CLARIFICATION OF TESTIMONY

Question 1. During your testimony you mentioned that audits of PSROS are being done. In that regard please answer the following questions.

How many audits have been done and what is the timetable for the remaining audits?

What is the scope of these audits?

Who is performing the audits?

What have been the findings and results of such audits?

Answer. Audits currently being performed on PSROs include independent CPA audits and audits done by the HEW Audit Agency. Independent CPA audits are performed by CPA firms hired by the PSROS. These audits are to be performed at the end of each annual budget period. The scope of these audits is detailed in an audit guide prepared by the HEW Audit Agency and includes an examination of the financial management system as well as selected specific compliance areas. These audits are required because HEW cannot audit each PSRO annually.

"Quick assessments" are performed by the HEW Audit Agency. The objectives are to determine whether (1) sound fiscal and administrative systems, including budget and accounting procedures, were implemented; (2) controls were adequate to ensure that project administration was not extravagant; and (3) the program objectives required by the contract were being met. In effect, this activity represents a limited overview of the PSRO's capability to appropriately account for and control funds provided.

Full audits, also performed by the HEW Audit Agency, are intended to provide an indepth review of the programmatic as well as the financial aspects of PSRO operations in terms of economy, effectiveness, and efficiency.

Over 90 independent CPA Audit reports have been received as of August 1979. Since PSROs are funded in different quarters, annual audit reports are submitted throughout the year. During 1977 the HEW Audit Agency performed 36 quick assessments and during 1978-1979 65 such audits have been performed. HEW full audit activity has involved 14 PSROS to date. HEW audits as many PSROS as possible each year.

In general, the audit activity has identified some weaknesses in the PSROS' accounting systems and internal controls. We are working with PSROs to improve these. More significant findings have led to the nonrenewal of a PSRO contract for financial mismanagement.

Question 2. In your testimony you point out that you expect to see between a 1 to 2 percent disagreement rate between intermediary and PSRO as a result of the postpayment monitoring process. GAO in its testimony pointed out even higher rates.

What will be done to reduce these rates of disagreements?

Doesn't the significance, or not, of PPM disagreements depend on more than just the percentage frequency? Determining whether a length of stay is too long is much easier and much less subject to debate in some cases than others. For example, GAO focused on cases that involve the exercise of only limited medical judgment. Wouldn't a 2 percent disagreement rate that was entirely made up of such cases be worthy of PSRO and HCFA attention?

Answer. My reference to expected disagreement rates of 1 to 2 percent dealt only with the approximate rate which will inevitably result when two different organizations review the same cases. We agree that higher rates, for example rates above 3 percent, should be monitored to determine causes of the differences and how these rates can be decreased by improved performance.

Under our new system, a disagreement rate of 3 percent has been selected as the cut-off point for required monitoring. This level of disagreement will include the inevitable differences of opinion as well as the cases which represent more serious differences. These more significant cases are the ones which we are most concerned with monitoring. It will not take a great many of these cases in a given hospital for the disagreement rate to remain higher than 3 percent. Though we understand your concern that a lower disagreement rate would be appropriate for cases involving only limited medical judgment, we feel if such cases were a problem disagreements identified based on these cases would result in overall disagreement rates of 3 percent or more. Thus monitoring would continue until lower rates were observed.

Question 3. How does HCFA plan to evaluate focused review?

Answer. The annual PSRO program evaluation will include general information on focusing methods. We have specific projects underway to determine the impact of focusing on PSRO costs including identifying how costs shifted with the initiation of focused review and how these cost shifts varied for different approaches to focusing. We are also examining the impact of individual PSROS to determine the extent to which the PSRO's focusing plan contributed to its

success.

Because most PSROS did not begin focused review until 1979, a comprehensive assessment of its impact on PSRO costs and utilization will not be available for the 1979 evaluation. We will be able to see some effects of the focusing effort in 1980 ore specific information on how the impact of focused review will be as part of the 1980 evaluation will be developed in the future. Question 4. In your testimony you indicate that the cost of the old utilization review system would now be $215 or $220 million and the PSRO program is currently operating at less cost. In this regard please respond to the following:

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Please provide, in detail, the basis for estimating and calculating this projected cost of the old utilization review system. For example, were adjustments made to sort out PSRO expenses for activities not formerly done as part of the pre-PSRO utilization review program?

Is there any inherent reason why the costs of old utilization review could not have been trimmed in the interests of economy as the costs of review by PSROS have been recently?

Answer. The estimates of PSRO and Utilization Review (UR) costs developed to compare the costs of these programs included only the costs of conducting hospital review. PSRO hospital review addresses quality of care, in addition to utilization, but costs attributable to this aspect of PSRO review were included in the PSRO cost estimate.

