Advisory of June 15, 2004, announcing the hearing

WITNESSES

Adventist Health System, Richard Morrison

American Hospital Association Board of Trustees, David Bernd

Center for Studying Health System Change, Paul B. Ginsburg

The Commonwealth Fund, Karen Davis

Hal Cohen, Inc., Harold A. Cohen

Harvard Business School, Regina E. Herzlinger

Harvard School of Public Health, Department of Health Policy and Management, Nancy Kane

Pacific Business Group on Health, Peter V. Lee

Southern Medical Health Systems, Inc., Randy Sucher

Catholic Health Association of the United States, Michael D. Place, statement

Community Catalyst, Boston, MA, statement and attachment

U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:05 a.m., in room 1100, Longworth House Office Building, Hon. Amo Houghton (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman HOUGHTON. Good morning, everybody. Thanks for being here today, an important meeting. During our hearing today we will look at nonprofit hospitals and also the larger issues of hospital pricing. I particularly want to thank the members of the panel for being here this morning. As we all know, or most of us know, there are 300,000 501(c)(3) organizations ranging from universities to blood donor organizations. Hospitals make up a significant part of total expenses in this category. As a part of our oversight agenda, it is important that we review topics such as tax-exempt hospital prices, charity care, quality of care, and the services offered by for-profits versus not-for-profits.

Relating to the financial situation by hospitals in my district, just to give you an example, Standard & Poor's has recently reported that New York hospitals still have some of the weakest access to capital in the Nation, attributed in part to the former government-mandated rate regulation. Despite their finances, our local hospitals also provide charity care, and I am sure this is true in many other hospitals in different parts of the country. At Arnot Ogden Medical Center in Elmira, New York in upstate New York, the Community Care Program provides discounts up to 300 percent of the Federal poverty level. Information on the policy is publicly posted.

Another example, F.F. Thompson Hospital in Canandaigua has a sliding fee policy that provides discounts up to 100 percent for persons with wages below 200 percent of the Federal poverty level. Still another example, at Jones Memorial Hospital in Wellsville, a small town in our area, a financial aid counselor will confidentially visit patients who are admitted with no health insurance, to make sure the patient knows that free or discounted care is available for patients in need. One topic we are going to be exploring today is hospital pricing. I have before me what is called a "charge master." This makes for fascinating reading.

[Laughter.]

I thought the Tax Code was complicated, but it is nothing like this. Hospitals seem to be stuck with a broken billing system and no one knows the cost of services in advance. So, people receive bills for services where the charges appear too high for a hospital gown or even an aspirin, and they do not understand that these amounts are not what insurance is going to pay for. People without health insurance individually negotiate payment with hospitals, a process that creates anxiety and a lot of uncertainty. If we could do it all over again, I am sure this is not a system that anyone in his right mind would dream up.

Appearing before us today on the first panel are experts who can describe how we got where we are, and what we might do to change. On the next panel we have distinguished representatives from hospitals, as well as an expert on government pricing, who are able to bring real world experience to bear on this very difficult problem. I welcome you all. Thank you for being here, and I look forward to your testimony. I am now pleased to yield to our ranking Democrat, my distinguished associate, Mr. Pomeroy.

[The opening statement of Chairman Houghton follows:]

Mr. POMEROY. Mr. Chairman, thank you very much, and I am delighted to be participating in today's hearing.  I do think that our work might have been achieved perhaps more successfully had the focus of this morning's hearing been a little more straightforward. I am not entirely clear whether we are exploring tax-exempt status or whether we are exploring hospital pricing practices, and I believe they are somewhat distinct points of inquiry. I think each represents an interesting area for us to explore, but to look at the pricing practices of tax-exempt hospitals seems unnecessarily confusing, leaves open the question of whether or not we are concerned about the pricing practices of non-tax-exempt hospitals, and leaves us somewhat wondering where this is going in the first place.

I think that, as I mentioned, there are some interesting things we can pull out of it. Transparency in pricing has got great value, and not just for hospitals. Actually, we have to think about that a little more, in government as well. I voted for a Medicare prescription drug bill (P.L. 108-173) I thought cost $400 billion. Come to find out it cost $536 billion. You know, some might think I should not have voted for that bill. I just wished I had known the price, and made a determination in light of the true price, not the price that was represented, that maybe some representing it knew wasn't the actual price. So, transparency in pricing is an important business.

I also think the business of how we establish pricing specifically in hospitals is quite interesting, because most of the people accessing hospital services have some kind of third-party coverage. Obviously, Medicare sets prices for the part covered by Medicare. Private insurance companies negotiate prices for the people that access care under their health insurance coverage, for the portions of copays are now Health Savings Accounts (HSAs) first-tier exposure. They will still get the discounts negotiated by their insurance companies, and then that leaves the uninsured, Mr. Chairman, as you note, without someone negotiating those discounts, and they are subject to the charge master. I think that for a second, 1 second, for anyone to suggest that the problems of the uninsured are really pricing practices misses the point. It is not whether there is transparency behind those prices, it is the reality that if you are uninsured you have pretty significant prospects. You cannot afford the cost of medical care in this day and age, and the problems of the uninsured deserve its whole additional focus.

The pricing issue, in and of itself, is a creation of the fact that we have several different ways people are covered for health insurance, and some not covered at all. If we are going to really get to the bottom of that one, we might want to take it back to the Subcommittee on Health, the subcommittee jurisdiction on this matter, and proceed an investigation of the uninsured. That might have some significant value as well.

These are all kinds of questions swirling around in my mind. The tax-exempt status is another issue. If there is indeed a significant record to establish that institutions, charitable in construct, tax-exempt in status, are not meeting what is expected of them under the code to achieve that status, that is an inquiry I think would have broad interest across the full Committee on Ways and Means, and I look forward to getting to the bottom of that. Again, trying to get to the bottom of that in a hearing on pricing practices, to me puts us on a circuitous route to that important question. In summary, Mr. Chairman, even though I feel like I am kind of climbing in a car I don't know where it is going, I am not even entirely sure why we are taking this trip, as long as I know you are along, Mr. Chairman, I am happy to be along for the ride. I yield back.

Chairman HOUGHTON. That is a pretty weak reed to lean on, I can tell you that. Mr. Thomas, the Chairman of the Committee on Ways and Means, would you like to make a statement?

Chairman THOMAS. Just briefly, Mr. Chairman. Thank you for the beginning of what I hope is a long process, since this is the Subcommittee on Oversight, the Subcommittee correctly charged with reviewing for the Committee issues and items already on the code, or the manner in which we should change differences in the code.

I listened with interest to my friend from North Dakota, Mr. Pomeroy, and the verbal statement that he delivered as his opening statement deviates from his written statement in referring to the $400 billion versus $500 something billion from the Administration. I guess that was necessary to insert in this hearing, but it really does underscore why hearings like this need to take place.

The $400 billion was the number determined by the Congressional Budget Office (CBO). Those individuals and institution under the law, which we are required to rely on to provide us with estimates, not once, but twice. After reviewing the legislation, CBO said that it was going to cost $400 billion. The gentleman is referring to another branch of government, the Executive Branch, which makes its own estimates, and I find it ironic that at times when they are arguing about particular policies or budgets, they prefer to hang on to CBO, rather than Office of Management and Budget (OMB). In this instance somehow, OMB is now the yardstick, and CBO is not. I find that when people choose different partners at different dances, it tells me something.

In addition, I invite all of you to read the article in The Hill newspaper on Thursday, June 17, only to illustrate that it is possible to be consistently wrong over time. The gentleman who writes the article refers to me and my relationship on this issue to the late 1990s. Someone needs to know I have been involved with this since the early 1980s, and it seems to me that once every 20 years is not outlandish to review an area of government policy that involves billions of dollars.

If you will go back and look at the history of the 501 or so-called charitable or nonprofit portion of the Tax Code, you see significant shifts in the '30s and in the '50s, and really no significant difference since the '50s.

I have asked Chairman Houghton, and I hope the gentleman from North Dakota will be a willing partner, to investigate the entire 501(c) section. When examining the entire 501(c) section, it seems prudent that you would look at those areas that involve themselves most extensively in the expenditures which occur under 501(c). Hospitals comprise 41 percent of the expenditures in this area. Why wouldn't you start with the group that gets the biggest, largest break?

The second reason I think it makes sense to go with hospitals is that when you look at other activities that are covered under 501(c)(3), there probably isn't as good an example, although 85 percent of the hospitals in the United States are not-for-profit. If I blindfolded you, took you into a hospital, took the blindfold off you and led you around to look at the hospital, you would be hard pressed to determine whether it's a 501(c) not-for-profit or a for-profit. In other words, here are two institutions structured fundamentally differently in the Tax Code, carrying out virtually identical duties, the responsibilities and functions as a hospital. The Chairman, in his opening statement, illustrated some things that not-for-profits do, which used to be called charitable--now it is called community benefit--in nature. We don't know if for-profits do that either, and if in fact there are as many for-profits that can be shown to give a break to low income as not-for-profits, then that is not really a difference for receiving that tax benefit. What is it that they do differently than people who pay taxes? We owe it to the taxpayers to explore that question.

When we were debating Medicare, a portion of Medicare that we talked about and got to know real well is a portion called bad debt. It is payment to hospitals in lieu of hospitals not being able to collect money from people who can't pay. Hospitals can't collect their bills, so taxpayers pay the money. If you pay the same amount to for-profit as not-for-profit since not-for-profit gets a tax break that for-profits don't which is supposed to be under a community or charity concept? We don't know. I do not understand the resistance in the community to getting some knowledge to the Members of Congress who are charged with the responsibility of overseeing the Tax Code, and that if this hearing does not provide us with sufficient understanding of how someone who in one situation is not-for-profit and the other one is for-profit, and there is no real difference between the two, why the expenditures? If there is a difference, where is the difference? How is it a difference? How, in going through the rest of the 501(c) can we begin to build a case to see if others merit, if in fact not-for-profit hospitals do, the differential that is in the Tax Code?

Mr. Pomeroy, your concern about the pricing goes right to the heart of our problem to differentiate between not-for-profits and for-profits, because you would at some time and under some circumstances, the not-for-profit aspect would display a different behavioral profile than the for-profits, and that is basically what we are going to try to do. We started with hospitals because they are the biggest chunk. They also give us an example to compare, ostensibly, to similar operations that are structured significantly differently under the Tax Code. So, I think it is most appropriate that we start with this area. One of the most confusing areas of hospitals, whether they are for-profit or not-for-profit is the pricing. So, if you are going to investigate how they are different or similar, it makes all the sense in the world to begin to talk about pricing.

With those opening statements, Mr. Chairman, I want everyone to know that this is the beginning of a very long series of hearings dealing incrementally, moving down the tax expenditure amount structure, to a number of institutions that are in direct competition with for-profit institutions in this society for which they receive significant tax benefits under the 501 category, and what is it that taxpayers are getting for the billions of dollars that are forgiven because of the categorization one way or another. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you, Mr. Thomas.  Mr. Stark, would you like to make a statement?

Mr. STARK. Thank you, Mr. Chairman. Thank you for inviting me to join with you today. I too am confused. I have reviewed the testimony, and there is nobody that talks about the difference in prices except Ms. Davis, who happens to be our witness, and I am not sure she has any charts. So, if this is a hearing to determine whether there is a difference in pricing between profits and nonprofits, we should send the witnesses home and ask them to come back with some examples.

There is a lot we could do to improve our health system, but I think we need to talk more about coverage for 44 million uninsured, not how to lower hospital bills. I think it is a given that patients don't select hospitals, their doctors do. Even if you had price transparency it would be foolish for people to choose a hospital on price alone without information as to what the quality of care is, and what happen--and most of us who are not physicians, don't have the foggiest idea of what is going to happen to us when we enter a hospital, so we wouldn't know what to ask or how to compare. It is one thing to compare a Chevrolet with a Ford with the help of the Internet, I suppose, but I would ask any of you to tell me what the difference is in a pap smear or a proctoscopic examination unless you have gone through it. Until we can determine the quality of services and combine that with cost, it seems to me we are wasting our time.

As to whether or not we ought to give tax exemption to hospitals, that seems to me to be a whole other issue and I would suggest that the real burden is to define, which we have been unable to do, certainly in the 30 odd years I have served on this Committee and the previous experience on the Committee on Banking, which used to have jurisdiction over the nonprofits, there is no definition of charity care for hospitals that a Certified Public Accountant (CPA), that Financial Accounting Standards Board (FASB) has. Is it a bad debt forgiven or is it a scholarship when you walk in the front door? Absent that, which happens to drive the disproportionate share of discounts, it is an important thing for us to know.

I would hope, Mr. Chairman, that we could look at that some more, so that we were able to define as to who gives charity care and who just doesn't have such good debt collectors, and that would be very useful to us in the future, but I hope maybe we can, in questioning, elicit some of that on some suggestions as to how we proceed from the witnesses. Again, thank you for allowing me to join you.

Chairman HOUGHTON. Thanks, Mr. Stark. Mrs. Johnson, would you like make a statement?

Mrs. JOHNSON. I thank you, Mr. Chairman, and indeed, I congratulate you on this hearing, and I am starting out on this thoughtful trek in terms of what does nonprofit status, which is a tax subsidy, gain us for those who enjoy it, and what is the relationship between those institutions that enjoy a privileged tax status and other institutions that provide like services that don't enjoy a privileged tax status.

I am here not because I am a member of the Subcommittee on Oversight, but because I am Chairman of the Subcommittee on Health, which has a different responsibility. One of our responsibilities that we are having great difficulty managing was well reflected in the Medicare Modernization bill. It asked for a number of studies and efforts for experts to better define that the information that we rely on in setting rates, and indeed, this afternoon we have a seminar of our Subcommittee with the Medicare Payment Advisory Committee (Med PAC) on their first report of how difficult it is to find data that will tell us what your financial circumstances are, and this issue of your having a defined amount that you charge people, that then varies all over the place, is one of the reasons it makes it very hard for us to figure out what your financial circumstances are. There is enormous conflict between what we call the Medicare margin and your total margin. This conflict has been so great, you can't make logical policy any more without better understanding these differences.

We are going to be taking on a lot of the issues associated with how do we evaluate whether or not our hospitals are financially stable, doing well, and fairly rewarded, and part of that is the nonprofit benefits for those that are nonprofits versus the for-profits. So, this is a different angle on something we are interested in. We do not have time nor researchers to do it. I am glad they are doing it. I am here to listen to that. There are going to be many aspects to hospital financing that we are going to look at, and the reason we are going to look at them is that if we don't community hospitals are going to be destroyed by the public and private reimbursement systems that are supposed to support them.

You look at what surgi-centers have done to hospitals in terms of taking out the simple programs, the simple cases. You look at what boutiques hospitals are positioned to do. You look at what competition for lab services are positioned to do, and you can't believe that community hospitals will be here for charitable or any other purpose if we don't get more honest and clear headed about what it is we are paying for and under what circumstances.

So, this hearing, to begin to sort out what is the nonprofit subsidy that goes to hospitals and what is it related to, and what do we think of it, and what is it costing us, is all a very, very important piece of the program, and then we need to look at not only hospitals as nonprofits but the nonprofits across the board. I don't know what other Members are finding, but I am deluged with applications for 501(c)(3) status, and we need to understand as a tax writing committee what is the effect of the nonprofit tax subsidy structure that we put in place many years ago with a very simple rationale, but which has absolutely exploded in multiple directions.

I commend Chairman Houghton and Mr. Pomeroy for starting out this series of hearings which I think is extremely important for our tax writing committee, and I am pleased to be here as the Chair of the Subcommittee on Health because these issues are always interrelated. I thank the Chairman for the courtesy of being able to make this comment on the record. Thank you.

Chairman HOUGHTON. Thanks, Mrs. Johnson. Unless anybody has a burning desire to make an opening statement, I think we will go right to the panel.

Mr. KLECZKA. Mr. Chairman, I don't have a burning desire except to insert two articles into the record at this point. Mr. Chairman, I would ask unanimous consent to put this hearing into perspective, that two articles be entered into the record. The first is The Hill article dated June 17, and it is entitled, "Congressional Inquiry Triggers Hospital Angst." The second is a BusinessWeek article from June 7, and the article is entitled, "Making Hospitals Cry Uncle."

Chairman HOUGHTON. Fine. We will put them in the record. Thanks very much, Mr. Kleczka.

[The information follows:]

Congressional inquiry triggers hospital angst
By Bob Cusack

In a move that has attracted attention on K Street, a powerful House lawmaker with a long memory has launched an investigation into the financial practices of the hospital industry.

Hospital lobbyists fear that the scrutiny could eventually lead Congress to make changes to the industry’s tax-exempt status.

Some healthcare experts believe it is no coincidence that House Ways and Means Committee Chairman Bill Thomas (R-Calif.), who is spearheading a broad review of all 501(c)(3) tax-exempt entities, picked hospitals as his first target.

Thomas and the hospital sector have had a complicated, roller-coaster-like relationship. In the late 1990s, Thomas protected the industry from proposed Clinton administration cuts in Medicare reimbursements.

But in 2002, the relationship soured after a draft of the House Medicare reform bill was leaked to the media. Thomas believed then — and believes now — that hospital Medicare payments have become bloated and need to be curbed.

Hospital groups rallied against the 2002 measure, claiming that it could slash billions of dollars they receive from Medicare. The intense lobbying effort worked, and an infuriated Thomas was forced to rewrite the legislation.

At the time, sources close to Thomas vowed that the lawmaker would get his way eventually — most likely in a nonelection year.

“Thomas remembers everything,” an industry lobbyist said, adding that hospital groups are nervous that Thomas is laying the groundwork to scale back hospital payments next year.

“He may tell [hospitals], either accept Medicare payment changes or lose your tax-exempt status,” the lobbyist said.

A hospital lobbyist agreed, saying, “That’s Thomas’s style.”

On Tuesday, the largely inactive Ways and Means Oversight Subcommittee will hold the first of a series of hearings on tax-exempt issues. In announcing the hearing, the committee took some veiled shots at the industry: “Hospital charges are not transparent. So consumers, including the uninsured, do not have access to information on the costs of medical treatment across hospitals.”

The release cited Medicare figures, claiming that “hospitals’ charges exceed their average costs by 118 percent.”

There are more than 300,000 reporting tax-exempt 501(c)(3) entities. Hospitals represent 1.9 percent of total reporting charitable 501(c)(3)s, but accounted for 41 percent ($337 billion) of total expenditures, according to the Ways and Means panel.

ne healthcare expert estimated that 80 to 85 percent of all hospitals are tax-exempt.

Thomas last month defended the inquiry, saying that taxpayers deserve to know what they are paying for. He told reporters, “I know a lot of people don’t want me asking these questions, but we are talking about billions of dollars.”

Earlier this year, the hospital industry suffered a public-relations hit when it claimed that government regulations were causing it to charge uninsured patients higher-than-normal prices. In a rare move, the Bush administration in February released the full text of its response letter to the American Hospital Association (AHA) disputing the contention government rules dictate hospital charges for the uninsured.

Hospital lobbyists are anxious that Ways and Means aide Deborah Williams is taking the staff lead on the investigation. Williams, who helped draft the new Medicare drug law, is very familiar with the ins and outs of the hospital sector, having previously worked for AHA.

But to the industry’s dismay, Williams is a vocal proponent of slowing the growth of hospital reimbursements.

Making Hospitals Cry Uncle
Has insurer J. Patrick Rooney found an unorthodox way to turn up the heat?

Conservative millionaire J. Patrick Rooney is on a mission from the Almighty: Bring down crushing and "ungodly" health-care costs. For more than a decade, he has worked to replace traditional insurance with tax-free health savings accounts (HSAS), which people can use to pay for their own medical care. "I'm doing the right thing, and I think the Lord will be pleased about it," he says.

Using his fortune to open doors in Washington, Rooney has relentlessly preached his gospel. Last year, Congress saw the light: GOP lawmakers inserted a $6.4 billion tax break for HSAs into a Medicare prescription-drug bill. And a recent survey by Mercer Human Resource Consulting says 75% of employers are likely to offer the accounts by 2006.

A courtly 76-year-old, Rooney has never hidden the fact that he stood to profit from his crusade. After pioneering HSA sales with his old company, Golden Rule Insurance, he sold out to UnitedHealth Group Inc. (UNH ) for $893 million just before Congress passed the tax break. He promptly founded Medical Savings Insurance Co. to sell more HSAs.

PR HARDBALL
But Rooney isn't relying on just the power of his ideas and political connections to make his company profitable. The Indianapolis-based insurance entrepreneur also is backing a nonprofit group that uses hardball tactics to get hospitals to cut prices. The nonprofit, called Consejo de Latinos Unidos, campaigns on behalf of uninsured Hispanics.

Last year, Consejo pressured the nations' No. 2 hospital system, Tenet Healthcare Corp. (THC ), to cut rates for uninsured patients and revamp its collection practices. At the same time, Rooney's Medical Savings won about $2 million in debt forgiveness from Tenet.

Now, Consejo's leader, Republican strategist K.B. Forbes, has turned his attention to Florida. Hospitals being pilloried there say Rooney's company owes them millions in unpaid bills, too. And Rooney has suggested that a new Consejo target--HCA Inc. (HCA ), America's largest hospital operator--could take a lesson from Tenet and shake its bad press by cutting a deal to forgive Medical Savings' debts.

Rooney, who pledged seed money to Consejo and hired a Washington public relations firm to draw attention to its cause, says he doesn't control Forbes. "K.B. has to paddle his own canoe," Rooney says. Besides, says Rooney, his drive to cut health-care costs, especially hospital fees, is about more than money: It's a moral crusade. As such, he makes no apologies for unorthodox methods.

ARM-TWISTING?
That includes backing Forbes, a onetime Medical Savings employee. "Forbes presents himself as an advocate of the consumer," says Linda S. Quick, president of South Florida Hospital & Healthcare Assn. But Consejo "seems to be initiated and financed by Rooney and others selling individual insurance."

With his folksy demeanor, Rooney comes across as an endearing do-gooder. He is also one of the most powerful voices on the Right. Since he pioneered HSAs in 1990, Rooney, his family, and employees have poured more than $5 million into Republican causes.

Rooney's new model of health coverage, which has won support from President George W. Bush, replaces traditional insurance with tax-free health savings accounts and high-deductible policies. The argument: If patients must pay out-of-pocket for, say, the first $1,000 in bills, they will seek more cost-effective care. That, Rooney maintains, will unleash market forces to hold down costs. Big insurers, including Aetna Inc. (AET ) and many regional Blue Cross Blue Shield Assn. plans, began rolling out HSAs this year.

