HOSPITAL COST CONTAINMENT
I S S U E BRIEF N U M B E R I B 8 2 0 7 2
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
Expenditures f o r hospital care have been increasing a t double-digit
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.
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
programs which h a v e
provides a n overview of the dimensions of the problem
for hospital care, the reasons f o r rising hospital costs,
on methods of controlling hospital
c o s t s and
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
expenditures in 1 9 8 1 represented 4.0% of the Gross National Product a n d
Hospital expenditures a r e not only the most rapidly
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.
addition, hospital c o s t s have generally
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:
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, including changes in size and the aging of the U.S.
a n d intensity, which
reflects the cature and quantity
services a n d
supplies provided to patients in the hospital, as well
a s advancements
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
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
billion, a n increase of
expenditure l e v e l of $41.3
o f Federal
health care d o l l a r s devoted to hospital c a r e has remained the same over
l a s t ten y e a r s (approximately 65%), the proportion of national
f o r hospital services which' a r e paid for with Federal dollars has risen
34.3% i n 1 9 7 0 t o 41.3% i n 1981.
Theories Explaining Hospital Cost Increases.
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
contribute to a partial understanding of the cost escalation problem.
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
Supporters of this view note that third-party payers
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
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
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
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
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
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
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.
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
A fourth theory singles out labor costs a s a principal pressure
hospital costs, although labor expenses as a proportion
relatively constant in
this view note t h a t hospitals are
employing greater numbers of personnel to produce services f o r patients
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
highly labor-intensive industry such as the hospital
out that new capital investment frequently d o e s not lead to a
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=.
part, the debate concerning the control of hospital costs h a s focused on ways
of reducing hospital operating
changing the way
hospitals a r e
reimbursed or by
limiting such reimbursement.
There a r e a number
different methods which separately or in combination could be and are used to
restrain hospital operating costs.
are known a s
hospital rate-setting o r rate review programs.
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
Usually the rate i s determined i n advance, a n d the hospital
then reimbursed o n the basis of this prospective
than on the
the costs actually
this m e t h o d , known
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.
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
factors), or a l i m i t based on the average c o s t s of
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
Another prospective method i s based on case mix measures, such as diagnostic
related groups (DRGs), under which hospital reimbursement i s based
average cost of providing hospital services a n d supplies t o patients with
In addition t o the various general approaches
to Controlling hospital
operating costs through reimbursement changes or limits a s described
other methods of controlling hospital costs have been
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
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
established or proposed with the goal of
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
The program began with a freeze o n wages and prices
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
for each major sector of the economy (Phase 11).
Phase I1 placed a general ceiling on increases in prices
inpatient day as well as limits o n increased expenditures f o r new technology,
non-wage related expenses, and
institutions a n d practitioners were also subject to controls.
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
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
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
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
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
again exceeded price increases in the economy a s a whole.
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
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)
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
setting the limits.
Under this authority, H H S has established limits for the
o n general routine c o s t s for hospital
annually from 1 9 7 4 to Sept. 3 0 , 1982.
In brief, the calculation of Section 223 limits for hospitals
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
in each g r o u p ; applying
reimbursement l i m i t (effective Oct. 1 , 1 9 8 1 , the limit is 108%) to
limit for each
grouping; a n d making
adjuszments to the limits when applying :hem z o
hospital inpatient routine per diem
in excess of
Section 223 limit were nonreimbursable.
If the hospital's per
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
3 , 1982)
contains f o u r provisions
Medicare reimbursement to hospitals.
F i r s t , the existing
limits were modified by:
extending them t o include ancillary
care unit operating costs; increasing the limits to 120% in F Y 8 3 , 115% in
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
S e c o n d , the l a w establishes a new 3-year
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
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
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
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
3 1 , 1982.
T h i s report, entitled Report
Prospective Payment f o r Medicare, h a s been
submitted to Congress.
