The Social Security Amendments of 1 9 6 7 a n d 1 9 7 2 authorized broad programs of experimentation i n prospective reimbursement and other alternative reimbursement and rate setting methods under the Medicare and Medicaid programs. Under this authority, the D e p a r t m e n t of Health and Human Services has supported a variety of efforts to develop, d e m o n s t a t e , a n d evaluate various prospective reimbursement s y s t e m s and State rate setting programs. In 1 9 7 4 , the then Social Security Administration funded evaluations of several of the early prospective reimbursement programs, including those in Western Pennsylvania, R h o d e Island, u p s t a t e New York, downstate New York, New J e r s e y , Indiana a n d Michigan. Beginning in 1 9 7 8 and continuing to 1 9 8 3 , the Health Care Financing Administration (HCFA) is funding a n evaluation of prospective reimbursement p r o g r a m s , the National Hospital Rate-Setting S t u d y , which covered programs i n the States of Arizona, C o l o r a d o , Connecticut, Indiana, M a r y l a n d , Massachusetts, Minnesota, Nebraska, New Jersey, New York, Rhode I s l a n d , Washington, Western P e n n s y l v a n i a , and Wisconsin. In a d d i t i o n , CRS- 7 IB82072 UPDATE-01/i0/83 developmental a n d demonstration p r o j e c ~ s ?ave Seen. sponsored in Maryland (whose system includes a l l third-party payers, both public and private, in the State); Rochester, New York (utilizing areawide budgeting); Washington a (the effects of various payment mechods and payer participation within Commission r e v i e w model); New Jersey (payment on a diagnosis specific per-admission basis); and New York (a comprehensive data system and a case-mix adjusted per-admission reimbursement system) to test the effectiveness a n d efficiency of various types of prospective reimbursement systems. New demonstration projects were recently approved in Massachusetts and New Y o r k , whose systems include prospective reimbursement of a l l third-party payers in each State. statement of policy i n the Federal On Oct. 8 , 1 9 8 2 , HCFA published a Register (47 F R 44612) establishing the general criteria it will use i n the future to a p p r o v e demonstration projects using a Statewide hospital reimbursement system. In light of data already accumulated during previous demonstrations a n d expected information from ongoing projects, HCFA has narrowed i t s research focus to projects which: --- a r e applicable Statewide; result in combined Medicare and Medicaid savings each year; - -- u s e diagnosis related groups (DRGs) a s the unit of payment; -- l i m i t sharing of risks for Medicare and Medicaid; a n d -- d o not preclude HMOs from negotiating their own rates. HCFA indicates i t will consider exceptions to these criteria f o r "prOpOSal~ using highly i n n o v a t i v e , competive prospective reimbursement systems such a s capitation o r competitive bidding". - e. Hospital C o s t Containment Legislation Under the Carter Administration. In April 1 9 7 7 , the Carter Administration sent to C o n g r e s s a proposal to (1) set a mandatory limit on total national hospital revenues f o r inpatient services by limiting increases in payments from a l l third-party payers (including Blue C r o s s , Medicare, Medicaid, private i n s u r e r s and individuals paying their own bills) to approximately 9 % in the f i r s t year (FY78), with controlled increases for subsequent years; and (2) establish a n a n n u a l national limit ($2.5 billion) o n n e w capital expenditures by acute care hospitals. Although the original bill (H.R. 6575/S. 1391) a n d its numerous r e v i s i o n s were actively considered by the four congressional committees to which it w a s referred, only the Senate Human Resources Committee had ordered a n amended version of the bill reported b y the end of 1977. In 1 9 7 8 , a n amended a n d weakened version of the original bill w a s reported by the House Interstate and Foreign Commerce Committee. The Finance Committee rejected the Carter Administration's version of hospital cost containment a n d reported instead H.R. 5 2 8 5 , a bill introduced by Senator Talmadge in 1 9 7 7 a s S. 1470. S. 1470 included a modification of Medicare and Medicaid reimbursement to hospitals by classifying