For hospitals, the plans pose a threat: bad debts. Patients accustomed to first-dollar coverage find they must pay before insurance kicks in, and many don't. In April, HCA blamed a rising tide of unpaid bills for its soft first quarter.

It's not just patients who aren't paying. Medical Savings routinely marks down its policyholders' hospital bills by as much as 80%. "Yes indeed, we're making unilateral decisions," Rooney says. "But by God, we have to hold the hospitals down to a reasonable price." Medical Savings tells providers to accept its checks as full payment--or collect from patients.

But as Forbes has demonstrated, hospitals pursuing low-income patients are vulnerable to attack. Last year, Consejo stoked press coverage of poor patients being hunted down by bill collectors. "Nobody wants these cases where someone was sick and the big, bad hospital is suing them," says Richard Morrison, a vice-president at Orlando's Adventist Health System, which says Medical Savings owes it some $1 million.

Consejo zeroed in on Tenet in 2001 after Forbes uncovered examples of bare-knuckle collection practices--such as a lien on a Louisiana patient's beat-up mobile home. His timing was perfect. Tenet was trying to acquire hospitals in four cities and had drawn fire from the feds over its Medicare billing. At critical junctures, Forbes would trot out patients to portray Tenet as intent on gouging the poor. Tenet lost three of the acquisition deals.

Behind the scenes, Tenet was in talks with Medical Savings over its unpaid bills. In January, 2003, Tenet caved. It forgave nearly all of Medical Savings' debt and lowered prices for the uninsured. In return, Consejo dropped 10 lawsuits. The deals with Consejo and Rooney were "contemporaneous and simultaneous," a Tenet executive says.

Like Tenet, HCA has sought a truce. In mid-2003, Chairman and CEO Jack O. Bovender Jr. set up a meeting with Rooney to explain HCA's discount policy in hopes that Rooney would persuade Forbes to back off. But prior to the meeting, Rooney forwarded a memo to Bovender from Medical Savings President Randy Suttles that drew parallels between HCA's situation and Tenet's. In the memo, which HCA made available to BusinessWeek, Suttles notes that Tenet had shaken some of its bad press after making a deal with Medical Savings. "HCA is in similar circumstances," Suttles wrote. A livid Bovender canceled the meeting.

When asked about the e-mail to Bovender, Rooney says: "The one thing hospitals can't afford is a loss of public trust." And he isn't afraid to get in their faces. "If we go to the hospital and beg, they'll say: 'We'll give you 20% off,"' says Rooney. "Well phooey--that's still an outrageous price. And we're not going to pay it." Indeed. More than 20 Florida hospital groups--including HCA--are suing Medical Savings for some $7 million in overdue payments.

HCA and other Florida hospitals figure they have better odds of bucking Forbes and Rooney than Tenet did: They're not under serious regulatory scrutiny, and they're moving to help the uninsured. Rooney paints a different picture, saying hospitals are lining up to deal: "Tenet is not the only one." Both he and Forbes--independently, of course--predict victory.

By Lorraine Woellert in Washington

Now, going to the panel. Nancy Kane, Professor at the Harvard School of Public Health in Boston; Paul Ginsburg, President of the Center for Studying Health System Change; Peter Lee, President of the Pacific Business Group on Health in San Francisco; Karen Davis, President of the Commonwealth Fund; and Regina Herzlinger, the Nancy McPherson Professor at the Harvard Business School in Boston. Please begin your testimony, and Dr. Kane, would you start?

STATEMENT OF NANCY KANE, PROFESSOR OF MANAGEMENT, DEPARTMENT OF HEALTH POLICY AND MANAGEMENT, HARVARD SCHOOL OF PUBLIC HEALTH, BOSTON, MASSACHUSETTS

Ms. KANE. Thank you. I just want to correct. I am a Professor at the Harvard School of Public Health, not the Harvard Business School. Mr. Chairman and Members of the Committee, thank you for inviting me to come and talk about medical bad debt and hospital tax exemption under the guise of hospital pricing practices.

I think I wanted to start by talking a little bit about medical debt because it is a growing public health problem. Besides causing an enormous financial burden on some of our most vulnerable citizens, including personal bankruptcy and the loss of their homes, and the garnishment of their wages, it causes these people to be at an enormously greater health risk. The people who incur medical debt do not follow up on life threatening conditions such as getting the lump out of their breast for breast cancer and then not going back for the chemotherapy or the radiation therapy. People with less critical conditions don't go to the physician and do not fill needed prescriptions, and people who have incurred medical debt don't let their children participate in sports and do not undertake physical activity for fear of incurring an injury that might add to their medical debt. If we are concerned about obesity in this country, it doesn't help to have people afraid to undertake physical activity.

Medical debt is related to the fundamental flaws in our health care financing system, which is both voluntary and extremely expensive, and increasingly out of the reach for a growing number of people in this country. Hospital pricing practices make a flawed system even worse by charging people who are self-pay, and therefore usually uninsured or at risk for a deductible or a coinsurance, it charges them the highest prices available. The hospital pricing system is now based on market-based negotiations, and the self-pay are not in a very good bargaining position when they arrive at the hospital door, or when they try to seek information on the Web, they are not asked what they would like to offer for that care when they are seeking care.

So, the self-pay and only a few indemnity carriers are left paying on the basis of hospital charges, the charges are set indeed to cover the negotiated discounts of everyone else. Historically that made some sense, back when the discounts were around 16 percent, back in 1982, and many more payers were indeed paying on the basis of charges, and in fact, many hospitals were encouraged to do that by the rate setting systems in various States. However, rate setting has disappeared and negotiated pricing has taken place.

Negotiated pricing now has brought those discounts up to 46 percent in 2002--that is the median, by the way, not the average, which is probably higher--therefore, the markup of charges over hospital costs has grown from about 120 percent of cost to 180 percent, and again, that is the median. Fifty percent of hospitals are at or below, and 50 percent are above 180 percent markup of their hospital charges over cost. Obviously, charges are wildly unrelated to cost, and other activities that hospitals undertake to specifically set charges to discriminate against either charge payers or Medicare outliers has made the charges even more wildly unrelated to cost.

Now to talk a little bit about the medical bad debt and the free care. Free care is only about 1 percent of hospital charges. That is the amount that is forgiven by hospitals. The determination of who is eligible for free care is generally up to the hospital's board and the hospital's management. A few States regulate a minimum amount of eligibility in terms of a person's income level, and I believe one of the Members described some of the range in eligibility--actually, I think it was the Chairman. It is wildly variable from State to State and hospital to hospital whether an individual will be eligible for free care. You can be at 100 percent of Federal poverty level and still not be eligible for free care in some States and in some hospitals. Even if you are eligible, you may not be aware that free care is available.

Bad debt is another 3 or 4 percent of hospital charges, and from the information I have gotten on some small surveys, definitely not a national database, about half of the bad debtors in hospitals are insured people trying to deal with high deductibles and coinsurance and copayments. The tax exemption, as I have just heard from the Members of the Committee , hasn't been reviewed in a long time, and clearly is not tied to the provision of charity care of community benefit, and it led to the kind of attitude that I got back in the years that I have been involved with local communities charging tax-exempt challenges, a former hospital Chief Executive Officer (CEO) informing me that it is just as charitable to serve a rich man as a poor man.

Most of the challenges are coming from State and local authorities. The Federal Government, the Internal Revenue Service (IRS) is really pretty weak in terms of encouraging greater charitable on the part of nonprofit hospitals. I see my time is up. In terms of transparency of pricing, you can see I don't think it is going to have a huge impact on the uninsured. Many of them are not allowed into the hospital until their care is an emergent condition. Therefore, shopping around for a price is really not going to help them, and I will end there. Thank you.

[The prepared statement of Ms. Kane follows:]

Chairman HOUGHTON. Thanks very much, Ms. Kane. Dr. Ginsburg, you may begin your testimony.

STATEMENT OF PAUL B. GINSBURG, PRESIDENT, CENTER FOR STUDYING HEALTH SYSTEM CHANGE

Mr. GINSBURG. Mr. Chairman, Mr. Pomeroy, and Members of the Subcommittee, I appreciate the invitation to be here to present testimony on hospital pricing issues. I am President of the Center for Studying Health System Change, which is an independent nonpartisan health policy research organization funded principally by the Robert Wood Johnson Foundation.

After a respite in the 1990s, health care costs are rising rapidly again. In 2003 hospital price increases were an important factor behind the increases in costs faced by those who were privately insured. Employers have been changing their health benefit plans to emphasize patient financial incentives to use less care and to be sensitive to prices. With hospital pricing extremely complex, it is fortunate that at least insured people have more effective mechanisms to purchase hospital care than by attempting to compare incredibly complex hospital charge masters for the services that they are likely to be provided when they are hospital patients. Uninsured people do not have such advantages and unless the hospital offers a lower price on the basis of the patient's income, they pay the highest prices, as Nancy Kane pointed out.

Consumers who are insured benefit enormously from relying on an intermediary to (a) negotiate prices with hospitals, and (b) analyze differences in negotiated prices among competing hospitals. Managed care plans negotiate prices with hospitals through formation of a network of hospitals that have agreed on rates. When the number of people enrolled in managed care plans expanded during the 1990s, managed care plans were able to negotiate more favorable prices from hospitals. Pressure for broader hospital networks, increasing hospital concentration and capacity constraints have weakened plans' negotiating position with hospitals in recent years.

In order to engage market forces while maintaining broad hospital networks, health plans have developed a new product, tiered hospital networks. Some of the hospitals in the network are labeled as preferred, and consumers are given financial incentives, usually lower copayments, to use them. High priced hospitals risk the loss of some patients, increasing incentives to agree on a lower price. This mechanism reflects a more refined device to incorporate patient financial incentives than say, deductibles, because tiered network incentives are aimed at situations at which patients have choices. Tiered networks accommodate both consumers who do not want their provider choice restricted, as well as those who want to avoid large out of pocket expenses. Nevertheless, tiered network products have grown slowly due to the complexity of the products, hospital resistance, and employer caution.

Consumer-driven plans and HSAs have similar issues concerning hospital pricing. In most situations hospital prices are handled by Preferred Provider Organization (PPO) mechanisms through negotiation. Health savings accounts, I expect, will have networks of hospitals with negotiated prices, and these negotiated prices will apply to the deductible as well, which will be very important to those enrolled in HSAs and consumer-driven plans.

When coinsurance is used, there is a need for the plan to communicate to its enrollees the relative costliness of hospitals. Some plans have been pioneering this by providing ratings like Zagat's ratings of how expensive different restaurants are. For example, California Blue Cross giving from one to five dollar signs for each hospital in its network. Rating hospital costliness is better than revealing negotiated prices. For one thing they are easier for consumers to use, and second, I am concerned that disclosure of negotiated prices will lead to higher prices because of how hospitals will use that information.

The bottom line for consumer-driven health plans, as well as for Health Maintenance Organizations (HMOs) and PPOs is that consumers are better off using their insurer as an intermediary to negotiate lower prices and inform them of the financial implications of choosing Hospital A over Hospital B.

A closing thought: making consumers more sensitive to prices and providing better information on prices and quality can contribute to slowing health care costs, but we should not oversell the potential. In the long run we know that new medical technology is the dominant driver of increasing health care costs. Much of the new technology is terrific, but the lack of careful consideration of clinical effectiveness of new treatments in relation to existing ones leads to more waste and poor outcomes than should be the case. Increased public resources for developing information on effectiveness is critical to the long run slowing of cost increases. Thank you.

[The prepared statement of Mr. Ginsburg follows:]

Chairman HOUGHTON. Thanks very much, Mr. Ginsburg. Mr. Lee?

STATEMENT OF PETER V. LEE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PACIFIC BUSINESS GROUP ON HEALTH, SAN FRANCISCO, CALIFORNIA

Mr. LEE. Thank you very much, Mr. Chairman, and Members of the Committee for having me join you today on behalf of the Pacific Business Group on Health, which represents some of the Nation's largest purchasers of health care. Our members represent over 3 million Americans in our efforts to both improve health care quality while moderating cost.

Rising hospital costs are a problem nationally, but events in California have underscored that there are three industry-wide issues that reinforce Chairman Thomas's note about the blindfolded nature of walking into hospitals, we can't necessarily tell the experience between nonprofit or for-profit. The three issues are first, staggering cost increases, second, huge variations in cost and quality of hospital care, and, third, the failure of the market to address these issues effectively.

While there are multiple issues for the reasons for rising cost, two in particular are the lack of transparency differentiating hospital quality and efficiency, and hospital consolidation, which in many markets has stifled competition. We see variations in cost between and within communities that defy any rational explanation and signal insufficiently competitive markets for hospital services. Gall bladder and heart surgery costs three times as much in Sacramento as it does in San Diego. Cesarean sections cost twice as much in Sacramento as in Los Angeles. The problem is not just high cost. It is also there is a total disconnect between cost and quality. There is no indication that cost differences have any relation to quality. A patient is about twice as likely to have a wound infected in the bottom 25 percent of hospitals as in the top 25 percent; a similar likelihood for getting pneumonia after surgery. Other avoidable complications, and there is no correlation between those quality indicators and cost.

Purchasers do look to their health plans they contract with to ensure that the hospitals are not getting overpaid, and are being rewarded for performance, but also that they provide valid tools so consumers can make better informed choices. Nationally we should have the same expectation of the Center for Medicare and Medicaid Services (CMS) and its administration of Medicare, and I think the good news is we have seen CMS step up to this challenge in important ways. There are four things I think that we need to look at to improve hospital quality and the efficiency with which our care is delivered in our Nation's hospitals.

First we have to expand the availability of standardized performance information. We currently have a Tower of Babel of conflicting and incomplete measures to report on hospital performance. The path to resolve this problem is to support and accelerate the efforts of the National Quality Forum. At the same time, CMS should be not only applauded for its focus on the importance of transparency, but urged to accelerate its efforts to make sure that there is usable information on hospitals and physician performance, and that the information is in the hands of consumers, purchasers and providers. One key element of that transparency is that we must have standards for measuring the relative efficiency with which care is delivered, looking beyond mere unit price to assess the full associated health insurance cost or the longitudinal efficiency with which care by hospitals and doctors is delivered. That is a key measure to be able to understand the difference between for-profit and nonprofit hospitals.

Second, we need to reward better hospital performance. There are large-scale pay-for-performance initiatives in the private sector for medical groups and physicians, and CMS has a new initiative for incentives at the hospital level. Those efforts are promising. Center for Medicare and Medicaid Services (CMS) should not only continue that innovation, but should look actively at how to innovate in partnership with private and State-based public purchasers.

Third, information must be provided along with incentives to consumers to make better choices. Across the country there are a growing array of tools and insurance products provided to health care consumers to help them choose and understand the differences between hospitals, physicians, and treatment options. Consumers want and need this information. Our task is to make sure that that information is valid.

Finally, we have to allow the market to function. We need to be sure that comparative performance information can be used in local markets. There is a danger that in communities that have had hospital consolidation, such efforts will be hindered. Hospitals creating networks is great if that consolidation will help the market to work. It is dangerous, however, if conglomerates of hospitals prevent individual hospitals from having their quality and efficiency show through separately. Conglomerates are dangerous if they prevent separate contracting arrangements with individual hospitals in local communities. I will just note that consumers need to have the information to make informed treatment choices. They don't. Providers need to be paid differently for better performance. Today they aren't. Without those two changes, we will never have a working market to reform hospital delivery. Thank you.

[The prepared statement of Mr. Lee follows:]

Chairman HOUGHTON. Thank you, Mr. Lee. Ms. Davis?

STATEMENT OF KAREN DAVIS, PRESIDENT, THE COMMONWEALTH FUND, NEW YORK, NEW YORK

Ms. DAVIS. Thank you, Mr. Chairman. Hospitals play a pivotal role in making health care accessible to those who cannot pay, but they also need to be financially viable. Nonprofit hospitals do charge patients less and collect lower payment rates than for-profit hospitals. I cite in my testimony a meta-analysis that summarizes all of the studies over the last 40 years, and they do conclude that net collected prices are lower in nonprofits.

Nonprofits admit more uninsured patients and they provide more uncompensated care than for-profit hospitals. Pricing uncompensated care and bill collection practices do vary widely across nonprofit hospitals, and the financial stability of hospitals also vary widely. About a third are in serious financial difficulty, a third are on the margin, and a third are doing well. Hospitals that do the best are not necessarily the most efficient or the highest quality. They are the ones providing the most uninsured care.

On the issue of price transparency, some witnesses on the panel today support it because they think it will improve cost conscious behavior by consumers. I agree that the real issue is not individual prices, but longitudinal efficiency, as Mr. Lee has said. It is the total cost over your hospital stay, really over the episode of your illness. That is what you want to know, not how much it is per day of intensive care.

I am more skeptical than my fellow panelists about whether consumer financial incentives can really drive improved quality and efficiency performance, but I think there are other compelling rationales for transparency in health care financing and reasons why we need information on quality and efficiency. For example it would help providers improve. It is hard to improve if you don't know how you stand. It would help, as Mr. Lee says, for purchasers to financially reward hospitals, health systems, and group practices that provide higher quality care more efficiently, and I think it is important for public accountability.

Why am I skeptical about consumer-driven health care? One form of this, for example, is called tiered cost-sharing. What that means: if you are burned in a major fire, or if you have a heart attack, if you have a stroke, and you go to the wrong hospital--you don't go to the cheapest hospital or the best hospital, you go where you are taken-- you can be charged $400 a day extra for every day you are in that hospital. That is not humane, and it is not going to make those hospitals higher quality or more efficient.

Having said that, I think there are solutions to trying to make care higher quality and more efficient. We can look at international examples. We can look historically at what has been tried in the United States, and the basic lesson that comes from those experiences is that government leadership matters. When government establishes a payment framework for purchasers and uses collective purchasing power to obtain better prices from providers, the rise in hospital costs is slowed, there is greater equity and there is better access to care for the uninsured.

The greatest promise for improving the performance of the health care sector lies in public information of quality and longitudinal efficiency, so I am very much for Medicare.  The Federal Government needs to take a leadership role and really put together the information on longitudinal efficiency over time, over the course of an illness in the following categories (by provider, by hospital, by medical group, by health system, and by private and public purchasers).  As a result, Medicare, Medicaid, and private insurers have incentive payments that reward hospitals and other providers who demonstrate superior quality and efficiency.  Purchasers are in a far better position to promote better quality and efficiency than are patients.

It also might be considered to set at least limits or bans on how much discounted prices can vary across payer source or patient. Certainly, it is reasonable not to charge uninsured patients more than other patients. I think it is important to preserve and strengthen a predominantly nonprofit hospital and health care sector, and think it would be reckless to undo tax preferences for nonprofit hospitals, given that they are a major source of uncompensated care and community benefit.

I think we need more creative ideas about how to create new financial incentives for the provision of charity care such as the idea of a Hill-Burton Act to provide capital funds for information technology in exchange for charitable care or better targeting of disparate proportionate share allowances. Ideally what we would have is a system of automatic and affordable health insurance coverage for all. Thank you.

[The prepared statement of Ms. Davis follows:]

Chairman HOUGHTON. Thanks very much. Dr. Herzlinger.

STATEMENT OF REGINA E. HERZLINGER, NANCY R. MCPHERSON PROFESSOR, HARVARD BUSINESS SCHOOL, BOSTON, MASSACHUSETTS

Ms. HERZLINGER. Thank you so much. I am honored to be here. It is very nice to see you again, Chairman Houghton. I last saw you at the 2000 Harvard Army Reserve Officer Training Corps induction ceremonies, and you gave a very moving and eloquent speech there, and my son, Captain Alexander Herzlinger, is now with the 101st Mountain Division in Iraq.

I would like to talk about how we get to this position. In most of our economy prices continually go down, quality continually goes up, and people have good access, so whether you are Jane Doe or a Member of this Committee, the elite of the United States, you have the same kind of access.

Why don't we look at those sectors and compare them to health care and see what they have that health care does not? Let's look at the automobile sector where prices have gone down, quality has gone up, and even poor people can buy very good automobiles. What happened?

First of all, consumers are in charge so the market is tailored to them and not to intermediaries like insurers. Secondly, providers are free to price as they want. Right now, for example, it is a good time to buy an Impala because the Chevrolet company has over produced its Impalas and it is cutting the prices. Thirdly, those markets have terrific information, so even though Congressman Stark may have ease in buying an automobile, I find it terribly complicated, but I have great information about the quality of cars that comes from sources like Consumer Reports and J.D. Power.

What happens when we have this kind of consumer-led system in health care? There are great things for the uninsured. For example, there is a company called Health Allies, which is a subdivision of United, which is the largest health insurer in the United States. Health Allies offers insurance from $500 to $3,000 for the uninsured, and the insurance is very good insurance. It is called essential coverage, and Health Allies negotiates on behalf of its individual members, and it gives them the market power that big insurers bring to their enrollees.

Congressman Stark asked why there were no data on prices. In fact, getting the price of a hospital procedure is akin to getting the battle plan for Iraq, it is very difficult right now, but there are private sector companies like Ingenix that make such data available. It is again a subdivision of UnitedHealthcare.

So, what is the role of government in solving the problem, the terrible problem that people who lack health insurance face when they enter hospitals? I think it is to enable a consumer-driven system that makes it possible for everybody to be on the same footing. Through the leadership of Congressman Thomas and Congresswoman Johnson, we have gotten HSAs and tax credits. Those are huge benefits for uninsured people, and give them tax support to buy health insurance. The providers must be free to price just like other providers in the United States are free to price, and the micro-management that we now have of provider pricing can't be anything but harmful.

The third and most important is to shed some sunlight in this market. A very good model is the Securities and Exchange Commission. When President Franklin Delano Roosevelt was elected President there was no transparency in the capital markets. There were no annual reports. There was no information that shareholders had. President Franklin Delano Roosevelt was urged, like you are, by various Members of this Committee, to regulate the business community more closely. He very wisely and presciently demurred, and what he chose to do was foster the Securities and Exchange Commission Act, and he said, approximately, "Sunshine is the best disinfectant."

What does the Securities and Exchange Commission do? It has fostered the lauded transparency and efficiency of our capital markets. It does not dictate what is to be measured. It does, however, require disclosure and dissemination of data. I hope and urge you that this model is followed in health care because sunshine is the best healer.

[The prepared statement of Ms. Herzlinger follows:]

Chairman HOUGHTON. Thank you very much, Dr. Herzlinger. I would like to yield to Mr. Thomas.