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
- 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
State according to the State's hospital reimbursement control
than according to Medicare's reimbursement methods if the State requests t h i s
that the State's
system will apply
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
services and to a c leasc - 5 % sf revenues 3r expenses for snz5 serviens ander
the State's Medicaid program; (2j is assured thac
S e equitable
treatment under t h e State's system of all p a y e r s , hospital
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
No regulations h a v e a s yet been issued implementing this provision.
changes the requirements
H H S . h a s issued a statement of policy which
States must meet
i n order
authority to c o n d u c t hospital
Federal Demonstrations and Experiments, below).
c. S t a t e Programs to Limit Hospital Reimbursement.
c o s t s have been
several States by
governments, Blue C r o s s plans, hospital a s s o c i a t i o n s , or a
Many of t h e s e State s y s t e m s resulted from the Department of
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
in section 4d.
S t a t e s in order
reimbursement t o hospitals.
More States have
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
97-35) allowed S t a t e s more flexibility in their
S t a t e programs to control hospital
responsible for the program
(for example, a
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
private payers); program methodology (budget r e v i e w , f o r m u l a , etc.);
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
comply) h a v e
established in a
Connecticut, M a r y l a n d , Massachusetts, New J e r s e y , New
Y o r k , Rhode
Washington and Wisconsin.
States have voluntary
F e d e r a l Demonstrations and Experiments.
Amendments of 1 9 6 7 a n d 1 9 7 2 authorized broad programs of
experimentation i n
the Medicare and Medicaid
authority, the D e p a r t m e n t of Health
variety of efforts to develop, d e m o n s t a t e , a n d evaluate various
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
prospective reimbursement programs, including those in Western
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
in 1 9 7 8 and
to 1 9 8 3 , the Health
Financing Administration (HCFA) is funding
a n evaluation
reimbursement p r o g r a m s ,
S t u d y , which
covered programs i n the States of Arizona, C o l o r a d o , Connecticut,
M a r y l a n d , Massachusetts, Minnesota, Nebraska, New Jersey, New York, Rhode
I s l a n d , Washington,
P e n n s y l v a n i a , and Wisconsin.
In a d d i t i o n ,
developmental a n d demonstration p r o j e c ~ s ?ave
(whose system includes a l l third-party payers, both public and
the State); Rochester, New York (utilizing areawide budgeting);
(the effects of various payment mechods
Commission r e v i e w model);
(payment on a diagnosis
per-admission basis); and
(a comprehensive data
system and a
effectiveness a n d efficiency of various types of
New demonstration projects were recently approved in Massachusetts
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
In light of data already accumulated during previous
demonstrations a n d expected
from ongoing projects, HCFA
narrowed i t s research focus to projects which:
a r e applicable Statewide;
result in combined Medicare and Medicaid savings
u s e diagnosis related groups (DRGs) a s the unit
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
using highly i n n o v a t i v e , competive prospective reimbursement systems such a s
capitation o r competitive bidding".
Hospital C o s t Containment
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
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
Although the original
1391) a n d
numerous r e v i s i o n s were actively
the four congressional
committees to which
it w a s
referred, only the Senate Human
Committee had ordered a n amended version of the bill reported b y the
In 1 9 7 8 , a n amended a n d weakened version of the original bill w a s reported
Interstate and Foreign
Committee rejected the Carter Administration's
containment a n d reported instead H.R. 5 2 8 5 , a bill
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
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
T h e bill a s passed
payment approacl-i to limiting hospital reimbursement under
tne Medicars and
programs a n d
a n amendment
contained voluntary g o a l s
costs nationwide, with
standby c o n t r o l s if these goals were not met.
T h e House did not
hospital c o s t containment bill before adjournment.
The Carter Administration reintroduced its cost containment bill
in 1 9 7 9
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
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.
