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“Reasonable Cost” Reimbursement for Inpatient Hospital Services Under Medicare and Medicaid: The Emergence of Public Control

Published online by Cambridge University Press:  29 April 2021

Stephen M. Weiner
Stephen M. Weiner*
Affiliation:
Massachusetts Rate Setting Commission; Yale Law School
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Abstract

In 1965 Congress, through amendments to the Social Security Act, established the Medicare and Medicaid programs and mandated that hospitals participating in those programs be reimbursed for the “reasonable cost” of providing inpatient services to Medicare and Medicaid patients. In this Article, the Chairman of the Massachusetts Rate Setting Commission contends that HEW—which, like Congress, was anxious to stimulate the voluntary participation of hospitals in the Medicare and Medicaid programs—interpreted “reasonable cost” with excessive liberality toward participating hospitals and created a fiscally burdensome and inflationary reimbursement system lacking principles of efficiency and planning. The author then describes a series of attempts—varying in scope and success—to reformulate “reasonable cost,” as applied to Medicare and Medicaid reimbursement, in a manner more consistent with the author's concept of sound public policy. The culmination of these attempts to date, he states, was Public Law 92-603 (Social Security Amendments of 1972), which introduced to the reimbursement system the concepts of (1) tough evaluation of the reasonableness of hospital costs, with emphasis on efficiency, utilization, and planning; (2) shifting de facto power over reimbursement rates away from the hospitals and into the hands of the agencies that purchase their services; and (3) increased public scrutiny of hospital operations. The author contends that this law, and the philosophy which underlies it, represents a healthy balancing of the needs of hospitals and the needs of the public; that the trend toward cost control and public control which the law embodies has been substantially furthered in those states which have statutorily established hospital budget or charge review programs; and that such trend will continue and profoundly affect any national health insurance plan enacted in the future.

Type
Articles
Information
American Journal of Law & Medicine , Volume 3 , Issue 1 , Spring 1977 , pp. 1 - 47
Copyright
Copyright © American Society of Law, Medicine and Ethics and Boston University 1977

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References

1 Office of Research and Statistics, Social Security Administration, Dep't of Health, Education, and Welfare, Background Information on Medical Expenditures, Prices and Costs at 32 (unpublished preliminary report, September 1974) [hereinafter referred to as ORS Background Report].

2 Id. Cost (expense) per adjusted day is derived by dividing total hospital expenses by a combined figure representing inpatient patient days and the patient day equivalent of outpatient visits.

3 Id. at 15-16. The ORS Background Report utilizes two different methodologies for comparing medical care increases with increases in the consumer price index (all items). In 1973 and 1974, using midyear comparisons (June 30), and in 1974 using average annual comparisons (fiscal year ending June 30), semiprivate room charges increased at annual rates less than those in the consumer price index (all items). During those years mandatory federal controls were in effect for the health care industry (until April 30, 1974) but not for most of the rest of the economy.

4 Medicare, originally “Health Insurance for the Aged,” was added as Title XVIII of the Social Security Act by P.L. 89-97, tit. I, § 102(a), 79 Stat. 291 (1965) (Social Security Act tit. XVIII, §§ 1801 et seq.) (current version at 42 U.S.C. §§ 1395 et seq. (1970 & Supp. V 1975)). Medicaid, originally “Grants to States for Medical Assistance Programs,” was added as Title XIX of the Social Security Act by P.L. 89-97, tit. I, § 121(a), 79 Stat. 343 (1965) (Social Security Act, tit. XIX, §§ 1901 et seq.) (current version at 42 U.S.C. §§ 1396 et seq. (1970 & Supp. V 1975)).

The frequent use of parallel citations in this Article is intended as an aid to the reader, who may be more familiar with references to the session law sections—or, in some cases to Social Security Act sections—for a specific piece of legislation.

5 For statutory citations, see notes 18-20 infra.

6 “The rapid increase in hospital costs during the 1960's and 1970's can be attributed in part to the methods by which hospitals are paid. Cost reimbursement and charges reimbursement … are inherently inflationary in that they fail to provide incentives for cost containment.” Dowling, , Prospective Reimbursement of Hospitals, 11 Inquiry at 163 (1974)Google Scholar. See also Berry, , Perspectives on Rate Regulation, in National Academy of Sciences, Institute of Medicine, Controls on Health Care 105 (1975)Google Scholar; Berry, , Prospective Rate Reimbursement and Cost Containment: Formula Reimbursement in New York, 13 Inquiry 288 (1976)Google Scholar.

7 Among the more readable discussions of the development and subsequent implementation of the “reasonable cost” principle under Medicare and Medicaid are H. & A. Somers, Medicare and the Hospitals 154-96 (1967); Law, S., Blue Cross: What Went Wrong?, 59–104 (2d ed. 1976, paperback)Google Scholar.

