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DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE,

Washington, April 8, 1954. Hon. CHARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington 25, D.C. DEAR Mr. CHAIRMAN: This letter is in reply to your request of February 4, 1954, for a report on H. R. 7700, a bill to amend the Public Health Service Act to provide mortgage loan insurance for hospitals and medical facilities used in connection with voluntary prepayment health plans.

The bill would establish a self-sustaining revolving fund, to be called the medical facilities mortgage insurance fund, to insure first mortgages made to finance the construction, improvement, or equipment of several kinds of medical facilities. Administration of this fund and of the functions to which it is related would be vested in the Surgeon General of the Public Health Service, under the supervision and direction of the Secretary of Health, Education, and Welfare.

The technical mortgage insurance provisions are closely patterned on the statutes authorizing the mortgage insurance program of the Federal Housing Administration. The fund would have an initial allocation of $2,500,000 and would be augmented by premium charges for mortgage insurance at a rate not in excess of 112 percent. Annual appropriations as necessary and borrowing authority are also provided for. The aggregate mortgages could not exceed $1 billion at any time. This ceiling could, however, be raised by an additional $250 million by Presidential action.

No one mortgage could be insured if it involved a principal obligation in excess of $5 million or in excess of 90 percent of the value of the property or project. Annual interest, exclusive of premium charges for insurance, could not exceed 612 percent, and each mortgage would be required to contain amortization arrangements within the mortgagor's reasonable ability to pay. Any responsible lending institution or source of private capital would be eligible for mortgage insurance under this program, and the mortgages insured could cover property acquired or constructed by "a nonprofit private agency, a health service association, or any group, partnership, or other association of physicians, or any other organization or individual for use as a medical facility * *

Mortgage insurance would be available for hospitals, diagnostic or treatment centers, personal health service centers, rehabilitation facilities, and physicians' and dentists' offices, and for the central service facilities connected with them. Insurance of a mortgage with respect to any of these types of facilities would be conditioned upon the existence of a contractual agreement that at least 60 percent of the capacity of the proposed medical facility would “be available to serve subscribers to group practice prepayment health service plans.”

The Surgeon General would be authorized to collect and make available information and statistics pertaining to medical facilities, mortgage insurance under the bill, the operation of group practice prepayment plans, the operation of health service associations, and the scope of personal health services available thereunder.

For the purposes of this report, the bill may be considered under three main headings: (1) The objectives, purposes, and scope of the proposed mortgage insurance program; (2) feasibility of the program; and (3) responsibility for administration of the program.

1. OBJECTIVES, PURPOSES, AND SCOPE OF PROGRAM

The bill (sec. 701) contains both a “declaration of policy” and a “declaration of purpose.”

The declaration of policy emphasizes “the serious need throughout the country for a greater number of hospitals and related medical facilities.” The need for hospital beds and medical facilities is a real and present one. My testimony before your committee on the proposed amendments to the Hospital Survey and Construction Act presented estimates as to the extent of need for certain types of facilities. The passage by the House of Representatives of H. R. 8149 reflects the concern of your committee and the House for meeting this need in the areas where it is most acute.

The declaration of policy also recites that “extension of voluntary, prepayment health plans offers an effective way for better distribution of health services and costs." We concur in this conclusion. As you know, the extension and the improvement of sound voluntary health service prepayment plans is the purpose of the administration's reinsurance proposal, embodied in H. R. 8356, which is now

being considered by your committee. We believe that voluntary, self-supporting prepayment plans can provide the means for making good medical care available at reasonable cost to a much larger proportion of our population than is now covered by such plans, and that the extension of such coverage is highly desirable.

Finally, the declaration of purposes contained in the bill includes the following:

“(3) To increase the opportunities and facilities by which doctors may associate themselves together in groups, partnerships, and other private initiative arrangements of their own choosing, in order to broaden the distribution of high quality medical care through general practitioners and specialists working together, making the most efficient use of medical skills, facilities, and equipment, and emphasizing preventive medicine, detection of disease and early diagnosis."