Chairman THOMAS. Thank you very much, Mr. Chairman. Dr. Kane's statement is just classic, that it is just as charitable to charge a rich man as a poor man, which may be the theme of why we are looking at pricing under the 501(c) section of the code.

Ms. Davis indicated that she could quantifiably differentiate between a not-for-profit and for-profit in terms of charitable activities. I am going to ask each of you if you believe you have seen sufficient data in which you can create a clear separation between not-for-profit and for-profit hospitals broken along a charity of a community service line. If you don't have that information, that is fine. I just need to know if everyone agrees with that particular position based upon the data and the evidence that you are familiar with. Dr. Kane, yes or no?

Ms. KANE. Yes, I have seen a difference. Generally the nonprofits do provide more free care, although the uncompensated care totals can be quite similar. The problem with nonprofit, it is hard to generalize about them. I think there are quite a few more of them, and so you will see a wider range in behavior.

Chairman THOMAS. I agree, and I have additional questions to follow up on that. Dr. Ginsburg, yes or no, in terms of a differentiation, in terms of charitable or community service between not-for-profits and for-profits?

Mr. GINSBURG. Yes. My recollection of the research literature is similar to Dr. Kane's, that we do see charitable care by for-profit hospitals, but we see more by nonprofits.

Chairman THOMAS. Mr. Lee?

Mr. LEE. Defer to my research experts up here. It is not an area that we have looked at closely.

Chairman THOMAS. That is fine. Dr. Herzlinger?

Ms. HERZLINGER. I think the question is: do nonprofits give enough charitable care--

Chairman THOMAS. That is my next question.

Ms. HERZLINGER. To render their tax exempt--

Chairman THOMAS. That is exactly the next question.--

Ms. HERZLINGER. I think that is--Ms. Davis is quite correct. Nonprofit hospitals do give more charitable care, but of course they should. They are tax exempt. We give them major tax subsidies to provide charitable care. We don't give those to for-profit hospitals.

Chairman THOMAS. Doctor, thank you for the bridge. That is exactly the question that I now need to ask, because all of you felt fairly comfortable, and one of you deferred to the others on the information that is available, that there is a difference between the not-for-profits and the for-profits.

My next question, obviously, then is: do you think it is measurable enough to deal with the significant difference in the way not-for-profits and for-profits are handled under the Tax Code? I will start again with Dr. Kane. Yes, no, or not enough information to make a decision?

Ms. KANE. Could you rephrase your question, please?

Chairman THOMAS. If in fact we all agree that not-for-profits do carry out charitable or community services that give us an ability to differentiate, perhaps not across the board, but substantially between the not-for-profit hospital group and the for-profit hospital group. Do you believe we have sufficient information, or are you comfortable in saying, yes, you can differentiate between the two, and the not-for-profit status of the 501(c) tax-preferred status of the not-for-profits is therefore appropriate, given the difference in the charitable services of the not-for-profits versus the for-profits?

Ms. KANE. You don't have enough information. First of all, I don't think you can even tell what the value of tax-exempt status is for a lot of these hospitals, and then again, the transparency issue, the lack of reporting and information, makes it very difficult right now to tell. In the research I have done, most nonprofit hospitals do not earn the value of their tax exemption through the provision of charity care. They do provide other community benefits. It is differential. It varies a lot across the population. We do not know how to properly value some of those services, so we don't have the information.

Chairman THOMAS. Dr. Ginsburg?

Mr. GINSBURG. I don't have anything to add to what Dr. Kane said.

Chairman THOMAS. Mr. Lee?

Mr. LEE. I don't have an answer relative to the specific qualification, but I would add one other element to your question if I could, Mr. Chairman, which is to consider not just the relative contribution to charity care, but also how nonprofit hospitals play in the market as they too, may act as over-consolidated entities which look very similar to for-profit entities, and that is another element to consider.

Chairman THOMAS. I can assure the gentlemen we are going to get there.

Mr. LEE. Okay.

[Laughter.]

Chairman THOMAS. Ms. Davis?

Ms. DAVIS. There is evidence that charity care is being increasingly concentrated in fewer and fewer hospitals, not all of them do it. Certainly there is evidence on other community benefits that are provided in the form of standby capacity like--

Chairman THOMAS. The focus of the question was do you have enough information to say you feel comfortable that the difference between the tax treatment of not-for-profits and for-profits is justified based upon the charity or community work they do?

Ms. DAVIS. We do have quantitative estimates of community benefits for medical education, standby capacity and charity care.

Chairman THOMAS. In your opinion, is it enough to justify the tax difference?

Ms. DAVIS. Yes, on the whole.

Chairman THOMAS. Okay doctor, I understand where you are. Very quickly. On page 6 of your testimony, Dr. Ginsburg, I do have to fundamentally disagree with you, where you say that over the long haul advancements in medical technology are far and away the biggest factor in rising costs.

One of the difficulties I have had is assuming that somehow medical technology is always a cost driver and not a cost saver. I really believe the problem is that you are introducing medical technology in fundamentally a cost plus structure. In a cost plus structure, medical technology will always cost more, but if you deal with a comprehensive payment in which you have accepted responsibility and your profit is what is left over, that cost structure is a significant driver to use medical technology to save money, i.e., increase your profit, and so I am very concerned that people automatically dismiss medical technology as though medical technology itself was the problem. It is not.

In my opinion, it is the payment structure in which medical technology is introduced. I just wanted to clarify that because people so often say medical technology is the reason costs are going up. No, it isn't. It is the structure and the mechanism by which we pay and utilize medical technology.

Mr. GINSBURG. I would differentiate between the capitated environment which has the incentives to use only valuable technology, and the fee-for-service environment, which unfortunately is our dominant payment mechanism, which tends to accept almost all technology.

Chairman THOMAS. Doctor, I accept that correction, but your statement is a stand-alone flat-out statement. That is all, and I just said that I would have some concern with that statement as a stand-alone statement.

Mr. GINSBURG. I think the other point I want to make is that there is so much dynamic in medical care, so that the services that people are getting over time are changing. People are getting more medical care, much of it valuable, and this is the key reason why spending per person increases.

Chairman THOMAS. I agree. Increased usage isn't necessarily medical technology. It is awareness, availability, education. All of those are factors that have dollar values to them. I was just focusing on the medical technology statement that you made.

I also have to say that your statement, disclosed prices will lead to higher prices, is about the most anti-market statement I have heard in a long, long time, because what hospitals receive and what third-party payers, the primary function of paying, is a negotiated price. When you talk about disclosing prices, those are mainly out there to make sure you get more payments from the government, not that they are any real standard of what the prices are. In attempting to determine the initial statement that I asked, whether or not there was a differential that could be seen and value gotten from the tax treatment, prices are fundamental to what we need to focus on. Let me ask only one additional question. Thank you, Mr. Chairman, for the time. Mr. Lee, when you looked at the differential in quality and cost on a quintile or a quartile structure, did you break it down between not-for-profit and for-profit as well as the structure that you outlined?

Mr. LEE. We have not done a full review of that, but we have that information, and right now when you look at this quartile mix, it is really sort of a scatter all across the map of where hospitals fall on efficiency and quality. I will look at it more closely and follow up with you, Mr. Chairman. My recollection that it is a mix among nonprofit and for-profit, where they are scattered amongst this mix of efficiency and quality.

Chairman THOMAS. Mr. Chairman, as we examine the question, we shouldn't just focus on community or charitable care as it may be defined. It seems to me that given the significant tax break that not-for-profits provide, we should see to a certain degree discernible differences among a number of axes that you would examine the materials, and I would submit that that is not the case now, or we don't have enough evidence to make that decision, and I would hope people don't believe as a general position that transparency and knowledge to consumers is a dangerous thing. It is the most important thing to getting some rational payment and quality structure in this area as far as I am concerned. Thank you very much, Mr. Chairman.

Chairman HOUGHTON. Again, I turn to Mr. Pomeroy. Mr. Thomas, I thought we would have a second round with the exception of you, because you had two positions here. Is that all right with you?

Chairman THOMAS. I am under the complete control of the Chairman.

[Laughter.]

Chairman HOUGHTON. Okay, Mr. Pomeroy.

Mr. POMEROY. Thank you, Mr. Chairman. Well, we have a rich stew of health policy ideas bubbling in this hearing, not really leading any direction, but we got a rich stew on our hands. I guess to the extent it relates to this issue of not-for-profit and their role in providing charity care, the panel is in agreement that there is a distinction in the market practices of not-for-profit versus proprietary institutions. There also seems to be agreement that not-for-profit, the basis for not-for-profit status as a hospital, ought to be considered beyond the issue of charitable care or uncompensated care, role in the community, community service, or other things appropriately considered. Any objection with those kind of general conclusions so far?

[No response.]

All right. I think a third point of consensus that I understood is more data to the public in understandable ways involving cost, but very importantly, also involving quality would be of great value.

[No response.]

Consensus again. All right. Well, let us kind of wade into areas where we might have some differences of opinion. Ms. Herzlinger, first of all, congratulations on raising a fine son, and our full support is with Captain Herzlinger and his important responsibilities on behalf of all of us in Iraq today.

Ms. HERZLINGER. Thank you.

Mr. POMEROY. It seems to me that you place a very important role on market dynamics. If we could get market dynamics into health care providing, it would be a big step forward. Do you believe abolishing employer-based health insurance for some other kind of comprehensive coverage is then a step in that direction?

Ms. HERZLINGER. I think it is very important that people have access to money that enables them to buy health insurance. Right now that money comes from employers, but it is really paid by employees. They just get paid in the form of health insurance rather than getting paid in the form of salaries.

Mr. POMEROY. Although there are some marketplace dynamics that captures. I mean distribution, discounts.

Ms. HERZLINGER. Perhaps. Although if the distribution were so powerful we would have our employers buying our cars for us, they would buy our food for us, they would buy our housing for us.

Mr. POMEROY. I am not sure of this car deal. I mean I kind of think, I like my car, Ford Escort, runs fine, but I think quite differently about health.

Ms. HERZLINGER. Yes, but that is--

Mr. POMEROY. I buy a cheap car because it gets me around. When it comes to my health, I don't want cheap. I want good.

Ms. HERZLINGER. You want value for the money.

Mr. POMEROY. I think that this analogy just didn't quite go all the way, but I was trying to get to what you imagine as a perfect coverage scheme.

Ms. HERZLINGER. Correct.

Mr. POMEROY. Would it be government provided?

Ms. HERZLINGER. My point was, Congressman, that the idea that big is beautiful, that big buyers create efficiencies in the market. If that were so, then all consumer goods would be purchased through big buyers rather than through consumers. Yet, most consumer goods are purchased, you and I buy our own clothes, we buy our own house, we buy our own food. We buy many things for ourselves, and we get good values for the money.

Mr. POMEROY. This is an interesting discussion in economics. I don't quite understand its application to what we have before us as a point of inquiry.

Ms. HERZLINGER. Well, you--

Mr. POMEROY. I really don't have time, unfortunately, to ferret it all out, because there is a couple things I want to get to beyond that. Probably, Dr. Kane. It seems like our pricing, it has had an evolution. Hospitals are, from the beginning of time, I suppose, they get paid by some, not for others, got to provide care for all. So, over time they developed a pricing way of making sure they recovered enough from those who paid to cover those who didn't pay, and in the era that we are in, be it Medicare on one hand or third-party payers on the other, they have been pretty effective at ferreting out where the cross-subsidies are for those not paying, and they don't pay for them anymore. They pay cost, not this cost plus a subsidy for those not paying and at the end of the line is the hospital, therefore, as you point out, charging the private uninsured more, because there is no discounts attached, than the others now pay.

However, as this has evolved where those with coverage used to pay more to cover those without coverage, now the uninsured are billed more than those with coverage. The difference for a hospital is that they are very unlikely to recover from those without coverage. So, although they are billed more, they are not paid more from this group; is that correct?

Ms. KANE. I think the average amount you recover from your people who would classify as uncompensated care is around 20 percent of cost, and that is the hospital's side of the experience. If you are a medical debtor, you have a very different experience even if you don't pay your full bill. You still can get harassed. You can still lose your house. You can still have your wages garnished. You can still be afraid to go back into the health care system for the next round. So, even though they don't pay their full costs, most of those who are eligible for medical bad debt or free care don't pay their full cost, they are still, particularly the bad debtors, experiencing financial angst.

Mr. POMEROY. Absolutely. In North Dakota, where I am from, I mean it is our leading cause of bankruptcies among farmers. It is a big deal. I will look forward to the second round, Mr. Chairman. So,  much more to cover.

Chairman HOUGHTON. Thank you very much. I would like to ask a question of Dr. Ginsburg. I think you mentioned two things, one, using the insurers more to determine the pricing strategy, and also you talked about the hospital networks. Do you want to elaborate on those two things?

Mr. GINSBURG. Yes. I think one of the most important innovations associated with managed care has been in purchasing, in a sense by developing a network of providers who have come to an agreement with the insurer about rates. This is a very effective mechanism for obtaining a lower price for the policy holders, and probably a lot better than they could do on their own even if they had a lot more price information than they do.

Chairman HOUGHTON. Any more?

Mr. GINSBURG. I would say that the--obviously the--

Chairman HOUGHTON. You don't have to go on. That is fine.

Mr. GINSBURG. Well, let me say that the one other point is that the network tool starts breaking down to the degree that consumers or employers demand that all hospitals be in the network, then that removes the leverage that the health plan would have with the hospital, and that issue is what the tiered network is trying to respond to.

Chairman HOUGHTON. All right. Mr. Stark, would you like to inquire?

Mr. STARK. Thank you, Mr. Chairman. Dr. Kane, in your review of foregone taxes, I guess, are you taking into account only Federal income taxes, or do you take into account real estate taxes paid locally, or forgiven locally?

Ms. KANE. The study I did it about, using '95 data, so it is old, was property tax, sales tax, State income tax, and Federal income tax, not including the value of tax exemption, the value of donations, the overall value of research grants and other tax-exempt benefits that come from being a charitable, the market value of the reputation of being charitable, none of that is in there, just the quantifiable numeric values.

Mr. STARK. I am just guessing here, but were the real estate and sales taxes the largest?

Ms. KANE. Yes. The real estate was the largest.

Mr. STARK. By far?

Ms. KANE. By far, yes.

Mr. STARK. So, that in effect, in the community, if you let the Federal income tax go away, which I don't think is very significant, if the local community, for example, were to apply real estate taxes to the institution, and then give them a voucher for every local resident that they treated who was indigent, say, and if they got enough vouchers, they could pay their real estate taxes. We would have a little bit more accurate way to measure what we in our respective communities were getting out of these hospitals, would it not?

Ms. KANE. It would help to be able to at least quantify the value of the real estate taxes. I just want to point out that when local tax authorities do challenge a hospital's tax exemption, as in Pennsylvania, what they ask for instead of vouchers for free care, is they ask for dollars to support highways and schools, so it doesn't get translated back into health care.

Mr. STARK. Okay. I suppose that happens with all of our real estate taxes, and squeaky wheel theory that I am sure you all teach in your various Ph.D. courses. Mr. Lee, are you acquainted with the Maryland Hospital Plan at all?

Mr. LEE. I am not sure what you are referring to, sir.

Mr. STARK. Well, Maryland has, I believe now, a unique system for reimbursing hospitals that I think would put many of your fears or your concerns to rest. Free advice, it is worth what you pay for it. We did have the California Hospital Association Board of Trustees here to review what they do in Maryland. It probably would help California, but it is something you might want to take a look at just to get an idea of how some of the concerns that you have might be addressed. I guess this is just in the way of disclosure here, but do any of you have either a financial interest in, or a large consulting contract with any for-profit plans, any large ownership, contractual--you sit on any boards? None of you?

[No response.]

You are all pure as the driven snow. Good.

[Laughter.]

Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you very much. Mrs. Johnson, would you like to inquire?

Mrs. JOHNSON. Just briefly, what do you know about another aspect of the issue of charity care and nonprofits? One of the key differences between a nonprofit and a for-profit is that the for-profit is more agile and can simply close up and move out if the charity care is overwhelming their bottom line. We have some indication, at least I have seen some evidence that for-profits are doing better in part because they have rebuilt hospitals in the suburbs and left the inner cities.

I would guess that part of the reason they have done that was because of the overwhelming concentration of charity care in the inner cities, though I don't know that. What do you know about this subject? Are mergers, are for-profits moving to avoid high volumes of charity care and leaving for-profits with greater charity responsibilities? Anyone of you who would like to respond that.

Mr. GINSBURG. Well, actually, I could say from our visits to communities around the country, we see both for-profit and nonprofit hospitals focusing their expansions in suburbs where there are large numbers of privately insured patients. It seems as though there are market incentives out there, and they are being responded to by both for-profit and nonprofit hospitals in many cases.

Mrs. JOHNSON. With no differentiation? There is no predominance of one versus another in their movement?

Mr. GINSBURG. Well, I am sure there is a differentiation. In a sense, I think the shareholders of a for-profit company wouldn't forgive them if they located new hospitals in areas where most of the people were uninsured. Some nonprofit hospitals that have good assets have that option of focusing more on their mission to provide care to the uninsured and other community services.

Mrs. JOHNSON. Anyone else? Ms. Davis?

Ms. DAVIS. If you look at the major provider in inner cities, those are either academic health centers or public hospitals. Historically, that has been the case, and they are the ones that wind up with large proportions of uninsured patients, large proportions of Medicaid patients. They are the dominant provider in those communities.

Mrs. JOHNSON. Anyone else care to comment? Yes, Dr. Herzlinger?

Ms. HERZLINGER. There is an interesting example of the hospital system in Milwaukee, a nonprofit hospital system which is the main provider of charity care in the inner city. It has formed a for-profit joint venture with its cardiologists to open a heart hospital in the suburbs. The cardiologists control the majority share, so they are, as you so aptly put it, nimble and responsive to the market. The hospital owns the minority--and the rest of the community, the minority share, and the hospital uses--the nonprofit hospital uses the profits from its for-profit venture to subsidize charity care in the inner city. I think it is an important and an instructive example.

Mrs. JOHNSON. Thank you very much. Dr. Ginsburg, just one comment on your technology issue. You know, the current payment system rewards expensive technology for diagnosis or treatment. It does not reward systemic technology that would reduce overhead costs or improve quality or eliminate duplicate care. So, I think right now we see technology as a big cost driver, but it is because the system is selecting the most expensive technology, and the technology most easily subject to overuse.

Mr. GINSBURG. That is right, and I think we have a problem just as far as medical services of inadvertently overpaying for some services, usually the newer ones where there are still productivity increases and underpaying the others. When it comes to things like information technology, which I believe has enormous potential to improve care and quality, often the business case is negative, that because of the fee-for-service payment system, often what hospitals or physician practices can do to avoid complications and errors hurt them financially rather than reward them.

Mrs. JOHNSON. Thank you, Mr. Chairman, for your courtesy.

Chairman HOUGHTON. Thanks very much, Mrs. Johnson. Mr. Kleczka?

Mr. KLECZKA. Thank you, Mr. Chairman.

Ms. Herzlinger, I happen to represent Milwaukee.

Ms. HERZLINGER. I know that.

Mr. KLECZKA. I think your analysis of what is going on with the boutique heart hospitals is not really accurate. In fact, since they are investor owned, there is not that much coming back to the hospital. It is going to the physicians who are the owners in part of the specialty hospital.

I should point out that we have two in Milwaukee, and I do not think it is a model to brag about for a profit hospital care, because what they are doing is not only from the nonprofits but also the for-profit hospitals, they are taking or cherrypicking not only the patients, but they are also taking out of these hospitals that provide charity care one of the big profit centers, and that is the heart.

I am happy to relate to you that both are doing very poorly in Milwaukee, and, in fact, they are having a problem getting patients and are today they are running specials. You can get a Magnetic Resonance Imagery (MRI) for $49.95. So, let me just say for those of you who shop at Kmart, come to Milwaukee and, even though you do not need one, we can get you a real cheap MRI for $49.95. So, you all come down, hear?

[Laughter.]

The problem I am having with this hearing is that we need this to find out more information on what is going on, and I guess that is fine, if the Committee were consistent on that. Know full well that last week we passed a tax bill which contained a $9 billion tobacco buyout for the tobacco farmers of the country, and this Committee never met and had a hearing on it. The full Committee never had a hearing on it, so we passed this blindly with no input from the public and it went through Congress--it went through the House, anyway, by a vast margin.

Today, we read in the Washington Post that the bulk of that $9 billion is going to go to the big, big, big tobacco producers, and the Ma-and-Pa farmer who has 10 acres or so of tobacco, they are going to get $1,000 a year. For the Chairman to come here and say, gosh, we have to do this, the Committee is so knowledgeable, we were not last week when we took $9 billion of your money and just dumped it down the ashtray.

I have a real problem, Mr. Chairman, with equating health care with buying a car, because when I bought my Jeep, I could kick the tires, but when I went for my colonoscopy last week, I couldn't kick my colon. I had to have someone who is an expert in that to do that, Dr. Herzlinger, so when you say that we have to provide the system in the country for health care consumers to get things cheaper, well, we have that for consumer goods. I can go buy a Digital Video Disc (DVD) for $39.95, pretty cheap, but where am I buying it from? I have to go to Kmart for that, who buys DVDs by the zillions from China and sells them cheap. However, if I go down to my local electronics store two blocks away from home, I am going to have to pay $129 for the same DVD because they don't volume purchase and things of that nature and that is our current health care system.

Ellen Bradley from Milwaukee has 5,000 employees and they go either to the hospital and the health care system and say I want to make you a deal, I have 5,000 people I want insured. Or they can go to a third-party insurer like Blue Cross or Aetna. That is where I as the consumer get my deal, through volume purchasing. I do not think we are going to see this through this much-touted HSA problem. In fact, it is going to probably add to the bad debts for the hospitals because until I have my account established, my high deductible has to be paid out of my pocket. For someone who is living on the edge and, you know, bought that car that you talked about so cheap, the Impala that they are giving away, they are not going to have money after they pay their Impala monthly payment to pay the hospital the $2,000 for the one visit or one episode. What we are looking at is destroying the employer-based insurance system of the country, and we, my friends, are going to live to regret it.

Now, if, in fact, we want nonprofit hospitals to do things on the cheap, as Dr. Ginsburg pointed out--and it was disputed by the Chairman, but I do not believe the Chairman or agree with the Chairman--a lot of the hospital costs and doctor costs are related to new technology, which we all want. So, we are going to say to the nonprofits, We want you guys to do it on the cheap so you can give more health care away and forget the new MRI because you should not be having that because you are billing these patients as Dr. Herzlinger said in her statement--in fact, what she referred to in the statement is price gouging of the uninsured. Well, that has not been proven by any of the panelists today. It is a nice thing to say. Again, I have to refer you to the article I put in the record, and this was the one I asked you to read, and it is a Business Week article, and it is entitled "Making Hospitals Cry `Uncle.'" If you ask me, it is not the nonprofit, tax-exempt status that is up today for a hearing. It is this article here which talks about a large contributor to the Republican Party and what he is doing to hospitals by grabbing them by the neck and shaking them until they call "Uncle." Thank you.

