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



 
   RECOMMENDATIONS REGARDING MEDICARE HOSPITAL AND PHYSICIAN PAYMENT 
                                POLICIES

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 1997

                               __________

                             Serial 105-66

                               __________

         Printed for the use of the Committee on Ways and Means


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 55-005 CC                   WASHINGTON : 1999
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                      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

Advisories announcing the hearing................................     2

                               WITNESSES

Prospective Payment Assessment Commission, Joseph P. Newhouse, 
  Ph.D., Chairman; accompanied by Donald Young, M.D., Executive 
  Director.......................................................     6
Physician Payment Review Commission, Hon. Gail R. Wilensky, 
  Ph.D., Chair; accompanied by Lauren B. LeRoy, Ph.D., Executive 
  Director.......................................................    14

                                 ______

American Academy of Family Physicians, Patrick B. Harr, M.D......    95
American Academy of Otolaryngology-Head and Neck Surgery, Michael 
  Maves, M.D.....................................................    90
American Hospital Association, Tom Johnson.......................    42
American Medical Association, Thomas R. Reardon, M.D.............    72
American Society of Internal Medicine, Alan Nelson, M.D..........    79
Federation of American Health Systems, Thomas Scully.............    50
Kaweah Delta Health Care District, Tom Johnson...................    42
National Association of Public Hospitals and Health Systems, 
  Larry S. Gage..................................................    55
Patient Access to Speciality Care Coalition, and Practice Expense 
  Coalition, Michael Maves, M.D..................................    90

                       SUBMISSIONS FOR THE RECORD

American Academy of Otolaryngology-Head and Neck Surgery, Inc., 
  Alexandria, VA, statement......................................   107
American College of Rheumatology, Atlanta, GA, statement.........   108
American Gastroenterological Association, Bethesda, MD, statement   111
College of American Pathologists, Northfield, IL, statement......   112


   RECOMMENDATIONS REGARDING MEDICARE HOSPITAL AND PHYSICIAN PAYMENT 
                                POLICIES

                              ----------                              


                        THURSDAY, MARCH 20, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:07 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE                             CONTACT: (202) 225-3943
March 13, 1997
No. HL-7

                      Thomas Announces Hearing on
              Recommendations Regarding Medicare Hospital
                     and Physician 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 recommendations regarding medicare hospital and 
physician payment policies. The hearing will take place on Thursday, 
March 20, 1997, in the main Committee hearing room, 1100 Longworth 
House Office Building, beginning at 10:00 a.m.
      
    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. Joseph Newhouse, Chairman of the Prospective 
Payment Assessment Commission (ProPAC), and Dr. Gail Wilensky, Chairman 
of the Physician Payment Review Commission (PPRC). 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:

      
    Medicare hospital and physician payments dominate the fee-for-
service portion of the Medicare program. The Congressional Budget 
Office estimates that hospital payments will total $483 billion between 
fiscal years 1998 and 2002--about 68 percent of Part A fee-for-service 
payments. Physician fee schedule payments will total $372 billion 
during this same period, or about 46 percent of Part B fee-for-service 
payments. The President's fiscal year 1998 budget includes several 
provisions relating to these areas. These proposals will be examined in 
light of the recommendations from ProPAC and PPRC.
      
    Since 1984, Medicare has paid for inpatient hospital services using 
a prospective payment system (PPS). This system offers incentives for 
hospitals to provide care in an efficient manner. At the same time, the 
inpatient hospital PPS recognizes the higher costs incurred by some 
institutions. The President's fiscal year 1998 budget includes several 
provisions related to hospitals including reducing the inpatient 
operating and capital payment rate updates, reducing the amount of 
additional payments to teaching and disproportionate share hospitals, 
and reducing payments for outlier cases. In addition, the President 
proposes to establish a PPS for outpatient services. In its March 
Report to Congress, ProPAC made several recommendations regarding these 
and other hospital payment issues.
      
    In 1992, Medicare began reimbursing physicians using a resource-
based relative value scale (RBRVS) system. At the same time, Medicare 
began to set annual volume performance standards for the rates of 
increase in Medicare physician expenditures and began to limit the 
amount of copayments that non-participating physicians could charge 
beneficiaries. Under the RBRVS system, each physician procedure has a 
work, malpractice, and practice expense component. The Health Care 
Financing Administration will be issuing a notice of proposed rule 
making this Spring to change the method for reimbursing physicians for 
their practice expenses. The new system will result in substantial 
changes for some medical specialties. In addition, the President's 
fiscal year 1998 budget includes several provisions related to 
physician services including moving to a single-conversion factor and 
reducing payments to high-cost hospital-based medical staffs. The 
Subcommittee will examine these and other physician issues as they 
compare to PPRC's recommendations.
      
    In announcing the hearing, Chairman Thomas stated: Both the 
Prospective Payment Assessment Commission and the Physician Payment 
Review Commission have made significant recommendations, which this 
Subcommittee should give careful consideration to as we examine the 
President's budget and develop policy for the future of fee-for-service 
Medicare.
      

FOCUS OF THE HEARING:

      
    This hearing will focus on the provisions in the President's fiscal 
year 1998 budget proposal regarding Medicare payments for hospitals and 
physicians. These proposals will be addressed in light of the 
recommendations developed by the Congress, by ProPAC and PPRC, as well 
as the policies contained in the Medicare Preservation Act of 1995 and 
the Balanced Budget Act of 1995.
      

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) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Thursday, April 3, 1997, 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 a 3.5-inch diskette in WordPerfect or ASCII format.
      
    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 `TTP://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 202-225-1904 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.
      

                                


                      ***NOTICE--CHANGE IN TIME***

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE                           Contact: (202) 225-3943
March 18, 1997
No. HL-7-Revised

                Time Change for Subcommittee Hearing on
                       Thursday, March 20, 1997,
                 on Recommendations Regarding Medicare
                Hospital and Physician Payment Policies

    Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on 
Health, Committee on Ways and Means, today announced that the 
Subcommittee hearing on recommendations regarding medicare hospital and 
physician payment policies previously scheduled for Thursday, March 20, 
1997, at 10:00 a.m., in the main Committee hearing room, 1100 Longworth 
House Office Building, will begin instead at 1:00 p.m.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-7, dated March 13, 1997.)
      

                                


    Chairman Thomas. The Subcommittee will come to order.
    Today the Subcommittee will examine two of the largest 
contributors to the Medicare fee-for-service spending. We have 
been spending some time on some of the newer approaches, 
cutting edge, if you will, and we sometimes tend to forget that 
there are areas in which most of the money continues to be 
spent.
    Although we have yet to receive legislative language, we 
understand the President's fiscal year 1998 budget contains 
several provisions regarding the services. The Congressional 
Budget Office estimates that the President's plan, as best they 
are able to estimate, would reduce projected payments for 
inpatient hospital services by $14.2 billion between fiscal 
year 1998 and fiscal year 2002. Physician payments would be 
reduced from projected spending by $6.2 billion.
    To assist us in examining the President's proposal, a 
return engagement for the Chairman of the Prospective Payment 
Assessment Commission, Dr. Joseph Newhouse, and the Chair of 
the Physician Payment Review Commission, Dr. Gail Wilensky.
    Each March these nonpartisan Commissions have reported to 
the Congress their recommendations for ways to improve the 
Medicare Program. It is March, and they are here to provide us 
with their recommendations.
    Over the last few weeks, we have heard from both ProPAC and 
PhysPRC on several Medicare issues, including, as I said, HMO 
payment policies and other areas. While this is a growing area, 
these topics for today's Subcommittee hearing are where the 
money is.
    We have also invited representatives from the hospital and 
physician communities to provide us with their feedback on the 
President's budget and the Commissions' recommendations. We 
need to find out ways to make Medicare a more prudent purchaser 
on the fee-for-service side of the program.
    Personally, I would like to welcome Tom Johnson, who is the 
chief executive officer of the Kaweah Delta Health Care 
District Hospital, which is located in the city of Visalia. The 
question of who is buried in Grant's Tomb is appropriate here. 
Guess which district Visalia is in. I look forward to hearing, 
however, from all the witnesses, and with that, I would call on 
my Ranking Member.
    Mr. Stark. Well, Mr. Chairman, I was not going to have an 
opening statement today. I have met all the witnesses and, 
indeed, known them for some time, and I look forward to their 
enlightening us.
    But yesterday there was an event in El Paso in which a 
group of FBI, IRS, and, I presume, HHS agents from the Office 
of the Inspector General, raided the Columbia HCA facility in 
El Paso ``as part of a long-term investigation.'' I would be 
less than modest if I did not suggest that that was an 
investigation which I requested several years ago.
    I have been expressing concerns that Columbia is not good 
for the health of America, and we are constantly presented with 
conflicting studies on what profit and nonprofit facilities do 
and who is more efficient. And I would presume we will soon 
have the benefit of a grand jury indictment or a jury trial 
transcript where we can get some hard data which ProPAC and, 
indeed, PhysPRC can use to see how the exchange of funds 
between the physicians and the hospitals, if in fact there was 
any, affected the cost and quality.
    Now, there may be nothing to this raid. It occurs to me, 
with all of the information I have had from Columbia Hospital 
about the quality awards they have won, Vladeck may have really 
wanted to get some proprietary information about how they got 
to be so good, and they would not tell them; so he raided the 
hospital to get this information so he could have all the other 
hospitals be as good as Columbia.
    That is a possibility. But for those of you who were 
thinking of going to the reception for Members tonight at the 
National Air and Space Museum hosted by Columbia, I would urge 
you to think about whether you have some concern for the 
propriety of attending this in view of the ongoing 
investigation.
    Mr. Chairman, thank you for indulging me, and I look 
forward to our first panel's enlightenment.
    Chairman Thomas. Thank you, Mr. Stark.
    The gentleman from Louisiana.
    Mr. McCrery. I thank the Chairman. In light of the opening 
statement of Mr. Stark, I feel compelled to say that it was a 
cheap shot. There have been not-for-profit hospitals and any 
number of other hospitals investigated and found guilty of 
improprieties. And to single out one institution, I think, is 
probably inappropriate. It was, in fact, a single institution 
in a single city, not a network-wide investigation or raid. I 
would just like to make the record clear on that.
    Mr. Stark. Would the gentleman yield?
    Mr. McCrery. Surely.
    Mr. Stark. It is my understanding further that the idea 
that it was a single institution will not be the case for long, 
at which point I would be glad to inform the gentleman further 
as to the extent of this investigation.
    Mr. McCrery. Well, at this point, it is a single 
institution.
    Mr. Stark. It is.
    Mr. McCrery. And the gentleman is well aware that the 
University of Pennsylvania had $30 million in fines. Would he 
suggest that the University of Pennsylvania go away? I think 
not. But we should continue, certainly, to investigate any 
institution, for-profit or not-for-profit, that violates the 
law and attempts to bilk this system that many have created 
over the years that is ripe for bilking.
    Chairman Thomas. I thank the gentlemen for their comments. 
I was going to try to smooth the waters by saying that the 
preceding was a paid vindictive announcement, but apparently 
that would not be appropriate at this time.
    If you have heard this before, stop me. Your written 
testimony will be made a part of the record. [Laughter.]
    But you can inform this Subcommittee in any way you see fit 
on what you folks have been doing and are going to report to us 
today about Medicare hospital and physician payment policies.
    Dr. Newhouse, did you want to start?