8 See, e.g., grants under Title V of the Social Security Act for payments for medical care for crippled children, ch. 531, § 512(a), 49 Stat. 631 (1935) (current version at 42 U.S.C. § 706 (1970)); the Emergency Maternity and Infant Care Program (EMIC) established in 1943 by the U.S. Children's Bureau; and grants to states to provide services to disabled individuals with employment potential, Vocational Rehabilitation Amendments of 1943, § 3a, 57 Stat. 376.

9 Mass. Gen. Laws Ann. ch. 7, § 30K (subsequently amended and eventually repealed by 1973 Mass. Acts ch. 1229, § 4).

10 Massachusetts Gen. Hosp. v. Cambridge, 347 Mass. 519, 522, 198 N.E.2d 889 (1964).

11 Id.

12 Rev. Rul. 56-185, 1956-18 I.R.B. 33.

13 American Hospital Association, Principles of Payment for Hospital Care (1953).

14 Eilers, Regulation of Blue Cross and Blue Shield Plans 179-96 (1963), cited in S. Law, supra note 7, at 60 n.375.

15 American Hospital Association & Blue Cross Association, Principles of Payment for Hospital Care (1963).

16 H. & A. Somers, supra note 7, at 175.

17 Id. at 191.

18 P.L. 89-97, tit. I, § 102(a), 79 Stat. 294 (1965) (Social Security Act, tit. XVIII, § 1814(b)) (current version at 42 U.S.C. § 1395f(b) (Supp. V 1975)).

19 P.L. 89-97, tit. I, § 102(a), 79 Stat. 322 (1965) (Social Security Act, tit. XVIII, § 1861(v) (1)) (current version at 42 U.S.C. § 1395x(v)(1) (Supp. V 1975)).

20 P.L. 89-97, tit. I, § 102(a), 79 Stat. 345 (1965) (Social Security Act, tit. XIX, § 1902(a)(13)(B)) (current version at 42 U.S.C. § 1396a(13)(D) (Supp. V 1975)).

21 20 C.F.R. § 405.451(c)(2) (1976).

22 20 C.F.R. § 405.451(c)(3) (1976).

23 20 C.F.R. § 405.451(c)(2) (1976) (emphasis added).

24 20 C.F.R. §405.415(a)(3). The right to exercise the option to use accelerated depreciation was subsequently cut off. See 35 Fed. Reg. 12,330 (Aug. 1, 1970)Google Scholar.

The Somers note that, to the extent hospitals could fund the depreciation, accelerated methods could produce almost as much excess revenues as replacement value depreciation, revenues that could be applied to future capital needs. H. & A. Somers, supra note 7, at 173.

25 20 C.F.R. § 405.415(d)(1) (1976).

26 20 C.F.R. § 405.418(a) (1976). This allowance distorted the otherwise consistent principle in the regulations that depreciation was to be treated as a cost rather than a reserve for future capital acquisition. The regulations appear to pioneer yet a third theory of depreciation by stating, in the context of permitting depreciation on assets acquired through public funds, that “recognition of this cost is necessary to maintain productive capacity for the future.” Id.

27 20 C.F.R. § 405.417(b) (1976).

28 20 C.F.R. § 405.428 (1976). The original proposed version of this provision established the allowance at 2 percent of allowable costs (excluding interest and the allowance itself) with an overall limitation equal to a percentage of equity capital. The proposal favored voluntary hospitals at the expense of proprietaries, because voluntary hospitals tended to have larger amounts of equity (due to charitable contributions) and because depreciation was recognized on assets purchased with public funds. Congress rectified the apparent inequity prior to promulgation of the regulation by amending section 1861(v)(1) to require inclusion as a reimbursable cost of a return on equity for proprietary providers. Act of Nov. 2, 1966, P.L. 89-713, § 7, 80 Stat. 1111. 20 C.F.R. § 405.428 provides a 2 percent allowance for voluntary providers and a 1 ½ percent allowance for proprietaries (the additional ½ percent presumably is made up for by the return on equity). For convenience in the text, the allowance is referred to as the 2 percent allowance.

29 ORS Background Report, supra note 1, at 38. See also Staff of Senate Finance Committee, 91st Cong., 1st Sess., Report: Medicare and Medicaid: Problems, Issues and Alternatives 46 (1970) [hereinafter cited as Finance Committee Report].

30 Finance Committee Report, supra note 29, at 50.

31 34 Fed. Reg. 1244 (Jan. 25, 1969)Google Scholar. 45 C.F.R. § 250.30(b)(1).