Chairman HOUGHTON. All right. Uncle Ryan, would you like to--

[Laughter.]

Mr. RYAN. What was the question? I, too, represent Milwaukee, Milwaukee County, seven suburbs in Milwaukee and I would argue that there is a different story behind these specialty hospitals. The MRI center in question, they are providing a service to the Milwaukee area residents, same MRI, same General Electric MRI device, same kind of skilled MRI radiologists, and they are doing it at lower cost. They are actually on radio and television saying, "If you want an MRI and you want it today, if you need it, or you want it the next day or the day after, we will give it to you instead of having to have the long waits that you have at hospitals, and we will do it at a fraction of the cost."

Mr. KLECZKA. Will the gentleman yield?

Mr. RYAN. So, I only get 5 minutes, so, no, sorry, Jerry, not this time.

Mr. KLECZKA. I will tell you the rest of the story when you are done.

Mr. RYAN. Okay. The point is that that is injecting competition in the marketplace, and those people in the Milwaukee area who have these consumer-directed plans are actually saving money. What we are finding with HSAs, one of our big Milwaukee insurance companies that is selling these things has shown that 42 percent of the people who bought their HSAs, many of whom are from Wisconsin, are people that did not have health insurance before. We are finding that people care about cost because they now have products that allow them to save money, and then we have competition in the marketplace where we are getting the same quality or better quality delivered to people at a faster time frame at lower cost. So, this form of competition is actually working, and we see it in Milwaukee. I did not want to give a speech. I wanted to ask a question.

Ms. Davis, I wanted to ask you a quick question, and then Dr. Herzlinger. You stated that other countries had a greater role for the government in establishing hospital budgets or pay rates. Moreover, other countries have done more to rationalize costs than the United States has, as you have mentioned. You know, I have seen so many cases, in the United Kingdom, in Canada, where we see these global budgets in place, we see rationalized costs, but they are accompanied with long waiting lists and higher mortality rates and lower-quality care. Could you comment on that?

Ms. DAVIS. In terms of waiting lists, you are right. Waiting times for elective procedures in the United Kingdom are much longer than in other countries. They are longer in Canada, and the United States is very low on waiting times for surgeries that are elective procedures.

In terms of quality and outcomes, we just recently released a report that was put together by an international working group on quality indicators, and they looked at 21 different quality indicators across the United Kingdom, Canada, Australia, New Zealand, and the United States. The United States is kind of in the middle. It is better on some things, and worse on other things. We are the best on breast cancer of those five countries and 13 percent better than the United Kingdom. On 5-year survival rates for kidney transplantation, Canada is the best, and the United States is the worst. Canada is 14 percent better than the United States.

It is a narrow difference, 10, 15 percent. We are usually in the middle, better on some things, though not on everything. Certainly in terms of convenience and waiting time for hospital care, we are better. On waiting times for physician care, we are actually not better. The United States and Canada are toward the bottom. In other places, you can get physician care the same day if you are sick and need care. Here, you wind up waiting a week, 2 weeks, to get--

Mr. RYAN. Well, is it not true that the average waiting time in Canada is 6 weeks for primary care and 7 weeks for a specialist on top of that?

Ms. DAVIS. The U.S. waiting time for physician appointments are long also, which is surprising to me--

Mr. RYAN. In HMOs or PPOs or every instance?

Ms. DAVIS. Well, for most, the non-elderly population, they would be in managed care.

Mr. RYAN. Okay. Just because I am running out of time, Ms. Herzlinger, I want to ask you, you know, I think one thing that we are all probably agreeing on here--and Congressman Stark and I had a hearing on this in our other committee, the Joint Economic Committee--is transparency on price. I think that is something that everybody here, every witness from all different sides of this debate spectrum have agreed, let's have transparency on price. That is something that I think we can get consensus on, and I have always said to my hospital friends that either they are going to come up with a way of doing it or, unfortunately, the government is going to have to do it for them. I would hope that the industry would figure out a way of doing it. My question to you, Ms. Herzlinger, is: does the current lack of price transparency benefit hospitals? Since this is the tax status hearing, how does that play into their hands on pricing strategy, if it does at all? Could you comment on that?

Ms. HERZLINGER. I think lack of transparency in a market always hurts consumers. If people do not know what something costs, they are not going to be good shoppers and when they are not good shoppers, we have misallocation of resources. So,  whether it hurts or helps hospitals, I do not know, but it certainly hurts consumers. If I needed to have a mastectomy, I would know more about my tomato sauce, my car, my pantyhose, than about the quality and the cost of the surgeon and hospital in which that mastectomy is to be done right now.

Mr. GINSBURG. If I could add something, I am certainly in favor of consumers having as good, accurate, and accessible price information as possible when they have incentives to choose lower-cost providers. We have to realize that in most markets, there is a lot of concentration on both the insurer and the hospital side. This is oligopoly and oligopsony, and it is not clear that actually announcing the results of negotiation between large insurers and hospitals is necessarily going to be better for the consumer. You know, if you think of cartel theory, public prices, it is a way of having--it facilitates the workings of a cartel. So, we need to be very careful that while we do want to provide a lot of relevant price information to the consumers, we do not want to also broadcast it around to make negotiations come out differently.

Mr. RYAN. Thank you. That was insightful.

Chairman HOUGHTON. Thanks, Mr. Ryan. Mr. Sandlin?

Mr. SANDLIN. Thank you, Mr. Chairman, and thanks to each of the witnesses for coming today. Dr. Kane, in reviewing your testimony, do you think that the cost of the preferred tax status of the nonprofits outweighs the benefits that those hospitals provide to the communities?

Ms. KANE. I think I mentioned we do not fully know how to value some of the benefits, some of the community benefits that hospitals do provide, including stand-by capacity, or some of the things that--

Mr. SANDLIN. Stand-by capacity and, of course, saving people's lives and treating people and taking care--

Ms. KANE. Well, nonprofit and for-profit hospitals save people's lives, so it is pretty hard--I hope.

Mr. SANDLIN. Well, my point--

Ms. KANE. It is a little hard to--

Mr. SANDLIN. My point is--

Ms. KANE. Just attribute that to tax-exempt status.

Mr. SANDLIN. My point is this: it is not all about business and dollars.

Ms. KANE. Absolutely.

Mr. SANDLIN. It is about treating people in health care; isn't that correct? That is the first obligation. Isn't that right?

Ms. KANE. Both for-profit and not-for-profit hospitals do treat people and hopefully do the best they can.

Mr. SANDLIN. Now, the Tax Code, I was looking at the 501(c) requirement, and it says that the hospitals have to provide a health benefit to the community at large, these nonprofits. Is that correct?

Ms. KANE. Yes, they are expected to provide a health benefit, which is about the same thing that a for-profit does.

Mr. SANDLIN. I understand that. My question to you is: does a 501(c)(3) nonprofit, are they required under the law to provide a health benefit to the community at large? That is my question.

Ms. KANE. Well, I believe so. I am not a lawyer.

Mr. SANDLIN. Okay. Thank you. Now, these hospitals are providing a health benefit to the community at large, are they not?

Ms. KANE. The nonprofit and the for-profits are both providing a--

Mr. SANDLIN. My question is: are the--

Ms. KANE. Health benefit to the community at large.

Mr. SANDLIN. Nonprofits providing a health care benefit to the community at large as required by the law? That is--

Ms. KANE. I hope so.

Mr. SANDLIN. Thank you. So, they are following the law, aren't they?

Ms. KANE. Again, I think you are asking me the question in a way that is probably inappropriate--

Mr. SANDLIN. No, ma'am. Here is my--

Ms. KANE. In respect to the issue around tax exemption.

Mr. SANDLIN. My question--no. My question is: they are following the law, are they not?

Ms. KANE. As far as I know. I think some hospitals do not necessarily follow the law, but most do try to provide a health benefit to--

Mr. SANDLIN. Do you think that nonprofit hospitals should provide a specific amount of charity care?

Ms. KANE. I think they should provide a specific amount of community benefits, as more specifically defined than is currently defined in the Federal law.

Mr. SANDLIN. Okay. Now, I have noticed that you have used some of your research, it says, and the materials we have to challenge the tax-exempt status of hospitals in Texas and Massachusetts and Idaho and Virginia, Ohio, Maine, and New Hampshire. Is that correct?

Ms. KANE. I am sorry. What was the question?

Mr. SANDLIN. Have you been involved, have you used research to challenge the tax-exempt status in those States that I listed?

Ms. KANE. I have not actually been the challenger. Usually, the Attorney General or a local tax authority is the challenger, and I am hired as an expert witness to assist in those challenges.

Mr. SANDLIN. So, basically you are an advocate for challenging the tax-exempt status--

Ms. KANE. No. I am usually the expert witness for those who have already challenged the tax exempt status of a hospital, in general because even though it is providing health care for the good of the community, they have a bad habit sometimes of telling people who do not pay full charges or were not insured that they cannot get care in their emergency room until they are really, really, really sick and that is when they get challenged.

Mr. SANDLIN. Okay.

Ms. KANE. There are some pretty egregious examples of that. I hope you are not trying to--

Mr. SANDLIN. Well, that is a charming--

Ms. KANE. Defend those.

Mr. SANDLIN. Story, but that was not my question. Now, you said that you are not an advocate for challenging the tax-exempt status of the hospitals, so could you tell me, in all the areas that you have worked to support or maintain the tax-exempt status of a hospital? What States have you done that in?

Ms. KANE. There usually are not challenges to support the hospital's tax-exempt status.

Mr. SANDLIN. Have you--I did not--have you taken a position contrary, have you taken a position on the other side of the issue to say, no, the tax-exempt status should be maintained in any State?

Ms. KANE. I have written about hospital tax--the whole article that I wrote that is cited in my testimony talks about the hospitals that do maintain their tax-exempt status through the virtue of providing charity. So, I do believe that most of my work is on measurement and reporting fact, and then--

Mr. SANDLIN. My question is--

Mr. MORRISON. If it happens to be useful to those who make a challenge, that is who calls me.

Mr. SANDLIN. Well, thank you again, and you have a nice report. Here is my question: you said that your research has been used as an expert witness to challenge the tax-exempt status of certain hospitals. Has that research been used or have you been an expert witness on the other side to support nonprofits hospitals? In what States would that be?

Ms. KANE. No, I have not.

Mr. SANDLIN. Okay.

Ms. KANE. Generally, people do not challenge hospitals if they think they are--

Mr. SANDLIN. That was not my question--

Ms. KANE. Already acting charitably.

Mr. SANDLIN. I think we understand what you are saying. Now, in Texas, are you aware of what the Texas law is on the requirement for charitable--

Ms. KANE. The Texas law was passed partly as a result of the challenge that I was involved in in Texas back in 19--somewhere between 1989 and 1991 or 1992, I believe.

Mr. SANDLIN. In 1993--well, the first I think was 1985 on indigent health care. In 1993, it was SB 427 and that requires charity care and government-sponsored indigent health care provided in an amount equal to at least 100 percent of the hospital's or hospital system's tax-exempt benefits, excluding Federal income tax, or charity care and community benefits are provided in a combined amount equal to at least 5 percent of the hospital's or hospital system's net patient revenue. Do you feel like that is an adequate amount?

Ms. KANE. I felt that was a fair law. They had to define "community benefit" in a way that leaves out things like Medicare contractual adjustments and medical bed--

Mr. SANDLIN. One final question. I notice there are lawsuits filed against East Texas Medical Center Regional Health Center in Tyler, Texas. Are you an expert witness or consultant in that particular litigation?

Ms. KANE. No.

Mr. SANDLIN. Have you been consulted or talked to in any way about that particular litigation?

Ms. KANE. No.

Mr. SANDLIN. Did you know that system provided $91 million in charity benefits in 2003 and will pass $100 million in 2004?

Ms. KANE. I am sorry. I did not hear what you said about the--

Mr. SANDLIN. I said were you aware that--you do these studies, and I just wanted to know if you were aware that that system provided $91 million in charity care in 2003 and will pass $100 million in 2004.

Ms. KANE. No, generally the data I get has to be nationally available, and that may not be something that is in one of my data sets. It is pretty hard to get that data unless you are involved in a lawsuit in Texas.

Mr. SANDLIN. Okay. Well, thank you for that. It just seems to me, Mr. Chairman--I am finished rather than attacking the hospitals, we should focus on coverage and if we focused on coverage, we could take care of these issues. Thank you, Mr. Chairman, and thank you, witnesses.

Chairman HOUGHTON. Thank you. Mr. Johnson, Mr. Sam Johnson?

Mr. JOHNSON. Thank you, Mr. Chairman. I appreciate that. I would just like to say that we have specialty hospitals, numerous in our area, and they are all doing a great job. It seems to me that physicians do not get away from the regular hospital when they get into the specialty business. They still maintain their status with the regular hospitals. Would you think that the patient should or shouldn't have the ability to choose between a specialty hospital and a regular hospital if the physician operates at both of them? Anybody.

Ms. DAVIS. The basic problem is that there are very different profitable returns on different services. So, the real problem is that you can make so much money on orthopedic care and cardiac care, yet you can lose so much money on burn care, and neonatal intensive care. If we had a more rational pricing structure, we would not have services being skimmed off into separate hospitals. It reduces the ability to cross-subsidize both patients who cannot pay and important--

Mr. JOHNSON. Okay. Let me ask you this question: why do you think they skimmed off to specialty hospitals? Because they were not getting the service at the hospital, which mostly are not-for-profit. My view. Excuse me. I interrupted you.

Ms. HERZLINGER. Not at all, Congressman Johnson. I think that the specialty hospitals, just like specialization in the rest of the economy, make things more efficient and more effective. That is why General Motors spun off Delphi because it couldn't do everything. There is tremendous data to show that the patients are very satisfied and they are lower cost.

The core problem is why do they set up specialty hospitals in heart and orthopedics owned in the Milwaukee area, to my knowledge, by the cardiologists in the area and the nonprofit charitable hospital system in the area. The reason is that we have these third-party payers who are setting the prices. Sometimes they set them too high, as in cardiology and orthopedics, and sometimes they set them too low, and sometimes they set them so that they stop the innovation, which is the key to raising productivity in the U.S. economy.

For example, Ralph Snyderman, the CEO of the Duke Medical Center, innovated a new treatment for congestive heart failure. Congestive heart failure costs $56 billion. In 1 year, by focusing, by specializing on congestive heart failure, he reduced the cost by 20 percent in 1 year. The way he did it is, because he was specialized on congestive heart failure, he made people healthier. When they were healthier, they used the hospital less and they stayed for shorter amounts of time.

In a normal marketplace, this kind of innovation would reap large rewards. Ralph Snyderman lost virtually all the savings because under a large third-party system, which is not agile and not responsive to innovations, he gets paid for treating sick people and the healthier they are, the more money he loses. That is the problem with a volume-based model that says, well, the big insurer can get big discounts. Perhaps that is so. The big insurer can also stifle the innovation, which is the heartbeat of the productivity in America.

Mr. JOHNSON. Let me interrupt you. I am about to run out of time.

Ms. HERZLINGER. Sorry.

Mr. JOHNSON. I want to hear from Dr. Ginsburg as well. Thank you.

Mr. GINSBURG. Yes, I wanted to first say that I think the problem is not big insurers. It is fee-for-service payments. When you pay for delivering more care, it is never a hospitable system for excellence, for doing better with fewer resources.

I just want to say something about specialty hospitals. There certainly are cases where specialty hospitals have innovated in care, but because of our financing system, because our reimbursement rates do not adequately reflect costs--and the Medicare program needs to pay attention to this--because of the fact that we have different insurers paying different amounts, there is a potential that the technical success of the specialty hospital could cause irreparable harm to community hospitals, not because the specialty hospital is better, but because it is agile enough to concentrate on the inadvertent incentives that have been placed in the system to treat more cardiology and orthopedics, to treat privately insured patients instead of Medicaid patients. I am also concerned about the conflict of interest that physician owners of these facilities have.

Mr. JOHNSON. Can he answer? Go ahead.

Mr. LEE. Congressman Johnson, I want to build on one other point about the issue both with specialty hospitals but also it goes to Congresswoman Johnson's question about the expansion of hospitals to suburbs, et cetera. One of the key problems we have driving hospital costs is supply-driven demand. Where you have more hospital beds, more people use them. We had in Northern California, Redding, which got a lot of attention, a Tenet hospital, it was not just an issue of its outlier payments. They were having too many people getting cardiac care, and it is because if you have docs that want to fill up their portfolio, with all due respect to physicians, people will get more care--physicians will provide more care. One of the issues we have to get to consumers is information not just about whether this hospital doing a good job or not, but are they doing the right care at the right time. That is one of the concerns that I have about specialty hospitals.

Mr. JOHNSON. Well, I will ask another question later, but it seems to me the not-for-profits are building more hospitals than the for-profits. You might answer that next time. Thank you.

Chairman HOUGHTON. All right, fine. Thanks, Mr. Johnson. Mr. Portman?

Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the witnesses today. We have had a very interesting dialogue about health care, haven't we? We have gotten to talk about costs and technology and its challenges as well as its opportunities. We have talked about pricing and transparency, and I do take some comfort, Mr. Chairman, in the fact that at least this panel, and I believe the panel that I am sitting on--perhaps there is not a consensus on this, but a majority of us, at least, seem to be focused on the fact that more transparency and more information will make not just a more efficient health care system, but a higher-quality health care system and that is encouraging. I do think that is a general direction that we should be able to move on a nonpartisan basis. Then the final issue is the tax-exemption issue, and they are all related, of course. Since that seems to be more of the focus of the hearing, let me focus my questions on that.

I will start by saying I represent the greater Cincinnati area. We have three nonprofit health care networks who do a terrific job in our community. They are all involved in charity care, uncompensated care, but also community benefit. They are also businesses, and they are run more like businesses today than they were 10 years ago, even than they were 2 years ago. As a result, they have gotten over some very significant financial challenges. Mr. Lee talked about excess bed capacity and so on, and, we have gone through a pretty aggressive managed care revolution really in Cincinnati and back and forth. My point is they are businesses and they have a bottom line, and they must compete, and they do.

Having said how important it is that they provide that community benefit--and it is--I also think it is appropriate for us to review and clarify the rules. We are basing most of our discussion today on, incidentally, a 1969 IRS ruling with regard to what, in fact, is a community benefit, which was a change from the charity definition and you know, probably once every--what would that be--35 years, it is time to review where we are, not that that has not been done periodically in the interim period, but I think it is appropriate that we talk about where we are.

So, my question would be whether this panel would have any specific recommendations as to what the standard ought to be. Do you believe the community benefit standard is appropriate, again, dating back to 1969? Do you believe that there should be more specific standards? Which is something Dr. Kane alluded to earlier and if it is all right, I will just start with Dr. Herzlinger and go across the panel. The mother of Captain Herzlinger.

Ms. HERZLINGER. Also Dr. Herzlinger, my daughter. I think businesses provide community benefits as well. They do provide employment. They pay taxes into the community. Nonprofit hospitals not only have tax subsidies; they also have capital market subsidies. They are entitled to issue municipal debt, which businesses cannot, and raise the cost of capital elsewhere in the economy.

When we talk about community benefits, I think it is very important to identify those community benefits that are unique to nonprofits and that for-profit businesses, which, after all, are the cornerstone of our great economy and our great country, also generate.

Mr. PORTMAN. Thank you. Ms. Davis?

Ms. DAVIS. I think it is hard to quantify all of the community benefits, like the value of stand-by capacity. So, when you set an explicit quantitative goal, you wind up focusing on charity care because it is easier to measure. So, I think there are some problems with trying to set a specific quantitative goal.

I do think one could work on better practices, for example not charging American uninsured patients more than the discounted rate you would give to an insured patient; not having certain kinds of collection practices, like liens on homes; and publishing the availability of charity care. So,  I think that is kind of the area where I think the best improvement could be made in the near term.

Mr. PORTMAN. Interesting suggestions. Just as an aside, the three major nonprofit networks in Cincinnati have just come up with a draft billings and collections principles and guidelines statement which they shared with me yesterday. In fact, I was going to ask it be made part of the record later, if I could ask unanimous consent, Mr. Chairman, to make it part of the record. It is currently being subject to a comment period, but it gets at those very issues, Ms. Davis, you talked about, including collections. Mr. Lee?

[The information follows:]

DRAFT UNTIL PUBLIC COMMENT PERIOD ENDS 7/1/04

Billing & Collections Principles and Guidelines for Low-Income, Uninsured Patients

Principles

All patients should be treated fairly, with dignity, compassion and respect.

Hospitals have a financial responsibility to seek payment from patients in cases where the patient does not qualify for charity care and where the patient’s income or other assets clearly indicate the ability to pay for the health care services provided.

Each hospital should have clearly articulated, understandable financial assistance policies consistent with its mission and values, and which underscore the hospital’s commitment to provide financial assistance to low-income patients.

Financial assistance policies should be clearly communicated to patients and must be applied consistently to all patients.

Financial assistance policies should apply to patients who cannot pay for any or all of the care they receive, and should balance the patient’s ability to pay with the hospital’s need to be fairly compensated for services rendered to ensure its on-going financial viability.

Hospitals should assist patients with enrolling in Medicaid and other government- sponsored programs.

Debt collection policies of the hospital and its debt collection agencies and attorneys must reflect the mission and values of the hospital.

Financial assistance policies do not preclude the patient from personal responsibility.  Patients must communicate their financial situation to hospitals, must work together with hospital staff to receive financial relief, and must be expected to meet their financial responsibility based upon their ability to pay.

Hospitals will not be able to reinvest in plant, equipment and new technologies to continue to provide the highest quality of care without being compensated for their services.  Financial assistance from hospitals must be complemented by efforts of government, employers and others to expand access to health care coverage for all Tristate residents.

Financial Assistance Eligibility

Each hospital should maintain, and update as appropriate, written financial assistance policies for low-income, uninsured patients including those eligible for charity care.

Absent regulatory prohibition, hospitals should develop discount programs for low-income uninsured patients who do not meet Federal Poverty Guidelines (FPG) to qualify for charity care.  These discount policies should be reevaluated periodically.