hospitals i n t o c o m p a r a b l e groups and reimbursing hospitals not more than a certain percentage of the g r o u p ' s a v e r a g e costs. An amended version of H.R. 5285 passed the S e n a t e i n October 1978. T h e bill a s passed included both the Talmadge prospective CRS- 8 IB82072 UPDATE-01y10/83 payment approacl-i to limiting hospital reimbursement under tne Medicars and Medicaid programs a n d a n amendment sponsored by Senator Nelson which contained voluntary g o a l s for hospital costs nationwide, with mandatory standby c o n t r o l s if these goals were not met. T h e House did not consider a hospital c o s t containment bill before adjournment. The Carter Administration reintroduced its cost containment bill in 1 9 7 9 (H.R. 2626/S.570). T h e 1 9 7 9 Carter Administration proposal was more like the compromise bills of t h e 95th Congress, rather than the 1 9 7 7 mandatory limit proposal, s i n c e it established mandatory standby controls on hospital costs which would be imposed only if certain voluntary goals were not met. The bill a l s o did not include the capital expenditure limits proposed i n the 1 9 7 7 and 1 9 7 8 versions. By the end of 1 9 7 9 , amended versions of the bill had been reported by the Senate Labor and Human Resources C o m m i t t e e , the House Ways and Means C o m m i t t e e , a n d the House Committee o n Interstate and Foreign Commerce. In a d d i t i o n , the Senate F i n a n c e Committee had reported H.R. 934, which incorporated the Talmadge approach to p r o ~ ' ~ e c t i vpayment e of hospitals under the Medicare a n d Medicaid programs. In November 1 9 7 9 , the House decisively rejected t h e Administration's bill and instead approved a . s u b s t i t u t e bill (H.R. 5635) offered by Representative Gephardt. The substitute created a commission (1) to monitor a voluntary effort on the part of the hospital industry to lower cost increases and (2) to report on long-term measures to control health c a r e costs. In a d d i t i o n , grants were authorized to assist States in establishing their own hospital cost containment programs. After defeat in the H o u s e , the Senate did not vote o n the Administration's p r o p ~ s a l ,and the Carter Administration's long battle for mandatory hospital c o s t controls w a s over. f. T h e Health C a r e Industry's Voluntary Effort. In December 1 9 7 7 , a partnership of professional organizations in the health field announced the formation of a Voluntary Effort (VE) t o control health care c o s t increases. The organizations included the American Hospital Association, the American Medical Association, t h e Blue Cross/Blue Shield Associations, the Federation of American H o s p i t a l s , the Health Industry Manufacturers Association, the Health Insurance Association of A m e r i c a , the National Association of Counties, Knauer and Associates (a consumer a f f a i r s organization), and a business representative. Each year since 1 9 7 7 , t h e VE has formulated goals and objectives f o r reducing the r a t e of growth in health care expenditures, and particularly hospital expenditures, i n subsequent years. T h e goals for hospitals have included: ------ reductions i n the national a n n u a l rate of increase i n community hospital total expenditures (2 percentage points per year for 1 9 7 8 and 1979) reductions i n the national a n n u a l rate of increase i n community hospital inpatient expenditures (1.5 percentage points i n 1 9 8 0 over the 1 9 7 9 r a t e of increase a n d a reduction from the 1 9 8 0 rate for 1981) n o n e t ' i n c r e a s e in the t o t a l number of staffed hospital beds in 1 9 7 8 , 1 9 7 9 , 1980 a n d 1 9 8 1 reductions in new capital investments improvements in hospital productivity, including a d e c l i n e in the number of employees per daily patient CRS- 9 C P ~ S U S ,and -- improvements in hospital utilization review. The 1 9 8 2 VE goals include a comprehensive utilization restraint program iheaded by the American Medical Associati?n); special attention to Medicare utilization patterns (led by the Blue Cross and Blue Shield Associations); expansion of local business community activities (headed by the Business Roundtable and the Washington Business Group on Health); a n d efforts to improve hospital