The 1977 evaluation report, "PSRO: An Initial Evaluation of PSROs" provided the basis for the calculation of UR estimates. For FY 76 a fully implemented "new" UR program was estimated to cost $143.6 million. This included $107.6 million for hospital UR based on the 1974 UR regulations; Medicare intermediary review costs of $10.5 million; and Medicaid State agency review costs of $25.5 million. A figure of 12.2 million Federal discharges was used in developing these cost estimates.

The updated estimate of UR costs reflects several changes. Medicare intermediary review costs were not included because comparable PSRO figure are not available. The base figure for 1976 excluding Medicare intermediary costs is $133.1 million. A unit cost of review estimate derived from this figure, based on 12.2 million discharges, is $10.91.

A 25 percent inflation rate is assumed for the four year period from 1976 to 1980 based on past increases in the Consumer Price Index and assumptions of consistent future increases. The unit cost of review reflecting this inflation factor is $13.64. Assuming that there are 15.5 million Federal discharges in 1980, the estimate of UR costs is $211.4 million.

Costs for a fully implemented PSRO program were derived assuming direct support of 195 PSROS at an average cost of $300,000 or a total of $58.5 million; a unit review cost of $8.70 for 15.5 million discharges or $134.9 million; and additional support costs of $4.6 million. The total estimate therefore is $198 million. To trim the costs of UR, either the system itself or its method of reimbursement would have to be changed. Currently the cost of UR is included in each hospital's general administrative expenses. The only applicable limits are general limitations on reasonable costs.

It would be difficult to change the UR system in the same way as the PSRO system was changed to reduce costs. PSRO cost reductions were achieved through focusing of review on cases identified as potential problem areas. Potential Problem areas are identified through profile analysis or the review of aggregated data on physician or institution practice patterns. Data necessary to generate this type of information is provided by PSROS and then aggregated into useful data displays at the national level. This enables PSROS to use comparative information from other areas of the country. PSROS themselves also produce reports on aspects of utilization or quality of particular concern in their areas.

An individual hospital would not have access to data necessary to enable it to conduct meaningful focusing. Moreover, without altering the current method of reimbursing based on reasonable costs, there is no mechanism to control hospital costs incurred through focusing.

Question 5. The American Association of PSROS testified at the hearing that sometimes there is a breakdown in communication between the fiscal intermediary and the PSRO, and as a consequence care that was not certified is paid for anyway.

Is HCFA aware of this problem?

How widespread is it believed to be?

What steps has HFCA taken or will it take to counteract this problem? Please also specifically explain how these steps will eliminate the problem in the future.

Answer. We were not aware of a breakdown in communication between PSROS and fiscal intermediaries, and contacted staff at the American Association of PSROS to determine the specific circmumstances referred to in its testimony. We were referred to two PSROS, one in New York and one in Massachusetts.

The New York PSRO described a problem that had occurred between the PSRO and the fiscal agent for the State Medicaid agency. The fiscal agent had disregarded PSRO decisions, and as a consequence care that was not certified by the PSRO was paid. This problem was identified by an audit, and the State of New York is now recovering the money which was inappropriately paid.

The Massachusetts PSRO referred to a problem which is more complex and concerns PSRO denial of services already provided. In this situation, care is paid for to protect the patient from financial liability for these services, provided that neither the patient nor the provider should have known that the services were not medically necessary. Payment in this case is required by specific statutory language.

While both of these situations relate to the payment for care not certified by the PSRO, we would not characterize them as the result of communication failures with the fiscal intermediary.

To ensure that such communication problems do not occur, HCFA is including this factor as a criterion to be evaluated in assessing intermediary performance. Intermediary performance will be assessed with regard to payments made based on PSRO certification decisions.

Mr. GIBBONS. We are about to have a recorded vote on the floor. And so I guess the best thing to do is to recess, and we will be back as quickly as we can.

The next witness and our concluding witness for this morning is Dr. Harry S. Weeks.

[A recess was taken.]

Mr. GIBBONS. We will resume. The next witness is Dr. Harry S. Weeks, president of the American Association of Professional Standards Review Organizations. Your entire record will be placed in the record, and you may either read it or summarize it or do it any way you want.

STATEMENT OF HARRY WEEKS, M.D., PRESIDENT OF THE AMERICAN ASSOCIATION OF PROFESSIONAL STANDARDS REVIEW

ORGANIZATIONS

Dr. WEEKS. With the Chair's pleasure, I will pick and choose. Mr. Chairman, we sincerely appreciate this opportunity to appear before you and I would like to introduce on my right Mrs. Lyla Hernandez, executive director of the Association.

We would like to speak generally about the PSRO program but more specifically about the points raised in two reports. One was prepared by the Congressional Budget Office and the other by the General Accounting Office. We have received a copy of the CBO study but did not receive the GAO report although one of our staff members discussed the report with a GAO staff person.

The 1978 evaluation of the PSRO program conducted by the Health Care Financing Administration showed that PSRO's are making an

impact in low hospital-use areas, such as California, as well as in high hospital-use areas such as New York City. PSRO's have now demonstrated that they can reduce the number of unnecessary hospital days for medicare beneficiaries relative to non-PSRO areas. A PSRO's impact in reducing unnecessary hospitalization seems to increase with maturity.