 STATEMENT OF JOSEPH P. NEWHOUSE, PH.D., CHAIRMAN, PROSPECTIVE 
  PAYMENT ASSESSMENT COMMISSION; ACCOMPANIED BY DONALD YOUNG, 
  M.D., EXECUTIVE DIRECTOR,  PROSPECTIVE  PAYMENT  ASSESSMENT 
                           COMMISSION

    Mr. Newhouse. Thank you very much, Mr. Chairman. It is a 
pleasure to be back here with you. I would like to focus most 
of my remarks today on the hospital operating cost update 
recommendation and then come to hospital outpatient services.
    I would like to just walk you through some of the charts 
that are attached to the testimony. Chart 1 I think tells a 
fairly remarkable tale. It shows the change in operating costs 
for the past 12 years since we have had the Prospective Payment 
System, and you will notice that for the first several years, 
the costs are going up around 9 percent or so a year. But in 
1994, they actually go down 1 percent in nominal terms, and the 
information we have for 1995 and 1996 suggests that trend is 
continuing--that is, costs are continuing to go down.
    Now, one of the reasons they are going down is shown in the 
next chart, chart 2. You will notice that in 1994 the length of 
stay fell a whole half a day. That is larger than at any time 
since PPS started. And in 1995 it fell another half a day--
again, a large change in length of stay. It is related, of 
course, to the increase in postacute care, skilled nursing 
facilities, and home health facilities that we have talked 
about before.
    Now, in part because of this fall in the length of stay, 
the margins for prospective payment systems have increased to 
all-time recent highs. That is in chart 3. They are as high as 
they have been since the first couple of years of prospective 
payment.
    Total margins are also fairly robust. If you move on to 
chart 4, you will see that they are also the highest they have 
been since the first 2 years of prospective payment, around 5.5 
percent.
    Now, these figures were in part responsible for our 
recommendation to you that the update factor for 1998 be zero.
    Now, if we move on to chart 5, however, you will see that 
even though the update factor is zero, that does not mean 
Medicare payments will not increase. Chart 5 shows at the top 
the increase over time in payments per discharge and costs per 
discharge, and you will see those two lines have diverged quite 
markedly in the last few years. That difference, of course, 
reflects the margins we were looking at before.
    If you look down, you will see the update factor has gone 
up over time considerably less than payments per discharge, and 
that is because there is an increased case mix complexity at 
hospitals.
    To sum up, Mr. Chairman, we believe hospital costs are 
going down, margins are high, and a zero update would be a 
prudent move on the part of Medicare as a purchaser.
    Let me make two quick remarks on hospital outpatient 
department payments. To use a technically precise term, they 
are a bit of a mess. We do believe there is a problem with 
beneficiary copayment that needs to be addressed. It is very 
high for many outpatient services. Doing that will require 
money, and we believe part of the money can be found by 
correcting a flaw in the payment formula, the so-called 
formula-driven overpayment.
    Thank you, Mr. Chairman, and I will await your questions.
    [The prepared statement follows:]

Statement of Joseph P. Newhouse, Ph.D., Chairman, Prospective Payment 
Assessment Commission

    Good afternoon, Mr. Chairman. I am Joseph Newhouse, Ph.D., 
Chairman of the Prospective Payment Assessment Commission 
(ProPAC). I am accompanied by Donald Young, M.D., the 
Commission's Executive Director. We are pleased to be here to 
discuss the Commission's recommendations to improve the 
Medicare program. During my testimony, I will refer to several 
charts. These charts are appended to the end of my written 
testimony.
    Over the past several weeks, we have testified before this 
Subcommittee about the Commission's recommendations on 
Medicare's risk program, post-acute care, and teaching and 
disproportionate share payment policies. These recommendations 
are published in our recently released Report and 
Recommendations to the Congress. This afternoon, I would like 
to discuss other recommendations that we make in our report. 
These include our views on payment updates for hospitals, 
hospital outpatient services, and the end-stage renal disease 
(ESRD) program.
    Mr. Chairman, as this Subcommittee's hearings have 
demonstrated, the Medicare program is at an important 
crossroads. Never before have beneficiaries had so many choices 
among providers, sites of care, and delivery options. At the 
same time, however, Medicare spending is growing at a rate that 
is unsustainable. Without any intervention, the Medicare 
Trustees estimate that the Part A Hospital Insurance Trust Fund 
will be depleted by the year 2001. The challenge is to enact 
policies that maintain quality care for Medicare beneficiaries 
while at the same time ensuring the fiscal viability of the 
program for future generations.
    The Commission believes that Medicare must take advantage 
of the invigorated heath care marketplace and tailor its 
payments to correspond to providers' lower costs in delivering 
services. At the same time, Medicare must reevaluate its 
payment methodologies for certain services where increasing 
utilization is a major reason for rising expenditures.
    While the bulk of our recommendations focus on payment 
methods, our first recommendation emphasizes the need for the 
Medicare program to be vigilant in monitoring and improving the 
quality of care delivered to beneficiaries who receive services 
under both the fee-for-service and capitation options. This is 
increasingly important given the cost-containment pressures and 
the rapid structural changes occurring in the health care 
financing and delivery systems. In our report, the Commission 
recommends that the Secretary pursue a comprehensive approach 
to quality assurance that includes not only analyzing patterns 
of care to raise quality standards, but also reviewing 
individual cases to identify poor performers.

                   Medicare Payments to PPS Hospitals

    Payments to PPS hospitals represent the largest share of 
Medicare outlays, about $74 billion in fiscal year 1997. In 
addition to payments for routine operating and capital costs 
associated with hospital admissions, Medicare makes additional 
payments to hospitals that have teaching programs and those 
that treat a disproportionate share of low-income patients.
    In its evaluation of Medicare policies, the Commission 
annually reviews the financial performance of hospitals. I 
would like to share with you some of our findings.

Hospital Payments and Costs

    Remarkable changes are occurring in hospitals. Since 1993, 
the growth in Medicare operating costs per discharge has been 
less than general inflation. In 1994, these costs actually 
decreased, in absolute terms, for the first time (see Chart 1). 
This 1.3 percent decline was 3.9 percent below the overall 
inflation rate. Preliminary data for 1995 indicate that costs 
fell an additional 1.2 percent in that year, or 3.8 percent 
relative to general inflation. Data from the American Hospital 
Association through October 1996 indicate this trend is 
continuing.
    Reduced cost growth partly reflects changes in the amount 
and timing of services furnished during inpatient stays. The 
average length of stay for Medicare beneficiaries in PPS 
hospitals dropped nearly 20 percent between 1990 and 1995 (see 
Chart 2). Shorter stays are due to a combination of earlier 
discharges to post-acute care settings and improvements in 
hospital productivity.
    The rapid drop in hospital cost growth has enabled 
hospitals to make a profit on Medicare patients despite payment 
updates that have been as low as at any time since PPS began. 
Through the late 1980s, PPS margins--which compare Medicare 
capital and operating payments to costs--dropped steadily, to a 
low of -2.4 percent in 1991 (see Chart 3). With slower cost 
growth, this trend began to reverse, and in 1994 PPS margins 
jumped to 5.0 percent with a further jump to 7.9 percent 
estimated for 1995. Assuming cost growth continues at the 
current level, ProPAC projects that PPS margins continued to 
rise in 1996 to 10.3 percent, and will be 11.7 percent this 
year.
    The dramatic decline in hospital costs also enabled 
hospitals to improve their overall financial position despite 
the financial pressures imposed by Medicare and private payers. 
Total margins--which reflect gains and losses from all payers 
on inpatient and outpatient services as well as non-patient 
care activities--increased from 4.4 percent in 1993 to 5.0 
percent in 1994; preliminary data for 1995 indicate continued 
improvement to 5.6 percent (see Chart 4). These margins were 
the highest in the past 10 years, and higher than at any time 
prior to the implementation of the Prospective Payment System.

[GRAPHIC] [TIFF OMITTED] T5005.001

[GRAPHIC] [TIFF OMITTED] T5005.002

[GRAPHIC] [TIFF OMITTED] T5005.003

[GRAPHIC] [TIFF OMITTED] T5005.004

PPS Operating Update

    Mr. Chairman, the trends I have just described portray a 
hospital industry that is adapting rapidly to a more price-
competitive environment. The Commission considered the declines 
in hospital cost growth as it developed its fiscal year 1998 
update recommendation for operating payments paid to PPS 
hospitals. The formula-based approach we have used is the same 
one we have used over the years. It takes into account the 
effects of inflation on hospital costs, changes in the mix and 
complexity of admissions, added costs of new technologies, and 
hospital productivity improvements.
    This year, our recommendation also reflects the effects of 
changes in the services provided by hospitals. Some of the 
recent declines in hospitals' inpatient operating costs may be 
because patient stays are shorter. This may be due to 
improvements in technology, the availability of less invasive 
procedures, and an increased use of post-acute care providers. 
While these changes may reflect improvements in patient care, 
they also indicate a discrepancy between the services provided 
in the inpatient setting and those included in the Medicare 
payment rate. The Commission believes that Medicare payments 
should be adjusted to reflect the reduced service content of 
Medicare discharges.
    ProPAC recommends a zero operating update for fiscal year 
1998. We believe a zero update fulfills Medicare's 
responsibility to act as a prudent purchaser while allowing 
hospitals sufficient funds to furnish quality care. I should 
add, Mr. Chairman, that if the Commission's recommendation is 
adopted, per case payments will still increase next year. This 
is because PPS payments grow in proportion to the complexity of 
patients that hospitals treat, and this complexity has 
increased each year.
    In fact, because of case-mix increases and other policy 
changes, Medicare payments to PPS hospitals historically have 
risen substantially more than increases in the hospital market 
basket, despite PPS updates that have been less than the market 
basket (see Chart 5). And, as I mentioned earlier, the slowdown 
in cost growth is resulting in a widening gap between payments 
and costs.

[GRAPHIC] [TIFF OMITTED] T5005.005

    Mr. Chairman, the Commission believes that the PPS 
operating update can be constrained for the upcoming fiscal 
year. Hospitals currently are receiving PPS payments that are 
higher than those proposed by either the President or the 
Congress during last year's budget negotiations. If no 
legislation is passed this year, hospitals will receive an 
update in fiscal year 1998 equal to the rise in the market 
basket--the largest increase relative to the market basket 
since 1985. Such a large increase would come at a time when 
hospital costs have been falling and hospital margins are high.
    Although the Commission believes that PPS rates should not 
be increased for fiscal year 1998, we emphasize that our 
recommendation applies for only one year. ProPAC will continue 
to monitor changes in hospital costs and financial condition to 
ensure that quality of and access to care do not suffer.

Capital Payment Rates

    Mr. Chairman, Medicare's current capital payment rates are 
15 to 17 percent too high. The Commission believes that flaws 
in the current rates must be corrected to avoid overpaying 
capital costs in future years. We also believe that there 
should be no capital update for fiscal year 1998.
    Medicare payments for inpatient capital currently reflect a 
transition from a cost-based to a fully prospective system 
which began in fiscal year 1992 and will be completed in 2001. 
Hospitals' capital payments are based on 1992 capital costs, 
updated to reflect subsequent costs increases. The data used to 
estimate the 1992 costs were flawed, however, resulting in 
inflated base payment rates. Moreover, the update applied to 
the 1992 base rates in 1993 through 1995 was based on 
historical costs increases, rather than an update framework. 
(Such a framework has been used to set capital payment updates 
since fiscal year 1996.) These flaws had little effect on 
Medicare payments for fiscal years 1992 through 1995 because 
capital payments were subject to a budget neutrality adjustment 
that limited total capital payments to 90 percent of hospitals' 
projected capital costs, regardless of the base payment rates. 
In fiscal year 1996, though, the budget neutrality adjustment 
expired and the Federal capital payment rate jumped 23 percent.
    The Commission is recommending that the current base rates 
be adjusted to achieve more appropriate payment levels so that 
the current overpayments will not be carried into future years. 
There are several ways this could be done. One approach, which 
the President has incorporated into his budget proposal, would 
be to replace the current base rates with the rates in effect 
in 1995, updated to the present. Alternatively, the 1992 base 
rates could be recalculated using actual cost data and then 
updated to the present year by an appropriate update factor. 
This would correct for errors that helped to cause the current 
distorted higher rates. Another option would be to reimpose a 
budget neutrality adjustment. This approach, however, would 
fail to break the link between capital payments and hospitals' 
costs, which is inconsistent with the goal of prospective 
payment.