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
In a d d i t i o n , the Senate F i n a n c e Committee had reported H.R.
which incorporated the Talmadge approach to p r o ~ ' ~ e c t i vpayment
under the Medicare a n d
1 9 7 9 , the House
t h e Administration's bill
. s u b s t i t u t e bill
substitute created a commission (1) to monitor a voluntary effort on the part
of the hospital industry to lower
cost increases and
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
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
for mandatory hospital c o s t controls w a s over.
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
formation of a Voluntary Effort (VE) t o control health care c o s t increases.
The organizations included the American Hospital Association,
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
A m e r i c a , the National
Counties, Knauer and Associates (a consumer a f f a i r s organization), and a
Each year since 1 9 7 7 , t h e VE has
and objectives f o r reducing the r a t e of growth in health
and particularly hospital expenditures, i n subsequent years.
T h e goals
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
C P ~ S U S ,and
improvements in hospital utilization review.
The 1 9 8 2 VE goals include a comprehensive utilization
iheaded by the American Medical Associati?n); special attention
utilization patterns (led by the Blue Cross and Blue Shield Associations);
expansion of local business community
Roundtable and the Washington Business Group on Health); a n d efforts
improve hospital productivity and technology management (led by the American
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.
The Carter Administration's Anti-Inflation Guidelines.
December 1 9 7 8 , the Carter Administration
voluntarily hold their 1979 total expenses to a 9.7% increase over their 1 9 7 8
request w a s made as
part of President C a r t e r ' s
economy-wide voluntary anti-inflation program.
of H e a l t h , Education and Welfare (now Health a n d Human Services),
f i g u r e included the following components: 7.9%
i n f l a t i o n , to reflect increases
in the prices of goods and
(including labor) that hospitals purchase; 0.8% for population
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
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
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
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.
Care Financing Administration, H H S , planned to monitor
voluntary guideline by comparing national, r e g i o n a l , and S t a t e hospital
the guideline every quarter and by
expenditures of individual hospitals.
Administration announced its intention to develop an Administration
care financing and
control rising health
care costs by
promoting competition among the providers of health care
(See CRS IB81046,
T h e Pro-Competition Proposals, for background
on the competitive approach).
A task force to develop such a proposal was
in M a y , 1 9 8 1 , by
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
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
health insurance premiums; encourage employers to offer a multiple choice of
health plans, with certain coinsurance requirements, and a n
contribution to each; increase Medicare coinsurance with a d d e d
catastrophic illness; offer a
beneficiaries to enroll in private health
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
the explosive growth of health care costs."
In support of the objective of
f o r c e s , the FY83 budget proposed
ineffective Federal regulatory activities, including the health planning
Professional Standards Review Organizations
T h e major
specific FY83 budget proposal affecting hospital
costs w a s a n interim
Administration proposals to improve market forces in health care can
the rate cf increase in industry costs."
Many questions concerning hospital cost containment have been
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
the impact o n the hospital industry itself and its employees?
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
Should controls be
limited t o reimbursement under
F e d e r a l programs,
such a s Medicare and
o r extended
third-party payers? Should there be short-term control measures
to lower immediately the increase in costs of
c a r e , or
p e r m a n e n t , long-term controls for the hospital industry be
would be the i m p a c t of any such Federal regulation on
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
increase l i m i t , comparison
the method o f control (e.g., a percentage
a v e r a g e hospital costs); what type of hospitals
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.
T h e major
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
inpatient routine nursing salary c o s t s from 8.5% to 5 % .
Section 2143 reduces the Medicare
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
Instead, requires State payments for inpatient hospital
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
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
Section 1 0 1 modifies the
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
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
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.
the Department to report its proposals within 5 months of enactment.
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
Section 103 eliminates the Medicare 5 %
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
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
1 9 8 2 (S. Rept. 97-494).
Passed Senate, amended, July
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
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.
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.
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
hospitals under t h e Medicare program
to a l l o w S t a t e s o r
( 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 )
the Secretary of H H S to reimburse hospitals
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
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
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.