Hospitals should work with patients who do not qualify for charity care to establish extended payment options including low interest loans that are appropriate given the patient’s income and assets.  Consideration should be given to prompt payment discounts and other means of relieving financial pressure on self-pay patients.

Hospitals should ensure best efforts to apply policies consistently to all patients, and hospitals should clearly define the type and scope of services eligible for assistance.

Hospitals should assist patients in determining eligibility for government-sponsored aid.

Hospitals should continue to provide financial assistance to patients who have exhausted their insurance and who exceed financial eligibility thresholds for extraordinary medical costs, although hospital financial assistance is not a substitute for employer-sponsored, public or patient-purchased insurance.

Communicating Financial Assistance Eligibility

All financial assistance applicants should be treated with dignity, respect and with cultural sensitivity.  Free interpretation and translation services should be made available as necessary.

All patients regardless of income level or payment status (i.e. insured, Medicare, self pay) will receive access to the same information regarding services and charges.

Hospitals should ensure that patient financial services personnel and financial counselors are fully trained on the hospital’s financial assistance policies and can communicate those policies clearly to patients.  Receptionists and switchboard personnel should be able to direct callers to hospital staff trained to provide financial assistance.

Communications to patients regarding financial assistance should be written in reader-friendly terminology and in a language the patient will understand.

Financial assistance policies must clearly state eligibility criteria and the process used by the hospital to determine whether a patient qualifies for financial assistance.  Eligibility requirements related to FPG should be clearly enumerated for patients, and patients should also be told how assets may be used in determining eligibility for financial assistance.

Hospitals should have adequate, easily visible signage in appropriate areas of the hospital (i.e. Emergency Department, Admitting/Registration) informing patients and their families of the availability of financial assistance.  Signs should include brief instructions about how to apply for financial assistance including contact information.

Information regarding the availability of financial assistance should be included on hospital bills including who to contact to begin the eligibility determination process.

Patients should be clearly informed about their obligations to complete eligibility documents and to provide financial documentation as necessary, as well as potential financial obligations they may incur.

When applicable, patients should be referred to an enroller to apply for Medicaid or similar programs to assist in offsetting some or all of the patient’s financial liability and to ensure that the hospital is fairly reimbursed for its services.

Hospitals should share their financial assistance policies with appropriate health and human services agencies and other organizations that assist such patients.

(The financial assistance and communications guidelines listed above apply to a hospital’s treatment of patients seeking charity care, financial assistance, or discounts, as applicable.  To receive such assistance, patients must comply with hospital financial assistance application requirements, including providing documentation as needed.  Patients must also cooperate with hospital staff and provide needed information in a timely manner to enroll the patient in Medicaid or other programs as required.)

Collections Guidelines

Hospitals will provide their mission statement and their billings and collections guidelines to their collection agencies and attorneys, and hospitals will secure their agreement to adhere to the same high standards incorporated in the hospital’s policies.  (Collection agency is defined as an outside agency engaging in bad debt collection services on behalf of a hospital as opposed to an outside agency contracted to manage the hospital’s day-to-day billing activities.)

No collections effort will be made by the hospital or its collection agency for patients who have completed the financial assistance application process and established their eligibility for charity care.  If such a patient is mistakenly billed, hospital staff will apologize for their error and correct the mistake.

Legal action, including the garnishing of wages, may be taken by the hospital only when there is sufficient evidence that the patient or responsible party has the income and/or assets to meet his or her obligation.

Hospitals will not force the sale or foreclosure of a patient’s primary residence to pay an outstanding medical bill.

If a patient is cooperating with an agreed-upon extended payment plan to settle an outstanding bill with a hospital, the hospital should not send the unpaid bill to a collection agency if the hospital is aware that doing so may negatively impact the patient’s credit rating.

(The above guidelines apply to a hospital’s collections practices.  However, patients who are financially obligated to pay for a portion of their care must cooperate with the hospital on establishing the best method of payment and then demonstrate good faith efforts to abide by that agreement.)

In conclusion, these guidelines largely reiterate current policies and procedures of GCHC member hospitals.  However, these guidelines may require some members to enact changes in their policy, which may require operational changes including, staff training, changes on invoices, contract revisions with collection agencies, etc.  The Greater Cincinnati Health Council endorses these guidelines and encourages its acute care hospital members to ensure that their billing and collections policies are consistent with these guidelines as soon as possible.

Mr. LEE. Also, Congressman Portman, California hospitals have come up with the same set of standards around billing practices for the uninsured. The only thing that I would add that is easily quantifiable is how nonprofit hospitals play in the market. As I noted in my remarks the concern is that hospital consolidation creates negotiating leverage that preclude insures from seeing differences in cost quality.  Cost and quality do not show through because it is a take-one/take-all on the same price basis. There is a problem in the market. I am concerned with having a separate set of standards for nonprofits, and I have the exact same concerns with the for-profit systems. This is an element that I think is worth looking at.

Mr. PORTMAN. Dr. Ginsburg?

Mr. GINSBURG. My organization studies markets and the implications for consumers, but we do not take positions on policy, so I would just as soon pass on this.

Mr. PORTMAN. Dr. Kane?

Ms. KANE. I think there are new guidelines out by the IRS that correspond more closely with what Karen Davis just mentioned around practices that hospitals undertake to show that they have a charitable intent when they are providing care. I think that is an improvement over what it was historically.

I have tried to quantify these benefits. It is difficult. It is also difficult to quantify the benefit of the exemption in any meaning--you know, without missing some large amounts of benefit that you cannot quantify. I do think the IRS is paying attention, and I think a stronger standard that allow States and local communities to play a role in what constitutes a community benefit is important. Hospitals in some States now work with their local community health agencies to say, what is important in our community for health, and if we do that, will that be considered towards our charitable status? For instance, in New Hampshire, that was part of their community benefit law.

I think there is a need to be more clear, perhaps, about what practices and what types of activities would constitute or count towards tax exemption and have some flexibility in how the hospitals choose to play that out. I think just the disclosure and the transparency of trying to do that will improve the way hospitals behave at this point.

Mr. PORTMAN. Thank you, Dr. Kane. Just quickly, Mr. Chairman, again, our three networks in Cincinnati are working, in fact, right now with our City Council, which would represent part of the population served, and with some of the health care providers for uncompensated care, health care clinics and so on, to try to determine what some of those needs are on a more regional basis and be responsive to that. The question is whether that is happening around the country. I cannot speak to that, but that is an interesting part of the equation given the fact that it is not just about Federal income tax; it is about property tax and other exemptions. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you. I am going to ask a question, and then I know Mr. Pomeroy wants to. I would like to step back a minute and move away from profits, and return on investment and community involvement and just take all those very difficult to generalize in terms of the two categories, the profit and not-for-profit. When you take a look at the cost structure of medicine, you want to have the toughest, most able, most precise financial people looking to make sure that the equipment is there, the care is there, the pricing is right. You would sort of instinctively go to the for-profit institutions.

Yet at the same time, there is another element in the not-for-profit, which is community involvement. People feel part of the hospital. They want to play a part in the whole overall medical element in the community. They feel it is part of them and I don't know why there is any inconsistency in not having a very sharp, driving, cost-conscious direction of a nonprofit hospital versus the profit hospital. Maybe you would have some comments to make on that.

Ms. DAVIS. Well, I think one of the basic differences in just what motivates nonprofits versus for-profits--and it is something I happened to look at 35 years ago in an economics doctoral dissertation--is they are motivated to be the best, to be the best equipped, and often to be the biggest, and, therefore, they will do things that do not make sense to a for-profit hospital because something they do may lose money. You have got the very best burn unit. You have got the very best neonatal intensive care unit. You do the best research. You are there for the community and always known as, when anything really bad goes wrong, this is the go-to place that leads nonprofit hospitals to try to do things, even if they lose money.

Now, in the past, they were able to cover that because they could cross-subsidize it out of charges to privately insured patients. As that has come down relative to costs under managed care, they are less able to provide those kinds of services. For the most part, they are the ones that will do things that we as a society want done but that are not profitable. I used the example of a major fire in a nightclub. Those burn patients went to certain hospitals, and those hospitals provided care. They are not going to make money on those patients. They are going to lose a lot of money on those patients. We all want those patients taken care of. That is the sort of thing that a nonprofit will do because they take great pride in having responded to that community emergency and were there at a time when patients need them. Obviously, they get some publicity out of it in local papers, and it helps their image as an institution. That is one of the reasons the nonprofit nature of this industry is so important.

Chairman HOUGHTON. If I could just sort of cut in here a minute, to flip my argument, if you take a look at many of the corporations in this country, they are enormously generous in terms of what they do and contribute into the community. So, I just do not understand the consistency here. Maybe you would like to discuss this.

Ms. HERZLINGER. Well, on the for-profit side, clearly in a well-managed, socially responsible corporation, its aim is to maximize the return for the shareholders within the norms of society. So, given a nonprofit and a for-profit, the for-profit aim is clearly to be as efficient as possible, and for-profits, especially if they are publicly traded, are much more transparent than nonprofits. I can get the financial statements of the Hospital Corporation of America (HCA) just by flicking on my computer. I would have a great deal of difficulty getting comparable statements for nonprofit hospitals. That kind of transparency in the market is an incentive for efficiency. I think the fair thing to do is to measure the costs and quality of both of them and let people make their own decisions about which ones gives them the best value for the money.

Chairman HOUGHTON. That is difficult when you are in a small community. Would you like to add something?

Mr. GINSBURG. The perspective I would like to point out is that nonprofit hospitals today account for, I think, upwards of 85 percent of the beds. They are the core of the hospital system. This percentage has been quite stable over time, and it seems as though, this is a country where not-for-profit hospitals are the norm. I think the major success that for-profit hospitals have had has been, first, in areas where there has not been a lot of local resources to support the development and expansion of nonprofit hospitals. So, in a sense, they have provided capital and I think that some of the for-profit companies have been skilled and effective at identifying failing not-for-profit hospitals that are failing because they are not managed well and purchase them and manage them well, and then often sell them back to a nonprofit entity. We have to realize that the nonprofit hospitals have this very dominant position. Whether it is the tax-exempt status, whether it is people's comfort, whether it is their philanthropy that leads to it, they are the central system.

Chairman HOUGHTON. All right. Does anybody have any other comments? If not, then we will go on.

Mrs. JOHNSON. Mr. Chairman?

Chairman HOUGHTON. Yes?

Mrs. JOHNSON. I thought you were closing this panel.

Chairman HOUGHTON. No, no. Go right ahead because I wanted to ask Mr. Pomeroy--go ahead, please.

Mrs. JOHNSON. I will not be able to stay for the second panel, but I will review the testimony. I want to mention something that has come out of this panel, although it is not central to your responsibilities in testifying here. Ms. Davis, you mentioned the stability that Medicare has provided to the health care system. I would say that that is absolutely no longer true. You look at the physician payment law. Talk about creating instability. It is astounding. You look at our ability under Medicare to reimburse accurately, and if you take the newly proposed outpatient and inpatient reimbursements--these are new regulations. They are precipitated by the big increases we provided in the last Medicare bill and by the census automatic action every 10 years, and you go through what is the interaction between the census redefinitions, the increases we gave them, the this is and the that's and the other things. When I ask the experts, who have spent their lives on this, "what is the outcome? how many of the hospitals in the rural areas that we gave big increases are going to get those increases?," they cannot tell me. When I ask them, "what is going to be the impact on these small urban hospitals that, frankly, are most disadvantaged in the reimbursement system?" they cannot tell me.

How can I make policy when we fight for a 4-percent increase for hospital reimbursements, and then we do not know whether they get them. My hospitals came in last week and documented that for the first time under Medicare, in spite of the big increases that we gave, the work we did on Indirect Medical Education (IME), on market basket, the first time we have ever given full market basket 2 years in a row, every single hospital in Connecticut is going to get an absolute reduction. A reduction. When their malpractice premiums are zooming, when their nursing costs are going up, when their technology costs are going up, and so on and so forth.

So, what drives me--and I am going to be looking at these pricing issues. I want you to give me anything you know about what we should do about how we price in Medicare, because every aspect of the system is wrong. You cannot set a price and keep it for 20 years. Volume increases; it should be declining. What should we do about that? What should we do about these special services? I mean, ironically, we have no cost base. We do not know what anything costs. We have an arbitrary base that we set in a certain year, and we have adjusted it by inflation. This is no way to run a railroad. Whether it is hospitals, whether it is technology, whether it is this, whether it is that, you know, we are--just when you adopt a transfer policy and you reduce benefit for short stays in a system based on averages, this is a travesty. It is a travesty of logic and it is a travesty of fairness to the hospitals.

So, whether it is doctor payments, whether it is hospital payments, whether it is boutique hospital payments, whether it is surgery center hospital payments, we do not know what we are doing. The terrible proof is that this new regulation that has come out, after the biggest increases we have ever passed across the board, the first time we have just said the whole rural system does not work because we cannot deal with low volume so we are just going to increase payments, knowing that it costs more for low volume. This is--I mean, I cannot tell you. There is no logic. There is no structure. There is no cost basis from which we can work. In the oncology area where I am absolutely insisting that practice expense bear some reality to practice expenses, I am being told, "why should we do it there when we routinely reimburse at 70 percent of practice expenses for everybody else?" What a bankrupt logic. What a quick way to destroy the quality of health care.

So, I am very interested in this nonprofit/for-profit, who is getting paid to provide uncompensated care. To think that Medicare payments are stabilizing our health care system is to put your head in the sand. I am sorry, but in every sector we are destabilizing the system, eroding quality, and driving the development of boutique hospitals and so on, in my personal estimation.

We do not have time to go into all that, but I invite every one of you to work with me on how do we change the way we price in Medicare. Because if we do not, we will destroy community hospitals, we will drive the good-quality physicians out of the system, and, frankly, it is only because of the Administration's good sense and forbearance that we haven't acted to destroy key home health providers who clearly are providing more services for less acute care patients. You would think we might want to know.

Ms. DAVIS. If I could respond quickly to that, I agree with you. Most of my focus is on the patient and what is good for the patient.

Mrs. JOHNSON. Right.

Ms. DAVIS. I did testify at the time of the Balanced Budget Act that the proposed cuts to the health care sector were simply unprecedented and much too deep. The effect of those cuts and other changes in the late 1990s was to take over a 10-year period $1 trillion out of the health care sector.

Mrs. JOHNSON. Right, but it is also true--

Ms. DAVIS. So, a lot of the problems we are seeing--and you see it a little bit in my charts 3 and 5 on pages 25 and 26. Medicare cut, Medicaid cut, managed care cut, and the cumulative effect of that has not been helpful to the--

Mrs. JOHNSON. I agree that the system is far more fragile than 10 years ago. It is also true that what we did in 1997 was limit the rate of growth for the next 6 years to the rate of growth of the preceding years.

What we are seeing now, because we limited that rate of growth, because Medicaid, a publicly funded system, is underpaying dramatically, and because of managed care's pressure, we are seeing a very fragile system now, and we cannot keep our head in the sand about the inaccuracy of our payment structure any longer. So, I invite your input. I know that you are concerned about this, and I just wanted to note that we are--you know, I see this as the first hearing in this venue, but we will be hearing these other things that are intimately related, too much for one committee, and I invite your cooperation and input. Thank you very much, and thank you, Mr. Chairman, for your indulgence.

Chairman HOUGHTON. Thank you. With all of that good news, I now turn to Mr. Pomeroy.

Mr. POMEROY. Thank you, Mr. Chairman. Well, we have been at it a couple of hours, and I think so far this hearing has established that a hearing undertaken without a rational focus is unlikely to produce a clear record. That said, I want to respond to the Chairman Thomas charge that we can try to make some sense of all this. I believe that we have established in this discussion that pricing alone is not a very effective sole indicator of whether tax-exempt status for hospitals or not is being appropriately fulfilled in the exercise of their operations. Is that correct? Is that a consensus across the panel? Any objection to that suggestion? Okay.

Then let me ask you this: do you think there would be--I have seen--I used to be an insurance commissioner for 8 years. I have seen all kinds of things in terms of hospital practices, proprietary and nonprofit. I have seen some wonderful commitment to the charitable mission of these nonprofit institutions, and I have seen some exercised, on the other hand, incompetently and less rigorously.

Is there something that ought to happen, that Congress can contribute to the nonprofit hospital world by way of surveying best practices, establishing a matrix of things that might be present in an exemplary nonprofit hospital institution, not to enforce but that maybe a hearing record would contain and it might provide some guidance to hospital executives and boards of directors in terms of things they ought to be keeping an eye on to make certain they comport with what is expected of best practices within the nonprofit hospital status? Would that have some value? Let's just run right across the table and start with Dr. Kane.

Ms. KANE. I think if Congress can come to some consensus on what best practice is, other than simply providing care to the public, it would be helpful. I am not sure you can come to consensus, having just heard the debate on the panel here of the members. I think it would be helpful to clarify what Congress thinks merits tax exemption, at least at the Federal level. It would be helpful to go beyond that and say, you know, here are best practices and how we expect you to provide those types of activities, if they are community-based activities, if they are the way you do billing and collection, if it is the way you make people eligible for charity care and at what income levels. All of that guidance would certainly help to make it more standard across the country in terms of what a citizen can expect if they do need a health care intervention in their lives.

Mr. POMEROY. So, maybe right topic as we discuss tax-exempt status, but we have to go far beyond pricing to capture maybe a solution that has value.

Ms. KANE. Pricing is not really the--not where I would go first.

Mr. POMEROY. Dr. Ginsburg?

Mr. GINSBURG. Yes, I think pricing is a different topic. I think that it really would be useful to have expressions from the Congress about what it expects hospitals to be doing for the tax-exempt status because the Congress has not spoken to this for a long time.

Mr. LEE. Congressman Pomeroy, the only thing I would add is a best practice area that Congress could make advice on is around not just what the hospitals do but how we pay hospitals. We have heard that one of the other consensuses here is a dysfunctionality in our payment system, a discussion that we need to reform. I would actually recommend to this committee the Medical Payment Advisory Commission's (MedPAC) June report which actually talks about forward-thinking purchasing practices that is going to be the driver, I think, of changing hospitals' performance.

Ms. DAVIS. I think you have put your finger on a very good idea. We have supported a case study of exemplary hospitals, which we will be releasing in August. It started with a database on hospitals in 21 States and found those in the best quartile on efficiency and the best quartile on quality measures, risk-adjusted for different diagnoses; out of that, it identified the 30 best hospitals and did case studies on four of them.

There are certain characteristics that are common to all of those best hospitals. It has to do with starting at the top, with the CEO's real commitment to quality. It has to do with something called true resource management in airlines, but it means that you listen to everybody you listen to the nurses when they say there is a problem, and you fix it. Everybody is free to speak up when they see a problem, and it gets addressed. I think that is just the beginning. That was conducted for us by Jack Meyer at the Economic and Social Research Institute. Other work in that area, whether it is on quality, efficiency, or access, would be very valuable.

Ms. HERZLINGER. I think it is very important that the Federal Government insist on measures of quality by provider, by hospital, by procedure for diseases over the long term. That is what transparency is all about. That is what the American people are interested in, as well as price data. The quality data are very important.

However, I think it is very dangerous for the government to get involved in specifying the processes of care. Best practices are the consensus of the majority, but the real innovations come not from the majority; they come from iconoclastic outliers. For example, the--

Mr. POMEROY. I agree. My time is up. By best practice, I mean, you know, consensus that we ought not attach houses of people that--

Ms. HERZLINGER. Oh, of course.

Mr. POMEROY. Not at all medical--

Ms. HERZLINGER. I misunderstood. Certainly.

Mr. POMEROY. Thank you very much.

Chairman HOUGHTON. Mr. Ryan?

Mr. RYAN. Are we doing a full round?

Chairman HOUGHTON. A very quick second round, please. Go ahead.

Mr. RYAN. Okay. Let me see if I can widen the focus here a little bit from the beginning statements of this hearing. Do we have good measurement as to the value attributed to this tax status? Obviously, I think everybody agrees we do not have that. Do we think that public value comes from this tax-exempt status? I think so. What is the measurement of that? Who knows? Is that measurement so great that the costs do not outweigh the benefits? We don't know the answer to that question. Perhaps with better available data we will get the answer to that question. It is a question that ought to be asked of all of us in the public for the public good.

I guess the question is: you cannot get away from the whole uninsured question when you talk about this. I mean, if we are talking about the system today where we have to rely on the public charity of nonprofit organizations who have to cross-subsidized in order to pick up those who do not have insurance, that is the system we are working in today. So, is this a rational delivery system within this use of this tax expenditure to get the care to those who are uninsured? Or should we try and focus on getting insurance into the hands of those who do not have insurance so that this method of redistribution and cross-subsidization is not necessary?

I would like to ask you to sort of pull that focus back a little bit and answer it this way: are we better served, quantitatively, economically, by fixing this uninsured problem we have in this country so you can focus on competition, on transparency, on making the market work? Or is the current system of using a tax expenditure on an ad hoc, individual hospital-by-hospital basis, cross-subsidizing and picking up the slack better than fixing this uninsured problem? Let me ask it that way and we will just start left to right, Dr. Kane and then to the right.

Ms. KANE. I think probably the obvious answer is it would be great if everybody was insured. This is something that I think--didn't Harry Truman suggest that? I mean, I am trying to think of how far back--I mean, it was before I was born, actually.

Mr. RYAN. We have to--

Ms. KANE. I agree that--

Mr. RYAN. Focus on direction of public policy.

Ms. KANE. Absolutely. We would love to see everybody insured in some type of universal coverage. I don't think you dare leave out the interim steps that we have in place for the safety net, because we haven't gotten there yet, and I think in 1969, the IRS and whoever set the laws misunderstood the impact of Medicare and Medicaid, thinking it would eliminate the uninsured. Guess what? They have come back.

I think we always have to be aware that, you know, until we are truly universal, we really will have people who are at risk who are not covered, and that we do need a system, a safety net for those people. Yes, absolutely, the bulk of public policy in my mind should be towards insuring everybody.

Mr. GINSBURG. It is really inconceivable that someone can be seen as having access to medical care today without having insurance and that should be the first priority. What I would say is that what we are seeing as our health care system becomes more competitive, it is becoming more difficult to continue the cross-subsidies that we have historically depended on to serve uninsured people or low-income people. As Nancy Kane says, we still have to do it, but in a sense, I think the priority for taking steps to expand health insurance is that much greater today because our cross-subsidy mechanisms are breaking down.

