[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
              REPORTS REGARDING MEDICARE PAYMENT POLICIES

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 3, 1998

                               __________

                             Serial 105-24

                               __________

         Printed for the use of the Committee on Ways and Means


                     U.S. GOVERNMENT PRINTING OFFICE
48-525 cc                    WASHINGTON : 1998





                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada                  GERALD D. KLECZKA, Wisconsin
JON CHRISTENSEN, Nebraska            JOHN LEWIS, Georgia
PHILIP M. CRANE, Illinois            XAVIER BECERRA, California
AMO HOUGHTON, New York
SAM JOHNSON, Texas


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 24, 1998, announcing the hearing............     2

                               WITNESSES

Medicare Payment Advisory Commission, Gail R. Wilensky, Ph.D., 
  Chair; accompanied by Murray Ross, Executive Director, MedPAC..     6
U.S. General Accounting Office, William J. Scanlon, Director, 
  Health Financing and Systems Issues, Health, Education, and 
  Human Services Division........................................    34

                                 ______

American Academy of Family Physicians, Deborah G. Haynes, M.D....    66
American Medical Association, Timothy T. Flaherty, M.D...........    51
American Society of Internal Medicine, Alan R. Nelson, M.D.......    57
Practice Expense Coalition, Alan S. Pearlman, M.D., and 
  University of Washington.......................................    75

                       SUBMISSIONS FOR THE RECORD

American Academy of Dermatology, Roger I. Ceilley, letter........    85
American Association of Health Plans, statement and attachments..    86
American Chiropractic Association, Arlington, VA, statement......    91
American College of Rheumatology, Atlanta, GA, statement.........    92
American College of Surgeons, statement and attachments..........    94
American Osteopathic Association, Howard M. Levine, statement....   101
American Society of Clinical Oncology, Alexandria, VA, statement.   105
Medical Group Management Association, statement..................   106
Society of Thoracic Surgeons, Richard Anderson, statement........   108
Stark, Hon. Pete, a Representative in Congress from the State of 
  California.....................................................     5


              REPORTS REGARDING MEDICARE PAYMENT POLICIES

                              ----------                              


                         TUESDAY, MARCH 3, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at noon in room 
1100, Longworth House Office Building, Hon. William M. Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

February 24, 1998

No. HL-19

                  Thomas Announces Hearing on Reports

                  Regarding Medicare Payment Policies

      
    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on reports regarding Medicare payment poplicies. 
The hearing will take place on Tuesday, March 3, 1998, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 12:00 noon.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Dr. Gail Wilensky, Chairman of the Medicare 
Payment Advisory Committee (MEDPAC) and Dr. William Scanlon, Director, 
Health Financing and Systems, U.S. General Accounting Office (GAO). 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    On March 1, 1998, MEDPAC will issue its first report on Medicare 
payment policies since the merger of the Prospective Payment Assessment 
Commission (ProPAC) and the Physician Payment Review Commission (PPRC). 
For more than a decade, ProPAC and PPRC provided analysis for the 
Congress on hospital, physician, post-acute care, and managed care 
issues. The Balanced Budget Act of 1997 (BBA) (P.L. 105-34) contains 
several provisions that reflect earlier recommendations of ProPAC and 
PPRC.
      
    This legislation requires the Secretary of Health and Human 
Services to develop rules to expand private health plan options under 
the Medicare+Choice program, expand preventive benefits, and implement 
prospective payment systems for skilled nursing facilities, hospital 
outpatient departments, home health agencies, and rehabilitation 
services. The Subcommittee will be seeking extensive guidance from 
MEDPAC on many of the important details of the BBA reforms.
      
    The BBA included a one-year delay in the implementation of the 
Administration's proposed rule for physician practice expense values 
and requested that GAO conduct a thorough review of the Health Care 
Financing Administration's (HCFA's) proposed methodology. The GAO 
report will address several issues including: (1) the appropriateness 
of resource-based methodology for practice expenses, (2) the adequacy 
of HCFA's data, (3) the categories of allowable costs, and (4) the 
methods for allocating direct and indirect expenses.
      
    In announcing the hearing, Chairman Thomas stated: ``Congress 
passed important reforms to make the Federal Government a more prudent 
purchaser of health care by offering our seniors more private plan 
choices, expanding preventive benefits, getting tough on fraud and 
abuse, and modernizing the fee-for-service part of the program. The 
Administration's implementation of this transformation--from a 1960s-
style program to one that is market-based--will need constant 
monitoring. Over the next few years, we will continue to look to the 
Medicare Payment Advisory Commission for up-to-date analysis and 
recommendations and to the watchful eye of the General Accounting 
Office for evaluation of the program. I look forward to receiving their 
initial reports.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the MEDPAC's 1998 recommendation on 
Medicare payment policies and the GAO's report on physician practice 
expenses.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address, and hearing date noted on a 
label, by the close of business, Tuesday, March 17, 1998 , to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Health office, room 1136 Longworth House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Thomas. The hour of noon having arrived, the 
Subcommittee on Health will come to order.
    The Balanced Budget Act, BBA, made fundamental changes to 
virtually every part of the Medicare Program. Most significant, 
I guess from most people's perspective, is the new 
Medicare+Choice program that will bring our seniors a menu of 
private plan options.
    The Congressional Budget Office, CBO, estimates that within 
4 years, a quarter of all Medicare beneficiaries will choose to 
enroll in a private plan instead of traditional fee-for-service 
Medicare. To show how late Medicare arrived on the scene, 
current estimates are that the private sector who get health 
care through their employer are currently at 85 percent in 
terms of a Medicare+Choice type option.
    The reforms contained in the Balanced Budget Act obviously 
didn't stop there. This Subcommittee held several hearings last 
spring in which we heard from experts that pretty obviously the 
fee-for-service portion of Medicare, the predominant portion of 
Medicare needed, is in need of an overhaul, or at least a 
tuneup. The Balanced Budget Act modernizes this part of the 
program from its sixties style cost-based reimbursement to deal 
with the fastest growing cost setter such as home health care 
and other areas with the prospective payment system and simple 
fee schedules that, for far too long, have been common practice 
in the private sector and overdue for adoption.
    In making these historic changes, we looked to the 
recommendations of, as we have done historically, two 
commissions that were established to advise Congress on these 
technical issues. The Prospective Payment Assessment 
Commission, ProPAC, and the Physician Payment Review 
Commission, PhysPRC.
    The Balanced Budget Act merged these commissions, just as 
we've talked about change in HCFA. Congress felt we needed a 
change in the structure that advised us into the Medicare 
Payment Advisory Commission, MedPAC. So ProPAC and PhysPRC are 
gone, but MedPAC is now with us.
    Our first witness will be Dr. Gail Wilensky, who is the 
Chairperson of MedPAC. As the administration grapples with the 
technical details regarding implementation of the Balanced 
Budget Act over the next few years, we will look to Dr. 
Wilensky and the MedPAC commissioners and the staff for their 
advice and counsel and this is an annual occurrence, it is just 
a slightly different structure that is providing us with our 
annual occurrence.
    At the same time at this hearing, our second witness, Dr. 
Bill Scanlon, will report the results of the General Accounting 
Office's examination of the physician practice expense issue. 
As we continue to implement the second major cost area, the 
work profile or the RBUS portion which we had implemented and 
the practice expense being the second one, we heard from 
physicians back home that they were concerned about the 
administration's methodology, if you will, in revamping of the 
physician payment portion on exercise.
    Many of the physicians that I and others spoke with felt 
that the administration was making these changes partially 
devoid of real-world experience inside a kind of a black box, 
that we weren't completely aware of the number of adjustments 
that had been made or, more importantly, why the adjustments 
were made.
    So to shed light on this issue, Congress chose to delay the 
implementation of the new practice expense payment method for a 
year to ask the General Accounting Office to give us their 
opinion after a thorough examination and, after that 
examination notwithstanding, to phase in the new system over 
several years.
    I look forward to hearing Dr. Scanlon's report and then, 
obviously, the followup panel to give us a comfort level in 
terms of what has been discovered, the timetable, and the steps 
that need to be made to implement this very important 
adjustment in the payment structure.
    And with that, I would indicate that any Member who wants 
to put a written statement into the record can and when the 
gentleman from California comes, he will have obviously missed 
an opportunity to make some cogent comments as he always does.
    Mr. McDermott. Mr. Chairman, could I put a statement in for 
Mr. Stark?
    Chairman Thomas. Without objection, the written statement 
from my colleague of California will be made a part of the 
record.
    [The opening statement of Mr. Stark follows:]

Opening Statement of Hon. Pete Stark

    Mr. Chairman,
    Thank you for holding this hearing.
    On the Practice Expense issue, I can't tell whether the GAO 
and MedPAC have given HCFA a C+ or a B-, but their statements 
remind me of my parents talking to me about my report cards, 
``Fortney, we know you can do better.'' It is too bad we don't 
have HCFA here to respond to the recommendations, and I urge 
you, Mr. Chairman, to send a letter--I'd be happy to join it--
asking HCFA to respond, ASAP, to the recommendations of MedPAC 
and the suggestions of the GAO.
    MedPAC's first report to Congress is an excellent starting 
point for launching the debate over Medicare's long-term 
future. Prior to passage of the Balanced Budget Act last year, 
it was fashionable to argue that Medicare was in dire straits--
too rigid to survive into the 21st century. But the budget that 
we enacted in 1997 showed that Congress can and always will 
respond to keep the program both solvent and intact. The BBA 
cut the 75 year tax shortfall in the Part A Trust Fund in half, 
and that assumes we return to the old rates of provider 
inflation after 2002. Yet MedPAC finds that hospital 
prospective payments under last year's bill will remain 
``reasonable''--a term of art that translates into PPS margins 
of about 15% per year. Read that as: ``the highest in 
history.'' MedPAC also notes more than once that a lower update 
this fiscal year could easily be justified. Clearly, a long 
term policy of restraints on provider inflation, coupled with 
modest, reasonable and progressive changes in beneficiaries' 
contributions can preserve the Medicare program without radical 
shifting of costs to the 73% of seniors living on less than 
$25,000 a year.
    That's not to say that the cost containment battle was been 
won. In one key area, MedPAC notes that the hospital industry 
has moved to diversify during the last 10 years into other 
lucrative areas, including moving ever-more procedures to 
outpatient services departments, where charges are far higher.
    Perhaps the gloomiest news is that MedPAC calculates the 
BBA will take about 40 YEARS before hospital outpatient 
department beneficiary copayments drop to 20% of the fee 
schedule. What happened? The budget package of last year 
supposedly reached the 20% goal in about 25 years. Mr. 
Chairman, this is an area we should revisit--and we should be 
more aggressive in paying for outpatient services in the lowest 
cost, quality setting.
    Mr. Rangel, myself and other subcommittee Democrats favor 
carving out DSH payments from Medicare HMO payments, since it 
is dubious that for-profit Medicare managed care plans--which 
are in the business of providing care only to their enrollees--
can easily be persuaded to spend money in the hospitals that 
bear the extra costs of serving the uninsured poor. I am 
pleased that MedPAC supports this proposal, and I hope we can 
act on it soon.
      

                                

    Chairman Thomas. And with that, I would ask Dr. Wilensky to 
come forward and initiate the era of MedPAC, which, I might 
hastily add, is not in any way affiliated with any political 
group raising funds for any purpose. It is, in fact, an 
advisory group.

 STATEMENT OF GAIL R. WILENSKY, PH.D, CHAIR, MEDICARE PAYMENT 
 ADVISORY COMMISSION; ACCOMPANIED BY MURRAY  ROSS,  EXECUTIVE  
                       DIRECTOR,  MEDPAC

    Ms. Wilensky. Thank you, Mr. Chairman. It is a pleasure to 
be here today to testify before you and the other Members of 
the Subcommittee. I have with me the new Executive Director of 
MedPAC, Murray Ross. You may have known him from his previous 
incarnation at the Congressional Budget Office, but we are very 
pleased that he has joined the MedPAC staff.
    We are also very pleased to be here today with our first of 
what will be a series of mandated reports to the Congress, this 
being our first, March 1 report on payments under Medicare.
    We have now completed this first phase of our new 
existence, having gotten out our first report and over the 
weekend having actually moved the staffs of the predecessor 
commissions into a single location. We feel that we are now 
fully on our way to being a new, unified commission.
    In our report to Congress, one volume of which is a set of 
recommendations and the second volume of which is a more 
technical series of discussions about these recommendations, we 
have covered a lot of area, reflecting the many changes that 
occurred in the Balanced Budget Act.
    This has been an enormous amount of change to the Medicare 
Program, more than has occurred at any other time in history 
and, therefore, there were many areas for comment.
    What we have focused on in this first report was whether or 
not the payments that were prescribed under the Balanced Budget 
Act appear to be adequate as best we can tell, as opposed to 
looking at payment rates de novo as we have done in the past. 
We will continue this type of assessment over the next several 
years because of the inclusion of specific payment changes in 
the Balanced Budget Act for many parts of Medicare.
    But there are a number of other areas that we have brought 
to the Congress' attention where either the work was complete 
or where recommendations may need to be reconsidered.
    Let me just indicate a couple of these areas.
    The payments that are made to the capitation plans, because 
of the floors and the minimum payments and the requirements for 
budget neutrality, are not entirely internally consistent and 
we need to get further direction from you as to how you would 
like these various factors to interact with each other.
    In addition, in what will be a common theme when it comes 
to risk adjustment, we think that phase-ins are important. Risk 
adjustment is only one of a number of changes that will affect 
the capitation plans, in addition to putting in remaining 
payments for graduate medical education, having floors, and 
blended rates. A result of all these changes, we think that the 
notion of phasing-in change an important concept.
    When it comes to the hospital payments, as best we can 
tell, the amounts that are included in the Balanced Budget Act, 
for inpatient spending appear to be reasonable. We believe a 
consistent payment increase for capital would be something 
between 0 and 0.7 percent. This is within a range that is 
consistent with the payments that exist for current operating 
expenses and would therefore be appropriate.
    We have a couple of recommendations, regarding the 
physician payment. One is that the volume and intensity change, 
which was included in the HCFA-proposed rule and which I 
remember well because of the experience on that issue which I 
encountered in 1991, not be included for practice expense. 
Times have changed, and the change in the sustainable growth 
rate makes it not necessary. If there is any error in 
projections, a difference in expected versus actual payments, 
there is an appropriate mechanism for recouping the 
overpayment.
    We have raised a number of important issues with regard to 
outpatient hospital payments. We strongly support strengthening 
the protection for seniors so that they pay only a 20-percent 
copayment and shortening the timeframe when this occurs.
    There are a number of other areas which I would be glad to 
discuss in the question-and-answer period, including some of 
the specific recommendations for postacute care and other parts 
of the Medicare system.
    Let me try to summarize several themes that are in the 
report.
    One, as I have indicated, is the need for a phase-in. With 
all of the change that has been included in the Balanced Budget 
Act having phase-ins is a constant theme and an important one.
    A second theme is the need for monitoring. A lot of change 
has been included in the Balanced Budget Act. We think it is 
important for the Congress to monitor the effects of the 
change, for HCFA to monitor the effect of the change, and for 
MedPAC to assist the Congress in monitoring the effect of all 
of this change and make sure the change is what you have 
intended.
    In addition, we think it is important to look for the 
effects of interactions. Because there has been so much change 
in some parts of Medicare, it won't be enough to look at the 
effect of any one of these changes, but rather to look at how 
they interact with each other and to make sure that these are 
the changes that you intended.
    Finally, it will be important to monitor missed regulatory 
deadlines that may occur. You have put an enormous amount of 
work on HCFA's plate. It is important to assess whether these 
changes are occurring on time. If not, it will be critical to 
specify penalties and acknowledge needed adjustments.
    There is a last issue, one that is not specifically in this 
report, one that we will touch on in our June report and then 
come back to over the next several years. This is to begin to 
look at the rationale and consistency of payment rates for 
similar services which occur across different sites.
    We need to start looking at the implicit signals we are 
sending in terms of payments for services that occur both in 
the outpatient hospital setting and in the physician's office. 
We need to look at the implicit signals for similar services 
that occur in a rehabilitation facility, in home care, and in 
skilled nursing facilities. This will be very difficult. It 
will be hard to come up with specific recommendations as to 
exactly what these differences should be, but we think the 
differences in payment have been occurring far too long without 
this kind of explicit recognition. We are sending signals to 
the providers of care, whether or not we recognize them. It is 
time for us to take more of an in-depth look at what we have 
been doing and make sure that the signals we have been sending 
are the ones that we intend.
    Let me stop here and answer any questions that you may 
have.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Gail R. Wilensky, Ph.D, Chair, Medicare Payment Advisory 
Commission; accompanied by Murray Ross, Executive Director, MedPAC

    Mr. Chairman and members of the Subcommittee, I am pleased 
to be here today to present the Medicare Payment Advisory 
Commission's (MedPAC's) first report to the Congress. This 
report focuses on Medicare payment policies. In our June 
report, we will examine broader issues affecting the Medicare 
program and its relationship to the American health care system 
as a whole.
    The Congress laid out a broad agenda for reforming Medicare 
payment policies in the Balanced Budget Act of 1997 (BBA), 
enacted last August. The creation of the Medicare+Choice 
program opens opportunities for beneficiaries to enroll in a 
broader range of managed-care options. Changes to the methods 
for determining per capita payments to these plans will reduce 
volatility and raise rates in low-cost areas, setting the stage 
for a greater number of plans to participate. Successful 
implementation of the risk adjustment of payments to 
Medicare+Choice plans called for in the act will make for a 
more level playing field for these plans and may also improve 
the quality of care for Medicare beneficiaries with high-cost 
conditions.
    The legislation also included significant changes intended 
to improve Medicare's traditional fee-for-service program. Both 
to slow spending growth and to improve the distribution of 
payments, the Congress set timetables for implementing 
prospective payment systems (PPS) for a range of providers. 
Interim payment provisions were outlined for most providers 
until those systems are developed. The legislation also 
included a provision to reduce beneficiaries' effective 
coinsurance for outpatient hospital services.
    The BBA provides the context for most of MedPAC's 
recommendations this year. The Commission's deliberations in 
its first five months have focused on key issues that will 
arise as the legislation is implemented by the Health Care 
Financing Administration (HCFA).
    In developing our recommendations, we evaluated the impact 
of the BBA in light of the evolution of the health care 
delivery system. Because its mission combines those of the 
Prospective Payment Assessment Commission and the Physician 
Payment Review Commission, MedPAC can look across the entire 
Medicare program. We were able, therefore, to consider the 
implications of these policy changes across the many components 
of Medicare. In our discussions, inconsistency in incentives 
across payment policies was a major area of concern. In 
addition, we considered the interaction between policies and 
their effects across health care providers. The Commission will 
continue to explore these issues in our June report and beyond. 
An issue that will need continued attention is how payment 
policies for Medicare+Choice and traditional fee-for-service 
affect each part of the program.
    Let me begin by discussing the information and 
recommendations the Commission provided regarding the 
Medicare+Choice program. Then I will present the Commission's 
views and recommendations on the traditional Medicare fee-for-
service program.

                            Medicare+Choice

    Two major components of the Medicare reforms that became 
law in the BBA were the expansion of options for private health 
plan participation under the new Medicare+Choice program and 
the restructuring of the method for paying those health plans. 
The new law changes the way capitation payments are calculated 
at the county level, requires HCFA to implement a new system of 
risk adjustment in 2000, and makes other changes that will 
significantly change the adjusted community rate (ACR) process 
used to establish minimum benefit levels in private plans.

County-Level Payment Rates

    Under prior law, each county's payment rate was determined 
by its per capita fee-for-service spending. Under the new 
system, the 1997 payment rate is the starting point for 
calculating each county's rates for 1998 and beyond, but 
payment rates will no longer be strictly tied to the local 
pattern of fee-for-service spending. Instead, the rate will be 
the highest of a blended local and national rate, a floor 
amount, or the prior year's rate increased by 2 percent. These 
changes were designed to lessen the volatility of payment rates 
over time and their variation across areas. They were also 
intended to expand the availability of Medicare+Choice plans in 
some markets where rates were low and constrain rates in other 
areas where they were higher than necessary to compensate plans 
fairly.
    The changes made by the BBA will effectively eliminate 
year-to-year volatility in county payment rates. As the changes 
are phased in over the next five years, rates will generally 
grow by a minimum of 2 percent each year and by a maximum of 
about 2 percentage points above the nationwide increase in 
program spending. The new system will reduce the amount of 
variation among counties. Although central urban counties will 
generally remain well above the national average and all other 
counties will remain below, the differential between them is 
projected to shrink over the first five years of new rates.
    The impact of these changes will be substantial. Therefore, 
the Commission recommends careful monitoring of plan and 
beneficiary participation, risk selection, plan premiums, 
supplemental benefits, beneficiary cost sharing, and access to 
care. All of these could be affected by the new payment rules, 
risk adjustment methods, and the expanded range of plans that 
can participate. Continued monitoring will allow policy makers 
to consider additional changes that may be needed to address 
adverse effects on beneficiaries. The Commission plans to 
continue analyzing these characteristics of the Medicare+Choice 
program, as should HCFA, and adequate resources should be made 
available to fulfill this important function.
    The Commission also has three specific recommendations 
regarding payments to Medicare+Choice plans. First, the 
Commission recommends that disability status be taken into 
account as a risk-adjustment category at the national level to 
avoid overpayment on behalf of disabled beneficiaries. Although 
spending for the disabled was about 86 percent of that for aged 
beneficiaries in 1997, the BBA did not set a separate lower 
floor for them. As a result, the rates could be overstated by 
as much as $60 per month for each enrolled disabled beneficiary 
in counties that are paid at the floor. Treating disability 
status as a risk-adjustment category would render this issue 
moot. Alternatively, the overpayments could be corrected by 
establishing a separate floor 14 percent below the floor for 
aged beneficiaries.
    Second, the Commission recommends providing an alternative 
to the mechanism created by the BBA to adjust county-level 
payment rates without affecting total spending. Depending on 
factors such as actual growth rates in Medicare spending, 
budget neutrality cannot always be achieved using that 
mechanism. This is happening in 1998 and 1999, and may happen 
again in 2000. Whenever spending growth is low enough that 
budget neutrality fails, it may be preferable to reduce payment 
rates below the floor, lower the minimum increase, or both.
    Third, the Commission recommends making additional 
modifications to the base capitation rates to make them more 
reliable estimates of expected patient care costs. 
Specifically, the Commission recommends that Medicare payments 
to disproportionate share hospitals be excluded from the base 
rates and that spending by Department of Veterans Affairs and 
Department of Defense facilities on behalf of Medicare 
beneficiaries for covered benefits be included. Consideration 
should also be given to rebasing the county rates when all of 
the transitions called for in the BBA have occurred. Finally, 
HCFA should develop a more appropriate input price index that 
reflects the prices faced by plans in delivering health care 
services in different areas.

Risk Adjustment

    In addition to revising the base capitation rates, the BBA 
mandates risk adjustment of Medicare capitation rates starting 
in the year 2000. Currently, plans are paid the same whether 
the beneficiaries they attract are healthy or sick. As a 
result, plans face a significant competitive disadvantage if 
they attract the chronically ill. Risk adjustment would change 
that, paying plans more to care for the sick and less to care 
for the healthy. This would place plans on a more level 
competitive basis, an increasingly important consideration as 
Medicare+Choice options expand and enrollment grows.
    Risk selection occurs not only when some plans attract 
predominantly healthy beneficiaries while others attract those 
in poorer health, but also when the health status of 
beneficiaries who enroll in private managed-care plans differs 
from those who remain in fee-for-service Medicare. Studies have 
repeatedly found significant risk selection in the Medicare 
risk-contracting program, with the typical managed-care 
enrollee being much healthier--and therefore less costly--than 
the typical fee-for-service beneficiary.
    Appropriate risk adjustment of these payments is essential 
for three reasons. First, because Medicare's capitation 
payments remain keyed to the cost of the average beneficiary, 
risk adjustment is needed to ensure that Medicare is not 
overpaying plans in its capitation program. Second, risk 
adjustment allows plans that attract more costly beneficiaries 
to compete adequately with other plans and to provide 
appropriate care. Finally, risk adjustment helps to ensure 
adequate access to and quality of care for beneficiaries who 
have high-cost conditions.
    Several factors argue in favor of moderating payment 
changes caused by risk adjustment. The impact of risk 
adjustment is uncertain due to the lack of data. Plans do not 
currently report the data necessary to simulate what any plan's 
risk adjusted payment will be. Moreover, other major changes in 
the risk contracting program will affect how risk adjusted 
payments play out. The expansion of choices, introduction of an 
annual enrollment period, removal of teaching-related payments 
from the base, and geographic redistribution of payments will 
make the market more volatile.
    While the Commission recognizes the importance of 
appropriate risk adjustment, it also recognizes the 
difficulties in designing and implementing the right approach. 
Consequently, our report includes five recommendations on this 
topic, which I will summarize. We will continue to study this 
issue and offer information and advice as appropriate.
    First, the Commission recommends that HCFA phase in the 
risk-adjustment system--including implementation of the 
adjusted payment rates--in an orderly fashion and announce the 
operational details as soon as feasible. The appropriate phase-
in period should be long enough to allow plans to adjust to the 
payment changes and to allow HCFA to refine its payment models 
without unduly delaying the intended beneficial effects of risk 
adjustment. These steps will help to reduce the possibility of 
disruption for plans and beneficiaries.
    Second, the Commission recommends that, as soon as 
possible, Medicare develop the capability to use diagnosis data 
from all sites of care for purposes of risk adjustment. 
Appropriate risk adjustment would require data about 
beneficiaries' health status to distinguish among them in terms 
of their likely relative costliness, but plans currently do not 
report these data. In the short run, therefore, Medicare will 
probably have to rely on diagnosis data only for patients who 
have been hospitalized. Full encounter data--from both hospital 
inpatient and ambulatory care sites--would better describe the 
relative costliness of enrollees and would provide more 
moderate variations in payment across patient categories than 
would inpatient data alone. Interim approaches to full 
encounter data should also be explored, for example, by 
identifying a sample of beneficiaries with costly conditions, 
but no inpatient treatment.
    The Commission also recommends that, as a further 
refinement, HCFA adopt a risk-adjustment system that recognizes 
changes in the costs of health conditions over time. Under 
risk-adjustment models that use one year of diagnosis data and 
one year of cost data to adjust rates, payment for an 
individual may swing significantly from year to year even 
though the expected costs of care for that enrollee do not. A 
more appropriate approach would recognize the pattern of future 
costs that beneficiaries are likely to incur based on their 
diagnoses. Relatively higher payments could be made for 
permanent conditions whose costs carried over several years; 
relatively lower payments could be made for diagnoses that did 
not entail permanent costs. This will provide more appropriate 
incentives for plans to care for the chronically ill and to 
meet the needs of people with multiple health problems.
    Developing a sound risk-adjustment methodology will be 
difficult. Moreover, risk adjustment will not by itself create 
neutral financial incentives for plans to provide specific 
services. The Commission therefore recommends that other 
approaches be explored to supplement the basic risk-adjustment 
system. Medicare should undertake a large-scale demonstration 
of partial capitation or other methods that would pay plans 
partly on the basis of a capitated rate and partly on the basis 
of payments for services used. Such a risk-sharing arrangement 
may be more economically neutral than either fee-for-service 
payment or capitation alone. It would also reduce a plan's 
overall financial risks, and might be particularly useful for 
small, new, or rural plans.
    Finally, given the relatively untested state of knowledge 
regarding the practical details of risk adjustment, the 
Commission recommends that HCFA closely monitor plans' 
responses to the rates. It is likely that risk-adjustment 
policies will need to be refined based on these responses. 
Special attention should be devoted to the reliability and 
stability of the method for small plans.

Adjusted Community Rate Process

    Medicare's financial relationship with plans does not stop 
with its capitation payments. Medicare also requires plans to 
demonstrate that the payments result in good value for 
beneficiaries. In particular, if Medicare's payment to a plan 
exceeds the plan's costs (including normal profits), the plan 
must pass the difference on to enrollees in the form of reduced 
cost sharing or additional benefits.
    The Medicare program requires each risk-contracting plan to 
estimate the costs of providing services to its Medicare 
enrollees. This estimate is called the adjusted community rate. 
By comparing the ACR to Medicare's payment, Medicare defines 
the minimum benefits a plan must offer. Changes to this process 
are likely, however, because of both recommendations to 
overcome shortcomings of the current system and provisions in 
the BBA.
    The existing ACR process has been criticized for several 
reasons. The ACR amount may not accurately reflect actual costs 
because of the incentives plans have to overstate costs and the 
lack of standard methods to measure costs and account for 
differences between the Medicare population and the commercial 
population in the volume and intensity of services used. There 
is no mechanism to review the calculation of the ACR rate 
adequately or to reconcile this estimate with actual costs. The 
process relies on an allowance for administrative costs and 
profit derived from commercial business, which may not reflect 
costs for Medicare contracts. Plans have flexibility in 
designing alternative benefit packages across market areas, so 
the minimum benefits defined through the ACR may not reflect 
the actual benefits offered. Finally, variation in accounting 
methods can distort comparisons of costs across plans.
    Changes enacted in the BBA will affect the ACR process in a 
variety of ways. Some aspects of the law may reduce the 
accuracy or comparability of ACRs among plans. The BBA 
eliminates the requirement that all plans have significant 
commercial enrollment. That very directly affects the ACR, 
because the current ACR calculation depend heavily on plans' 
commercial premiums and profits. In addition, while most plans 
must file complete ACR information, high-deductible medical 
savings account plans and private fee-for-service plans will 
not be held to the same requirements as other plans. Other 
changes in the BBA may improve the situation, however, such as 
regular auditing of financial records relating to Medicare 
utilization, costs, and the calculation of the ACR. In 
addition, plans will not be allowed to vary basic and 
supplemental premiums and they cannot change the benefit 
package from what was submitted through the ACR process.
    Because the information provided through the ACR process is 
essential to determine whether Medicare capitation payment 
amounts are appropriate and to monitor how managed care plans 
provide services to Medicare beneficiaries, the Commission 
includes several recommendations in our report on improving the 
ACR process.
    First, plans should be required to report their actual 
accounting costs and revenues from Medicare and commercial 
enrollees to ensure that plans' projections of costs can be 
compared with actual costs. These costs should be the basis for 
the plans' ACR projections. Second, because routine audits of 
plan financial information are crucial for ensuring their 
accuracy, the Commission recommends that adequate funds and 
personnel be made available within HCFA to conduct them.
    ACRs based on plans' accounting costs would provide a much 
stronger administrative tool for ensuring that plans delivered 
good value to beneficiaries. That is desirable, but is not 
without some risk of pushing plans too hard. Some monitoring 
and modification of enforcement may be needed as a revised ACR 
is implemented to avoid disrupting the current Medicare managed 
care market. In particular, plans in highly competitive markets 
may already be driven to offer generous benefits to maintain 
their market share. The Commission recommends that HCFA monitor 
the effects of any new ACR in such markets and consider ways to 
smooth the transition to a new and more effective ACR policy.
    A revised ACR would also give HCFA expanded and more 
accurate information on the value that plans deliver. The 
Commission recommends that HCFA use these data to construct 
standardized reports on the payment, costs, and benefits of 
Medicare+Choice plans. Such reports would be particularly 
important in areas where the BBA increases Medicare's 
capitation rates in demonstrating what Medicare's additional 
spending is buying. They would also be important for tracking 
the value offered by provider-sponsored organizations and other 
plans located in markets with little or no direct competition 
among plans.

                    Fee-For-Service Payment Policies

    As I observed earlier, the BBA also made significant 
changes to the way providers are paid under the fee-for-service 
program. The Commission examined these policies and ways to 
improve them, focusing particularly on issues in developing and 
implementing prospective payment systems for a range of 
providers. As a result of that study, the Commission has made a 
series of recommendations concerning fee-for-service payment 
methods, beginning with those regarding hospitals and updating 
the prospective payment rates for acute-care inpatient 
services.

Hospitals

    Medicare pays for inpatient services at general acute care 
hospitals using predetermined per discharge payment rates 
developed under a prospective payment system. The BBA made 
major changes to the PPS policies, including reductions in the 
annual updates for PPS operating and capital payment rates over 
the next several years and lower payments for indirect medical 
education costs to teaching hospitals. The BBA also constrained 
special payments to hospitals with a disproportionate share 
(DSH) of low-income patients and required the Secretary of 
Health and Human Services to report on potential changes to the 
DSH payment formula.
     Updates to PPS Hospital Payments
    The Commission's analysis indicates that hospitals continue 
to fare well financially under PPS. Since 1991, even though 
payment increases have been moderate, cost increases have been 
even lower, resulting in rising PPS margins. Hospitals have 
sharply reduced cost growth across the board in response to 
pressure from private insurers, resulting in higher total 
margins. This indicates that the hospital industry has 
successfully adapted to a more competitive environment by 
changing its practice patterns, holding its resource costs 
down, and in general operating more efficiently.
    Although the PPS provisions of the BBA will have a 
substantial effect on hospital payments, the Commission's 
analysis indicates that using conservative assumptions of cost 
growth, the hospital industry will achieve the highest PPS 
margins in history by 2002. Although other changes may exert 
increasing pressure on hospitals' continued viability, 
Medicare's payments will still more than cover the costs of 
providing inpatient hospital services to its beneficiaries even 
with the update reductions in the BBA.
    Even though the PPS operating payment rate updates are set 
in law, the Commission will continue to develop update 
recommendations to provide Congress with an assessment of 
whether the updates are appropriate. Establishing this 
recommendation involves an examination of the appropriateness 
of the current payment rates by analyzing the latest 
information on hospital financial performance. The Commission 
finds that the update set in current law for fiscal year 1999--
market basket minus 1.9 percentage points--is appropriate. In 
fact, this amount is closer to the high end of the range 
considered by the Commission than to the low end.
    The update to capital payments under PPS was not 
established in the law. Based on analysmission recommends an 
update for PPS capital payments of between zero and 0.7 
percent. This would be consistent with the increase in 
operating payments.
     Disproportionate Share Payments
    For more than a decade, Medicare has made a special payment 
adjustment for hospitals that treat a disproportionate share of 
low-income patients under the prospective payment system. 
Concerns have been raised for some time, however, about the 
accuracy of the underlying measure of care to the poor and the 
policies for targeting payments to specific hospitals. The BBA 
requires the Secretary to report on a revised methodology for 
Medicare DSH payments by August 1998.
    The Commission has three recommendations designed to 
improve the way that DSH payments are distributed among 
hospitals. This would be done through a better measure of 
providing care to the poor than is currently available and a 
distribution formula that more consistently links each 
hospital's per case DSH payment to its low-income patient 
share.
    First, the Commission recommends distributing DSH payments 
according to each hospital's share of low-income patient costs 
and volume of Medicare cases. This would help to target 
payments toward the hospitals most in need while protecting 
Medicare patients' access to care at facilities they use. The 
measure of low-income patient share should include Medicaid and 
poor Medicare patients, patients covered by state and local 
indigent care programs, and those who receive uncompensated 
care. These should include those in both inpatient and 
outpatient settings.
    Second, DSH payments should be concentrated among hospitals 
with the highest shares of poor patients by establishing a 
minimum threshold for low-income patient cost share. Based on 
the Commission's analysis, a reasonable range for the threshold 
would be levels that make between 50 percent and 60 percent of 
PPS hospitals eligible for a DSH payment. This would focus 
payments on facilities that provide the most care to the poor, 
while minimizing the disruption in the current distribution of 
payments. The adjustment should increase gradually from zero at 
the threshold. Further, the same formula should apply to all 
hospitals, regardless of location or other characteristics.
    Finally, the Commission recommends that the Secretary be 
given the authority to collect the data necessary to improve 
the DSH formula based on the approach discussed above. The only 
data needed would be charges for Medicare, Medicaid and other 
programs for the poor, and uncompensated care and total patient 
care charges. Initially, these data would be needed from all 
PPS hospitals to evaluate and perhaps recalibrate the formula. 
At some point, however, only those hospitals requesting DSH 
payments would need to submit the necessary data.

Providers Excluded From the Acute Care Hospital PPS

    The Commission also considered the appropriate update to 
payments for providers that were excluded from the acute care 
hospital PPS. Rehabilitation, psychiatric, long-term care, 
children's and cancer specialty hospitals and rehabilitation 
and psychiatric distinct-part units in acute care hospitals are 
a diverse group that share a common payment method that was 
established in the Tax Equity and Fiscal Responsibility Act of 
1982 (TEFRA).
    Prior to enactment of the BBA, excluded facilities were 
paid the lower of their Medicare-allowable costs or a facility-
specific target amount. The target amount was based on a 
facility's actual costs in one of its early years of operation 
(the specific year depends on the type of facility), so new 
facilities had strong incentives to inflate their costs to 
establish a high target. Providers that kept their costs below 
their target received additional incentive payments and those 
with costs above it received some additional payments to offset 
their losses up to a specified amount. This system resulted in 
strong financial performance for new facilities. Because older 
facilities tended to have lower targets, they may have faced 
more difficulty in keeping their costs below their target.
    The BBA specified several changes to the TEFRA payment 
method that will help to treat old and new facilities more 
equitably. The changes include reduced annual increases to the 
target amounts, further constraints on payments to high-cost 
facilities, limits on payments for new providers, and 
opportunities for older providers to raise their cost limits. 
The BBA also requires that a prospective payment system be 
implemented for rehabilitation facilities and that a study of 
PPS for long-term care hospitals be completed by fiscal year 
2000. The Commission strongly supports these modifications.
    The Commission evaluated the update formula established in 
the BBA and recommends that it be based on the forecasted 
market basket increase minus 0.4 percentage points in fiscal 
year 1999, rather than the full market basket. This reduction 
reflects forecast errors in the market basket that was used to 
set the fiscal year 1997 update. In addition, the formula 
should be modified so that all facilities that have costs above 
their target amount receive a positive update to their target. 
In addition, the newly instituted cap on target amounts should 
be adjusted to account for geographic differences in wages. 
This change in method may require legislation.
    The BBA includes provisions to implement prospective 
payment systems for many providers. Because the TEFRA system--
even with the recent legislation--is not a payment mechanism 
for the long term, the Commission views the movement toward 
prospective systems as desirable. HCFA is required to begin a 
transition to a prospective payment system for rehabilitation 
facilities beginning in October 2000. The Commission is 
concerned, however, that HCFA is considering using the RUG-III 
classification system, which was designed to explain variation 
in nursing home patients, in the PPS for rehabilitation 
facilities. Research indicates that this may not be 
appropriate. The Commission will continue to examine 
appropriate payment approaches for these providers.
    Of the three major categories of excluded providers, there 
was no provision in the BBA to move forward with a prospective 
payment system for psychiatric facilities. The Commission urges 
the Secretary to continue trying to improve Medicare's payment 
policies for these providers. Although research about case-mix 
classification systems for these facilities has indicated some 
major difficulties due to differences in treatment goals across 
hospitals, the limitations of TEFRA mean that these providers 
should not be overlooked in future payment reforms.

Hospital Outpatient Services

    Payments for hospital outpatient services have been one of 
the fastest-growing sectors of the Medicare program. The 
variety of largely cost-based methods used by the program to 
pay hospitals has become tremendously complex over time, making 
it a difficult system to administer and under which to operate. 
There are few incentives for hospitals to constrain either the 
growth of costs per service or the growth in the volume of 
services. Further, an anomaly in the way Medicare calculates 
hospital payments for these services led to beneficiaries 
paying a much larger share of the total payment than the 20 
percent coinsurance they pay for most other services.
    These problems led the Congress to enact in the BBA a 
prospective payment system for hospital outpatient services. 
Under this system, nearly all hospital outpatient services will 
be brought under a single payment system, in which a hospital 
will receive a predetermined payment amount for a given 
service.
    In severing the direct link between hospital costs and 
Medicare payments, the BBA's outpatient provisions arguably 
represent the most significant changes to the way Medicare pays 
for these services since the inception of the benefit. Given 
the potential magnitude of the impacts of these changes, the 
Commission is concerned how these provisions are implemented 
could result in significant disruptions in access to hospital 
outpatient services. We have therefore developed a set of 
recommendations related to the hospital outpatient PPS--one 
that addresses the somewhat independent issue of beneficiary 
coinsurance liability and several that concern technical 
aspects of the new system.
    Medicare calculates a beneficiary's coinsurance liability 
for a hospital outpatient service at the time the bill is 
submitted, based on a hospital's charges. The program payment, 
however, is calculated retrospectively on the basis of the 
hospital's costs, net of the beneficiary copayment. Since 
hospitals' charges have increased more rapidly than their costs 
over time, beneficiary copayments have come to constitute an 
ever larger proportion of the total payment to hospitals. 
Currently, Medicare beneficiaries pay about half of the total 
payment to hospitals for outpatient services, compared with 20 
percent for most other Medicare services.
    The BBA includes a mechanism whereby this disproportionate 
liability would be reduced over time under the outpatient PPS. 
However, the length of time required to reach the goal of a 20 
percent beneficiary copayment for hospital outpatient services 
is considerable, possibly as long as 40 years. It is the 
Commission's position that this phase-in does not adequately 
protect the interests of Medicare beneficiaries. We believe 
that the Congress should revisit this issue and specify a 
reduction in beneficiary coinsurance that takes place over a 
defined period of time, significantly shorter than that 
implicit in the BBA.
    The Commission has also taken an active interest in 
technical aspects of the implementation of the outpatient PPS. 
We are especially concerned that changes in payment policy 
resulting from the implementation of the BBA provisions may 
result in reduced access to hospital outpatient services for 
some beneficiaries or, since many of these services may be 
provided in other ambulatory settings, shifting of services to 
less clinically appropriate settings. To help minimize adverse 
impacts on Medicare beneficiaries, the Commission has made 
several recommendations that would help ensure that Medicare 
payments for hospital outpatient services accurately reflect 
the appropriate costs that hospitals incur in providing them. 
We recommend that the individual service be the initial unit of 
payment, that relative weights be based on the costs of 
individual services, rather than groups of similar services, 
that certain medical education costs be excluded from the 
calculation of relative weights and budget targets, and 
finally, that adjustments be made as necessary to preserve 
access on behalf of vulnerable populations or for specialized 
services.
    Finally, the Commission addresses the BBA's requirement 
that a volume control mechanism be implemented to control the 
growth in expenditures for hospital outpatient services under 
the PPS. While we acknowledge that the historical rate of 
growth for these services is unsustainable, we are concerned 
that the factors that contribute to growth in outpatient 
service volume are not well enough understood to allow informed 
decisions about volume growth. Therefore, the Commission 
recommends instead that these expenditures be controlled at 
least initially through an expenditure cah to controlling 
outpatient service volume should be developed once the 
outpatient PPS is implemented.