Hospital Outpatient Services

    The Commission has several major concerns with current 
Medicare policies related to hospital outpatient services. 
These focus on the methods used to pay hospital outpatient 
departments and the cost-sharing amounts beneficiaries must pay 
to receive services in the hospital outpatient setting.
    Payment for hospital outpatient services is extremely 
fragmented. While some services are paid using prospective 
rates, most are still paid on the basis of costs or charges, or 
a blend of costs or charges and prospective rates. Cost and 
charge-based payment methodologies contribute to growth in 
Medicare spending because they provide few financial incentives 
for hospitals to furnish services efficiently. Other factors 
that contribute to the growth in outpatient spending are the 
volume and complexity of services delivered, as providers shift 
more care historically delivered in an inpatient setting to the 
ambulatory arena.
    The payment system for hospital outpatient services needs 
to be revised. Medicare payments for all outpatient facility 
services have been growing, on average, about 14 percent 
annually since 1983. In 1995, payments were about $16.3 
billion; HCFA estimates that about 70 percent of these 
payments, or $11 billion, were made to hospitals for outpatient 
services.
    The Commission believes a prospective payment system should 
be implemented for hospital outpatient services. Such a system 
should include both per service rates and a mechanism to 
control volume. Part of the difficulty in constraining spending 
in the ambulatory arena, however, is that almost all services 
provided in the hospital outpatient department can be obtained 
in other settings. Thus, payment methods and constraints that 
apply to the hospital outpatient setting only may result in 
services being shifted to other sites that receive more 
generous payments. Consequently, the Commission believes that 
Medicare should move towards a payment system that is 
consistent across all facilities.
    To the extent that prospective payment cannot be 
implemented immediately, the Congress should address a flaw in 
the current payment formula for most outpatient surgeries, 
radiology procedures, and selected diagnostic services that 
systematically pays hospitals more than Congress intended. 
Medicare's payments for these services are supposed to be the 
amount that remains after subtracting the beneficiaries' 
copayments from the total service payments due the hospital. 
The current payment formula, however, does not take into 
account the full amount of the beneficiaries' copayments. 
Consequently, Medicare ends up paying hospitals more than 
intended. This formula-driven overpayment should be corrected 
immediately.
    The Commission also recommends reducing beneficiaries' 
over-inflated liability for hospital outpatient services. Under 
the current system, beneficiary coinsurance is set at 20 
percent of the hospital's charges. However, because these 
charges are higher than Medicare payments, beneficiaries end up 
paying substantially more than 20 percent of the total payment. 
For certain surgical, radiological, and diagnostic procedures, 
the average beneficiary copayment is more than half of the 
entire payment. In addition, the amounts that beneficiaries pay 
vary widely, depending upon hospitals' charges. For example, 10 
percent of beneficiaries who received a cataract procedure in 
1995 paid coinsurance amounts of $332 or less, while another 10 
percent paid at least two and a half times that amount, or $868 
(see Chart 6).

[GRAPHIC] [TIFF OMITTED] T5005.006

    The Commission believes that hospital outpatient 
coinsurance should be limited to 20 percent of the Medicare-
allowed payment, as it is in other settings. We recognize that 
reducing beneficiary coinsurance requirements would increase 
Medicare outlays. This increase should be offset in part by 
correcting the flaw in the hospital outpatient payment formula. 
If necessary, the reduction in beneficiary liability could be 
phased in over several years.

           Update to the Composite Rate for Dialysis Services

    Medicare payments for end-stage renal disease (ESRD) 
beneficiaries are growing rapidly. Between fiscal years 1986 
and 1994, spending grew at an average annual rate of 13 
percent, to $8.4 billion. A large part of this increase is due 
to an expanding ESRD population. The number of recipients 
increased, on average, nearly 9 percent per year over the same 
period. While these enrollees represent only 0.6 percent of the 
Medicare population, they account for about 5 percent of total 
program expenditures.
    The Omnibus Budget Reconciliation Act of 1990 requires 
ProPAC to recommend an annual update to the prospective 
payment--called the composite rate--that Medicare pays to 
covers all of the services routinely required for a dialysis 
treatment. Unlike Medicare payments to other providers, the 
composite rate has not been updated since 1983; it is $126 per 
treatment for hospital-based providers and $122 for independent 
facilities. While their payment to cost ratios have declined, 
independent dialysis facilities--which account for about two-
thirds of dialysis providers--have consistently received 
payments that are higher than their costs. Payment-to-cost 
ratios for hospital-based facilities are considerably lower, 
but this may be related to their overhead allocation practices 
(see Chart 7).

[GRAPHIC] [TIFF OMITTED] T5005.007

    Because Medicare is the dominant payer for chronic 
dialysis, it has a unique responsibility to monitor the quality 
of these services. While there is no conclusive evidence 
indicating that quality of care has actually declined, recent 
studies suggest that almost half of all U.S. hemodialysis 
patients are underdialyzed, which raises the risk of morbidity 
and mortality. The Commission is concerned that maintaining the 
current level of payments may adversely affect the quality of 
care provided to dialysis patients. Therefore, we recommend 
that the composite rate be increased by 2.8 percent in fiscal 
year 1998. Further, the Commission recommends that HCFA 
regularly audit dialysis cost reports and track quality 
indicators for these providers to monitor the relationship 
between dialysis payments and quality of care. Future 
recommendations to increase the composite rate will depend upon 
whether the Commission finds that higher payments raise the 
standard of care.

                               Conclusion

    The Commission believes that important reforms are needed 
in the areas I have just discussed. The Commission's 
recommendations would help to preserve the Medicare program 
while maintaining quality care for Medicare beneficiaries.
    This concludes my formal statement, Mr. Chairman. I would 
be pleased to answer any questions you or members of the 
Subcommittee may have.
      

                                


    Chairman Thomas. Thank you very much, Dr. Newhouse.
    Dr. Wilensky.

  STATEMENT OF HON. GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN 
  PAYMENT REVIEW COMMISSION; ACCOMPANIED BY LAUREN B. LEROY, 
 PH.D., EXECUTIVE DIRECTOR, PHYSICIAN PAYMENT REVIEW COMMISSION

    Ms. Wilensky. Thank you, Mr. Chairman. It is a pleasure to 
be here and to report on some of the recommendations for this 
year's annual report.
    As you indicated, we have already discussed in earlier 
hearings issues relating to risk adjustment and payments to 
risk plans. I would like to focus my comments primarily on two 
issues: Implementing the resource-based practice expense and 
improving the volume performance standard. If I have time, I 
would like to touch on a couple of other areas that PPRC is 
working on that we think are also very important.
    With regard to implementing the resource-based practice 
expense relative value, as you know, legislation was passed in 
1994 that requires implementation in January 1998. There is 
currently a controversy on two major issues. The first has to 
do with the accuracy of values that are being developed by 
HCFA, and the second has to do with the anticipated size of 
payment change.
    What we are urging at PPRC is that the process of moving to 
a practice expense relative value system begin as scheduled in 
January 1998, but that it be phased in over a 3-year period. 
The reason is the following: There will not be any new 
information in another year's time, and we do know the 
direction that the system needs to go to.
    Before the relative value scale was introduced, we started 
with cuts in overvalued procedures because, again, we knew the 
right direction to start. What we are recommending is that HCFA 
develop a process to refine the initial values and that they 
get input from the interested parties and that when HCFA 
announces in its proposed rule, which is expected in May, they 
provide information about the refinement process at that time 
so physicians understand what will happen with the refinement 
process and how they can participate.
    With regard to the anticipated size of the payment changes, 
we agree there is some concern. In table 1 of the handout, we 
indicate the estimated size of these changes. Briefly, about 35 
percent of the services could go up by more than 25 percent, 
and 39 percent of the services could go down by more than 25 
percent based on the numbers we now have.
    In any case, what this means is that practices are at risk 
for seeing large changes. The way to handle that is to have a 
transition period, and it is why PPRC recommends there be a 3-
year transition. Not only does that allow you time for a 
refinement process as you proceed, but it clearly dampens the 
effect that would occur if it was entirely introduced in 1 
year. This, of course, should sound familiar. It is the concept 
that the Congress has included in all of the legislation about 
major changes that have occurred with regard to the Medicare 
Program.
    So we would recommend there be movement forward starting in 
January, that the refinement process be made more clear, and 
that there be a transition. We also think it would be helpful 
if HCFA would be clearer on the kinds of budget-neutral 
assumptions it will make--that is, the volume offset. This is 
an issue that I actually painfully recall when the first round 
was occurring. I think it is fair to ask HCFA and to indicate 
what actually happened during the first round, whether they 
should have symmetric changes, and whether the health care 
environment has changed so much that it is really not relevant.
    Let me briefly touch on improving the volume performance 
standard. There are two problems right now: One, that there are 
three separate performance standards. That means you are 
introducing distortions. Figure 3 and table 3 show what some of 
those distortions are. And, second, by law there is a deduction 
of 4 percentage points to the 5-year historical trend which is 
beginning to make the growth rate that is included quite 
unreasonable.
    We recommend the concept of a sustainable growth rate. It 
is one Congress has raised. It is one the administration has 
raised. It would mean a single conversion factor and a target 
linked to the GDP. PPRC recommends 1 or 2 percent above GDP, 
but something linked to it, and to have a system that fully 
recoups both the excess and shortfall payments that may occur.
    Just let me mention the areas in which we are also doing 
work. They have to do with monitoring access in managed care, 
access for vulnerable populations, the use of performance 
measures, the use of data for health plans and PSOs. These are 
areas we would be glad to speak about either here or in any 
other hearings or in private that you may wish to have.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Gail R. Wilensky, Ph.D., Chair, Physician Payment 
Review Commission

    Mr. Chairman and members of the subcommittee, I am pleased 
to be here today to present key recommendations and analyses 
from the Physician Payment Review Commission's 1997 annual 
report to Congress. Reflecting the Commission's mandate, our 
1997 report considers a wide range of issues affecting 
Medicare, Medicaid, and the broader health system. Throughout, 
we have looked to see how these public programs can benefit 
from the tremendous changes that are occurring in how Americans 
pay for and receive health care. The number of individuals 
covered by traditional indemnity insurance is shrinking. 
Managed-care plans are evolving toward more integrated systems 
and closer relationships with their provider networks, while 
physicians and hospitals are joining together in new types of 
organizations. In response to rising premiums, leading 
corporate purchasers of health care are changing the way they 
pay for health services, potentially affecting both the costs 
and quality of care.
    Medicare can learn from these experiences. In fact, as 
commercial managed-care penetration grows and managed-care 
enrollees age into Medicare, it is inevitable that more and 
more beneficiaries will select this option within Medicare. The 
beginning of this trend is reflected in the recent growth in 
Medicare managed-care enrollment (Figure 1). Moreover, changes 
can be made in the traditional program that can help contain 
costs and improve quality. The challenge is to develop reforms 
that ensure both Medicare's financial solvency and beneficiary 
access to timely, appropriate health care services. 

[GRAPHIC] [TIFF OMITTED] T5005.008

    Because previous hearings of this subcommittee focused on 
other important aspects of the Commission's report including 
payment policy under Medicare managed-care, risk adjustment, 
and graduate medical education, my comments today primarily 
focus on issues affecting Medicare physician payment. The 
Commission also has some advice to provide in a number of other 
areas including:
     access to care under Medicare managed-care;
     Medicare's use of quality and performance 
measures;
     the capabilities of health plans to provide data 
useful for risk adjustment, access and quality monitoring;
     consumer protection under managed care; and
     managing health care for those individuals who are 
both Medicare and Medicaid beneficiaries.
    While I will touch upon these issues at the end of my 
statement, time will not permit more substantial discussion 
today. We would welcome the opportunity to discuss them later. 
In addition, the Commission has made recommendations concerning 
the rules under which provider-sponsored organizations (PSOs) 
may participate in Medicare. Since I understand that the 
subcommittee may devote an entire hearing to this issue, we 
would be happy to provide a more comprehensive review of our 
work at that time.

           Physician Payment Under the Medicare Fee Schedule

    When the Congress enacted physician payment reform in 1989, 
it called for the Medicare Fee Schedule to be phased in over 
five years, beginning in 1992. With the completion of that 
transition in 1996, the fee schedule is now the sole basis for 
Medicare payments to physicians. Many of the concerns that led 
to adoption of physician payment reforms have been addressed:
     the pattern of relative payments for physicians' 
services has been significantly realigned;
     physician fee updates are now linked to 
performance in slowing volume growth, giving Medicare a tool to 
hold down growth in spending for physicians' services;
     balance billing--the practice of charging patients 
more than Medicare's allowed charge--has decreased 
dramatically; and
     access remains good for most beneficiaries. There 
have been decreases in use of some types of services but these 
changes appear to reflect changes in treatment modalities or 
other factors, rather than changes in payment policy. Moreover, 
beneficiaries report no increases in problems obtaining care 
and their satisfaction with care continues to be high.
    Still important challenges remain, in part due to 
inconsistencies within physician payment policy that resulted 
from lack of data or compromises made to gain support for the 
1989 reforms. My remarks today will focus on several of these 
critical issues:
     implementing resource-based practice expense 
relative values,
     refining other aspects of the Medicare Fee 
Schedule, and
     improving the system of Volume Performance 
Standards.