32 See generally S. Law, supra note 7, at 63-89; H. & A. Somers, supra note 7, at 157-85.

33 Finance Committee Report, supra note 29, at 29-30.

34 Id. at 42-44.

35 P.L. 90-248, tit. IV, § 402(a)-(b), 81 Stat. 930 (1968) (current version at 42 U.S.C. § 1395b-1(a)-(b) (Supp. V 1975)).

36 P.L. 92-603, 86 Stat. 1329 (1972) (codified in scattered sections of 42 U.S.C.). For discussion of the impact of P.L. 92-603 on reasonable cost, see Part III, section D of this Article.

37 20 C.F.R. § 405.428 (1976), as amended in 34 Fed. Reg. 9927 (June 27, 1969).

38 In partial replacement of the 2 percent allowance, HEW adopted an allowance equal to 8½ percent of inpatient routine nursing salary costs. 20 C.F.R. § 405.430 (1976). This provision was adopted effective July 1, 1971, and made applicable to inpatient routine nursing salary costs effective July 1, 1969. The purported purpose of the allowance is to recognize the above-average nursing needs of elderly patients. As a percentage of other allowable costs, this allowance has the same inefficiency incentive as did the 2 percent allowance. For a critique of the basis for this differential, see S. Law, supra note 7, at 86-88. The differential, of course, by its nature applied only to Medicare reimbursement.

39 A questionnaire sent by the Staff of the Senate Finance Committee to the Governors elicited such responses as the following:

[W]e expect that reimbursement of hospitals under Title XVIII and Title XIX on a full cost basis will create economic incentives for price inflation of hospital charges and every wasteful practice implicit in such cost-plus reimbursement. [Arkansas]

Financially, the payment of full costs is in effect a blank check to hospitals to meet any cost they may undertake. [Massachusetts]

This cost-plus formula compels us to reimburse hospitals for whatever costs they incur, regardless of the quality of their management practices. This open-ended mode of reimbursement contains no incentives whatever for hospitals to operate efficiently. We have developed a reimbursement criteria [sic] that would build in incentives to hold hospital costs down … we are not permitted to use them because of Federal reimbursement requirements. [New York]

A majority of state governors responded “yes” to the questionnaire inquiry: “Medicaid regulations require States to reimburse hospitals under Medicaid on the same basis as they are reimbursed under Medicare. Does this reimbursement requirement impose any burden on your State? Please explain.” Finance Committee Report, supra note 29, at 50-51.

40 N.Y. Public Health Law § 2807(3) (as amended by 1968 N.Y. Laws ch. 862, § 8, and prior to the 1969 amendment cited in note 42 infra). Section 2807 applied to rates for hospital and health-related services paid by governmental agencies (principally Medicaid) and by Blue Cross plans (art. IX-c corporations). In either case the Commissioner of Public Health certified, but approval of the rates was the responsibility of the state director of the budget (in the case of payment by government agencies) and by the superintendent of insurance (in the case of Article IX-c corporations).

41 N.Y. Public Health Law § 2807(3) (as amended by 1968 N.Y. Laws ch. 957, § 4).

42 N.Y. Public Health Law § 2807(2) (as amended by 1969 N.Y. Laws ch. 184, § 20, and 1969 N.Y. Laws ch. 957, § 4. Chapter 184 introduced the freeze and established it for a period originally running from April 1, 1969 through June 30, 1971. Chapter 957 formulated the criteria for certification and shortened the period of the freeze to December 31, 1969).

43 Catholic Medical Center v. Rockefeller, 305 F. Supp. 1256 (E.D.N.Y. 1969). A word on the judicial history of this case is in order. 305 F. Supp. 1256 is an “Interim Memorandum” of the District Court. Final findings and orders were postponed, as indicated later in this Article, pending solicitation of views from HEW. The final order of the court is reported at 305 F. Supp. 1268 (E.D.N.Y. 1969). On direct appeal from the three-judge court, the U.S. Supreme Court ruled that a direct appeal did not lie since no injunctive relief had been granted. 397 U.S. 820 (1970). The appeal was vacated and the case remanded to the District Court with instructions to enter a fresh decree. The District Court reaffirmed its decree and was upheld on appeal to the Circuit Court. 403 F.2d 1297 (2d Cir. 1970).

44 305 F. Supp. 1256, 1263.

45 Id.

46 Id. at 1264.

47 Id. at 1265.

48 P.L. 89-97, tit. I, § 121(a), 79 Stat. 351 (1965) (Social Security Act Title XIX, § 1904) (codified at 42 U.S.C. § 1396c (1970)).

49 305 F. Supp. 1256, 1264.

50 305 F. Supp. 1268, 1269.