Post-Acute Care Providers

    The BBA incorporated significant payment policy changes for 
post-acute providers--skilled nursing facilities, home health 
agencies, long-term care hospitals, and rehabilitation 
facilities. Medicare spending for services provided in these 
facilities has been rising rapidly. It appears that hospitals 
have shortened their stays and controlled their costs in part 
through shifts in service delivery to these other sites. There 
is also evidence that beneficiaries are changing the types of 
providers they use following an acute event. The Commission 
will continue to analyze how these changing treatment patterns 
affect the use of and spending for these services.
     Home Health
    Development of a prospective payment system for home health 
services by fiscal year 2000 may be one of HCFA's most 
difficult undertakings. There are currently few limits on who 
can receive these services and how many visits they may 
receive. As a result, home health visits more than doubled 
between 1992 and 1996. The reasons beneficiaries use home 
health and the patterns of care should contribute to the design 
of the payment system, yet not enough is known. The Commission 
will continue to explore variations in episodes of care as well 
as differences between the typical home health user, who 
receives these services for a short time, and those who receive 
visits over extended periods and account for the largest share 
of visits and spending.
    Home health care is the only major Medicare benefit with no 
beneficiary copayment requirements. Further, it lacks serious 
restrictions on coverage and has exhibited substantial billing 
fraud. Accordingly, the Commission recommends imposing modest 
copayments, but with an annual limit to protect vulnerable 
beneficiaries who would be subject to these payments.
    The Commission also recommends standardized coding for home 
health visits. HCFA needs more information about visits both to 
develop an appropriate case-mix adjustment system and to 
monitor service provision after the payment method is changed. 
This would involve, in addition to coding the length of the 
visit on the bill, recording the services provided.
    Finally, the Commission recognizes that in developing a 
prospective payment system for home health services, the 
Secretary may need to make special provisions for long-term 
users. Based on analysis by the Commission, there are at least 
two distinct populations who receive home health services. One 
group includes people who receive a limited number of visits 
following an acute event. The other group consists of long-term 
users who are likelier to be older or disabled. Further, the 
Commission recommends that an independent case manager should 
review the plans of care for Medicare beneficiaries receiving 
home health services for extended periods. The case manager 
would ensure that the services provided met the patient's needs 
and would recommend to the certifying physician appropriate 
changes to the plan of care.
     Skilled Nursing Facilities
    HCFA will implement a prospective payment method for 
skilled nursing facilities in July of this year. This will be a 
great improvement to the current payment method. When the 
proposed rule is released, the Commission may provide more 
detailed comments on that system. The Commission will be 
particularly interested in whether the proposed system could be 
improved by having a single payment for a stay instead of a day 
of care. Further, the Commission is concerned with the need for 
consistent policies across the providers that treat similar 
patients, and will be considering the policies adopted for 
skilled nursing facilities in light of payment methods for 
rehabilitation facilities and long-term care hospitals, and 
possibly home health agencies. The Commission will continue 
work in this area to move toward payments for services rather 
than sites of care.

Physician Payment

    With the Medicare Fee Schedule now in its seventh year of 
implementation, a number of payment policy issues have already 
been addressed. The fee schedule's relative value units for 
physician work have been updated annually for new services, and 
all work values were reviewed in 1996. A process is in place 
for monitoring beneficiary access to care, and no changes in 
access have been detected since the fee schedule was 
introduced. Finally, the new sustainable growth rate system 
will overcome limitations of the former volume performance 
standards policy.
    During the coming year, the most important physician 
payment issue is likely to be implementation of resource-based 
practice expense relative values. Much work remains to be done 
before the values will be ready for implementation in 1999, 
however. The Commission has focused on two issues in particular 
that need to be resolved before the new values are implemented.
    The first issue concerns a proposal to reduce practice 
expense payments for nonsurgical services provided in 
conjunction with an office visit. In a June 1997 proposed rule 
on practice expense, HCFA proposed a 50 percent reduction in 
practice expense payments for such services. The Commission 
agrees that payment reductions may be appropriate but has 
concerns about the magnitude and uniformity of the proposed 50 
percent reduction. It recommends that HCFA delay the proposed 
policy change until data are collected allowing development of 
service-specific reductions that reflect the economies of 
providing nonsurgical services with an office visit. Plans for 
development of service-specific reductions should be included 
in the practice expense proposed rule due from HCFA by May 1, 
1998.
    The second issue considered by the Commission involves 
HCFA's plans to use a volume aned practice expense values are 
implemented. This adjustment would reduce the fee schedule 
conversion factor to account for expected increases in the 
volume and intensity of services that experience a reduction in 
payment rates. In the June 1997 proposed rule, HCFA proposed a 
volume and intensity adjustment of -2.4 percent. The Commission 
recommends use of the sustainable growth rate system to adjust 
the conversion factor for any increases in volume. HCFA should 
not use a volume and intensity adjustment in anticipation of 
those increases.

Dialysis Services

    MedPAC is required to recommend to the Congress an annual 
update to the payment for dialysis services. Our deliberations 
on this topic followed the framework developed by the former 
Prospective Payment Assessment Commission. We considered the 
factors that were likely to affect the costs of providing 
dialysis, the base payment received by dialysis providers, and 
Medicare's special obligation to its beneficiaries with end-
stage renal disease. Medicare is the dominant payer for these 
services and these are particularly vulnerable beneficiaries, 
so it is critical that quality of care and patient outcomes be 
considered in evaluating the payment rates and methods.
    Based on the Commission's analysis, payments for dialysis 
services should be updated by 2.7 percent to reflect the market 
basket increase in the cost of inputs to a treatment session. 
It is important, however, that this increase be used to improve 
the quality of care provided to beneficiaries with ESRD. 
Therefore, we urge HCFA to monitor closely the relationships 
among treatment patterns, patient outcomes, and facility costs. 
In addition, the Medicare program should have more accurate 
cost information to use in evaluating its payment rates. 
Therefore, consistent with the BBA, we recommend annual audits 
of dialysis facility cost reports. Rather than auditing every 
facility every three years, however, more useful information 
might be obtained through focused audits on facilities chosen 
based on past audit results or other indicators of potential 
problems.
      

                                

    Chairman Thomas. Thank you very much. And I guess the first 
question I would ask is not a substantive one based on what you 
are reporting, because it looks familiar to what has been done 
in the past but rather how is the change over going? All of us 
are concerned about the new responsibilities at HCFA and we 
have talked about not just reorganization but reculturalization 
of folks who have a new role to play. Not that they weren't 
beginning to move in that direction, but in fact a far greater 
one of a fact-gathering, information-disseminating, consumer-
customer-support structure is going to be required.
    How is the reculturalization of the former PPRC and ProPAC 
coming in creating a MedPAC? From the appearance of the work 
product coming out, it looks much the same, that is, it looks 
like quality work but I am just curious and I assume others are 
as well.
    Ms. Wilensky. Reorganizations always produce some 
struggles. I would be less than honest if I were to say that it 
hasn't occurred here, but we are fortunate to have an excellent 
group of professionals. They have come out of somewhat 
different operating styles as independent commissions, but the 
bottom line is they have come together to produce what I 
believe is a very high-quality report. For each and every 
commission meeting that we have held since October 1, we have 
been very pleased with the quality and timeliness of material 
that has been produced.
    We are physically together now in our new headquarters on 
17th and K Streets. We will, I think, be moving forward now 
truly as a single commission because of this move to a single 
location. I think, all things considered, we have gotten 
through the first 6 months with, in the final analysis the only 
thing that counts, a high-quality product on time.
    Chairman Thomas. And in the long run, it's pretty obvious 
that this restructuring will focus our support groups in a way 
that will give us meaningful data because the restructuring is 
going on on the outside to meet the restructuring on the 
inside.
    Thank you, also, for your usual good product in terms of 
the updates, support numbers. Clearly as we move forward to 
graduate medical education question and the associated historic 
payment structure is going to be a major concern that we will 
look at.
    The other thing that has bothered a lot of us is our 
failure, notwithstanding HCFA's efforts over the years, to deal 
with risk adjustment. I used to say there were two things I 
wanted under the Christmas tree which would make our job a 
whole lot easier. One of them was a good measuring device to 
deal with the risk-based capital standards, as we were trying 
to figure out who really shared risk as we moved toward these 
new models of delivery provider, sponsor organizations, and 
others, and actually the NAIC came through in a relatively 
short period of time with that wish list, and a gift that we 
could utilize in a way that we had not before.
    No one has been forthcoming with the risk adjustment 
mechanism that really works. We've got some surrogates and I 
agree with early reports that we've got to move these 
surrogates into place, but clearly to create a really useful 
model is going to require the collection of data that requires 
costs and there are folk who are in the forefront of gathering 
this kind of data almost totally for proprietary purposes in 
terms of reducing their internal costs of delivering, but we 
need to externalize that and get HCFA to collect it.
    I know there are some concerns about some of the plans who 
are now active because of Medicare+Choice and they are 
concerned about the administrative cost associated with this 
collection of data. Do you have any words of wisdom to us? My 
goal is to get it and I want to make sure that we are not being 
unfair in the collection of this data.
    One, I don't want to over collect, but, two, I want to get 
enough to be able to move a product relatively quickly. I don't 
want to create unnecessary costs but if there are necessary 
costs associated with it, I am willing to make sure that they 
be paid. So, where are we in this business of moving toward a 
risk-adjustment mechanism, how do we gather the data, who 
should pay, what's a fair payment, how much data is 
appropriate, are we on target in that area?
    Ms. Wilensky. It is probably the most serious technical 
issue that we face. If you keep in mind the notion of phasing 
in, not just in terms of going forward with the adjustment but 
in terms of starting with what we have available and making it 
better as we go along, it will be a good guiding principle.
    Let me give you a couple of examples about what I mean. 
Right now we have most readily available inpatient data on 
patient diagnoses. We know that that is not the best data to 
use for risk adjustment. It would be far better to have full 
encounter data, data from the outpatient setting, but we are 
going to have to, in all likelihood, begin the risk adjustment 
process using only inpatient data and then move forward with 
full encounter data.
    One of the reasons that PPRC, as the predecessor 
commission, and MedPAC now, as the current commission, has 
recommended a phase-in for risk adjustment, and also not 
attempting to recoup all possible money that selection bias 
might have suggested.
    Progress on risk adjustment is going slowly but it is 
moving. One of the first milestones that will alert you as to 
progress in this area is whether or not HCFA can meet its 1999 
reporting date. And if it can't meet that, it will certainly 
suggest some serious problems with meeting the year 2000 
implementation.
    I have had a couple of conversations about this with Nancy-
Ann Min DeParle, the new HCFA Administrator. She is very 
interested in having HCFA and MedPAC work as well together as 
possible and to have more interactions between our staffs than 
have sometimes occurred in the past. This interaction has had a 
somewhat checkered history, sometimes better, sometimes not so 
good. We have already had MedPAC staff over to share the 
recommendations that were part of this report and to further 
that exchange.
    But you are correct in your concerns. It is a difficult 
area and it has seemed that we haven't been making as much 
progress over the last decade as we should have, and now the 
time is very short for change to be implemented.
    Chairman Thomas. I will tell you that my operating 
structure is something is better than nothing and we cannot 
wait around until we've got a perfect model. We will try to be 
as flexible as possible to update when better models are given 
to us, but everybody needs to know we are going to go with 
something, because something is better than nothing.
    Ms. Wilensky. I agree wholeheartedly and, furthermore, 
something will drive a better future product. It is, in my 
opinion, the best way to move risk adjustment forward, to go 
with the best you have, to recognize that it will have to be 
modified, and to try to include some cushioning, and some phase 
in. It's also important to monitoring the affect of those 
changes on the plans and on the seniors who are in these plans, 
so that you can protect both the seniors and the plans from 
inappropriate change. But it is important to recognize that if 
we wait for the perfect risk adjuster, we will be waiting a lot 
longer than this millennium.
    Chairman Thomas. Correct. And the sooner we start, the 
better we will understand the faults in the one that we will be 
working with which will allow us to fine tune it to move it. 
But I think really in this instance, the going is the goal, 
because we are going to constantly adjust this as we collect 
data, hopefully under a structure that provides maximum 
confidentiality and maximum usability of language, not just for 
risk adjusters but also for outcomes, so that we can begin to 
get some kind of a measure of quality which all of us are 
concerned about and that all of them are focused around the 
collection of data in a reasonable way with new understanding 
of patient confidentiality.
    Thank you very much.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Thank you, Mr. Chairman. Mr. Ross, I have a 
few questions about Louisiana's Medicaid Program--just joking.
    I trust your new job will be a more dynamic one than your 
previous job.
    Dr. Wilensky, with respect to your recommendation that the 
coinsurance for outpatient services go down to 20 percent at a 
faster rate than was outlined in the BBA, is it still the 
estimate that the faster rate of progress toward the 20-percent 
coinsurance would cost about $19 billion and, if so, have you 
suggested some way to pay for that additional cost to the 
system?
     And I'd also like for you to comment on the wisdom of such 
a proposal. Is it true that by reducing the coinsurance amount 
we are merely shifting costs from insurance plans, which the 
vast majority of seniors have, the so-called Medigap policies, 
to taxpayers?
    Ms. Wilensky. Well, how much it will cost depends on how 
much quicker you try to bring the 20-percent coinsurance to 
actuality. It was our belief that the current plan is projected 
to require 40 years until there will actually be a 20-percent 
coinsurance for seniors and that this is not appropriate. How 
much faster, in part, will depend on how much money is 
available for additional spending and while we have all heard 
many interests in spending the anticipated surplus, before we 
actually have a surplus, I guess maybe this affected our view 
as well. We did not, however, specifically indicate where the 
additional dollars ought to come from, but because the Congress 
had recognized the problem of the current arrangement, where 
seniors may be paying as much as 50 percent of the cost rather 
than the nominal 20 percent that they are supposedly paying, 
that the Congress needs to make the adjustment faster.
    With regard to the comment as to whether or not we're 
shifting to taxpayers what would otherwise be coming out of the 
insurance companies, there are really two responses. For the 
most part, of course, it is the seniors collectively, not the 
insurance companies, that are paying the extra commission 
because the seniors are paying for them in the premiums that 
seniors pay to the insurance companies which, in turn, pick up 
this element of coinsurance. And, of course, we do have a small 
number of individuals who do not have Medigap or Medicaid and 
who are not part of the risk-based plans, although they 
represent a relatively small number of seniors.
    It is unfortunate that we let this problem go as long as we 
have. It is not a new issue. I was aware of it when I was HCFA 
Administrator in the early nineties and the cost of fixing it 
stopped us then. Unfortunately, what has happened is that as it 
has gone on longer, it has become an even more expensive 
problem because the gap between charges and the Medicare-
recognized cost has grown, and since the senior is billed 20 
percent of charges as opposed as to 20 percent of the Medicare 
allowed cost, as this gap has gotten bigger so has the burden 
and that is why we now have a problem fixing it.
    My recommendation is if there is serious interest in 
resolving the problem sooner, we will be glad to work with you 
in making some estimates as to how not to wait 40 years for 
resolution but to do it in a way which won't cost too much 
additional moneys. CBO traditionally has provided you with such 
estimates. We would also be glad to help you with some 
suggestions.
    This was a discussion that represented strong agreement on 
the part of commissioners who frequently took differing views 
on other issues. All of us felt very strongly that the current 
40-year estimate for resolution was an unreasonable burden to 
place on seniors.
    Mr. McCrery. Well, thank you for that answer. Isn't it 
true, though, that as we see more and more seniors in capitated 
plan, this is less and less of an issue.
    Ms. Wilensky. That I do agree with. To the extent that we 
see some substantial increases in people going into capitation 
plans although we're still at only 13 percent. Current 
expectations are that in a decade, it will be only about 40 
percent. If that, in fact, is not a correct estimate, if there 
is substantially greater growth in capitation plans, it will 
make this a smaller issue. It may make it easier to change it 
then.
    Mr. McCrery. Yes. That estimate is based on the current 
model. We're hopeful the Medicare Commission meeting this year 
will come up with something different from the current model so 
we may have to revise our estimates in that.
    Thank you.
    Chairman Thomas. If the gentleman from New York doesn't 
mind, I want to work in, if possible, although he's not now a 
Subcommittee Member he once was and therefore carries a 
responsibility by showing up, which I'm very much appreciative 
of, depending on the question asked. [Laughter.]
    The gentleman from Washington.
    Mr. McDermott. Thank you, Mr. Chairman, for the disclaimer. 
Dr. Wilensky, I have a specific question. I looked at the 
report and read that there are some recommendations for your 
changing of the AAPCC, adjusted average per capita cost, rates. 
My understanding is that number is arrived at by taking the 
total amount spent by Medicare beneficiaries as the numerator 
and divided by the number of people who receive their Medicare 
benefits in that county. Is that a correct statement?
    Ms. Wilensky. Well, what you start with is Medicare per 
capita spending. It used to determine the capitation rates. Now 
you use it as a starting point, but you take in a number of 
other factors as well including the blended rate, the minimum 
floor, and so forth.
    Mr. McDermott. Well, let me tell you what the specific 
problem is. The veterans.
    Ms. Wilensky. Yes, that----
    Mr. McDermott. Some areas of the country have more 
veterans, maybe geography, maybe it's a nice place to retire, 
maybe it's more military bases, whatever. And my understanding 
is that number, the numerator, does not include costs Medicare 
beneficiaries received in veterans or DOD health facilities. 
The average cost, as I think your report says, is understated 3 
percent nationwide, but in King County, Washington, my county, 
it is understated 4.3 percent, and if you go to the county 
immediately south, which is Congressman Dicks' and Congressman 
Adam Smith's Districts, you are looking at a 22.6-percent 
participation by veterans that are not counted, so that the 
number is low.
    And I see that you recommended----
    Ms. Wilensky. Yes.
    Mr. McDermott [continuing]. That there is a change in this, 
but I'd like to hear how quickly you think that can be done. I 
get an awful lot of letters from veterans, because they get 
complaints from the HMOs about what they are being paid because 
of the fact that veterans aren't counted.
    Ms. Wilensky. We agree that the problem that they are 
raising is a legitimate one. In fact, there are two 
modifications, one that we've suggested in terms of taking out 
some expenditures, exclusions of special payments that 
hospitals receive for disproportionate share payments, that 
ought not to be in there and also including some that we ought 
to have in there, particularly the cost of care that is 
currently provided, either by VA or DOD facilities.
    There is a problem regarding the availability of needed 
data we need to have data at the county level. This is the one 
difficulty that we've recognized is, because the Medicare 
payment rates are set at the county level. This is what the C 
part of the AAPCC measure stands for. We need this data in 
order to make the adjustment, which we think, in fact, is 
appropriate. We are not including VA and DOD costs here, but we 
need to be sure that we have the information available at the 
county level.
    As I recall, there is some difficulty in gathering the data 
immediately, but my impression is that this is a problem that 
could be resolved in a year or two. This is not an 
insurmountable problem. It was only a problem in fixing it 
immediately, but we strongly recommend HCFA begin to include VA 
and DOD spending and make whatever adjustments in the data 
collection they need to make.
    Mr. McDermott. I want to thank you for looking at this 
whole issue because it is a problem, and particularly a problem 
for the Northwest generally, in that the AAPCC rate is about 8 
percent below the national average. The feeling in the 
Northwest is that we are being punished. It's sort of the old 
adage that no good deed goes unpunished. The fact that our 
system has been more efficient, we are now paying for that by 
lower AAPCC rates, and it is unclear to me when that is going 
to be rectified, if ever.
    Ms. Wilensky. There are a number of things that will help. 
The Puget Sound area, and the whole State of Washington, as 
well as Oregon, have had traditionally relatively low rates of 
health care spending in and in Medicare, the capitation rates 
were also low.
    During the first few years following the Balanced Budget 
Act, it is mostly the floor payments, the $367 floor, that will 
impact your area. Over time, the blending of the national and 
the local rates will begin to kick in, so that places that have 
had low payments, but not the lowest payment counties, will 
also begin to have some effect.
    Differentials will continue, but they will be far less than 
what we have seen in the past and if, as we've recommended, we 
make the adjustments for the VA, DOD expenditures, that will 
also help.
    It's not a gift. It is a better reflection of the 
expenditures that are going on in the community and they ought 
to be reflected in the measure of Medicare spending in an area.
    Mr. McDermott. Could I, with the indulgence of the 
Chairman, one last question, and that is, I noticed in the 
commission's report----
    Chairman Thomas. Will the gentleman yield on the point? I 
will let you go on with your other question, but I want to 
respond to that point, because you have brought up an issue 
that actually cuts several different ways.
    Obviously, as Dr. Wilensky pointed out, one of our major 
concerns both from a Medicare+Choice point of view and frankly 
from a political point of view as well, is to make sure that we 
create a reasonable floor. Not a floor that would simply 
overcompensate the old structure, but actually be an attractant 
to the Medicare+Choice. I do believe that you will shine, but 
not immediately, because you were not overweight. You have a 
very aggressive managed care structure. You shouldn't see it as 
a good deed going unpunished. It isn't denied; it's just 
delayed.
    When other people begin having to take the 6-day forced 
marches, you will already be in shape and you will benefit 
immensely by it--if not in this life, in another life.
    But, we're going to have to monitor this because we have 
got to make sure that those areas that have done a good job do 
get rewarded and the structure right now is minimal penal end 
on the areas who have the high AAPCCs who haven't done a good 
job and the low areas in an attempt to create a more uniform 
structure and you're kind of in the middle and I'm very 
sympathetic to that and we are going to review that constantly.
    The other point you brought up has to deal with veterans 
and the fact that they are not currently figured in. And, in 
fact, it's even a worse profile than that. Because they aren't 
figured in to get the benefits where they are, so that you can 
have a realistic view of population and the VA, frankly, has 
not been as aggressive in offering programs to the low-income 
veterans, where the low-income veterans are.
    And I've run into this for years in a suburban rural area 
with a high veteran population where they get shipped all over 
the place. We cannot continue to build outpatient clinics and 
one of the more exciting things we are working on is in working 
with the Veterans Administration, Dr. Kizer there, and others, 
to make sure that the Veterans Administration is in fact 
performing for veterans, especially low-income veterans, 
through its vision program.
    And we're trying to create legislation which would 
coordinate the VA's outreach program under vision with the 
Medicare eligible aspect of every World War II veteran who is 
now Medicare eligible and blend the two, separate from 
adjusting the AAPCC.
    Hopefully this year we will move that legislation, not as a 
demo, but as a permanent change. And you need to talk to your 
friends in this administration, not to try to push a demo but 
to try to put a program in place for the low-income veteran.
    Mr. McDermott. I raised it partly, Mr. Chairman, because 
the subvention program--Seattle is one of the demos--so they 
are acutely aware of the numbers, and that is part of the 
reason why that is an issue and it will soon be an issue 
everywhere.
    Chairman Thomas. And we need to look at it carefully and 
blend the two as we go forward.
    The numbers on the DOD and the TriCare and the subvention 
demonstration there are of a concern, but they are nowhere near 
the magnitude that we need to deal with in the veterans 
program. One is thousands and the other is millions, and 
frankly, they've been underserved for far too long and it's 
because we haven't been as imaginative as we need to be to 
create a positive blend, a change both inside the culture of 
the VA and the positive blend using Medicare moneys.
    Ironically, when we try to score it, since they have been 
underserved, if we try to give them adequate service, this is a 
new consumption of services and therefore the costs go through 
the ceiling which is an outrage because they should have been 
given this level of service all along.
    And I look forward to working with the gentleman as one of 
the demo areas to make sure we move it in rapidly. That's your 
first question. Your second question.
    Mr. McDermott. Well, my second question was the commission 
report notes a tremendous difference in payments between 
hospital outpatient departments and the so-called ASCs, 
ambulatory surgical centers. But the language seems to warn 
that there are quality problems in doing some of the procedures 
in the ASCs or doctor's offices. Yet we have a tremendous 
disparity in pay. We actually pay more for it to be done in a 
place where we raise questions of quality. I would appreciate a 
comment or two from you about this. It would seem to me from a 
quality standpoint, you'd want to say let's stop paying in the 
outpatient or the doctor's office and get it done in the 
hospital because the quality would be better and we would 
actually pay less. So----
    Ms. Wilensky. My closing comments were intended to address 
the generic issue that you have just raised. That is, we pay 
for the same service or similar service in different settings 
and how we pay in different places for roughly the same service 
hasn't received very much scrutiny. It's because our 
traditional way of assessing payment in Medicare has typically 
been by service type. As a result we spend a lot of time 
thinking about outpatient spending, or physician payments, or 
PPS, prospective payment system, excluded hospitals, usually by 
type of excluded facility.
    This is one of the areas that MedPAC has raised for its own 
future work plan, starting in June and for our retreat after 
the June report, but this is a hard problem. We anticipate 
we'll be working on this issue for several years. Do the kinds 
of payment differentials that occur for a similar service 
across different sites make any sense. What are we implicitly 
signaling to these sites? Is that justified?
    Now, it is far easier to say this is the problem then to 
fix it. We understand it will be very difficult for us to come 
up with a rationale for fixing the problem but we think it has 
gone on far too long. If a similar service is provided in a 
rehabilitation hospital, long-term care facility, skilled-
nursing facility, or home care you're liable to have enormously 
different payments.
    If you provide a similar service, it may or may not be for 
a patient of similar severity in the outpatient facility, in a 
freestanding facility or in a doctor's office. However, we now 
have very different payment levels by rate and it is not clear 
that these make sense and are sending people in the right 
directions.
    So, MedPAC will be looking at this. I don't want to promise 
an immediate solution, because I think we are cognizant of how 
hard this problem is, but we're especially concerned that 15 
years after PPS has started, and almost a decade after you 
passed legislation for the resource-based relative value 
system, RBRVS, this issue has not yet been studied to the best 
of our knowledge.
    Mr. McDermott. I think the Chairman's nodding indicates 
that everybody understands this is a big problem, but it seems 
to me that there are quality questions. If I read your 
language, it appears you are looking at quality as well. It's 
clear that it is a more important issue than perhaps some other 
things that might be on the list, so I would hope that that 
would get these quality issues to the top of the list.
    Thank you, Mr. Chairman.
    Ms. Wilensky. We'll keep that in mind. Thank you, Mr. 
McDermott.
    Chairman Thomas. Well, thank you. Obviously, there were a 
number of difficult decisions to make. Some of them, frankly, 
arbitrary, because we had to start but it was more important to 
start, and fine tuning as we go along is absolutely essential.
    I thank you the gentleman for his questions.
    Does the gentleman from New York wish to inquire?
    Mr. Houghton. Yes, Mr. Chairman. I have three questions and 
they don't require elaborate answers. The first question, I 
understand that the MedPAC feels that if a PSO, provider-
sponsored organization, is the only Medicare choice plan in an 
area it requires some monitoring and the American Medical 
Association, AMA, doesn't. So maybe you can explain that.
    The second question is home health care. You suggest there 
be a modest copayment. Why?
    And third, I'd just like to know how the merger is going 
between the ProPAC and the PPRC.
    Ms. Wilensky. OK, I'll be glad to answer all three.
    Let me explain our sense of what is likely to happen in 
highly competitive markets, versus markets in which there is 
little competition. I think that is what I see is the best 
answer for the questions raised with regard to the PSOs. Up 
until now, the adjusted community rate was a measure that 
forced any savings from the payment covering the Medicare 
benefit to be provided as additional benefits for seniors. What 
we have seen is that in highly competitive areas, we really 
didn't have to worry about the ACRs, adjusted community rates, 
serving as the device that made sure seniors got the benefits 
they should have got out of savings from HMOs, health 
maintenance organizations.
    It's really within this sense of having the ACR as the 
measure that would allow us to assess what could be offered 
above the Medicare package. There has been a problem about how 
good a measure the ACR is. Will the ACR be relevant for groups 
that don't have commercial products which may include PSOs.
    But more importantly, if you're in an area where there 
isn't much competition, then the kinds of pressures that make 
sure additional benefits are offered won't be present. It's the 
concerns about what happens with the extra moneys, particularly 
for areas where Medicare payment is being impacted by the 
floor, so the Medicare payment which might have been $280, or 
$300, or $325 per person if you looked at traditional Medicare 
becomes a capitation rate of $367.
    If there are areas where there is very little competition, 
it will be especially important to monitor how the extra money 
is spent, to make sure that seniors are getting value for the 
additional money being spent.
    What you are seeing reflected in the MedPAC report is a 
distinction between areas where there is a competitive 
environment and a number of different plans, PSOs or 
traditional HMOs or whatever, and areas in which there isn't a 
competitive environment. That was the source of the comments 
about noncompetitive markets.
    Mr. Houghton. I'd like to make a comment after that.
    Ms. Wilensky. OK. The second one, with regard to the copay 
for home care is a reiteration of a recommendation that was 
made last year by ProPAC and it was, to be honest, a 
controversial issue for MedPAC. We are struggling with two 
conflicting desires. We don't want to keep needed services from 
frail seniors who need home care, but we are mindful that home 
care is an area that has seen explosive growth. The number of 
people who receive services has doubled in the last decade and 
the number of services that are provided has also grown 
rapidly.
    What we have done is try to craft a balancing of these 
concerns. We therefore recommended a modest copayment, we did 
not give a specific amount but we are thinking something in the 
$3 to $5 range, subject to an annual limit. We did not specify 
the limit but we are not thinking of hundreds of visits before 
you hit the annual limit.
    Furthermore, we are recommending the introduction of an 
independent case manager for long-term users of home care, both 
to relieve some of the pressure that physicians have told us 
about, that they receive from the families of people who want 
to have someone checking in on a senior, whether they really 
need home care per se, and also to be sure that the seniors are 
getting the right services. We sent somebody who is an 
independent observer, who doesn't have an economic stake in 
continuing home care. We want to make sure that the seniors get 
the services that they need. So we have attempted, with this 
modest copayment, subject to an annual limit, and an 
independent assessment by a case manager for long-term users, 
to balance off these different needs.
    If you don't ever want to risk having some impediments 
receiving home care, then of course you wouldn't have any sort 
of copayment or any other kind of constraint. On the other 
hand, we normally have copayments of some sort in most other 
parts of Medicare.
    We were struggling with this balancing of concerns for 
seniors and the concerns about what has been reported to us 
regarding overuse and what we observed going on in the program.
    Finally in regards to your question about how the merger is 
going. We've gotten through the first phase, not too much the 
worse for wear, I think. A high-quality report, on time and or 
we're physically together in a single location. Personally, if 
I don't have to do this again for a while it's OK.
    Mr. Houghton. Let me just follow up, if I could. You know, 
getting back to the PSO issue, intellectually if you have two 
people, you have competition. If you have one person, you 
don't.
    But I wonder whether that's true here. If I'm a service 
organization, as I envision it, and again I come from a rural 
area, it's really a community organization and everybody's 
involved, everybody's looking at it all the time. From the true 
economic standpoint, you wouldn't have competition but there 
are so many people involved looking at it, pouring over it all 
the time, I would think it would be a good idea maybe to try to 
hold back rather than having the government breathe down the 
necks of those people who are trying to make something that I 
think is terrific work.
    Ms. Wilensky. Well, I have been a longstanding proponent of 
a PSO option. I think it is important that the physicians and 
the hospitals that have been providing care to seniors be 
allowed to come together and provide that care within a risk-
based system so that substantially increased moneys can go to 
that same group that has been providing services to seniors.
    However, I want to be pretty sure that there will be more 
services provided to seniors, and not just higher 
reimbursements to the people who are providing care. I know if 
there is some competitive force between PSOs or a PSO and an 
HMO, this is likely to happen, but if there is just a single 
group in town, particularly if they are not under the pressure 
of showing the government what they've done with the additional 
money they've received the extra payment could go as extra 
reimbursement. We just want to make sure it is the seniors who 
get the benefit from the additional money.
    Chairman Thomas. Just briefly because the gentleman's 
questions were extremely important ones. Would that we could 
get to the level of discussion that was just undertaken on 
PSOs. My problem is notwithstanding, that we are trying to 
empower this new arrangement principally in rural and suburban 
areas in savings doctors and hospitals, some of the latest 
information we're getting is that there are two types of 
provisions in terms of dollars and cents that are causing us 
problems in moving in that direction. One of the things we are 
going to have to do is either get GAO or somebody else to take 
a look at things we didn't do which have now produced 
impediments to allowing provider sponsored organizations to 
move forward in a timely and reasonable way.
    These are unintended consequences, of earlier legislation 
that was enacted for good and noble purposes but which has 
continued to cause us problems in a number of areas that 
lovingly bears the name of my colleague from California either 
in its first version or, more importantly, in its second 
version.
    The other problem, I tell the gentleman from New York, in 
terms of the home health care copayment question is just the 
tip of an enormous iceberg which was the movement of the home 
health care from part A to part B. Or moving it from a payroll 
tax structure to a 75 cents on the dollar general fund payment. 
If he wants just a little flavor of this ongoing battle, take a 
look at the venipuncture question in terms of how folks are 
currently able to receive the home health care benefits and our 
attempt to try to channel it to necessary and appropriate home 
health care support. This is a little bit of flavor of the 
ongoing concerns about the way in which people are utilizing 
the home health care question.
    It's to the point that you wonder to what extent is home 
the major focus versus health care. And that is going to be an 
ongoing area of examination and illumination. I think the 
emphasis out of the Medicare fund, whether A or B as an 
anachronism or combined, has got to be only on health and not 
on the home support assisted living aspect where it doesn't 
merely touch on health. That's going to be an ongoing problem 
that we are going to have to rely on you folks providing us 
with the kind of timely and appropriate understanding of what 
is going on out there.
    Again, focus on venipuncture only as the first of a number 
of battles we are going to have to face before we get this 
anywhere near right.
    I thank the gentleman for his questions. They are right on.
    The gentlewoman from Connecticut.
    Mrs. Johnson of Connecticut. Thank you.
    Nice to see you again. I have a few questions that I want 
to get through that I'd like to ask. First of all, you do 
comment that studies have repeatedly found significant risk 
selection in the Medicare risk contracting program. Now that we 
really have pretty good data, that there is little 
disenrollment, it would seem to me that over time, and over not 
a very long time, the experience in those plans would be the 
same as fee-for-service. That even if you select risk, over 
time that selection has little effect. Would you expect that to 
be the case and if so, what impact would the risk adjuster 
have?
    Ms. Wilensky. Well, I do think the issue that few people 
leave risk plans is an important issue. Because of the fast 
growth plans have experienced, and anticipate for at least the 
next decade, many plans will still mostly have new enrollees 
for the first several years. This means the potential for new 
plans to experience very favorable selection for at least the 
first couple of years of their existence is still an issue that 
we ought not to ignore. The plans will be getting average 
payments, but unusually healthy individuals.
    Mrs. Johnson of Connecticut. Recently, the department did 
receive a report on the Medicare Select plan. It was required 
by legislation we passed a number of years ago, making that 
potentially a permanent alternative and now because this report 
is favorable, it will be a permanent alternative.
    But my contention in that at the time we wrote that 
legislation was that HMOs tend to attract people with high 
costs. When I go from senior citizen center to senior citizen 
center, the people who are most considering the HMOs are the 
people who have no drug coverage and need the $500 or the 
whatever drug coverage that's provided and who often have to go 
to the doctor far more often than their colleagues, so the 
higher cost people are attracted to the HMOs, in my estimation, 
or at least that certainly is anecdotally a significant factor.
    Ms. Wilensky. Well, in fact one of the reasons you want to 
have risk adjustments is because you want to make sure sick 
people can go to HMOs and that the HMOs will be well paid by 
them. We also need to recognize that in some areas you may get 
people who are moving to new areas where they don't have ties 
to the physicians, who, by virtue of their moving, will tend to 
be healthier than the average senior, and will be attracted to 
HMOs. As a result, in some areas of the country, some HMOs can 
expect, anecdotally and intuitively, to attract healthier 
individuals.
    Some HMOs, because of where they are located, may not 
attract healthier seniors. So it is not just a selection 
between fee-for-service and managed care or HMOs that we need 
to be concerned about. Risk adjustment will also allow for 
adjustments between those HMOs or PSOs that get a lot of sick 
people and those that get healthier seniors.
    The evidence has been pretty consistent that at least 
seniors joing an HMO are healthier than average and have been 
using less services. Now, the fact that they tend to stay in 
the HMOs may mean that over time that some of the selection 
problem goes away.
    As you know, even with a number as small as 4 percent 
disenrollment, can be a problem. What we know about the 4 
percent who go back to traditional Medicare is that, they tend 
to be very heavy users of services.
    Now it may be their choice, it may not be that these 
seniors are pushed out by the HMO. It may be that they 
anticipated requiring some services like home care that they 
think they can get in more unlimited quantities outside of an 
HMO and so seek to go to traditional Medicare for that reason. 
We want to get the adjustment right. We're not trying to 
penalize HMOs, we're just trying to make whatever adjustments 
appear to be supported by empirical facts.
    Again, we need to do this as much so we can make sure that 
sick people can go to HMOs, receive the kind of services that 
they want and need, and not put the HMO out of business as to 
make sure that traditional Medicare doesn't bear the burden of 
a lot of old and frail individuals.
    Mrs. Johnson of Connecticut. I certainly agree that we want 
to look at acuity and seriousness of illness, but I am very 
concerned about making the assumption that in the first 2 or 3 
years a managed care plan can help healthier people because in 
this recent study I don't think that is supported and, when we 
look at disenrollment, I'm not familiar with your 4-percent 
figure. My understanding is that of the disenrollees, most of 
them choose another managed care plan and don't go back to fee-
for-service. So, I don't know what that breakout is.
    Ms. Wilensky. It's about 7 or 8 percent disenroll over the 
course of the year; about half of them, or a little more, go to 
another HMO and about 3.5 to 4 percent go back to traditional 
fee-for-service Medicare.
    That group that goes back to traditional fee-for-service 
Medicare tends to be very high users of services. Again, I am 
not trying to say this as a way to sound punitive to HMOs. It 
is really to try to recognize that you can get different groups 
of healthy and sick people going into health care plans and to 
recognize that can be as true among different HMOs as between 
HMOs and traditional fee-for-service.
    Mrs. Johnson of Connecticut. And I think that is a very 
valid point and I think geography has something to do with that 
and a number of things, but that is a very valid point.
    Just briefly, under the Balanced Budget Act, we do have an 
IPS, an interim payment system, for home care providers and we 
pegged the payment system for new providers at the national 
average. I can't quite remember if there is some accommodation 
or not.
    But in my district we've run into a new problem and I 
wonder if you have any new data that could help us with it. 
It's a facility that is new so it wasn't in existence in 1994, 
the base year. But it serves almost entirely, I guess entirely, 
mentally retarded patients. So, its cost structure isn't the 
same as the national average. I wonder if you have any data 
that could help us look at the cost structure of this kind of 
facility nationwide so we would have a better, fairer base for 
it to start from.
    Ms. Wilensky. I would be glad to have whoever in your 
office is working on this issue, work with Murray Ross on 
MedPAC staff to see if there is some way we can provide 
information that will at least clarify what these costs might 
be.
    Mrs. Johnson of Connecticut. Thank you very much. And then 
you say that the commission is concerned that HCFA is 
considering using RUG III classification system which was 
designed to explain variations in nursing home patients and a 
PBS or rehabilitation facility.
    Ms. Wilensky. Correct.
    Mrs. Johnson of Connecticut. Because research indicates 
that it is not appropriate. I'm pleased to see your 
recommendation. Do you have any reason to believe that HCFA is 
going to use that RUG III system for long-term hospitals?
    Ms. Wilensky. Well we have struggled with this issue of 
trying to come up with a classification system, a common 
classification system, which would cover facilities that 
sometimes or frequently are providing common sets of services. 
We are more now in the position of saying we have not as yet 
been able to come up with this common system. Furthermore, some 
of the data with regard to the rehabilitation hospitals is 
proprietary and therefore brings additional difficulties as a 
basis of information.
    I don't know whether there was reason to believe HCFA was 
about to go ahead with the RUG III option, other than the fact 
that they are under Congressional instructions to proceed with 
prospective payment, first for the nursing facilities and then 
for rehabilitation facilities and for other excluded hospitals.
    But we are concerned that it appears empirically that the 
RUG system which has been under development for the last 10-15 
years is, unfortunately, not a very good predictor for 
rehabilitation facilities. We want it clear for the record that 
as desirable as having a single system is, if it doesn't work, 
it doesn't work.
    Mrs. Johnson of Connecticut. I appreciate that. I also was 
very interested in your recommendations in regard to DSH 
payment. But I'm a little concerned about your second 
recommendation that recommends that there should be a minimum 
threshold of low income patient cost share. Last year when we 
were working on all this stuff, we found that while Medicare 
margins are healthy across the board, there is a small group of 
hospitals at which they are not very healthy. Now those are not 
DSH hospitals, so I'm not making a direct line here, but it 
does seem to me that for certain hospitals, even if they have a 
relatively small number of DSH payments, for them they could be 
very significant costs. I'm a little worried about minimum 
thresholds.
    Ms. Wilensky. As in the home care copayment issue, we have 
attempted to weigh a number of factors and to balance them. Our 
concern about minimum thresholds is easier to explain. 
Previously the threshold differed depending on whether the 
hospital was urban or rural. The threshold had a cliff effect, 
and low income didn't include all the components of income the 
commission thought represented the relevant measures of low 
income.
    What we have tried to do is continue to concentrate DSH 
payments, to not spread these payments over all hospitals, but 
rather to have them go to the 50 or 60 percent of the hospitals 
that were funding most of the low-income care. The DSH payments 
depend on how much Medicare services the hospital is providing, 
so that it not become a general support for hospitals that 
provide care to low-income people and to phase-in payments so 
as to prevent a cliff effect.
    Whether there will be some hospitals that only provide a 
small amount of Medicare services or have a relatively small 
low-income population, and therefore could use a small amount 
of support, is something that can clearly happen. Again it's a 
tradeoff--do you want to have no concentration and just have 
all hospitals get a little bit of help. Will that provide 
enough help to the 30 or 40 percent of the institutions that do 
a lot of uncompensated care. Our real concern is to reraise 
this issue. We're sure you can make DSH payments better than 
they are now.
    Mrs. Johnson of Connecticut. It may be that your broader 
definition which is your first recommendation. I think it is 
very, very important. It may sort of satisfy this problem but I 
do want to be alert to it because the proportion of care, even 
though it may be small in the institution, could be a factor.
    And just last, let me comment that, you mention that HCFA 
is proposing a volume in intensity of services, a reduction in 
payment rate. This is the section that talks about the practice 
expense adjustments. And I'm very concerned about this because 
what I'm finding from this particular group of specialists is 
that the costs in these areas, of equipment, of paperwork, of 
administrative costs, have gone up in many instances doubling 
really in recent years and that often the time it takes to do 
the test is considerable. And so the idea that they would be 
able to just increase the volume in some of these specialty 
areas does not, with those examples I've been given, hold water 
the way it did in just an office visit practice concern.
    Ms. Wilensky. Well, as you know this is an issue I 
discussed with many of you in 1991 during the work value phase 
of the relative value scale. It is, with some pleasure on my 
part, that I can say I am supportive of the position of not 
including a behavioral effect in the proposed rule. I think 
that the empirical experience that occurred after the first 
phase of the relative value scale indicated there was far less 
change than HCFA had anticipated, but equally important, the 
constraints on collecting whatever unanticipated change existed 
with the volume performance standard are no longer present 
because Congress has put into place the sustainable growth 
measure.
    And so, it seems to us the expectation for change is far 
less, given the changing environment facing the physician and 
the constraints on getting any excess payments back are far 
less because of your adoption of the sustainable growth rate. 
As a result, we recommend that there not be an adjustment for 
anticipated volume and intensity.
    Mrs. Johnson of Connecticut. Thank you, Dr. Wilensky. Thank 
you, Mr. Chairman.
    Chairman Thomas. Thank you gentlewoman.
    Does the gentleman from California wish to inquire?
    Mr. Stark. Yes, Mr. Chairman, and I apologize to you and 
our star witness today for being late and missing her prepared 
testimony.
    Chairman Thomas. We have a galaxy of witnesses.
    Mr. Stark. I actually had these questions prepared before 
her testimony was available and wanted to ask Dr. Wilensky a 
couple of things.
    As she knows, I have been somewhere between reminding and 
pestering her, about doctors' opposing the President's proposal 
for paying for drugs on the basis of acquisition cost rather 
than on this so-called average wholesale price which is sort of 
the equivalent of the sticker price on an automobile. If you 
know anybody who paid that for their car, you found somebody to 
sell a bridge to.
    These drugs are reimbursed by Medicare at 10 times the 
amount the doctor pays for them. Doctors are saying they can't 
afford to administer these drugs because of the cost of 
syringes, refrigeration, and so on. Aren't those costs supposed 
to be covered by the practice expense component of the Medicare 
reimbursement system?
    Ms. Wilensky. Yes, it should be and to the extent there are 
problems, they should be dealt with directly. The work value 
part of the relative value scale was just reviewed as part of 
its first 5-year review and the practice expense rule will be 
coming out soon.
    If the argument is that the physician needs to cross-
subsidize, I think the response is we ought to fix the initial 
payment if there is indeed a problem with regard to the fee 
schedule; that's the place that needs to be fixed and you need 
to make a different argument to justify a higher reimbursement 
for the drug.
    Mr. Stark. My second question, or comment, is that your 
report, indicates that it is going to take us 40 years for the 
beneficiary's share of the outpatient payments to get down to 
the 20-percent level. That doesn't seem correct. Particularly 
when, in many of these cases, the same procedure could be done 
in an ambulatory surgical center, where Medicare doesn't pay 
anywhere near what we pay them for the outpatient department. 
We need to save the trust fund and, more importantly, we need 
to answer our beneficiaries who come in screaming because their 
copays are often huge relative to the cost of the procedure. Is 
there any way we can make this change more quickly? The 
hospitals say they go broke, but it is my understanding that it 
is only a reduction in prospective earnings, not a reduction in 
current cash flow. Can you offer us any suggestions as to how 
we could get our patients, or our constituents, off the hook 
for more than a 20-percent copay.
    Ms. Wilensky. I think the commissioners who initially 
raised the issue on the commission were surprised that the 
commission came forward with the recommendation that we did. We 
understand our recommendation is a ``coster'' in the 
traditional sense that under the current rules it would cost 
the Government money, but we think that allowing 40 years to 
pass before seniors would pay no more than a 20-percent 
copayment for outpatient services is inappropriate. It appears 
that there are instances now when seniors are paying up to 50 
percent rather than the 20 percent they should.
    Mr. Stark. How much in my lifetime?
    Dr. Wilensky. There are two ways to attack this problem. 
Before you came in, I had discussed that one of the areas that 
the commission wants to take on during the next couple of 
years, is looking at payments that are made for essentially the 
same service that are provided in different settings. This is a 
very difficult issue, but we think it is high time that we 
looked at this.
    Mr. Stark. And if they are equally safe, shouldn't we just 
pay for the lowest one?
    Ms. Wilensky. Well, we need to take into account such 
factors as the severity of illness of the patient to the extent 
that there tend to be different patients in different settings. 
We also need to be careful that we don't shut down too many 
outpatient departments or emergency rooms and that may justify 
some margin of difference in payment.
    Mr. Stark. My only concern is where the----
    Ms. Wilensky. We are sympathetic with the differences that 
exist but even more so that they have not occurred because of 
rational pricing policies. With regard to the other matter, 
there are a lot of ways to try to get the 40-year period 
shorter, some of which would cost either the government or the 
hospitals money. If you are indeed serious in trying to shorten 
the time from 40 years, which we felt was unreasonable, we 
would be glad to work with you to come up with different 
options.
    Chairman Thomas. Will the gentleman yield briefly on that 
point?
    Mr. Stark. Surely.
    Chairman Thomas. Obviously we're trying to undo something 
that developed over time, but didn't we also empower hospitals 
to negotiate that, so that there could be some market force 
pressure in terms of hospitals and patients in terms of what 
that amount is going to be.
    Ms. Wilensky. I don't know. I will be glad to look into how 
much it would affect the number of years. To be honest, the 40 
years was not our estimate, it was an estimate we picked up 
from CBO. But we were concerned with the amount of time that 
would need to pass before seniors paid no more than 20-percent 
copayment for outpatient services.
    Chairman Thomas. My only point is that there are 
potentially three players and not two and that although clearly 
revenue to replace it is the desired goal of hospitals, and 
patients, market forces to negotiate down that amount can also 
play a factor at least at particular hospitals with particular 
patients.
    I thank the gentleman for yielding.
    Mr. Stark. My final question deals with TEFRA cost limits, 
and more particularly the Vencor story in the Wall Street 
Journal. That story indicates that Vencor jacked their costs up 
in the nineties to $68,000 a patient. Then they quit taking 
severe cases and their costs dropped, but they are operating on 
the old high-cost base that they established.
    Now, that's not available in the future, but it's still an 
issue. One, they probably are getting overpaid. Second, they 
prohibit entry of new competitors into the field. I wonder if 
you might be able to suggest some legislative fixes, if it 
can't be done administratively, to level the playingfield. So 
we would pay people what they ought to get paid and not based 
on some system that was gamed. Why not fix it to make it as 
fair a system as we could? Your advice in that would be useful. 
Do you think it is a good idea to make those adjustments?
     Ms. Wilensky. We would be glad to work with you to come up 
with such payment rate changes. We have been concerned that 
what you get paid depends on when you joined Medicare and how 
clever you were in fixing that initial rate. This is something 
we should look at.
    Mr. Stark. Thank you very much.
    Chairman Thomas. I am sure there are individual horror 
stories, there always are, but as a collective group, as I 
recall in the balanced budget agreement changes we got about $4 
billion over 5 years as a corrector as we move forward in this 
area and we'll continue to look at it.
    If there are no further questions, then, as a segue into 
Dr. Scanlon's presentation, would you briefly give us MedPAC's 
comments on the GAO study dealing with the physician practice 
expense payments. Or did you have any.
    Ms. Wilensky. We do not have it. We will be glad to make 
such comments available as soon as we're had time to assess the 
report.
    Chairman Thomas. Alright. Do you want to make any general 
statement? No, I'm just kidding you. Thank you very much. I 
look forward to seeing you again.
    Ms. Wilensky. Thank you, Mr. Thomas.
    Chairman Thomas. Thank you, Dr. Scanlon. As usual, 
obviously, the GAO report and any testimony that you may have 
will be made a part of the record as a written statement. And 
you can address us in any way you see fit about your findings 
in this important legislative area.

STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH FINANCING AND 
SYSTEMS ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, 
                U.S. GENERAL ACCOUNTING  OFFICE

    Mr. Scanlon. Thank you very much, Mr. Chairman. Members of 
the Subcommittee I am very pleased to be here today to discuss 
the report that we did on the efforts of the Health Care 
Financing Administration, HCFA, to revise the practice expense 
component of the Medicare physicians' fee schedule.
    As you noted, in the Balanced Budget Act the Congress asked 
us to evaluate HCFA's proposed fee schedule revisions that were 
published last June and the impact of those revisions on the 
access to care.
    On Friday we issued our report that provides a detailed 
analysis of the methods that HCFA used. In my testimony today, 
what I'd like to do is provide an overview of the challenges 
involved in revising the fee schedule and some of the problems 
that HCFA should address as it moves toward implementing the 
revisions in January of 1999.
    Before commenting on the methods that HCFA employed, I'd 
like to first note the magnitude of the task of creating 
resource-based practice expense relative values.
    Medicare's fee schedule pays physicians for almost 7,000 
services and procedures, each of which may involve different 
amounts and types of practice expenses, including different 
types of staffs such as nurses, lab technicians, receptionists, 
billing clerks, as well as a myriad of supplies, equipment, and 
office space.
    Creating resource-based practice expense relative values 
means estimating how much each of these resources is used in 
the delivery in each of those 7,000-plus procedures. We believe 
that HCFA has made substantial progress in addressing this 
formidable task. Its general approach for collecting 
information on physicians' practice expenses by convening 15 
panels of experts to identify the resources associated with 
services and procedures is reasonable.
    Other approaches for collecting this data such as 
conducting surveys or gathering data onsite may be useful 
supplements to HCFA's use of expert panels, but these 
alternatives would not be practical approaches for the primary 
data gathering. A survey to collect the detailed information 
needed to build the full fee schedule would be very time 
consuming to complete and runs the risk of poor response rate 
as HCFA experienced in its attempts to collect detailed 
information on indirect expenses.
    Similarly, onsite direct measurement of the resources 
involved for a sufficient number of procedures and practices is 
impractical as the primary means of data collection due to the 
likely enormous costs. In using the expert panel data, HCFA 
made various adjustments that were intended to convert the 
panel's estimates to a common scale, to eliminate expenses that 
are reimbursed to hospitals rather than to physicians, to 
reduce potentially excessive estimates, and to ensure 
consistency with aggregate survey date on practice expenses.
    While we agree with the intent of those adjustments, we 
believe that some of them have methodological weaknesses and 
other adjustments and assumptions lack supporting data.
    HCFA has done very little in the way of performing 
sensitivity analyses that would enable it to determine the 
impact of the various adjustments and assumptions either 
individually or collectively. Such sensitivity analyses could 
help determine whether the effects of the adjustments and 
assumptions warrant additional focused data gathering to 
determine their validity. We believe this additional work 
should not, however, delay the phase-in of the fee schedule 
revisions.
    With regard to the potential impact of the revisions on 
access, I would echo the sentiments expressed in the Medicare 
Payment Advisory Commission's report, and our own report. There 
have been very significant reductions in fees for selected 
services since the Medicare fee schedule was implemented in 
1992. Changes associated with the Balanced Budget Act for 1998 
add to those reductions. The likely practice expense revisions 
will compound those cuts.
    It is impossible now to predict the impact of the total 
reductions on Medicare beneficiaries' access. It is important 
to remember, however, though, that access will depend not just 
on the change in Medicare fees, but how those fees relate to 
those paid by other purchasers.
    Recent successes in controlling health care cost growth are 
partially the result of purchasers and health plans 
aggressively seeking discounts from providers. On a relative 
basis, Medicare fees may remain sufficient to preserve 
beneficiary access. Nevertheless, this is an issue that 
warrants continued monitoring and possible Medicare fee 
schedule adjustments as the revisions are phased in.
    In conclusion, I would note that switching from charge-
based to resource-base relative values for practice expense, 
while maintaining budget neutrality, inevitably creates winners 
and losers, as well as controversy. Controversy arose last June 
with the issuance of the proposed revision and may be expected 
this May with the next version.
    It should also be noted that similar controversy surrounded 
the introduction of the resourced-based work relative values in 
1992 but since then the medical community's confidence in those 
values has increased. In our report we recommend several 
actions HCFA can take to improve its methods and data. We 
believe if adopted these would give the physicians greater 
assurance that revisions HCFA proposes are appropriate and 
sound. HCFA officials have said that they would carefully 
review and consider each of our recommendations.
    Mr. Chairman, that concludes my statement. I'd be happy to 
answer any questions you or Members of the Subcommittee have.
    [The prepared statement follows:]

Statement of William J. Scanlon Director, Health Financing and Systems 
Issues, Health, Education, and Human Services Division, U.S. General 
Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    We are pleased to be here today to discuss the efforts of 
the Health Care Financing Administration (HCFA) to revise the 
practice expense component of Medicare's physician fee 
schedule. The Medicare program uses a fee schedule, implemented 
in 1992, that specifies the payments to physicians for each of 
over 7,000 services and procedures. In 1997, the physician fee 
schedule payments totaled about $43 billion.\1\ The fee 
schedule system was intended to relate Medicare's payments to 
three categories of resources used to provide a service--
physician work,\2\ practice expenses, and malpractice expenses. 
Currently, only the physician work component, which accounts 
for about half the payment for each procedure, is resource-
based. The practice expense and malpractice expense components, 
which account for about 41 percent and 5 percent, respectively, 
of the fee schedule allowances, are still based on historical 
charges for physician services.
---------------------------------------------------------------------------
    \1\ For each service or procedure, Medicare pays 80 percent of the 
allowed amount set by the fee schedule, and Medicare patients are 
responsible for the remaining 20 percent. In this testimony, we refer 
to the Medicare fee schedule allowance as the Medicare payment.
    \2\ Physician work is based on the time the physician spends, the 
intensity of effort and level of skill required, and stress as a result 
of the risk of harm to the patient.
---------------------------------------------------------------------------
    In the Balanced Budget Act of 1997,\3\ the Congress asked 
us to evaluate HCFA's proposed fee schedule revisions published 
in a June 18, 1997, notice of proposed rulemaking and the 
impact of those revisions on access to care. Our report, 
Medicare:  HCFA Can Improve Methods for Revising Physician 
Practice Expense Payments,\4\ provides a detailed analysis of 
the methods HCFA used to develop the June 1997 proposed 
revisions. In my testimony today I will provide an overview of 
the challenges involved in revising the fee schedule and some 
problems HCFA will have to resolve as it moves toward 
implementing the revisions in January 1999.
---------------------------------------------------------------------------
    \3\ Sec. 4505, P.L. 105-33, 111 Stat. 251, 435, Aug. 5, 1997.
    \4\ GAO/HEHS-98-79, Feb. 27, 1998.
---------------------------------------------------------------------------
    In summary, HCFA's general approach for collecting 
information on physicians' practice expenses was reasonable. 
HCFA convened 15 panels of experts to identify the resources 
associated with several thousand services and procedures. These 
resources include physicians' equipment and supplies, and the 
time of physicians' staff, such as nurses, technicians, and 
billing clerks. Other approaches for collecting these data, 
such as mailing out surveys and gathering data on-site, may be 
useful supplements to HCFA's use of expert panels, but they 
would not be practical approaches for the primary data 
gathering.
    HCFA made various adjustments to the expert panels' data 
that were intended to (1) convert the panels' estimates to a 
common scale, (2) eliminate expenses reimbursed to hospitals 
rather than to physicians, (3) reduce potentially excessive 
estimates, and (4) ensure consistency with aggregate survey 
data on practice expenses for equipment, supplies, and 
nonphysician labor. While we agree with the intent of these 
adjustments, we believe some have methodological weaknesses, 
and other adjustments and assumptions lack supporting data.
    HCFA has done little in the way of performing sensitivity 
analyses that would enable it to determine the impact of the 
various adjustments, methodologies, and assumptions, either 
individually or collectively. Such sensitivity analyses could 
help determine whether the effects of the adjustments and 
assumptions warrant additional, focused data gathering to 
determine their validity. We believe this additional work 
should not, however, delay phase-in of the fee schedule 
revisions.
    Since implementation of the physician fee schedule in 1992, 
Medicare beneficiaries have generally experienced very good 
access to physician services. The eventual impact of the new 
practice expense revisions on Medicare payments to physicians 
is unknown at this time, but they should be considered in the 
context of other changes in payments to physicians by Medicare 
and by other payers. Recent successes in health care cost 
control are partially the result of purchasers and health plans 
aggressively seeking discounts from providers. How Medicare 
payments to physicians relate to those of other payers will 
determine whether the changes in Medicare payments to 
physicians reduce Medicare beneficiaries' access to physician 
services. This issue warrants continued monitoring, and 
possible Medicare fee schedule adjustments, as the revisions 
are phased-in.

                               Background

    The Social Security Act Amendments of 1994 \5\ required the 
Secretary of Health and Human Services to revise the fee 
schedule by 1998 so the practice expense component would 
reflect the relative amount of resources physicians use when 
they provide a service or perform a procedure. The legislation 
required that the revisions be budget neutral--in other words, 
Medicare payments for practice expenses could increase for some 
procedures and decrease for others, but the revisions must not 
increase or decrease total Medicare payments. Physicians could, 
however, experience increases or decreases in their payments 
from Medicare, depending on the services and procedures they 
provide.
---------------------------------------------------------------------------
    \5\ Section 121, P.L. 103-42, 108 Stat. 4398, 4408, Oct. 31, 1994.
---------------------------------------------------------------------------
    HCFA published a notice of proposed rulemaking in the June 
18, 1997, Federal Register describing its proposed revisions to 
physician practice expense payments. HCFA estimated that its 
revisions, had they been in effect in fiscal year 1997, would 
have reallocated $2 billion of the $18 billion of the practice 
expense component of the Medicare fee schedule that year. The 
revisions would generally increase Medicare payments to 
physician specialties that provide more office-based services 
while decreasing payments to physician specialties that provide 
primarily hospital-based services. The revisions could also 
affect physicians' non-Medicare income, since many other health 
insurers use the Medicare fee schedule as the basis for their 
payments. Some physician groups argued that HCFA based its 
proposed revisions on invalid data and that the reallocations 
of Medicare payments would be too severe. Subsequently, the 
Balanced Budget Act of 1997 delayed implementation of the 
resource-based practice expense revisions until 1999 and 
required HCFA to publish a revised proposal by May 1, 1998. The 
act also required us to evaluate the June 1997 proposed 
revisions, including their potential impact on beneficiary 
access to care.

        HCFA's Method To Estimate Direct Expenses Was Reasonable

    HCFA faced significant challenges in revising the practice 
expense component of the fee schedule--perhaps more challenging 
than the task of estimating the physician work associated with 
each procedure. Practice expenses involve multiple items, such 
as the wages and salaries of receptionists, nurses, and 
technicians employed by the physician; the cost of office 
equipment such as examining tables, instruments, and diagnostic 
equipment; the cost of supplies such as face masks and wound 
dressings; and the cost of billing services and office space. 
Practice expenses are also expected to vary significantly. For 
example, a general practice physician in a solo practice may 
have different expenses than a physician in a group practice. 
For most physician practices, the total of supply, equipment, 
and nonphysician labor expenses is probably readily available. 
However, Medicare pays physicians by procedure, such as a skin 
biopsy; therefore, HCFA had to develop a way to estimate the 
portion of practice expenses associated with each procedure--
information that is not readily available.
    Ideally, estimates of the relative resources associated 
with each medical procedure would be based on resource data 
obtained from a broad, representative sample of physician 
practices. However, the feasibility of completing such an 
enormous data collection task within reasonable time and cost 
constraints is doubtful, as evidenced by HCFA's unsuccessful 
attempt to survey 5,000 practices. After considering this 
option and the limitations of survey data already gathered by 
other organizations, HCFA decided to use expert panels to 
estimate the relative resources associated with medical 
procedures and convened 15 specialty-specific clinical practice 
expense panels (CPEP).\6\ Each panel included 12 to 15 members; 
about half the members of each panel were physicians, and the 
remaining members were practice administrators and nonphysician 
clinicians such as nurses. HCFA provided national medical 
specialty societies an opportunity to nominate the panelists, 
and panel members represented over 60 specialties and 
subspecialties.
---------------------------------------------------------------------------
    \6\ For example, one panel reviewed general surgery codes, while 
another reviewed orthopedic codes.
---------------------------------------------------------------------------
    Each panel was asked to estimate the practice expenses \7\ 
associated with selected procedure codes.\8\ Some codes, called 
``redundant codes,'' were assigned to two or more CPEPs so that 
HCFA and its contractor could analyze differences in the 
estimates developed by the various panels. For example, HCFA 
included the repair of a disk in the lower back among the 
procedures reviewed by both the orthopedic and neurosurgery 
panels.\9\
---------------------------------------------------------------------------
    \7\ The CPEP members were instructed to base their estimates on the 
typical patient--the patient who most frequently undergoes a particular 
procedure--not necessarily a Medicare patient. For example, most women 
receiving hysterectomies are in their 40s and 50s and are not Medicare 
patients.
    \8\ The Current Procedural Terminology (CPT), compiled by the 
American Medical Association, is used by the Medicare program and most 
other payers to identify, classify, and bill medical procedures. It 
consists of procedure codes, descriptions, and modifiers to facilitate 
billing and payment for medical services and procedures performed by 
physicians. When the terms ``code'' and ``procedure code'' are used in 
this testimony, they refer to CPT codes.
    \9\ This was procedure code 63030.
---------------------------------------------------------------------------
    We believe that HCFA's use of expert panels is a reasonable 
method for estimating the direct labor and other direct 
practice expenses associated with medical services and 
procedures. We explored alternative primary data-gathering 
approaches, such as mailing out surveys, using existing survey 
data, and gathering data on-site, and we concluded that each of 
those approaches has practical limitations that preclude their 
use as reasonable alternatives to HCFA's use of expert panels. 
Gathering data directly from a limited number of physician 
practices would, however, be a useful external validity check 
on HCFA's proposed practice expense revisions and would also 
help HCFA identify refinements needed during phase-in of the 
fee schedule revisions.

   Weaknesses and Limitations of HCFA's Adjustment of Direct Expense 
                               Estimates

    HCFA staff believed that each of the CPEPs developed 
reasonable relative rankings of their assigned procedure codes. 
However, they also believed that the CPEP estimates needed to 
be adjusted to convert them to a common scale, eliminate 
certain inappropriate expenses, and align the panels' estimates 
with data on aggregate practice expenses. While we agree with 
the intent of these adjustments, we identified methodological 
weaknesses with some and a lack of supporting data with others.
    HCFA staff found that labor estimates varied across CPEPs 
for the same procedures and therefore used an adjustment 
process referred to as ``linking'' to convert the different 
labor estimates to a common scale. HCFA's linking process used 
a statistical model to reconcile significant differences 
between various panels' estimates for the same procedure (for 
example, hernia repair). HCFA used linking factors derived from 
its model to adjust CPEP's estimates. HCFA's linking model 
works best when the estimates from different CPEPs follow 
certain patterns; however, we found that, in some cases, the 
CPEP data deviated considerably from these patterns and that 
there are technical weaknesses in the model that raise 
questions about the linking factors HCFA used.
    HCFA applied two sets of edits to the direct expense data 
in order to eliminate inappropriate or unreasonable expenses: 
one based on policy considerations, the other to correct for 
certain estimates HCFA considered to be unreasonable. The most 
controversial policy edit concerned HCFA's elimination of 
nearly all expenses related to physicians' staff, primarily 
nurses, for work they do in hospitals. HCFA excluded these 
physician practice expenses from the panels' estimates because, 
under current Medicare policy, those expenses are covered by 
payments to hospitals rather than to physicians. We believe 
that HCFA acted appropriately according to Medicare policy by 
excluding these expenses. However, shifts in medical practices 
affecting Medicare's payments may have resulted in physicians 
absorbing these expenses.
    In a notice published in the October 1997 Federal Register, 
HCFA asked for specific data from physicians, hospitals, and 
others on this issue. After we completed our field work, HCFA 
received some limited information, which we have not reviewed. 
HCFA officials said that they will review that information to 
determine whether a change in their position is warranted. If 
additional data indicate that this practice occurs frequently, 
it would be appropriate for HCFA to determine whether Medicare 
reimbursements to hospitals and physicians warrant adjustment.
    HCFA also limited some administrative and clinical labor 
estimates that it believes are too high. Specifically, HCFA 
believes that (1) the administrative labor time estimates 
developed by the CPEPs for many diagnostic tests and minor 
procedures seemed excessive compared with the administrative 
labor time estimates for a midlevel office visit; and (2) the 
clinical labor time estimates for many procedures appeared to 
be excessive compared with the time physicians spend in 
performing the procedures. Therefore, HCFA capped the 
administrative labor time for several categories of services at 
the level of a midlevel office visit. Furthermore, with certain 
exceptions, HCFA capped nonphysician clinical labor at 1-1/2 
times the number of minutes it takes a physician to perform a 
procedure. HCFA has not, however, conducted tests or studies 
that validate the appropriateness of these caps and thus cannot 
be assured that they are necessary or reasonable.
    Various physician groups have suggested that HCFA 
reclassify certain administrative labor activities as indirect 
expenses. Such a move could eliminate the need for limiting 
some of the expert panels' administrative labor estimates, 
which some observers believe are less reliable than the other 
estimates they developed. HCFA officials said that they are 
considering this possibility.
    Finally, HCFA adjusted the CPEP data so that it was 
consistent in the aggregate with national practice expense data 
developed from the American Medical Association's (AMA) 
Socioeconomic Monitoring System (SMS) survey--a process that it 
called ``scaling.'' HCFA found that the aggregate CPEP 
estimates for labor, supplies, and equipment each accounted for 
a different portion of total direct expenses than the SMS data 
did. For example, labor accounted for 73 percent of total 
direct expenses in the SMS survey data but only 60 percent of 
the total direct expenses in the CPEP data. To make the CPEP 
percentages mirror the SMS survey percentages, HCFA inflated 
the CPEPs' labor expenses for each code by 21 percent and the 
medical supply expenses by 6 percent and deflated the CPEPs' 
medical equipment expenses by 61 percent.
    The need for scaling was due in part to the equipment 
utilization rates HCFA used. HCFA officials told us that actual 
equipment utilization rates were not available from the medical 
community and therefore they had to make assumptions about the 
rate at which equipment is used in order to assign equipment 
costs to each code. For equipment associated with specific 
procedures, such as a treadmill used as part of a cardiology 
stress test, HCFA assumed a utilization rate of 50 percent, 
while, for equipment that supports all or nearly all services 
provided by a practice, such as an examination table, HCFA 
assumed a utilization rate of 100 percent. Scaling provided 
HCFA with a cap on the total amount of practice expenses 
devoted to equipment that was not dependent upon the equipment 
rate assumption HCFA used.
    While HCFA officials acknowledge that their equipment 
utilization rate assumptions are not based on actual data, they 
claim that the assumptions are not significant for most 
procedures since equipment typically represents only a small 
fraction of a procedure's direct expenses. The AMA and other 
physician groups that we contacted have said, however, that 
HCFA's estimates greatly overstate the utilization of most 
equipment, which results in underestimating equipment expenses 
used in developing new practice expense fees. HCFA agrees that 
the equipment utilization rate will affect each medical 
specialty differently, especially those with high equipment 
expenses, but HCFA staff have not tested the effects of 
different utilization rates on the various specialties.
    In a notice in the October 1997 Federal Register, HCFA 
asked for copies of any studies or other data showing actual 
utilization rates of equipment, by procedure code. This is 
consistent with the Balanced Budget Act of 1997 requirement 
that HCFA use actual data in setting equipment utilization 
rates.

          Impact on Access to Care Needs Continued Monitoring

    It is not clear whether beneficiary access to care will be 
adversely affected by Medicare's new fee schedule payments for 
physician practice expenses. This will depend upon such factors 
as the magnitude of the Medicare payment reductions experienced 
by different medical specialties, other health insurers' use of 
the fee schedule, and fees paid by other purchasers of 
physician services.
    While beneficiary access to care has remained very good 
since implementation of the fee schedule began in 1992, the 
cumulative effects of the transition to the fee schedule, 
recent adjustments to the fee schedule that were mandated by 
the Balanced Budget Act, and the upcoming practice expense 
revisions could alter physicians' willingness to accept 
Medicare's fee schedule payments for some procedures. For 
example, between 1992 and 1996, cardiologists experienced a 9 
percent reduction in their Medicare fee schedule payments; 
gastroenterologists, an 8-percent reduction, and 
ophthalmologists, a 12-percent reduction. HCFA's June 1997 
proposed rule would result in further reductions of 17 percent, 
20 percent, and 11 percent, respectively, for these specialties 
once the new practice expense component of the fee schedule is 
fully implemented in 2002. Additionally, Medicare payments for 
surgical services were reduced by 10.4 percent beginning in 
1998 as a result of provisions contained in the Balanced Budget 
Act. The combined impact of the proposed and prior changes on 
physicians' incomes will affect some medical specialties more 
than others. Therefore, there is a continuing need to monitor 
indicators of beneficiary access to care, focusing on services 
and procedures with the greatest reductions in Medicare 
payments.

                              Observations

    Even though HCFA has made considerable progress developing 
new practice expense fees, much remains to be done before the 
new fee schedule payments are implemented starting in 1999. For 
example, HCFA has not collected actual data that would serve as 
a check on the panels' data and as a test of its assumptions 
and adjustments. Furthermore, HCFA has done little in the way 
of conducting sensitivity analyses to determine which of its 
adjustments and assumptions have the greatest effects on the 
proposed fee schedule revisions. There is no need, however, for 
HCFA to abandon the work of the expert panels and start over 
using a different methodology; doing so would needlessly 
increase costs and further delay implementation of the fee 
schedule revisions.
    The budget neutrality requirement imposed by the Congress 
means that some physician groups would benefit from changes in 
Medicare's payments for physician practice expenses to the 
detriment of other groups. As a result, considerable 
controversy has arisen within the medical community regarding 
HCFA's proposed fee schedule revisions, and such controversy 
can be expected to continue following issuance of HCFA's next 
notice of proposed rulemaking, which is due May 1, 1998. 
Similar controversy occurred when Medicare initially adopted a 
resource-based payment system for physician work in 1992. Since 
that time, however, medical community confidence in the 
physician work component of the fee schedule has increased.
    In our recently issued report, we recommended several 
actions HCFA should take to improve its methods for revising 
Medicare's payments for physician practice expenses. These 
recommendations, if adopted, would give physicians greater 
assurance that the revisions HCFA proposes are appropriate and 
sound. HCFA officials said that they would carefully review and 
consider each of our recommendations as they develop their 
rule.
    Mr. Chairman, this concludes my statement. I will be happy 
to answer your questions.
    [The GAO Report is being retained in the Committee's 
files.]
      

                                

    Chairman Thomas. Thank you very much, Dr. Scanlon.
    This is an important issue, and we're hoping that your 
report will turn a page in the ongoing attempts to get it 
right. It is important because it does involve a zero-sum 
redistribution, which has caused some concern about getting it 
right, and I want to make sure we get it right.
    We will hear, after you, a panel of physicians, and their 
opinion of what you've done. So Dr. Pearlman will be able to 
more fully elaborate on his own testimony. But in reading his 
testimony I was taken apart by a statement he makes on the 
bottom of the last page. Although I understand that in certain 
of these words there's plenty of wiggle room, I want you to 
react to this statement to see if you agree with it fully, 
disagree in part, or basically disagree with it, because it is 
important for us to understand what we have in the GAO report.
    And he says on the bottom of the last page, ``The first 
step is to recognize, as has the General Accounting Office, 
that the unresolved questions over data and methodology are too 
great to support confidence in any proposal made this year that 
purports to be the final word on the issue.'' I guess the 
argument would be, is it the final word or not? I think none of 
us are looking to the final word; we're looking to some 
reasonably conclusive word that will allow us to move forward.
    So in that sense, do you agree with his assessment that the 
General Accounting Office believes that the unresolved 
questions over data and methodology are too great to support 
confidence in any proposal made this year?
    Mr. Scanlon. I think that you've touched the point where we 
would differ, which is the issue of the final word versus, as 
you said, whether we have a reasonably conclusive basis for 
moving forward. In our report we discuss the critical 
importance of a refinement process that's going to improve 
these relative values over time. We recognize, and HCFA 
recognizes, that not only in the process of estimating these 
originally are difficulties in gathering sufficient information 
to feel totally comfortable--but that the world changes, and 
the resources that may be involved in different procedures and 
new procedures may require that one readdress the question. So 
we don't agree that you can't move forward at this point, but 
we would agree that, in moving forward, we're not going to have 
the final relative values units.
    Chairman Thomas. The other question I would ask you is, 
again, on methodology, because, frankly, we're all trying to 
get it right. My understanding is that the Practice Expense 
Coalition has Coopers and Lybrand to try to develop a practice 
expense methodology based on cost accounting. Although the idea 
of allocating costs at the practice level is relatively 
straightforward, what I would appreciate, if you have the 
ability to make some comment on, is that if the costs are going 
to be allocated according to the Current Procedural Terminology 
code book, which I've acquired and looked at there, about 7,000 
individual procedures that would have to be part of that coding 
aspect, is that a practicable, a reasonable, and appropriate 
approach, in your opinion?
    Mr. Scanlon. I've had a chance to look at Dr. Pearlman's 
statement, and in particular, the description of the Coopers 
and Lybrand approach, and there are remarkable similarities 
between it and other approaches, as well as the approach that 
HCFA has employed. The heart of what's involved here is the 
ability to assign expenses to each of those 7,000 procedures. 
In Dr. Pearlman's statement, I think that his language or his 
words are that we either know or we can learn how to assign 
different expenses to those procedures. That's the challenge.
    In looking at other methods, as well as what HCFA has done, 
there's a combination of assumptions and actual data. HCFA 
gathers its data through the expert panels. Other people have 
proposed going into offices with stopwatches or going into 
offices with staff logs and asking people to record what they 
do every 15 minutes.
    The alternatives will produce data of different precision 
at very, very different costs. The issue is to balance the 
amount of precision you get with the cost, gathering that kind 
of information. We think HCFA made a reasonable compromise in 
bringing together the panels to try to get that information.
    Chairman Thomas. And the old saw, time is money, so 
although the gathering of that data does have differing costs, 
it also deals with different timetables.
    Mr. Scanlon. That's correct.
    Chairman Thomas. And the concern is, do we have enough to 
go forward--not, is what we have--perfect. That's our biggest 
concern in dealing with this.
    Mr. Scanlon. We think we have enough----
    Chairman Thomas. It's degrees of comfort level----
    Mr. Scanlon. Right.
    Chairman Thomas [continuing]. Not absoluteness.
    Mr. Scanlon. And I would underscore the recommendation we 
made that, to increase our comfort level, the importance is to 
understand what are the most important assumptions and data 
elements that contribute to changes in fees that we're going to 
be introducing, and then to work to verify that those 
assumptions and the data elements that we had were reasonable. 
Across the board we can't afford to go back and try and develop 
perfect data, but in a targeted way we can improve the data 
that we have for this task.
    Chairman Thomas. And then, just finally, I have had my 
share of criticisms with HCFA, but what I got out of your 
study--and if it's incorrect, let me know--is that in this 
instance HCFA has been open and cooperative in trying to 
resolve concerns about the content and level of accuracy of 
their data; is that correct?
    Mr. Scanlon. They've certainly been open and cooperative 
with us, and we believe they've had continued contact with the 
medical societies. They've requested information from the 
medical societies. We think that they need to add an additional 
effort which is a more proactive stance in terms of gathering 
information themselves.
    Chairman Thomas. My goal is to focus on the difficulty of 
the job, not on trying to line up folks who are villains in 
terms of not trying to get to the bottom of it. I think this is 
an extremely difficult process, and that if there is a degree 
of cooperation on all sides, that's very positive. Is that a 
fair statement?
    Mr. Scanlon. That's very fair.
    Chairman Thomas. Thank you.
    The gentleman from California.
    Mr. Stark. Well, thank you, Mr. Chairman.
    Mr. Chairman--I'm puzzled that we don't have HCFA here to 
respond to some of Dr. Scanlon's review. I can't tell whether 
you gave them a C+ or a B-. But, perhaps you would like to 
write a letter to HCFA? I'd love to join in asking them to 
respond to the various suggestions we've heard today.
    Chairman Thomas. I'd just tell the gentleman that it may 
seem to be appropriate if they were sitting at the table. The 
problem is I believe that their response to every question we 
asked them would be that they're in the process of developing 
regulations that are going to be issued on May 1, and they'd be 
free to comment when the regulations have been issued, and I 
thought I could do that adequately----
    Mr. Stark. Let's do it on May 2. [Laughter.]
    Chairman Thomas [continuing]. As a kind of a cover for 
them. So sometime after May 1 will be appropriate. Until then, 
they're in the process of developing regulations; they're going 
to be out on May 1, and it would be inappropriate to comment 
until those regulations are issued. [Laughter.]
    Mr. Stark. It sounds like a stone wall.
    Dr. Scanlon, let me just review the issue because I may be 
more objective about this. As I recall, when the physician 
reimbursement plan was devised, it was meant to be 
``relative,'' am I correct? You've used the word relative 
several times in the last 15 minutes.
    Mr. Scanlon. That's correct.
    Mr. Stark. So that we could, under the law, just decide 
that practice expense for heart transplant is a dollar, but 
then we might say that a pediatric visit is one cent, and it's 
all relative. There is no suggestion that the practice expense 
was ever going to be an accurate determination of the dollar 
cost of the expenses of each procedure and reimbursed on that 
basis; is that correct?
    Mr. Scanlon. There was no intent to fully reimburse the 
practice expenses. The idea was just to get the relative values 
correct. The level that you're----
    Mr. Stark. I think you've hit on what is causing some angst 
amongst ourselves in the physician community. Many of them are 
saying, ``This doesn't begin to cover my cost.'' It's a very 
hard thing to say, ``But, Doc, it was never intended to cover 
your cost. It was intended to pay some portion of those costs 
relative to what your colleagues in other specialties may be 
getting.'' And, that's often overlooked, these many years 
later, I believe. I just think it's important that we remind 
people that what doctors now want really was never on the 
table.
    Mr. Scanlon. There's also a question being raised--and this 
is something that we did not try to verify, both because of the 
timeframe for our study, as well as the fact that HCFA is in 
the process of revising its rule for the May 1 issuance--but 
the issue raised by the physicians' community is that it's a 
different proportion of practice expenses that may end up being 
reimbursed for different types of services.
    Mr. Stark. You're also hearing mostly, I suspect, from 
those physicians who have the highest fees and the lowest 
volume in number of procedures. In other words, the $6,000 
surgery rather than the $50 office visit. Therefore, the 
practice expense for each time they receive that fee is more 
significant.
    When we were doing the professional side of it, we didn't 
hear any complaints from the high-cost-per-procedure community 
because they were getting a hundred times what the primary care 
people were getting for these high, expensive procedures. But 
the interesting thing is they all agreed with the Shiao study.
    If we got all the doctors to agree and the accountants to 
agree, and everybody else to agree, on the relative value basis 
that the Shiao study put forward, which defines the relative 
difference between transplanting a liver and a heart? Talk 
about a complex and very subjective decision.
    Now, they were able to agree on the relative value between 
these very subjective procedures. I can't imagine that you 
can't figure out what the office costs are on a relative basis. 
This leads me to believe that this is merely a course of 
complaints among those who will have some reduction. Even the 
people who are getting increases aren't getting very much. Is 
that not the question? When we make these adjustments that have 
been proposed in the past, the primary care guys and the GPs 
and the interns are going to get a few bucks' increase. But, 
the people who take the decrease, while there are fewer of 
those procedures, will take a much higher dollar cost. In other 
words, the decreases might average $500, and the increases 
might average $5. Is that a fair assessment of what we're faced 
with?
    Mr. Scanlon. I'm more familiar with it in percentage terms, 
and again, we didn't focus on this a lot because we knew they 
were temporary numbers that were going to be replaced, but, as 
I recall, the increases would average by specialty somewhere in 
the order of 10 percent for the biggest gainers and some of the 
specialties that would lose could lose on the order of 20 
percent or more. So we're talking about whatever that number is 
times the base----
    Mr. Stark. Times the base. And if all of the gainers were 
pretty low-cost procedures, because they were the volume 
people. And, the losers were those whose $600,000 incomes were 
made up of fewer procedures. Then it would stand to reason that 
you're going to get bigger dollar cuts per procedure, would it 
not?
    Mr. Scanlon. That's correct.
    Mr. Stark. As I say, I would hope that you will continue to 
give us your excellent advice----
    Mr. Scanlon. I think that at the time the work values were 
computed, I agree with you that the task was enormously 
complex. This task in some ways is as complex or more complex, 
given the fact that what we're talking about is trying to deal 
with an office operation and assign it to all the different 
procedures that are going on with that office----
    Mr. Stark. It's complex, but much more objective, is it 
not? Much more empirical as it were?
    Mr. Scanlon. Well, it could be empirical in the sense that 
if we could afford to have someone in there with a stopwatch 
and have someone monitor every supply and the equipment used, 
then we could be very, very precise, but we really can't afford 
that. So, instead, what we need to do is rely on very skilled 
observers to tell us their best estimate of what----
    Mr. Stark. Let me try this a minute. In the dim, dark past, 
I used to fuss with this professionally. You don't need a 
stopwatch per procedure; you can deal with the averages. You 
are not going to pay for the semiretired surgeon who does one 
procedure a week. You're not going to load the full practice 
expense into that one procedure. You have to deal with a 
surgical office where the full-time surgeon has to do five 
procedures a day, or let's assume, three a day. You take that 
average and say, ``I'm sorry, if you don't work up to the 
average, Pal, you don't get a higher cost per procedure just 
because your productivity is low.'' That would be un-American.
    Mr. Scanlon. No, these were all calculated for what would 
be the typical patient, we assume, within an average practice, 
but the reality is that the estimates of expenses for different 
procedures vary considerably because of the time that's 
involved and in some instances because of the equipment and 
supplies that are involved in those procedures.
    Mr. Stark. Thank you. Thank you, Madam Chairman.
    Mrs. Johnson of Connecticut. Mr. McCrery.
    Mr. McCrery. Dr. Scanlon, I just want to try, if I can, 
clear up the gist of what you said and what your report says. 
First of all, you mentioned that the data that HCFA has 
accumulated is OK. I mean, that's probably as good as the data 
that you could expect to get. But you've also said that HCFA 
must be careful to interpret the data and use methodologies 
designed to interpret the data in a way that will give us a 
fair result. Is that basically what you said?
    Mr. Scanlon. I don't think I'd use the word ``fair.'' I 
think it would be a result that we'd have more confidence in, 
and we did recognize that in collecting the primary data, which 
are the estimates of these panels as to the time and equipment 
and supplies involved in procedures, that there are differences 
across panels in estimates, as there would be differences in 
physicians and offices, if they were to fill out surveys.
    HCFA's task was to try to bring that information, combine 
it in a way that they could come up with one value for each 
procedure. They also had a number of other adjustments that 
they felt necessary to make, for some, they didn't have data to 
support the assumptions underlying those adjustments. People 
would feel more comfortable about the end result if they had a 
comfort level with the adjustment to combine the panel data, as 
well as those other adjustments to the data that HCFA has 
imposed.
    Do you think HCFA has time between now and when they are 
supposed to submit their recommendations to follow through on 
your suggestions?
    Mr. Scanlon. We feel that they have time to follow through 
on some of our suggestions, but they also, we believe, should 
be instituting an ongoing process that's going to allow them to 
refine the relative values and to collect the additional 
information as well as to adjust the methods, so that during 
the phase-in, as called for by the Balanced Budget Act, that we 
see the relative values modified in a way that again increases 
people's confidence in them.
    Mr. McCrery. Are you suggesting that GAO participate in 
that oversight or----
    Mr. Scanlon. We would be happy to examine what HCFA is 
doing at any point, including the May rule that will be 
published, and then to follow the activities of HCFA for this 
Subcommittee as well as for the Congress.
    Mr. McCrery. Madam Chair, I just want to point out that 
while we can somewhat dispassionately discuss changes like 
this, we are talking about substantial changes in how the 
government reimburses specialties and physicians in general 
that will affect their income in a substantial way in some 
cases, and we ought not take what we're doing lightly. We ought 
to demand that HCFA follow through on the recommendations of 
the GAO and we ought to provide that oversight that Dr. Scanlon 
is suggesting, perhaps in concert with GAO and this 
Subcommittee, because I am concerned that we are going to 
impose on some specialties decreases and reimbursement levels 
that would be greater than warranted by a true reflection of 
what their costs are. So I'm hopeful that we will follow 
through with the recommendations of GAO and look very closely 
at this transition period, and make sure that HCFA follows the 
recommendations closely of GAO, and perhaps we can work with 
GAO to develop a rigorous oversight regime during the 
transition period.
    Mrs. Johnson of Connecticut. Dr. Scanlon, I find your 
report really very concerning. You say, overall, their data is 
good; overall, their methods are OK. Then you go on to say, 
``While we agree with the intent of the adjustments they made, 
we believe that some methodological weaknesses and other 
adjustments and assumptions lack supporting data.'' Now, 
frankly, I think that matters a lot. It's not just that some 
people are going to get paid a lot less, but you say, yourself, 
that the cumulative effects--now, it's true, you're pointing to 
more things than the adjustment and practice expense 
reimbursements, but the cumulative effects of the transition to 
the fee schedule--``recent adjustments to the fee schedule that 
were mandated by the Balanced Budget Act and the upcoming 
practice expense revisions could alter physicians' willingness 
to accept Medicare's fee schedule payments for some 
procedures.''
    Now I think that's very serious, and frankly, that does 
reflect a lot of things I've been hearing out there. Earlier 
on--I imagine you were here--I mentioned to Dr. Wilensky that 
the volume assumptions were not sound, and when I talk to 
physicians, I'm keenly aware of the additional equipment 
they're now required to buy, some of it OSHA-mandated, some of 
it other mandated; the longer time it takes for some of the 
sterilization procedures. Some of the procedures that we're 
going to cut by 50 percent now take 1 hour instead of 45 
minutes, and the paperwork and the overhead is much greater. 
When I hear that this is OK and we should go ahead, in spite of 
the weaknesses, I do find it disturbing.
    You mentioned the equipment utilization section; that HCFA 
officials ``told us actual equipment utilization rates were not 
available, and therefore, they had to make assumptions about 
the rate at which equipment is used in order to assign 
equipment cost to each code,'' and then you go on to go through 
some of the concerns that people have had about the equipment 
utilization rates. This is very fundamental. If you make the 
wrong assumptions about equipment utilization rates, you're 
going to come out with wrong numbers. It does seem to me that 
while their overall approach seems to have been rational, that 
we would be ill advised to move ahead with this until we get a 
better handle, for example, on equipment utilization rates.
    Mr. Scanlon. In terms of the equipment utilization rates, 
the effect of equipment on the practice expense relative values 
is not just the result of their assumption, but they also use 
data from the American Medical Association, actual practice 
expenses, to scale the relative values, and in the process they 
are able to adjust for an error in their equipment rates. This 
is still an area, though, that's of concern to us because in 
doing that they did an adjustment for all procedures, and one 
of the things that we've talked with them about is the issue of 
whether one needs to vary that adjustment for different types 
of procedures or for different specialties.
    Our concerns about their methods are significant, but in 
weighing what the possible impact would be on fees, we felt 
that it was still justified to move forward at this time. We 
would be much more comfortable if HCFA implements the 
sensitivity analysis that we asked for in terms of identifying 
what each of these assumptions and each of the types of data 
that we think of as a bit weaker, what impact they have on the 
fees being paid. If then we discover that there's a significant 
problem for particular procedures, we think that we'd have the 
opportunity to get information to adjust the fee for that 
procedure or----
    Mrs. Johnson of Connecticut. All right. I would remind you 
that, generally, by the time we discover that we've made a 
mistake, at least 2 years have elapsed, for us to collect the 
data and figure it out.
    Let me give you one specific example because my colleague 
from California, Mr. Stark, mentioned drug reimbursement rates. 
We can figure out how to reimburse right about drugs if we also 
are sure that in the RBRVS we have taken into account the work 
required to deliver the drug, but what's happening is that 
techniques of delivering are changing, and we are not doing 
that. So that when you look at the recent report on oncology 
drugs, those reimbursement rates, and you look at the codes for 
reimbursing the oncologist, neither take into account it uses 
an infusion therapy operation; you have to give a predrug, then 
you have the person there; often they're there 6 hours in your 
office. You have to have certain OSHA-qualified hoods to do 
this and that and the other thing. If you open the bottle, you 
have to get rid of it. So it's not one dose; you can use half 
the bottle, and you have to waste the other half. You have to 
pay the insurance and the inventory upkeep, and so on, of a 
whole variety of drugs, so you can deliver them.
    I am concerned about what we're doing in practice expenses 
because we're getting at that sort of soft, odd area that we 
have not been able to take into account very well in, for 
instance, drug reimbursement rates, and we have not taken into 
account very well in RBRVSs in some of the more recently--in 
some of the areas where the practice has changed and the 
instruments, sometimes surgical, but sometimes pharmaceutical, 
have changed dramatically. I think there are key things that we 
don't know here about the machinery equipment, that it has to 
be standard now in offices, even if it's only used rather 
seldom, and the cost of delivering pharmaceuticals and things 
like that. How would you deal with? Have you focused any 
attention, for instance, on the oncology area and delivery of 
drug therapies? And who's paying for what? How accurate are we?
    Mr. Scanlon. The oncologists were members of certain 
panels, but there was not a special oncology panel, but we 
didn't focus on individual procedures. We focused on HCFA's 
overall method.
    I agree with you that there is changing technology in terms 
of the delivery of services, and that needs to be reflected in 
these relative values. One of the things that HCFA has done, 
since the publication of the June rule, is solicited 
information from the medical community to help them make better 
assumptions in terms of limiting excessive cost, help them 
understand what types of personnel may assist physicians in 
different settings. We think those are the kinds of things that 
are important to have information on. At this point in time 
HCFA made some assumptions that affected the relative values 
that were published in the June rule. With information, they'll 
be able to assess whether or not those assumptions should be 
retained.
    The example that you give of oncology drugs is a perfect 
example where the easiest way would be if the medical community 
would come forward with information that HCFA could then use to 
adjust fees. But if that doesn't happen, we would encourage 
HCFA, recognizing that this may be an important area, to pursue 
information on its own.
    Mrs. Johnson of Connecticut. Thank you. I would just say, 
making mistakes in this area is going to be very costly because 
if we get it wrong, it's not hard to not have the equipment and 
send them down to the hospital for the equipment, where the 
costs are higher. If we get it wrong, it's better not to 
deliver the drug and let them go to the hospital and have the 
drugs delivered, and that will be more expensive, and less 
convenient. So access and quality for actually the senior out 
there in the small town is a very big issue if we get the 
practice expenses matter wrong. So I'm interested that your 
focus was really on the overall, and I appreciate your 
responses very much. I guess I find the weaknesses in HCFA's 
work that you point to very substantial, and so I would see 
your comments about their being overall right and their data 
being overall OK as being a rather big umbrella statement and 
not the basis on which to set specific reimbursement rates.
    Mr. Scanlon. If I could add, our concerns with what HCFA 
did all involve the adjustments that occurred after they 
collected the original panel data. It is possible, with the 
data that they have, to pose a different set of adjustments 
before their May rule. That's quite feasible for them to do.
    Mrs. Johnson of Connecticut. OK.
    Mr. Scanlon. And we think that the basis for doing that can 
be either the information that's coming in from the medical 
communities or in further consideration on their part as to 
what's an appropriate adjustment.
    Mrs. Johnson of Connecticut. Yes, thank you. I join Mr. 
McCrery in believing that there ought to be a lot of oversight 
of those adjustments that clearly need to be made.
    And, just last--and you could yes/no to this because we do 
have our guests that we would like to have a chance to ask you 
questions also--should this have been done without the 
constraint of budget neutrality, so we could see what we were 
doing, and then come back to, what can we afford?
    In other words, is the constraint of budget neutrality 
creating a certain dishonesty in this process?
    Mr. Scanlon. We have considered that issue, and I don't 
think the answer is yes, but I'm not positive about that.
    Mrs. Johnson of Connecticut. OK. Dr. Cooksey, it's a 
pleasure to have you with us.
    Dr. Cooksey. Thank you.
    Dr. Scanlon, you're with the General Accounting Office. I'd 
assume your Ph.D. is in accounting?
    Mr. Scanlon. No, my Ph.D. is in economics.
    Dr. Cooksey. Do you sometimes get the feeling that there 
are not enough people in Washington that have taken accounting 
courses?
    Mr. Scanlon. Well, being in the General Accounting Office, 
I don't necessarily get that feeling. We have an ample supply 
of accountants. [Laughter.]
    Dr. Cooksey. Good, good. I'm sure you do. I hope you do.
    Mr. Scanlon. Right, but maybe more generally.
    Dr. Cooksey. How long have you been in your position in 
dealing with health care issues?
    Mr. Scanlon. I've been in my position at GAO for 4 years, 
and I've been dealing with health care issues since 1975.
    Dr. Cooksey. I've seen your name around for many years. Do 
you get the feeling that we're dealing with a highly regulated, 
highly politicized, very complex health care system?
    Mr. Scanlon. No question about that.
    Dr. Cooksey. Do you get the feeling that all of these 
hearings, all the votes, all the sound and fury is merely 
tinkering with a complex system without really addressing some 
of the basic problems?
    Mr. Scanlon. I think we probably often feel that the only 
thing that we can do is touch the edges, that we really are not 
equipped to deal with the core issues.
    Dr. Cooksey. Is there any concern on your part that the 
balanced budget bill--now act--the way it came out, the final 
version, will skew the RBRVS system?
    Mr. Scanlon. No, I don't think I have that concern. I mean, 
I think that what the instructions from the Balanced Budget Act 
are is to calculate for resource-based relative values based on 
actual cost, and that the issue there is the ability to 
undertake that activity within reasonable resource constraints 
in terms of budget and time, and to achieve the most precise 
and most accurate result that you can.
    Dr. Cooksey. I've taken a few accounting courses. It's been 
several years ago, but it's my understanding that the 
accounting profession and a lot of the more progressive 
businesses that have good accounting procedures are moving to 
more cost accounting. Would you agree with that or disagree 
with that?
    Mr. Scanlon. I think cost accounting is essential in terms 
of operating a business, in the sense that if one isn't aware 
of the cost of producing either your product or your service, 
it's very difficult to understand how to price it or understand 
how to promote or whether you should promote it. So I think 
that a good and a successful business is going to be very aware 
of its cost for producing different services.
    Dr. Cooksey. Do you feel like the U.S. Government, from 
your perspective in the General Accounting Office, is moving to 
take advantage of these new cost accounting trends? Are the 
government agencies on the leading edge or the trailing edge of 
this trend toward cost accounting?
    Mr. Scanlon. Well, I think that the Federal Government, and 
particularly through the Government Performance Results Act, 
GPRA, that the Congress has indicated very clearly that there 
is a concern that we understand what the product of government 
is. The challenge is that the product of government is often 
very intangible; a business has a service or a product to sell, 
whereas in government we have many potential effects that come 
from governmental activities. And the difficulty is in terms of 
identifying what those effects are and then measuring the 
quantity of the effect that we have, and then finally being 
able to relate that to the resources going into that activity.
    In reality, we are only now moving through the first stages 
of the GPRA effort, and so in some respects we are at the 
opposite of this activity in terms of trying to do cost 
accounting for government, but someday we maybe will be pleased 
with the progress, but we certainly shouldn't be pleased today.
    Dr. Cooksey. Do you envision a time that the government, as 
a major stakeholder, as a payor of health care for many 
different segments of the American population, could reach a 
point that the government could trust market forces, market 
patient's choice, and trust competition for those people that 
it's providing health care for, as an alternative to what we 
agreed upon earlier in this discussion, that we have a highly 
regulated, highly politicized situation where you have all the 
stakeholders there orchestrating the political system? Is this 
alternative feasible? Is it feasible within this millennium or 
the next millennium or even within Pete Stark's lifetime?
    Mr. Scanlon. Let's hope it's at least feasible within the 
next millennium. I'm not sure about this one. I think we have 
the fundamental problem we are trying to address now, which is 
that identifying the outcomes of health care is a difficult 
task. We don't want to hold providers more accountable for 
positive outcomes than they should be, and we don't know what 
is the appropriate prognosis for any individual patient.
    We're moving in the direction of trying to measure outcomes 
with respect to health plans, and someday we may be able to do 
the same thing with respect to providers. Then I think we would 
have a lot more confidence in market forces because we would be 
able to decide who is producing the appropriate amount of 
services for what we're paying.
    Up until then, what our traditional approach has been is 
that we do do regulation. We do regulation of the inputs that 
we have. We ask that providers be qualified before we allow 
them to offer services, and then we often look at the process 
in which they're delivering services to see that it's safe and 
sound and according to accepted practices. The dilemma we have, 
it's the only thing to deal with until we get a better fix on 
outcomes.
    Dr. Cooksey. In this millennium that we're about to finish, 
in the early part of this century, the health care profession 
was more of a cottage industry, and in the examining room you 
had a patient and a physician. With the advent of World War II, 
you had a patient and a physician and employer, and then a 
labor union leader, and then with 1965 you had the government 
paying for Medicare and Medicaid, and then in the eighties we 
had corporate medicine and managed care. So I feel like the 
examination and treatment room is getting very full in this 
millennium with all of these people I just outlined.
    Do you think you could ever trust your patients that the 
government pays for, that the taxpayers pay for, to go back 
into that waiting room where it's just the patient and the 
physician without the companies, without the labor union 
leaders, without the bureaucrats, without the regulators, 
without corporate entities? Is that feasible?
    Mr. Scanlon. Again, I think it may be feasible if we 
understand what should be the outcome of that encounter with a 
physician or with any other health care provider; then we will 
be able to know whether the appropriate outcome occurs.
    Dr. Cooksey. Final question: When you go see a physician, 
how many of those players do you want in the examination and 
treatment room with you?
    Mr. Scanlon. I prefer to go alone.
    Dr. Cooksey. Thank you. Thank you, Mr. Chairman.
    Mrs. Johnson of Connecticut. Thank you very much, Dr. 
Scanlon, for your testimony and your work in this area.
    I'd like to call now the next panel: Dr. Flaherty, the 
American Medical Association; Alan Nelson, the American Society 
of Internal Medicine; Deborah Haynes, the American Academy of 
Family Physicians; Dr. Alan Pearlman, on behalf of the Practice 
Expense Coalition.
    I appreciate you all being here. You do know the rules. 
Your testimony will be entered in the record in its entirety, 
and we invite you to make an opening statement of 5 minutes. 
Because of the schedules of Members, we will go right through 
the whole panel, so we get to hear all of you and then take 
questions thereafter.
    Dr. Flaherty.