Implementing Resource-based Practice Expense Relative Values

    The most controversial of refinements to the fee schedule 
continues to be the development of resource-based practice 
expense relative values, required by legislation passed in 1994 
to be implemented in 1998. When the fee schedule was enacted, 
data were not available to develop these values. The Congress 
acknowledged this gap by asking the Commission to study the 
issue. The Commission has considered the current charge-based 
values to be inconsistent with the goals and intent of a 
resource-based fee schedule. And its research demonstrated that 
it is feasible to develop resource-based values for practice 
expense.
    No Need for Delay. The current controversy concerns two 
issues: the accuracy of the values the Health Care Financing 
Administration (HCFA) and its contractors are developing, and 
the anticipated size of the payment changes projected to occur. 
With respect to the accuracy of the values, a number of 
specialty societies have questioned HCFA's data and methods for 
developing values. They argue that acceptable values cannot be 
derived for implementation next January.
    The Commission disagrees. No new information will be 
available to HCFA with another year that would produce 
``better'' relative values. In fact, enough is known about the 
direction and magnitude of changing to a resource-based method 
that it makes sense to proceed. This is the approach that was 
taken even before the fee schedule was implemented when payment 
cuts were mandated for those ``overvalued procedures'' 
predicted to be reduced under a resource-based approach. 
Further delay in implementing new practice expense values is 
unwarranted, given how much time has already passed since 
implementation of the fee schedule with its flawed charge-based 
practice expense values.
    Refinement Process. Any inaccuracies in relative values 
could be resolved in a refinement process similar to that used 
to refine physician work values. The Commission recommends that 
HCFA develop a process to refine initial values with input from 
interested parties. Announcement of this process should be made 
when proposed practice expense values are released for public 
comment.
    Phase In New Values. With respect to concerns that some 
physicians will experience more extreme payment reductions than 
they had anticipated, the Commission has long maintained that 
new values be phased in over a three years, rather than all at 
once as required by current law. This is because of the 
disruption that could occur if substantial changes in payment 
for individual services were implemented in a single step. For 
example, the Commission's analyses suggest that when resource-
based practice expense values are introduced, practice expense 
relative values for about 36 percent of services will increase 
by more than 24 percent; 39 percent of services will experience 
a decrease in practice expense relative values of more than 25 
percent (Table 1).
    HCFA's Practicing Physicians Advisory Council recently 
concurred with the Commission by recommending a transition. A 
three-year transition would help mitigate the effect of any 
errors before they are corrected in the refinement process. If 
the implementation of new values is delayed contrary to the 
Commission's recommendations, the length of the phase-in should 
be shortened accordingly. Providers who will experience large 
payment reductions can use the delay to prepare for changes so 
a full three-year phase-in would not be necessary.
    Budget Neutrality Assumptions. Finally, there are concerns 
about whether HCFA will apply a volume offset to maintain 
budget neutrality when implementing the new values. When the 
fee schedule was first implemented, HCFA's actuaries assumed 
that physicians experiencing payment declines would increase 
services to offset half of their lost revenues. To account for 
this volume offset, the conversion factor was lowered, 
resulting in lower increases in physician fees than had been 
anticipated. The Commission recommended then that the volume 
offset should have been symmetrical: that is, it should have 
been structured to recognize that physicians experiencing 
payment gains may reduce the number of services they provide.
    In implementing new practice expense values, HCFA should 
consider three issues: whether physicians actually responded to 
fee changes as the volume offset anticipated, whether an offset 
should be symmetric, and whether increased penetration of 
managed care has affected physicians' ability to increase 
service volumes in response to payment reductions.

[GRAPHIC] [TIFF OMITTED] T5005.009


Refining Other Aspects of the Medicare Fee Schedule

    Other important refinements to the fee schedule are still 
taking place that are improving the accuracy with which it 
measures the relative resources required to provide each 
service. In the past year, HCFA has completed two substantial 
efforts to improve the fee schedule:
     the first review of the relative value scale, and
     changes in fee schedule payment areas.
    The Five-Year Review. The 1989 legislation which created 
the fee schedule also directed HCFA to review all relative 
values every five years to ensure their accuracy. The first 
review was completed last November; revised values were 
reflected in physician payments as of January 1. This review 
focused exclusively on physician work values, because they 
comprise the only fee schedule component that is currently 
resource-based. Future reviews will look at practice expense 
values; malpractice values remain charge-based.
    With input from multiple physician specialty societies and 
the American Medical Association's Relative Value Update 
Committee, HCFA conducted a two-year process that reviewed 
values for over 1,000 services. In the Commission's view, this 
process was successful in improving the accuracy of work 
relative values. Its decisionmaking mechanisms were consistent, 
its methods were fair, and it was accountable to all interested 
parties. In addition, the review identified overvalued as well 
as undervalued services.
    Several issues remain to be addressed in 1997. These 
include such questions as whether surgical global services 
should be increased to reflect the increase given to values for 
evaluation and management services. (Global services encompass 
both the surgical procedure and visits before and after 
surgery). The Commission will monitor HCFA's response to this 
and other unresolved issues in the coming year. Along with 
others, it is also beginning work on how to improve the process 
for the next review and how to incorporate the review of 
practice expense relative values into the process.
    Fee Schedule Payment Areas. The Commission was less pleased 
with changes made in the fee schedule payment areas. These 
areas exist so that payments under the fee schedule can be 
adjusted for variations in local prices. Currently, every state 
has one or more geographic payment areas. Medicare payments are 
the same within each area, but vary from area to area. For 
example, physicians in Manhattan are paid 34 percent more than 
physicians in South Dakota for a level 3 established patient 
office visit.
    Payment areas must be drawn carefully to be equitable and 
to ensure that risk-plan payments are tied accurately to local 
fee-for-service expenditures. Changes made by HCFA reduced the 
number of payment areas from 210 to 89 (Table 2).

[GRAPHIC] [TIFF OMITTED] T5005.010

    These new areas represent an improvement over previous 
policy. First, in many cases, areas were combined when input 
prices were similar. Second, all areas now conform to county 
boundaries. Even so, the Commission is concerned about certain 
limitations of HCFA's method. First, under the new 
configuration, there may be significant payment differentials 
within a market. Second, HCFA has indicated that it will not 
divide statewide areas into smaller areas even if demographic 
and economic changes result in large differences in input 
prices.

          Improving the System of Volume Performance Standards

    Despite progress in slowing the rate of growth in 
physicians' services, overall Medicare expenditures continue to 
increase at a rate many consider unaffordable (Figure 2). The 
Congressional Budget Office projects that Medicare spending 
will continue growing at rates of 8 percent to 9 percent 
annually. 

[GRAPHIC] [TIFF OMITTED] T5005.011

    Because of similar high rates of spending growth for 
physicians' services in the late 1980s, the Volume Performance 
Standard (VPS) system was introduced to curb further increases 
in spending growth for physicians' services. The VPS system 
sets target rates of spending growth, and then adjusts payment 
levels depending on whether those targets were met. The target 
rates of spending growth are called performance standards; 
adjustments to payment levels based on these standards are 
called conversion factor updates.
    Problems with the VPS. The Commission has long held that a 
budgeting tool like the VPS system is necessary to constrain 
spending for physicians' services, But it has also warned that 
methodological flaws keep the system from working as intended. 
The current system is flawed for two reasons:
     there are separate performance standards and 
conversion factor updates for primary care services, surgical 
services, and other services.
     in setting spending targets, it applies a 4 
percentage point deduction to the five-year historical trend 
for volume and intensity growth of physicians' services.
    The existence of three performance standards is introducing 
serious distortions in the patterns of relative payment, the 
very problem the Medicare Fee Schedule was intended to correct 
(Figure 3). Conversion factors for 1997 are: $40.96 for 
surgical services, $35.77 for primary care services, and $33.85 
for nonsurgical services (Table 3). Shifts in relative payments 
accomplished over the past several years will likely be 
reversed unless further legislative changes are made.

[GRAPHIC] [TIFF OMITTED] T5005.012

[GRAPHIC] [TIFF OMITTED] T5005.013

    Basing updates on historical trends less a legislated 
deduction will result in increasingly unrealistic target rates 
of spending growth. When the first performance standards were 
calculated, the historical trend was high and only a small 
deduction was taken. At that time, it was expected that volume 
and intensity growth would remain high. In fact, the five-year 
trend for volume and intensity growth has fallen from about 8 
percent in 1992 to about 4 percent in 1996. Even so, the 
legislated deduction has increased over time from 0.5 
percentage points initially to its current 4.0 percentage 
points. As a result, the performance standards that were 
originally well above GDP growth, are now projected to fall 
well below growth in the Medicare program as a whole or the 
national economy (Figure 4).

[GRAPHIC] [TIFF OMITTED] T5005.014

    The Sustainable Growth Rate System. During the last 
session, this committee, others in Congress, and the 
Administration proposed changes to correct these problems, 
referred to as the sustainable growth rate system. This system 
would incorporate many of the Commission's recommendations, 
including:
     establishing a single conversion factor update, 
and performance standard for all physicians' services covered 
by the Medicare Fee Schedule;
     setting a target linked to growth in gross 
domestic product (GDP); and
     structuring the system to fully recoup excess 
spending or return shortfalls.
    Single Performance Standard and Update. Adopting a single 
performance standard and update would eliminate distortions in 
payment. Changing to a single budget-neutral conversion factor 
now, however, would require a large reduction in payment for 
surgical services which are also likely to reduced with 
implementation of new practice expense relative values. The 
Commission recommends that a transition to a single conversion 
factor should occur over a three-year period. This transition 
should be coordinated with the implementation of resource-based 
practice expense values to prevent large payment reductions for 
any category of service in a single year.
    Standards Linked to GDP Growth. Linking performance 
standards to projected growth of real gross domestic product 
per capita would provide a realistic and affordable goal that 
links targets to what the economy as a whole can afford. The 
Commission has also recommended that targets be set to exceed 
GDP growth by 1 or 2 percentage points to allow for 
advancements in medical capabilities.
    Symmetrical Limits on Updates. Finally, the sustainable 
growth rate system will recoup excess spending or return 
shortfalls within one year. This can lead to substantial 
fluctuations in the conversion factor from year to year, 
because of the inherent volatility of annual spending growth. 
Limits on the size of annual updates are therefore critical for 
preventing undue changes in payment levels. The mechanism 
allows any excess spending or surplus beyond these limits to be 
recovered in subsequent years. The Administration has proposed 
limiting updates to 3 percentage points above the Medicare 
Economic Index (MEI) to 8.25 percentage points below. The 
Commission recommends a more narrow and symmetric range, 
restricting the size of annual reductions and increases from 
the MEI to 5 percentage points.
    Constraining Total Medicare Spending. The Commission also 
has some views on how to develop mechanisms for constraining 
spending in the Medicare program. While spending growth for 
physicians' services has slowed, other services, such as 
outpatient hospital and home health services, continue to grow 
unabated (Figure 5). There are no mechanisms linking payment 
levels for these services to volume and intensity growth. While 
prospective payment for inpatient hospital services does curb 
price, it does not rein in overall spending growth because 
there are no constraints on the number of admissions. 
Developing constraints for spending growth in sectors other 
than physicians' services is difficult, however. Although it is 
physicians that determine the number and intensity of these 
services, they would not be directly affected by reductions in 
other providers' payment levels.

[GRAPHIC] [TIFF OMITTED] T5005.015

    Fee-for-service spending can be constrained through either 
expenditure targets or expenditure limits. An expenditure 
target system (like the VPS) establishes a level of spending, 
and then adjusts payments up or down so that, on average over 
time, spending matches the planned budget trajectory. An 
expenditure limit system sets a ceiling for spending and only 
adjusts payments downward as needed when spending exceeds the 
limit. If spending falls below the limit, payments are not 
affected and the shortfall results in budget savings. The 
failsafe budget mechanism proposed in the last year's Medicare 
restructuring legislation is an example of an expenditure limit 
system.
    There are several challenges in designing a Medicare 
expenditure limit system. First, it should achieve the desired 
rate of growth without producing large annual fluctuations in 
payment levels. Second, decisions must be made about allocating 
spending to individual sectors. Third, the implications on 
different geographic areas must be weighed. Finally, any new 
system must be consistent with current payment mechanisms, such 
as the expenditure target system already in place for 
physicians' services.