productivity and technology management (led by the American Hospital Association). T h e Subcommittee o n Health and the Environment of the House Committee o n Energy and Commerce held a hearing on Dec. 1 5 , 1 9 8 1 , to explore the increases in hospital costs and the effect of the Voluntary Effort. g. The Carter Administration's Anti-Inflation Guidelines. In late December 1 9 7 8 , the Carter Administration asked the Nation's hospitals to voluntarily hold their 1979 total expenses to a 9.7% increase over their 1 9 7 8 total expenses. This request w a s made as part of President C a r t e r ' s economy-wide voluntary anti-inflation program. According to the Department of H e a l t h , Education and Welfare (now Health a n d Human Services), the 9.7% f i g u r e included the following components: 7.9% for hospital market basket i n f l a t i o n , to reflect increases in the prices of goods and services (including labor) that hospitals purchase; 0.8% for population growth; and 1.0% f o r additional services, less productivity and efficiency. In a d d i t i o n , a voluntary $ 3 billion national limit was set on capital expenditures by hospitals for projects and equipment costing more than $150,000. On Aug. 1 , 1 9 8 0 , the Department of Health a n d Human Services (HHS) and the Council on Wage a n d Price Stability called o n the hospital industry to voluntarily reduce the rate of increase in total hospital expenditures by 1.7 percentage points in 1 9 8 0 , after adjusting for changes in inflation. - T h e 13.4% guideline w a s a composite of three factors: 11.6% for projected increases i n the costs of goods a n d services purchased by hospitals; 0.8% f o r population growth; and 1.0% for net new services and technology. The Health Care Financing Administration, H H S , planned to monitor compliance with the voluntary guideline by comparing national, r e g i o n a l , and S t a t e hospital cost increases with the guideline every quarter and by monitoring annual expenditures of individual hospitals. 5. Reagan Administration Proposals. Early in 1981, the Reagan Administration announced its intention to develop an Administration bill to reform health care financing and control rising health care costs by promoting competition among the providers of health care (See CRS IB81046, Health Insurance: T h e Pro-Competition Proposals, for background information on the competitive approach). A task force to develop such a proposal was established in M a y , 1 9 8 1 , by Secretary Richard Schweiker within the In addition, a private sector Department of Health and Human Services (EHS). task f o r c e was established to a d v i s e the HHS group. Option papers were developed and presented to a White House Cabinet Council o n Human Resources in l a t e 1981/early 1982. Under consideration h a v e been a number of o p t i o n s , including proposals to: establish a tax cap o n employer contributions to health insurance premiums; encourage employers to offer a multiple choice of health plans, with certain coinsurance requirements, and a n equal employer contribution to each; increase Medicare coinsurance with a d d e d coverage for catastrophic illness; offer a Medicare voucher which would allow beneficiaries to enroll in private health plans (see CRS 1B81179, Health Insurance: the Medicare Voucher Proposals). The Administration has not a s y e t announced what its policy on the competition approach might be. T h e Reagan Administration's FY83 budget indicated that later in 1 9 8 2 it planned to "propose major reforms of the current health c a r e financing system to introduce more price discipline into the health care market and moderate the explosive growth of health care costs." In support of the objective of strengthening market f o r c e s , the FY83 budget proposed "elimination of ineffective Federal regulatory activities, including the health planning and Professional Standards Review Organizations (PSRO) programs." T h e major 2% specific FY83 budget proposal affecting hospital costs w a s a n interim reduction in Medicare reimbursement to hospitals until "forthcoming Administration proposals to improve market forces in health care can reduce the rate cf increase in industry costs." 