   STATEMENT OF TIMOTHY T. FLAHERTY, M.D., MEMBER, EXECUTIVE 
   COMMITTEE, BOARD OF TRUSTEES, AMERICAN MEDICAL ASSOCIATION

    Dr. Flaherty. My name is Dr. Tim Flaherty. I'm a practicing 
radiologist from Neenah, Wisconsin, and a member of the AMA, 
American Medical Association's, executive committee of the 
board of trustees. I want to thank you for the opportunity to 
testify on this critical physician payment issue.
    With the Balanced Budget Act, Congress brought Medicare 
beneficiaries a new benefit and new choices. For physicians, 
however, the BBA also brought extensive new payment restraints 
and redistribution that could eventually affect the care of 
beneficiaries received. Provisions calling for a single 
conversion factor and changes in practice expense values will 
lower payments for some physicians and raise them for others. 
However, the new spending targets established by the BBA may 
reduce Medicare payments to all physicians below current 
levels.
    The combined payment cuts for a number of physical 
specialties could be severe. Both the GAO and MedPAC point to 
the need to carefully monitor how these changes will affect the 
access and quality of care available to elderly and disabled 
Americans. The AMA agrees, but is concerned that the current 
monitoring tools may not identify potential access or quality 
problems until they become significant or widespread.
    One important tool for identifying potential access 
problems was eliminated in the BBA, and we are asking Congress 
to reinstate that tool which requires HCFA and MedPAC to report 
each spring on the projection of physician payment updates for 
the following year. Under the sustainable growth payment 
updates, we will be reduced when the utilization of service 
grows by more than the gross domestic product, GDP. The CBO 
predicts utilization will, in fact, exceed the target. As a 
result, CBO predicts that Medicare payments rates in the year 
2002 will be 11 percent lower than payments today--11 percent 
lower than payments today--and 19 percent lower when adjusted 
for inflation. Ironically, this severe target was imposed 
despite the fact that since 1991 growth in spending for 
physician services has been well below Medicare overall rate of 
growth. No other provider group can match this record. Yet, 
physicians face projected payment cuts, while other providers 
can expect payment increases. In fact, Medicare+Choice care 
plans are even guaranteed a 2-percent increase each year.
    As originally proposed and debated, the sustainable growth 
rate target was to be set at GDP plus 1 or 2 percent, but it 
was tightened to GDP plus 0 in the Balanced Budget Act. This is 
not realistic, and the result in payment cuts could stifle 
development and availability of new medical innovations. The 
spending target must be raised to GDP plus 2. Even then, 
projected growth in physician spending over the next 10 years 
will be lower than the BBA set for Medicare as a whole.
    BBA also addressed the development of resource-based 
practice expense values for Medicare fee schedule. The AMA 
supports resource-based values so long as they reflect actual 
practice expenses. It is imperative that HCFA get this right 
because practice expense represents 41 percent of physician 
payments.
    We supported the BBA provisions extending the 
implementation dates for requiring HCFA to revise its proposal, 
and we thank the Subcommittee and its Members for your support 
in these provisions. Congress also called upon the GAO to 
comply with HCFA's methods and data. We believe the GAO has 
developed an excellent report, and it is consistent with AMA 
policy. The AMA agrees that the use of expert panels to 
identify direct costs is appropriate, but we share the GAO's 
criticism of the way HCFA edited and linked the panel data, and 
do not believe it should be as is. Instead, adjustments should 
be made to improve the data's consistency.
    We also agree that HCFA should explore including billing 
and other administrative costs in the indirect costs, just as 
office and other overhead expenses are now included. HCFA also 
should use specialty-specific data from the AMA's annual SMS, 
socioeconomic monitoring survey. Specialties vary in the 
dollars spent and practice resources per hour worked. The SMS 
was not designed to support development of relative values, but 
it has become clear that the survey is presently the most valid 
means of measuring practice costs. If the new values are to be 
truly reflective of the physician's actual cost, HCFA must make 
more extensive use of these data.
    In addition, the AMA believes HCFA needs to collect some 
additional data from medical practices and other sources. 
However, we think this data can be collected without delaying 
implementation. We concur with the GAO that starting data 
collection over again would needlessly increase costs and 
further delay implementation.
    We also strongly support MedPAC's recommendation that HCFA 
should not apply--should not apply, not apply--a behavioral 
offset to practice expense charges. Physicians have repeatedly 
challenged this offset, which would have reduced payments by $1 
billion across the board in HCFA's June rule. In fact, we don't 
think these offsets are warranted for other payment charges 
either.
    I appreciate the opportunity to appear, and I'd be happy to 
answer questions.
    [The prepared statement follows:]

Statement of Timothy T. Flaherty, M.D., Member, Executive Committee, 
Board of Trustees, American Medical Association

    Mr. Chairman and members of the Subcommittee, my name is 
Timothy T. Flaherty, MD. I am a practicing radiologist from 
Neenah, Wisconsin, and a member of the Executive Committee of 
the American Medical Association's Board of Trustees. I thank 
you for the opportunity to testify today on a number of 
critical issues raised in two recently-released reports from 
the General Accounting Office and the Medicare Payment Advisory 
Commission.
    With the enactment of the Balanced Budget Act of 1997 
(BBA), Congress opened a broad array of new private plans to 
Medicare beneficiaries and began the work that will be 
necessary to preserve the program for future generations. As 
with any new endeavor, careful monitoring will be required to 
ensure that nothing goes awry and patients are protected as the 
new Medicare+Choice program is implemented over the next few 
years. At the same time, we must all remember that many, if not 
most, beneficiaries will remain in Medicare's fee-for-service 
program for years to come. It is therefore appropriate that the 
subcommittee has chosen to focus on both sides of the program 
at this important hearing.
    While the BBA brought Medicare's 37 million beneficiaries 
new benefits and new choices, it also brought extensive payment 
restraints and redistributions for their caregivers. For 
example, we note that modifications in the calculation of 
practice expenses and movement to a single conversion factor 
are expected to lower payments for some physician services and 
raise them for others. In addition, it is possible that the 
Sustainable Growth Rate target established in the BBA will 
bring about an across-the-board reduction in Medicare payments 
for physician services.

                     Monitoring Access and Quality

    Both GAO and MedPAC have pointed to the need to carefully 
monitor the impact of these changes on elderly and disabled 
Americans. The AMA fully agrees with this conclusion. However, 
we are concerned that current monitoring tools may not identify 
potential access or quality problems until they become 
egregious and widespread.
    To date, studies based on claims data and beneficiary 
surveys have found little evidence of any widespread 
deterioration in the availability of services to Medicare 
patients. However, anecdotal evidence suggests that some 
physicians are responding to growing cost pressures by 
foregoing investment in new technologies, reducing office 
staff, eliminating costly educational materials, curtailing the 
number of Medicare patients they see, and reducing the time 
they spend with them.
    Should these trends become more prevalent, the availability 
and standard of care Medicare patients enjoy today may decline. 
The AMA is now conducting more comprehensive research on how 
payment cuts affect medical practice. We would be happy to 
share our results with MedPAC and this committee. In addition, 
however, we would urge MedPAC and others with a responsibility 
to protect Medicare beneficiaries to devise more refined 
methods of detecting and addressing access problems before they 
become widespread.

                        Physician Update Reports

    We would further submit that the BBA eliminated one very 
important safety feature that has helped ensure that large 
numbers of physicians continue to participate in Medicare. We 
ask that Congress take immediate action to reinstate a 
requirement that the Health Care Financing Administration and 
MedPAC report each spring on projected physician payment 
updates for the following year.
    When Congress first created a Medicare spending target (or 
volume performance standard) with an automatic formula for 
determining future payment updates, lawmakers acknowledged the 
potential for the formula to trigger updates that were either 
excessive or inadequate. They therefore asked HCFA and the 
Physician Payment Review Commission to advise Congress each 
spring on whether the default updates should be modified or 
allowed to stand.
    These spring reports turned out to be a crucial ingredient 
in the new physician payment system. Lawmakers repeatedly 
turned to the reports for advice on refining the new payment 
system or altering the updates. Moreover, since HCFA officials 
repeatedly ignored a directive requiring them to produce 
quarterly reports on physician expenditures, the spring reports 
became the only information any of the interested parties had 
for evaluating and modifying upcoming changes in the payment 
rates before it was too late.

                        Sustainable Growth Rate

    Despite its important role, the required update preview was 
dropped this year when the previous spending target was 
replaced with a new ``Sustainable Growth Rate'' target tied to 
increases in the gross domestic product. We note that MedPAC 
does conduct an annual review of the updates for hospitals and 
other health care facilities. And we believe that as PPRC's 
successor, the new commission can play an important role in 
ensuring that payment rates are set at levels that are fair to 
the government and adequate to maintain continued access to 
high quality care for Medicare patients.
    This is especially important in view of the fact that 
physicians face a potential downward payment spiral that could 
lead to negative updates and payment rates that are well below 
those in place today. Shortly after the BBA was enacted, for 
example, the Congressional Budget Office predicted that the 
conversion factor used to determine Medicare payments will drop 
to $32.63 in 2002--or 11% (unadjusted for inflation) below this 
year's conversion factor of $36.63.
    Whether the CBO is right or not will depend on how much 
Medicare patients' utilization of physician services grows over 
the next few years. If growth per beneficiary can be held to 
only 3% a year, for example, a recent AMA study suggests that 
physicians could see annual updates of about 0.5%. If the 
volume of services rises by 6% instead, however, payments would 
fall by 2% a year. Moreover, once adjustments are made for 
inflation, physicians face real per-service payment cuts of 
-1.5% or -4% under either scenario.
    These declines are of particular concern because, since 
1991, physician spending growth has been well below the rate 
for any other major sector of Medicare, and well below overall 
Medicare growth. Moreover, the projected Medicare payment level 
for physicians is a steep actual decline, while hospital and 
other provider payment rates go up. In fact, the 
Medicare+Choice plans are even guaranteed a 2% positive 
increase each year.
    Such reductions, especially if they are accompanied by the 
new provider taxes or user fees proposed in the President's 
latest budget, may make it impossible for some physicians to 
cover their costs of treating Medicare patients. Some 
physicians may have no choice but to scale back the number of 
Medicare patients they see or the level of services they 
provide. For this reason, the AMA is convinced that, in 
addition to reinstating MedPAC's spring payment reports, 
Congress needs to modify the SGR.
    With the SGR system, expenditure targets are determined 
through a formula that includes changes in Medicare payments, 
the number of fee-for-service beneficiaries, projected growth 
in the gross domestic product per capita, and recently-enacted 
laws and regulations. As originally proposed by PPRC, the 
formula would have included an allowance of one or two 
percentage points to make room for utilization increases 
stemming from technological innovation, emerging diseases, or 
potential favorable selection into the new Medicare+Choice 
plans. While Congress had endorsed this concept in prior budget 
bills, the allowance was dropped last year and the formula 
became GDP +0% rather than GDP +1% or +2%.
    This year, the system will permit Medicare expenditures for 
fee-for-service patients to rise by just 1.5% in total, or 
about 4% per beneficiary. Such tight constraints will hold 
increases in physician spending well below historical levels 
and overall Medicare program growth, and could hamper efforts 
to encourage care in more cost-effective settings outside the 
hospital.
    Such severe limits also could inhibit the creation and 
diffusion of new medical technologies and innovations. As the 
SGR is currently constructed, if adoption of new technologies 
generates even modest increases in the use of physician 
services, Medicare spending could exceed the target and trigger 
across the board reductions in physician payments. Facing such 
financial disincentives, physicians might be reluctant to 
invest in new devices and provide new technologies to Medicare 
patients, who then would be denied the advantages of recent 
increases in funding for biomedical research and changes in the 
FDA device approval process.
    It is hard for physicians to understand why they alone 
among provider groups should be expected to absorb continued 
across-the board payment cuts. If Congress is serious about 
expanding the opportunities for medical innovation and if the 
SGR is to have any credibility with physicians, then the SGR 
allowance for utilization growth must be raised to at least GDP 
+ 2%. We note that, even at that level, physician spending over 
the next 10 years would be held to lower growth rates than the 
BBA set for Medicare as a whole.

                       Practice Expense Payments

    The BBA also included important provisions affecting 
another aspect of Medicare's physician payment system: the 
development of resource-based practice expense values. Due to 
major problems with HCFA's initial proposal for resource-based 
practice expense values, we strongly supported the BBA 
provisions extending the implementation date for the new 
payments and requiring that HCFA revise its proposal to 
incorporate accurate cost data. We wish to thank the Chairman 
and Members of this Subcommittee, as well as the full Congress, 
for your support in enacting these provisions. We were also 
pleased that Congress directed the General Accounting Office to 
evaluate HCFA's methods and data and the potential impact of 
the payment changes on beneficiary access. The AMA continues to 
support the change to resource-based values, so long as they 
reflect the actual costs of clinical practice.
    Since enactment of the BBA, we have been impressed with the 
dedication of both GAO and HCFA staff to meeting the Act's 
requirements. Project teams from both agencies have consulted 
frequently with AMA staff, particularly with regard to 
potential use of data from the AMA's annual survey of 
physicians in the new values. The GAO recommendations are 
generally consistent with AMA policy, and we believe the agency 
has developed an excellent report. We also believe that HCFA is 
likely to adopt many of the modifications recommended by the 
GAO.
    In comments on its June 1997 proposal, we identified many 
flaws in HCFA's methods and data. The AMA agrees with the GAO 
that use of expert panels is an appropriate way to gather 
information about procedure-specific, or direct, practice 
costs. However, the way that HCFA used the panel data in its 
June proposal indicated that even the agency itself had little 
confidence in the results. A variety of methods were utilized, 
including a statistical approach called ``cross-specialty 
linking'' and a series of across-the-board data ``edits,'' that 
substantially reduced the cost estimates provided by the expert 
panels. HCFA did not describe the criteria that it used to 
judge the relative accuracy of the panel estimates. Nor did it 
explain its apparent conclusion that only one of the panels 
produced accurate results. Moreover, in contrast to the process 
used to construct the physician work values, the cross-
specialty linking process for practice expense relied 
exclusively on statistical methods, with no opportunity for 
clinical judgment.
    Despite our criticism of the way HCFA altered the direct 
cost data in its June proposal, however, the AMA believes that 
the expert panel data require some adjustment and should not be 
used ``as is.'' AMA observers attended all of the expert panel 
meetings and concluded that the panel estimates of billing 
costs, and possibly other administrative costs, were of 
questionable validity. Over the last six months, HCFA has made 
several well-intentioned but unproductive efforts to evaluate 
and correct these data. In our estimation, it is now time to 
move on and try other approaches to obtain accurate billing and 
administrative cost estimates. We support the GAO 
recommendation, therefore, that HCFA make targeted adjustments 
to improve the expert panel data's consistency and eliminate 
the need for linking. We also agree with the GAO that the 
agency should explore the option of including billing and other 
administrative costs in indirect costs, such as office rent and 
other overhead costs. This approach would eliminate the need to 
rely on panel estimates to measure billing and administrative 
costs for each procedure, thereby also eliminating the need to 
adjust or link the panel estimates for these resource costs.
    In another recommendation favored by the AMA, the GAO also 
suggests that HCFA utilize the specialty-specific AMA 
Socioeconomic Monitoring System (SMS) data. With a response 
rate greater than 60%, the SMS is of high quality and is the 
only existing practice expense database derived from a randomly 
selected national sample. The SMS core survey has been 
conducted since 1982 by respected survey research firms and its 
validity is well-recognized. Although the SMS was not designed 
to support the development of relative values and the sample 
sizes for some specialties are not large enough to produce 
statistically valid responses, it has become clear that no 
other valid and reliable cost data are currently available.
    HCFA's June proposal used the SMS data only to establish 
the total proportion of direct and indirect practice costs. The 
SMS reveals significant practice cost differences among 
specialties, however, including wide variations in the total 
dollars expended on practice resources per hour worked, as well 
as on individual cost components, such as medical equipment, 
staff labor, and materials and supplies. We concur, therefore, 
with the GAO's conclusion that HCFA should make more extensive 
use of the SMS data in its revised practice expense proposal.
    With the expert panel and SMS data, we believe HCFA could 
develop reasonably accurate values. Consequently, we also agree 
with the GAO that starting data collection over again would 
needlessly increase costs and further delay implementation. At 
the same time, we appreciate the GAO's recognition of the need 
for HCFA to engage in some limited additional data collection. 
We are eager to see a detailed new proposal from HCFA 
explaining how it plans to use expert panel data, SMS data, and 
data provided by specialty societies. Even without knowing the 
details, however, it seems likely to us that these data will 
prove sufficient for initial implementation of the new values 
to proceed as scheduled in January 1999.
    Nonetheless, it is important for data collection efforts to 
be initiated before a final rule is issued and continued during 
the four-year transition period to validate information 
provided by the expert panels and supplement information 
available from the SMS. As a first step, we believe HCFA could 
collect data on administrative and equipment costs from a 
representative sample of medical practices, firms that provide 
billing, coding, transcription, and procurement services to 
practices, and industry groups such as the Medical Group 
Management Association and the Health Industry Manufacturers 
Association.
    One of the most serious flaws in HCFA's June practice 
expense proposal was the application of a ``behavioral offset'' 
that would have removed more than $1 billion from Medicare's 
budget for physician services. HCFA actuaries' assumption that 
physicians would manipulate patient demand to recoup 50% of any 
payment reductions in their services led to a proposed 2.4% 
payment cut for all services. An earlier analysis by PPRC staff 
suggested that the actuaries' assumption was incorrect and 
MedPAC has now recommended that no behavioral offset be applied 
when the new practice expense values are implemented.
    In the commission's view, the offset is unnecessary since 
the SGR would recover any additional spending that might be 
generated by changes in practice expense values. We 
wholeheartedly endorse this recommendation. In fact, we would 
submit that the same rationale should apply to all legislative 
or regulatory changes in physician payment rates. There is no 
need to apply a behavioral offset in calculating savings from 
federal budget proposals or determining budget neutrality when 
other modifications are made in physician payments.
    The AMA also agrees with the MedPAC recommendation that 
HCFA delay its proposed payment reductions for procedures done 
at the same encounter as an office visit. HCFA has neither 
collected nor presented data or rationale to justify the 
proposed reductions.

                Hospital Outpatient Department Payments

    Along with its specific physician provisions, the BBA also 
includes a number of other changes in fee-for-service provider 
payments that will affect physicians and their patients less 
directly. Chief among these is a requirement that Medicare move 
to a new prospective method of paying for hospital outpatient 
services.
    In its discussions of the new system, MedPAC's goal was to 
ensure that the site where care is delivered is dictated by 
medical decisions rather than financial incentives. The AMA 
wholeheartedly endorses that goal along with the commission's 
conclusion that the goal can best be achieved if hospital 
outpatient payments are consistent with payment in other 
ambulatory settings such as physicians' offices. As noted by 
MedPAC, at least initially, this would require a system based 
on disaggregated payments, rather than the bundled payment 
system that HCFA is developing.
    We believe both physicians and outpatient departments would 
prefer to continue using the CPT coding system that is already 
familiar to them. Consequently, the AMA has grave reservations 
about the commission's recommendation that HCFA ``continue to 
investigate service classification systems that would allow a 
broader definition of the unit of payment and could be applied 
consistently in all ambulatory settings.''
    The difficulties that have arisen in setting 
disproportionate share payments on the inpatient side lead us 
to wonder whether it is possible to create accurate adjustments 
for the cost of ``providing socially valued services.'' Should 
this commission recommendation prove feasible, however, we 
believe Congress should also consider whether certain physician 
clinics might also be eligible for a ``socially-valued 
service'' bonus. A less complicated solution might be to 
reverse the BBA provisions that reduce state and federal 
governments' financial liability for patients dually eligible 
for both Medicare and Medicaid. As you know, the AMA vigorously 
opposed this BBA provision and continues to advocate for a 
legislative correction.
    The AMA also cannot endorse MedPAC's recommended cap on 
outpatient expenditures. The commission proposes to monitor the 
cap's impact on access and quality. However, as noted earlier, 
the AMA is worried that many beneficiaries might experience 
serious problems before monitoring detected any deterioration 
in access and quality.
    Should Congress adopt a cap on outpatient payments despite 
its potential disadvantages, however, any savings should be 
used to bring about a more rapid reduction in hospital 
outpatient copayments. These copayments are scheduled to 
decline under the BBA. However, MedPAC estimates that they 
won't reach the 20% level applied to other services for another 
40 years. Like the commission, the AMA thinks 40 years is far 
too long. Even if lawmakers wisely reject the outpatient 
expenditure cap and are forced to look for alternative funding, 
we believe a faster phase-down is in order.

                            Home Health Care

    At the same time, the AMA, like the commission, is in favor 
of imposing a new copayment for home health services. Some 
thought is required in determining exactly how these copayments 
should be applied, however, and we would like to work with 
MedPAC and Congress in determining the most appropriate 
approach. With regard to the commission's call for a case 
manager to review the plan of care for beneficiaries receiving 
home health services for extended periods, we submit that any 
legislation to carry out this recommendation should clarify 
that the case manager could be the patient's physician.

                            Medicare+Choice

    On another issue of great importance to Medicare 
beneficiaries, the AMA appreciates MedPAC's efforts to ensure a 
smooth implementation of the new Medicare+Choice program. With 
its detailed work on risk adjusting payments to the private 
plans, the commission and its staff have made a significant 
contribution to the challenge ahead.
    Since we have not yet had an opportunity to review the 
report in full, the AMA is not ready to support each and every 
recommendation the commission has made in this area. However, 
we agree that it is time to move ahead with new risk adjusters 
and that, ideally, these adjusters should reflect more than a 
single year of data for diagnoses and costs if some existing 
data issues can be resolved. Like MedPAC, we also believe that 
Medicare should undertake demonstrations of partial capitation 
or other methods that pay plans based partly on a capitated 
rate and partly on fee-for-service rates.
    We also concur with MedPAC's conclusion that improvements 
are needed in the adjusted community rate used to determine how 
much of the Medicare payment must be used to supplement 
benefits or defray premiums. However, we do not share the 
commission's view that PSOs in non-competitive markets should 
be subjected to some sort of special reporting and monitoring.
    The AMA has previously endorsed proposals to exclude 
hospitals' disproportionate share payments from the fee-for-
service costs used to calculate payments for capitated plans. 
We would therefore favor MedPAC's recommendation to exclude the 
DSH payments from the local component of the new blended rates 
created in the BBA.
    To ensure equal treatment across all Medicare providers, 
the AMA also backs the commission's proposal to take additional 
steps, if necessary, to ensure that payments to Medicare + 
Choice plans are budget neutral. If physician payment changes 
must be budget neutral, then private plans should be held to 
the same standards.
      

                                

    Mrs. Johnson of Connecticut. Thank you very much, Dr. 
Flaherty.
    Dr. Nelson.

 STATEMENT OF ALAN R. NELSON, M.D., EXECUTIVE VICE PRESIDENT, 
             AMERICAN SOCIETY OF INTERNAL MEDICINE

    Dr. Nelson. I'm Dr. Alan Nelson, the executive vice 
president of the American Society of Internal Medicine. My 
testimony will focus on two questions: First, are the basic 
methodology and data being used by HCFA to develop resource-
based practice expenses fundamentally sound----
    Mrs. Johnson of Connecticut. Excuse me, Dr. Nelson. Could 
you come a little closer to the microphone?
    Dr. Nelson. Of course.
    Mrs. Johnson of Connecticut. Thank you.
    Dr. Nelson. Are the basic methodology and data being used 
by HCFA fundamentally sound? And, second, are the requirements 
of the Balanced Budget Act of 1997 being met by HCFA?
    Some critics of HCFA's current rulemaking process have 
argued that the agency's approach is so fundamentally flawed 
that it needs to start over with some other approach. The 
report of the GAO rejects this conclusion. It specifically 
concluded that HCFA's approach of using expert panels is a 
reasonable method for estimating direct labor and other direct 
practice expenses. The report refutes the criticisms that the 
expert panels were composed in unrepresentative fashion, that 
their members were not prepared in advance to provide accurate 
estimates of practice expenses, and that their estimates were 
based on speculation, not data.
    We also concur with the GAO that it would not be 
practicable to conduct onsite analyses or mail survey of 
physician practices for the purposes of developing a proposed 
rule. As the GAO notes, such approaches have their own 
limitations, including the potential for low or biased 
responses that preclude their use in a proposed rule.
    The GAO also agrees that HCFA's approach to allocating 
indirect costs on the basis of physician work, direct practice 
expenses, and malpractice cost is reasonable. Most importantly, 
the GAO concludes that, ``There is no need for HCFA to abandon 
the work of the expert panels and start over using a different 
methodology. Doing so would needlessly increase costs and 
further delay implementation of the fee schedule revisions.'' 
This should put to rest the argument that HCFA's data and 
methodology are so fundamentally flawed that it needs to adopt 
a cost accounting analysis, activity-based accounting, or some 
other unproved alternative to develop an acceptable proposed 
rule.
    The improvements recommended by the GAO address the 
adjustments HCFA made to the expert panel data. For example, 
HCFA used a statistical formula to link the labor cost of 
physician services on a common scale. The intent of this 
adjustment, which the GAO supports is to eliminate variations 
in labor costs that otherwise would have resulted in some 
categories of services having much higher labor costs than 
other services that in fact have comparable costs. HCFA found 
that the labor costs of surgical and other procedural services, 
as estimated by the expert panels, are too high compared to 
those for office visits and other evaluation and management 
services.
    ASIM agrees that it is appropriate for HCFA to consider 
changes in how it links labor costs on a common scale, but it's 
important to emphasize that the GAO does not call for HCFA to 
eliminate linking or other adjustments. On the contrary, the 
GAO says that, ``We consider linking to be desirable. It's 
clear from the GAO report that, without some method to link 
labor costs on a common scale, some categories of services will 
continue to be significantly overvalued compared to other 
categories of services.
    ASIM agrees with the GAO that the impact on access should 
be monitored. Improvements as well as decreases in access 
should be monitored. However, resource-based practice expenses, 
by improving payments for primary care services, may help 
improve overall access for some Medicare beneficiaries.
    The GAO report demonstrates that HCFA has met the 
requirements of the Balanced Budget Act. BBA mandates that HCFA 
consult with physicians and consider using actual cost data to 
the maximum extent practicable. The GAO report details the 
extensive consultation with physicians that has occurred and 
details why it's not practicable for HCFA to survey physicians 
on their actual costs in order to develop an acceptable 
proposed rule. We agree with the GAO that additional data might 
be considered in the annual refinement process that is mandated 
by the Balanced Budget Act.
    In conclusion, ASIM is committed to working with HCFA to 
refine and improve its data and methodology. The GAO report 
provides a balanced blueprint for achieving the necessary 
improvements, but without incurring the needless costs of 
further delay that would have been required had HCFA been 
forced to use an entirely different approach.
    Finally, although we agree with the GAO's view that HCFA 
should consider changes in the methods it uses to adjust the 
expert panel data, we are pleased that the GAO endorses the 
desirability of linking the practice expenses of physician 
services on a common scale.
    I'll be pleased to answer questions.
    [The prepared statement follows:]

Statement of Alan R. Nelson, M.D., Executive Vice President, American 
Society of Internal Medicine

                              Introduction

    I am Alan R. Nelson, MD, Executive Vice President of the 
American Society of Internal Medicine (ASIM). ASIM represents 
physicians who specialize in internal medicine, the nation's 
largest medical specialty and the one that provides care to 
more Medicare patients than any other specialty. I am pleased 
to provide the Ways and Means health subcommittee with 
internists' perspectives on the current state of HCFA's efforts 
to develop resource-based practice expenses (RBPEs). Our 
testimony will address the following questions:
    1. Is HCFA meeting the spirit and intent of the provisions 
in the Balanced Budget Act of 1997 (BBA) relating to practice 
expenses?
    2. Are the basic process and methodology being used by HCFA 
for developing RBPEs fundamentally sound, and if so, are there 
improvements that still should be considered by HCFA as it 
develops the proposed rule?
    My testimony will refer to the findings and recommendations 
of a draft report by the General Accounting Office (GAO), which 
ASIM had the opportunity to review on February 11. ASIM's 
testimony also refers to recommendations that the Medicare 
Payment Advisory Commission (MEDPAC) is expected to include in 
the Commission's March 1 report to Congress. The MEDPAC report, 
and the final versions of the GAO recommendations, were not 
available to ASIM when this testimony was prepared, so there 
may be some revisions in each of those reports' findings and 
recommendations from those that served as the basis for our 
testimony. Quotes attributable to the GAO report are based on 
our notes and recollections of the exact words used in the 
draft report.
    ASIM's testimony today will explain why we believe that:
    1. HCFA is meeting the spirit and intent of the BBA 
relating to practice expenses, particularly the requirements 
that it consult with physicians and consider data on actual 
costs to the maximum extent practicable.
    2. HCFA's basic methodology and data are valid, although 
some improvements are appropriate.
    3. It is not necessary for HCFA to start over and use an 
entirely different approach to develop resource-based practice 
expenses, which would needlessly increase costs and lead to 
further delay.
    The GAO's draft report concurs with ASIM on each of these 
conclusions.

            Requirements of the Balanced Budget Act of 1997

    ASIM supports the practice expense provisions of the BBA. 
We believe that they represent an eminently fair and balanced 
approach to addressing the concerns that many physicians 
expressed last year. The BBA provided another year for 
physicians to consult with HCFA prior to implementation of 
RBPEs, and gave direction to HCFA on how its proposal might be 
improved. At the same time, though, it recognized the concerns 
of physicians whose services have historically been undervalued 
by the existing charge-based practice expenses, by beginning 
the process of redistributing payments in 1998. We appreciate 
the leadership shown by this subcommittee on this issue. 
    More specifically, the Balanced Budget Act of 1997 directs 
the Secretary of the Department of Health and Human Services 
to:
    1. phase-in implementation of resource-based practice 
expense (PE) payments over four years, beginning on 1/1/99;
    2. use generally accepted accounting principles and 
``actual cost'' data to the ``maximum extent practicable'';
    3. consult with physicians and other experts.
    4. publish a new proposed rule and new practice expense 
relative value units (PE-RVUs) by May 1, 1998, with a 90 day 
public comment period;
    5. begin moving payments to resource-based practice 
expenses, effective on January 1, 1998, by implementing a 
``down payment'' that increased practice expense RVUs for 
undervalued office visits and reduced them for procedures whose 
current PE-RVUs are overvalued (based on a comparison of PE-
RVUs to work RVUs).
    In addition, the law directed the General Accounting Office 
to submit a report to Congress, within six months of enactment 
of the BBA, on the data and methodology being used by HCFA to 
develop the new proposed rule. 