51 Id. at 1269-70.

52 305 F. Supp. 1268, 1271. The language used by the court, “not in excess of reasonable charges consistent with efficiency, economy, and quality care,” is taken from Social Security Amendments of 1967, P.L. 90-248, § 237, 81 Stat. 911 (1968) (Social Security Act § 1902(a)(30) (current version at 42 U.S.C. § 1396a(a)(30) (1970) (intended to permit establishment of safeguards against unnecessary care and services).

53 305 F. Supp. 1256, 1266-67.

54 “If the question here was the conformity of New York's proposed ‘General Reimbursement Principles’ with Federal law, there would be a substantial need for H.E.W.'s expertise. An across-the-board freeze of the prior year's rates, for all hospitals, does not involve as complex an issue in comparing the New York statute with the Social Security Act.” Id. at 1267. But a recent California case suggests that the federal courts may find a plan to be invalid in spite of HEW approval. California Hospital Association v. Obledo, Civ. No. 76-903-R (C.D. Cal. November 5, 1976).

55 305 F. Supp. 1268, 1270.

56 While HEW's position that the New York freeze violates the Social Security Act and the HEW regulations is not conclusive, we find its arguments entirely persuasive on a doubtful issue of construction where great weight should be given to administrative expertise.

Id. (emphasis added)

In reviewing the application of N.Y. Public Health Law § 2807(3) free of HEW's position on inpatient hospital reimbursement, the New York Court of Appeals upheld the Commissioner of Public Health's rule that a proprietary nursing home would be limited in its reimbursement to an amount equal to 50 percent of the weighted average adjusted inpatient cost of proprietary hospitals. Sigety v. Ingraham, 324 N.Y.S.2d 10 (1971). In the facts of that case, the actual costs incurred by the facility clearly exceeded the ceiling.

57 P.L. 89-97, tit. I, § 102(a), 79 Stat. 322 (1965) (Social Security Act, tit. XVIII, § 1861(v)(1) (current version at 42 U.S.C. § 1395x(v)(1) (Supp. V 1975)) (quoted at p. 8 supra).

58 Connecticut D.P.W. v. H.E.W., 448 F.2d 209, 214 (2d Cir. 1971).

59 Id. at 213.

60 Finance Committee Report, supra note 29, at 29-30.

61 448 F.2d at 214.

62 See, e.g., Message from the President of the United States Relative to Building a National Health Strategy, H.R. Doc. No. 92-49, 92d Cong., 1st Sess. (Feb. 18, 1971).

63 45 C.F.R. § 250.30(b)(1)(iii), in 36 Fed. Reg. 12,621 (July 2, 1971).

64 45 C.F.R. § 250.30(b)(1)(iii)(a) in 36 Fed. Reg. 12,621 (July 2, 1971).

65 45 C.F.R. § 250.30(b)(1)(iii)-(iv); in 36 Fed. Reg. 12,621 (July 2, 1971).

66 The basic reimbursement methodology is set forth in Part 86, Administrative Rules and Regulations of the Commissioner of Health, State of New York Dep't of Health Hospital Memorandum Service 71-61 (Sept. 2, 1971) [hereinafter cited as N.Y. Rules].

67 Id. § 86.16.

68 Id. §§ 86.13-.14.

69 Id. § 86.15.

70 Memorandum from Thomas Tierney, Director, Bureau of Health Insurance, reported in [1976] Medicare and Medicaid (CCH) ¶ 5858.77.

71 N.Y. Rules, supra note 66, § 86.9(d).

72 See, e.g., S. Law, supra note 7, at 105-07.

73 For a later description of the effects of the New York System, see Berry, supra note 6.

74 New York's system provided the basis for the Medicaid prospective system developed in Massachusetts, approved by HEW at the end of 1973, and implemented on April 1, 1974. See Massachusetts Rate Setting Commission Regulation 74-1 (1974), 74-26 (1974), and 14 CHSR 3 (1975, 1976). The Massachusetts system, like New York's, uses an all-inclusive per diem as the basis of payment and contains occupancy penalties, currently requiring minimum occupancy of 60 percent of available bed days for maternity and 75 percent (80 percent for teaching hospitals) of available bed days for non-maternity services. Unlike the New York system, however, the Massachusetts formula was instituted after inception of a state-supervised Medicaid hospital utilization review program (Commonwealth Hospital Admissions Monitoring Program), which provided at least a potential check on hospitals’ responding to the prospective formula by increasing patient days inappropriately. The Massachusetts system does not group hospitals, although groupings were included in the original proposal for a prospective system considered by the Commission at a public hearing held in July, 1973. Under that original proposal, the grouping would have been used to establish ceilings on total cost, not merely routine cost, and the inter-hospital comparison within the group was to have been based on cost per stay rather than cost per day. The grouping proposal was not accepted because of philosophical differences among the then Commissioners. Massachusetts has not adopted groupings for Medicaid purposes pending completion of developmental work under a contract from the Social Security Administration described in note 81, infra, and implementation of a state law mandate that the Rate Setting Commission develop and implement a grouping methodology as part of a system for reviewing and approving hospital budgets, Mass. Gen. Laws Ann. ch. 6A, § 40.