6. Issues. Many questions concerning hospital cost containment have been debated. Among these a r e broad issues such a s whether we a r e indeed spending too much on hospital care a n d , if s o , how much should w e be spending? Can o r should only o n e sector of the health care industry (hospitals) be c o n t r o l l e d , even if it represents the largest portion of national expenditures for health c a r e (approximately 40%)? What impact would economic constraints have o n the quality and availability of health care prOV,ided by hospitals? What would be the impact o n the hospital industry itself and its employees? equitably so Can a p r o g r a m . o f cost control for hospitals be administered t h a t efficient hospitals a r e not harmed? What should be the relative r o l e s of t h e Federal Government, the S t a t e s , and the hospital industry in any cost containment efforts? Should controls be limited t o reimbursement under F e d e r a l programs, such a s Medicare and Medicaid, o r extended to all third-party payers? Should there be short-term control measures to attempt to lower immediately the increase in costs of hospital c a r e , or should p e r m a n e n t , long-term controls for the hospital industry be considered? What would be the i m p a c t of any such Federal regulation on the private sector? W h a t impact would controls have on the Federal deficit? More specific issues include the type of hospital c o s t s to be controlled; increase l i m i t , comparison with the method o f control (e.g., a percentage a v e r a g e hospital costs); what type of hospitals should be included under controls; the nature of exceptions to a control program; recognition of State c o s t containment programs; the method of enforcement; a n d the nature of any l i m i t s o n capital expenditures. LEGISLATION T h e major legislation reimbursement included: P.L. 97-35, H.R. in the 97th Congress affecting hospital 3982 T h e Omnibus Budget Reconciliation Act of 1981. Among other i t e m s , contains the following provisions limiting or o t h e r w i s e a f f e c t i n g hospital reimbursement: Section 2141 reduces the Medicare plus factor payment to hospitals for inpatient routine nursing salary c o s t s from 8.5% to 5 % . Section 2143 reduces the Medicare hospital reimbursement l i m i t for inpatient routine operating costs ("Section 223" limits) f r o m 112% to 1 0 8 % of the mean costs of groupings of comparable hospitals. Section 2161 offsets by one percentage point the reductions in t h e Federal matching payments under Medicaid f o r States with qualified hospital c o s t review programs i n effect on July 1 , 1981. Section 2173 deletes the requirement that State reimbursement t o hospitals under the Medicaid program follow the reasonable c o s t rules a s defined under Medicare. Instead, requires State payments for inpatient hospital services to be reasonable and adequate to meet t h e costs which musc be incurred by efficiently and economically operated facilities i n order to meet applicable laws, regulations, and quality and safety standards. In a d d i t i o n , requires the Secretary of HHS t o develop a model prospective payment system f o r inpatient hospital services which may be used f o r reimbursement under the Medicaid and Medicare programs. R e q u i r e s the Secretary t o r e p o r t t o the Congress on the development of such system no later than J u l y 3 1 , 1982. Introduced June 1 9 , 1981; signed i n t o l a w Aug. 1 3 , 1981. P.L. 9 7 - 2 4 8 , H.R. 4 9 6 1 Tax Equity and Fiscal Responsibility Act of 1982. Among other i t e m s , contains the following provisions limiting or o t h e r w i s e a f f e c t i n g hospital reimbursement: Section 1 0 1 modifies the existing Medicare limits on hospital reimbursement ("section 223" limits) by extending the limits to i n c l u d e hospital ancillary and special care unit operating costs; i n c r e a s i n g t h e current limit from 1 0 8 % to 120% in F Y 8 3 , 115% in F Y 8 4 , a n d 1 1 0 % i n F Y 8 5 a n d subsequent years; applying the limit o n a per admission or per discharge basis; providing for case mix adjustments; exempting rural h o s p i t a l s with less than 5 0 beds from the limits; a n d including adjustments f o r psychiatric hospitals and hospitals serving a disproportionate number of low-income o r Medicare patients. S e c o n d , establishes yearly Medicare l i m i t s o v e r a 3-year period o n the rate of increase in i n p a t i e n t hospital operating c o s t s equal to 1 percentage point a b o v e the rate of increase in a market-basket m e a s u r e of A hospital with prices paid by hospitals for s u p p l i e s and services. operating costs below its target r a t e would be paid its c o s t s plus 5 0 % of the savings, not to exceed 5% of the target rate; a hospital with c o s t s a b o v e the target r a t e would receive, for the f i r s t 2 y e a r s , 25% of i t s c o s t s which a r e in excess of the target rate; none o f a n y excess c o s t s would be reimbursed i n the third year. Third, directs the D e p a r t m e n t of Health a n d H u m a n S e r v i c e s to develop, in consultation with the S e n a t e Finance Committee a n d t h e House Ways and Means Committee, legislative proposals under which h o s p i t a l s a n d other providers would be paid by Medicare o n a prospective basis. Requires the Department to report its proposals within 5 months of enactment. Fourth, permits Medicare reimbursement to h o s p i t a l s i n a S t a t e to be based o n the State's hospital reimbursement system if it meets certain conditions, including that it will not result in g r e a t e r Medicare expenditures over a 3-year period. Section 103 eliminates the Medicare 5 % hospital routine nursing salary S e c t i o n 1 0 6 r e q u i r e s the H H S S e c r e r a r y t o p r o v i d e , by r e g u i a t i o n , that the c o s t s i n c u r r e d by a h o s p i t a l i n c o m p l y i n g w i t h i t s f r e e c a r e o b l i g a t i o n under t h e H i l l - B u r t o n A c t would not be c o n s i d e r e d r e a s o n a b l e c o s t s f o r p u r p o s e s of Medicare reimbursement. R e p o r t e d by t h e S e n a t e F i n a n c e Committee July 12, 1 9 8 2 (S. Rept. 97-494). Passed Senate, amended, July 22, 1982. Health p r o v i s i o n s a g r e e d t o by H o u s e a n d S e n a t e c o n f e r e e s on Aug. 1 2 , 1982. R e p o r t e d by t h e C o m m i t t e e of C o n f e r e n c e o n Aug. 17, 1982 (H.Rept. 97-760, S.Rept. 97-530). C o n f e r e n c e r e p o r t a p p r o v e d by t h e H o u s e a n d S e n a t e on A u g 1 9 , 1982. S i g n e d i n t o l a w Sept. 3 , 1982. H.R. 5084 (Wyden) M e d i c a r e H o s p i t a l R e i m b u r s e m e n t Reform Act. Modifies reimbursement to hospitals under t h e Medicare program to a l l o w S t a t e s o r legal entities ( d e f i n e d a s a h o s p i t a l , an a s s o c i a t i o n of h o s p i t a l s , a n e n t i t y w h i c h o p e r a t e s i n o n e o r m o r e S t a t e s , o r a u n i t of S t a t e o r l o c a l g o v e r n m e n t ) to apply to the Secretary of H H S to reimburse hospitals according to a n alternative r e i m b u r s e m e n t s y s t e m rather t h a n u n d e r M e d i c a r e ' s c u r r e n t r e t r o s p e c t i v e c o s t reimbursement rules. Requires t h a t e x p e n d i t u r e s under t h e a l t e r n a t i v e system S e n o g r e a t e r t h a n t h e e x p e n d i t u r e s which would otherwise have been made u n 5 e r t h e M e d i c a r e a n d Medicaid programs. I n t r o d u c e d Nov. 2 0 , 1 9 8 1 ; r e f e r r e d t o C o n m i t t e e s o n W a y s and M e a n s , a n d Energy a n d Commerce. HEARINGS U.S. Congress. House. C o m m i t t e e o n E n e r g y a n d Commerce. I n c r e a s e i n h o s p i t a l c o s t s and the e f f e c t of t h e v o l u n t a r y effort. H e a r i n g s , 9 7 t h C o n g r e s s , 1 s t session. Dec. 1 5 , 1981. W a s h i n g t o n , U.S Govt. Print. Off., 1982. 2 2 2 p. " S e r i a l no. 97-71" ----- P r o s p e c t i v e r e i m b u r s e m e n t s y s t e m s f o r hospitals. Hearings, 9 7 t h C o n g r e s s , 2d session. Nov. 1 9 , 1982. Unprinted. U.S. Congress. House. C o m m i t t e e o n W a y s a n d Means. Impact o f t h e a d m i . n i n i s t r a t i o n f s budget c u t s o n t h e n a t i o n ' s public hospitals. H e a r i n g s , 9 7 t h C o n g r e s s , 2d session. Jan. 1 2 , 1982. W a s h i n g t o n , U.S. G o v t . Print. Off., 1982. 