                      Consultation with Physicians

    The record shows that HCFA has fully met the law's 
requirements that it consult with physicians and other experts 
on the development of the proposed rule. The actions that HCFA 
has taken since enactment of the BBA include the following:
     A 60 day comment period was provided on a HCFA 
notice of intent to issue a proposed rule on practice expenses, 
published in October, 1997. The notice invited comments on how 
to use generally accepted accounting principles, utilization 
rates of equipment, and actual cost data in the development of 
the proposed rule.
     The RVS Update Committee (RUC), which consists of 
specialty society representatives and the American Medical 
Association (AMA), was asked by HCFA in September of last year 
to participate in a ``mock'' validation panel. This provided 
specialty societies with an opportunity to advise HCFA on how 
to structure the validation process, and helped them prepare 
for the subsequent validation panel meetings. The RUC had 
another opportunity to question HCFA staff on methodological 
issues relating to the development of the proposed rule at its 
February, 1998 meeting.
     Specialty societies nominated physicians, practice 
administrators, and other experts to participate in panels that 
met this past Fall to validate the data on direct practice 
expenses.
     Specialty societies, accountants, health services 
researchers, and other experts participated in a conference 
held on November 21 that discussed how to apply generally 
accepted accounting principles to the development of indirect 
PE-RVUs. (Indirect costs are the general costs of running a 
physician practice that cannot be specifically allocated to a 
particular procedure).
     Specialty societies nominated physicians to serve 
on a cross-specialty panel that met in December to advise HCFA 
on how to develop direct practice expense RVUs for a list of 
high volume, high cost physician services.
     HCFA staff have regularly solicited advice from 
specialty societies, the AMA, and others on methodological 
issues relating to development of the proposed rule.
    It should be noted that the above actions to solicit the 
views of physicians are in addition to the extensive 
consultation that occurred prior to enactment of the BBA. The 
physicians, practice administrators, nurses and other experts 
who were selected to serve on the Clinical Practice Expert 
Panels (CPEPs) that developed the initial direct PE-RVUs were 
selected from nominations made by specialty societies. 
Specialty societies and the AMA were given an opportunity to 
review preliminary data from HCFA as early as January, 1997. 
They were also given an opportunity to submit comments during a 
90 day comment period on the proposed rule on RBPEs that was 
published in June, 1997.
    Physicians were also consulted by the General Accounting 
Office as it prepared its report to Congress on HCFA's data and 
methodology. ASIM was invited on three separate occasions to 
meet with the GAO to discuss internists' views on the process, 
data and methodology being used by HCFA. The AMA and other 
specialty societies were given similar opportunities. Since 
HCFA will likely give great weight to the GAO's 
recommendations, the GAO report provided another vehicle for 
physicians to have input into HCFA's decision-making.
    It should also be noted that physicians will have another 
opportunity to comment on the new proposed rule and PE-RVUs 
that will be published by May 1, 1998. It is likely that the 
1998 PE-RVUs will also be published as interim PE-RVUs that 
will be subject to yet another comment period. The BBA also 
requires that HCFA make further refinements in each of the 
transition years, which will provide physicians with additional 
opportunities to advise HCFA on any improvements that are 
needed. The RUC will soon be developing a proposal to HCFA to 
participate in the refinement process, which if accepted by 
HCFA, will provide an ongoing means for HCFA to consult with 
the medical profession on refinements of the PE-RVUs.
    By the time that the PE-RVUs begin to be implemented on 
January 1, 1999 physicians will have had far more opportunity 
to advise HCFA on data and methodology than was the case when 
resource-based work RVUs began to be implemented on January 1, 
1992. As a result, the medical profession should have a higher 
degree of confidence that their views were considered in 
developing the PE-RVUs than may have been the case when the 
resource-based relative value scale (RBRVS) for physician work 
was first implemented. (It should be noted that many in the 
medical profession expressed the same kinds of concerns about 
implementation of the RBRVS that Congress is now hearing about 
practice expenses, but that over time the RBRVS has become 
almost universally accepted by physicians). The subsequent 
refinements that will occur during the four year transition 
should give the profession an even higher degree of confidence 
in the final PE-RVUs that will be implemented on January 1, 
2002.

  Use of Actual Cost Data and Generally Accepted Accounting Principles

    ASIM also believes that HCFA is in the process of fully 
meeting Congress' intent that it consider use of actual cost 
data and generally accepted accounting principles to the 
maximum extent practicable. As noted previously, HCFA solicited 
comments on actual cost data, equipment utilization rates, and 
generally accepted accounting principles in its October notice 
of intent to issue a proposed rule. The November 21 conference 
on indirect costs invited further discussion of this issue. 
Witnesses who provided comments at the conference offered a 
wide range of opinion on the extent by which the data being 
used by HCFA was consistent with generally accepted accounting 
principles, with several of the witnesses concluding that 
HCFA's approach is consistent with generally accepted 
accounting principles.
    HCFA is also using actual cost data from the CPEPs and 
validation panels. Data from the AMA's Socioeconomic Monitoring 
Survey (SMS) can also be used to determine specialty-specific 
proportions of direct and indirect practice expenses. 
Independent sources of data on the pricing of labor and 
equipment costs are also being used by HCFA to develop the 
direct PE-RVUs.
    Despite HCFA's efforts to consider data on actual costs, 
some physician groups have repeatedly argued that HCFA's data 
are so fundamentally flawed that the agency needs to start over 
and conduct a new cost accounting analysis of physician 
practices, either through on-site studies or through a survey 
process. They claim that the CPEP and validation panel process 
was based on speculation, not actual cost data, and that the 
requirements of the BBA will not be satisfied unless HCFA 
undergoes a new study of the actual costs of physician 
practices.
    ASIM firmly believes, however, that with some improvements, 
HCFA's data and methodology will prove to be valid, and that it 
is not necessary or desirable to conduct on-site studies or 
surveys of physician practice costs, except possibly on a 
limited basis as part of a refinement process.

            Acceptability of HCFA's Basic Data, Methodology

    It is not only ASIM, however, that reached the conclusion 
that HCFA's basic methodology is fundamentally sound.
    The draft GAO report specifically concluded that the use of 
expert panels is an acceptable method for estimating direct 
labor and other direct PEs. It also concluded that alternative 
methods (including new surveys of physician practice costs or 
an activity-based accounting methodology) have their own 
practical limitations that preclude their use in developing the 
proposed rule. 
    The GAO's draft report dismissed the argument that the 
CPEPs were not representative of the physicians that provided 
the services whose direct costs were being estimated, or that 
the panel members engaged in ``best guesses'' that had no 
factual validity. The GAO found instead that many CPEP 
participants reviewed practice cost data on their own practices 
prior to the CPEPs and came to the meetings prepared to discuss 
the issues, using actual cost data, rather than basing their 
estimates on pure speculation.
    The GAO also concluded that mail out surveys, use of 
existing data, and on-site gathering each has ``practical 
limitations that preclude their use as reasonable 
alternatives'' to the expert panel approach. The limitations it 
saw in the other methods include low or biased response rates 
and high cost (the GAO noted that it cost the PPRC $135,000 to 
survey one single multi-specialty practice). The draft report 
also specifically says that activity-based accounting, one of 
the alternatives favored by critics of HCFA's current 
methodology, ``does not provide the specificity needed to 
adjust the MFS'' because it allocates costs to broad categories 
of codes, not specific procedures.
    Most importantly, in reference to cost accounting surveys 
and other approaches that have been recommended by the Practice 
Expense Coalition, the draft GAO report stated that ``starting 
over and using one these approaches as the primary means for 
developing direct PE estimates would needlessly increase costs 
and further delay implementation.''
    ASIM fully concurs with the GAO's draft conclusion that the 
CPEP process is an acceptable method of developing labor and 
other direct practice expenses, although some additional work 
still must be done to validate the CPEP (and validation panel) 
estimates and to link and standardize the labor cost estimates 
across families of services. We strongly agree with the GAO 
that starting over and using mail surveys of physician 
practices, on-site cost accounting analyses, or activity-based 
accounting would needlessly increase costs and further delay 
implementation.

                Use of Survey Data in Future Refinements

    The GAO draft report suggested that gathering data from a 
limited number of practices could be useful in pinpointing 
problems that should be addressed during the refinement 
process, and in validating some of the CPEP results for key 
procedures. It also suggested that gathering such data might be 
useful in the subsequent refinement processes.
    ASIM does not disagree that it may be appropriate to gather 
data from a limited number of physician practices as one source 
of information to be used in future refinements. We believe, 
however, that HCFA would first need to decide, in consultation 
with physician groups, on how such data should be collected and 
used. A poorly designed survey could be prone to the same 
limitations, such as poor response rates and under-
representation of small primary care practices, that led the 
GAO to preclude using such data in the development of the 
proposed rule. The CPEP data should not be thrown out based on 
data from a survey of a limited number of practices on the 
costs of a few procedures.
    The AMA has suggested that HCFA attempt to validate and 
refine the CPEP data by comparing it with other data from other 
independent sources, such as data from billing companies and 
transcription services. ASIM concurs that such data should also 
be considered by HCFA as it validates and refines the CPEP 
data.
    The GAO's draft findings on the acceptability of the CPEP 
process, and on the practical limitations of alternative 
approaches, should put to rest the argument that HCFA has 
failed to meet the BBA's mandate that it consider actual cost 
data and generally accepted accounting principles to the 
``maximum extent practicable.'' The discussion should no longer 
be over whether an entirely new approach, requiring further 
delay, is needed. Rather, the discussion now should be directed 
to what improvements in HCFA's methodology are appropriate, as 
well as on how the refinement process should be conducted.

           Suggested Improvements in HCFA's Methodology, Data

Linkages

    One of the most important--and potentially controversial--
recommendations in the draft GAO report concerns the formula 
used by HCFA to link the labor costs of physician services. The 
GAO suggests that HCFA consider other approaches to the 
statistical regression formula proposed in the June 18 notice 
of proposed rule making.
    HCFA's rationale for applying the regression formula was 
that the relative relationships with the CPEPs are generally 
correct, but the absolute time estimates need normalization. 
HCFA noted that absolute numbers within some of the CPEPs may 
have reflected duplicate counting of tasks that can be 
performed simultaneously, and that different CPEPs may not have 
calculated absolute labor costs in the same manner. As a 
result, HCFA observed that there was considerable variation in 
the CPEP absolute estimates for the clinical and administrative 
staff times, including variation in the estimates for services 
that were evaluated by more than one CPEP.
    It is essential that such variation be corrected. To 
illustrate, if one CPEP came up with absolute estimates of 
clinical and administrative staff times that are 20% higher 
than those derived by another CPEP for services that in fact 
involve comparable labor costs, the result of using the ``raw'' 
CPEP estimates--without statistical linking--would be that the 
services rated by the former CPEP would be overvalued compared 
to those rated by the other panel. In other words, since the 
purpose of a relative value scale is to place all the relative 
value units on a common relative scale, use of the ``raw'' CPEP 
estimates would not produce a common scale of the costs of 
providing one service compared to another as the law requires.
    Therefore, ASIM believes that it is absolutely necessary 
that HCFA standardize the data to create a relative value scale 
that appropriately values the relationships between all 
services and that not doing so would fail to meet Congressional 
intent.
    More specifically, ASIM is concerned that with the 
exception of the panel that evaluated evaluation and management 
services, the CPEPs generally came up with absolute labor costs 
estimates that were too high, especially compared to those for 
E/M services. HCFA implicitly recognized this, since the 
regression formula had the effect of lowering the labor cost 
estimates of non-E/M services.
    The GAO draft report accurately quotes ASIM as believing 
that linking is appropriate because some of the CPEPs uniformly 
assigned higher labor time than the E/M CPEP. The draft report 
suggests, however, that HCFA's regression formula may have 
created anomalies that are not supported by the CPEP data. As 
an alternative to the regression formula, the GAO states that 
HCFA is looking at ``assigning uniform administrative staff 
times across broad categories of codes,'' such as the time 
required to schedule an appointment. It also suggests that 
shifting billing costs into the indirect cost formula may 
reduce the need for statistical linking.
    ASIM is not opposed to considering whether, as an 
alternative to the regression formula, there are other 
approaches to establishing appropriate linkages between the 
labor costs of E/M services and non-E/M services. However, we 
strongly believe that any alternative linking method must 
correct the continued problem of non-E/M codes having 
excessively high administrative cost estimates compared to E/M 
services. The validation panels, and the cross specialty panel 
meeting that HCFA held in December, did not correct the 
misalignment of the labor costs of non-E/M services compared to 
E/M services. Therefore, it is essential that HCFA establish an 
appropriate linkage in the new proposed rule.
    In our discussions with the GAO staff, the GAO staff 
assured ASIM that by asking that HCFA consider alternative 
approaches to the regression formula, it was not suggesting 
that it was unnecessary to establish an appropriate 
relationship between the labor costs of E/M and non-E/M 
services. Rather, the GAO only intended to suggest that HCFA 
consider other approaches that would appropriately link the 
labor costs of E/M and non-E/M services, such as by 
standardizing certain costs and shifting administrative costs 
into the indirect cost category. The GAO also did not rule out 
making such adjustments through a statistical formula. The 
draft report also states that the GAO cannot yet evaluate other 
approaches that may be considered by HCFA.
    Although it is unlikely that Congress would want to get 
involved in the technical deliberations on linkage, Congress 
needs to be aware of the impact this issue will have on whether 
or not the new proposed rule satisfies the law's intent that 
practice expenses be based on the resources involved in 
providing each physician service. If an alternative to the 
statistical linking formula perpetuates the over-valuation of 
the clinical and administrative labor costs of in-hospital 
surgical procedures compared to office visits and other E/M 
services, the new practice expense payments will still not 
accurately reflect the resource costs of providing one 
physician service compared to another.
    ASIM is committed to working with HCFA on developing an 
approach that will assure that the labor costs of non-E/M 
services are appropriately aligned with non-E/M services. If 
there is a better way to achieve this than the statistical 
formula proposed in June, then we have no objection to 
considering such an alternative. But without knowing what 
alternative may be offered by HCFA, it is premature to conclude 
that statistical linking is not necessary.

Scaling

    The GAO draft report recommends that HCFA eliminate scaling 
of the CPEP data to the national survey data (AMA SMS data).
    Scaling means adjusting the proportion of direct costs from 
the CPEP data so that they are consistent with the AMA SMS 
data. The SMS data suggests that the direct costs can be 
divided as follows: labor cost, 73 percent; medical supplies, 
18 percent; and medical equipment, 9 percent. The CPEP 
estimates, in aggregate, came up with different shares of 
direct costs: labor, 60 percent; medical supplies, 17 percent; 
and medical equipment, 23 percent. Thus, HCFA adjusted the CPEP 
expenses for labor, medical supplies and equipment by scaling 
factors of 1.21, 1.06, and .39 respectively.
    Eliminating scaling would tend to help specialties with a 
higher proportion of equipment costs, and disadvantage those 
with a higher proportion of labor costs. Since the direct 
expenses of primary care physicians typically have high 
proportions of labor costs, and lower proportions of equipment 
costs, than surgical and medical specialists, the GAO's 
recommended change likely would disadvantage primary care 
physicians. ASIM has not, however, made a decision yet on 
whether or not elimination of scaling is appropriate. We will 
be examining this further and providing our recommendations 
directly to HCFA.

Indirect Costs

    The draft GAO report recommends that HCFA consider using 
specialty-specific adjustment factors to determine the ratio of 
direct and indirect costs; and consider moving administrative 
costs into the indirect cost category. It also concludes that 
the basic approach of allocating indirect costs based on 
physician work RVUs, direct PE RVUs and malpractice RVUs, 
asble. Some physician groups had argued that the indirect costs 
should not be allocated using such a ``proxy'' formula. ASIM 
agrees with the draft GAO report's conclusion that HCFA's 
method for allocating indirect costs based on the proposed 
formula is acceptable.
    ASIM does not have any conceptual problems with moving 
billing and other administrative costs into the indirect cost 
category, but we believe that this would necessitate treating 
those costs differently than would be the case if they were 
allocated based on the physician work+direct cost+malpractice 
RVU formula. Use of the formula used to determine other 
indirect practice expense would inappropriately allow surgical 
procedures with higher work RVUs to get substantially higher 
billing costs than E/M services, even though the costs of 
billing for a surgical procedure are not much different than 
for an office visit.
    We support using specialty-specific ratios of direct to 
indirect costs, provided that there are adequate and valid data 
for each specialty to accurately calculate specialty-specific 
ratios.

Use of Physician Nurses

    The draft GAO report concluded that ``HCFA appropriately 
disallowed nearly all expenses related to staff that accompany 
physicians to the hospital since there is no available evidence 
that these expenses are not already being reimbursed or are a 
common practice.''
    Some surgical groups have argued that surgeons often bring 
their nurses into the hospital and that these costs should be 
reimbursed by HCFA. The draft GAO report disagreed. In ASIM's 
meeting with the GAO staff to review the draft report, we were 
advised that they had been told by surgical groups that there 
was some new evidence given to HCFA in response to the October 
rule-making notice that supports the claim that this is a 
widespread practice. GAO staff said it planned to examine the 
evidence and determine if it should modify its conclusion. ASIM 
recommends that the GAO ask HCFA to independently validate any 
such evidence, to determine if it is the usual practice for a 
typical Medicare patient, before agreeing that such expenses 
should be allowed.

                       Draft GAO Recommendations

    Based on its overall analysis and findings, as discussed 
previously in this testimony, the draft GAO report concludes 
with several recommendations. ASIM's specific reaction to each 
recommendation is as follows:
    1. HCFA should document how it intends to adjust the CPEP 
data, the basis for the adjustment, and the effects on 
physician practices. HCFA should also describe the process for 
future refinements and updating.
    We concur with this recommendation. ASIM believes that HCFA 
should describe the elements that are needed in a future 
refinement process, but should leave the door open for the RUC 
to submit a proposal on how it might participate in such 
refinements.
    2. On a limited basis, HCFA should collect actual PE data 
to identify significant problems that should be addressed in 
the refinement process.
    ASIM concurs with this recommendation, provided that HCFA 
also look at o companies and transcription services. Any survey 
of physician practices or on-site gathering needs to be 
carefully designed to minimize response bias and other problems 
inherent in a survey process.
    3. HCFA should revise the linking methods and eliminate 
scaling to the national survey data.
    We concur with looking at alternatives to the regression 
formula used in the proposed rule, as long as the revised 
linking method properly aligns all services on a common scale, 
and specifically addresses the problem of inflated labor costs 
for non-E/M services compared to E/M services. We support using 
specialty-specific ratios of direct and indirect costs. ASIM 
has not adopted a position yet on the proposal to eliminate 
scaling to the national survey data.
    4. HCFA should collect data from a limited number of 
practices to test assumptions that underlie the other 
adjustments or the limitations on direct costs.
    ASIM concurs, but with the same caveats on the use of 
survey data that were discussed earlier.
    5. HCFA should evaluate assigning indirect PEs based on 
specialty-specific data.
    ASIM concurs.
    6. HCFA should monitor the impact of RBPEs on access, 
focusing on procedures with the largest cumulative reduction.
    ASIM concurs that the impact on access should be monitored. 
Congress should understand, however, that there are inherent 
limitations in any study that attempts to link changes in 
access (which may be due to a myriad of factors) to specific 
payment changes. Improvements in access to primary care 
services should also be monitored.

      Application of the ``Down Payment'' to the Transition Years

    The BBA began the process of moving payments in the direct 
of resource-based payments, by mandating a ``down payment'' in 
1998 that improved the practice expense RVUs for office visits, 
while lowering them for some procedures. The legislative 
history of this provision, which originated in the Senate 
Finance Committee but was also accepted by the House conferees, 
shows that the intent was to increase the PE-RVUs of office 
visits in 1998 as a first step toward the expected increases 
that will occur when RBPEs are implemented on 1/1/99. Congress 
clearly intended for the PE-RVUs, as adjusted by the down 
payment, to be used in the subsequent years of the transition 
that begins in 1999 (i.e. the down-payment adjusted PE-RVUs 
would be blended with the resource-based PE-RVUs). Since other 
provisions in the BBA postponed implementation of RBPEs for one 
year (followed by an additional four year transition) the down 
payment was viewed by Congress as being an essential first step 
to helping physicians whose practice expense payments for 
office visits are undervalued.
    In its notice of intent to issue a rule, HCFA indicated 
that the 1998 PE-RVUs, as adjusted by the down payment, would 
be the basis for the subsequent blended transition. Some 
physician groups are now trying to influence HCFA to 
reinterpret the law in such a way as to apply the down payment 
only to the 1998 PE-RVUs. They argue that the charge-based 
RVUs, which would be blended with the resource-based PEs 
beginning in 1999, should revert back to the 1997 PE-RVUs that 
were in effect prior to the down payment mandated by the BBA.
    ASIM strongly opposes any such reinterpretation of the law 
and congressional intent. If HCFA agreed to apply the down 
payment only in 1998, but not the subsequent transition years, 
this would not only violate congressional intent, but would 
break faith with the members of ASIM and other primary care 
groups that supported the compromise on practice expense that 
was adopted last year. (We accepted a delay in implementation 
and a four year transition, conditioned on the requirement that 
HCFA begin making improvements in 1998 in PE payments for 
office visits, with the understanding that such improvements 
would carry into the transition years). It will also reopen the 
divisive debate in Congress and within the medical profession 
on an issue that Congress intended to settle last year. 
Finally, it could have the effect of raising PE payments for 
office visits in 1998, then lowering them in 1999--a ``ping 
pong'' effect that makes no rational sense.
    It must be remembered why Congress mandated resource-based 
practice expenses in the first place, and why it decided to 
begin the process of making improvements--through the down 
payment--in 1998. Congress concluded--correctly--that the 
historical charge basis for determining practice expense 
payments undervalued office-based services. Even with the 
``down payment,'' the practice expense RVUs of a coronary 
bypass procedure that is performed in the hospital are more 
than 81 times that of a mid-level established patient office 
visit--even though the hospital picks up most of the costs of 
the bypass procedure. For many office-based services, Medicare 
payments now barely cover the costs of providing those 
services. Improved payments for the practice expenses of office 
visits and other undervalued services will therefore help 
improve access for those services. The down payment was a good 
first step to correcting the existing inequities, and Congress 
should not go along with any attempt to reverse the progress 
that is being made.
    ASIM does not believe that it will be necessary for 
Congress to enact legislation to clarify the intent of the down 
payment provisions, since we believe that the intent of the BBA 
provisions are clear. But if this issue is reopened by HCFA, 
then we will urge Congress to step in and enact a technical 
correction that makes it clear that the 1998 PE-RVUs, as 
adjusted by the down payment, will apply in the transition 
years.

              MEDPAC Recommendations on Practice Expenses

    It is our understanding that MEDPAC will recommend that 
HCFA not adopt its proposal to reduce payments for procedures 
provided in conjunction with an office visit or other E/M 
service. ASIM strongly concurs with the MEDPAC's 
recommendation. HCFA's proposal to reduce PE-RVUs for such 
procedures by 50% would result in payments that do not reflect 
the resource costs of providing each procedure. There is no 
basis for HCFA to arbitrarily assume that the costs of 
providing procedures in conjunction with an E/M service are 
reduced by 50% from the costs of the original procedure.
    We also understand that MEDPAC will oppose HCFA's proposal 
to include a volume and intensity adjustment--otherwise known 
as a behavioral offset--in its calculations of the PE-RVUs. In 
its June 18, 1997 propose rule, HCFA stated that it intended to 
assume that 50% of the reductions in payments for specific 
procedures will be offset by an increase in volume and 
intensity. The effect of this assumption is to increase the 
amount of reductions for some procedures, and reduce the 
expected gain from others. ASIM agrees with MEDPAC's view that 
HCFA's experience with implementation of the RBRVS does not 
support the need for such a volume and intensity adjustment. 
Further, MEDPAC argues--correctly--that the sustainable growth 
rate for physician services, also mandated by the BBA, already 
corrects for any increase in the volume and intensity of 
physician services. ASIM strongly urges Congress to advise HCFA 
that application of a volume and intensity offset to the PE-
RVUs is inconsistent with requirement that resource-based 
practice expenses be implemented in a budget neutral manner.

                               Conclusion

    ASIM is pleased that the draft GAO report fundamentally 
supports our assessment that HCFA is satisfying the intent of 
the BBA and that it is not necessary or desirable for HCFA to 
start over with an entirely different approach. We are pleased 
that the GAO recognizes the validity of the CPEP process and 
HCFA's formula for allocating indirect costs. We agree with the 
report's assessment of the practical limitations of the cost 
accounting surveys and other alternatives that have been 
advocated by others. We concur with the GAO that HCFA was 
correct in disallowing the costs associated with nurses who 
accompany a surgeon into the hospital, barring independently 
verifiable data that this is a typical practice.
    None of the GAO draft report's recommendations for 
improvement are fundamentally inconsistent with the way HCFA is 
going about developing RBPEs. ASIM believes that the GAO's 
suggestions for improvement are for the most part appropriate, 
although we have some concern about supporting alternatives to 
statistical linking until we are certain that there is a better 
approach that would correct the misalignment of labor costs for 
non-E/M services compared to E/M services. None of the 
suggested improvements would result in what the draft report 
rightly calls the ``needless'' increase in costs and further 
delay that would be required if HCFA was forced to use cost 
accounting studies or some other alternative methodology to 
develop RBPEs, as the critics of HCFA's current process and 
methodology have long advocated.
      

                                

    Mrs. Johnson of Connecticut. Thank you, Dr. Nelson.
    Dr. Haynes.

    STATEMENT OF DEBORAH G. HAYNES, M.D., MEMBER, BOARD OF 
        DIRECTORS, AMERICAN ACADEMY OF FAMILY PHYSICIANS

    Dr. Haynes. Good afternoon, Madam Chair and Members of the 
Subcommittee. I'm Dr. Deborah Haynes, a practicing family 
physician from Wichita, Kansas, and a member of the board of 
directors of the American Academy of Family Physicians. Thank 
you for inviting the Academy to comment on the General 
Accounting Office's report on the method that HCFA is 
developing to pay doctors' overhead expenses on the basis of 
resource cost, starting in 1999.
    I have been selected to represent the Academy today because 
of my participation at various stages of the HCFA rulemaking 
effort and my daily work as a family physician who participates 
in the Medicare Program.
    The issue of switching to a resource-based method for 
making Medicare practice expense payments is a compelling and 
urgent one for family physicians. Practice expenses are more 
than 52 percent of a family physician's total Medicare revenue. 
A number of studies have shown that the services of family 
physicians and other primary care physicians are still 
undervalued by the current Medicare payment system.
    One of the requirements of the balanced budget law is the 
GAO report that we have before us today. The Academy is overall 
pleased with the report. The GAO finds that HCFA has met the 
three main requirements of the balanced budget law. Physicians 
and other experts have been consulted extensively in the 
development of the HCFA proposal. Generally accepted accounting 
principles have been followed, and actual cost data has been 
gathered to the maximum extent practicable.
    The report also includes five key findings in support of 
the HCFA method. First, the report specifically expresses the 
GAO's support for the HCFA method and the soundness of the data 
flowing from it. As you know, direct practice expense data was 
obtained by 15 groups, known as the Clinical Practice Expert 
Panels, CPEPs. These panels were comprised of physicians and 
practice administrators. The data was reexamined in October 
1997 by validation panels. Then the highest volume and highest 
cost services were further examined by a cross-specialty panel 
in December 1997.
    I served on the validation panel for the E&M codes and on 
the cross-specialty panel. These panels were representative of 
the physicians whose direct practice costs were being examined, 
and the data amounts to more than just estimates. GAO found 
that HCFA's methods and data were acceptable as a starting 
point, and we agree.
    Second, GAO dismisses alternative data gathering such as 
activity-based accounting. These alternatives would increase 
the cost of the HCFA effort while needlessly delaying 
implementation of the new method.
    We could support the use of additional data gathered from a 
limited number of practices if the data is used specifically 
during the refinement period to verify CPEP results for some 
procedures.
    Third, the GAO supports the use of a statistical linking 
method for normalizing the data from the expert panels, but it 
suggests that HCFA consider evaluating a different linking 
method than the one it has proposed. We believe that HCFA's 
current proposed linking formula is statistically valid. It is 
preferable to simply averaging values across the CPEPs. We 
believe that a linkage based on the E&M codes, which is what 
HCFA proposes, is advisable, since virtually every medical 
specialty provides E&M codes, and virtually all of the CPEPs 
reviewed the E&M codes, making them a common denominator that 
can link all of the findings. We could support a new linkage 
formula, if it is developed in consultation with physicians and 
eliminates the inflated estimates that exist for some codes.
    Fourth, GAO believes HCFA acted appropriately in 
disallowing practice expense payments for the work done in 
hospitals by a physician's staff. We agree with the HCFA 
decision not to cover practice expenses in this situation.
    Fifth, the GAO recommends that HCFA monitor the impact of 
its practice expense proposal and access to services, focusing 
attention, in particular, on those procedures with the largest 
reductions in payments. We also believe that HCFA should 
monitor improvements in access to primary care services that 
may result in the new method. We hope that having the 
Government's principal accounting agency validate HCFA's 
approach will lay to rest criticisms of the acceptability of 
HCFA's data and methods. The practice expense issue does not 
need to be reopened legislatively. HCFA is on the right track, 
according to GAO, and we could not agree more.
    The last issue I'd like to touch on is the $330 million 
downpayment for office-based procedures. Some medical groups 
are urging HCFA to use the 1997 practice expense relative value 
units instead of the new 1998 downpayment-adjusted practice 
expense RVUs as the base amount for the blend during the 4-year 
transition. This interpretation defies congressional intent and 
logic, and would lower payments for office services different 
than what they should be under the law. We strongly oppose 
reinterpretation of the law this way.
    Thank you for the opportunity to offer the family practice 
viewpoint on practice expense payments. I'll be glad to answer 
questions.
    [The prepared statement and attachment follow:]

Statement of Deborah G. Haynes, M.D., Member, Board of Directors, 
American Academy of Family Physicians

                              Introduction

    My name is Deborah G. Haynes, M.D. I am a member of the 
Board of Directors of the 85,000-member American Academy of 
Family Physicians, and I serve as Chairperson of the Academy's 
Commission on Quality and Scope of Practice. It is my privilege 
to appear before this subcommittee today to discuss our views 
on the method being developed by the Health Care Financing 
Administration (HCFA) for implementing resource-based practice 
expense relative value units as part of the Medicare physician 
fee schedule.
    As you may know, the HCFA proposal appeared in a June 18, 
1997 Federal Register proposal addressing revisions in the 
Medicare physician fee schedule. On October 31, 1997, HCFA 
published a Notice of Intent to Regulate in the Federal 
Register that requested information from the physician 
community and other experts on specific elements of the 
proposal. The HCFA practice expense proposal is also examined 
in reports that Congress is expected to receive from the 
Medicare Payment Advisory Commission (MedPAC) and the General 
Accounting Office (GAO). These reports were in a draft form 
when this statement was prepared, so my comments are based on 
the draft versions of the MedPAC and GAO reports.
    I was asked to represent the Academy today because of my 
involvement in the HCFA endeavor to develop resource-based 
relative value units for practice expense payments. I served on 
the validation panel for evaluation and management (E/M) codes 
in October 1997, and participated in a cross-specialty meeting 
in December 1997. Both events were convened by HCFA as part of 
their effort to gather actual data on physician practice costs 
to the maximum extent practicable as part of the rulemaking on 
practice expenses, as required by the Balanced Budget Act of 
1997 (P.L. 105-33). I also spoke for the Academy as part of a 
group of primary care physicians that met at length in October 
1997 with the GAO team during the predrafting phase of the 
report the subcommittee is examining today. Accordingly, my 
knowledge of the practice expense issue stems from personal 
experience as a participant in the HCFA rulemaking effort--and 
from my daily work as a family physician who participates in 
the Medicare program.

         The Need for Resource-Based Practice Expense Payments

    Prior to 1992, Medicare compensated physicians on the basis 
of historical charges that substantially overvalued procedures 
performed in hospital settings while deeply undervaluing E/M 
services and other non-surgical services provided in office 
settings. In 1992, HCFA began to implement a new Resource-Based 
Relative Value Scale (RBRVS) designed to pay physicians on the 
basis of relative value units (RVUs) for each procedure. These 
RVUs are based on the time, skill and effort required of a 
physician to perform a particular procedure. Payments for 
physician work, however, are only a part of the whole 
reimbursement. Physicians also have to be compensated for the 
Medicare share of their practice expenses and malpractice costs 
as a part of each payment under the RBRVS system. The RBRVS is 
intended to eventually encompass all three components of the 
fee: physician work, practice expenses and malpractice costs. 
Congress expected the RBRVS to be an accurate and equitable 
system for paying physicians for their Medicare services.
    What is at issue today is resource-based practice expenses. 
HCFA has not yet proposed a method for determining resource-
based RVUs for malpractice costs, but has substantially 
completed the process of establishing resource-based RVUs for 
practice expenses. These expenses include the costs of office 
staff, and the equipment and supplies necessary to run an 
office. We believe that the HCFA proposal on practice expenses 
meets the requirements established in the Balanced Budget Act 
of 1997, because it is the result of extensive collaboration 
with the physician community, and the methodology is valid as 
it is based on reliable data on actual physician practice 
costs. In these conclusions we agree with the General 
Accounting Office, whose draft report we have reviewed.
    Establishing resource-based RVUs for the practice expense 
and malpractice components of the Medicare physician fee 
schedule is lagging behind schedule. All physician work RVUs 
are now resource-based and were even reviewed and modified as 
part of a five-year review conducted by HCFA and the American 
Medical Association RVU Update Committee (RUC) in 1995 and 
1996. However, the practice expense and malpractice components 
of the fee schedule have not yet been converted into resource-
based RVUs. This is a serious problem given the proportion of 
the overall fee that is represented by each component. The need 
to rectify this tardiness is especially compelling when one 
considers that practice expenses account for 41 percent of the 
total RVUs in the Medicare Fee Schedule and 52.2 percent of a 
family physician's total revenue, according to the 1988-1990 
AMA Socioeconomic Monitoring Survey.
    Congress in 1994 extended the deadline for implementation 
of resource-based practice expense RVUs to 1998. Reputable, 
independent studies conducted by the Physician Payment Review 
Commission, the Harvard School of Public Health and Health 
Economics Research, Inc. in the mid-1990s confirmed the 
problems of the current payment system and bolstered the need 
to correct the practice expenses issue as soon as possible. 
Thus, HCFA began the process of gathering direct practice 
expense data for developing the new practice expense RVUs with 
the assistance of Abt Associates, Inc. in 1996.

         Practice Expenses and the Balanced Budget Law of 1997

    Preliminary results of the HCFA effort to establish 
resource-based practice expense RVUs were released in the early 
part of 1997. The data justified a substantial decrease in 
practice expense payments for certain facility-based, 
procedural services and an increase for primary care and other 
office-based services. Reaction to the data and a subsequent 
HCFA proposal for implementing a new practice expense method 
based on it led to a new timetable for implementation of 
resource-based practice expenses in the balanced budget law 
enacted last year.
    The law spelled out in detail how HCFA is to proceed with 
the task of completing the implementation of resource-based 
practice expenses. A transition period totaling five years 
(1998-2002) was established. HCFA has begun phasing in the new 
practice expense method this year by shifting $330 million from 
the most overvalued procedures to the office-based services 
represented by CPT codes 99201-99215. Further, HCFA is required 
to consult with physicians and other experts, and use generally 
accepted accounting principles and actual cost data to the 
``maximum extent practicable'' in drafting a new proposed rule 
on practice expenses which must be published by May 1. Finally, 
the law requires GAO to report to Congress on the HCFA 
proposal.
    Although the balanced budget law establishes a five-year 
transition process that began this January, during which family 
physicians will continue to be underpaid for their Medicare 
practice costs, it is encouraging that the long-standing 
problem with practice expenses will at last be resolved by 
2002.

                  The General Accounting Office Report

    The Academy is very pleased with the draft report. We 
believe the GAO displayed commendable objectivity in its 
thorough examination of the issues surrounding the HCFA 
proposal as well as balance in its subsequent recommendations 
to Congress. This draft reflects an impressive amount of 
research into the complicated topic of Medicare practice 
expense payments, familiarity with the HCFA proposal and 
comprehensive knowledge of the various arguments advanced in 
support of or in opposition to the HCFA proposal.
    The GAO report contains a number of significant findings 
and recommendations that I will address in the order presented 
in the draft.
    The GAO found that using expert panels such as the Clinical 
Practice Expert Panels (CPEPs) for estimating direct labor and 
other direct practice expenses is an acceptable method. The GAO 
rebuts specific criticisms of the CPEP process by noting that 
these panels were representative of the medical specialties and 
that members were contributing information based largely on 
facts, not merely ``best guesses.'' The Academy concurs with 
this assessment of the HCFA method.
    The report is very clear in stating that alternative data 
gathering proposals that have been advanced are unreasonable 
and, if followed, would increase costs while needlessly 
delaying the implementation of a new method for determining 
practice expense payments. The GAO resoundingly dismisses the 
activity-based accounting alternative, for example, because it 
reallocates practice costs to broad categories of codes and not 
to specific procedures, as required by the law. The Academy 
agrees with the GAO position on alternative data gathering 
proposals.
    The GAO suggests that data gathered through a limited 
survey should be used as part of a refinement process and that 
the refinement process itself should be clearly described to 
the public. Collecting additional data specifically as part of 
a refinement process is supportable and could be of assistance 
to HCFA. Such an activity, however, should not be used as 
justification to discard the data already amassed from the 
expert and validation panels. The Academy believes that if 
additional data is to be collected as part of the refinement 
process, HCFA must then offer a detailed proposal for 
conducting a targeted data gathering effort to the public so 
that physicians may collaborate with the agency on how such 
data should be gathered and used.
    Some specialty groups would like to involve the Relative 
Value Unit Update Committee (RUC) in the practice expense 
refinement activities. Although we are supportive in concept of 
utilizing the RUC in this fashion, the Academy also has 
concerns with involving the RUC in refinement of the resource-
based practice expense RVUs. Before utilizing the RUC, 
sufficient staffing and resources must be obtained to ensure 
that the committee is capable of handling an increased 
workload. Just as importantly, we believe that non-physician 
clinicians, such as physician assistants, nurses and practice 
administrators should be invited to participate in RUC practice 
expense refinement activities. These providers and 
administrators would bring valuable perspectives on the 
clinical and administrative labor upon which the allocation of 
direct and indirect practice expense RVUs is based.
    The report supports the use of a statistical linking method 
for normalizing the data generated by the CPEPs while 
suggesting that HCFA consider other possible means of linking 
the labor and administrative costs for E/M and non-E/M 
services. The Academy reviewed HCFA's proposed regression 
formula for linking the CPEP data and found it to be a 
statistically valid one. We also found it more preferable than 
simply averaging values across all expert panels since this 
approach can disturb the relative rankings of codes within 
panels. Further, we believe that a linkage based on the E/M 
codes is preferable because virtually every specialty provides 
E/M services and virtually all of the CPEPs reviewed E/M 
services, making these codes a ``common denominator'' that can 
connect all of the findings to one another. In addition, the 
composition of the E/M validation panel was more balanced 
between primary care and subspecialties than were other panels, 
and there was greater consensus among its members, leading us 
to believe that the data reported by the E/M panel were 
inherently more accurate and less inflated than those recorded 
by the other panels.
    While the Academy is supportive of HCFA's proposed linking 
formula, we are not opposed to considering other methods for 
normalizing the direct practice expense data. However, our 
flexibility is subject to the following caveats: if the linkage 
formula is to be modified, a detailed proposal for 
accomplishing this change should be developed with guidance 
from physicians, offered for public comment, and it should 
correct the problem with inflated administrative and labor cost 
estimates for some non-E/M codes. Otherwise, an alternative 
formula probably would be unacceptable to family physicians.
    The report also recommends that HCFA consider certain 
improvements in its methodology, including the elimination of 
``scaling,'' the use of specialty-specific adjustment factors 
to determine the ratio of direct and indirect costs, and moving 
administrative costs into the indirect practice expense 
category. I will address these individually below.
    ``Scaling'' refers to a statistical adjustment made in the 
CPEP data so that the proportion of direct expenses 
attributable to labor, equipment and supplies is consistent 
with the AMA Socioeconomic Monitoring Survey (SMS). In its June 
18, 1997 proposed rule, HCFA noted that in the aggregate, for 
all CPEPs, labor comprised 60 percent of total direct expenses, 
medical supplies comprised 17 percent, and medical equipment 
comprised 23 percent. Further, HCFA noted that the 
corresponding percentages from the AMA SMS data were 73, 18, 
and 19, respectively. To equate the aggregate CPEP percentages 
with those of the AMA SMS, HCFA proposed an adjustment in CPEP 
expenses for labor, medical supplies and medical equipment 
using scaling factors of 1.21, 1.06 and .39, respectively. In 
essence, this involved multiplying the CPEP expenses for labor, 
equipment and supplies for each code by the given scaling 
factors so that the overall distribution would be equivalent to 
the distribution in the AMA SMS.
    The impact of scaling on the direct expenses of any given 
code depends on the distribution of direct expense for that 
code as compared to the aggregate distribution. This means that 
codes with a greater-than-average share of labor costs would 
experience an increase in direct expenses as a result of 
scaling, while the opposite would occur for codes with a 
greater-than-average share of equipment costs.
    The GAO recommends elimination of scaling in the HCFA 
practice expense proposal. This is because HCFA never explained 
why it felt compelled to scale the CPEP data to fit the AMA SMS 
and, as the Academy commented last year, we failed to 
understand the value added by scaling, especially given the 
credibility of the CPEP data. Thus, to the extent that there is 
no value added by this mathematical manipulation, we concur 
with the GAO's recommendation to eliminate scaling.
    The GAO recommends using specialty-specific ratios to 
allocate indirect practice expenses among codes. In its 
proposed rule, HCFA wants to use the aggregate ratio (55/45) 
for this purpose so the adjustment would be the same across the 
board for all codes. The Academy has not taken issue with the 
method HCFA originally suggested for allocating indirect 
practice expenses among codes. However, scaling indirect 
practice expense RVUs to the available pool of RVUs on the 
basis of the percentage of direct and indirect practice expense 
RVUs billed by each specialty, as recommended by the American 
Society of Internal Medicine, rather than on a fixed factor of 
0.219 as in the HCFA proposal, has merits. We believe that the 
use of specialty-specific ratios in the formula would represent 
a further refinement of that formula. Although the ASIM method 
is more complex, this approach might, in fact, allocate 
indirect practice expenses more accurately. We would support 
HCFA's consideration of this refinement, with an understanding 
of the trade-off between simplicity and precision in this 
decision.
    In reference to the GAO proposal to shift administrative 
expenses to the indirect side of the equation, the Academy 
conceptually has no problem with doing this, a position similar 
to that held by ASIM. The CPEP and subsequent validation panels 
have highlighted the difficulty with trying to attach 
administrative costs to individual procedure codes. For 
example, how does one account for multiple service codes 
submitted on the same claim form? Or all of the other 
administrative expenses incurred for a patient presenting with 
multiple medical problems--a common situation in family 
practices? Like rent and utilities, administrative costs will 
probably vary less by procedure code and more by the size and 
type of practice. The only problem with shifting administrative 
costs to the indirect category is that the formula for 
allocating indirect expenses would allow higher payments for 
the indirect practice costs of surgical services even though 
associated billing costs, for example, are most likely the same 
as those costs associated with billing for an E/M service. 
However, the question of whether these billing and 
administrative costs should be standardized, or if this data 
should be obtained from independent data sources such as 
billing agencies, has not yet been addressed by the Academy.
    The GAO challenges the claims of some subspecialists that 
it is a common practice for them to bring their office staff 
into the hospital to assist on rounds and in surgery. 
Specifically, GAO said there is no evidence that utilizing 
staff in this fashion is a common practice. The Academy agrees. 
These claims should be subjected to external review and 
validation, however, and even if validated, we contend that 
payment for the expenses of staff brought into the hospital 
should come from Medicare Part A, not Part B.
    It should also be noted that the GAO report specifically 
certifies that the HCFA proposal meets the balanced budget 
law's requirements for consulting physicians and other experts 
and gathering actual cost data to the ``maximum extent 
practicable,'' as required by the balanced budget law. We hope 
that having the government's principal accounting agency 
validate HCFA's approach will finally lay to rest the unfounded 
criticisms about data gathering efforts, accounting principles, 
the thoroughness of efforts to consult with physicians and 
other experts and so forth that have been lodged against the 
HCFA proposal.
    Finally, the GAO recommends that HCFA monitor the impact of 
its proposal on access to services, focusing its attention in 
particular on those procedures with the largest reductions in 
practice expense payments. The Academy believes that HCFA 
should also monitor improvements with access to primary care 
services that may result from the new practice expense payment 
method.