This particular purpose of the bill appears to be designed to foster what is generally referred to as "group practice.” Our Department is fully cognizant of the advantages, in terms of improving quality, accessibility, and economy in the provision of medical care, that can flow from good group practice arrangements.

Turning to the operative provisions of the bill, one of the most important is section 706 (d). This provision appears to orient the bill principally toward the promotion of group practice prepayment plans. Section 706 (d) is to the effect that no mortgage shall be accepted for insurance unless the mortgagor has entered into an agreement whereby not less than 60 percent of the medical facilities will be available to serve subscribers through group practice prepayment plans. This provision has the significant effect of confining the benefits of the bill to borrowers who(1) undertake to use the facilities in connection with prepayment plans which

provide medical services (as distinct from cash reimbursement and various

other types of voluntary prepayment plans), and (2) provide such services through physicians organized on a group practice

basis (as distinct from the provision of medical care through individual

practitioners or other patterns of medical practice). Recognizing the value of such arrangements, we see no justification for having the Federal Government thus favor one pattern of voluntary prepayment plan and one pattern of medical practice to the exclusion of all other sound approaches to the general problem of making good medical care accessible to the people.

If section 706 (d) and related provisions were deleted so as clearly to orient the bill toward encouragement, without discrimination, of the private financing of needed health service facilities, we would favor the proposal in principle, provided that the feasibility of the proposal as a self-sustaining program could be demonstrated. This administration has shown its interest in the construction of medical facilities by its support of outright grants under the hospital survey and construction program. It seems clear that such interest would all the more extend to any self-financing program under which the Federal Government would stimulate the construction of medical facilities. If the device of Federal mortgage loan insurance, which has successfully stimulated private investment in the construction of housing, is feasible in connection with the provision of needed health facilities, we see no reason why it should not be adopted for this purpose.

2. FEASIBILITY AS A SELF-FINANCING PROGRAM

What we have said about our endorsement, in principle, of a mortgage loan insurance program directed broadly to the alleviation of shortages in health facilities is subject to a determination that such a program would in fact be selfsustaining and would not require subsidization from general revenues. This is true because, insofar as subsidies are justifiable in this field, we believe that they are and should be (as under H. R. 8149) provided for, on a priority-of-need basis, in the program of grants-in-aid for nonprofit facilities under the hospital survey and construction provisions of the Public Health Service Act.

On the basis of such evidence as has thus far come to our attention, we are not yet persuaded that sound mortgage loan insurance can be effectively applied, or applied on a broad enough basis, to the construction of needed hospitals and related medical facilities to achieve the objectives we have outlined as desirable and to enable such a program to be maintained on a self-sustaining basis.

Sound mortgage insurance presupposes that the mortgaged facility is of a type well suited for financing on a normal commercial basis. Homes, like industrial properties, are well suited for financing on such a basis. Is this true of hospitals,

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clinics, rehabilitation centers, and similar facilities? They are usually specialized facilities; they are not generally built for commercal purposes and have little value apart from their specialized use. It is doubtful that such facilities can be measured by normal investment standards or that the normal investment remedies of foreclosure and sale can be readily brought to bear on community facilities such as hospitals and rehabilitation centers.

In our opinion convincing evidence on the question of financial feasibility must be procured from a well-diversified group of financial and investment experts in order to justify favorable action on the bill at this time. Such evidence must, we believe, extend beyond the financing of facilities sponsored by service prepayment plans of the group practice type. If the evidence were confined to facilities so sponsored, we believe that the objections raised earlier in this report as to the limited scope of the bill in its present form would be applicable; that is, it would in effect be a bill to favor one type of prepayment plan and one pattern of medical practice.

In addition to the basic issue of financial feasibility, we believe there are other important questions of a financial and technical character which should be carefully considered. Among these provisions are the following:

(a) The provision (p. 15, line 3) making it the duty of the Surgeon General to insure mortgages if certain conditions have been met; in this form no discretion is permitted ;

(b) The provision that the amount of the insured loan may be as much as 90 percent of the value of the property or project;

(c) The provision requiring that the insurance cover the whole loan (subject to the 1 percent deduction provision applicable where the lending institution assumes the expense of foreclosure proceedings) ;

(d) The statutory ceiling on the premium rate;
(e) The statutory ceiling on interest on insured loans;
(f) The appropriateness of the program ceilings.