2 2 9 p. " S e r i a l no. 97-42" U.S. Congress. Senate. C o m m i t t e e on F i n a n c e . Hospital r e i m b u r s e m e n t s y s t e m s u s e d by t h i r d party payors. Hearings, 9 7 t h C o n g r e s s , 2d session. Sept. 1 6 , 1982. Unprinted. ----- S t a t e h o s p i t a l payment systems. H e a r i n g s , 9 7 t h C o n g r e s s , 2d session. J u n e 2 3 , 1 9 8 2 . W a s h i n g t o n , U.S. Govt. Print. Off., 1982. 2 4 9 p. R E P O R T S AND C O N G R E S S I O N A L D O C U M E N T S U.S. Congress. C o m m i t t e e of Conference. T a x Equity and F i s c a l R e s p o n s i b i l i t y A c t of 1 9 8 2 ; c o n f e r e n c e r e p o r t t o accompany H.2.. 4961. Washington, 2 . S . Govt. P r ~ n t .Off., Aug. 1 7 , 1982. 723 p. (97th C o n g r e s s , 2d session. House. Report no. 97-760; Senate. Report no. 97-530.) U.S. Congress. House. Committee o n Ways and Means. Explanation of H.R. 6878; the Medicare, Unemployment C o m p e n s a t i o n , and Public Assistance Amendments of 1982. W a s h i n g t o n , U.S. Govt. Print. Off., Aug. 2 , 1982. 9 5 p. At head of title: Committee print. U.S. Congress. Senate. Tax Equity a n d Fiscal R e s p o n s i b i l i t y Act of 1 9 8 2 ; report on H.R. 4 9 6 1 together with a d d i t i o n a l supplemental and minority views. Washington, U.S. Govt. Print. Off., July 1 2 , 1982. 4 3 5 p. (97th C o n g r e s s , 2 8 session. Senate. Report no. 97-494, vol. 1). CHRONOLOGY OF EVENTS 12/31/82 -- Department of Health and H u m a n Services submitted report on the prospective reimbursement o f hospitals by Medicare to Congress. 11/19/82 -- Hearings held by Subcommittee on Health a n d the Environment, Committee o n Energy and C o m m e r c e , o n prospective reimbursement systems f o r hospitals. 10/08/82 -- The Department of HHS issued a statement o f policy regarding criteria for a p p r o v a l of S t a t e w i d e hospital reimbursement demonstration projects (47 F R 44612). 09/30/82 -- The Department of HHS issued rules and r e g u l a t i o n s implementing the hospital c o s t limits a n d t h e rate of increase limits in P.L. 97-248 (47 F R 4 3 2 8 2 a n d 43296). 09/16/82 -- Hearings held by Subcommittee on H e a l t h , S e n a t e Finance Committee, on hospital r e i m b u r s e m e n t systems used by third-party payors. 09/03/82 -- The Tax Equity and Fiscal R e s p o n s i b i 1 i t y ' ~ c t of 1 9 8 2 (P.L. 97-248) was signed i n t o law. 08/19/82 -- Conference report on H.R. and Senate. 08/17/82 -- H.R. 4961 reported by the C o m m i t t e e of C o n f e r e n c e (H.Rept. 9 7 - 7 6 0 , S.Rept. 97-530). -- H.R. 6877 reported by the H o u s e C o m m i t t e e o n Energy and Commerce (H.Rept. 9 7 - 7 5 7 , part I). 08/12/82 -- Health provisions of H.R. 4961 approved by the House and Senate conferees. 07/28/82 -- Rep. Dingell et al. iritroduced H.R. -- Rep. Rostenkowski et al. introduced H.R. .* 4961 approved by the House 6877. 6878. -- H.R. 6 8 7 7 approved by the Energy and Commerce Committee. 07/22/82 -- H.R. 4961 was passed, a s a m e n d e d , by the Senate. 07/12/82 -- H.R. 4 9 6 1 was reported by t h e Senate Finance Committee (S. Rept. 97-494). 06/23/82 -- Hearings held by Subcommittee on H e a l t h , Senate Finance Committee, o n S t a t e hospital payment systems. 04/14/82 -- T h e American Hospital Association released its " P r ~ p O S a lfor Medicare Prospective Fixed Price Payment to Hospitals." 12/15/81 -- Hearings held by Subcommittee on Health and the Environment, Committee on Energy and- C o m m e r c e , on hospital cost increases a n d the effect of the voluntary effort. 11/20/81 --- Representative Wyden introduced H.R. 08/13/81 5084. T h e Omnibus Reconciliation Act of 1 9 8 1 (P.L. 97-35) was signed into law. ADDITiONAL REFERENCE SOURCES American Hospital Association. Proposal for medicare prospective fixed price payment t o hospitals. American Hospital Association, Apr. 1 4 , 1982. 1 4 p. Conference report on H.R. 4961. ed. v. 1 2 8 , Aug. 1 7 , 1982: Congressional r e c o r d , daily H6167-H6355. Prospective r a t e setting. Dowling, William L., ed. Germantown, Md., Aspen Systems Corporation, 1977. 1 5 9 p. Feldstein, Martin. Hospital costs a n d health insurance. Cambridge, Mass., Harvard University P r e s s , 1981. 