            The Medicare Payment Advisory Commission Report

    Two important issues relating to the HCFA practice expense 
proposal were not included in the GAO report, but are expected 
to be mentioned in the forthcoming annual report of the MedPAC. 
We are referring to the HCFA proposals to include in the new 
practice expense method a behavioral offset and a reduction in 
practice expense RVUs for multiple procedures performed during 
an E/M office visit.
    The Academy strongly opposes the inclusion in the practice 
expense proposal of a 2.4 percentage point reduction, or 
behavioral offset, in the conversion factor to account for 
increases in the volume and intensity of services that HCFA 
claims will result from changes in net income caused by 
implementation of resource-based practice expenses. We have 
always opposed HCFA's use of a behavioral offset, and oppose it 
again in this instance. Given that we do not believe that HCFA 
has ever been able to adequately support the need for a 
behavioral offset, the Academy opposes this provision of the 
resource-based practice expense proposal and is pleased by the 
commission's agreement with us on this matter.
    We strongly disagree with HCFA's proposal to reduce by 50 
percent the practice expense RVUs for additional procedures 
furnished during the same encounter as an E/M service. None of 
the direct cost data gathered for the development of the new 
practice expense RVUs justifies the proposed 50 percent 
reduction.
    In the short term, HCFA would simply reduce the practice 
expense RVUs for the additional procedures by 50 percent; the 
reduction would not apply to the E/M service. This is similar 
to the way in which HCFA lowers payment for multiple surgical 
procedures furnished to the same patient on the same day by the 
same surgeon. In the long term, HCFA would like to apply a 
procedure code-specific reduction when a given procedure is 
performed during the same encounter as an E/M service.
    Under this proposal, if a patient came into the office for 
a visit and subsequently received a blood draw and an 
electrocardiogram, HCFA would reduce the practice expense RVUs 
for the blood draw and electrocardiogram by 50 percent, even 
though they probably involve different equipment and supplies 
and, potentially, different clinical staff. We concede that 
there may be some savings in administrative staff time 
associated with multiple procedures performed during the same 
encounter as an E/M service. However, arbitrarily reducing 
practice expense RVUs by 50 percent is an inappropriate means 
of addressing this issue.
    Medicare's physician payment system is supposed to be based 
on resource costs. However, until resource cost data are 
provided showing that practice expenses for office procedures 
are reduced by half when an office visit is also provided, 
there is no rationale for applying a multiple procedure 
reduction to office procedures.
    For these reasons, we encourage HCFA to proceed with the 
data development necessary to identify procedure code-specific 
reductions that can be implemented in the long run while not 
making any arbitrary reductions in the short-run. We are 
pleased that the commission has adopted a similar stance on 
this matter. Alternatively, in the short run, HCFA should only 
reduce the administrative labor component of the direct 
practice expense RVUs by 50 percent and recognize that the 
clinical labor, equipment and supply components of direct 
practice expenses as well as indirect practice expenses are the 
same whether the procedure is done as a stand alone or with an 
E/M service.

           Down Payment is Applicable in the Transition Years

    As noted earlier, the movement to resource-based practice 
expense RVUs began this year with a $330 million ``down 
payment'' for office-based procedures. It is clear from the 
legislative history of this provision that the increase in 1998 
practice expense RVUs for office visits is supposed to be 
blended with the new, resource-based practice expense RVUs 
starting in 1999. HCFA stated precisely this particular 
understanding in its notice of intent to issue a rule; that is, 
that the 1998 down-payment-adjusted practice expense RVUs for 
office visits would be blended with resource-based practice 
expense RVUs for office visits beginning in 1999.
    It has come to our attention that some medical specialties 
are urging HCFA to reinterpret the law with respect to the base 
year for the transition period. That is, using the 1997 
practice expense RVUs instead of the 1998 down payment-adjusted 
practice expense RVUs as the base amount for the blend during 
the four-year transition period is being advanced at this time. 
This interpretation defies logic and congressional intent, and 
would lower overall payments for office visit services from 
what they would be otherwise under the balanced budget law, and 
for these reasons this effort is strongly opposed by the 
Academy.
    Also, increasing practice expense payments for office 
visits in 1998 just to turn around and calculate them in part 
based on the lower, historical charge-based RVUs of 1997 would, 
in effect, negate the compromise on practice expenses adopted 
last year. The Academy and other primary care groups accepted 
the implementation delay and four-year transition period 
contingent on HCFA starting to improve practice expense 
payments for office visits in 1998. If a revision such as the 
one proposed were accepted by HCFA, it would reopen a very 
controversial debate that for all intents and purposes was 
settled with enactment of the balanced budget law. For these 
reasons we urge Congress and HCFA to leave the balanced budget 
law untouched.

                               Conclusion

    Once again, thank you for this opportunity to present the 
family practice viewpoint on the resource-based practice 
expense issue. After so many years of waiting for this 
component of the Medicare physician fee schedule to be fixed, 
we are gratified that Congress at last has set a deadline 
certain of January 1, 2002 for full implementation of the new 
payment method. It is overdue, but ``better late than never'' 
as the old saying goes.
    If you take away any one message from my comments, let it 
be this: the practice expense issue is not an issue anymore; it 
does not need to be reopened. The GAO report firmly states that 
the work by HCFA complies with the balanced budget law's 
requirements for gathering actual data to the maximum extent 
practicable, using generally accepted accounting principles, 
and obtaining the guidance of as many physicians and other 
experts as possible. The GAO confirms that the HCFA proposal is 
a reasonable and workable one, and that the rulemaking process 
should proceed uninterrupted so that implementation of 
resource-based practice expense RVUs can be achieved by the 
deadline established in the law. We could not agree more.
    I invite the subcommittee and its members to continue to 
look to the Academy as a resource on matters pertaining to the 
Medicare physician fee schedule and resource-based practice 
expenses. We would like to continue to be a part of this 
discussion, and we will try to be as helpful as possible. At 
this time, I would pleased to answer questions from the 
subcommittee members.
[GRAPHIC] [TIFF OMITTED] T8525.002

      

                                

    Mrs. Johnson of Connecticut. Thank you, Dr. Haynes.
    Dr. Pearlman.

STATEMENT OF ALAN S. PEARLMAN, M.D., PROFESSOR OF MEDICINE AND 
     ANESTHESIOLOGY, DIVISION OF CARDIOLOGY, UNIVERSITY OF 
  WASHINGTON, SEATTLE, WASHINGTON; ON BEHALF OF THE PRACTICE 
                       EXPENSE COALITION

    Dr. Pearlman. Madam Chair and Members of the Subcommittee, 
I'm Alan Pearlman, a cardiologist practicing in Seattle, 
Washington. I'm honored today to have the opportunity to 
represent the 43 member organizations of the Practice Expense 
Coalition and to offer our reactions to GAO's report.
    We agree with GAO that HCFA can improve the methods used to 
develop practice expense relative value units, and we urge this 
Subcommittee to tell HCFA that it should improve its work. We 
renew our offer to work in partnership with HCFA and the entire 
physician community, offering funds and assistance to get this 
task completed correctly and on time.
    Today I'd like to summarize our submitted statement, which 
was based on the draft GAO report, react to some changes in the 
final GAO report, and seek this Subcommittee's willingness to 
continue its oversight of this critically important issue.
    The bottom line is that Congress was right in deciding last 
year to delay implementation of new practice expense relative 
value units. The Practice Expense Coalition greatly appreciates 
the thoughtful leadership exercised by this Subcommittee and 
the Congress in recommending this reexamination and look 
forward to continuing to work with you.
    The BBA establishes two key criteria for HCFA in preparing 
new practice expense relative values. HCFA must look at total 
practice costs, and it must use an accounting methodology. GAO 
has correctly identified the key troublespots in HCFA's work 
that caused last year's congressional reaction. If HCFA abides 
by the statute and takes the steps recommended by GAO, the 
coalition believes that by the end of the transition period, 
new practice expense relative values can be developed that will 
be fair to all physicians.
    Let me highlight several key points in the GAO's study. 
First, although GAO found the use of CPEP panels to be an 
acceptable estimating tool, the CPEP data were never validated. 
GAO recommends they should be, and we agree.
    Second, GAO's conclusion on HCFA's linking methodology and 
data edits supports our contention that it is not appropriate 
to redistribute support for physician services based on methods 
that are subjective and flawed.
    Third, GAO reinforces our concerns about the indirect cost 
issues in HCFA's revisions and makes it clear that we still 
have no satisfactory approach to this thorny problem.
    Fourth, we agree with GAO that the consequences for 
beneficiaries must be regularly reviewed, especially in light 
of all of the changes that have occurred to the physician fee 
schedule. We know that most Medicare beneficiaries are now able 
to get timely access to appropriate medical services, whether 
they be primary care or specialized interventions. What we do 
not know is whether the same access and quality can be 
maintained with payment reductions of the magnitude proposed 
last June. Clear information from beneficiaries studies is 
needed to make sure that Congress can react on a timely basis 
if problems arise.
    Let me address two changes to our submitted statement made 
necessary by revisions in GAO's report. First, the GAO changed 
its initial recommendation on the scaling techniques that HCFA 
used and now supports their use. Our concerns with scaling 
remain, and we hope that HCFA will continue to improve this 
technique and clarify its use to the physician community.
    Second, GAO has acknowledged that the use of physician-
employed staff in other settings, such as the hospital, is a 
more complex issue than it first thought. Whereas the draft 
report supported HCFA's decision to disallow these costs, the 
final report suggests that further examination of the issues 
may be in order. We welcome this change. We've made progress in 
discussing this point with HCFA and believe that a satisfactory 
resolution can be found.
    Our greatest concern at this point is the future. I also 
participated in both the validation panels and the cross-
specialty panel, which were not the focus of the GAO report, 
and I have significant concerns about where the process is 
going now. As GAO notes, HCFA has not yet reached a conclusion 
on how to address a number of key issues. We urge this 
Subcommittee to require HCFA to make a timely report on these 
issues in advance of the May rulemaking. Only then can Congress 
exercise the most effective oversight.
    In conclusion, we believe that the two key elements of the 
Balanced Budget Act--the use of total practice expenses and an 
accounting methodology--can be achieved. We have presented to 
HCFA a plan developed by Coopers and Lybrand for how this can 
be done. I'd be happy to have the Coopers and Lybrand 
accountants brief you or your staff on the details of this 
plan.
    This completes my testimony. I'd be pleased to respond to 
questions.
    [The prepared statement follows:]

Statement of Alan S. Pearlman, M.D., Professor of Medicine and 
Anesthesiology, Division of Cardiology, University of Washington, 
Seattle, Washington; on Behalf of the Practice Expense Coalition

    Mr. Chairman, and Members of the Subcommittee: My name is 
Alan Pearlman, M.D., and I practice cardiology in Seattle, 
Washington. I am here today on behalf of the Practice Expense 
Coalition which represents 43 national medical specialty 
societies, medical organizations and major medical clinics 
(list attached). My own professional society, the American 
College of Cardiology, is an active member of the Coalition. We 
are united by our common desire to ensure that the transition 
to new practice expense relative value units for the Medicare 
physician fee schedule is successful and does not disrupt 
beneficiary access to important, lifesaving medical services 
and technology.
    The members of the Coalition appreciate the opportunity to 
present testimony today on the General Accounting Office's 
review of the Health Care Financing Administration's efforts to 
revise Medicare's practice expense calculations. The continuing 
oversight of this Subcommittee is critical to a successful 
outcome. We also appreciate the actions of this Subcommittee 
and Congress to give HCFA more time to complete this important 
task and for your efforts to clarify the statutory instructions 
to the agency. HCFA's assignment is large and complex, and we 
believe the decisions incorporated in the Balanced Budget Act 
of 1997 will help to ensure that HCFA will do its work 
properly.
    Coalition representatives recently had the opportunity to 
review the General Accounting Office's draft report entitled 
``HCFA Can Improve its Methods for Revising Physician Practice 
Expense Fees,'' and this statement is based on our review of 
that draft. We understand that there may be changes in the tone 
and even in the content of the final report, and we will 
reflect those in oral testimony. Based on our review of the 
draft, we have concluded that it is a generally unbiased view 
of the challenges and problems that have beset this effort. 
This report validates the decision of this Subcommittee and 
Congress to clarify the instructionr the agency to complete the 
revisions of practice expense relative value units. While the 
Practice Expense Coalition has some specific concerns about 
particular issues in the draft report, we believe that as 
written it should be helpful to Congress in its continuing 
oversight of this important physician payment issue. If HCFA 
responds effectively to each of the points that GAO has made, 
and follows the mandates of the Balanced Budget Act of 1997 on 
practice expenses, especially the use of total practice costs 
and cost accounting methodology, it is our belief that the 
agency can design new practice expense relative values by the 
end of the transition period that will generally be fair to the 
entire physician community.
    The Practice Expense Coalition commends GAO for the 
thoroughness of its analysis and work to date on this complex 
issue. We appreciate the extent to which the GAO staff 
consulted with us and the other interested parties. Their work 
identified the key problem areas and, we believe, raised 
appropriate criticism of HCFA's work up through the June 18, 
1997, Notice of Proposed Rulemaking (NPRM). The GAO draft 
report identified fundamental problems with the database and 
the methodology used. We agree with that assessment. However, 
the Coalition would urge this Subcommittee to go beyond the GAO 
conclusion of ``HCFA can improve its methods'' to a requirement 
that HCFA should do so.
    It is important to note that GAO did not review and 
evaluate all the actions of the agency subsequent to that June 
rulemaking. For example, GAO does not comment on the physician 
panels convened by HCFA last Fall, nor does it review the 
public responses to HCFA's October 31 notice of intent to issue 
a rulemaking. The practice expense issue continues to be a work 
in progress. Therefore, we urge this Subcommittee to request 
that GAO continue its evaluation of HCFA's work. Specifically, 
this evaluation should focus on HCFA's response to the mandates 
of the Balanced Budget Act of 1is time how, or even whether, 
HCFA intends to respond to those mandates, and we believe that 
continued oversight by an independent entity such as GAO is 
essential.
    I would like to comment briefly on the draft conclusions of 
GAO and its recommendations which confirm the wisdom of the 
Balanced Budget Act's provisions on practice expenses. GAO's 
conclusions in many respects parallel the Coalition's comments 
on the June 18 rulemaking. I will conclude my comments with a 
proposal for how HCFA can respond to GAO and the directives in 
the Balanced Budget Act in both the short and long term.

             Use of Expert Panels to Estimate Direct Costs

    HCFA convened a number of expert panels in 1996 to collect 
information on direct costs. These panels, known as Clinical 
Practice Expert Panels (CPEPs), included physicians, practice 
managers and other health professionals and represented 
virtually every specialty. The panels met twice to estimate 
direct costs and labor times for all physician services under 
Medicare. GAO concluded that the CPEP method of collecting or 
estimating direct cost information is acceptable, but that the 
data should be validated based on surveys of actual physician 
practices. We believe that expert panels can provide useful 
information about direct costs; however, GAO did not evaluate 
the accuracy of the particular estimates that were made, nor 
has HCFA made any such independent evaluation. In the absence 
of this review, external validation as suggested in the report 
is critical to building confidence in the specific information 
derived from these panels. As I will discuss later, there may 
be other, even more effective ways to identify the costs 
physicians incur when they provide medical services.
    A fundamental problem with the CPEPs was the lack of common 
ground rules for their operation. As a consequence, there was 
little consistency across panels. HCFA tried to correct for 
these differences through its statistical manipulations of the 
CPEP data, includinging ``data reasonableness'' edits. These 
efforts failed, however, because they were neither based on 
input from clinicians nor on any objective data. The GAO 
criticism of the manipulations is appropriate.
    The key element of GAO's recommendation is the external 
validation of the original CPEP data. We believe that Congress 
should insist on such validation if the CPEP data are to be an 
ongoing part of the practice expense database and should 
require HCFA to make any needed corrections based on these 
surveys. This effort does not need to be time consuming or 
resource intensive, but can be based on a limited number of 
surveys of physician practices.

                  Statistical Techniques Used By HCFA

     Because of the lack of common ground rules in the CPEPs, 
the results understandably varied. HCFA tried to correct for 
this problem after the fact by making statistical adjustments 
to the data, referred to as linking and scaling, and applying 
``data reasonableness'' edits. Each technique was intended to 
adjust the data to establish more consistency in the values 
that came from each CPEP panel. The use of these statistical 
adjustments has been a key point of controversy, because most 
of the redistribution in physician payment is derived from 
these actions. The large cuts in payments for many procedures 
that HCFA predicted in its estimates of the impact of the rule 
proposed last June were in large measure driven by HCFA's 
decisions at this point in the process.
    GAO raises serious questions about linking, scaling and the 
other data reasonableness rules that HCFA used in the June 
proposed rule. The Coalition agrees with this assessment and 
had raised similar concerns in its comments on the June 
proposal. Basically these steps turned the work of the CPEPs on 
its head and were undoubtedly the greatest contributing factor 
to the concerns that we expressed and Congress acknowledged in 
its 1997 legislation on practice expenses. HCFA needs to 
completely revise or discard linking, scaling and the other 
data reasonableness rules. Everyone acknowledges that some 
means must be found to relate the diverse expenses of 
physicians into a coherent payment system. It is clear that 
HCFA has not developed that means, and we are today still 
unclear how the agency intends to do this.

Indirect Cost Issues

    HCFA proposed to divide physician practice expenses into 
direct and indirect costs. Separate data collection strategies 
were developed. The CPEP process focused on direct costs, and 
HCFA planned a mail survey of 5,000 physician practices to 
collect data on indirect expenses. That survey was never 
completed, so HCFA was forced to look to other sources for 
information on indirect expenses. The quality of indirect cost 
information has been an issue ever since. While GAO did not 
measure the validity of the data used, it did look at 
allocation and definition issues. GAO recognized that HCFA's 
method for allocating indirect costs to the individual 
procedure codes was an acceptable option, given that there is 
no one accepted way of doing this. However, GAO properly points 
out that the use of specialty specific indirect expense data 
would be more consistent with the requirements of the 1994 and 
1997 statutes that HCFA use actual data.
    We agree that there is more than one way to allocate 
indirect costs, but we also concur with GAO's comments about 
specialty specific data. HCFA made assumptions about indirect 
costs that simply did not reflect the realities of medical 
practices, and as a result the indirect costs of many 
specialties were improperly estimated. The key issue with 
indirect costs is that HCFA never figured out how to substitute 
for its failed survey of physicians. HCFA and its contractor 
sent out a survey that was so complicated it could not succeed. 
We had urged HCFA to work closely with the different medical 
organizations to assure a reasonable response rate and the 
accuracy of the responses. These offers were rebuffed by the 
agency, and the result was predictable. The survey response was 
inadequate in light of the 70% percent response rate demanded 
by OMB. HCFA has had to substitute estimates of indirect 
expenses for actual data. This, in combination with HCFA's 
allocation decisions, has significantly affected the specialty 
practice expense totals. Physicians with high levels of 
indirect costs have had them systematically undercounted in 
this process.
    GAO advocates that administrative and billing costs be 
moved from the direct pool to the indirect pool. This comment 
mirrors a discussion held in December 1997 at a HCFA meeting 
with all medical specialties. This change could have a 
significant effect on physician payments, and requires further 
analysis. Both HCFA and the Practice Expense Coalition are 
currently modeling this change to determine its payment impact 
and its consistency with the BBA requirements to use generally 
accepted cost accounting standards. Since the outcome of this 
recommendation depends on the intersection of many working 
parts, we are awaiting the results of these studies before 
judging its merits. We note, however, that the accuracy of the 
indirect expense pool, however defined, depends heavily on the 
quality of the total practice cost information that HCFA uses. 
GAO doetion of whether HCFA has met the BBA requirement that it 
recognize all costs, so we are unable to evaluate this 
recommendation more completely at this time.

                     Disallowance of Certain Costs

    As HCFA has defined practice expenses, certain categories 
of costs have not been included. The Coalition has addressed 
this with HCFA, and discussions continue on the policy issues 
that underlie HCFA's decisions to date. We are disappointed 
that GAO's draft report agreed with HCFA's original decision to 
disallow any consideration of the costs physicians incur when 
they bring their own staff to facilities outside their own 
office to assist in the care of patients. We agree that not 
every specialty uses its own staff in this way; however, data 
from the Lewin Group, surveys conducted by the Society of 
Thoracic Surgeons, and studies by the national physician 
assistant organizations demonstrate that certain specialties, 
such as thoracic surgery and neurosurgery, do utilize their own 
staff outside of the office to a significant extent. These are 
very real expenses to these physician practices, and a way must 
be found to incorporate them in Medicare payments. These 
studies have been provided to both HCFA and GAO, and can be 
made available to the Subcommittee as well.
    We believe that this trend will increase as the revolution 
in the organization of health care financing and delivery 
continues. This is true not only for staff, but also for 
equipment as well. Medicare needs to recognize this changing 
reality of current medical practice and incorporate it into the 
payment system. There are several ways this could be done once 
agreement is reached on the rate of occurrence and the level of 
cost directly borne by the physician practice. One is to allow 
for a billing modifier that would be used when such staff or 
equipment were involved. Another would be to build 
reimbursement for the cost into payments for all services 
performed outside the office setting and average the amount 
across all such payments. The simplest solution is for HCFA to 
follow the dictates of the BBA and develop practice expense 
relative value units that start with the actual, total costs of 
physician practices. The use of staff in this way would thus be 
captured.
    Standby costs and uncompensated care can be significant 
expense items for some specialties, such as emergency medicine. 
There is a need to address this issue as well so that 
physicians not be asked to carry expenses for which there is no 
compensation.

                      Impact On Beneficiary Access

    GAO suggests that there be ongoing review of beneficiary 
access to care once these changes are in place, with special 
focus on access to those services that see the biggest payment 
reductions. GAO noted that the magnitude of the changes 
proposed last June were ``significant and could affect 
physician decisions regarding care of Medicare beneficiaries.'' 
Of course, the best approach is to assure that the final 
product does not lead to disruptions in the delivery of medical 
and surgical services; however, ongoing monitoring of changing 
physician reimbursement patterns is a critical step, and one 
that Congress should insist upon. The purpose of Medicare is to 
assure that beneficiaries have access to the medical care they 
need when they need it. Payment policies that significantly 
alter the status quo must be carefully evaluated on an ongoing 
basis so that any needed corrections can be instituted. Studies 
by PPRC and others to date indicate that currently 
beneficiaries do not experience significant access problems to 
either primary care physicians or specialists. The payment 
changes that could result from a new practice expense system 
may upset this balance and should be carefully monitored.
    The GAO study still does not answer the question of whether 
HCFA is on track for the May rulemaking. As I noted earlier, we 
hope Congress will ask for a subsequent review based on the 
requirements of the Balanced Budget Act. We believe that the 
requirements of that act, and the standards laid out in this 
GAO report, provide the framework for a successful transition 
to a new set of practice expense relative values.

      Additional Recommendations of the Practice Expense Coalition

    So that the remaining tasks can be accomplished in a timely 
manner, we have offered to enter into a public-private 
partnership with HCFA that would jointly fund the various 
activities that must be accomplished if this change in practice 
expense relative value units is to be successful and completed 
on time. Every physician interest should be included in that 
joint effort. Although we have received no response from HCFA 
to this offer, we reiterate it today in the hope that all sides 
will see the wisdom of such collaboration, and we can proceed 
to implement it immediately.
    Were HCFA to agree with us on this cooperative arrangement, 
we believe that the work could proceed in the following way.
    The first step is to recognize, as has the General 
Accounting Office, that the unresolved questions over data and 
methodology are too great to support confidence in any proposal 
made this year that purports to be the final word on the issue.
    Second, we should agree that the practice expense relative 
values effective in 1999, the first transition year, will 
probably change quite a bit as the refinement proceeds. Not 
every question has to be answered in the May rulemaking, but 
HCFA should clearly define the process that will be in place to 
get to the final answers.
    The next step is to figure out the interim values for 1999 
that will make up 25% of the transition values. In 
consideration of the time and resources HCFA has available, and 
the lack of general acceptance of significant portions of the 
work so far, we suggest the agency minimize the reallocation of 
dollars. We realize that the transition is intended to ``soften 
the blow'' to any affected specialty, but we urge that even 
modest reallocations of payment not occur until HCFA has fully 
complied with the mandates of the BBA to use total costs and an 
accounting methodology. We believe that there is enough data 
available from several sources, and that an acceptable short 
term methodology can be worked out, to allow a first step 
toward practice expense relative values that are based on the 
resources actually used by physicians. However, we must bet 
data refinements and methodological work remain to be done, and 
must be done, before the completion of the transition period. 
There is still much uncertainty, so that is why we recommend 
that HCFA be sure that the interim system's redistribution 
impacts are very modest, so that the many remaining issues can 
be worked out without causing significant disruption to patient 
care.
    We believe that in 1999, HCFA should refine the system 
around the key requirements of the BBA--actual data on total 
physician costs and generally accepted cost accounting 
standards. We recently presented to HCFA the method I will now 
outline.
    The Coalition recommends that the total practice cost 
requirement be met by using the American Medical Association's 
statistical monitoring system data as the starting point. It is 
unlikely that we will find a more robust data base than this 
one, even if millions more federal dollars are spent and much 
more time is devoted to the effort. AMA has been collecting 
this information for more than 25 years, and the survey is 
conducted by the RAND Corporation, a highly reputable firm. 
There are some issues with the data base that need to be 
addressed, such as underrepresented specialties, but these are 
fairly straightforward and can be accomplished within the time 
frames of the BBA and with reasonable expenditures. This 
proposal could also incorporate the direct cost data that HCFA 
has already collected.
    The other key element is a methodology based on cost 
accounting, and the Coalition has asked Coopers & Lybrand 
to develop that for us. The outline has been given to HCFA for 
its review, and I will summarize it here. We realize that more 
work is required to have a finished product for the fee 
schedule, and we have asked Coopers & Lybrand to continue 
its design efforts. This further work will be given to HCFA and 
to Congress as a demonstration that the mandate of the Balanced 
Budget Act can be reasonably achieved within the time allotted 
by the transition period and at a reayers.
    The system is relatively straightforward. The fundamental 
theory behind cost accounting is the identification of 
resources consumed in the production/provision of goods or 
services and the corresponding costs (e.g., direct and indirect 
expenses) of those resources. In healthcare, the final 
``product'' is the treatment provided to a patient; thus the 
cost accounting system must be able to identify and allocate 
the actual costs of resources used at the procedural level in 
treating patients.
    In this case, we can identify the total costs through the 
AMA data. From other sources, we know the proportion of 
Medicare patients by specialty, and the specialty specific use 
of various medical and surgical services. We know, or can 
learn, about the importance of different types of costs/
expenses for each type of specialty and each type of service. 
Using this and other information that now is available, we can 
allocate to the procedure code level, which is the level of 
payment. Once this is done, we can use a number of commonly 
used codes to equate costs for different specialties.
    Obviously, at this time, I can only present the skeleton of 
the process, but I would be happy to arrange for 
representatives of Coopers & Lybrand to brief you and your 
staff in greater detail. This is a process that can work. It 
can be completed in the time allowed for the transition without 
further legislative action. It needs only the support of 
Congress and HCFA to be put into place.
    Mr. Chairman, this concludes my testimony. I would be 
pleased to respond to any questions.
[GRAPHIC] [TIFF OMITTED] T8525.001

      

                                

    Mrs. Johnson of Connecticut. Thank you very much, Dr. 
Pearlman, and my thanks to the panel.
    I, unfortunately, am going to have to leave, but I 
appreciate your comments very much, and it's especially useful 
to have two of you who have participated in these panels with 
different points of view. I think it was, to me, at least, as a 
Member listening often to issues in which I don't have a great 
depth of knowledge, it's clear from the GAO's report that we do 
need to do more work, and HCFA seems to acknowledge they need 
to do more work, and we need to have very good oversight of 
that work. So, at least I, for one, look forward to your 
continued input as we move through this process. I do not 
believe that we can afford to move forward and implement the 
law we passed unless we also do move forward on the issues 
raised by GAO.
    So I thank you very much, and I'm sure we would be 
interested in the Coopers and Lybrand study, if the staff 
doesn't already have it. Thank you very much.
    I am going to turn the hearing over to my colleague, Mr. 
McCrery.
    Mr. McCrery [presiding]. Thank you, Ms. Johnson.
    I want, too, to thank this panel for your excellent 
testimony. I don't have any questions. I think your testimony 
was excellent and speaks for itself.
    But I do want to point out, before I turn it over to Dr. 
Cooksey for some comments, that as far as I know, anyway, 
nobody on this panel and nobody in Congress is out to gore 
anybody, and we're not out to do something that slights a 
specialty or overly enhances somebody else. We're just trying, 
as best we can, within the constraints that we have, the 
budgetary constraints that we have, to work out a system that 
is as fair to the greatest number of people possible.
    It's unfortunate, in my view, that we even have to go 
through this exercise, and I've expressed this viewpoint many 
times here in this room--that I don't want to be, as a 
policymaker, responsible for telling physicians or anybody else 
how much they can make or how much they can get reimbursed for 
doing something that ought to be determined by the private 
marketplace.
    So I'm anxious for the Medicare Commission to do its work 
this year and to present us policymakers with something that's 
a little more radical in its thinking than the current system 
is, and perhaps a proposal that will put us--or give us the 
chance to put Medicare into more of a free market context, so 
that it will take us away from this kind of responsibility.
    With that, I'll turn it over to Dr. Cooksey.
    Dr. Cooksey. Thank you.
    Dr. Nelson, I'm glad to hear a physician that talks as if 
you have knowledge, or at least a confidence in your knowledge 
of accounting, because I think that too often physicians are 
just as guilty as the bureaucrats and politicians of not having 
an adequate accounting background. So it's good to have you 
here.
    What accounting system do you understand HCFA to be using 
now, if they're not using activity-based or a cost accounting 
system?
    Dr. Nelson. Well, I certainly can't--I certainly won't 
pretend that I am an accountant. I have practiced internal 
medicine for 27 years in Salt Lake City.
    The crux of our testimony had to do with GAO's assessment 
of the methodology, and the fact that GAO concluded that using 
the expert panels provided adequate information that, with some 
additional adjustments, could be utilized, so that we didn't 
have to go back to square one and delay this whole process. So 
I don't claim any individual expertise in this. I'm just 
interpreting what we've heard from GAO.
    Dr. Cooksey. Would you prefer to see an accrual accounting 
system? Or there seems to be some question about cost 
accounting.
    Dr. Nelson. No, as I understand, the expert panel 
processes--you've heard people who have participated in that--
used physicians and their staff to determine what proportion of 
their practice expenses could be allocated to the various 
procedures. Some have suggested going with stopwatches and 
going into physicians' offices and directly measuring that. 
ASIM believes that that would unduly prolong the process, and 
not address some serious problems with fairness that are based 
on historic charges.
    We have to remember that we're dealing with a current 
reimbursement formula that is patently unfair in many instances 
because of the historic bias. I'm not an accountant, but I 
understand principles of fairness.
    Dr. Cooksey. Good. OK, I'm misinterpreted your comments 
about accounting.
    Let me ask you another question. Would you trust the system 
that my colleague, Congressman McCrery, alluded to, a market-
driven system in which the patient has choice, in which there 
is competition, in which the physicians, primary care 
specialists--and, incidentally, I did general practice before I 
was in the Air Force and before I did specialize--but would you 
trust a market-driven system or do you trust the system with 
government regulators, with the labor union leaders, with the 
White House, with corporate medicine in the examining room with 
us? Would you trust market forces? Do you trust the patient to 
make the choice about providers, about quality of care, about 
cost of care?
    Dr. Nelson. Generally, of course. Of course I do. 
Obviously, in a public program there needs to be some assurance 
that the market is working properly, but the American Society 
of Internal Medicine, for example, supports a Medicare reform 
that would call for defined contribution, to move it closer 
toward the market force, market-based system.
    Dr. Cooksey. I, too, think that's a move in the right 
direction.
    Dr. Haynes, it's good to have you here. Your testimony was 
very good as well. My associate is a woman, and she is 
wonderful. She was one of my residents that I helped train 20 
years ago, and she's now the best surgeon in town. She was long 
before I left.
    What is your basis for stating what the intent of Congress 
was in using 1997 as a base year or 1998? You know, I'm a 
member of this body, and I'm not sure what the intent of 
Congress was, but I'm glad to know that you know. What is your 
basis for saying what is--what was the base?
    Dr. Haynes. This is based on last year a compromise that, 
instead of everything being implemented in 1998, it would be a 
transition period, and the Academy agreed to that transition 
period, if there would be a downpayment toward starting to 
offset the inequities that exist in payments to primary care 
physicians.
    So that now in 1998 we have the downpayment being applied 
to the relative value units, RVUs, already, and there are some 
groups who are recommending that, as you start to transition in 
1999, we go back to the 1997 dollars and not use the 
downpayment dollars. In essence, some doctors would get more 
money this year. Then it would go back down next year, and then 
it might go up the year after that.
    Dr. Cooksey. But my question is, how did you find out what 
the intent of Congress is? Did I miss a meeting? Was there a 
meeting in which someone said this is the intent of Congress?
    Dr. Haynes. I just assumed that, because the law was passed 
that way, that that was the intent; that Congress wanted there 
to start being some changeover of the undervalued services. And 
so if we go back to the way it was in 1997, that would not be 
what the Balanced Budget Act calls for.
    Dr. Cooksey. OK, a very interesting interpretation.
    Well, I personally feel that we need to go to a system in 
which the patient truly has a choice. A system that's driven by 
the patient getting the highest quality of care at the lowest 
cost, and government and physicians should have information 
systems that will let us know who's got the best outcomes. We 
will have an open window, so that the public can know who the 
good providers are, who gets the good results, whose patients 
get well the quickest. In that system, there are going to be 
winners and losers among physicians, among specialists, and 
among primary care, and there are going to be some physicians 
that will go out and take advantage of the information systems 
while they're providing high-quality care at a low cost, and 
they will do well. And there will be physicians who will be 
providing high-quality care at a low cost, but do not take 
advantage of information systems, and they're going to suffer.
    But I trust those market forces more than I trust my 
colleagues in this, quote, ``august'' body. I trust patients to 
make those decisions better than I trust regulators and labor 
union leaders and the White House and the politicians to make 
those decisions. So that's what we all need to be driving for--
going back to that room where there's a patient and a physician 
in the examining room, in the treatment room, and trust the 
market forces, trust the patient, and we'll all be better off. 
And, most importantly, the patients will be better off, and 
what's good for the patient will be good for the physicians.
    Thank you, Mr. Chairman.
    Mr. McCrery. Thank you, Dr. Cooksey. Your wisdom is just 
about to catch up with your years. Any time you want to come 
and join us here, we appreciate having you.
    I thank the panel again for your testimony.
    [Whereupon, at 2:45 p.m., the hearing adjourned subject to 
the call of the Chair.]
    [Submissions for the record follow:]
                                    American Academy of    
                                                Dermatology
                                                  February 25, 1998

The Honorable William M. Thomas
Chairman, Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
1136 Longworth House Office Building
Washington, D.C. 20515

    Dear Mr. Chairman:

    I am writing in reference to the Subcommittee's hearing on Tuesday, 
March 3, to examine Medicare payment policies. On behalf of the 
American Academy of Dermatology, I would like to offer the following 
comments for consideration by the subcommittee and for inclusion in the 
printed record of the hearing.
    The Academy knows that the Subcommittee will hear from a number of 
groups regarding the implementation of the resource-based practice 
expense system effective January 1, 1999. We are confident that you 
will receive recommendations from both the ``losing'' specialties, 
particularly surgical groups, and from the primary care organizations. 
The former, of course, is interested in minimizing any reductions in 
payment, while primary care groups are generally concerned about 
increasing payments for office visits.
    There are, however, other interests to be considered in this 
debate. Dermatologists, for example, provide both surgical and medical 
services primarily in office settings. As such, dermatologists are the 
most cost-effective providers of care for skin diseases.
    Under the June 18, 1997, proposed rule, we would have received 
substantial increases in payment for practice expenses. These increases 
are long-overdue. For many years, we have been requesting that the 
Health Care Financing Administration (HCFA) fully recognize the 
practice costs associated with office-based surgery, particularly the 
unreimbursed costs including surgical trays, suture materials, 
dressings, and other related supplies. In meetings with HCFA staff, we 
have been told repeatedly that the development of resource-based 
practice costs would result in more accurate reimbursement for the cost 
associated with office-based surgery.
    The Academy was, therefore, pleased to see in the proposed rule 
that those costs for surgical trays were finally going to be 
recognized. However, when implementation of the practice expense system 
was delayed and the ``down payment'' for primary care services was 
enacted by the Congress, the impact of this provision on dermatologists 
and other office-based procedural specialists was totally ignored. We 
are similarly concerned that our views might be ignored or inadequately 
considered by HCFA as it proceeds with plans to implement the new 
system.
    The purpose of this letter is to advise you of our position. First, 
the Academy understands that HCFA is being asked to initiate additional 
data collection activities to refine the relative values during the 
transition period. Obviously, we cannot quarrel with any effort to 
improve the reliability of the data upon which the system is based. 
However, it is critical that any data collection be objective and not 
used to achieve some ``political'' outcome for particular groups of 
providers, whether a reduction in the decreases for ``losing'' 
specialties or certain levels of increases for the favored primary care 
services.
    Second, until such time as better data is available, we hope that 
you will urge HCFA to use the rates contained in the June 18, 1997, 
notice. While we would not claim that such data is perfect, we think it 
is clearly the best data currently available. The purpose of the 
transition, is, of course, to lessen the
    impact on the ``losing'' specialties by gradually phasing in the 
new rates over a four year period with only 25 percent of the changes 
implemented in 1999. In our opinion, this transition provides ample 
protection for losing services while additional studies or data 
collection efforts are conducted.
    I thank you for the opportunity to offer these comments. If there 
is any way that the Academy can assist you in this effort, please do 
not hesitate to call on us.
    With best wishes.

            Sincerely,
                                     Roger I. Ceilley, M.D.
                                                          President
      

                                

Statement of the American Association of Health Plans

    AAHP would like to take this opportunity to comment on the 
testimony of the Medicare Payment Advisory Commission (MedPAC), 
particularly in light of the recent release of their annual 
report to Congress. First, AAHP would like to highlight the 
success of the Medicare HMO program. Dramatic enrollment growth 
and low disenrollment rates demonstrate beneficiary 
satisfaction with the Medicare HMO program. The Medicare HMO 
program works for its enrollees--that is why enrollment is 
growing rapidly even though every beneficiary has the choice to 
remain in the traditional FFS Medicare program. As of January 
1998, 15.9 percent--or 5.9 million Medicare beneficiaries--were 
enrolled in health plans, compared to 15.4 percent in December 
1997 and 12.7 percent in December 1996. Five years ago, only 
6.2 percent of Medicare beneficiaries were enrolled in health 
plans. (Refer to graph at the end of this statement titled: 
Percent of Medicare Beneficiaries Enrolled in Managed Care 
Reaches 15.9% in January 1998)
    According to the Health Care Financing Administration 
(HCFA), approximately 90,000 Medicare beneficiaries join health 
plans each month. Annual growth rates for Medicare 
beneficiaries enrolled in the risk program have grown steadily, 
from 10 percent in calendar year 1990 to 26 percent between 
January 1997 and January 1998. Enrollment growth is strong both 
in areas with traditionally high Medicare risk penetration and 
in new markets, including the Middle Atlantic and South 
Atlantic regions.
    The majority of Medicare HMOs offer services not covered by 
fee-for-service Medicare, including outpatient prescription 
drugs, routine physicals, immunizations, and preventive health 
screenings (such as eye and ear exams) in their basic package 
of Medicare benefits. The percentage of plans offering 
outpatient prescription drug coverage has more than doubled 
since 1993 (see chart above). As of January 1998, 67 percent of 
Medicare health plans do not charge a premium for the plan's 
basic package of Medicare benefits. In its June 1997 report, 
the Prospective Payment Assessment Commission (ProPAC) 
estimated that, on average, health care benefits offered by 
risk plans are about $950 more generous on an annual basis than 
benefits offered in the Medicare fee-for-service system. (Refer 
to graph at the end of this statement titled: Percentage of 
Risk Plans Offering Prescription Drug Coverage More Than 
Doubles Since 1993)
    MedPAC was given a broad mandate under the Balanced Budget 
Act of 1997 (BBA) to examine Medicare payment policy. Given the 
myriad payment changes under the BBA that HCFA has begun to 
implement, a number of issues of concern have arisen. Our 
comments will focus specifically on the Commission's 
recommendations in the areas of Medicare's methodology for 
calculating payments to health plans and risk adjustment under 
the Medicare+Choice program.
    AAHP is concerned that MedPAC's recommendations regarding 
both payment and risk adjustment have the potential to 
significantly undercut the payment rates to Medicare+Choice 
organizations as established by the BBA. If MedPAC 
recommendations had been fully implemented for 1998, in many 
areas, 1998 and 1999 and possibly 2000 rates could fall below 
1997 rates. Moreover, payments to Medicare+Choice organizations 
are more constrained than Congress expected due to changes in 
the baseline,\1\ and the assessment of a $95 million user fee 
in FY1998. Further undercutting payment rates to 
Medicare+Choice organizations will harm the beneficiaries who 
enroll in Medicare+Choice organizations and enjoy quality, 
comprehensive services.
---------------------------------------------------------------------------
    \1\ Under the Balanced Budget Act of 1997, it was anticipated that 
the per capita national average growth rate would be 5.0 percent for 
the traditional program and 4.6 percent for the Medicare+Choice 
program. The January 1998 CBO baseline has lowered the anticipated 
growth in spending for both the traditional program (to 4.7 percent) 
and the Medicare+Choice program (to 3.3 percent.)
---------------------------------------------------------------------------
    Under the BBA, Congress effectively delinked 
Medicare+Choice payment rates from Medicare FFS payments. In 
addition, Congress set the growth rate for Medicare+Choice 
payments below the national average FFS growth rate--.8 
percentage points below the FFS growth rate in 1998 and .5 
percentage points below the FFS growth rate in 1999 through 
2002. During the BBA debate, some argued that setting the 
Medicare+Choice growth rate below the national average FFS 
growth rate allows Congress to adjust for any overpayments in 
the program which may result from risk selection. Congress, 
therefore, has adjusted aggregate payments for risk selection 
in the program.
    Adjustments to the payment methodology enacted in the BBA 
should occur only after an evaluation of the impact of these 
changes on beneficiaries and participating plans. In addition, 
risk adjusting Medicare+Choice payments should be implemented 
in a manner that will improve payment accuracy and result in 
the least disruption possible to beneficiaries and plans 
participating in the program.