Mr. LEE. Congressman Ryan, I think the first step-back point is the tax benefit relative to uncompensated care distracts a little bit from the fact that most hospitals, for-profit and nonprofit, are compensated for that care from commercial private payers. This is one of the dysfunctions of our payment system. We have a vicious cycle caused by uninsured and underinsured costs in hospitals being picked up by employers, by those that have insurance, driving those prices up, driving to more uninsurance.

Mr. RYAN. So, let me ask you this: you are saying that it is the private dollars from the purchasers of health care that are paying for those uninsured, not the tax expenditures that are flowing through?

Mr. LEE. I am saying it is both, and I don't know the quantity of which is bigger, but it is absolutely a huge portion, which is hard dollars being paid by insured Americans, which is picking up a substantial portion of the uncompensated care costs in hospitals. Although the question that much of this hearing is focusing on is the tax status, the issue underlying driving hospital costs is part of a vicious cycle that is discouraging small employers from stepping up to the plate and getting insurance because it costs more. So, that is an important observation, I believe. The other is in terms of it isn't either-or--

Chairman HOUGHTON. Will you please be quick on this? Because we have got another panel.

Mr. LEE. That is my main observation on that question.

Chairman HOUGHTON. Fine. Thanks very much. Mr. Stark?

Ms. DAVIS. I think the answer is hands down it would be better if we would work on the problem of the uninsured. I mean, it is just a massive problem. It affects every--

Chairman HOUGHTON. I thought I had cut this off.

Ms. DAVIS. I would like to say, even if we--

Chairman HOUGHTON. Could we come back to you? Thank you very much. Go ahead, Mr. Stark.

Mr. STARK. I just had a comment for Mr. Lee on the idea of not-for-profits banding together to set prices. I believe that we certainly saw that in California. That was a reaction to the original move by Aetna and others to gouge big discounts out of separate units. So, this was the not-for-profits pushing back after they had been told that they would lose a lot of their patient base if they did not subscribe to discounts which were arguably too deep. So, it is kind of a bounce back and forth as the pendulum swings. Ms. Davis, of the 30 best in your study, how many were for-profit hospitals?

Ms. DAVIS. Those were nearly all nonprofits, but as Dr. Ginsburg said, most hospitals are nonprofit and all of the top four studies were nonprofit.

Mr. STARK. They are, and we did our own study to try and find in all of the for-profits, if any of them--this was just with U.S. News and World Report's study. The closest we can was one of two of them got a ninth ranking in orthopedic surgery, and that was about as close as any quality hospital got in the profit group. None of them are teaching hospitals, to my knowledge, and then, of course, we have the example set by HCA, HealthSouth, and Tenant, who are the largest criminals, Tenant in California recently having killed 167 people by unnecessary heart procedures. I don't think you can make a very good case for the for-profit community based on the record that they have established in this country to date. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you very much. Mr. Johnson?

Mr. JOHNSON. Thank you, Mr. Chairman. You know, since enactment of the Medicare bill last year, many employers have expressed interest in offering high-deductible insurance plans along with HSAs to their employees. You know, employees will be paying out of their pocket for their hospitals expenses. How important is transparency to them? Can you tell me if there is any transparency between doctors' costs, too?

Ms. HERZLINGER. Health Allies was started for just that purpose. It was started with the idea that there would be high-deductible accounts with Health Risk Assessments (HRAs) that the employer, employee, or somebody else funded, for which they could use the resources to pay part of that deductible. Health Allies, which is what I referred to in my testimony, does is it makes transparent to the user what the prices are for different procedures and for different physicians. It also negotiates a discount on their behalf. So, by aggregating individuals, it makes these individuals as powerful as a group in seeking discounts.

Mr. JOHNSON. Yes, sir?

Mr. LEE. Congressman Johnson, we have a problem with the lack of transparency of hospitals. It is a real crisis at the physician level, and generally there is not good information there. There are a few very small, baby steps. The National Committee for Quality Assurance has physician recognition programs for physicians that provide diabetic care or cardiac care, that provides a bundle of measures to say this doctor is really good for these areas of care. Among the issues we happen to be working on with CMS is to get to the physician level of measurement and choice so consumers can get that information of who should do my knee surgery. We are not there today.

Mr. JOHNSON. Yes, sir?

Mr. GINSBURG. I think a limitation of HSAs, according to the way the legislation is written, is defining HSAs in terms of a deductible and if you talk about someone who is being hospitalized, inevitably they exceed that deductible. So, the only price incentives they face, other than whether to go into the hospital or not, is just if they have coinsurance where they will bear, say, 20 percent of the price differences across hospitals or if they have co-payments.

I think that there is some potential, which perhaps future revisions of HSAs could address, about some incentives to choose better providers or, in a sense, to make choices which do not involve a large deductible and which would not qualify. We published something in December reflecting a conference on what are the innovative ideas in patient cost sharing. I am concerned that many of those ideas just would not fit under the way that the Congress has defined HSAs, and it is an area that you might look at.

Mr. JOHNSON. I alluded to the fact that not-for-profits were building more buildings, more hospitals--they are in our area, for sure, and you all nodded yes--over the for-profits. Are those beds going to be usable? Hospitals where I am are turning those bed into family rooms, for crying out loud, because they cannot fill them. Do you think that the construction of not-for-profit hospitals is too high? If they were taxed, they wouldn't be building them, would they? Does somebody want to respond?

Mr. LEE.  I would just respond, Congressman Johnson, that health care very much is local, and in some communities there is undercapacity because of lack of building, but in many communities, there is overcapacity. So, I think that needs to be looked at on a community-by-community basis in terms of the need for new hospitals beds or not.

Mr. JOHNSON. Yes, but are not-for-profits building more than for-profits? Because it used to be the other way around, it seems to me.

Ms. KANE. It really is a function of your local market. That is who is there, perhaps you know, that is where they tend to stay. For-profits can really cruise the country and look for a location they want to locate. Nonprofits tend to stay local and look for local opportunities, so they may be more likely to build in your market because that is where they are.

Mr. JOHNSON. Thank you. I appreciate your comments.

Chairman HOUGHTON. Thanks. Mr. Sandlin?

Mr. SANDLIN. Thank you, Mr. Chairman. I just have one question. Dr. Ginsburg, from the information that has been provided to me, most of these tax-exempt hospitals are currently running at about a 5-percent margin, and if we change the tax-exempt status of those hospitals, do you think we run the risk of those hospitals closing or going bankrupt, and then obviously not being able to provide services to the communities?

Mr. GINSBURG. Yes, well, nonprofit hospitals need to earn a margin if they are to have capital to expand and replace themselves. So, because they cannot get equity capital, they have to rely on their retained earnings and debt. So, just seeing a nonprofit hospital earn a return is not a sign that it is going awry. Certainly, anything which took away the tax-exempt status would certainly hurt the abilities of these hospitals to either continue operating or certainly to have capital investment to expand.

Mr. SANDLIN. If, in fact, it is only 5 percent, not only would it take away, but it might drive the stake in the heart to kill the hospital by taking away the tax-exempt status. Is that correct?

Mr. GINSBURG. I do not have information to be able to agree or disagree about how important that would be.

Mr. SANDLIN. Would you think that taking away the tax-exempt status is a larger financial penalty than the 5-percent margin under which they are currently operating?

Mr. GINSBURG. That is really a quantitative question as to how valuable that tax--

Mr. SANDLIN. Would you rather have a 5-percent margin or the tax-exempt status?

Mr. GINSBURG. I am not prepared to speak to that.

Mr. SANDLIN. You do not know if you would rather have a tax-exempt status or a 5-percent margin?

Mr. GINSBURG. No, I do not know and they have both now.

Mr. SANDLIN. Well, I think that answers the question. Thank you.

Chairman HOUGHTON. Well, thank you very much. This is the beginning of a long process. I appreciate your expertise and your frank discussion. Good luck and we will be in touch with you later. Thanks very much. I would like to ask the second panel to come up here. That is David Bernd, who is Chair of the American Hospital Association (AHA) Board of Trustees; Randy Sucher, Executive Vice President and Chief Operating Officer (COO) of Southern Medical health System, in Mobile, Alabama; Richard Morrison, Regional Vice President, Florida Hospital for Government; and also Harold Cohen, Dr. Cohen, a consultant with Hal Cohen of Baltimore. I am sorry that Ben Cardin is not here, Doctor, wherever you are, because he wanted to introduce you, but I am sure he will have something to say when he comes back. He is managing a couple of bills on the floor.

All right. We are going to try to do this a little more expeditiously because we do have votes coming up in about an hour. If we could have your testimony, and I think the panel has thinned out a little bit so we will not have quite as many questions. I really appreciate your being here, and, Mr. Bernd, will you begin?

STATEMENT OF DAVID BERND, CHAIR, AMERICAN HOSPITAL ASSOCIATION BOARD OF TRUSTEES

Mr. BERND. Thank you, Mr. Chairman. My name is David Bernd. I am president and CEO of Sentara Healthcare in Norfolk, Virginia, and Chairman of the Board of Trustees of the AHA. Sentara began in 1888 as a 25-bed retreat for the sick and now serves more than 2 million people in the Hampton Roads area. That is a big change, but what has not changed is the caring and compassion with which our people do their jobs. All the good things that hospitals do are done in the face of mounting challenges; 44 million uninsured Americans is one of them. It is a fundamental problem that permeates every aspect of our health care delivery system. We recognize that hospital billing and collection policies have come under increased scrutiny. Hospitals, led by the AHA, are taking substantial steps to demonstrate that their compassion extends from the bedside to the billing office.

The AHA board recently developed a set of principles and guidelines to help hospital leaders as they struggle to help patients of limited means. My written testimony has details, but the guidelines cover topics such as offering discounts to patients who do not quality for charity care and making sure patient accounts are pursued fairly and consistently. As of today, over 2,500 hospitals have signed a confirmation of their commitment to follow these guidelines, and the number is rising.

With recent guidance that we requested from the Federal Government, it is now clear that fear of violating Federal regulations no longer should impede hospitals' charity care efforts. At the same time, we know that the transparency factor is also important. We are attacking this issue on two fronts: we are working with CMS, the Joint Commission, and other organizations on the quality initiative to make information about hospital quality available in a useful way to the public. Nearly all hospitals eligible to take part in the initiative are doing so. A consumer-oriented website will be up early next year.

The important goal of transparency is pricing information. Our principles and guidelines include this statement: hospitals should make available for review by the public specific information in a meaningful format about what they charge for services. The key word, Mr. Chairman, is "meaningful." Publishing our list of master charges would require patients to sift through a document containing tens of thousands of diagnostic codes. There are better, more meaningful ways to do this, and I will outline some of these suggestions in my statement.

Regardless of how prices are displayed, hospitals have always helped patients who cannot pay. At Sentara, for instance, 63-year-old Cora Brown came to us without insurance and was diagnosed with colon cancer. Our staff treated her with the respect and compassion every human being deserves, helped her apply for Medicaid, and covered most of her medical expenses that were not covered. Cora is just one example of a patient who received care regardless of her ability to pay, and we are just one example of how so many hospitals extend their compassion to the financial side of caring.

Some have claimed that hospitals are subsidized for this kind of care through special payments from Medicare. This is inaccurate. While every hospital in every community serves patients who are unable to pay, Medicare's disproportionate share payments and indirect medical education payments, while important to the industry, do not go to every hospital. They are targeted only to specific hospitals, and they are not intended by Congress to offset or subsidize the actual costs of uncompensated care that individual hospitals incur.

Finally, let me touch on the tax-exempt status, Mr. Chairman. Hospitals are the lifeline of many communities, and not-for-profit hospitals, which receive certain tax exemptions, are governed by the community and exist to meet the community's needs. Since 1969, the promotion of health has been explicitly recognized as a purpose meriting tax exemption. In 2002, 84 percent of community hospitals reported that they work with other providers or public agencies to conduct community health assessments. They determine what services are needed, and then they work together to make those services happen. From homeless shelters to school vaccination programs to free health screenings, hospitals take medical care far beyond the hospital walls to get at where it is needed--in the community.

To close, let me again stress that the people of America's hospitals work hard every day to meet the needs of their communities. They are why our Nation has the best health care in the world. Making sure all Americans can take advantage of that health care is a huge challenge. Hospitals are working diligently to address the specific issues that I have outlined here today, and nothing will make a greater improvement than all of us working together to address the real need: health insurance coverage for everyone. I will be happy to respond to your questions. Thank you.

 [The prepared statement of Mr. Bernd follows:]

Chairman HOUGHTON. Thanks very much, Mr. Bernd. Mr. Sucher?

STATEMENT OF RANDY SUCHER, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER, SOUTHERN MEDICAL HEALTH SYSTEMS, INC., MOBILE, ALABAMA

Mr. SUCHER. Thank you, Mr. Chairman. I come from Southern Medical Health Systems, a small for-profit company in Mobile, Alabama. We operate Springhill Medical Center, a private for-profit hospital. Establishing prices for hospital procedures has changed a lot, as we have talked today, as the practices of insurers and Medicare have evolved.

When Medicare adopted DRGs (diagnosis-related groups) in the 1980s as the basis for payment, this generally introduced the concept of incentives for hospitals to control costs. At the same time, it reduced the impact of the line-item as that became less important because individual prices have a minimal effect on payments to hospitals except in the rare cases that an insurance company, HMO, or PPO paid for services based on a negotiated percentage of charges.

So, why do hospitals charge for every item and service? One, we still have to Medicare cost reports in order to properly allocate our costs. For those Medicare cost reports, we have to know the detailed charges to prepare those cost reports. We also identify the usage of items internally for internal control and internal costing purposes for hospital. We also provide those detailed items, in providing detailed bills with proper coding for insurance companies, as often requested by insurance companies or individuals. So, even though we do not like to, the practice of charging for every individual item still continues in health care today.

Charges are generally developed based on detailed analyses of prominent payer fee schedules in the current market. For example, if Blue Cross were to pay us $2,400 for an outpatient cardiac catheterization and the standard discount for Blue Cross patients in Alabama is around 50 percent, the standard charge may be 200 percent of that fee schedule amount. Determining the allocation of that overall intended charge to the components of care is difficult because every case is so different. As we have already talked today, health care is not like an assembly line in an automobile manufacturing plant. Every patient is very different, with varying complications, comorbidities, and severity of illness. Every physician is also different in their treatment protocols for each patient, using various supplies, pharmaceuticals, and diagnostic tests. Hospital care is really much more akin to a chef making seafood gumbo where almost all the outcomes are successful, but no two taste or cost exactly the same, and there are very large variations. In fact, hospitals have little control over the costs since only physicians and not hospitals order the tests and ultimately determine the cost and what is done for each and every patient.

So, why do hospital charges vary so much from costs? One reason is that every payer contract we have includes a provision that for any particular individual patient, the payer will pay the hospital the lesser of the negotiated rate or the hospital's customary charges. Negotiated rates for each payer are generally a fixed rate that the insurer pays for an average episode of care across a broad spectrum of patients. For those patients that require a lot of extra care, like a heart cath patient requires a lot of stents, hospitals take a terrible beating when they take that average payment. So, hospitals cannot afford to not make money on the low-end cases by ever having their charges be less than the negotiated rates. High charge markups generally help hospitals avoid that catch-22.

The second reason for high hospital charges, as we already talked about a lot today, is cost shifting. It has occurred for many years in the industry and will continue to occur until massive changes occur. To make up for those payers that often pay hospitals below our actual cost--Medicare and HMOs included--and to be able to provide some level of free care, hospitals must shift unfunded cost to payers--generally PPOs, commercial insurance, and the uninsured--that pay some percentage of charges. In our case, these payers represent less than 10 percent of our revenue, but they comprise most or all of our profits.

The aforementioned item in the requirements that hospitals charge all patients the same price for the same services results in high prices for the uninsured. Until recent proposed changes in regulations, hospitals have been very concerned with giving discounts to patients other than as the result of contractual requirements. Now most hospitals, including ours, have a financial screening preregistration process whereby an uninsured patient can receive a discount based on ability and willingness to pay.

One thing we have talked a little about is efficiency. A lot has been said about rewarding hospitals for efficiency. One of the most perplexing aspects of Medicare, which espouses to reward efficiency through the DRG system, is that the application of the wage index guidelines actually penalizes hospitals like those in Alabama for providing a lower cost of care. We actually get much lower payment than most other hospitals in the Nation, even though we are, in fact, a low-cost provider State. Thank you very much.

[The prepared statement of Mr. Sucher follows:]

Chairman HOUGHTON. Thank you so much. Mr. Morrison?

STATEMENT OF RICHARD MORRISON, REGIONAL VICE PRESIDENT FOR GOVERNMENTAL AND REGULATORY AFFAIRS, ADVENTIST HEALTH SYSTEM, ORLANDO, FLORIDA

Mr. MORRISON. Mr. Chairman and Members of the Subcommittee, I am Richard Morrison. I am with the Adventist Health System based in Orlando, Florida. We started out in 1908 with one hospital. We now have 38 hospitals in 10 States. We believe we provide a significant amount of community benefit in the areas that we have our hospitals and nursing homes. I am not here today to talk specifically about that. I am appearing today to discuss the relationship between hospital charges and costs.

In my remarks, I would like to touch upon the relationship between cost and charges, charges and payment. Do charges differentially impact the uninsured? What does it cost to maintain a current charge structure? Do charges serve a purpose? Can the current system be changed? Can transparency be improved?

There is, as has been noted, a very tenuous relationship between cost and charges in the health care industry. It should be noted, however, that this relationship did not come about overnight. It has taken place over a 30-year period and has been in response to changes in a Federal policy as it relates to Medicare and Medicare reimbursement, industry policy, and responses by the hospital industry in and of itself.

Hospitals do have charge masters, as, Mr. Chairman, you noted. Some may be as much as 25,000 items. This is the list from which the bills are created. The bills are not necessarily what gets paid. Everyone gets billed the same amount. What people pay or what the expectation of payment is is what differs greatly.

Medicare does not negotiate. It pays a flat amount based on a diagnosis. Medicaid pays a per diem. Health Maintenance Organizations (HMOs) and PPOs may pay on a Medicare-based DRG, they may pay a per diem, or in our case, they pay a discount off of charges. Almost all of our accounts with managed care companies are a discount off the charges, with a cap on the amount that we can increase our charges year to year.

The system of payment for the uninsured is a little more complex. For non-elective care and all admissions that come through the emergency room, we have the expectation of payment of zero for those with incomes under 150 percent of poverty or less, and that expectation of payment can rise to 60 percent of charges for those up to 400 percent of poverty, or about $75,000 for a household income of four people. Overall, these expected payments are subject to a cap of 25 percent of household income.

We also have methods available that can deal with those people who are above the 400 percent of poverty line so that they are not facing the full impact of high charges. We will work with these individuals and try to reduce their burden and can guarantee them a discount of 30 percent or more, depending upon their individual circumstances.

Charges do have some utility in health care even though there is only a passing relationship to cost. As was noted, they are still required by Medicare and some insurance companies and form the basis of payment. Maintaining the complex charge structure is expensive. We have to have over 300 people to track and audit the process of billing.

The charging structure also creates confusion for the consumer. This goes beyond the oft-quoted $10 aspirin. This includes the problem of giving a bill to an individual that says that the bill is $25,000, your insurance company paid $12,000, you pay $500. The question is: what happens to the rest? It gives rise to the issue of charges are too high in health care.

As we go to the high-deductible plans and the consideration of HSAs, hospitals must give consideration to extending discounts to the HSAs and the insurance companies themselves must begin to negotiate on behalf of the beneficiary so that discounts are passed on to the individual. Modifying our structure is going to be extremely complex. Even if we were to try to go to a diagnosis-based group, we are still going to have to maintain the tracking of resource consumption.

If we look at the issue of transparency, I believe we do have transparency in outpatient services. Where it will become very, very difficult is looking at price transparency on the inpatient side because there is a tremendous amount of variation that can take place even for something so simply as a routine delivery. Cost can vary as much as 25 percent for something that you would expect to have a high degree of predictability. This is owing to the idiosyncratic factors of health of an individual as well as to practice patterns of a physician.

To conclude, hospital charges today are a product of market and regulatory behavior over the last 30 years. The connection of charges to cost is tenuous. Charges do have some utility and are still required to be maintained. Hospitals can deal with the imbalance of cost and charges through aggressive discounting, particularly to the uninsured. Changing the system to something more understood and administered will take extensive work and creativity. Mr. Chairman, Members of the Committee, thank you for the opportunity to speak with you today.

[The prepared statement of Mr. Morrison follows:]

Chairman HOUGHTON. Thanks, Mr. Morrison. Dr. Cohen--and again, I am sorry that Ben Cardin isn't here to introduce you.

STATEMENT OF HAROLD A. COHEN, PRESIDENT, HAL COHEN, INC., BALTIMORE, MARYLAND

Mr. COHEN. Thank you, Mr. Chairman, Members of the Subcommittee. I am here today to testify regarding the experience of Maryland's Health Services Cost Review Commission (HSCRC), which is the State agency in Maryland which regulates hospital rates, as well as to answer any questions you might have regarding the lessons to be learned regarding hospital charge levels in the rest of the country.

The commission was created by the Maryland legislature in 1971 and began setting rates in 1974 for all acute care hospitals. In 1977, Maryland entered into a demonstration with Medicare and Medicaid whereby both government agencies agreed to waive Federal supremacy and to pay Maryland hospitals on the basis of rates set by the Health Services Cost Review Commission, subject to a waiver test. That Medicare waiver was later changed to an operating waiver subject to a payment test with the considerable support of Senator Mikulski.

In setting rates, the commission's goal is to finance the mission of efficient and effective hospitals. Hospitals are expected to have missions that include care to the poor, and some hospitals' missions included teaching and research. The commission sets rates by comparing costs and making adjustments which are not all that dissimilar to the kinds that the Medicare system makes. I want to briefly discuss pricing levels, equity, and access, and, if there is time, talk about cost containment and data availability.

Since pricing levels are a focus of this hearing, I am going to focus on them and the statistics that I present in all the exhibits come from the AHA's 2004 edition of Hospital Statistics, which has 2002 data. The national average markup, as it shows, was almost 131 percent, meaning, on average, hospitals charge about $23,100 for an admission that costs $10,000.

There is a huge range in markups. Maryland has by far the lowest markup, and well below the next-lowest, largely because prices mean something. It is what, largely, everyone pays. In addition, there is a common method for setting rates in Maryland, along with pooling of uncompensated care, so that the markups of all hospitals are fairly similar. In other States, there is much greater variation in markups, with many hospitals' markups being much higher than the national or State average, some having charges more than 10 times their costs.