327 p. New Jersey's experiment with DRG-based Iglehart, John K. hospital reimbursement. The New England journal of medicine, v. 307, no. 2 6 , Dec. 2 3 , 1982: 1655-1660. ----- T h e new era of prospective payment for hospitals. The New England journal of medicine, v. 307, no. 20, Nov. 1 1 , 1982: 1288-1292. Prospective reimbursement of hospitals. Prepared by the Staff of the Subcommittee o n Health, S e n a t e Finance Committee, with the assistance of Janet P e r n i c e Lundy and Glenn Markus, Congressional Research Service. J u n e 2 2 , 1982. 23 p. Salkever, David S. Hospital section inflation. Mass., Lexington B o o k s , 1979. 1 8 5 p. Lexington, S c h w a r t z , William B. The regulation strategy f o r controiiing hospital costs. The New England journal o f medicine, V. 3 0 5 , no. 2 1 , KOV. i 9 , i981: i249-i255. S l o a n , Frank A. Regulation and the rising c o s t of hospital care. T h e r e v i e w of economics and s t a t i s t i c s , v. 6 3 , no. 4, November 1981: 479-487. S l o a n , Frank A., a n d Bruce Steinwald. I n s u r a n c e , regulation, and hospital costs. L e x i n g t o n , Mass., Lexington Books 1980. 266 p. U.S. Congress. Congressional Budget Office. An analysis of the American Hospital Association's proposal to modify medicare hospital reimbursement. Congressional Budget Office, J u n e 1982. 21 p. ---- Containing medical care c o s t s through market forces. Washington, U.S. Govt. Print. Off., May 1982. 6 7 p. ---- Controlling r i s i n g hospital costs. Washington, U.S. Govt. P r i n t Off., September 1979. 96 p. ---- The C B O hospital cost containment model: a technical analysis. Staff working paper. W a s h i n g t o n , U.S. Govt. Print. Off., February 1981. 3 6 p. U.S. Dept. of H e a l t h and Human Services. Abstracts of state legislated hospital cost-containment programs. Health C a r e Financing R e v i e w , v. 4, no. 2 , December 1982: 129-158. ---- An analysis of the effects of prospective reimbursement programs o n hospital programs by Craig Coelen and Daniel Sullivan. Health care f i n a n c i n g r e v i e w , Winter 1981: 1-40. ---- First a n n u a l r e p o r t of t h e national h o s p i t a l rate-setting study: a comparative review of n i n e prospective ratesetting programs. Health C a r e Financing Administration Pub. No. 03061. August 1980. 1 4 0 p. ---- National health expenditures, 1 9 8 1 by Robert M. Gibson a n d Daniel R. Waldo. Health c a r e f i n a n c i n g review, v . 4 , no. 1 September 1982: 1-35. ----- Report to Congress: Hospital prospective payment for Medicare. D e c e m b e r 1982. 200 p. U.S. General Accounting Office. Information o n prospective reimbursement systems. Washington (Document No. HRD-82-73, May 1 0 , 1982.) 11 p . ----- Rising hospital costs can be restrained by regulating payments and improving management; report to the Congress by t h e Comptroller General o f the United States. Washington (Document No. HRD-80-72, Sept. 1 9 , 1980.) 210 p. ---- Health care expeneltures s n d ?rzc2s by janet Pernice iundy. Washlngtac 1377. Regularly updated. ---- Health insurance: the pro-competition proposals by Janet Pernice Lundy and Glenn Markus. Washington 1981. (Issue Brief 81046) Regularly updated. ------- ---- ---- 2ic9ard ? r r l c e 2nd (Issue brief 77066) Health planning: issues for the future by Kay Reiss. Washington 1982. (Issue brief 82023) Regularly updated. Medicaid by Jennifer O f S u l l i v a n . Washington 1982. (Issue brief 82041) Regularly updated. Medicare by Jennifer O r S u l l i v a n and Glenn R. Markus. Washington 1982. (Issue brief 82044) Regularly updated. Medicare and Medicaid provisions of the "Omnibus Budget Reconciliation Act of 1981" (P.L. 97-35) by Jennifer 55 p. (Report No. OfSullivan. Washington 1981. 81-210 EPW) ---- Medicare and Medicaid provisions of the "Tax Equity and Fiscal Responsibility Act of 1982" (P.L. 97-248) by Jennifer O f S u l l i v a n and Glenn Karkus. Washington 1982. 66 p. R e p o r t no. 92-173 EPW ---- Voluntary effort goals for hospitals by Janet Pernice Lundy. Washington Aug. 1 9 , 1982. (CRS white paper) Weiner, Stephen M. Paying for hospital services under medicare: can w e control hospital costs? In Federal health programs; problems and prospects. Lexington, Mass., D.C. Heath and C o m p a n y , 1981: 135-151. Zubkoff, Michael, Ira E. Raskin, and Ruth S. Hanft, eds. selected notes for f u t u r e Hospital cost containment policy. New York, published for the Milbank Memorial Fund by P r o d i s t , 1978. 6 5 6 p. -