The Massachusetts Rate Setting Commission, incidentally, encountered an unexpected side benefit from use of the occupancy penalties. “Available bed days” for purposes of the first set of rate calculations under the system was based on figures the hospitals reported to the Commission as their available bed complement. For the second set of rates, the Commission generally used licensed beds as the base, and found substantial differences between hospital licensed quotas and what the hospitals reported as available beds (the latter generally being lower). Because use of the higher figure (licensed quota) would have produced a larger number of occupancy penalties, the Commission allowed hospitals to reduce or eliminate occupancy penalties by reducing licensed quotas. The result was a much more accurate set of information for planning purposes on what beds were actually available for use in Massachusetts.

75 86 Stat. 1329 (1972) (codified in scattered sections of 42 U.S.C.).

76 H.R. Rep. No. 92-231, 92d Cong., 1st Sess. 101 (1971) [hereinafter cited as H.R. Report].

77 Id.

78 Social Security Amendments of 1972, P.L. 92-603, § 232, 86 Stat. 1410 (codified at 42 U.S.C. § 1396(a)(13)(D) (Supp. V 1975)).

79 H.R. Report, supra, note 76, at 101.

80 See note 74 supra.

81 45 C.F.R. § 250.30(a)(2)(ii)(a) (1976). To date, only four states have sought and received prior HEW approval for systems under this provision (New York, Massachusetts, Colorado, and California), and of these, one (California) has had its State Plan amendments overturned in federal court despite HEW approval. California Hospital Association v. Obledo, supra note 54. No analysis has yet been offered as to why more states have not sought approval for alternative “reasonable cost” systems under § 232, but it may be that the level of state resources required to develop and implement an alternative system—particularly given the difficulty of gaining access to Medicare information—has acted as a disincentive. In Massachusetts, for example, the Rate Setting Commission had been collecting its own annual cost reports and conducting hospital audits in conjunction with Blue Cross well before the inception of Medicare and Medicaid, so that it had available sources of information for rate setting purposes independent of the Medicare cost and audit reports. To the extent that alternative system approval would require a state to develop its own cost reporting and auditing capacity, it would involve a substantial amount of time and money.

It should also be noted that P.L. 92-603 contains a potentially significant terminological distinction between “reasonable cost” reimbursement and payment on a “reasonable cost related basis,” which is the criterion established for reimbursement to skilled nursing facilities and intermediate care facilities, effective as of July 1, 1976. See P.L. 92-603, tit. II, § 249 (a), 86 Stat. 1426 (1972) (Social Security Act § 1902(a)(13)(E)) (codified at 42 U.S.C. § 1396a(a)(13)(E) (Supp. V 1975)). In promulgating regulations under § 1902(a)(13)(E), HEW stated:

[N]either does the statute require that States provide assurance that each facility will be reimbursed its reasonable costs, as some comments urged. The intent expressed in the legislative history that States be allowed the maximum possible flexibility in developing cost-related payment methods sheds light on the distinction between “reasonable cost” and “reasonable cost-related.” …

… [T]here is no single acceptable method for determining reasonable cost, but rather a variety of acceptable methods; it follows from this that there is no single figure that is the reasonable cost, but rather a spectrum of figures within an acceptable range, any one of which is a reasonable cost. The Department expects that a variety of acceptable methods for determining a reasonable cost-related payment rate will be developed. The legislative history of Section 249 makes clear that the States are to be allowed great freedom both to define allowable costs items and to set a value on the reasonable cost of such items….

The legislative history makes clear that States may set their payment rates at the level which will reimburse only those costs which a State finds reasonable. States are not required to reimburse for luxury services, questionable allowances for depreciation, and similar items which they may reasonably choose not to recognize as “reasonable.“

Fed. Reg. 27,303 (July 1, 1976).

Although the language does not apply to inpatient hospital reimbursement, it does suggest a change in attitude on the part of HEW concerning the flexibility to be allowed in state reimbursement systems and a sensitivity to some of the implications, described below in the text, of the changes in Congressional attitude toward reimbursement principles.

82 H.R. Report, supra note 76, at 80. See also S. Rep. No. 92-1230, 92d Cong., 2d Sess. 224 (1972) [hereinafter cited as S. Report].

83 H.R. Report, supra note 76, at 80-81; S. Report, supra note 82, at 224-25.

84 86 Stat. 1391 (1972). See note 35, supra, for 1967 reference.