For hospital services, the typical markup in Maryland is about 20 percent. That 20 percent roughly reflects about 8 percent for uncompensated care, because hospitals have to get paid for the costs of the care, that they provide to the patients who don't pay; about 7 percent for approved discounts; and about 5 percent turns out to be for profits. That Exhibit 2 shows the average charge per case for the Nation and each State. Again, Maryland has by far the lowest average charge, being $9,945, which is a little more than half the national average. New Jersey had the highest. The average charge per case was $18,100 in 2002; it is now over $20,000, which indicates that, as Paul Ginsburg mentioned in the first panel, that once a patient goes to the hospital, they are almost certainly going to exceed the deductible in a high-deductible policy.

I want to discuss briefly--well, I am just about out of time, so you can see the data. People in Maryland--one example of the low charges in Maryland is that Medicare beneficiaries in Maryland pay 20 percent of charges, and 20 percent of charges is about $70 million less than paying the national co-pays, which are based on 20 percent of national charges--though they are coming down. There is a huge savings to the beneficiary. Thank you very much.

[The prepared statement of Mr. Cohen follows:]

Chairman HOUGHTON. Thank you, Dr. Cohen. Mr. Morrison, you said in one of your statements something that I think is going to be hanging over us for years and years and years: the connection of charges to cost is tenuous. Are we always going to be arguing about that irrespective of transparency and fairness and the allocation of administrative costs and things like that? Isn't that always going to be a problem with us?

Mr. MORRISON. Mr. Chairman, I believe it is. Just given the nature of the health care industry and the way health care is paid, you will always have arguments about what is the real nature and real relationship of charges to cost. So, yes, no matter what you do, I think we will still have that debate and that argument.

Chairman HOUGHTON. Dr. Cohen, do the uninsured pay the same as the insured?

Mr. COHEN. The uninsured frequently don't pay. The uninsured are charged the same as the insured--

Chairman HOUGHTON. Is the concept that they pay the same as the insured?

Mr. COHEN. The concept is that they are billed the same as the insured, but they don't frequently pay. Since they don't pay and there are resources used in providing them care, the rates that are charged to those who do pay have to cover the costs associated with their care.

Chairman HOUGHTON. So, in effect, when an uninsured patient comes in the door of a hospital, they really don't have any information on how much the service is going to cost them?

Mr. COHEN. In Maryland, they could if they want. I mean, there is a huge amount of data available as to what charges are by hospital, by DRG, and that data is current. As of now, it is available through March of 2004. It is extremely current if they wanted the information and if they ask the hospital what on average it charged, you know, the hospital would tell them if they knew in fact what DRG they were going to be in. Patients don't always know, and their doctors don't always know, exactly what they are going to have.

Chairman HOUGHTON. I guess that is my point. I am sick, I am uninsured, I go into the hospital. I am really not interested in the costs, I am interested in getting cured. There is no sort of general framework which I can use as sort of a cost estimate.

Mr. COHEN. I think if you ask the--I mean, typically, certainly in Maryland, if you ask the hospital what do you charge for this kind of procedure, the hospital could give you an estimate, we charge about from this to this. You never know what kind of complications might arise in a particular instance, so you can't give a firm quote under those circumstances.

Chairman HOUGHTON. Mr. Pomeroy.

Mr. POMEROY. Thank you, Mr. Chairman. My questions, really, get to the issues of trying to get our hands around some other points of fulfilling the nonprofit mission. I am very interested, Mr. Bernd, in your testimony, where you indicate that AHA has kind of set forward a number of things that basically are expected of its members, particularly those enjoying the nonprofit status. Would you expand on that a bit?

Mr. BERND. Certainly. We would expect all of our members to have indigent care policies and to take care of the poor in our communities. We would also expect them to endorse our policies around discounts for patients that fall outside of charitable care and have higher income levels than what is ascertained for charity care normally. We also expect our community institutions, not-for-profit institutions, to serve the larger community through such things as health education, wellness programs, outreach programs. I think the not-for-profit mission is much wider than just providing indigent care, and we expect that of our not-for-profit members.

Mr. POMEROY. The earlier panel, to a person, seemed to agree with the proposition that looking at legitimacy of tax-exempt status solely through the prism of pricing practices was too narrow, there were other things involved. Do you agree with that?

Mr. BERND. I certainly would agree. Our health care is a good example. For instance, 3 years ago, our epidemiologists determined that in our community there was a higher use of antibiotics in our community. We actually started a community-wide campaign with physicians in the community called "Resistance Kills." This program costs us a considerable amount of money, but we were actually able to show in two years a significant reduction in the use of antibiotics. In fact, this program has been picked up by other insurance organizations, BlueCross BlueShield in other states. So, I think the not-for-profit mission is much wider than the indigent care, though indigent care is obviously the cornerstone of our not-for-profit mission.

Mr. POMEROY. Mr. Morrison, your experience in nonprofit care delivery--do you have any responses to those questions?

Mr. MORRISON. Yes, sir, I do. Thank you, Congressman. We need to look beyond just the charity care, and I think we do need to look at the broader issues of what is provided as well as the issue of opportunities that may be foregone and the willingness of institutions to undertake services that you would not do if you were just looking at this from a profit motive. Because one of the things that I think you will find historically is that the not-for-profit institutions will take on services that do not necessarily provide a bottom line, but are necessary for the community. Not-for-profit institutions will also take on related issues, such as what we are doing in our community,  a looking at the root causes, for instance of health disparities in various ethnic populations, and then working directly with the community to solve those issues.

We are also looking at, and it would be almost counter-intuitive, but we are looking at how do we reduce utilization of health care, how do we reduce chronic care, how can I reduce the admissions to my institution. If I was just in this for the profit, I would not be doing those things. I think there is one of the distinctions that is very, very difficult to measure but that you have to look at over the course of time.

Mr. POMEROY. I have no quarrel at all with the Chairman's statement that this is something we ought to look at once in a while, a tremendous tax expenditure going in this area in terms of revenue foregone to the nonprofit status. It is only appropriate to keep an eye on whether or not the ultimate marketplace performance is as we expect for that status. Is this something within AHA or within the community of hospitals, there is discussion? Do you sense that there is a higher sensitivity in these days about trying to be--making certain that your operations lend a distinct character in light of a nonprofit status? Mr. Bernd? Maybe right across the panel on that one.

Mr. BERND. I would certainly agree with that statement. I think the fact that we have so many uninsured in this country has exacerbated the problem of trying to provide adequate health care. With 44 million people without health insurance, it has become a larger issue for all of us, and how do we take care of those people appropriately and can we give them discounts off these charges we've talked about, which I know our institution certainly does. To give you an example, we have a sliding scale that goes up to 500 percent of the Federal poverty level and give up to 45 percent discounts. This is widely available. We make it available to all of our patients. So, it is an issue that I think is in the forefront and I think it is a healthy discussion and I think it is something we need to talk about openly, and I think this is a really good topic.

Mr. POMEROY. I had asked to go across the panel, but I have taken too much time already, Mr. Chairman. I will yield back.

Chairman HOUGHTON. Thanks very much, Mr. Pomeroy--Chairman Thomas.

Chairman THOMAS. Thank you, Mr. Chairman. The only medical professionals that are truly trying to work themselves out of a job are dentists, based upon the way in which we now treat their area of expertise. I clearly think it is always smart business to assist people in being around longer to utilize services rather than intense interventions for short periods of time so we could always try to get to a bottom line.

I guess I am most concerned about the arguments that the not-for-profits are doing something, for example, the "Resistance Kills" on the antibiotics or the example of attempting to reduce the needed services and that somehow that was associated with your not-for-profit status. Is the reverse, then, to be assumed, that if you were a for-profit you wouldn't care about that? Or would the Hippocratic oath and the commitment to helping people have something to do with that, rather than your not-for-profit status. Mr. Sucher, would you have anything to say about that, since I think you are a for-profit operation?

Mr. SUCHER. I think it is incumbent upon the industry as a whole, regardless of profit or not-for-profit status, that we all seek quality probably even more than you can imagine. We fiercely chase quality every day in everything we do in trying to provide services to our patients, irregardless of our status.

Chairman THOMAS. Let me ask you a follow-up question, because I know pricing has been somewhat of a concern. There was a statement earlier that in fact if you had disclosed prices, would drive prices up. I have difficulty discerning just what a price on a price list or a master charge list is comprised of. If you ask most businesses, you would start with materials and overhead and add labor and then perhaps put a profit margin in there. Are any of your prices on your price list constructed that way?

Mr. SUCHER. I think they were at one time. I think we have gotten so far away from that and being so reliant on the insurers for establishing procedure-based payments and procedure codes that we now look to them to, really, tell us what they are willing to pay and kind of establish our charges accordingly. We want to make sure we are not charging less than they are willing to pay, certainly.

Chairman THOMAS. Mr. Bernd, do you take a look at materials, labor, overhead, and then add a profit margin, notwithstanding the fact that you are not-for-profit?

Mr. BERND. Well, no, sir, I don't think we look at that that way. I agree with what Mr. Sucher said, it is a matter of negotiated price, so it may or may not reflect your costs.

Chairman THOMAS. Then what is the value of a price list if everything winds up being negotiated?

Mr. BERND. That is a good question. Its relevancy is probably not as much as it used to be.

Chairman THOMAS. Well, I think the proper answer is that it is important when you deal with government as to what payment you are going to get from government. We have seen enormous increases in the price lists, and as you indicate, they have no relationship to the actual payment made. Do you believe that when you negotiate a price, you have a pretty good idea on what your costs of materials, overhead, and labor are so that you won't negotiate a price less than those costs?

Mr. BERND. I would say with commercial payors that is true. With the government, we can't negotiate price.

Chairman THOMAS. Therefore a price list creates a value for you if it continues to go up, notwithstanding the fact it has no relationship to what you are really getting compensated for by other players. Is that one of the reasons why the price list goes up?

Mr. BERND. Probably.

Chairman THOMAS. Probably? Do you believe that if prices were disclosed it would drive prices higher?

Mr. BERND. We disclose our prices to our customers. Again, they are very complex, but we do disclose them.

Chairman THOMAS. Do you believe that has caused pressure to drive the prices higher?

Mr. BERND. No.

Chairman THOMAS. If all hospitals disclosed prices, much as you do for virtually any other commodity or service, would that be a benefit to the consumer, or would it make it more difficult for the consumer to make a decision?

Mr. BERND. I think we should be totally transparent on our pricing to all of our customers.

Chairman THOMAS. Okay. In trying to determine structures between not-for-profit and for-profit, Mr. Bernd, I notice that on the Form 990 filed by Sentara Health Care in 2002, that in your role as the president and CEO, you received $908,684, with an additional $236,000 in deferred compensation and $12,840 in expenses, which is $1,160,000 in salary and deferred compensation. Have you ever done comparisons with for-profit systems, and do you believe that that is kind of where the pricing for executives in your capacity, given your responsibilities, are paid?

Mr. BERND. Well, first of all, I do not set my own salary. I have an independent board of directors made up of community--

Chairman THOMAS. I didn't ask you if you set your own salary. Is the number incorrect, the $1.16 million?

Mr. BERND. I believe it is accurate.

Chairman THOMAS. Then my question was do you believe that is comparable across the board between for-profit and not-for-profit with people in your commensurate responsibility position?

Mr. BERND. I don't know.

Chairman THOMAS. You have never done comparative salary and compensation examinations?

Mr. BERND. Personally, no. We hire an independent organization that does that for the board of directors, under their control.

Chairman THOMAS. Last question, for all of you. We are looking at the question of whether or not we should maintain a tax preference for a particular type of hospital structure. Everyone believes we should take care of the uninsured. What, to you, is a higher use of taxpayer money: should we deny tax preference and use that to take care of the uninsured, or would you prefer to retain your tax preference and we set up a set of structures which guarantee that the uninsured are taken care of under the charity or the community label for which you receive the tax preference? We can just start with you, Mr. Bernd. We will go down the panel.

Mr. BERND. That is a very long question. Can you repeat it for me, please? I am sorry.

Chairman THOMAS. It is very simple. Everyone has argued that because they received a nonprofit benefit, we are doing charitable things, although once you examine it there are some folks, especially Dr. Cohen, about the fact that they get charged, we don't get collected. We have had bad debt. We've got a very elaborate superstructure to try to deal with this. Everyone says if we could get the uninsured insured, that would really solve a lot of problems.

We are looking at an enormous amount of money that is currently going, 41 percent of the tax expenditures under 501(c), to hospitals which originally was for charity and now community. My assumption was that maybe some of the uninsured got picked up that way and what we have heard were very minuscule examples of that effort which should pass muster.

Very simple choice: in trying to make policy, would you prefer we repeal the tax-exempt status under 501(c) for any hospital and apply the money saved to perfect an insurance package for the uninsured? That would solve your problem, because now the people who are coming to your door are paying you and you can run more on a for-profit structure in which we might be able to adjust whether or not you make a profit. Or would you prefer, do you think it is a better societal service to keep the not-for-profit tax-preferred status, but you are going to say somebody else should worry about the uninsured, don't take it out of our money, when in fact the reason for creating the tax preference was for charity and community work. So, would you support eliminating the tax-preferred status and solving the uninsured problem with that money? Would that be a better use of the taxpayers' money than the way it is currently spent?

Mr. BERND. No, I don't believe so. I think, as we talked about it, not-for-profit status and charitable has more to do than with indigent care and patients that don't have insurance, it has to do with community mission, community assets. Not-for-profit status is wider than just that issue.

Chairman THOMAS. The board that sets your salary may have some impact on the $1.16 million. Mr. Sucher, what is your position?

Mr. SUCHER. Obviously, being from the for-profit side, we would much prefer a level playing field in all of our competitive aspects. We do provide much uncompensated care as well, for which we get nothing as far as benefit. So, we would really prefer to see something done regarding those who are uninsured in lieu of a tax break.

Chairman THOMAS. You realize that your testimony just shocks me in terms of the position that you have assumed.

Mr. SUCHER. Yes, sir.

Chairman THOMAS. Mr. Morrison?

Mr. MORRISON. My testimony will also shock you. It would be my consideration that we should maintain the tax-exempt status for long-term considerations. While there may be some short-term issues that we are facing with the uninsured, I think the stability of the health care system long-term has been shown that it is served by the tax-exempt nature of hospitals. It will continue to be served by the tax-exempt nature of hospitals.

Chairman THOMAS. Dr. Cohen?

Mr. COHEN. Well, my priority is that extending coverage to the uninsured is the most important option out there for the limited resources that we have. However, tax breaks don't provide money. They allow hospitals to not pay money and if they suddenly have to pay that money, then Medicare, for example, would have to pay rates which paid their fair share of that burden that you then placed on the hospitals. So, if I had to answer your question, it would be first extend coverage. Then, if you eliminate the tax breaks, make sure that Medicare and Medicaid pay their fair share of the added costs that would be placed on hospitals by having to pay those taxes.

Chairman THOMAS. Thank you very much, Dr. Cohen, because that underscores my point. I would say to my friend from North Dakota, prices are fundamental to dealing with the question of not-for-profit or profit, because nobody can tell you how they determine what their prices are other than dealing with the government on payments that are not realistic and don't deal with the cost of materials, overhead, labor, or profit. If in fact we are going to talk about trying to serve the uninsured, and in fact the price list is created for the purpose of getting more money out of taxpayers, i.e., the Medicare and the Medicaid payments, what it actually costs to do what they do is essential in looking at limited dollars, whether it is through tax-preferred structure or payments for real costs. If you don't know what they are, you cannot deal with the question responsibly as a legislator.

When you are talking about tax-preferred status and what requirements need to be performed for that, you need to start with how much does it cost to do business. I would be more than willing to submit for the record the list of CEOs and the payment they receive between the not-for-profit and the for-profit on comparable hospital responsibility sizes. There is a significant difference in that area alone. You wonder what other prices would be reflected if you had an accurate ability to determine what materials, overhead, cost, small margin of profit, notwithstanding the fact they are not for-profit, would produce between the two structures. Then you can determine the relative value of the tax-exempt. You can determine whether or not we ought to create a real system where you get the money out of the services that you deliver and that we make sure everybody gets a minimum compensation from that structure, and augmented if necessary to deliver the services.

Psychic value of believing you are serving the community doesn't necessarily reflect the real value of the tax-deferred that does not get counted when we are dealing with the uninsured. Pricing is essential to completing the understanding of that model. Thank you, Mr. Chairman.

[The information follows:]

Comparison of Not-For-Profit and For-Profit Hospital Executive Compensation 

 Hospital System                        Hospitals       Beds              Compensation                                                                                     

Top 5
Not-For-Profit
President and CEO
Catholic Healthcare West                  38                  8,413             $1,969,575
San Francisco, CA

President and CEO                         
Providence Health System                18                  3,306             $1,421,000
Seattle, WA   

CEO and Director
Sutter Health                                   24                  5,383             $1,203,005   
Sacramento, CA        

President and CEO
Adventist Health System West          19                  2,634               $971,410
Roseville, CA 

President and CEO                         
Sioux Valley Hospitals                      26                  1,902                $398,303
Sioux Falls, SD                               

Source:  2002 990 IRS Forms for the 5 largest non-profit systems, excluding decentralized systems.  It includes salaries, deferred compensation, expenses and other allowances. 

 Hospital System                        Hospitals       Beds              Compensation           

For-Profit
President and CEO
Health Management Associates         43                  5,520             $1,404,203
Brentwood, TN

Chairman, President and CEO
Lifepoint Hospitals                           21                  1,968             $1,124,615
Brentwood, TN

Chairman, President and CEO
Iasis Healthcare Corp.                      14                  2,028             $1,086,449
Franklin, TN

CEO
Ardent Health Services                     23                  2,125               $525,001
Nashville, TN

Senior Vice President*                    
Group Operations
Community Health Systems              20                  1,692               $477,980
Brentwood, TN

*Senior Vice President is used for comparison purposes.  With 72 hospitals, the Community system would be significantly larger than the not-for-profit systems.

Source:  To compare systems of similar size, this includes the five smallest public for-profit systems. 2002 data, SEC 14(A) and Annual Reports.  It includes salaries, bonuses and deferred compensation. 

Chairman HOUGHTON. Thank you. Mr. Cardin?

Mr. CARDIN. Thank you, Mr. Chairman. As I listened to Chairman Thomas' and Dr. Cohen's exchange, one very important point--and that is if we were to eliminate the tax-preferred status, then it would be incumbent upon the extra costs associated with that being shared fairly. In Maryland, we can do that because we have an all-payor structure. In the rest of Nation, I doubt that would occur, because of the way the prices are negotiated based upon market share, based upon the size of the entity that is negotiating with the hospital. If you are larger and you have a bigger share of that hospital's market, you can command a larger discount. That is just basic economics.

I apologize for not being here during the presentations. I was actually, on behalf of the Democrats, managing two Ways and Means bills that were on the floor. I first want to acknowledge Dr. Cohen, because he is the person in our State responsible for the way that we were able to administer an all-payor system and still have one today. Many other States tried; Maryland is the only State that has been able to succeed. The reason is that Dr. Cohen established a regulatory system that was immune from traditional political involvement. As a legislator in Maryland, I never would have thought to interfere with the rate-setting discretion of our commission. That is a credit to Dr. Cohen and the confidence that we had in Maryland in the manner in which he administered the system.

I think most people here don't understand what an all-payor system is. All-payor system is not a regulatory system that establishes a rate that hospitals can charge for a particular service. It establishes a rate that a hospital can charge for service, which is different among hospitals but the same for all the payors within that hospital. So, it makes no difference whether you are Medicaid or Medicare or private insurer or uninsured when you walk in the door. Basically, you are going to be charged the same amount for the services that the hospital performs. Under that theory--and maybe this is theory; I hope it is not--that you want to provide identical services to everyone who walks through your door for the same type of condition, that there is no difference in quality if you walk in with a Medicare card or you walk in with a BlueCross BlueShield card, into a hospital, that you are still going to get the same quality attention. Therefore, why should there be a difference in fee?

Of course, the second major advantage in the Maryland all-payor system is that we can get Medicaid and Medicare to pay its fair share, whereas in the other States in the Nation that is a little more difficult and complicated process. There is one more advantage, I might say, to the hospital community here. I have been told there is either one or two people in CMS that deal with the Maryland waiver. So, we don't have to deal with CMS, even though it is located in the State of Maryland, a great organization--at least the employees are great people. It does give you that advantage.

So, I am just--particularly when you look at the nonprofit, the tax-preferred community, where you have a role to play in a community itself, why aren't you proposing more of this all-payor concept so that you can get a fair distribution of the costs? Why don't I hear more of my colleagues around the Nation talk about returning to some form of an all-payor system in order to deal with this dilemma of treating all the users of a hospital fairly?

Mr. BERND. As you mention, the system in Maryland has been very successful. In fact, talking to Dick Davidson about this, who was there when the system started, and how successful it has been, he said that there have been 15 other States that have tried it and have failed. The uniqueness of the Maryland system, as you know, is it is limited to 47 hospitals which get reviewed independently each year. There is an independent commission that is set up and I guess the biggest hurdle is Medicare and Medicaid paying full costs and the State being allowed by Medicare to set those rates.

For instance, we looked at if you set an all-payor system in the State of California, for instance, just to duplicate what has happened with Medicare in the State of Maryland, you would have to increase the California medical reimbursement to hospitals in California by 40 percent. So, you have such disparities in reimbursement by Federal programs that it makes it very--

Mr. CARDIN. I am not sure that is totally accurate. Why don't we start with North Dakota, a little bit more manageable State than California. I mean, there are a lot of other States we could pick other than California. California is a country unto itself. I understand the unique concerns. Dr. Cohen, is it possible that we could export, or are just so grateful that we have this waiver we are afraid if any other State looks at it, it could jeopardize what we are doing in Maryland?

Mr. COHEN. I think--first of all, thank you very much for the kind words. I think one of the issues, when Maryland started, Medicaid was cost-based reimbursement. You were in the State legislature at the time when we negotiated the waiver, as I recall. We explained to the Maryland legislature that it was going to cost an additional 2 percent to pay their fair share. That is all it was going to be back then and the Maryland legislature said we are happy to pay our fair share and they adjusted the budget accordingly and went with the waiver. It is not clear to me that a lot of other States are willing to pay their fair share for Medicaid right now.

There are tremendous equity advantages and huge access advantages. In my written testimony, I didn't have time to present it all, but I did indicate the fact that in Maryland everyone has access to all the hospitals. We had Legal Aid testify that they had no dumping cases. Hospitals were, you know, willing to treat people and uncompensated care is equitably financed and it is spread among all hospitals. There aren't any charity care hospitals as such. There are hospitals that provide a fair bit of charity care, but the range is only around 2 to 13, with the average of being around 7.5, I mean, which is--the average is high because there is good access, but no one hospital is all that high.