                               Other Work

    As I mentioned earlier, the 1997 annual report also 
considers a number of other issues we have not yet shared with 
this committee. I would like to take just a few moments to 
outline some of the Commission's recommendations in these 
areas.
    Several weeks ago, I testified on issues related to payment 
and risk adjustment in Medicare's managed-care program. In our 
1996 report, the Commission addressed a number of other 
important policy issues relevant to Medicare managed care. 
These included which types of plans should be made available, 
standards for plan participation, and mechanisms for 
facilitating beneficiary choice.
    This year, we have moved forward with work on access to 
care in Medicare risk plans (both for the typical Medicare 
beneficiary and for vulnerable subgroups), use of quality and 
performance measures, consumer protection initiatives, and the 
treatment of provider-sponsored organizations.

Access in Medicare Managed Care

    Although monitoring access under Medicare managed care 
could alert policymakers to any adverse effects of program 
changes, there is now no system for doing so. Since, both the 
Secretary of Health and Human Services and the Commission are 
required to monitor beneficiary access to care in Medicare fee 
for service, the Commission recommends that a similar 
requirement be created to monitor managed-care access. Its 
recently completed survey on beneficiary access in Medicare 
managed care shows the feasibility of this method for 
monitoring access. (See attached PPRC Update describing the 
results of this survey). Monitoring efforts should be designed 
to permit comparisons, where possible, of access between 
Medicare managed care and fee for service. In addition, these 
should include analyses designed to explain access barriers for 
vulnerable groups and to determine the relationship between 
access and outcomes.

[GRAPHIC] [TIFF OMITTED] T5005.017

[GRAPHIC] [TIFF OMITTED] T5005.018


Access for Vulnerable Populations

    To promote access for vulnerable populations in Medicare 
managed care, the Commission recommends that the Congress 
direct HCFA to pursue demonstrations of a broad range of 
innovative and effective health delivery approaches for 
vulnerable groups in managed care. It should also direct an 
agency such as the Agency for Health Care Policy and Research 
to develop a research framework for promoting access for 
vulnerable groups in Medicare managed care, and to coordinate 
public and private efforts to evaluate and disseminate 
innovative health care delivery strategies.

Medicare's Use of Performance Measures

    With private-sector purchasers increasingly using 
information on health plans' performance in administering their 
benefits programs, use of quality and performance information 
in Medicare looks promising for the future. Performance 
measures should now be used in Medicare to provide 
beneficiaries with information on participating health plans 
and, where comparable information can be obtained, on fee for 
service. The measures should also be used in Medicare's quality 
improvement program and in program monitoring. In addition, 
HCFA should proceed in its use of Medicare performance measures 
as guided by advances in methodology and by considerations of 
public acceptance and private-sector use. It should also seek 
to promote efficiency and minimize duplication of effort by 
continued collaboration with others to identify core measures.
    Implementing an enhanced quality assurance system that 
incorporates health plan performance measures would also permit 
dropping the so-called 50-50 rule. This rule, which prohibits a 
Medicare risk-contracting plan from exceeding a 50 percent cap 
on publicly insured (i.e., Medicare and Medicaid) enrollees is 
arguably no longer needed in a Medicare program where more 
direct measures of health plan quality and performance are 
being implemented. Retaining this rule presents a barrier to 
plans' specializing in the elderly and disabled and restricts 
Medicare participation or market expansion of health plans.

Health Plan Data

    As policymakers seek to improve Medicare fee for service 
and expand the range of plan options available to 
beneficiaries, the need for data will likely increase. The 
Commission recommends that HCFA define a standard core health 
data set useful for risk assessment and adjustment, quality 
improvement, access monitoring, and other performance measures. 
The cost of providing data should be weighed against the value 
of expected use. The data set should be as consistent as 
possible with health plans' other internal and external data 
needs. Once the core data set is well-defined, HCFA should 
require health plans and their contractors to provide the 
necessary data.

Provider-Sponsored Organizations

    In 1995, the Congress proposed allowing PSOs to contract 
directly with Medicare. Different legislative proposals would 
have treated PSOs differently from other managed-care plans by 
waiving state licensure requirements and applying federal 
solvency standards. Since then the environment has changed. New 
PSOs have emerged in many markets, states are revising their 
laws, and the National Association of Insurance Commissioners 
is developing new regulatory approaches that could be adopted 
by the states. These trends seem to reduce the urgency of 
special treatment for PSOs under Medicare.
    For that reason, the Commission recommends that provider-
sponsored organizations that participate as risk contractors in 
the Medicare program should be required to meet the same 
standards as other plans. Flexibility should be used in 
developing and enforcing standards and rules as appropriate 
given differences in plan design. Plan participation in 
Medicare should be monitored to ensure that state or federal 
requirements do not impose unreasonable barriers to market 
entry for PSOs or other health plans seeking to participate in 
Medicare.

Federal Premium Contribution

    Over the past few years, the congressional debate on 
Medicare has primarily focused on how to offer beneficiaries a 
broader choice of health plans. Some have argued that focusing 
only on expanding the risk-contracting program is too narrow. 
They advocate a more fundamental change of providing a 
contribution that beneficiaries would use toward purchase of 
health insurance from a variety of approved plans, including 
Medicare fee for service. Because such a system would be a 
significant departure from the current program, the Commission 
has begun to analyze these issues and their implications for 
Medicare.
    In considering how a Medicare premium contribution system 
might work, the Commission looked to see what lessons could be 
learned from two existing premium contribution systems: the 
Federal Employees Health Benefits Program and the California 
Public Employees' Retirement System. These programs have made 
quite different decisions on key design issues such as the 
structure of the premium contribution, how competition among 
plans is managed, and benefit package design. Another issue 
that would confront Medicare would be how to integrate current 
and future beneficiaries into a new system. We have looked at 
the advantages and disadvantages of various approaches, 
considering whether these are administratively feasibly, how 
they might effect competition on premium prices, their 
potential impact on adverse selection, and their potential for 
controlling programs costs. The Commission will continue to 
analyze these issues in the months ahead to provide for an 
informed discussion should Congress consider such a proposal.
Secondary Insurance for Medicare Beneficiaries

    For the second consecutive year, the Commission has devoted 
time to considering issues related to private secondary 
insurance for Medicare beneficiaries. These include the impact 
of secondary insurance on Medicare spending, expanding 
portability, and how to evaluate the impact of program 
innovations. To facilitate future evaluations, the Commission 
recommends that insurers and employers that provide 
supplemental insurance be required to report information to 
HCFA about beneficiaries' purchase or receipt of such 
insurance.

Dually Eligible Beneficiaries

    Finally, given that more than five million elderly and 
disabled persons (nearly 15 percent of Medicare beneficiaries) 
are entitled to receive benefits from both Medicare and 
Medicaid (Table 4). Proposals to restructure Medicare and 
Medicaid should explicitly take into account their implications 
for these dually eligible individuals. Proposed changes should 
be assessed in terms of their effect on the potential for 
coordinating the financing and delivery of care. 

[GRAPHIC] [TIFF OMITTED] T5005.016

      

                                