Mr. Leonard Schaeffer, Administrator of the Health Care Financing Administration wrote to members of the National Professional Standards Review Council and stated in that leter:

The PSRO program has now become an effective partner in the HEW campaign to reduce unnecessary care and to assure quality of care. In 1977, $45 million was spent on the concurrent review for medicare patients by the 96 PSRO's studied, resulting in savings of about $50 million from the elimination of unnecessary hospital days. However, these PSRO's replaced hospital utilization review programs which would have cost more than $20 million, and for which no savings have been demonstrated.

All evaluation reports come under criticism, and this is healthy and should continue. But, there are two important things to keep in mind. First, numbers cannot evaluate all the aspects of a program such as this. There are good things happening under this program which will never be measurable by numbers. For example, changes in physician attitudes. Physicians are becoming more conscious of the cost of the services they provide to patients and of the need to document the services that are provided.

Getting physician involvement is not always easy and we have traveled extensively trying to preach the gospel, so to speak, and sharing experiences with the doctors throughout this country on how to do this.

Usually we do it by getting people involved. Every once in a while I have to meet one head-on. I remember having difficulty with a physician in the southern part of my State because the senior man aboard was a recalcitrant character who was the pin-maker in that town and was not particularly impressed with the program.

I met with him on a Sunday night and explained the program to him and some of his remarks were, "What is a nice guy like you doing in a program like this?" But I went on and asked him if he would be a physician surveyor for one of the hospitals.

The next week I talked my prettiest coordinator into going and sent her down to the House. I told her to drive slowly to the hospital and explain to him what the program was all about and how he should do his evaluation and so forth. That physician, when he came home, gave me a call in Wheeling, where I live, and said, "You know, I think this thing is going to work. I learned something today." And he said, "You ought to do this with more fellows like me."

So, there are ways of getting physicians involved and in that particular instance it worked out all right and it is now one of my better hospitals.

An additional impact of the PSRO program that cannot be readily measured is the carryover effect to the private sector. Many private corporations believe they are receiving substantial benefit from the carryover of PSRO review to their own patients and are anxious to increase that impact by contracting with PSRO's to review the health services provided to their employees or recipients.

A survey conducted in February of 1979 showed that 49 PSRO's are conducting review of private patients. Those private organizations contracting for PSRO review include: Aetna, Caterpillar, Blue Cross, International Harvester, John Hancock, Banker's Life, New Mexico Carpenters Union, Pacific Mutual, Motorola, Continental Airlines, Coors Beer, and Boeing Aircraft.

Some of these are listed in this testimony. On my own experience, unsolicited, a representative of a fiscal intermediary in southern West Virginia reported that in the first year that we implemented the PSRO review in the southern part of our State, which included 34 hospitals, the diagnostic admissions on private Blue Cross patients in that area dropped by 49.1 percent.

They felt this was attributable to us and I do not know how you measure this sort of thing.

The second important point to make is that the ideal of 100-percentsound evaluation system described in the CBO report can be accomplished only if the PSRO program itself is restricted. We have always understood the congressional mandate as placing priority on the rapid implementation of effective utilization and quality review in all areas. The evaluation system proposed in the CBO report would halt that rapid implementation and place the priority on evaluation of the PSRO system rather than on the system itself.

I think we understand the congressional intent, and I would take exception and speak against the idea of a partial implementation. As I see this thing, in many areas, we are about like a TV monitor in a department store. I think a lot of people know we are there and we have established our presence and, frankly, I think we have a lot of people with their hands in their pocket. I really feel we are playing a more subtle role than most people realize.

A more useful approach to evaluation may be to employ the objective setting approach in which all PSRO's are now engaged. This ap approach requires all PSRO's to establish yearly objectives. These objectives are determined by comparing utilization figures for each local PSRO with national figures and identification of areas where possible overutilization may be occurring. In addition, local problems in quality of care have been identified and objectives set to correct those problems. A PSRO in New York identified serious problems in the quality of care provided by one hospital and ultimately closed that hospital due to the hospital's inability or lack of desire to cooperate.

The PSRO in Norfolk, Va., through its review efforts, has achieved a 20-percent reduction in days of care for psychiatric facilities in its area. In Wisconsin, one PSRO has documented 46,784 net days saved because of review.

A PSRO in New Jersey found that acute myocardial patients in its area had an average length of stay, ALOS, that was well above regional norms. One of the objectives the PSRO established, therefore, was to bring the average length of stay for the diagnosis within regional norms. Data now show that the ALOS for acute myocardial infarction patients has been reduced by 4 days, to 16.02 days, in 1 year. The stories of individual PSRO accomplishments can go on and on. It is AAPSRO's opinion that implementation of objective setting will enable PSRO's to show much greater effectiveness in meeting the congressional mandate.