Mr. CARDIN. I appreciate that. I would conclude by saying you are either going to pay now or pay later, and it is a lot less expensive if you pay up front and give access to quality hospital care to all your constituents. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you, Mr. Cardin. Mr. Johnson?

Mr. JOHNSON. Thank you, Mr. Chairman. I am wondering if patients who have high-deductible plans or maybe the new HSAs would be billed as those who are insured or those who are uninsured, since they are paying out of the pocket.

Mr. COHEN. I can tell you that in Maryland they are all billed the same. So, the answer is they are all billed the same.

Mr. JOHNSON. For Maryland. I doubt that is the same with the rest of them.

Mr. SUCHER. It is one of our concerns that those type plans, and you are starting to see them proliferate in a less organized manner across the Internet offering insurance for $50 a month, things like that. All those plans do is offer access to that payor's discounts, which gets them, you know, maybe 70 percent of charges or 80 percent of charges. It gets them a discount, but that is all. So, they are billed the entire rate minus the discount that whatever plan they have signed up for entitles them to, and then they are expected to pay that discounted rate.

Mr. JOHNSON. Based on the insurer?

Mr. SUCHER. Based on the supposed insurer that is backing them, of course, who is not just giving them access to their rates.

Mr. JOHNSON. Which is providing that type of insurance.

Mr. SUCHER. Right, and of course our concern with that is that the payor can't afford to pay 70 percent any more than they could pay 100. So, we get very little from that patient as well.

Mr. JOHNSON. Let me ask you this question. Since physicians decide on what treatment is needed, do they know what the treatment costs every time and how do you think that affects total cost?

Mr. MORRISON. Congressman, that is an excellent question. We have in our organization undertaken some efforts to try to educate our physicians on what particular tests cost, what particular drugs cost, and as we are able to increase their sensitivity, they do make different decisions as to the selection of the drug or whether that test is really, really necessary. I am not sure it is a practice across the board, but I think it is something that hospitals ought to consider because doctors are a little inoculated from the impact of their decisions upon the cost of care.

Mr. JOHNSON. Is every hospital different? Go ahead.

Mr. SUCHER. Well, we are the same way. We very much know what our costs are and provide the information to our physicians regularly and encourage them to understand that and know what they can do to change that as well. Contrary to one of Mr. Thomas's earlier comments, I think hospitals today generally do know their costs of procedures. We know very precisely what our average costs for most things we do are. The trick is getting that from what we know the cost to be to some sensible charge structure, when--you know, I can't get anybody to pay any more to deliver a baby; where I lose money, I am sure not going to go in and say, gosh, I am going to discount my prices over here to come closer to costs when I can't raise the other side of the equation.

Mr. BERND. I would just add that I think one of the most effective tools to provide effective care is working with physicians to look at the best treatment models for patients' illnesses and try to streamline the care process, which takes into account efficiency and effectiveness of the care, and using disease-based information that is available on what the best treatments are for patients with certain illnesses. I think that is really a key to long-term success of trying to hold down costs.

Mr. JOHNSON. Do you think the for-profits or not-for-profits provide better physicians, facilities, and response than one or the other? You know, why do you think specialty hospitals popped up? According to the physicians I have talked to, they said the hospitals were not giving them the operating time when they needed it.

Mr. BERND. I think that facilities between not-for-profits and for-profits are very similar. I think the specialty hospitals in some places have been brought forward due to lack of capacity. I think in others it has something to do with profit motive. It just depends upon the situation, and I think we have talked--we heard earlier the testimony about the fact that certain procedures in hospitals are more profitable than others, and if you do take those out of an institution you can do well financially. So, it is a complex issue.

Mr. JOHNSON. Yes, sir?

Mr. MORRISON. I think that the first place you really do have to look is that, the financial incentives that are there in the boutique hospitals and with the physician involvement, you do have the prospect of taking the more profitable or the easy cases to someplace where you have an investment, and taking the more difficult cases where you do not. There may be instances where there are capacity issues, but those are generally met by the not-for-profit institutions. The issue is one of business and financial motive.

Mr. JOHNSON. Thank you very much. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you. I am going to turn to Mr. Weller in a moment, but before I do, Mr. Bernd, please repeat your answer to one of Mr. Johnson's questions regarding some of the key elements of keeping down long-term costs.

Mr. BERND. Well, I think using evidence-based medicine and trying to work with physicians to put into place treatment protocols and care pathways are very effective. I know we have had a lot of success in Norfolk with those, where you try to use evidence that is there on how to best treat a patient and follow a particular pathway. It is very effective in not only reducing cost, but having more effective care.

Other things that are happening is we put in remotely controlled intensive care unit monitoring, where patients are monitored in intensive care units around the clock. You have immediate intervention with patients in trouble and we have seen a dramatic decrease in mortality and a decrease in cost for the investment of this technology.

So, I think you are beginning to see some very good breakthroughs. Another good example are software systems that are now in place that, for instance, will provide to the clinicians when they order a particular drug, will show them how it interacts with other drugs, what counter-indications there are, lab test results. So, I think we are on the cusp of having some tremendous breakthroughs in both quality and cost reductions.

Chairman HOUGHTON. Is this something which would lend itself, really, to sort of regional repricing and re-estimation, or is it something which could be right across the country?

Mr. BERND. I think it is something that could be very beneficial across the country and I think, the other problem we have with prices and hospitals and health care obviously has to do with increased utilization and the fact that we are getting older as a society. I hope these interventions and changes in technology will help us decrease the increases, which have been very high lately.

Chairman HOUGHTON. Thanks very much. Mr. Weller?

Mr. WELLER. Thank you, Mr. Chairman, and thank you for the opportunity to ask some questions. You know, Mr. Bernd, representing the AHA, as you know in Illinois, as is in the case of my own district, the vast majority of hospitals are not-for-profits.

Mr. BERND. All right.

Mr. WELLER. The district that I represent in the south suburbs, every hospital is a not-for-profit. They usually are the largest employer in town, if not competing with the usual locally, the school district, and they also provide service to my communities. I would note, one thing I am particularly proud of is that all my hospitals have a record of serving the health care needs of people in our communities regardless of their ability to pay, their insurance status or even their citizenship status.

There is almost 1.7 million Illinoisans, many of them immigrants and the working poor that have no health insurance. Yet all my hospitals, as I have seen in the records that I have, have been there when they have needed medical care. This past year, Illinois hospitals provided more than $2 billion annually in medical care for which they did not receive one dime in reimbursement.

I would note one system which serves much of my district, Provena Hospital System in Illinois, provides $6.5 million in free care and last year lost $32.8 million on Medicaid services that they provided to my constituents. One particular hospital of Provena, St. Joseph's in Joliet, provides care at no cost to the Will-Grundy free clinic and donated a quarter of a million dollars to the local YMCA to build a health care facility.

As I have seen, Illinois hospitals take their commitment to charity care pretty seriously. In fact, last year the Integrated Healthcare Association (IHA) and the Metropolitan Chicago Health Care Council developed guidelines in charity care and collection practices for the uninsured that are designed to be patient-friendly. Mr. Bernd, I would like to get your perspective on these guidelines.

The guidelines include a number of basic principles. Uninsured patients receive free care if they are at or below 100 percent of Federal poverty. Discounts provided to patients with incomes between 100 and 200 percent of Federal poverty. Hospitals work with patients receiving discounts to develop a reasonable payment plan. Hospitals do not take legal action against charity care patients who have demonstrated that they do not have sufficient income or assets to meet their financial obligations.

Obviously, in order for these hospitals to serve, they also have to survive financially. Illinois hospitals such as Provena have demonstrated that they can serve these communities, particularly those with limited access to care. They tend to be the poorer non-citizen patients.

The question I have for you, Mr. Bernd, is, you know, you are coming before us today with a national perspective. I have shared with you the initiatives of the Illinois hospital community. I was wondering what are your thoughts on charity care guidelines such as those that we have in Illinois?

Mr. BERND. Actually, those guidelines that you have presented, endorsed by the Illinois Hospital Association, have come from the collaboration with the AHA, and actually we are asking every hospital in the union to endorse those particular guidelines. In fact, over 2,500 hospitals have endorsed those specific guidelines. I think they are excellent. I personally see them as a minimum requirement for our members. In fact, I was the first--we were the first institution that signed those. I think that is very good and I think it is something that is really needed.

Mr. WELLER. So, essentially these guidelines are in process of being adopted nationwide? How many States adopted?

Mr. BERND. Well, again, 2,500 of our 5,500 members have adopted it and we have only been at this about a month. So, we are very encouraged by the results, and we expect to have 100 percent of our members across all States endorse this.

Mr. WELLER. You had mentioned that you see these guidelines as the bottom line. How would you improve them?

Mr. BERND. Well, for instance, my own health care institution, we provide discounts up to 500 percent of the Federal poverty. So, that is our commitment to our community. I think it would differ in each community, depending upon the needs of the community, the types of population, the number of poor you have, wage index. I think you need to tailor them by each community.

Mr. WELLER. You know, Congress always comes up with great ideas, as you know.

Mr. BERND. Yes, sir.

Mr. WELLER. I was just wondering, is there a role for Congress in developing these kinds of guidelines?

Mr. BERND. I would hope what you have done, which is to really publicly advocate what your member hospitals have done from your district. That is really outstanding. I am sure we will report that in our national news and the fact that our congressmen are supporting us in this effort. I think the real thing we all need to work on and the thing that we have all talked about today is the fact that there are now 44 million Americans without health insurance and the strains it is putting on all the systems, our health care systems. It is a real problem. It is now beginning to hit the middle class, and it really is a problem.

Mr. WELLER. Thank you, Mr. Bernd.

Mr. BERND. Yes, sir.

Mr. WELLER. Thank you, Mr. Chairman.

Chairman HOUGHTON. Mr. Pomeroy.

Mr. POMEROY. Mr. Chairman, I just have a request relative to the issue of whether people with HSAs that carry health insurance over the top of their HSA first-tier exposure are able to access the discounted arrangements made by the underlying insurance company for their portion of the first-tier costs. We inquired of the largest players in the health insurance industry. I have a response from BlueCross BlueShield. Others are sought from the United Health Group. We would ask that these be allowed as part of the record of this hearing, Mr. Chairman.

Chairman HOUGHTON. Absolutely. Mr. Portman.

[The information was not received at the time of printing]

Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the panelists for giving us some good information today. I was here for the earlier panel and then had a meeting in between. In that meeting, it happened to have been with somebody who works for one of our hospitals back home. I talked earlier in the hearing about the fact that we have three major networks in greater Cincinnati, Ohio. They are all three nonprofit. They all provide charity care, of course, but also benefits to the community beyond that.

This person in particular was talking about billing. This was a good opportunity coincidentally to hear something from somebody who in this case is a relatively junior member of the billing staff, and she was talking about some of the very issues that you struggle with every day, including the fact that many of the patients are not able to access insured coverage, so they come in either under Medicaid or with no health care and no compensation for their care. They don't tell the hospital that. So, the collection process begins, it becomes very complicated. Reminds me a little bit of the IRS collection process, where often the left hand has not known what the right hand has been doing--although that is better now--and in the end there is a lot of wasted cost and effort and very little benefit to the hospital in the end because the person doesn't have the resources.

My first question would be is the current system of billing serving the hospitals well, and how could it be improved? Particularly, what recommendations would you have for this panel in terms of dealing with the billing side of things strictly as it relates to uninsured or under-insured patients? Mr. Bernd, maybe you want to start with that.

Mr. BERND. I think the present billing system doesn't serve the patients and the hospitals very well. It is very complex. We deal with over 100, 200 different insurance companies. I think some of the things we could work on are standardization of requests from insurance companies, standardization of information that is needed. It is a very difficult system and it is very complex. I think you heard about that today with pricing in the other areas. So, we could use some help in that area.

Mr. PORTMAN. Well, with regard to standardization, we have talked about that for years. With regard to the Federal side, I know we do more electronic billing now, which I am told is more efficient. I hope you all believe that. With regard to the private sector side, how would you get to that uniform or standardization of billing? Should that be a Federal mandate, are you suggesting? How would you get to the point that I think everybody agrees would be helpful to reduce the administrative costs?

Mr. BERND. Well, I would like to see the private industry do that, but maybe encouragement by committees such as this to say that we need to do it on the private basis would spur us on to do that. We need the cooperation of all these various insurance companies.

Mr. PORTMAN. Let me ask the second question, and gentlemen, jump in as to my first one, too. Do you believe that hospitals are well-served by a system that bills consumers amounts unrelated to what their insurer actually pays? Is that something that is good for hospitals? Mr. Morrison, you seem eager to answer that.

Mr. MORRISON. I am eager to answer that. Thank you, Congressman. I am not sure that we are well-served by that, because I think, if we know up front if you are insured, that your insurance company is going to pay something substantially less than, essentially, our rack rate, it does create a significant amount of confusion to that enrollee if he were to get a bill for $20,000. He doesn't know is he going to owe a portion of this? What is this bill all about? His insurance company comes back and says, you know, we paid $10,000, you owe $500--is the hospital going to come back at me to get the balance? Which we are precluded from doing because there is not balance billing. I think if we are required to send out a detailed bill when there is no expectation that an individual is going to pay off that detailed bill, it does create a tremendous amount of confusion and it creates a lot of cost. It is unnecessary.

Mr. PORTMAN. Mr. Sucher?

Mr. SUCHER. I think one of the greatest injustices to hospitals from the current system is that the insurers don't really show the insured what they did in fact pay. For that same $20,000 bill he just cited, if we get $10,000, for all the patient knows, they paid $19,500, because all they then get is a statement that shows the bill is taken care of except there is $500 left. It is very hard, then, to collect that $500 from the patient when he thinks we have already gotten $19,500, when in fact we have only gotten $8,000 or $10,000. So, it is a very disserving system for all concerned.

Mr. PORTMAN. So, more transparency, we talked about earlier, even in billing--simplifying it and doing as much at the front end as possible to determine what the insurer can pay, will pay, and what the costs are would be helpful, it seems to me.

Mr. COHEN. Mr. Portman, I believe that the very high charges are a major problem for managed care and insurance companies. Many admissions are through the emergency room. If you don't have a contract with the hospital and, for those patients who go through the emergency room, if you are responsible for paying charges, it is an exceedingly high amount. The result is that it puts inappropriate pressure on payors to negotiate with virtually every hospital. I think that puts too much of the balance of power in the hospital arena in regard to the negotiations, and that is something to consider.

Mr. PORTMAN. Thank you, Dr. Cohen. One final question. I would ask for this response in writing, since my time has expired. Mr. Morrison, Florida law, as you know, hospitals are required upon request to provide the estimated charges for a hospital stay or a treatment. If you could give us your written response as to what the positives and negatives are to that--and for that matter, any other panelists who have thoughts on that as a system that could be used in other States. Again, gentlemen, thank you for your testimony. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thank you. I just have one final question. Mr. Sucher, I am interested in a simplification, reduction, making it understandable. This is not just in health care, but in a whole variety of other things. Are there some immediate changes we could use to simplify the hospital billing system, like right now?

Mr. SUCHER. I wish there were. I would certainly be glad to offer something if there was. The simplest thing is, as he just said, doing some kind of a lump-sum billing that allows, like Medicare for DRGs, and avoid the whole detail-billing process. I don't think that is a quick solution because there is too much invested in that process from so many things, to make a quick change in that.

Chairman HOUGHTON. Is that possible on a State-by-State basis or would it have to be a national?

Mr. SUCHER. I think you would prefer it was national rather than State-by-State. I mean, demonstration projects oftentimes can get something done, so--

Chairman HOUGHTON. All right. Okay, well, thank you very much. Appreciate your testimony. It has been a great day. Onward and upward to another session.

[Whereupon, at 1:20 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Houghton to Ms. Davis, Mr. Bernd, and Mr. Cohen, and their responses follow:]

Question from Chairman Amo Houghton to Ms. Karen Davis

Question: You stated to the Committee that you have quantitative estimates of the community benefits for medical education, standby capacity and charity care.  I ask that you provide those estimates to the Committee. In addition, you stated that on the whole it was enough to justify the tax difference.  I ask that you provide that evidence to the Committee.

Answer: Like other nonprofits, nonprofit hospitals are ordinarily exempt from federal income taxes.  As a rule, they receive their tax-exempt status under Section 501(c)(3) of the Internal Revenue Service Code which applies to organizations with religious, charitable, public safety testing, scientific, literary, and educational purposes.  Because the code has never explicitly included medical organizations, hospitals and other health care organizations have qualified under the term “charitable.”[1]  The status also means that hospitals will have access to tax-free bonds, can receive tax deductible donations from donors, and will have a greater likelihood of being exempt from various state and local taxes.[2]

An IRS ruling in 1969 explicitly defined the criteria for hospitals’ tax exemption.[3]

In particular, nonprofit hospitals were to operate a full-time emergency room and could not deny emergency care to patients.  In the ruling, charitable activities, in the context of health care, were those that generally promoted health and thus benefited the community as a whole.

A broad range of activities undertaken by nonprofit and public health care institutions have been identified as community benefits.  Schlesinger and colleagues, for example, identified over 30 different community benefit activities that health care institutions engage in.[4]  Such activities include those with public good attributes such as teaching and research which benefit entire communities, those that have positive spillover effects such as programs designed to prevent disease, and those activities, like outreach to high risk patient groups, which have little likelihood of being undertaken by profit making institutions.  Other types of community benefit are community involvement in governance and a refusal to exploit information asymmetries endemic to the health services market such as imperfect information on the part of patients.

Academic medical centers and teaching hospitals, the vast majority of which are public and private non-profit institutions, pursue several unique missions that benefit the broader community.  Those missions include graduate medical education, biomedical research, and the maintenance of standby capacity for highly specialized care to medically complex patients.  Research conducted by Lane Koenig, Al Dobson and others for the Commonwealth Fund’s Task Force on Academic Health Centers and published in a late 2003 article in Health Affairs estimated that the costs of these three missions alone amounted to $27.2 billion in 2002.[5]  Of that total, $16.4 billion went to graduate medical education, $9.6 billion financed stand-by capacity, and $1.2 billion funded research. Also see Appendix A for a summary of work on this issue in the final report of the Commonwealth Fund Task Force on Academic Health Centers.

It should be noted that these estimates are based on standby capacity for highly specialized care such as burn units and trauma care. They do not include future threats including the value to communities of having a hospital equipped to deal with terrorist attacks or natural threats such as a SARS-like epidemic. Most communities would willingly forego property taxes on local nonprofit hospitals in exchange for assurance that this capacity was available – even if an occasion to use it never materialized.

With respect to charity care, as I indicated in my testimony,[6] a significant amount of research has shown that nonprofit hospitals are more likely to care for uninsured patients than are for-profit hospitals.[7]  Further, academic health centers are more likely to care for such patients than are community hospitals.[8]  In recent years, care for the uninsured has been increasingly concentrated in fewer institutions willing to provide that care.  Public academic health center hospitals provide the highest levels of charity care among all hospitals, while private nonprofit academic health centers provide twice as much free care as other private hospitals.

Recent work by Jack Hadley and John Holahan found that in 2001, private and public health care providers spent an estimated $35 billion a year on care for uninsured patients that went uncompensated (i.e, that was not paid for by patients or private or public insurers).[9]  Hospitals delivered about two-thirds of total uncompensated care or a total of about $23.6 billion. 

I have only identified some of the quantifiable benefits that flow to communities and the nation as a whole from nonprofit and public hospitals.  Clearly such community benefit activities yield considerable value to the U.S. health care system.  Nonprofit hospitals’ tax exempt status should be considered in the context of the overall framework of our health care system and its unique needs. Highly fragmented, it relies heavily on local health care institutions to provide a wide range of health care services, not all of them profitable, to an increasingly diverse population, as well as the education and training of health care professionals.  Reliance on nonprofit health care institutions has likely helped the system maintain its high degree of decentralization and privatization while still managing to provide at least some of the services that traditionally for-profit entities might have failed to provide.  Serious debate about the tax-exempt status of hospitals really has to engage the larger, more fundamental question of the how the United States wants to finance the health care of its population. 

Appendix A

Excerpt from Envisioning the Future of Academic Health Centers: Final Report of The Commonwealth Fund Task Force on Academic Health Centers, New York: The Commonwealth Fund, February 2003; 7-9. (Fund Publication #600) Available at www.cmwf.org.

Clinical Costs of Mission-Related Activities in Academic Health Center Hospitals

The conduct of mission-related activities in AHCs and other health care institutions is often associated with extra expenses that are not compensated in competitive health care markets. These extra expenses are manifested in part as higher clinical costs at AHCs. The performance of some missions, such as educating medical students and residents and conducting clinical research, makes the provision of care less efficient or requires extra work and the hiring of extra staff.

According to a recent analysis by The Lewin Group, the cost per case for AHC hospitals ($8,548) was higher than the cost per case for other teaching hospitals ($6,047) and for other urban, community hospitals ($5,238) in fiscal year 1998 (Figure 3).[10] The Lewin Group analysis decomposed these total cost per case estimates to provide separate cost estimates for each of the mission-related categories for fiscal year 1998. After accounting for differences in wages, case mix, and other factors that influence cost per case, mission-related costs averaged $2,360, or 28 percent of total costs, for AHC hospitals. By comparison, mission-related costs for other teaching hospitals accounted for only 11 percent ($674) of total costs. For AHC hospitals, stand-by capacity (defined as the capacity to provide high-technology or intensive services whose availability is essential to a modern health care system, but that are not always in use) accounted for the largest component of mission-related costs (45 percent), with indirect medical education and research representing 42 percent and 13 percent of total mission-related costs, respectively (Figure 4). After updating these cost estimates to 2002 values using the Centers for Medicare and Medicaid Services Prospective Payment System Hospital Input Price Index, total mission-related costs, including medical education, are estimated to be $11.4 billion for AHC hospitals and $27.2 billion for all teaching hospitals (Table 1).

Table 1. Total Clinical Costs of Mission-Related Activities
by AHC Status, 2002* ($ billions)

* Costs have been estimated using the Centers for Medicare and Medicaid Services (CMS) Prospective Payment System Hospital Input Price Index.

** N is the number of hospitals in the CMS Prospective Payment System Hospital Input Price Index.

Note: Numbers may not add up due to rounding.

Source: Lane Koenig et al., “Mission-Related Costs of Teaching Hospitals: Estimates of Graduate Medical Education, Clinical Research, and Stand-by Capacity” (Unpublished manuscript, November 2002).