    Chairman Thomas. Thank you very much. Let me talk to you in 
reverse order because I have a couple of fairly specific 
questions for you, Dr. Wilensky, and then, Dr. Newhouse, I want 
to take you through some of your charts and some of the things 
you said since the idea of a zero-based update has gotten some 
folks' attention. And I want to make sure I understand 
everything you said and that your charts show.
    Dr. Wilensky, you talked about the update, the conversion 
to a single factor. We did visit that and dealt with it and 
came up with a phase-in period, and it just seems to me that 
when you are dealing with any significant number up or down and 
that number deals with someone's income, 30 to 40 percent in a 
12-month period is a fairly tough shift. If, in fact, that were 
to occur, I assume the Full Committee would be besieged to 
examine income averaging as a change in the Tax Code, and so we 
clearly agree with a phase-in procedure. Everybody seems to 
think 3 years is appropriate. Two might be OK; 4 years is 
probably too long, so 3 years sounds good.
    I am more interested in what has occurred with HCFA in 
their attempt to get a handle on the one component which is 
supposed to be a real-world check, which was the practice 
expense, and they had set up a fairly elaborate procedure to 
get that data which, in terms of polling, was not returned in 
any kind of a number to give you any degree of confidence.
    When folks do that, there are ways to statistically 
manipulate what you have to get it to look a bit random. What 
they did was to choose something else, and that was go to a 
formula structure. I know that was also different than your 
suggestions earlier.
    I frankly am less concerned how you do it than whether or 
not what they do has some degree of validity that allows us to 
have a comfort level, notwithstanding, I think, a clear 
sentiment to do it over several years rather than one.
    Ms. Wilensky. Well, there has been a lot of controversy 
raised. Now, there are two components. There is a direct and an 
indirect allocation of the practice expense, and the concern 
has been for the indirect costs.
    There are some standard accounting procedures that can be 
used that are either allocating according to time or according 
to work. Again, we think that while there is some arbitrariness 
that will inevitably occur and we wish there had been some 
different procedures or studies used during the time they had 
available, we still think it is possible to proceed now by 
indicating clearly that changes will be made in the refinement 
process and how physicians will be involved during that 
process. It is better to move ahead.
    There is concern being raised, but there is or should be 
equal concern for people who have been being paid on a 
historical charge basis for the last 7 years.
    Chairman Thomas. Thank you. Also in the President's 
proposal on the physician performance standards, you folks 
proposed a GDP plus a kind of----
    Ms. Wilensky. Two.
    Chairman Thomas. Two--it was 1 or 2. But let's take the 
hard number, the 2 percent. It would be gross domestic product 
plus 2 percentage points. The President's was just GDP; right?
    Ms. Wilensky. Yes.
    Chairman Thomas. Why the 2-percentage-point bump? How 
significant is it, and how strong are your feelings about it in 
comparison to what the President offered?
    Ms. Wilensky. The concern of the Commission was that the 
GDP period would not allow for some of the advantages of new 
technology that at least initially may be cost increasing. I do 
not think there are strong feelings about the number 2. I think 
there was some concern that GDP plus zero was very stringent. 
It would especially be an issue of concern were it to last very 
long.
    In some ways, it is like the minus 4 that is now attached 
to the volume performance standard. When it was first 
introduced, it did not have nearly the draconian effect that it 
will have if it stays on. This is not something we explicitly 
discussed, but my own sense would be GDP plus zero probably 
would not cause too much harm if limited to a very short 
period. It would not allow for the adoption of new technologies 
if it were for more than a couple of years.
    So we would feel comfortable with GDP plus something small.
    Chairman Thomas. Thank you.
    Dr. Newhouse, in terms of ProPAC's recommendation for a 
zero update, there has been some, if not criticism, at least 
concern, and you walked us through a number of areas. And in 
your report on page 21 and your table 1.1 in that report, it 
kind of sets out the components of the hospital update taken 
into consideration by the Commission. And it is a series of 
items rather than just a single one. I want you to go over the 
list there, especially the scientific, technological advances 
in medicine, the productivity case mix and so on. Just give us 
a flavor for how you wound up with the decision that you got.
    Mr. Newhouse. I would be happy to do that, Mr. Chairman. 
Take the top two items. We start with the forecast of the 
market basket increase for the following year. That is just a 
forecast or a guess. For this year, we started with the HCFA 
estimate of 2.8 percent, and it has been the Commission's 
custom to correct for any errors in past forecasts--if the 
forecast has been too high, to take that back, in effect, and 
if it has been too low, to give it back. And the 1996 forecast 
error, as you see, was eight-tenths of 1 percent negative, 
meaning from the government's point of view hospitals were 
overpaid, so we are taking that back. That gets us down to 2 
percent.
    Now, the next item, scientific and technological advance, 
the rationale for it is really the same rationale that Dr. 
Wilensky just gave you for the plus on the GDP factor; that is, 
historically, innovation and technological change in medicine 
has increased capabilities and increased costs.
    The Commission has historically added about three-tenths of 
1 percent to a full percent for this factor. This year, because 
of the increased price competitiveness of the medical care 
sector, we thought there might be more cost reducing 
innovation. And so we went toward the lower end of that range 
and came out at four-tenths of 1 percent.
    I should add that this whole procedure, going through this 
step by step, is the procedure that the Commission has 
customarily used every year, so it is really--the only thing to 
supply this year is why we came out at the numbers we came out 
at.
    Now, the next item, the allowance for productivity and 
service change, is clearly what is important in getting to our 
final recommendation of zero. And it is also something of a 
change from the way we have operated in the past. In the past, 
we have used a standard of about 1 percentage point for an 
increase in productivity. That is to say, we felt that 
hospitals could increase their efficiency, if you will, of 
doing what they are doing by about 1 percent a year. You can 
imagine them on a treadmill with a slight grade of 1 percent. 
And we have said, therefore, we will knock off 1 percentage 
point because we think they can improve productivity by that 
much.
    Now, what was different this year and why it comes to minus 
3 to minus 1 is that we explicitly considered the fall in 
length of stay and the increase in postacute care, which, as 
you know, is paid for separately. And that is why the words 
``and service change'' appear in that line as well as 
productivity.
    As you know, the operating payment pays for the DRG, which 
is a bundle of services during the admission. And if some of 
that bundle is shifting out to postacute care and being paid 
for separately, then it would be appropriate to reduce what we 
are paying for the DRG. And that is what is going on here. So 
we took out--we have a range there, minus 3 to minus 1, because 
the exact amount is not very clear.
    Finally, the last component, the net adjustment for case 
mix change, the case mix change is the average of the DRG 
weights at a hospital. For example, a coronary bypass operation 
has a weight of about 5, and a cataract operation has a weight 
of about 0.5. And Medicare pays in proportion to those weights. 
So the hospital gets 10 times as much, roughly, for a bypass 
operation as it does for a cataract operation. And if the 
average of those weights goes up, Medicare payments go up 
proportionately.
    Now, there has always been an issue about how much of this 
increase in the weight is so-called true change, that is, more 
complicated cases being treated, and how much is so-called 
upcoding, that is, how much is it really the same patient being 
reclassified to a higher category. And Medicare wants to pay 
for the former and does not want to pay for the latter.
    So this line is in there to say how much in the 
Commission's view is the latter, is upcoding, and to the degree 
it is upcoding, we would knock some off. Now, we have been at 
PPS for quite a long time now, and we think that the upcoding 
that should be occurring is occurring, and, therefore, we did 
not deduct anything for upcoding this year. In other words, we 
think that hospitals are doing it to the degree that they can 
do it.
    So putting that all together, that comes out, as you see at 
the bottom, to minus six-tenths to plus 1.4 percent, and we 
just decided to pick zero in the middle and recommend a zero 
update to you.
    Chairman Thomas. Have you ever done less than zero?
    Mr. Newhouse. No. The Commission has never recommended less 
than zero. In fact, it has never recommended zero, but 
historically, of course, the market basket increase that we 
started with way up on top has been higher. So it would have 
taken quite a bit more to get----
    Chairman Thomas. So, in effect, the Governor on this whole 
process, even if you were to go zero--we can never go below 
where you are going to get money back. It is not going to 
happen. So we are going to go to zero. But if you will look at 
the correction, even if we are off to a degree, that is a 
built-in rudder, isn't it, when you do your correction for 
fiscal year 1996 forecast error?
    Mr. Newhouse. Yes, that is just in the market basket--
whatever the market basket turns out to be. It is an estimate, 
and then after the fact, we know what it turned out to be and 
we correct for the differences. But that is just the market 
basket which is the input prices.
    Chairman Thomas. Worst-case scenario, you are wrong, what 
is the makeup procedure, or do we just do better next time?
    Mr. Newhouse. Because all human institutions, including our 
Commission, can be wrong, we are recommending this update for 1 
year only, and then we would take a look in another year to see 
how it would go or how it is going.
    Chairman Thomas. Everybody wants true productivity 
improvements. Zero updates to me do not sound like a very good 
incentive for productivity. Is that false economy, or are there 
ways in which hospitals would actually have an incentive to 
increase productivity, notwithstanding a zero?
    Mr. Newhouse. Well, Mr. Chairman, the Commission has always 
had a philosophy of sharing gains in productivity. So when I 
said there was a 1-percent correction, actually the treadmill 
was really set at 2 percent and we were going to give half back 
to the industry. But beyond that, to any individual hospital, 
because the payment it gets is really independent of what it 
does--it is the action that you in the Congress take that 
determines that--any individual hospital, if it can improve 
productivity, it is still going to save the full amount. If you 
decided in the aggregate that hospitals are becoming more 
productive, it is still true that if the individual hospital 
becomes more productive, it saves the full amount.
    I think the incentive to the individual hospital is still 
quite strong.
    Chairman Thomas. OK. Let's take your chart 5, which I think 
gives us a number of lines and shows history in terms of 
payment changes, costs, and the rest.
    What would it look like with a zero update if we took your 
recommendation and plugged it into the chart?
    Mr. Newhouse. OK. It may be easier to--I will tell you the 
answer on chart 5. The divergence up at the top would probably 
be----
    Chairman Thomas. If you have a better chart, I will look at 
the better chart.
    Mr. Newhouse. Well, why don't you look at chart 3, which is 
the PPS margins.
    Chairman Thomas. We will do that, but I do like the one 
that puts them all together.
    Mr. Newhouse. OK, fine. We will go back----
    Chairman Thomas. We will do chart 3. Go ahead.
    Mr. Newhouse. Chart 5 I think would be the gap between the 
top line and the next to top line, that is, between payments 
and costs, would be roughly unchanged. Our estimate is it would 
shrink slightly. To go back to chart 3----
    Chairman Thomas. Well, to project current trends, they 
would obviously continue to separate, which is why you are 
telling us that they wouldn't. But you wouldn't get a 
corrective factor with the 1 year zero.
    Mr. Newhouse.The number the Commission used for the 
estimates actually goes beyond the zero update on operating 
costs and also includes a minus 15 percent on the capital cost 
side, which we have not come to yet. Those two together, doing 
both, we estimate would reduce the PPS margin to 10.4 percent. 
And current law has a 2-percent update, so that would be 
roughly 12.4 percent. So we are still talking double-digit 
margins on the PPS side, and if you decided not to adopt the 
capital cost reduction, of course, the margins would be even 
higher than our 10.4.
    Chairman Thomas. And if we were not to adopt your zero 
percentage, you believe the current trends and the way in which 
we have been looking at it, your argument in all likelihood, 
all things being equal, would be much stronger next year.
    Mr. Newhouse. Yes, I do. I think that if you do not adopt 
our recommendations--say for the sake of argument you went with 
a 1-percent increase, the margin would be approximately--that 
would translate into approximately an additional 1-percentage-
point increase in the margin.
    Chairman Thomas. And that if we decided to go with your 
recommendation of zero and what we got--and I will just use 
chart 5--instead of a continued separation, a kind of a 
stabilizing of the relationship that would encourage us perhaps 
to then take a look at the next year to see if it stabilizes 
and we might be able to deal with a Greenspan-esque approach to 
closing the gap, is that----
    Mr. Newhouse. I would think that would be prudent, yes, Mr. 
Chairman.
    Chairman Thomas. But you believe the prudent step now, as 
per your recommendation, is to, at least for the year, try 
zero.
    Mr. Newhouse. Yes.
    Chairman Thomas. The gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman.
    Concerning the zero update recommendation, Joe, there are a 
wide variety of recommendations. The national public hospitals 
will testify that their overall margins are less than 1 
percent, seven-tenths, while their Medicare margins are pretty 
high. The President is recommending minus 1, the blue dogs are 
minus 2, you are minus 2.8. I presume it is at 2.8. So do you 
take into account the other revenues, or do you just focus on 
Medicare and what the margin on Medicare will be after your 
update?
    Mr. Newhouse. We have looked at both PPS margins and total 
margins by subgroup. Now, we can do better, clearly, at 
forecasting PPS margins than total margins because it is much 
harder to forecast what will happen to private revenues.
    Mr. Stark. Yes. The question is: We now pay a higher amount 
for hospital-based SNFs and home health care agencies. Is that 
not correct?
    Mr. Newhouse. I am sorry. I did not fully understand.
    Mr. Stark. We pay extra or higher reimbursement to SNFs and 
home health agencies that are hospital based.
    Mr. Newhouse. We pay higher for SNFs.
    Mr. Stark. And home health----
    Mr. Newhouse. Not for home health.
    Mr. Stark. Not for home health? You are sure?
    In any event, why should we pay more for SNFs? What is to 
suggest they are any different? Just because it is hospital 
based, why should we pay that particular SNF more than one with 
equally good quality care, which I presume is licensed by the 
same body that licenses the hospital-based one?
    Mr. Newhouse. I think that question is a difficult one for 
the purposes of formulating policy. What we know is that costs 
are higher in hospital-based SNFs.
    Mr. Stark. Well, yes, but that is because they are loading 
a lot of overhead that other SNFs----
    Mr. Newhouse. You took the words out of my mouth. That was 
why it was difficult----
    Mr. Stark. But from the standpoint of our getting a better 
bargain in quality care, you cannot give me some built-in 
reason that we ought to do that. Is that correct?
    Mr. Newhouse. Well, the built-in reason would have to be 
that I think that one believed, for example, that the true 
costs were--true costs as opposed to the accounting costs--were 
higher and that for some reason or other there was not free-
standing SNF in this community, for example.
    Mr. Stark. Right up there with boiling seas and flying pigs 
in the leaps-of-faith department. OK.
    Have you ever considered that we are getting less service 
in review, and out of HHS, and that we ought to perhaps think 
about having a little higher cost of administration in HCFA? We 
always brag about the fact that it is only 2 percent or less, 
but is it time--and have either of you ever considered--Gail 
might know more about this than the rest--that maybe we ought 
to think about giving them a little more money?
    Ms. Wilensky. Yes and yes.
    Mr. Newhouse. Yes.
    Ms. Wilensky. The answer is yes and yes, I believe that 
that is correct.
    Mr. Newhouse. Yes, I do, too. I also----
    Mr. Stark. I wonder if as isues get more complicated and 
complex and----
    Ms. Wilensky. Particularly with regard to some of the 
payment safeguards, where I think there would be----
    Mr. Stark. Well, to the extent that that is something you 
all could refer to us as a suggested policy, I would like to 
share it with my colleagues, because we have spent years and we 
never have really looked at that. That was just something that 
might be of interest to us.
    The only other question I have for ProPAC is on the 
outpatient department payments. You want to have a PPS for 
hospital outpatient as soon as possible. Is that right?
    Mr. Newhouse. We would like to shift away from cost-based 
reimbursement as soon as possible.
    Mr. Stark. All right. Now, the administration says we 
should fix the problem over 10 years. Mr. Coyne and I have a 
bill that says 1 year. That is a pretty easy scale now for you 
all to just crank up or down for me. Where should that be? I 
think 10 years is too long. We will go broke. Or I may not be 
here to watch you fix it. But is there a better range for 
phasing in whatever the fix is?
    Mr. Newhouse. Just to be clear what we are talking about, 
my understanding of the 10-year phase-in for the administration 
is on the beneficiary cost-sharing or copayment side.
    Mr. Stark. And not on the whole PPS----
    Mr. Newhouse. Not on the whole reimbursement side. But I 
could be mistaken.
    Mr. Stark. What about on the reimbursement side?
    Mr. Newhouse. On the reimbursement side, the problem is the 
integration--or getting a level playingfield, if you will, 
between what is in physician offices and what is in hospital 
outpatient departments, which we are not near to doing in my 
view. It would be nice if we were, but we are not. I would 
worry about getting the playingfield----
    Mr. Stark. All right. Well, let me just finish. In many 
areas, the ambulatory centers do a safe job for basically half 
the money that we pay for the outpatient department. Right?
    Mr. Newhouse. As far as I know.
    Mr. Stark. Let's put it this way: Where ambulatory surgical 
centers do procedures that are safe and----