85 Social Security Administration, HEW, Prospective Reimbursement: Studies, Experiments, and Demonstrations, Report to Congress under Section 222, P.L. 92-603 (August 1974). For discussion of some of the results of prospective reimbursement systems undertaken under HEW auspices, see the following reports prepared during the past few years: Bauer and Clark, New York: The Formula Approach to Prospective Reimbursement (1974), The Indiana Controlled Charges System (1974), The New Jersey Budget Review Program (1974), and Budget Review and Prospective Rate Setting for Rhode Island Hospitals (1974); Applied Management Sciences, Inc., Analysis of Prospective Reimbursement Systems: Western Pennsylvania (1975); Thornberry and Zimmerman, Hospital Cost Control: An Assessment of the Rhode Island Experience with Prospective Reimbursement, 1971 and 1972 (for Rhode Island Health Services Research) (1975); Berry, Prospective Rate Reimbursement and Cost Containment: Formula Reimbursement in New York, supra note 6; Worthington, , Prospective Reimbursement of Hospitals to Promote Efficiency: New Jersey, 13 Inquiry 302 (1976)Google Scholar; Hellinger, , Prospective Reimbursement through Budget Review: New Jersey, Rhode Island and Western Pennsylvania, 13 Inquiry 309 (1976)Google Scholar. See also note 106 infra concerning the awarding by HEW of contracts under § 222.

For a recent general description of HEW's activities with prospective rate setting, see Iglehart, , Government Searching for a More Cost-Efficient Way to Pay Hospitals, 8 National Journal 1822 (1976)Google Scholar.

86 H.R. Report, supra note 76, at 82-83. See also S. Report, supra note 82, at 187.

87 H.R. Report, supra note 75, at 83. See also S. Report, supra note 82, at 188.

88 20 C.F.R. § 405.460 (1974), adopted at 39 Fed. Reg. 20,164 (June 6, 1974) (effective 1 July 1, 1974) (amended at 40 Fed. Reg. 32,742 (August 4, 1975)) establishes ceilings on routine inpatient hospital costs. Pursuant to 20 C.F.R. § 405.460, a “Schedule of Limits on Hospital Inpatient General Routine Service Costs,” governing fiscal periods beginning after June 1974, and before July 1975, was published at 39 Fed. Reg. 20,168 (June 6, 1974); a Schedule governing fiscal periods beginning after June 1975 was published at 40 Fed. Reg. 23,622 (May, 30, 1975); and a Schedule governing fiscal periods beginning on or after July 1, 1976 was published at 41 Fed. Reg. 26,992 (June 30, 1976). After some confusion developed, the provisions of P.L. 92-603, § 223, 86 Stat. 1381 (1972), as implemented through 20 C.F.R. § 405.460, were explicitly applied to Medicaid reimbursement by amendments to 45 C.F.R. § 250.30(a)(2)(i) and (ii) (1976), appearing at 41 Fed. Reg. 51,401 and 51,402 (November 22, 1976) (effective for cost-reporting periods beginning after June 1974).

It should be noted that, insofar as § 223 applies to Medicare reimbursement, it permits the hospitals to charge beneficiaries any costs excluded by operation of the ceiling, presumably on the theory that the patient may wish to pay for “amenities in plush surroundings.” 20 C.F.R. § 405.461.

89 See Social Security Amendments of 1972, P.L. 92-603, § 221, 86 Stat. 1386 (1972) (current version at 42 U.S.C. § 1320a-1 (Supp. V 1975)). The applicable definition of “capital expenditure” appears at P.L. 92-603, 86 Stat. 1388 (codified at 42 U.S.C. 1320a-1(g) (Supp. V 1975)). The term “designated planning agency” was originally defined in P.L. 92-603, § 221, 86 Stat. 1387 (codified at 42 U.S.C. § 1320a-1(d)(1)B (Supp. V 1975)). For those states with agreements pursuant to § 1122 of the Social Security Act, the National Health Planning and Resources Development Act of 1974, P.L. 93-641, § 1523(a)(4), 88 Stat. 2246 (codified at 42 U.S.C. § 300m-2(a)(4) (Supp. V 1975), established the State Health Planning and Development Agency (SHPDA) as the designated planning agency for § 1122 purposes. For information on SHPDAs, see note 107 infra.

90 H.R. Report, supra note 75, at 78-79; S. Report, supra note 81, at 184-85.

91 Quoted in H.R. Report, supra note 75, at 102; S. Report, supra note 81, at 204.

92 See Economic Stabilization Act of 1970, P.L. 92-210, 85 Stat. 743, as amended by Economic Stabilization Act Amendments of 1973, P.L. 93-28, 87 Stat. 27; Exec. Order No. 11,695, 38 Fed. Reg. 1473 (Jan. 12, 1973); Exec. Order No. 11,730, 38 Fed. Reg. 19,345 (July 19, 1973).