                    MedPAC's Payment Recommendations

    The Balanced Budget Act of 1997 made significant changes to 
HCFA's methodology for calculating payments to health plans 
participating in the Medicare program. MedPAC's March 1998 
report to Congress recommends numerous technical changes to the 
payment methodology specified by the BBA. AAHP is concerned 
that a number of MedPAC's recommendations would further 
constrain payments to Medicare+Choice organizations, thereby 
limiting the expansion of choice available to beneficiaries and 
the additional benefits enjoyed by beneficiaries enrolled in 
these organizations.
    It is important to note that as Medicare+Choice is fully 
implemented, health plans and other Medicare+Choice 
organizations will see significant new administrative costs 
such as enrollee encounter data submission requirements and 
information system changes. In addition, for FY 1998, HCFA 
intends to collect $95 million in user fees from Medicare risk 
HMOs, the only organizations participating in the 
Medicare+Choice program this year. Over one-fifth of the 
minimum annual update has been eroded through the assessment of 
the 0.428 percent user fee on Medicare+Choice organizations 
from January through September 1998. A number of plans have 
already begun to adjust their benefit offerings in response to 
the new payment methodology and the assessment of the FY1998 
user fee by scaling back additional benefits such as outpatient 
prescription drugs and dental care. HCFA has asked for the full 
$150 million authorized by the BBA for FY 1999 to fund 
beneficiary information and education activities.
    If the important goal of expanded choice is to be served, 
health plans must be able to maintain benefit offerings at 
levels that are attractive to Medicare beneficiaries and meet 
their needs. In this context, our primary concern is that 
MedPAC's recommendations should not inject new challenges for 
health plans to provide enhanced benefits with shrinking 
resources.

Budget Neutrality Mechanism

    Under the BBA, total payments under the new methodology can 
be no higher than what total payments would have been under the 
old approach. The budget neutrality mechanism, however, is only 
applied to the blended rates and is not applied to the floor or 
minimum increase payment rates. As a result, budget neutrality 
cannot always be achieved, as was the case in 1998. While 
projections suggest that budget neutrality will be achieved in 
2000 through 2003, the MedPAC report notes that Congress should 
create an alternate budget neutrality mechanism.
    The MedPAC report suggests several possible alternate 
budget neutrality mechanisms, including waiving the provision 
that requires a minimum 2 percent increase. Such a change would 
have resulted in a minimum increase of 1.6 percent (instead of 
2 percent) in 1998. AAHP strongly opposes such a change as it 
conflicts with the intent of the BBA, to ensure stability of 
payments to Medicare+Choice organizations and the beneficiaries 
they serve by ensuring a minimum 2 percent update. This minimum 
update will be especially important for the newer, smaller 
plans that will begin to emerge in 1999. In addition, the 
percent update provides a reasonable relationship to growth 
rates in the traditional Medicare program. Even the MedPAC 
report itself points out that significant changes under the 
BBA--expansion of choices, an annual coordinated enrollment 
period, removal of graduate medical education payments from 
Medicare+Choice payments, the geographic redistribution of 
payments, and an uncertain risk adjustment methodology--combine 
to make the Medicare+Choice market more ``volatile.''

Medicare Spending by Department of Veterans Affairs and 
Department of Defense Facilities

    AAHP supports increasing the base rates to reflect spending 
on Medicare-covered services by the Department of Veterans 
Affairs and Department of Defense facilities on behalf of 
Medicare beneficiaries. Medicare HMO payments do not recognize 
the resource costs being expended by the Department of Defense 
and Veterans Affairs facilities for treating Medicare 
beneficiaries. At the same time, seniors who are eligible to 
use these facilities are included in the total count of 
Medicare beneficiaries residing in a county. As a result, 
managed care payments are too low in areas where there is 
extensive use of VA or DoD facilities by Medicare 
beneficiaries. In 1996, ProPAC estimated that health care 
provided in DoD and VA facilities to Medicare beneficiaries 
accounts for 3.1 percent of the total resource costs across all 
states of treating Medicare beneficiaries. As MedPAC points 
out, data on the use of VA and DoD facilities is only available 
at the state level. AAHP strongly supports the collection of 
data on service use at VA and DoD facilities at the county 
level, and adjusting the base rate accordingly. Such data would 
ensure accurate payments to Medicare+Choice organizations in 
areas with VA and DoD facilities.

Disproportionate Share Hospital Funds

    The MedPAC report also recommends exclusion of special 
payments to hospitals serving a disproportionate share of low-
income payments from the base rates used for the local 
component of blended rates. AAHP strongly opposes MedPAC's 
recommendation that disproportionate share hospital (DSH) funds 
be carved out of base rates. The MedPAC report asserts that 
``plans are overpaid to the extent that they do not pass on DSH 
payments to the appropriate hospitals.'' MedPAC's report, 
however, does not provide support for the assertion that plans 
do not contract with DSH hospitals. In fact, a 1996 AAHP 
commissioned analysis found that HMOs make higher payments to 
major teaching hospitals and have utilization rates for these 
facilities that are comparable to fee-for-service. There is a 
strong correlation between teaching hospitals and those that 
receive DSH payments. AAHP commissioned The Medstat Group, a 
highly respected medical economics company, to analyze the use 
of teaching hospitals by HMOs.
    Using a database of over 4 million privately insured 
individuals covered by large employers, Medstat found that HMOs 
have utilization rates at academic centers comparable to fee-
for-service plans. According to Medstat, HMOs admitted a 
slightly larger share of their patients to major teaching 
hospitals than did fee-for-service plans, a finding that 
contradicts the Administration's assumptions that Medicare HMOs 
are not admitting patients to teaching hospitals. The analysis 
also found that HMOs pay major teaching hospitals about 12 
percent more than they pay non-teaching hospitals. These 
findings contradict assumptions that health plans are not 
sending their patients to teaching hospitals and paying for the 
increased costs associated with these facilities. As noted 
above, there is a strong correlation between teaching hospitals 
and those that receive DSH payments.

Monitoring Changes Under the BBA

    AAHP fully supports MedPAC's recommendation calling for 
close monitoring of plan and beneficiary participation, risk 
selection, plan premiums, supplemental benefits, beneficiary 
cost sharing, and access to care. This monitoring will be 
critical in identifying and assessing patterns that result from 
the geographic redistribution of payments under the BBA. We 
agree with MedPAC that HCFA should also play a lead role in 
monitoring the impact of the Balanced Budget Act on health 
plans and beneficiaries alike. We urge both MedPAC and HCFA to 
undertake this monitoring prior to making additional changes to 
the Medicare+Choice payment methodology.

                MedPAC's Risk Adjustment Recommendations

    AAHP has consistently supported the goal of ensuring that 
Medicare payments to health plans are accurate and that they 
fairly reflect the health care service needs of the Medicare 
beneficiaries who enroll. We strongly urge Congress and MedPAC 
to consider the interaction of the recently implemented payment 
methodology with its proposed risk adjustment mechanism and the 
effect that its proposal will have on the success of the 
Medicare+Choice program. Risk adjusting Medicare+Choice 
payments should be implemented in a manner that will improve 
payment accuracy and result in the least disruption possible to 
beneficiaries and plans participating in the program.

Risk Adjustment Should Entail Redistribution, Not Aggregate 
Reduction

    AAHP believes that the risk adjustment methodology 
developed by HCFA should be implemented so that payments across 
Medicare+Choice plans are redistributed, without a further 
aggregate reduction of payment to the Medicare+Choice part of 
the program as a result of risk adjustment. Failure to do so 
will result in an unlevel playing field in many markets as 
growth in Medicare+Choice payment rates fails to keep pace with 
growth in the FFS program, leaving payments in some areas to 
fall even further below FFS payments. As a result, 
beneficiaries will have fewer Medicare+Choice options, reduced 
benefits and higher premiums.
Risk Adjustment Based on Inpatient Data Only

    While AAHP shares MedPAC's concern regarding the limits of 
a risk adjustment methodology based on inpatient data only, we 
are also concerned about the difficulty of obtaining data from 
additional sites of care. Many organizations are already 
experiencing difficulty meeting HCFA's requirements for 
collecting inpatient data, in part due to the need for 
significant systems modifications to collect and report the 
required data. In addition, HCFA is still developing its 
systems for receiving and reviewing the inpatient data. Given 
the uncertainty in the inpatient data collection process, the 
time frame necessary for successful initiation of a data 
collection effort that includes data from ambulatory sites of 
care is difficult to predict. As an interim step, however, HCFA 
may wish to consider supplementing an inpatient data only model 
with some select outpatient data focusing on a small number of 
diagnoses that commonly require hospitalization. This approach 
could give credit to plans with programs that promote moving 
care out of inpatient settings in clinically appropriate 
circumstances. As the MedPAC report points out, ``given the 
untested nature of the (risk adjustment) system, it is 
reasonable to expect significant problems as well as 
significant opportunities for improvement over time.''

Phase-In of Risk Adjustment

    AAHP supports MedPAC's recommendation that HCFA undertake 
an orderly phase-in of all aspects of the new risk adjustment 
method. The report also recommends that ``as soon as feasible, 
HCFA should announce operational details of its risk-adjustment 
system, to allow plans the necessary time to modify their 
contracts, accounts, and systems.'' The lack of operational 
details surrounding the risk-adjustment system has posed 
significant challenges and problems for AAHP members. Most 
plans need to make changes to their information systems to 
collect the data required for risk adjustment, and others may 
need to rewrite their provider contracts to ensure appropriate 
data collection. These activities can be costly and are 
occurring at the same time as myriad other changes to the 
program are being implemented.
    In addition to a deliberate phase-in of the risk adjustment 
method, AAHP supports the notion that HCFA limit changes 
resulting from this method to protect beneficiaries and plans 
from sharp swings in payment. MedPAC notes that lack of data 
has created uncertainty and that HCFA is still in the process 
of establishing the mechanism for collecting data from plans. 
While HCFA does not have an existing database to simulate plan 
payments under the new risk adjustment methodology, efforts are 
underway to develop such a database. It is unclear at this 
point, however, whether HCFA will be able successfully to 
assemble such a database and to provide timely estimates of 
plan payments under the new risk adjustment methodology. The 
uncertainty surrounding HCFA's proposed risk adjustment 
methodology and the potential for disruption to plans and 
beneficiaries both argue for limiting changes in payments to 
Medicare+Choice organizations under the new risk adjustment 
methodology.

                               Conclusion

    We urge MedPAC and Congress to proceed with caution to 
avoid volatility in the Medicare+Choice market and to encourage 
the expansion of choices available to Medicare beneficiaries. 
We will continue to work with Congress, HCFA, and MedPAC to 
ensure the successful implementation of the Medicare+Choice 
program.
[GRAPHIC] [TIFF OMITTED] T8525.003

      

                                

Statement of the American Chiropractic Association

    This testimony is submitted for the record of the March 3, 
1998 hearing of the Committee on Ways and Means, Subcommittee 
on Health, on behalf of the American Chiropractic Association 
(ACA), a membership association representing a majority of 
licensed Doctors of Chiropractic in the United States, 
regarding the GAO report on Medicare payment policies.
    The ACA generally supports the GAO report entitled, ``HCFA 
Can Improve Methods for Revising Physician Practice Expense 
Payments.'' It is the opinion of the ACA that the resource-
based methodology used by HCFA to calculate practice expense is 
basically sound and that the new fee schedule should go into 
effect in January 1999, with a three-year phase in period, as 
scheduled.

                    Practice Expense Relative Values

    Under the new system, practice expense will be more fairly 
allocated to those who primarily provide office-based services 
and, therefore, are financially responsible for overhead 
expenses. For example, 76 percent of chiropractic physicians 
are in a solo private practice. Less than nine percent of 
doctors of chiropractic practice in urban areas of more than 
one million residents and 47 percent of doctors of chiropractic 
practice in communities of less than 50,000. A recent national 
survey showed that mean practice expense for doctors of 
chiropractic is just under 60 percent of average gross income. 
On average, practice expense under the current system comprises 
approximately 40 percent of the fee for any given CPT/HCPCS 
code reimbursed under the Medicare Fee Schedule. However, the 
practice expense allocated to the only three CPT codes that can 
be used by doctors of chiropractic under the Medicare payment 
system comprises only 30.3 percent of the total RVUs allocated 
to those codes. Thus, actual practice expense for chiropractic 
physicians is approximately twice the practice expense 
reimbursable by Medicare at the present time.
    Although doctors of chiropractic are slated for an increase 
of approximately 15 percent in total reimbursement for Medicare 
services under the proposed resource-based practice expense 
system, the total impact on net income for the profession is 
relatively small. The percentage of income received by doctors 
of chiropractic from Medicare patient fees in 1995 was 8.4 
percent.
    It has been intimated by some during the debate that has 
surrounded the practice expense issue that the increases 
projected for non-medical providers, such as doctors of 
chiropractic, account for the losses forecasted for surgical 
groups. This is simply not true. Reimbursement for non-medical 
doctors such as podiatrists, chiropractors, and optometrists 
comprises approximately four percent of the Medicare fee 
schedule. Reimbursement specifically for chiropractors 
comprises less than one percent of the Medicare fee schedule. 
In fact, elimination of the increase projected for all of these 
provider groups would only reduce surgical losses by two 
percent. As an example, HCFA has projected that under the new 
payment system, reimbursement for a coronary bypass procedure 
would fall to approximately $1770. Elimination of the increases 
assigned to all non-medical doctors would raise this to $1786, 
a difference of only $16. The projected reallocation assigned 
to chiropractic alone would have significantly less than a one 
half of one percent impact on the changes estimated for 
surgical and other groups. 

                                Linking

    Throughout its report, the GAO expresses its concern 
regarding HCFA's linking methodology and its adjustments to the 
CPEP data. Using its linking methodology, HCFA adjusted the 
CPEPs' administrative and clinical labor estimates because of 
the inconsistency in the estimates for the same procedures. 
According to the GAO, these variations in numbers indicate that 
some adjustments to the CPEP data are necessary.
    It is clear from the report, however, that HCFA has not 
made any final decisions as to what their next step will be 
regarding the validation of the CPEP data. According to the 
GAO, ``At this time, it is unclear what approach HCFA will take 
in preparing its next proposed rule, which is due in May 
1998.'' In addition, the report indicates that HCFA officials 
are considering a ``check'' of the CPEP data by gathering 
direct expense data through surveys or on-site reviews. The GAO 
does not believe these ``checks'' would be practicable unless a 
limited number of on-site reviews were conducted to enable HCFA 
to identify any problems noted with the direct expense 
rankings. HCFA has not yet reached a final decision on a check 
of the CPEP data.
    It is the ACA's understanding that any final decision by 
HCFA regarding the linking or adjustment of CPEP data will not 
be made public until the proposed rule due in May 1998, at 
which time the ACA will submit written comment.

                     Multiple Procedure Reductions

    The ACA recommends that HCFA delay implementation of a 
multiple procedure reduction of practice RVUs until a system 
for procedure code-specific reductions can be developed. 
Although doctors of chiropractic would not be directly affected 
by this proposed policy, we believe that the proposed across-
the-board reduction would penalize those providers who commonly 
perform multiple procedures that do not result in efficiencies 
of scale. 

                               Conclusion

    In summary, the ACA concurs with the GAO report that HCFA's 
methodology for developing new practice expense RVUs is 
adequate and that it is not necessary to develop a new 
methodology. In addition, it is understood that there may be 
some adjustment of the CPEP data. The ACA will reserve comment 
on CPEP linking until HCFA finalizes its methodology for this 
procedure.
    We appreciate the opportunity to provide these comments.
      

                                

Statement of American College of Rheumatology

    The American College of Rheumatology (ACR) is an 
organization of physicians, health professionals, and 
scientists that serves its members through programs of 
education, research and advocacy that foster excellence in the 
care of people with arthritis and rheumatic and musculoskeletal 
diseases. The ACR is pleased to provide written testimony to 
the Ways and Means Health Subcommittee on reports submitted to 
the Subcommittee by the General Accounting Office (GAO) and the 
Medicare Payment Advisory Committee (MEDPAC) on Medicare 
payment policies.

          GAO Report On HCFA'S RBPE Implementation Methodology

    ACR has had the opportunity to review the final GAO report 
on HCFA's methods for revising physician practice expense 
payments, and we commend the GAO for accomplishing this 
significant task within a relatively tight timeline. 
Furthermore, we concur with the vast majority of the report's 
findings. The College's testimony will focus on the following 
aspects of the GAO report: (1) HCFA's methodology for 
developing direct cost estimates; (2) Linking; and (3) Use of 
physician nurses in the hospital setting.

HCFA's Methodology for Developing Direct Cost Estimates

    The GAO report states that ``HCFA used an acceptable method 
to develop direct cost estimates.'' The ACR fully concurs with 
this assessment. ACR believes that the Clinical Practice Expert 
Panel (CPEP) methodology utilized to generate data on direct 
practice costs was an open and inclusive process that resulted 
in values that will serve as an effective starting point for 
developing appropriate practice expense RVUs. We reject the 
opinion of many stakeholders that the data is fundamentally 
``flawed.'' The intent of the CPEP process itself was to 
develop a body of data using a multidisciplinary, 
representative sample of physicians and other experts 
(nominated by specialty societies) with expertise regarding the 
practice expenses under their review. Every opportunity was 
provided for all affected parties to provide input. By the time 
the official transition to resource-based practice expenses 
begins in May, 1998 with the release of the proposed rule on 
the 1999 Medicare Fee Schedule, physicians and other interested 
parties will have been given over ten formally promulgated 
opportunities to provide input into this process. In fact, 
physicians themselves will have actively participated in the 
actual development of RBPEs through every stage of the process, 
including participation in the original CPEPs, in the 
validation panels conducted in October, 1997, and the 
multispecialty panel meeting convened in December. HCFA has 
also provided a variety of other forums for physician groups to 
convey their opinions to the agency. For these reasons, we 
believe that the agency's actions to date--and the plans for 
future opportunities to submit views--already fully meets 
Congressionally mandated requirements in the Balanced Budget 
Act of 1997 that HCFA ``consult with organizations representing 
physicians regarding data and methodology to be used.''
    We also fully concur with the passage in the report 
indicating that ``Other methods for estimating direct expenses 
have limitations.'' The College agrees that the expense of 
alternative approaches such as mail or on-site surveys (both in 
time and actual cost) makes them, by definition, prohibitive. 
Additionally, these types of data gathering efforts are 
invariably plagued by low response rates, as noted in GAO's 
report, and are often hampered by design bias and potentially 
even by gaming. The report's stated concerns that activity-
based or cost-based accounting do not provide the specificity 
needed to adjust the Medicare fee schedule, are also shared by 
ACR.
    It has come to the attention of the College that the 
coalition of procedurally-oriented groups has suggested that 
HCFA's current approach be replaced by a cost-accounting-based 
methodology generated by a ``public-private partnership'' of 
HCFA and the medical specialty society community. The ACR finds 
such a proposal problematic in several ways. First, we believe 
that such an approach would result in a top-down RVS that would 
mirror the inequities in the current charge-based system--i.e., 
those services that are now reimbursed more for their practice 
expenses because of Medicare's charge-based system would still 
get more; those services that are reimbursed less would still 
get less. This is because the American Medical Association's 
Socioeconomic Monitoring Survey (SMS) data, on which the 
proposal would be based, itself is distorted by the current 
charge-based RVUs. HCFA's approach is a bottom up approach--
figure out the resources that are required to perform each 
service, and then convert them into a relative value system 
(RVS), resulting in the Congressionally mandated resource-based 
relative value system.
    The College also believes that HCFA has been engaging the 
professional medical community in a ``public-private 
partnership'' on RBPEs all along, as evidenced by the 
preponderance of opportunities for input afforded to the 
specialty societies. Finally, it is our opinion that use of a 
cost-accounting approach would merely maintain the status quo 
where procedurally-oriented services are over-reimbursed at the 
expense of evaluation and management services.

Linking

    ACR believes that the issue of whether to utilize the 
redundant CPT codes reviewed by the CPEPs to link the direct 
cost estimates generated by the separate CPEPs remains 
fundamental to the development of accurate resource-based 
practice expenses. The College concurs with HCFA's assertion in 
last June's proposed rule that the relative relationships 
within CPEPs are correct, but the relationships between CPEPs 
need to be normalized to bring the relative estimates to a 
single scale. Accordingly, ACR agrees with the GAO report that 
the CPEP estimates need adjustment and that linking is 
desirable. In the absence of such linking, the proposed RBPE 
RVU system would not truly contain ``relative'' values.
    GAO's report does raise questions regarding the specific 
linking formula utilized by HCFA, primarily regarding anomalies 
caused by the formula and the redundant CPT codes used to 
develop the links. While we believe that HCFA should remain 
open to the possibility of revising its linking methodology if 
credible alternate approaches are identified that can develop 
appropriate practice expense values, we reject the notion that 
the proposed linking methodology must be overhauled, 
reconstructed or abandoned. We therefore concur with the 
opinion of the Physician Payment Review Commission (PPRC) staff 
cited in the report that it is not necessary for HCFA to select 
new redundant codes, assemble new CPEPs, and estimate the 
linking regression on new data. It is our firm belief that the 
overall validity of the practice expense RVUs is dependent on 
HCFA adopting policies and rules to establish an appropriate 
relativity between the staff time estimates by the varying 
CPEPs. Therefore, while the College is not wedded to the 
specific linking model currently outlined by HCFA, we agree 
with the GAO report in the strongest possible terms that the 
CPEP estimates need some type of adjustment, and we believe a 
linking methodology is an appropriate approach.

Use of Physician Nurses in the Hospital Setting

    The GAO report concluded that ``HCFA appropriately 
disallowed nearly all expenses related to staff that accompany 
physicians to the hospital since there is no available evidence 
that these expenses are not already being reimbursed or are a 
common practice.'' Some surgical groups have argued that 
surgeons often bring their nurses into the hospital and that 
these costs should be reimbursed by HCFA. GAO staff has been 
told by surgical groups that new evidence had been given to 
HCFA in response to the October rule-making notice that 
supports the claim that this is a widespread practice. GAO 
staff has said that it planned to examine the evidence and 
determine if it should modify its conclusion. ACR recommends 
that the GAO ask HCFA to independently validate any such 
evidence, to determine if it is the usual practice for a 
typical Medicare patient, before agreeing that such expenses 
should be allowed.

               MEDPAC Report On Medicare Payment Policies

    MEDPAC has recommended that HCFA not adopt its proposal to 
reduce payments for procedures provided in conjunction with an 
office visit or other E/M service without further study. The 
ACR strongly agrees with this recommendation. It is the opinion 
of the ACR that extending the 50% discount for multiple 
procedures to non-surgical services would be highly 
inappropriate, at best. We believe that using reductions for 
multiple surgical procedures performed through a single 
incision as a template for reducing multiple diagnostic 
procedures performed during an office visit or other E/M 
services is simply illogical. In these situations, the only 
savings in physician work or practice expenses that could be 
realized is a minor reduction in the administrative time 
associated with scheduling another appointment or pulling a 
chart, which is to say the savings in practice costs would be 
neglible. In light of the lack of data provided to support 
making such a dramatic change in reimbursement for services 
rendered during an E/M visit, we strongly urge HCFA to at least 
pilot-test the effects of such a proposal before 
implementation.
    We also concur with the MEDPAC recommendation that a volume 
and intensity adjustment, or behavioral offset, should not be 
used. In its June 18, 1997 propose rule, HCFA stated that it 
intended to assume that 50% of the reductions in payments for 
specific procedures will be offset by an increase in volume and 
intensity. The effect of this assumption is to increase the 
amount of reductions for some procedures, and reduce the 
expected gain from others. The College agrees with MEDPAC's 
view that HCFA's experience with implementation of the RBRVS 
does not support the need for such a volume and intensity 
adjustment. Further, MEDPAC correctly that the sustainable 
growth rate for physician services, also mandated by the BBA, 
already corrects for any increase in the volume and intensity 
of physician services. ACR strongly urges Congress to advise 
HCFA that application of a volume and intensity offset to the 
PE-RVUs is inconsistent with requirement that resource-based 
practice expenses be implemented in a budget neutral manner.

                               Conclusion

    The ACR concurs with virtually all of the findings outlined 
in the GAO report. We believe that HCFA did utilize an 
acceptable method to develop direct cost estimates, and that 
while the specific proposed formula for linking the estimates 
is not perfect, some sort of linking or normalization is 
desirable. As was indicated by PPRC staff in the GAO report, 
drastic overhaul of the process, or implementation of an 
alternative approach, is not necessary. ACR agrees with the GAO 
that HCFA was correct in disallowing the costs associated with 
nurses who accompany a surgeon into the hospital, without 
independently verifiable data that this is a typical practice. 
The College also concurs with the recommendations relating to 
practice expense made by MEDPAC. We believe that it would be 
highly premature for HCFA to proceed with its recommendation to 
reduce payments for procedures provided in conjunction with an 
office visit or other E/M service without further study. We 
also agree that history does not support the need for a volume 
and intensity adjustment, and that the institution of the 
sustainable growth rate system makes this adjustment 
unnecessary.
      

                                

Statement of American College of Surgeons

    On behalf of our 62,000 Fellows, the American College of 
Surgeons welcomes this opportunity to provide its views about 
imminent changes in practice expense relative values under 
Medicare's physician fee schedule. As you know, the College and 
surgeons generally have been extremely concerned about the 
potential consequences of the new practice expense values. In 
particular, we have repeatedly expressed the view that the 
quality and validity of the data and other information that the 
Health Care Financing Administration (HCFA) has compiled so far 
would in no way support a massive redistribution of Medicare 
payments.
    We want to take this opportunity to compliment the General 
Accounting Office (GAO) for the work it has done in evaluating 
HCFA's proposed practice expense methodology. The College was 
pleased to have the opportunity to provide very extensive input 
during GAO's development of its February 1998 report, and we 
are pleased to see this input reflected in many places in the 
document. Overall, we believe that, despite a very challenging 
timetable for GAO's work, the report sheds considerable light 
on many of the problems with the data and methodology that HCFA 
has contemplated using to determine the new practice expense 
values.

              Combined Effect of Medicare Payment Policies

    Before turning to matters directly related to resource-
based practice expense values, it is important to note that 
Medicare policies already in place are expected to produce 
significant reductions in Medicare payment for surgical 
services. The most obvious are the adoption of a single 
Medicare dollar conversion factor and the use of a GDP-based 
formula for determining acceptable rates of growth in Medicare 
expenditures for physicians' services. As we understand it, the 
Congressional Budget Office (CBO) has projected that these new 
policies will cause the Medicare conversion factor to fall from 
$40.96 for surgical services in 1997 to $32.63 by 2002. This, 
by itself, would amount to a 20 percent reduction in Medicare 
payments.
    Obviously, if the new practice expense relative values for 
surgical services are lower than those currently assigned, 
these services would sustain significant payment reductions due 
to the combined effect of reductions in practice expense 
relative values and reductions in the conversion factor. In 
other words, under this scenario, there would be fewer relative 
value units and each unit would be worth considerably less.
    Following are some specific examples of what this could 
mean. If we assume that the proposed practice expense values 
published by HCFA last June were adopted and that CBO's 
conversion factor projections are accurate, Medicare payment 
for both coronary arteries bypass and cataract extraction could 
fall by 47 percent between 1997 and 2002. For total hip 
replacement, the comparable reduction would be 45 percent. And, 
for laparoscopic removal of the gall bladder and kidney 
transplantation, the payment reductions over this same time 
frame would amount to 34 and 31 percent, respectively. The 
Medicare payment trajectory for all of these services is shown 
on the accompanying charts. It is worth remembering that these 
payment reductions do not take into account the impact of 
inflation over this time.
    The College believes that payment reductions of this 
magnitude would have serious consequences for surgical 
practices in both urban and rural areas, as well as for the 
faculty practice plans of large teaching institutions. They 
would inevitably reduce surgeons' willingness to treat Medicare 
beneficiaries. Even now, the College is receiving notices 
indicating that some surgeons have reluctantly concluded that 
they can no longer care for Medicare patients as a result of 
already-imposed payment reductions, such as the 10.4 percent 
reduction in the Medicare conversion factor for surgical 
services that was implemented this year. There also is little 
doubt that continued downward pressure on payments for surgical 
services will only intensify the pressure for private 
contracting under Medicare.
    GAO's February report itself raises a cautionary flag about 
``the cumulative effect'' of various Medicare physician payment 
policy changes. Unfortunately, GAO seems content simply to 
monitor the situation. The College, instead, believes that 
policymakers need to assess in advance the reasonableness of 
the policies they are contemplating, rather than simply waiting 
until serious complications begin to materialize.

              Concerns about Direct Practice Expense Data

    The College has many serious concerns with the data and 
methodologies that HCFA has contemplated using to determine the 
new resource-based practice expense relative values.
    First, we do not believe that the agency has the kind of 
data on physicians' direct practice expenses that are needed to 
determine accurate practice expense values. The most recent 
attempt to reach consensus on labor-related data for a 
relatively small subset of physicians' services was 
unsuccessful. Further, the various physician panels that have 
been convened over time provided significantly different direct 
practice expense estimates. Here are just a few examples:
     The administrative staff time estimate for a 
chiropractic manipulative treatment nearly doubled, from 60 
minutes during the Clinical Practice Expert Panel (CPEP) 
process to 110 minutes in the ``validation'' panel meeting.
     The administrative staff time for a level 3 office 
visit for an established patient (CPT 99213) increased by 50 
percent, from 30 minutes in the CPEP process to 45 minutes in 
the validation panel meeting. Moreover, during the cross-
specialty panel meeting held in mid-December, primary care 
physicians argued that the administrative staff time for this 
code should be increased to 85 minutes--that is, almost double 
the time estimated less than two months earlier. More 
importantly, the previous 30 minute estimate had been used by 
HCFA to arbitrarily cap the administrative staff times allowed 
for various procedural services, because the agency assumed 
that this 30 minute estimate was some sort of ``gold 
standard.''
     The administrative staff time estimate for the 
inpatient consultation code (CPT 99253) fell by more than one 
third, going from 75 minutes in the CPEP process to 49 minutes 
in the validation panel meeting.
    The estimated clinical staff time for allergy skin testing 
increased by more than 360 percent, going from 13 minutes in 
the CPEP process to 60 minutes in the validation panel meeting.
     The administrative staff time estimate for balloon 
angioplasty rose by more than 125 percent, going from 143 
minutes in the CPEP process to 322 minutes during the 
validation panel meeting.
    What is even more significant is that the above differences 
relate to high-volume services, with which the various panel 
members would be expected to have considerable, recent 
experience. In addition, none of these services involve a 
global service period; they all relate to a single event. The 
College believes this raises serious questions about the 
validity of the estimates obtained for low-volume services, 
including those provided by few or even none of the CPEP panel 
members charged with developing them. It also raises serious 
questions about the accuracy and completeness of the estimates 
developed for services with a global service period--that is, 
those services involving care that stretches from the time a 
decision is made that a patient must undergo a major operation 
until 90 days following the operation.
    The GAO report acknowledges the differences in the direct 
practice expense estimates developed by the various panels but 
does not specifically discuss the implications of these 
differences for future rulemaking.
    The College believes that even the method HCFA is using to 
determine the direct practice expenses associated with a 
particular service is flawed. It relies on the concept of the 
``typical patient.'' Under HCFA's approach, expenses are only 
counted if they are incurred more than 50 percent of the time a 
particular service is provided. In the case of services 
provided by both generalists and specialists, differences in 
the sheer volume of the services provided essentially 
guarantees that the typical patient approach will cause 
specialists to be underpaid each time they perform a service on 
their typical patient (who has been referred by another 
physician, is symptomatic, and for whom the surgeon or other 
specialist has the added administrative burden of keeping the 
referring physician informed of the results--all of which have 
consequences for practice expenses).
    In short, this ``typical patient'' definition serves to 
discount or even ignore a considerable portion of practice 
expenses incurred by surgeons. In contrast, when HCFA 
determines DRG weights under Medicare's hospital prospective 
payment system, the agency takes into account data for all 
patients, and the weight for a DRG is based on the weighted 
average, not on the ``typical'' patient. Unfortunately, the GAO 
report does not address the serious shortcomings of HCFA's 
``typical patient'' definition for purposes of determining new 
practice expense values.
    With respect to direct practice expenses, the College also 
believes quite strongly that the labor costs of the physician-
employed staff who accompany a surgeon to the hospital must be 
taken into account. So far, HCFA has refused to do so, although 
the agency recently requested additional information about this 
practice and the College was pleased to comply. Based on a 
survey conducted by The Lewin Group, the College is able to 
document that many surgical practices use their own clinical 
staff in non-office settings. The results of this survey (copy 
attached) show that in at least five surgical specialties and 
subspecialties--neurosurgery, ophthalmology, general thoracic 
surgery, congenital thoracic surgery, and adult cardiac 
surgery--at least 50 percent of practices use employed clinical 
staff in non-office settings. Further, a sufficient number of 
practices in other specialties use their clinical staff in this 
way that we believe HCFA must make an effort to take their 
associated labor costs into account in determining fair and 
accurate practice expense values. The Lewin Group data 
indicate, for example, that 31 percent of general surgery 
practices pay for clinical staff used in non-office settings. 
While the sample for this survey is admittedly small, the data 
indicate that this is a significant and real practice cost that 
simply cannot be ignored. The College is pleased that GAO's 
report specifically recommends that HCFA ``determine whether 
changes in hospital staffing patterns and physicians' use of 
their clinical staff in hospital settings warrants adjustments 
between Medicare reimbursements to hospitals and physicians.''

          Concerns about Indirect Practice Expense Allocation

    The College believes it is also important to note that 
there is still no single, agreed-upon method for allocating 
indirect practice expenses. GAO's February report acknowledges 
this. These costs account for a significant share of the 
practice expenses incurred by many surgeons and other 
specialists. In fact, as we have argued, a significant portion 
of labor costs should be considered indirect expenses. As far 
as the College has been able to determine, no independent 
researcher has reached HCFA's conclusion that, on average, 
fully 55 percent of physician practice expenses are direct and 
only 45 percent are indirect. For example, Pope and Burge found 
direct expenses to be about 36 percent of the total, while Dunn 
and Latimer concluded that direct expenses represented about 32 
percent of the total. We believe that HCFA's 55/45 direct/
indirect practice expense split, and the undifferentiated 
manner in which the agency has previously allocated indirect 
practice expenses (that is, without taking into account 
specialty-specific differences in direct and indirect practice 
expense shares) seriously and inappropriately disadvantage 
surgeons and other specialists that have a relatively high 
share of indirect practice costs.

                             Other Concerns

    Finally, the College is very concerned that HCFA will 
obviously be required to make many controversial assumptions 
and decisions in calculating resource-based practice expense 
values. Overall, the College is deeply concerned about the fact 
that every HCFA data manipulation, statistical adjustment, or 
rule appears to factor out or otherwise limit practice expenses 
incurred by surgeons (for example, the cross-linking process, 
arbitrary caps on clinical and administrative labor time, and 
the removal of labor costs related to surgeon-employed staff 
involved in providing services to hospital patients). Moreover, 
surgeons are told that some of their labor costs will not be 
counted as direct costs at the individual level, but then these 
costs are counted by HCFA for purposes of determining aggregate 
direct expenses. In addition, surgeons have been given 
conflicting messages about where--and whether--to count the 
significant non-physician labor costs involved in getting a 
patient scheduled and ready for an operation.
    The College is gratified that GAO's recent report devotes 
considerable attention to problems with many of HCFA's 
statistical and other adjustments. We note, for example, that 
GAO has correctly noted HCFA's caps on clinical and 
administrative staff time for many procedural services ``are 
not supported by any data or analysis'' and that ``HCFA has 
not...conducted tests or studies that validate these changes 
and thus cannot be assured that they are necessary or 
reasonable.'' We note, too, that GAO is ``not convinced that 
HCFA's linking model is free of statistical problems.'' In 
fact, GAO goes on to emphasize that it ``did not expect to see 
such substantial and often striking deviations from the 
assumptions or patterns that HCFA staff had told us were the 
basis for their model.''

                        Specific Recommendations

    At this time, we are tempted to suggest that the work HCFA 
has completed so far in developing practice expense relative 
values should be set aside and that a new, more feasible work 
plan must be developed. We recognize, of course, that such a 
suggestion would not be permitted under the current statutory 
deadline. However, we do have several other concrete 
suggestions.
    1. The College believes that real, unbiased practice 
expense data must be injected in the process, rather than 
continuing to rely on unsubstantiated and ever changing 
estimates. Such data could be compared with the estimates 
developed by the CPEPs and the validation panels. We note that 
GAO's report also sees value in collecting actual data.
    2. The ``typical patient'' definition needs to be 
revisited. Surgeons are not simply convinced that the current 
approach is fair. At the very least, for some subset of codes, 
perhaps the practice expenses could be separately estimated for 
the typical patient seen by specialists and the typical patient 
seen by non-specialists, and then some weighted average 
estimate used. Another option would involve the use of code 
modifiers to distinguish between patients that have been 
referred from one physician to another (that is, from a primary 
care physician to a specialist) from those that have not been 
referred. In other words, such modifiers would recognize that 
different patient populations receiving the ``same'' service 
actually require the physicians involved to incur very 
different levels of practice expenses, in part because of 
differences in patient characteristics and needs, and in part 
because some practice expenses must be incurred just to keep 
the referring physician informed.
    3. In the proposed rule scheduled to be issued this May, 
HCFA should model several different options. Among other 
things, the agency should examine the impact of modifying its 
assumptions with respect to the proportion of direct and 
indirect expenses (and the sizes of the respective relative 
value pools). For example, we believe it would be appropriate 
to examine the impact of treating only the clinical staff time 
directly related to individual services as direct practice 
expenses, while considering the remaining clinical staff time 
and all administrative staff time as an indirect expense. This 
approach would acknowledge the difficulty of accurately linking 
administrative staff time to individual physicians' services. 
It would also acknowledge that some clinical staff time is 
spent in activities that cannot be directly linked to 
individual services provided to individual patients (such as 
time spent by a nurse in quality assurance activities, office 
management, continuing medical education, and so forth).
    4. HCFA must complete an impact analysis that compares any 
proposed practice expense payments with actual practice 
expenses incurred by physicians on a specialty-by-specialty 
basis. The College believes that data exist to do this. We 
recognize that there may be differences of opinion about what 
such an impact analysis might imply, but we see absolutely no 
reason not to do the work. In fact, we believe that such a 
detailed impact analysis is what the Congress expected when it 
enacted section 4505 of the Balanced Budget Act. The College 
and other physicians' organizations have taken the position 
that any new practice expense values should at least cover 
about the same proportion of each specialty's expenses, if the 
system claims to be resource-based. In fact, if the system 
truly were resource-based, it would cover all reasonable 
expenses.
    5. At the very least, the College believes that a 
reasonable ceiling and floor on the amount of change in 
practice expense values must be adopted. A simple phasing-in of 
inappropriately low values certainly would not be acceptable to 
the College, nor would vague promises of potential, future 
refinements in relative values.
    The College believes that, at the end of the day, HCFA, 
Secretary Shalala, and the Congress will need to assess the 
reasonableness of Medicare payment amounts as a whole. 
Moreover, since third party payers increasingly are adopting 
Medicare relative values, decisions made by federal 
policymakers take on a more global importance. Further, as we 
have emphasized continually, a massive redistribution of 
Medicare payments is not justified given the relatively poor 
quality of the information and the questionable methodologies 
currently available to HCFA.
    In closing, let me note that the College recognizes fully 
that the various Medicare policy changes, including the new 
practice expense relative values, were motivated by a desire to 
increase payments for primary care services. However, as the 
attached charts show, vast differences in the volume of 
services provided by generalists and specialists mean that even 
relatively costly services must be subjected to radical payment 
reductions so that payment for visit services can be increased 
by a modest amount. We find it difficult to imagine how 
surgeons will be able to continue providing high quality care 
to Medicare beneficiaries if the projected changes in Medicare 
payments for surgical services become a reality. In this 
regard, we assume that policymakers are prepared to acknowledge 
that the health care needs of Medicare beneficiaries cannot be 
met by primary care physicians alone. Finally, the College also 
recognizes that HCFA has been attempting to develop new 
practice expense values under very challenging circumstances. 
While we can sympathize with this, we know that it will be 
surgeons and their patients who will have to live with the 
final result of the agency's efforts.
[GRAPHIC] [TIFF OMITTED] T8525.004

[GRAPHIC] [TIFF OMITTED] T8525.005

                   Key Assumptions in ACS Projections

Medicare Conversion Factors

    1997 $40.96 (Source: Federal Register, November 22, 1996)
    1998 $36.69 (Source: Federal Register, October 31, 1997)
    1999 $36.06 (Source: Congressional Budget Office)
    2000 $34.70 (Source: Congressional Budget Office)
    2001 $33.22 (Source: Congressional Budget Office)
    2002 $32.63 (Source: Congressional Budget Office)
    The conversion factors projected for 1999 and beyond 
obviously reflect CBO's expectation that Medicare expenditures 
for physicians' services will exceed the applicable Sustainable 
Growth Rates, thereby triggering the need to make compensating, 
downward adjustments in the conversion factors.

Service-Specific Relative Values

    The relative work values published for 1998 remain 
unchanged through 2002 (and the 0.917 work value adjuster 
continues to apply). Note that these work values do reflect the 
increases approved for global surgical services, beginning in 
1998.
    The practice expense values published June 18, 1997 are 
adopted, beginning in 1999, and fully phased in by 2002.
    No change in malpractice values. While current law requires 
implementation of new resource-based malpractice values in 
2000, the impact of any such values cannot be estimated at this 
time.

Geographic Adjustment Factors

    The ``average'' payment amounts shown would be those paid 
in a locale whose geographic adjustment factors equal 1.00. 
Medicare payment amounts in locales with different geographic 
adjustment factors would be higher or lower than those shown.

           Practice That Pay For Staff in Non-Office Settings           
------------------------------------------------------------------------
                                                 Number Who  Percent Who
                                                  Pay for      Pay for  
                                    Number of     Staff in     Staff in 
                                   Respondents    Out-of-      Out-of-  
                                                   Office       Office  
                                                  Settings     Settings 
------------------------------------------------------------------------
Colon and Rectal Surgery.........           12            1           8%
General Surgery..................           13            4          31%
Neurosurgery.....................           12            6          50%
Ophthalmology....................            2            1          50%
Plastic and Reconstructive                                              
 Surgery.........................            6            2          33%
Vascular.........................            8            1          13%
Thoracic Surgery                                                        
General Thoracic Surgery.........           13            8          62%
Congenital Thoracic Surgery......           10            5          50%
Adult Cardiac Surgery............           14           10          71%
    Total........................           90           38          42%
------------------------------------------------------------------------

      

                                

Statement of Howard M. Levine, President, American Osteopathic 
Association

    My name is Howard M. Levine, D.O., and I am the President 
of the American Osteopathic Association (AOA). On behalf of the 
nation's more than 40,000 osteopathic physicians and the 
millions of patients for whom we care, I am pleased to provide 
the members of the House Ways and Means Committee's 
Subcommittee on Health with the AOA's written comments for the 
hearing record accompanying its March 3, 1998 hearing on the 
topic of Resource-Based Practice Expenses.
    The AOA appreciates the opportunity to address HCFA's 
practice expense proposal, as addressed by the final report by 
the GAO, submitted to Congress on February 27, 1998.

                               Background

    Before 1982, Medicare remunerated physicians on the basis 
of historical charges that substantially overvalued procedures 
performed in hospital settings while undervaluing evaluation 
and management (E/M) services and other non-surgical services 
provided in office settings. During 1992, HCFA began to 
implement a new Resource-Based Relative Value Scale (RBRVS) 
designed to pay physicians on the basis of relative value units 
(RVUs) for each procedure. The work RVUs are based on the 
actual work required of a physician to execute a particular 
medical procedure. However, this is only part of the payment 
schedule. Physicians are also compensated for the Medicare 
share of their practice expenses and malpractice costs as a 
part of each payment under the RBRVS system. The RBRVS is 
intended eventually to be based on actual data for all three 
components of the fee: physician work, practice expenses and 
malpractice costs. The BBA has set a timetable for the creation 
of malpractice RVUs. HCFA has also substantially completed the 
process of establishing Resource-Based Practice Expenses (RBPE) 
RVUs for practice expenses. These expenses include the costs of 
office staff, and the equipment and supplies necessary to run 
an office.
    In essence, the AOA believes that the HCFA proposal on RBPE 
meets the requirements established by the Balanced Budget Act 
of 1997. We believe that because of HCFA's in-depth work and 
collaboration with the physician community that the RBPE 
methodology is valid since it is based on data provided by 
physicians on actual physician practice costs. We therefore 
concur with the General Accounting Office's findings.