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
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 ,
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.
9 7 t h C o n g r e s s , 2d session.
Nov. 1 9 , 1982.
C o m m i t t e e o n W a y s a n d Means.
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
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"
C o m m i t t e e on F i n a n c e .
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.
9 7 t h C o n g r e s s , 2d session.
Sept. 1 6 , 1982.
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
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.,
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
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.
(97th C o n g r e s s , 2d session. House.
Report no. 97-760; Senate. Report no. 97-530.)
Committee o n Ways and Means.
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:
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
Department of Health and H u m a n Services submitted
report on the prospective reimbursement o f hospitals
by Medicare to Congress.
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.
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).
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
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.
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.
Conference report on H.R.
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).
Health provisions of H.R. 4961 approved by the
House and Senate conferees.
Rep. Dingell et al. iritroduced H.R.
Rep. Rostenkowski et al. introduced H.R.
4961 approved by the House
H.R. 6 8 7 7 approved by the Energy and Commerce
H.R. 4961 was passed, a s a m e n d e d , by the Senate.
H.R. 4 9 6 1 was reported by t h e Senate Finance
Committee (S. Rept. 97-494).
Hearings held by Subcommittee on H e a l t h , Senate
Finance Committee, o n S t a t e hospital payment systems.
T h e American Hospital Association released its
" P r ~ p O S a lfor Medicare Prospective Fixed Price
Payment to Hospitals."
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
Representative Wyden introduced H.R.
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.
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
Prospective r a t e setting.
Dowling, William L., ed.
Germantown, Md., Aspen Systems Corporation, 1977.
1 5 9 p.
Hospital costs a n d health insurance.
Cambridge, Mass., Harvard University P r e s s , 1981.
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:
T h e new era of prospective payment for hospitals. The
New England journal of medicine, v. 307, no. 20, Nov. 1 1 , 1982:
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.
Salkever, David S.
Hospital section inflation.
Mass., Lexington B o o k s , 1979. 1 8 5 p.
S c h w a r t z , William B.
The regulation strategy f o r controiiing
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:
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
Congressional Budget Office.
An analysis of
the American Hospital Association's proposal to modify
medicare hospital reimbursement.
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.
The C B O hospital cost containment model:
Staff working paper.
W a s h i n g t o n , U.S. Govt.
Print. Off., February 1981.
3 6 p.
Dept. of H e a l t h and Human Services. Abstracts of state
legislated hospital cost-containment programs.
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
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
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
Report to Congress:
Hospital prospective payment for
D e c e m b e r 1982.
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
(Document No. HRD-80-72,
Sept. 1 9 , 1980.) 210 p.
Health care expeneltures s n d ?rzc2s by
janet Pernice iundy.
the pro-competition proposals
Janet Pernice Lundy and Glenn Markus.
(Issue Brief 81046)
2ic9ard ? r r l c e 2nd
(Issue brief 77066)
Health planning: issues for the future by Kay Reiss.
(Issue brief 82023)
Jennifer O f S u l l i v a n .
(Issue brief 82041)
Jennifer O r S u l l i v a n and Glenn R. Markus.
(Issue brief 82044)
Medicare and Medicaid provisions of the "Omnibus Budget
Reconciliation Act of 1981" (P.L. 97-35) by
55 p. (Report No.
Medicare and Medicaid provisions of the "Tax Equity and
Fiscal Responsibility Act of 1982" (P.L. 97-248)
Jennifer O f S u l l i v a n and Glenn Karkus.
1982. 66 p.
R e p o r t no. 92-173 EPW
Voluntary effort goals for hospitals by
Janet Pernice Lundy.
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:
Zubkoff, Michael, Ira E. Raskin, and Ruth S. Hanft, eds.
selected notes for f u t u r e
Hospital cost containment
New York, published for the Milbank Memorial
Fund by P r o d i s t , 1978.
6 5 6 p.