3. RESPONSIBILITY FOR ADMINISTRATION Apart from the above questions as to the objectives and financial soundness of the program contemplated by H. R. 7700, it would be important to determine where the principal responsibility for administration should lie. The program objectives of the bill and the desirability of effecting coordination with health programs administered by this Department argue_for the vesting of some measure of responsibility for administration in this Department. On the other hand, the important financial, mortgage, and real-property-law aspects of the program contemplated by the bill indicate that serious consideration should be given to vesting primary responsibility for administration of the proposed program in some other agency or department of the Government which is already experienced in the mortgage financing field.

In summary, while we are unable to endorse the bill in its present form, we should like to reiterate our support, in principle, for the concept of utilizing the mortgage loan insurance approach to supplement other efforts for relieving the shortage of health facilities in this country, provided that there are reliable grounds for the conclusion that such a program can rest on a sound, selfsustaining, self-liquidating basis. We regret that the evidence as to financial feasibility that has so far come to our attention does not enable us to state a more definitive conclusion with respect to the merits of the bill as a whole.

The Bureau of the Budget advises that it perceives no objection to the subinission of this report to your committee. Sincerely yours,

NELSON A. ROCKFELLER,

Acting Secretary. (For a supplemental letter approving H. R. 7700 with certain amendments, see below, p. 151.)

EXECUTIVE OFFICE OF THE PRESIDENT,

BUREAU OF THE BUDGET,

Washington 25, D. C. April 22, 1954. Hon. CHARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington 25, D. C. My dear Mr. CHAIRMAN: This will acknowledge your letters of January 8 and February 4, 1954, requesting the views of the Bureau of the Budget with respect to H. R. 6951 and H. R. 7700, similar bills to provide mortgage loan insurance for hospitals and medical facilities used in connection with voluntary prepayment health plans.

The bills would create a mortgage insurance fund to be used as a revolving fund to cover the insurance of eligible mortgages. The Surgeon General, Public Health Service, under the supervision and direction of the Secretary of Health, Education, and Welfare, would be authorized to insure mortgages made to secure a loan for the purpose of financing the construction, improvement or equipping of a medical facility which would be available primarily to serve subscribers to group practice prepayment health service plans. The aggregate amount of mortgages so insured could not exceed $1 billion at any one time and no one mortgage could involve a principal obligation in excess of $5 million.

The basic purposes of these bills, to stimulate the construction of additional medical centers, clinics, and other medical facilities and to encourage the extension of voluntary, prepayment health plans providing comprehensive medical and hospital care of high quality to the people at reasonable costs, certainly are highly desirable. With the President's approval, the Department of Health, Education, and Welfare has suggested two measures, H. R. 8149 and H. R. 8356, which should go a long way toward accomplishing these same objectives. Enactment of H. R. 8356 would establish a limited Federal reinsurance service to encourage private and nonprofit health insurance organizations to offer broader health protection to more families. Enactment of H. R. 8149, to amend the hospital survey and construction provisions of the Public Health Service Act, would authorize financial assistance in the construction of several new types of urgently needed medical care facilities. The Bureau of the Budget, in its letter of March 17, 1954, to the chairman of the Senate Committee on Labor and Public Welfare, copy attached, recommended enactment of H. R. 8149 with certain amendments suggested by the Secretary of Health, Education, and Welfare.

In our opinion, these proposals of the administration provide a constructive approach to the problems of building additional medical facilities and expanding voluntary prepayment health service plans. In the absence of a de onstrated need for the mortgage loan insurance approach and evidence as to its financial feasibility, we believe it unwise to initiate such a program to be administered by the Federal Government.

Accordingly, the Bureau of the Budget recommends against the enactment of either H. R. 6951 or H. R. 7700. Sincerely yours,

DONALD R. BELCHER,

Assistant Director.