The AOA's Positions on the GAO's Recommendations on the Resource-Based 
        Practice Expense Component of the Medicare Fee Schedule

    The AOA found the GAO draft report to be a fair and 
realistic assessment of HCFA's RBPE proposal. This topic is 
extremely complex and with widely varying positions put forth 
to Congress and to HCFA on this crucial issue. The GAO report 
listed a significant number of findings and recommendations 
that I will address below along with our corresponding AOA 
position(s):
    1. GAO concluded that direct labor estimates and other 
direct practice expenses formulated by Clinical Practice Expert 
Panels (CPEP) are an acceptable method for contributing towards 
a viable RBPE system. The report recommended that HCFA should 
document how it will plan to adjust its (CPEP) data, the basis 
for this adjustment, and the effects it may have on physician 
practices. HCFA is also required to describe their process for 
future refinements and updating of this data. In its report, 
the GAO discounts allegations that the CPEP process was flawed 
because the information contributed was based on facts, not by 
``best guesses.''
     AOA Position: The AOA agrees with the GAO in its 
review of this HCFA method.
    2. GAO has clarified that alternative data gathering 
proposals advanced by certain groups are unreasonable and would 
increase costs while further delaying the implementation of the 
new method for determining PE payments.
     AOA Position: The AOA agrees with the GAO in this 
finding because activity based accounting alternatives 
reallocate practice costs to broad categories of codes and not 
to specific procedures, as mandated by law. This methodology is 
also extremely expensive and subject to sampling bias.
    3. GAO recommends that HCFA, on a limited basis, should 
collect actual Practice Expense data to identify significant 
problems that may be addressed in the refinement process.
     AOA Position: The AOA concurs in general with this 
GAO recommendation, however we believe that certain caveats 
need apply here. We believe that HCFA should look at other 
sources of data, and that any survey of physician practices or 
on-site gathering of data needs to be carefully designed to 
minimize response bias that may occur. In addition, HCFA should 
develop an acceptable methodology for collecting such data.
    4. GAO recommends that HCFA should revise its linking 
methods and eliminate scaling to the national survey data. GAO 
also recommended to HCFA that it should evaluate the 
possibility of assigning indirect practice expenses based on 
specialty-specific data (Two AOA Positions to Follow)
     AOA Position: The AOA concurs in general with the 
GAO that HCFA's proposed regression formula for linking the 
CPEP data is statistically sound. Even though the AOA is 
supportive of HCFA's proposed linking formula, we are open to 
considering other methods for normalizing direct practice 
expense data. However, this should only be done as long as the 
revised method addresses the problem of inflated administrative 
and labor costs for non E/M codes.

                           Scaling Background

    The GAO report recommended to HCFA that it should eliminate 
``scaling.'' Scaling is a statistical adjustment made in the 
CPEP data in that the proportion of direct expenses attributed 
to labor, equipment and supplies is consistent with the AMA 
Socioeconomic Monitoring Survey (SMS) data. In its June 12, 
1997 proposed rule, HCFA noted in the aggregate, for all CPEPs, 
labor equaled 60 percent of total direct expenses, medical 
supplies comprised 17 percent and medical equipment equaled 23 
percent. HCFA also noted that the correspondin percentages from 
the AMA SMS data were 73, 18, and 19 percent respectively. To 
equate the aggregate CPEP percentages with those for the AMA 
SMS data, HCFA proposed an adjustment in CPEP expenses for 
labor, medical supplies and medical equipment using scaling 
factors of 1.21, 1.06 and .39 respectively.
    Essentially, this would involve multiplying the CPEP 
expenses for labor, equipment and supplies for each code by the 
given scaling factors so that the overall distribution would be 
equivalent to the distribution in the AMA SMS data. The impact 
of scaling on the direct expenses of any given code depends on 
the distribution of direct expenses for that code as compared 
to the aggregate distribution. This means that codes with a 
greater-than-average share of labor costs would experience an 
increase in direct expenses as a result of scaling, while the 
opposite would occur for codes with a greater-than-average 
share of equipment costs.
    Since HCFA never explained why it must scale the CPEP data 
to fit with the AMA SMS data, we see no mathematical value in 
it. The AOA believes that HCFA should consider alternatives to 
scaling but would like to see more methodological details prior 
to making a change.
     AOA Position: HCFA proposed in its RBPE rule that 
it wants to utilize the aggregate ratio(55/45) since the 
adjustment would be the same across the board for all codes. 
Scaling indirect practice expense RVUs billed by each specialty 
has merit. We believe that the use of specialty specific ratios 
in the formula would represent a further refinement of that 
formula. The AOA agrees with this GAO recommendation because it 
has been difficult for HCFA to gather consistent data in this 
regard for all of the medical specialties
    5. GAO recommended that HCFA should collect data from a 
limited number of practices to test assumptions that underlie 
the other adjustments or the limitations on direct costs.
     AOA Position: The AOA agrees with the GAO, however 
we believe, that HCFA should look at other sources of data, and 
that any survey of physician practices or on-site gathering 
needs to be carefully designed to minimize a response bias that 
may occur and for HCFA to create an acceptable methodology for 
collecting such data would need to be determined.
    6. GAO recommends a shift of administrative expenses to the 
indirect side of the RBPE formula
     AOA Position: The AOA could agree to this proposal 
in theory. Because in practical terms, the CPEP and subsequent 
validation panels have highlighted the difficulty with trying 
to attach administrative costs to individual procedure codes. 
Accounting for multiple service codes submitted on the same 
claim form, or variables such as rent, utilities and 
administrative costs can vary widely by practice. The main 
problem with trying to shift these costs to the indirect 
category is that the formula for allocating indirect expenses 
would allow higher payments for the indirect practice costs of 
surgical services even though associated billing costs, for 
example, are most likely the same as those costs associated 
with billing for an E/M service.
    7. In its report to Congress, the GAO recommended that HCFA 
should monitor the impact on access, focusing on procedures 
with the largest cumulative reduction.
     AOA Position: The AOA agrees with this GAO 
recommendation, however, we suggest that the GAO acknowledge 
the inherent limitations of attempting to link changes in 
access (which may be due to multiple variables) to specific 
payment changes. The AOA also suggests that the report indicate 
that improvements in access to primary care services should 
also be monitored.

  HCFA's Compliance With the Balanced Budget Act of 1997 Requirements 
                            Relating to RBPE

    We believe that HCFA is complying fully within the law's 
requirements. The BBA directs HCFA to :
     Phase-In Implementation of Resource-Based Practice Expense 
(PE) Payments Over Four Years, Beginning on 1/1/99;
     Use Generally Accepted Accounting Principles and ``Actual 
Cost'' Data to the ``Maximum Extent Practicable''; and
     Consult With Physicians and Other Experts.
    The record shows that HCFA is in the process of fully complying 
with the law's requirements:
     A 60 day comment period was provided on a HCFA notice of 
intent to issue a proposed rule on practice expenses, published in 
October, 1997. The notice invited comments on several issues, including 
how to use generally accepted accounting principles, actual cost data 
and the nature of the refinement process that Congress mandated for 
each of the four years of the transition.
     Specialty societies nominated physicians, practice 
administrators, and other experts to participate in panels that met 
this past Fall to validate the data on direct practice expenses.
     Specialty societies participated in two conferences, held 
in November and December, that discussed use of actual cost data and 
generally accepted accounting principles.
     HCFA has gathered extensive actual cost data, from annual 
AMA surveys on practice expenses; from data developed by the Clinical 
Practice Expert Panels and validation panels; and from pricing data on 
labor and equipment costs involved in each service.
     Physicians will be able to comment again during a 90-day 
comment period on the new proposed rule. Physicians were also consulted 
by the GAO as it prepared its upcoming report to Congress on HCFA's 
data and methodology.

                           Refinement Process

    The AOA believes that there is a need for a fair and 
accurate refinement process. In order for HCFA to improve upon 
the crucial work done by the CPEPs and validation panels, there 
must be a more proportional representation of primary care 
physicians in relation to the specialists on future panels that 
will help conduct the refinement process.

  Does the BBA Require That HCFA Initiate a New Cost Accounting Study?

    No. The law does not require that HCFA initiate an entirely 
new cost accounting survey of physician practices. Actual cost 
data must be considered to the ``maximum extent practicable.'' 
It is not practicable for HCFA to implement a new cost 
accounting study in time for the data to be incorporated into a 
proposed rule that must, by law, be published no later than May 
1, 1998. Given the massive amount of information on actual 
costs that HCFA has already collected, a new study is also not 
needed to develop practice expense payments that are more 
accurate and fair than those determined by the current charge-
based methodology.
    Since the law requires that HCFA establish a process for 
additional refinements during each of the four transition 
years, only 25 percent of the PE-RVUs will be based on a 
resource-based methodology during the first year of 
implementation. Therefore, there will be another year to make 
further refinements before the resource-based methodology 
comprises even half of the total PE payments.

                           Behavioral Offsets

    Two crucial issues relating to HCFA practice expense 
proposals that were not included in the GAO report, are 
expected to be included in the forthcoming MedPAC annual 
report. We are referring to the HCFA proposals to include a 
behavioral offset and a reduction in practice expense RVUs for 
multiple procedures performed during an E/M office visit.
     AOA Position: The AOA opposes the inclusion in the 
practice expense proposal of a 2.4 percent age point reduction, 
or behavioral offset, in the conversion factor to account for 
increases in the volume and intensity of services that HCFA 
claims will result from changes in net income caused by the 
implementation of resource-based expenses. The AOA also 
disagrees with HCFA's proposal to reduce by 50 percent the 
practice expense RVUs for additional procedures furnished 
during the same encounter as an E/M service

                               Conclusion

    Thank you for the opportunity to present our views on this 
crucial issue before your committee. The AOA believes that HCFA 
is on course and is doing all that it can to ensure the 
implementation of an equitable Medicare reimbursement system 
that values all components of a physician's practice in 
providing medical services to the American public.
    The AOA supports the findings of the GAO report and we 
firmly believe that this issue does not need to be revisited. 
Overall, the GAO believes that HCFA is complying with the BBA 
requirements for gathering actual data to the maximum extent 
practicable, using generally accepted accounting principles and 
by using the input of physicians and experts as needed. The GAO 
report reaffirms that the HCFA RBPE proposal is a realistic and 
viable methodology and that the rulemaking process should move 
forward without interruption so that RBPE RVUs can be 
implemented by the deadline mandated by law.
      

                                

Statement of American Society of Clincial Oncology

                   Medicare Physician Payment Issues

    The American Society of Clinical Oncology (ASCO) is the 
national organization representing physicians who specialize in 
the treatment of cancer. ASCO has 11,700 members.
    ASCO strongly supports revision of the Medicare physician 
fee schedule to incorporate the use of resource-based practice 
expense components. We are pleased that the General Accounting 
Office has in general endorsed the methods being used by the 
Health Care Financing Administration (HCFA) to make this 
revision. New practice expense components should be implemented 
in accordance with the existing statutory schedule without 
further delay.
    While ASCO does endorse HCFA's basic approach, we do, 
however, have concerns with two important details in HCFA's 
proposed implementation.

                Payment Reduction for Multiple Services

    ASCO opposes HCFA's plan to reduce the payment for many 
procedures that are furnished on the same day as an office 
visit. Under HCFA's proposal, the practice expense component 
for procedures that do not have a global payment would be 
reduced by 50 percent if the physician also charges for a 
visit. This reduction is based on HCFA's assumption that there 
would be a substantial overlap of costs when multiple services 
are provided, but in reality any overlap would be far less than 
the 50 percent assumed by HCFA.
    Oncologists frequently furnish visit services to a cancer 
patient on the same day as the patient receives chemotherapy. 
During the visit the physician examines the patient, deals with 
problems that have arisen, and makes plans for further 
treatment. The subsequent chemotherapy consists of the 
administration of anticancer agents and supportive drugs and 
hydration by specially trained nurses.
    There is very little overlap between the costs of the visit 
and the costs of the chemotherapy. The cost of the staff time 
necessary to prepare and administer the drugs and the cost of 
the supplies involved in that process are not reduced in any 
respect because the physician saw the patient before the 
chemotherapy began. Nevertheless, under HCFA's proposal the 
practice expense component for the chemotherapy, which 
comprises almost the entire payment amount, would be reduced by 
50 percent. Oncologists would not be able to carry on their 
practices with such reductions. Any cost overlap that exists is 
limited to minor administrative costs, such as the time 
necessary to make the patient's appointment for the multiple 
services. HCFA should not be permitted to endanger the 
provision of medical care to Medicare beneficiaries though 
large and arbitrary payment reductions.

                        Indirect Cost Allocation

    ASCO is also concerned about the method selected by HCFA 
for allocation of indirect costs to particular services. HCFA 
has proposed to allocate indirect costs (such as rent, 
utilities, and certain equipment) to particular services based 
on the total of the direct practice expense costs, physician 
work relative value units, and malpractice relative value units 
associated with each service. In making this allocation, HCFA 
has proposed to use the assumption, based on data from the 
American Medical Association, that indirect costs are 45 
percent of total practice expense costs.
    Much of what oncologists do involves the provision of 
chemotherapy to patients. This service requires oncologists to 
incur considerable expense for items that HCFA considers 
indirect costs, such as extra space for the special 
chemotherapy chairs, space and a ventilator hood for mixing the 
toxic drugs, higher disposal costs for the chemotherapy-related 
waste, and so forth. Because chemotherapy administration is not 
considered to have a physician work component, however, it 
appears that HCFA's methodology allocates relatively small 
amounts of indirect costs to chemotherapy services.
    A number of observers have recommended that HCFA should 
consider the use of specialty-specific ratios instead of 
relying on the AMA's estimation that indirect costs constitute 
an average of 45 percent of costs for all physicians. ASCO 
urges that this approach should be evaluated as a possibly 
better means to recognize all of the indirect costs incurred by 
specialties, such as oncology, that frequently furnish services 
that do not involve physician work components.
      

                                

Statement of the Medical Group Management Association

    Mr. Chairman and Members of the Subcommittee, the Medical 
Group Management Association (MGMA) appreciates the opportunity 
to provide feedback on the General Accounting Office's (GAO) 
report ``HCFA Can Improve Its Methods for Revising Physician 
Practice Expense Fees.'' MGMA is the oldest and largest 
association representing physician group practices with more 
than 8,900 health care organizations nationwide in which just 
under 200,000 physicians practice medicine. MGMA's membership 
reflects the diversity of physician organizational structures 
today, including large tax-exempt integrated delivery systems, 
taxable multi-specialty clinics, small single specialty 
practices, hospital-based clinics, academic practice plans, 
integrated delivery systems, management services organizations, 
and physician practice management companies.
    MGMA brings a particularly valuable perspective to the 
practice expense issue. In addition to regular discussions with 
the Health Care Financing Administration (HCFA), MGMA presented 
material at HCFA's indirect expense meeting and participated on 
the practice expense cross-specialty panel. As a research-
oriented organization, MGMA has collected practice expense data 
since 1955. Our data collection involves group practices which 
range in size from two to several hundred physicians. As such, 
we understand the magnitude and complexity of HCFA's task. MGMA 
represents an equal proportion of managers and administrators 
working within the primary care and specialty care sectors. 
Consequently, we are well suited to focus solely on the 
research aspect without particular regard to one specialty or 
primary care. Finally, MGMA served as a technical consultant 
under a subcontract arrangement with Abt Associates which 
contracted with HCFA to gather practice expense data.
    MGMA believes that the GAO successfully explored and 
presented the breadth and complexities of the practice expense 
relative value units (RVU) adjustment debate. We further 
commend GAO for its outreach to MGMA and others in the medical 
community. MGMA strongly supports GAO's recommendation that 
HCFA gather data from a limited number of physician practices 
to use as an external validity check; MGMA has been advocating 
this data collection throughout the process.
    MGMA's comments today focus on two areas of the report: (1) 
the use of expert panels to derive practice expense data and 
(2) the consideration of how administrative costs should be 
allocated.

                          Use of Expert Panels

     GAO's ``results in brief'' indicates that HCFA's 
use of expert panels to estimate the direct labor and other 
direct practice expenses associated with medical services or 
procedures was an acceptable method. While MGMA understands 
that there are limitations to other methodologies, we continue 
to believe that the use of panels as the only means of data 
collection is not sufficient for the level of information 
required to adjust accurately the practice expense RVUs. As 
well versed as today's practicing physicians are in the 
business of medicine, their primary contribution is focused on 
the clinical rather than the managerial and administrative 
aspects of medical practices.
     It is important to note that, although the use of 
expert panels can be unscientific and potentially subjective, 
MGMA does not discourage the use of this process to derive 
additional information. In fact, our August 14, 1997 comments 
to HCFA state that the approach is useful to the extent that 
panelists have access to actual practice expense data. MGMA's 
concern with the panels has been the manner in which they were 
convened and conducted.
     I. To HCFA's credit, some of MGMA's concerns 
emanating from the Clinical Practice Expert Panels (CPEP) have 
been addressed. With each panel, the Agency demonstrated its 
willingness to address process concerns. Specifically, we 
commend HCFA for reaching out to practice administrators by 
providing MGMA with a slot on the cross-specialty panel and by 
actively seeking feedback from other practice administrators 
who were observing that panel.
     Although improved over time, the panel process was 
fraught with shortcomings. MGMA remains concerned with the 
subjective process of establishing administrative and clinical 
time. The panelists, who were primarily practicing physicians, 
explicitly recognized their unfamiliarity with the day to day 
tasks of their office staff, especially administrative staff. 
Some of this uncertainty (``bias'') could have been 
substantially diminished if the panelists were given the time 
and know-how to collect informal data from their practices 
prior to the convening of the panels.
     MGMA remains concerned about panel 
inconsistencies. Without the specific tasks associated with 
each staff explicitly spelled out for the panelists and until 
information is collected on the ``typical patient'' for each 
specialty, inconsistencies persisted. Furthermore, insufficient 
time was allotted to the process, thereby prohibiting panelists 
to fully explore each others' views and working together to 
identify and eliminate inconsistencies.
     With respect to the Department of Labor's wage 
rates, MGMA believes that a study should be conducted during 
the transition period to compare the actual medical practice 
compensation costs to the Department of Labor's figures. We 
believe that in some instances the role of staff may be 
undervalued for today's increasingly specialized 
responsibilities.

                 Allocation of Administrative Expenses

     Financial Management for Medical Groups, by Ernest 
J. Pavlock, PhD, CPA and published by MGMA's Center for 
Research in Ambulatory Health Care Administration (CRAHCA) 
defines a direct cost as one ``that can be traced to or caused 
by a particular service, product, segment or activity of the 
practice. For example, there are direct costs of performing a 
particular procedure, making a product, or managing a 
department or an office'' (emphasis added). On the other hand, 
an indirect cost is one ``that cannot be traceable to a 
particular cost objectThey are costs necessary to be incurred 
to support the total practice. However, they are caused by two 
or more cost objects jointly but are not directly traceable to 
either individuallyIndirect costs are also referred to as 
'overhead'.''
     Medical group practices, like all other business 
practices, must have a detailed understanding of the direct and 
indirect costs incurred in medical care delivery. Prompt access 
to relevant and reliable financial information is critical to 
run an effective business. Without such information, it is 
virtually impossible to work in today's increasingly cost 
conscious environment.
     In recent months, there has been a push to 
consider billing and other administrative costs as indirect. 
MGMA understands that without actual service level practice 
expense data some may feel forced to consider such expenses 
indirect. As well versed as today's practicing physicians are 
in the business of medicine, their primary contribution is 
focused on clinical rather than the managerial and 
administrative aspects of medical practices. Hence, it is no 
wonder that the panels convened thus far were unable to come to 
closure on medical group administration.
     MGMA believes, however, the answer is not simply 
to allocate the costs into an undefined category. This 
expansion of the indirect cost category only makes it more 
difficult for practices to have a handle on specific costs and 
masks the proper accounting and economic analysis needed in 
this particular field. Instead, and particularly in light of 
GAO's report to Congress, MGMA encourages HCFA to convene a 
separate panel composed of managerial and billing staff to 
obtain task specific information. Only after gaining additional 
insights can HCFA begin to determine whether and which 
individual tasks may need to be shifted to the indirect 
category.

                               Conclusion

    In closing, we would like to thank the Subcommittee for its 
continued interest in the practice expense issue and for 
working with the MGMA and the entire medical community to 
ensure that the adjustment of practice expense RVUs is based on 
sound scientific data.
      

                                

Statement of Richard Anderson, President, Society of Thoracic Surgeons

    The Society of Thoracic Surgeons and the American 
Association for Thoracic Surgery represent the board certified 
cardiac and thoracic surgeons of the United States. We are 
pleased to provide the following information and 
recommendations for consideration by the Ways & Means 
Committee on the very important and complex issue of revision 
of reimbursement for practice expenses under the Medicare Fee 
Schedule.
    First, we wish to commend Congress and this committee for 
the decision last year to delay the implementation of resource-
based practice expenses for one year and to direct the Health 
Care Financing Administration to develop a revised proposal for 
implementation in 1999 which would ``recognize all staff, 
equipment, supplies and expenses, not just those which can be 
tied to specific procedures, and use actual data on ... key 
assumptions.''
    We are very concerned that the intent of Congress is not 
being followed. HCFA has gathered no new data and appears still 
not to recognize many critical staff costs.

 I. Background: What Has Happened to the Allowed Charges for Heart and 
                              Lung Surgery

    Reimbursement for open-heart surgery--coronary artery 
bypass and surgery and other complex heart procedures--has 
already been reduced sharply in the last ten years. The 
national Medicare average allowed charge for three-vessel by-
pass and graft surgery was $3,781 in 1988; in 1998, it has been 
reduced to $2,512. Adjusted for inflation, the allowed charge 
today is $1802. That is, reimbursement for this lengthy and 
complicated procedure, where the life of the patient is at 
risk, has been reduced 34 percent in present dollars; in 
constant dollars--the real measure--the reduction is more than 
50 percent.
    The allowed charge for lobectomy--removal of a part of one 
lung for lung cancer or other diseases--has been reduced from 
$1,654 in 1988 to $1,071 today--a reduction of 15 percent in 
present dollars and over 39 percent in constant dollars.
    HCFA's 1997 proposal would have reduced the allowed charges 
for these procedure by another 32 and 26 percent, respectively.
    The following table illustrates the reductions which have 
already occurred over the ten years from 1988 to 1998 and the 
further effect last year's proposal would have had:

                                                                                                                
----------------------------------------------------------------------------------------------------------------
                                                                CABG 3 (CPT      Lobectomy (CPT 32480) 
                                                                       33512)          -------------------------
                                                             --------------------------                         
                                                                             Constant    Current $     Constant 
                                                               Current $      1988$                     1988$   
----------------------------------------------------------------------------------------------------------------
1988........................................................       $3,781       $3,781       $1,654       $1,654
1997........................................................       $2,831       $2,058       $1,518       $1,098
1998........................................................       $2,514       $1,802       $1,420       $1,005
June 1997 HCFA Proposal (at 1998 Conversion Factor).........       $1,714       $1,230       $1,071         $768
----------------------------------------------------------------------------------------------------------------

                II. Are the Present Work Values Correct?

    We believe that the estimates from Professor Hsiao of the 
Harvard School of Public Health, on which the work values were 
based, significantly undervalued the time required for pre and 
post-surgical services and underestimated both the difficulty 
and intensity of advanced surgical procedures on the heart and 
lungs.
    We do not make this assertion lightly. In 1991 the Society 
of Thoracic Surgeons undertook an extensive study, through Abt 
Associates, of the time and work required for cardiac and 
thoracic surgery. This methodology was essentially identical to 
that used by Professor Hsiao, but with a larger data base. The 
design and methodology of this study were reviewed with HCFA 
before the study began and its objectivity assured by an 
independent review panel.
    The conclusion was that major cardiac surgery procedures 
had been undervalued by 43 percent and many thoracic surgery 
procedures by 20 percent. This data was submitted to HCFA with 
a request that it be utilized in final decisions or, at the 
very least, that the Hsiao study of these procedures be 
reexamined.
    HCFA ignored both this data on work values and our request 
for restudy.
    These extreme reductions in reimbursement for cardiac and 
thoracic surgery are occurring at a time when the average age 
of our patients is increasing; when complicating factors, such 
as prior angioplasty or comorbid conditions are more prevalent; 
and when hospitals have shifted costs onto surgeons. Despite 
these changes, cardiac and thoracic surgeons have continued to 
treat Medicare patients without differentiation. We do not even 
inquire into the insurance status of our patients. The 
undervaluation of work has up to this time been compensated by 
adequate reimbursement for practice expenses. Full 
reimbursement for practice expenses has been and remains 
essential.

                       III. ``Opportunity Cost''

    Cardiac and thoracic surgeons spend a minimum of seven 
years in training after medical school--longer than any other 
medical specialty and four years longer than family 
practitioners. Most cardiac and thoracic surgeons are well into 
their thirties before they begin practice, and many have 
incurred substantial debt to complete their education. Because 
the work is physically demanding, their work lives are also 
shorter than those of general medical practitioners.
    In developing the concept which led to the ``resource based 
relative value fee system'' Professor Hsiao and his colleagues 
originally recommended including an adjustment for the value of 
the time lost in training--``opportunity cost'' in the 
economists' phrase. Professor Hsiao and his colleagues 
estimated the amortized value of the opportunity cost of 
specialty training for cardiac and thoracic surgery at 9.16 
percent and for general family practice at 3.52 percent. When 
put on a relative scale, the opportunity cost factor for 
cardiac and thoracic surgery was 1.05, for family practice 0.99 
(JAMA, October 28, 1988).
    In simplifying the RBRVS system for implementation, this 
opportunity cost adjustment was lost. Allowed charges for 
cardiac and thoracic surgery are now, therefore, six percent 
less than they should have been if only the time lost in 
training (not counting the shorter work life at the end of 
practice) had been recognized. We request that the original 
recommendation of the Harvard School of Public Health that work 
values be adjusted for the ``opportunity cost'' of advanced 
training be reinstated and that no further adjustment be made 
to the fee schedule until this is done.

                     IV. The Practice Cost Dilemma

    In this context we approach the valuation--or revaluation--
of practice costs. As the committee knows, these practice 
expense allowances were originally set through a formula based 
on historical allowed charges--those essentially set in the 
free market, paid by commercial insurers.
    Our information shows that the current practice expense 
reimbursement is within ten percent of the actual practice 
costs incurred by cardiac and thoracic surgeons at the present 
time.
    The American Medical Association Socioeconomic Survey shows 
mean practice costs for ``other surgeons''--which includes 
cardiac and thoracic surgeons--at $252,000 per surgeon. 
Research we have done -and we are now undertaking a larger 
survey to provide more definitive information -has shown 
average practice expenses among our specialty of approximately 
$244,000.
    Present practice cost reimbursement, under the 1998 fee 
schedule, for a cardiac surgeon who performs 200 major 
operations a year, with an additional 200 consults and another 
200 chargeable office visits is $ 259,600 per year--within six 
percent of our best present information on mean actual costs.

                      V. Last Year's HCFA Proposal

    HCFA's June 1997 proposal would have reduced practice 
expense reimbursement for a three-vessel bypass to $398; for a 
partial lung removal to $280; and for a heart transplant to 
$620. These were HCFA's estimates at that time of the correct 
allowance for all practice expenses incurred by the cardiac or 
thoracic surgeon, not just for the hours required for the 
operation and the days of hospitalization, and all other 
services provided in the full 90 day global period. (For a 
heart transplant, these allowances would also have to cover the 
time of the transplant coordinator, which often extends to six 
months before the transplant surgery is performed.)
    Total practice expense reimbursement for the cardiac 
surgeon with the case load outlined above, under this proposal, 
would have dropped to $92,500 -about 38 percent of actual 
costs.
    For comparison, the AMA Socioeconomic Survey shows that the 
mean practice expenses for a general family practitioner are 
$170,400 a year. Under the HCFA proposal, practice expense 
reimbursement for a general family practitioner with a case 
load of 6000 office visits a year (an average of 24 patients a 
day for 20 minute patient encounters) would be $170,000 a year 
-full practice expense reimbursement.
    These above comparisons are approximate, and should be 
refined. The wide differential in the ratio of actual costs to 
proposed reimbursement clearly indicates that, however, the 
1997 HCFA proposal was poorly constructed. Validation of any 
new proposal against the actual practice costs -at the very 
least, spot-sampling of actual total practice costs incurred by 
specialties -is essential before any radical changes are made 
in the Medicare Fee Schedule. We are pleased that the General 
Accounting Office has recommended such sampling to check the 
validity of HCFA's estimates.
    This committee last year heard some very misleading 
statements about the practice costs of cardiac surgery. One 
statement compared practice expense reimbursement for an office 
visit to that for open heart surgery which ``requires only a 
few hours of surgeon's time.''
    The reality is that reimbursement for surgery covers 90 
days of service to the patient--in the operating room, in the 
hospital before and after surgery, and for the remaining time, 
within 90 days, after hospital discharge. Surgeons, unlike many 
other practitioners, do not charge for repeat visits within the 
90 day global period. Thus the service provided to a cardiac 
surgical patient should not be compared to that for a 15 minute 
office visit.

             VI. Do We Still Need Heart and Lung Surgeons?

    This committee also heard last year a statement that the 
need for cardiac surgery--and other advanced cardiac care--is 
diminishing because of the improved general medical care 
provided since fees for primary care services were raised. HCFA 
has apparently accepted this assertion and is implementing 
physician payment reform as though increasing reimbursement for 
general medical care might bring about both a reduction in the 
cost of care and in the incidence of serious heart and lung 
disease requiring surgical treatment by specialists. This is 
not only a badly mistaken assumption, as described below, but 
goes well beyond Congressional intent for a relative value 
based payment system.
    The number of primary care office visits paid for by 
Medicare has increased significantly since the RBRVS came into 
effect. Unfortunately, this has not resulted in a decrease in 
the incidence of heart disease nor in the need for advanced 
treatments, such as those provided by cardiac, thoracic, and 
other surgeons.
    Heart disease remains the leading cause of death in the 
United States. Despite advances in medical care and the 
introduction of invasive cardiology procedures which delay and 
sometimes replace the need for heart surgery, about 300,000 
Americans are referred by cardiologists for heart surgery every 
year. (Over 50 percent are Medicare patients.)
    In an aging population, the prevalence of heart disease is 
increasing and, with that, the need for advanced medical and 
surgical treatment. The real story in heart disease is not that 
we have been able to decrease its incidence but rather that we 
are constantly improving the likelihood of long-term survival 
after a diagnosis of heart disease and even after a heart 
attack. This improvement in survival is the result of 
improvements in the total spectrum of specialized cardiac care, 
including that provided by both cardiologists and cardiac 
surgeons.
    We would emphasize that cardiac surgeons have no control 
over their case volume. Patients are referred to us by other 
physicians, who have determined that their patients need 
surgery. We do not, and cannot, control our own volume--only 
our results, of which we are proud.

       VII. What Would Happen to Access Under the HCFA Proposal?

    At present there are no serious problems for Medicare 
patients to access to either general medical or specialty care. 
However, one must question what would be the effect upon 
Medicare patients with heart or lung disease if a 
redistribution of reimbursement from specialty care to general 
medical care of the magnitude proposed by HCFA were 
implemented.
    Cardiac and thoracic surgeons do not currently distinguish 
between Medicare and other patients. We typically do not even 
know the insurance status of the majority of our patients 
(billing and preauthorization are handled by office staff). We 
treat the uninsured or underinsured the same as private pay 
patients. Our commitment is to treat patients irrespective of 
their ability to pay.
    However, the impact of reductions in reimbursement that 
even approach the magnitude discussed above would be 
substantial. Thirty-one percent of the practicing cardiac and 
thoracic surgeons in the U.S. are 55 years of age or older. 
These are the most experienced and capable individuals in our 
profession. If a large number of these surgeons retire, and 
many are already doing so, the work force may not be sufficient 
to treat the anticipated increase in the number of Americans 
who are over age 55. (As noted above, there is no evidence that 
improvement in preventive or other non-specialty care is 
reducing the need for surgery or other advanced medical 
procedures. The need is largely age-driven).
    Because of the long lead time involved in training heart 
and lug surgeons, a four-year phase in of a bad proposal would 
not prevent the damage to the specialty of cardiac and thoracic 
surgery. The incentives put in place now will determine to a 
great extent the supply of cardiac and thoracic surgeons four 
and ten years from now.
    Years of strenuous advanced training are essential in our 
profession. The early sacrifices are significant. At these 
reduced rates of reimbursement, will the most talented 
individuals--both intellectually acute and gifted with the 
essential hand coordination--enter into this profession?
    We do not know the answer. We do know that in Canada and in 
some European countries, shortages of cardiac surgeons have 
resulted in waiting lists for operations which are currently 
performed in the United States as soon as the decision is made 
for surgery and that some patients die before they are 
scheduled. The General Accounting Office is correct in warning 
that changes in reimbursement of the significance proposed 
could affect coverage for Medicare beneficiaries and the 
quality of care that physicians are able to provide.

   VIII. What has HCFA done since Passage of the Balanced Budget Act?

    Since passage of the Balanced Budget Act, HCFA has held 
three meetings with physicians and convened one panel to 
discuss ways of allocating indirect costs.
    They have probably met the mandate of the Balanced Budget 
Act that they ``consult with physician organizations.'' But 
that is all. No new data or information has been gathered. We 
do not know what changes they intend to make in their 
methodology, or their means of extrapolating from the limited, 
and somewhat uncertain, information they now have.
    The General Accounting Office has confirmed our belief that 
there are significant flaws and omissions in HCFA's methodology 
and that HCFA has not yet stated how it intends to correct 
these errors.
    HCFA does not have, and apparently has no intention of 
collecting, information on what physician's real practice costs 
are. Without, at a minimum, spot-checking the validity of the 
estimates they are now working from (as GAO has recommended), 
economists tell us they cannot meet the mandate of developing a 
rule based on generally accepted accounting principles. (Even 
if it is conceded that the panel estimates on direct costs are 
an acceptable starting point, there is no justification for the 
manipulations HCFA made to the panel data; nor is there a way 
to allocate indirect costs from direct costs, without reliable 
information on total costs from which to determine the 
magnitude of indirect costs).
    Without accurate information on total costs, HCFA was not, 
and still is not, able to determine total indirect costs, the 
ratio of direct to indirect costs, or the allocation of costs 
to individual procedures.
    HCFA's methodology--starting with estimates (not 
measurements) of direct costs, then developing a theoretical 
ratio of indirect to direct costs from an overall pool without 
recognition of differences in this ratio between specialties, 
and then allocating the presumed pool of indirect costs to 
procedures by formulae rather than data, lacks the basic 
grounding in empirical information required. While the 
subsequent validation panels have to some degree refined the 
estimates of direct costs, these revisions have not cured the 
basic methodological flaw: the absence of empirical data.

          IX. The Use of Physician-employed Staff in Hospitals

    Some analyses of practice costs seem to assume that 
physicians who practice primarily in a hospital setting have 
few practice costs. The assumption seems to be that when a 
surgeon goes to the hospital, he or she turns out the lights, 
puts the telephone on message recording, and puts the staff on 
unpaid leave.
    The reality, of course, is that our staffs are working in 
the office while we are in the hospital. Staff must be there to 
take calls from patients, to triage emergency calls, to handle 
all the preauthorization, insurance billing and other 
administrative work of an office, at all times. HCFA staff or 
its research contractors are welcome to visit without 
appointment, at our members' offices, at any time.
    But there is an additional, very important expense. Within 
the last five years it has become common for physicians 
providing highly-skilled and high intensity critical services 
such as heart and lung surgery to employ their own staff to 
assist in patient care in hospitals.
    There are two reasons for this. First, under the cost-
saving pressures of managed care and the hospital DRG payment 
system, hospitals have reduced both the number and the skill 
levels of hospital staff.
    Second, and most important, advances in the technology and 
the quality control required for complex surgery have made it 
more important than ever that the surgical team function as a 
coordinated unit, not as an assemblage of individuals. Surgeons 
work most effectively and most safely with nurses and operating 
assistants who work with them consistently. Prospective payment 
through DRGs has caused hospitals to encourage early discharge 
of patients. Thoracic surgeons have worked with their hospitals 
to find safe and effective ways to shorten hospital length of 
stay which, in the past 8 years, has decreased dramatically for 
all patients following heart and lung surgery. However, with 
earlier discharge from the hospital, care responsibilities have 
been shifted from the hospital to the surgeon's office. 
Consequently, more nurses have been hired to maintain 
postoperative surveillance and contact with patients and to 
assist the surgeon during an additional number of office visits 
during the early part of the 90 global period. Thus far, 
surgeons have absorbed these new practice expenses. The drastic 
reductions in practice expense proposed by HCFA will result in 
the curtailment of these services and place the quality of care 
in jeopardy.
    The mortality rate for coronary artery bypass surgery has 
declined from 4.5 percent in 1987 to 2.9 percent in 1996, at a 
time when the average age of the patients and the severity of 
their disease and comorbid factors have increased. The skill 
and unity of the operating team is a major factor in obtaining 
and maintaining quality at this level.
    One issue is accountability; the surgeon is clearly and 
solely responsible for the selection, training, and supervision 
of clinical staff when they are his staff. Lines of 
responsibility are more diffuse if the clinical staff are 
employed by the hospital. Second is predis critical for all 
surgeons, but notably for those who, as is common, have 
operating privileges at more than one hospital. The surgeon 
must take his or her own team from one hospital to the next to 
maintain quality.
    These clinical staff members from the surgeon's team 
typically work not only in the operating room, but with the 
patient in the hospital delivering both pre and post-operative 
care. This is particularly important in the intensive care unit 
and in the first several days post-operatively, when the 
patient must be carefully monitored and the surgeon notified 
immediately of any complication.
    For these reasons, the majority of cardiac surgeons, both 
in university teaching hospitals and non-teaching hospitals, 
and a significant, and growing, number of general thoracic 
surgeons now employ their own clinical staff who work in with 
them in hospitals as well as in the office. These staff members 
include both physician assistants and skilled clinical nurses.
    We do not have data on the number of clinical nurses who 
work with our members in hospitals. (We would be willing to 
survey membership as part of a private-public data-gathering 
effort.) Data on the employment of physician assistants in 
surgery are, however, available from surveys of The American 
Association of Physician Assistants and the Association of 
Physician Assistants in Cardiovascular Surgery.
    The AAPA has estimated that 1,002 of the 31,300 practicing 
physician assistants in clinical practice specialize in 
cardiothoracic surgery. A cardiothoracic PA will assist in the 
care of 180-250 patients a year. This leads to the conclusion 
that PAs alone (not counting other clinical staff employed by 
surgeons) are involved in at least 200,000 cardiac cases a 
year.
    The APACVS survey shows that 72 percent of the PAs employed 
in cardiovascular surgery are employed by solo or group 
physician practices. An undetermined number of the remaining 28 
percent, who work in university teaching hospitals, are in 
actuality employed by the university clinical practice plan.
    Data recently submitted to HCFA from the American College 
of Surgeons also show that 71 percent of the cardiac and 62 
percent of the general thoracic practices pay for staff who 
work with them in non-office settings.
    Data included in the APACVS survey show that virtually all 
of those PAs have responsibilities in the operating room. More 
than 85 percent have follow-up assignments with those patients 
in critical care and other hospital postoperative care as long 
as these patients are in the hospital.
    This data has been submitted to HCFA and, most recently, to 
the General Accounting Office, which has concluded that ``there 
may have been a shift in hospital and physician practices that 
Medicare has not recognized in its methods for reimbursing 
nonphysician clinical labor expenses.'' We urge the Committee 
to monitor this issue closely, as the failure to consider these 
costs in any revision of practice expenses could have a severe 
impact on quality.
    HCFA several times has noted that there is separate 
reimbursement for services provided by PAs as assistants at 
surgery. This reimbursement is not, however, available for PAs 
who work in the 110 teaching hospitals. Even where this 
reimbursement is available, it covers only the services in the 
operating room, not the additional services pre- and post-
operatively. Of course, there is no separate reimbursement for 
the nurses or other clinical personnel who also work with 
surgeons in the hospital.
    Adequate recognition of the cost of these personnel to 
physicians must be recognized. This is a matter not just of 
equity, but of quality. We intend to maintain the record of 
quality which has reduced mortality in CABG to current levels--
we intend in fact to improve further. We do not believe HCFA 
should ask us to turn back to standards of care which we now 
know are unacceptable.

               X. Development of Interim Values for 1998

    It is now obvious that HCFA will not be able to meet the 
Congressional directive and the present deadline of May 1998 
for development of a new practice expense proposal using, ``to 
the maximum extent practicable, generally accepted accounting 
principles.'' Any expectation that it might be possible to meet 
this requirement through refinement of existing data should 
have been dispelled by the inability of the cross-specialty 
panel meetings December 15 and 16 to reach agreement on any 
point other than this one: that any extrapolations of indirect 
expenses should start with specialty-specific data.
    The data and information now available is not sufficient to 
provide the basis for any rule which would significantly revise 
the present Medicare Fee Schedule. In addition to the lack of 
data on total costs by specialty, the information from the 
validation panels and the cross-specialty meeting has shown 
conclusively that the linkage of CPEP data according to the 
E&M codes and other revisions to CPEP estimates made in 
developing the June proposal were based on assumptions, not 
data.
    We hope that HCFA will recognize and communicate to 
Congress its need for additional time to meet the Congressional 
mandate. This should be preferable, for all parties, to 
presenting Congress and the medical community, in May 1998, 
with a proposal which clearly does not meet the statutory 
mandate.
    If Congress and HCFA believe that HCFA should keep to the 
current timetable, it is essential that HCFA correct at least 
the most obvious flaws in the methodology used and utilize the 
best data now available--the AMA Socioeconomc Survey--to 
validate its assumptions. The Practice Expense Coalition, of 
which we are a member, has provided HCFA with recommendations, 
prepared by Coopers & Lybrand, to develop such interim 
values.
    In light of the weakness of the data now available and the 
serious questions which remain over methodology, HCFA should be 
careful not to propose changes in reimbursement this year which 
would have inevitable consequences on the future supply of 
skilled specialists. As noted above, the long lead time 
required to maintain an adequate work force means that 
consequences will flow from an ill-advised decision, even under 
the presumed softening of the four-year transition. Given the 
reductions that have already occurred over the past ten years, 
as well as the erosion expected in the medical conversion 
factor, we recommend that any further reduction in the allowed 
charge for advanced medical procedures be limited to a maximum 
of ten percent.

                               Conclusion

    We recognize the difficulty and complexity of the tasks 
facing HCFA in developing a new practice expense proposal and 
in refining other components of the fee schedule to provide 
equity and justice, and to maintain the quality of medical 
care, particularly as this pertains to highly-advanced 
specialty care. The current practice expense proposal, 
compounding the other faults of the RBRVS system, would clearly 
lead to marketplace distortions within medicine, negatively 
affecting Medicare patients. Surgeons cannot practice if their 
expenses, including those of malpractice insurance, are not 
met. Practicing physicians will be driven from practice and 
fewer medical students will choose the additional years of 
training needed to qualify for advanced surgical practice. With 
the continued aging of our population, the need for specialty 
care will not diminish; primary care, however well practiced, 
will not prevent the inevitable diseases of aging. Reduced 
access to specialty care is not the solution to the problem.
    The Society of Thoracic Surgeons and the American 
Association for Thoracic Surgery pledge to work cooperatively 
with both HCFA and the Congress as we address the complex 
issues of providing quality health care to our aging 
population.

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