93 Berry, supra note 6, at 120.

94 Memorandum of Kathleen R. Connors, Massachusetts Rate Setting Commission (May 7, 1975) (concerning hospital cost and charge increases).

95 See New Jersey Hosp. Ass'n v. Klein, Civ. No. 76-64 (D.N.J. April 9, 1976); Wisconsin Hosp. Ass'n v. Schmidt, Civ. No. 75-C-382 (E.D. Wis. April 28, 1976); and Hospital Ass'n of N.Y. v. Toia, 76 Civ. 2027 (S.D.N.Y. Nov. 9, 1976).

96 See HEW Action Transmittal SRS-AT-76-53 (MSA), dated April 1, 1976.

97 Proposed § 1132(b)(2)(B) of Title XI of the Social Security Act, as contained in § 11(a) of S. 3205.

98 P.L. 93-641, 88 Stat. 2225 (1975) (codified at 42 U.S.C. §§ 300k-300t (Supp. V 1975) (adding tit. XV and tit. XVI to the Public Health Service Act).

99 Mass. Gen. Laws Ann. ch. 111, § 25B et seq.

100 Mass. Gen. Laws Ann. ch. 6A, § 32.

101 For the most current version, see Massachusetts Rate Setting Commission Regulation 14 CHSR 3.74(e).

102 Massachusetts Department of Public Health, Rules and Regulations for Determination of Need, § 55.2(c).

103 For Related Information, See Bauer, Improving the Information for Hospital Rate Setting 40-41 (1976), and Brown, Rowland, & Sweetland, Exchange of Information Between Hospital Rate Setting and Certificate of Need Agencies: Selected State Experiences (1976).

104 P.L. 93-641, § 1523(a)(4)(B), 88 Stat. 2246 (codified at 42 U.S.C. § 300m-2(a)(4)(B) (Supp. V 1975)).

105 P.L. 93-641, § 1526, 88 Stat. 2249 (codified at 42 U.S.C. § 300m-5 (Supp. V 1975)).

106 Because of the stringency of the § 1526 organizational requirement, a number of states well advanced in the development of rate regulation techniques—including Massachusetts— would not have qualified for a grant. Consequently HEW combined grant-funding under § 1526 with contract-funding under § 222 of P.L. 92-603, and made monies available at the end of 1976 for carrying out additional developmental and operation experimentation to: Blue Cross of Western Pennsylvania, the Maryland Health Services Cost Review Commission, the Washington State Hospital Commission, the National Office of the Blue Cross Association, the New Jersey State Department of Health, the Connecticut Commission on Hospitals and Health Care, the California State Department of Health, and the Massachusetts Rate Setting Commission.

107 P.L. 93-641, § 1533(d), 88 Stat. 2254 (codified at 42 U.S.C. § 300n-2(d) (Supp. V 1975).

108 For the definition of a “health systems agency” (HSA) see P.L. 93-641 § 1512(a), 88 Stat. 2232 (codified at 42 U.S.C. § 300/-1a (Supp. V 1975)). For the definition of “state health planning and development agency” (SHPDA), see P.L. 93-641, § 1523(a)(6), 88 Stat. 2246 (codified at 42 U.S.C. § 300m(a) (Supp. V 1975)).

109 For HSAs, see P.L. 93-641 § 1513(g), 88 Stat. 2239 (codified at 42 U.S.C. § 3001-2(g) (Supp. V 1975)); for SHPDAs, see P.L. 93-641, § 1523(a)(6) (codified at 42 U.S.C. § 300m-2(a)(6) (Supp. V 1975)).

110 See H. 3160, 1976 Sess. Mass. General Court, § 1, inserting a proposed Mass. Gen. Law ch. 6A, § 38(b). The proposal was not formally adopted.

111 Mass. Gen. Laws Ann. ch. 6A, § 40.

112 Provisions governing PSROs appeared in P.L. 92-603, tit. II, § 249F, 86 Stat. 1429 (1972) (Social Security Act §§ 1152 et seq.) (codified at 42 U.S.C. §§ 1320c et seq. (Supp. V 1975)).

113 See Bureau of Quality Assurance, Health Services Administration, HEW, PSRO Transmittal No. 20 (May 30, 1975); 42 C.F.R. (proposed) § 101.1702, 41 Fed. Reg. 53,215 (December 3, 1976).

114 See Strasser, , Disclosure of PSRO Information to Hospital Rate Setting Bodies: A Legal Analysis (1976)Google Scholar. See also Memorandum of Joseph Duffey, Massachusetts Rate Setting Commission (January 2, 1977) (concerning proposed regulations governing confidentiality of data and information gathered by PSROs.) The PSRO data concerning the medical need for hospital services provided to Medicare and Medicaid patients may have an additional—as yet untested—use in the rate setting process for those states, such as New York and Massachusetts, which employ occupancy requirements in calculating the Medicaid rates. The PSRO determinations on medical necessity could be used to adjust reported actual bed days (which might be sufficiently high to avoid a penalty) downward to reflect that portion of actual bed days that was not necessary (thereby perhaps putting the hospital into a penalty position).