VETERANS' ADMINISTRATION,

April 28, 1954. Hon. CHARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington 25, D.C. DEAR MR. WOLVERTON : Further reference is made to your request for a report by the Veterans Administration on H. R. 7700, 83d Congress, “A bill to amend the Public Health Service Act to provide mortgage loan insurance for hospitals and medical facilities used in connection with voluntary prepayment health plans.”

The purpose of this measure, which, if enacted, would be known as the Medical Facilities Mortgage Insurance Act of 1954, is to encourage private lending sources to provide funds for the construction and operation of hospitals and other medical facilities which are to be used in connection with voluntary group practice prepayment health service plans. To accomplish this purpose the bill would authorize the Government to insure mortgages on such hospitals and medical facilities by means of a revolving fund to be known as the medical facilities mortgage insurance fund which would be administered by the Surgeon General under the supervision and direction of the Secretary of Health, Education, and Welfare.

The general mortgage insurance program proposed by the bill appears to be patterned after the insurance procedure followed by the Federal Housing Administration under the provisions of the National Housing Act. The FHA program, however, involves loans which are individually in a much smaller amount and collectively in a greater volume, and inasmuch as they are made in connection with residential property the general insurance risk against loss would appear to be less than might be the case under the proposed program to insure loans up to $5 million on business ventures involving hospitals and other medical facilities. Whether or not the premium rate proposed for the insurance of these mortgages, not to exceed 142 percent per annum of the outstanding principal balance of the mortgage, is adequate to cover the risk involved is an actuarial factor concerning which the Veterans Administration is not in a position to express an opinion.

The Veterans Administration would not be charged with any duties or responsibilities under the bill nor would it appear to be otherwise directly affected. Except for the foregoing the Veterans' Administration has no comment to make with respect to H. R. 7700. It is assumed that your committee will desire the views of the Department of Health, Education, and Welfare, that Department being primarily concerned with the administrative responsibilities which would flow from the proposed legislation, if enacted.

Advice has been received from the Bureau of the Budget that there would be no objection by that office to the submission of this report to your committee. Sincerely yours,

H. V. HIGLEY, Administrator.

HOUSING AND HOME FINANCE AGENCY,

OFFICE OF THE ADMINISTRATOR,

Washington 25, D. C., March 11, 1954. Re H. R. 7700, 83d Congress Hon. CHARLES A. WOLVERTON, Chairman, Committee on Interstate and Foreign Commerce,

House of Representatives, Washington 25, D. C. Dear Congressman WOLVERTON: This is in further reply to your letter of February 4 requesting the views of this agency on H. R. 7700, a bill to amend the Public Health Service Act to provide mortgage loan insurance for hospitals and medical facilities used in connection with voluntary prepayment health plans.

As you know, the bill would add a new title. VII to the Public Health Service Act to authorize the Surgeon General of the United States to insure and make commitments to insure mortgages financing the construction and equipping of medical facilities. The bill is designed to encourage the extension of voluntary, prepayment health plans at reasonable costs and to encourage doctors to form associations or groups in order to broaden the distribution of skilled medical care. The mortgage insurance provisions of the bill are modelled after those of the National Housing Act, particularly the provisions in that act relating to multifamily housing.

This agency has no objection to the enactment of the proposed legislation. The mortgage insurance program which would be authorized by this legislation has different purposes and would involve considerably different considerations with respect to the insurance risk than the mortgage insurance program administered by this agency under the National Housing Act. We would not be in a position, therefore, to express any views with respect to these basic matters. A representative of this agency has already given your committee staff assistance with respect to the provisions of the bill governing the operation of the insurance program.

We understand that you are also obtaining the views of the Department of Health, Education, and Welfare. In view of the fact that that Department is primarily responsible for Federal activities relating to the administration of health functions and some of its officials have participated in various recent studies in this field, we believe that agency is in a better position than is the Housing Agency to advise you concerning the merits of the bill and the needs which it would serve.

In view of your request for a prompt report, this is being sent to you prior to clearance with the Bureau of the Budget. As soon as the Bureau's views are obtained, we will send you a supplemental report. Sincerely yours,

ALBERT M. COLE, Administrator.

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