    Mr. Newhouse. Yes.
    Mr. Stark [continuing]. Considered routine, we pay about 
half of what we would pay for the same procedure in the same 
town when it is done in an outpatient setting. Ought we not 
look at that and ask you for some recommendations?
    Now, there are people who say we ought to raise payments to 
the outpatient level. I suggest that we might look a little 
more toward bringing it down to the ambulatory surgical center 
level. Could you give us some advice on that?
    Mr. Newhouse. Yes. In our next year's report, we would be 
happy to take a look at that. I suspect personally that some of 
this may be the same kind of issue we were talking about with 
the SNFs, that we are talking about allocation of overhead on 
the part of the hospital.
    Mr. Stark. I just have one request for Gail. We have heard 
a lot from many physicians lately about whatever we wrought 
many years ago when we implemented this payment system. I know 
you can attest to the fact that I warned the surgeons that, 
while they liked it the year we passed it, there would be some 
years in the future when they would not think we were such good 
guys here and would complain about the fact they were getting 
reduced in payment as opposed to, say, primary care who were 
getting an increase.
    Well, that time seems to have come. Many people have warned 
us not to deal with anecdotes, but what I am hearing is, Gee 
whiz, I am going broke. We all know that physicians' incomes I 
guess on average went from 160 to 195, but averages do not mean 
much.
    Could you provide to the Subcommittee in a sanitized 
version some examples, maybe going back a few years, and then 
estimating what would happen in these practice adjustments. So 
you could say here is Physician A in California or Physician B 
in New York who over these years has had this much Medicare 
revenue, this much per procedure, whether it is back surgery or 
whatever, and here is what will happen under these scenarios. 
We are talking about aggregate information, and it does not 
mean much when you say the physician is only going to move from 
$6,000 a procedure to $5,725--then I am not as concerned. If 
the physician is going from $6,000 to $2,000 in 1 year, then we 
ought to look at it.
    I am sure you can get that information from HCFA, and give 
us some anecdotes, if you will, so we can get a feel for what 
these ranges would do, both phasing-in and the amount. I would 
find that helpful, and I think my colleagues would as well.
    Ms. Wilensky. We would be very glad to provide that 
information. Let me make the point that I think there are three 
things going on right now that are causing so much attention 
from the physician community.
    First, there are two different kinds of changes that have 
strong interactive kinds of effects; that is, the movement to a 
single conversion factor and the use of the relative value 
practice expense. It is pushing the same people in a downward 
direction.
    The other thing that is happening is that I think you are 
getting a response from the surgeon community about questioning 
whether working with the government is working with a fair 
business partner. The reason their higher conversion factors 
have been occurring over the last few years is that their 
volumes have been lowered.
    Now, there is a lot of debate about whether they caused it 
or whether the internists and generalists were responsible. But 
I think you are also----
    Mr. Stark. But we agreed to reward them, in any event.
    Ms. Wilensky. But the reward that was built into the law 
was that if you spend less, you get a higher conversion factor. 
And I think you are hearing, with some legitimacy, complaints: 
We played the game as you said; now we are getting hit. When 
you go to a single conversion factor, we are taking it on the 
chin.
    Mr. Stark. If I could respond, I am not so excited about 
the single conversion factor, but I do feel the practice 
expense is something that a good accountant could consider. 
That is empirical. What is the rent? What is the salary? What 
is the cost of insurance? That is what it is, and we ought to 
be able to get that more easily.
    Thank you very much for indulging me.
    Chairman Thomas. Certainly, and I want to assure my friend 
that in this new atmosphere of civility, anything that occurred 
on his watch, he is going to get full credit. [Laughter.]
    Chairman Thomas. The gentleman from Louisiana.
    Mr. McCrery. Dr. Newhouse, in the President's proposal for 
Medicare, he would limit the definition of a hospital discharge 
to only those patients that go from the Medicare hospital to 
home and would define as a transfer a patient going from the 
hospital to a PPS-exempt facility or a SNF.
    Are you familiar with that proposal?
    Mr. Newhouse. Yes.
    Mr. McCrery. Do you think that might have the effect of 
hospitals keeping patients longer?
    Mr. Newhouse. It might, Mr. McCrery. But I personally favor 
this proposal, but I think it will have a fairly limited 
impact. So let me try to explain all of that to you.
    The limited impact part is that we know from the ProPAC 
work that most patients that go to SNFs actually have longer 
than average stays. That is not terribly surprising. They are 
probably the sicker patients. And the transfer payment only 
really comes into play if you stay past the so-called geometric 
mean, or you can think of it as the average stay.
    So since these patients are sicker, actually for relatively 
few of them is it going to matter, because the hospitals--once 
they get past the mean, the hospital is going to get the 
standard DRG payment either way. But for some patients it will 
matter; that is, for the patients that are staying relatively 
short times in the hospital. So let's focus on that where it 
does matter.
    The Commission did not take this up, which is why I am 
giving you my personal view. The reason I personally like it is 
that it somewhat levels the playingfield; that is, right now 
for these patients, if the hospital discharges the patient to 
the SNF, which may just be another floor of the hospital, the 
hospital is going to start to collect a per diem payment and it 
still keeps the entire DRG payment. So there is a fairly strong 
incentive to get the patient out to the SNF, financial 
incentive.
    Under this scheme, things would be somewhat more balanced. 
The hospital would actually keep more money if it kept the 
patient in the hospital per se, and that would somewhat play 
against the additional money it would get if it transferred the 
patient to the SNF.
    Now, you could also make it neutral by linking the hospital 
payment with the SNF payment or the entire postacute payment, 
as we recommended that you do a demonstration of that in our 
recommendations to you. That would also be a way of keeping 
things neutral. But that is why I think this would be 
relatively limited but probably a step in the right direction.
    Mr. McCrery. Do you all recommend anything else to deal 
with the increasing number of postacute care services?
    Mr. Newhouse. Do we recommend anything else? We have a 
number of recommendations to you on postacute care for SNF. 
They kind of divide into short-run changes and longer run, more 
visionary kinds of changes.
    The short-run changes are to impose cost limits on 
ancillary services for SNF care, and on the home health side to 
think about some kind of reduced payment for high users and 
also some copayment for home health. The more visionary refers 
to linking the acute and postacute services that I mentioned. 
That we would do by demonstration first.
    Mr. McCrery. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Does the gentlewoman from Connecticut wish 
to inquire?
    Mrs. Johnson. Thank you. It is a pleasure to have you here 
today and begin the process or move it one step further along 
of understanding the challenge of all of these numbers that 
have to be laid out there for the next year.
    I am interested in your recommendation in terms of hospital 
updates and particularly the zero update, because in recent 
years, in my experience, these recommendations have very 
different impacts on different kinds of hospitals. And we have 
seen in our charts, for instance, that the margin will be very 
low or negative in the big teaching hospitals. And then when 
you add the IME and the DME and the DSH in, they come back up.
    Well, the medium-sized hospitals that do not get teaching 
reimbursement or DSH payments and yet have a high Medicare 
hospital census in my experience suffer the most when we press 
down on Medicare reimbursement rates. The other institutions 
have other sources of money that tend to compensate for zero 
updates or low adjustments, a lowering of the market basket 
change.
    Have you played out these rates to look at how they will 
affect different kinds of hospitals, and particularly the sort 
of midsized hospitals that will serve a region of small towns 
but are not teaching hospitals and are not DSH hospitals and do 
not even have a particularly high level of uncompensated care?
    Mr. Newhouse. As best I can recall, we have not cut it 
quite that finely. We have looked at teaching and DSH against 
nonteaching and DSH. Naturally, as with any industry, there is 
a spread across the industry in how profitable firms and what 
their margins are and so forth. We see the stock market going 
up and down all the time in response to that news.
    Our estimates are that the hospitals with negative PPS 
margins will be at an all-time recent low, even with our 
proposal; that they will be about 20 percent of hospitals with 
such margins, down from about 60 percent of such hospitals a 
few years ago.
    The other point I would make is that some analysis the 
Commission did a few years ago suggested that, as you would 
expect, hospitals with negative margins in one year are not 
necessarily the same hospitals with negative margins the next 
year; that negative margins get the attention of the board and 
some steps are done to address the problem, and margins become 
positive.
    So as far as we know, there are probably relatively few 
hospitals--but there surely are some--that go year after year 
with negative margins. Those hospitals, of course, are the ones 
that over time will merge or close. But I think that is a 
relatively limited problem, as opposed to, say, a large class 
of hospitals. In any event, things are certainly getting better 
for the hospital industry as a whole.
    Mrs. Johnson. Any help you could give me in looking at 
those hospitals or refining down your view, Dr. Newhouse, would 
be helpful, because smaller hospitals that are really critical 
to the quality of health care in large, rather rural areas but 
not carried as rural hospitals are very important, and they 
carry--those are areas where the population is also aging. So 
they have an increasingly high percentage of Medicare patients. 
And I do see them having a lot of trouble, and they have 
already downsized costs a couple of successive times that are 
significant enough to hit the papers, involve all the staff--
really be an institutional response to cost cutting.
    But you can only do that so many times and still have 
decent service capability. I would hope you would look at that 
more carefully. Dr. Young and I spent a good deal of time on 
this issue last year, and it is true your data does not go 
deeply to the issue that I am raising.
    I would be happy to have you comment in 1 minute, Dr. 
Young. I do want to get on to my other question, because in 
teaching hospitals, you are recommending that we encourage 
training in settings outside the hospital. I absolutely agree 
with that. But that is going to be money that used to flow to 
the teaching hospital that is going to flow now outside the 
teaching hospital. If at the same time we base IME payments 
only on volume of Medicare patients, then what are we going to 
do to the ability of teaching centers to survive?
    This is my thought. If you base reimbursements only on 
volume of Medicare patients and the hospital only has residents 
in, say, three areas, then that is one thing. But if they are a 
really sophisticated medical center, and they are trying to 
train not only specialists in a lot of areas but sub-
subspecialists as well, then they are going to have the same 
reimbursement for their Medicare patients as a teaching 
hospital, whether they have 10 residents or 50 residents. At 
least, that is the way I read your recommendation. And while we 
do not want to encourage them to hire more residents--and I 
understand you are trying to get rid of that resident/bed ratio 
and all those things that drive institutions to hire more 
residents whether we need the doctors or not, nonetheless doing 
it only on volume, I think, could have a significant and 
concerning impact on teaching institutions.
    Mr. Newhouse. Well, in terms of the first question on 
giving the hospital flexibility; that is, teaching hospitals 
being able to send it elsewhere, that still is primarily at the 
option of the hospital. That is, we want to give the hospital 
the ability to do that, which it does not now have. If it 
chooses not to do that, well, that is its business. But we 
think it should have the option to do that.
    On the remainder of the question, the most important thing, 
in our view, is to disassociate the payment to the teaching 
hospital from the number of residents that it has, which would 
have the effect then of ending the subsidy to the hospital of 
hiring another resident.
    How, then, any teaching moneys are distributed would have 
to be addressed, because one would need a replacement formula. 
The Commission recommended that at least at the outset that be 
done historically to avoid major disruptions. But one would 
have to--if the delinking were done, one would have to come to 
an issue of how any teaching moneys would be distributed among 
hospitals over time as the number of residents changes.
    Mrs. Johnson. Just to conclude, we also did a historic 
performance for 2 years, but I do not think just patient volume 
is going to be an adequate basis on which to distribute. I 
think we also have to look at, in a sense, the teaching burden 
of that hospital, how many disciplines it is responsible for, 
and how many levels of--how intense their teaching 
responsibilities are.
    Mr. Newhouse. I agree with that, Mrs. Johnson, yes.
    Mrs. Johnson. OK. Thank you.
    Chairman Thomas. I thank the gentle lady.
    Does the gentleman from New York wish to inquire?
    Mr. Houghton. Thank you, Mr. Chairman.
    I have two questions. This is a pretty technical 
discussion, and I do not understand it all. But these are two 
questions which I have.
    First of all, a specific one. In terms of the information 
which was distributed by you, Dr. Young, at one of the 
briefings, I have a list here that talks about the urban and 
the rural hospital PPS margins, and the rural are very 
distinctly lower for Medicare than the urban. Maybe you could 
explain that to me.
    The next question is really for both Dr. Young and Dr. 
Newhouse. If I understand it correctly, you are saying that 
there should be zero adjustment for the hospitals for a 1-year 
period. However, the administration has suggested a market 
basket minus 1 percent for a 5-year period.
    Now, we have got to produce a budget for a 5-year period. 
We have to look ahead. So what happens to the other 4 years?
    Mr. Newhouse. Which one do you want to take first?
    Mr. Houghton. You choose it.
    Dr. Young. On the information that I distributed, in 1995 
the PPS margins for rural hospitals were 3 percent. That is 
substantially lower than the average. On the other hand, the 
total margins for rural hospitals were 7 percent. That is 
substantially higher than the average.
    We think in part what we are seeing on the margins today is 
a result of declining cost growth and, as Dr. Newhouse pointed 
out, even actually negative cost growth. Costs in some areas 
are lower this year than they were last year.
    We are not seeing that declining cost growth nearly to the 
same extent in rural areas as in urban, and that in part is 
what is accounting for and driving the lower PPS margins in 
rural areas. Part of that may well be due to the fact that 
these hospitals are still able to generate substantial added 
revenues from their private payers, and that is why their total 
margins are so high. They have not had the same financial 
pressure that urban hospitals have as a result of managed care 
and changes in the private market. They therefore have not 
lowered their cost growth. Their PPS margins are lower, but 
overall they are still doing fine. In fact, they are doing a 
lot better on average than the urban hospitals.
    Mr. Houghton. Because of the private?
    Dr. Young. I am sorry?
    Mr. Houghton. Because of the private?
    Dr. Young. Because their ability to generate revenues 
substantially in excess of their costs from their private 
business.
    Mr. Newhouse. On the question of the years 2 through 5, I 
think the Commission was just uncomfortable in trying to 
forecast. If you look at my chart 3, the margins for the last 5 
years, we have gone from 1 to 5 to 8 to 10 to 12 percent. I do 
not think anybody sitting back in 1991 or 1992 would have been 
able to have guessed that that was what was going to happen. 
Certainly, I do not know anybody that thought that hospital 
costs would actually fall after they had been going up kind of 
9 percent a year for years and years.
    So we were just uncomfortable. I think you will have to 
make a decision about----
    Mr. Houghton. In your uncomfortableness, can you give us 
sort of a guesstimate?
    Mr. Newhouse. A guesstimate. Well, there is the issue of 
the guesstimate and then how much of a margin of error you 
build in around the guesstimate. If I had to guess--and it 
really is a guess--I am skeptical that costs are actually going 
to continue to fall, at least in nominal terms. They might fall 
in real terms some. I think a lot depends on how much 
additional pressure is going to be brought to bear on the 
private side on hospitals. Medicare, after all, still is only--
although it is the biggest single payer, it still is only a 
minority of hospital dollars for many hospitals and all 
hospitals in the aggregate.
    So I think hospital costs--it is also going to depend on 
what inflation is, obviously. We start with our market basket 
forecast. It is probably reasonable to forecast around 3 
percent inflation a year, but that has got to have a lot of 
uncertainty around it, too.
    So that is the best I can do for you.
    Mr. Houghton. Well, if you forecast 3 percent a year, that 
is approximately what the White House has done, 2.8 percent, I 
think, and then a minus 1 percent from that. Would you agree 
with that philosophy?
    Mr. Newhouse. Well, that would certainly be within a range 
of my comfort zone. There are other numbers that would be in 
that range, too; particularly by the time you get out 3, 4, and 
5 years, it gets to be a fairly wide range, I think, about what 
actually might happen.
    Mr. Houghton. Thank you very much.
    Chairman Thomas. I thank the gentleman from New York and 
thank once again our stalwarts, and my guess is we will see you 
before the summer solstice.
    Thank you very much.
    The next panel, as advertised: Thomas Johnson, who is the 
chief executive officer of Kaweah Delta Health Care District 
Hospital; actually, he is here on behalf of the American 
Hospital Association; Tom Scully, Federation of American Health 
Systems; and Larry Gage, president, National Association of 
Public Hospitals and Health Systems.
    When you get settled, I will tell all of you that any 
written statements you may have for the record will be made a 
part of the record without objection, and you may proceed to 
inform the Subcommittee in any way you see fit. We will begin 
with Mr. Johnson and then move across the panel.
    Welcome, Tom.