115 See Weiner, State Regulation and Health Care Technology 9-10 (1976) (unpublished paper).

116 See Conn. Gen. Stat. § 19-73a et seq. (Supp. 1977); Md. Ann. Code art. 43 § 568H et seq. (Supp. 1975); Mass. Gen. Laws Ann. ch. 6A, § 32 et seq. (Supp. 1976-77); N.J. Stat. Ann. 26:2H-1 et seq. (Supp. 1976-77); Wash. Rev. Code Ann. § 70.39.010 et seq. For a review of current state rate setting programs, see Sattler & Burns, Abstracts of State Rate Review and Prospective Payment Legislation (1976). For a general discussion about budget review approaches, see Community Service Society of New York, Prospective Reimbursement for Hospitals, A Guide for Policymakers (1976).

117 The Massachusetts General Court (the legislature) was encouraged by the Dukakis Administration to adopt budget review legislation on the theory that even the most cost-containment-oriented Medicaid hospital reimbursement system would have little overall impact on hospital costs. See Testimony of Stephen M. Weiner, Chairman, Massachusetts Rate Setting Commission, Before Joint Legislative Committee on Health Care, on H. 3160 (March 1976). The line of reasoning ran as follows: Medicaid constituted at most 15 percent of hospital revenues in Massachusetts. Costs disallowed by the Medicaid program on a prospective basis would be incurred by a hospital if it increased its charges and passed the cost on to other purchasers. The cost, once incurred, would eventually find its way back into the hospital's base cost for Medicaid reimbursement purposes. Thus, in the absence of control over the hospital's charges—and therefore over its total revenues from patient care services—the Medicaid system would achieve a short-term saving to Medicaid (until the disallowed cost appeared in the base) but no real savings.

118 Weiner, supra note 114, at 2-9. In considering that distinction, it is interesting to note that the Massachusetts Rate Setting Commission is the nation's only agency with regulatory authority over hospital budgets through a budget review program (Mass. Gen. Laws Ann. ch. 6A, §§ 37 et seq. and Commission Regulation 14 CHSR 9) and at the same time, is responsible for establishing or approving rates for major third party purchasers (for Medicaid, see Mass. Gen. Laws Ann. ch. 6A, § 32 and Commission Regulation 14 CHSR 3; for Blue Cross, see Mass. Gen. Laws Ann. ch. 176A, § 5 (Supp. 1976-77) and Blue Cross Participating Hospital Agreement (HA-26) (Sept. 17, 1975)).

119 Medicare is administered by the Bureau of Health Insurance within the Social Security Administration, Medicaid by the Medical Services Administration of Social and Rehabilitation Services. The Bureau of Quality Assurance in the Health Services Administration supervises the PSROs. The Bureau of Health Planning and Resource Development in the Health Resources Administration is responsible for overseeing implementation of HSA and SHPDA responsibilities under P.L. 93-641, while the Office of Research and Statistics, Social Security Administration, has responsibility for state rate regulation grants and for developing the uniform accounting provisions of P.L. 93-641.

120 Federal regulatory authority was established under the Economic Stabilization Program, see note 92 supra. However, that Program was not specifically health-related (except during its last phases), did not seek to establish permanent changes in the organization and delivery of health care, and was short-lived.

121 As the Article was being prepared for publication, two developments occurred which appear to suggest that the Carter Administration will modify the trend toward decentralization and will attempt to establish a regulatory presence at the federal level. First, the Administration has proposed federal establishment of a hospital cost control program not tied specifically to Medicare and Medicaid. The program would control all purchases of hospital care, regardless of funding source. Second, HEW has moved to eliminate the internal decentralization described in note 119 supra by combining the Bureau of Health Insurance, the Medical Services Administration, and the Bureau of Quality Assurance within a new HEW agency. It remains to be seen (1) whether these proposals will be implemented, and if so, (2) whether the planning agencies, represented by the Bureau of Health Planning and Resource Development, will be brought into this constellation, and (3) whether the federal reliance on such non-governmental agencies as the PSROs and HSAs will be altered by this change.

122 See P.L. 93-641, § 1533(d), 88 Stat. 2254 (codified in 42 U.S.C. § 300n-2(d) (Supp. V 1975)). See also proposed amendment to Social Security Act § 1861 by insertion of new subsection 1861(aa)(1)(A), in § 10 of S. 3205 (text pp. 35-36 supra).