STATEMENT OF TOM JOHNSON, CHIEF EXECUTIVE OFFICER, KAWEAH DELTA 
  HEALTH CARE DISTRICT, VISALIA, CALIFORNIA;  ON  BEHALF  OF  
                 AMERICAN  HOSPITAL ASSOCIATION

    Mr. Johnson. Thank you, Mr. Chairman. I am Tom Johnson, 
chief executive officer of the Kaweah Delta Health Care 
District. The district is a public agency in Visalia, 
California, a community of 92,000 people in the heart of the 
south San Joaquin Valley. The district includes three hospital 
campuses: One devoted to rehabilitative care, another devoted 
to senior care and ambulatory services, and a large campus with 
a full array of outpatient, nursing care, and acute-care 
services. We also operate a wellness center, a child-care 
center, and a community benefit program with outreach and 
clinic services to the underserved population.
    Fully, 24 percent of the population in our county is on 
public assistance, and the unemployment rate in our county is 
17 percent. Without a county hospital, our district plays a 
lead role serving the needs of people on Medicare and Medicaid, 
as well as the uninsured.
    I am pleased to appear today on behalf of the AHA and its 
5,000 hospitals, health systems, networks, and other providers 
of care. We appreciate this opportunity to present our views on 
Medicare's hospital payment policies, especially ProPAC's 
recommendations, as well as some of the President's budget 
proposals.
    Many of ProPAC's recommendations for fiscal year 1998 are 
long-term suggestions that would move Medicare into the future 
in a progressive and constructive manner. However, a few of the 
short-term recommendations would present significant 
difficulties for hospitals and health systems like mine that 
are trying to serve today's seniors, cope with the volatile 
health care market, and at the same time strengthen our ability 
to serve the Medicare beneficiaries of tomorrow.
    One of our concerns is the recommended PPS update for 
operating rates. Throughout the eighties, the Commission 
recommended PPS update amounts that were less than the full 
market basket increase. In part, this was done to spur 
hospitals to improve efficiency. Over the last year, hospitals 
have improved productivity significantly, but it seems that the 
Commission's approach for productivity gains and losses is the 
same: Lower recommended payment updates, more specifically, as 
we have heard, a zero update for fiscal year 1998.
    ProPAC's recommendation was based on a finding that, due in 
large part to increased efficiency, hospital margins have 
improved for Medicare inpatient services. This improvement may 
encourage the belief that reductions in payments to hospitals 
can be achieved without pain. This is not true. In fact, when 
ProPAC reported these margins, they also estimated that 40 
percent of the Nation's hospitals lose money when they treat 
Medicare inpatients.
    More important, 20 percent of the hospitals have negative 
total margins. Overall, they are losing money. The reason: 
Medicare pays less than costs--only 97 cents on the dollar, 
according to ProPAC--and Medicaid is an even worse payer, and 
managed care ratchets down the commercial payment, which means 
we can no longer cost shift to make up the difference.
    For about 1,000 hospitals, one in five of the Nation's 
community hospitals, Medicare and Medicaid combined represent 
more than two-thirds of total revenues. In our hospital, it is 
70 percent. These hospitals are vital resources in their 
communities. Many serve a large number of the elderly. Update 
or no update, hospitals like these still must meet market price 
increases as measured by the hospital market basket index.
    We urge Congress to reject ProPAC's recommendation and 
enact a positive PPS update. It is the best way to ensure that 
Medicare can continue to purchase high-quality services for our 
seniors. On this issue, the President's budget proposal is far 
more preferable and reasonable than ProPAC's recommendation.
    Mr. Chairman, some of ProPAC's other recommendations are 
reasonable long-term improvements, such as the expanded use of 
prospective payment systems for skilled nursing, home health, 
and outpatient services. However, while promoting this move for 
outpatient services, the Commission also suggests a budget-
driven reduction in outpatient reimbursement for certain 
surgical, diagnostic, and radiology services. It makes little 
policy sense to tinker in the short term with the formula-based 
outpatient payments while also embracing prospective payment 
and the incentive for efficiency it brings. AHA asks Congress 
to implement PPS for outpatient services quickly, as proposed 
by the administration, and forgo short-term contradictory 
changes in payment, as suggested by the Commission.
    ProPAC also calls for implementation of PPS for skilled 
nursing and home health care, and, again, we agree. We 
recommend, however, that Medicare's payment policies reflect 
several differences in the cost of providing these types of 
care. These differences include the intensity of services 
provided, geographic differences in cost, and additional costs 
associated with hospital-based facilities.
    Finally, in conclusion, the AHA strongly supports changing 
the way Medicare pays managed care plans. The President, 
ProPAC, and PPRC have suggested ways to reduce variations in 
managed care payments across the country. We urge Congress to 
support these efforts. We also support carving out GME and DSH 
funding from these payments to ensure that hospitals and others 
providing the services, not the managed care plans receiving 
the payments, are appropriately reimbursed.
    Mr. Chairman, Medicare was a good idea 30 years ago when I 
entered into this field, and it is a good idea today. We look 
forward to working with you to ensure that hospitals and health 
systems can continue serving America's seniors for generations 
to come.
    Thank you.
    [The prepared statement follows:]

Statement of Tom Johnson, Chief Executive Officer, Kaweah Delta Health 
Care District, Visalia, California; on Behalf of American Hospital 
Association

    Mr. Chairman, I am Tom Johnson, chief executive officer of 
the Kaweah Delta Health Care District, a public agency in 
Visalia, CA. Visalia is a community of 92,000 people. The 
district consists of three hospital campuses--one devoted to 
rehabilitative care, another devoted to senior care and 
ambulatory services, and a large campus which has a full array 
of outpatient, distinct-part nursing care and acute care 
services such as open heart surgery. The district also operates 
a wellness center, a child care center and a community benefit 
program with outreach and clinic services to the underserved 
population in the district.
    I am pleased today to appear on behalf of the American 
Hospital Association (AHA) and the nearly 5,000 hospitals, 
health systems, networks, and other providers of care that the 
AHA represents. Medicare plays a major role in the everyday 
efforts of hospitals and health systems like mine to deliver 
care in our communities, and we appreciate this opportunity to 
present our views on Medicare's hospital payment policies, 
particularly the Prospective Payment Assessment Commission's 
(ProPAC) recommendations, as well as the President's budget 
proposals.
    I would like to begin, Mr. Chairman, by commending ProPAC's 
commissioners and staff. The issues that surround Medicare have 
been influenced by the same dramatic change that is buffeting 
the health care environment itself. Keeping up with and sifting 
through those issues is a difficult and complicated task, and 
we appreciate the diligence and determination with which the 
commissioners and staff get the job done.
    In its March 1 report to Congress, ProPAC made 43 
recommendations for Fiscal Year 1998. Many of these are long-
term suggestions that would move Medicare into the future in a 
progressive and constructive manner, and we support those 
concepts. However, a few of the more short-term recommendations 
would present significant difficulties for hospitals and health 
systems like mine that are trying to serve today's seniors, 
cope with a volatile health care environment and, at the same 
time, strengthen our ability to serve the Medicare 
beneficiaries of tomorrow.
    SHORT-TERM ISSUES--I will start by noting our concerns 
about recommendations that we believe are ill-advised. Then I 
will move on to comments about some of the recommendations that 
we support.
    Update for operating rates--The Prospective Payment System 
(PPS) was developed to provide hospitals with an incentive for 
efficiency and, by setting a fixed rate with an update factor 
for inflation, protect the Medicare program from the costs of 
inefficiency that could occur when hospitals provided inpatient 
services. Throughout the 1980s, the commission recommended PPS 
update amounts that were less than the full market basket 
increase, in part to give hospitals an incentive for improved 
efficiency. In the last year, hospitals have been successful in 
improving productivity significantly. But it appears that the 
commission's approach for productivity gains and losses is the 
same: lower recommended payment updates--more specifically, a 
zero update for Fiscal Year 1998. We urge Congress not to 
penalize hospitals for the efficiencies they have achieved.
    ProPAC's recommendation, in part, was based on its finding 
that hospitals' margins, in the aggregate, have improved for 
Medicare inpatient services. The fact that hospitals have 
become more efficient may encourage the belief that reductions 
in payments to hospitals can be achieved without inflicting 
pain. This is not true. First, it is important to note that 
ProPAC's findings about hospitals' financial status apply 
solely to Medicare inpatient services. Second, at the same time 
ProPAC reported these Medicare PPS inpatient margins, it also 
estimated that approximately 40 percent of the nation's 
hospitals lose money when they treat Medicare inpatients. 
    More important, 20 percent of hospitals have negative total 
margins, meaning that, overall, they are losing money on all 
patients served. Government payment sources pay less than the 
cost of providing care. In the aggregate (including both 
inpatient and outpatient services), Medicare pays less than 
costs (only 97 cents on the dollar, according to ProPAC) and 
Medicaid is an even worse payer--a critical difference for 
hospitals that do not have a level of private-pay patients to 
make up the difference.
    For roughly 1,000 hospitals, representing one in five of 
the nation's community hospitals, Medicare and Medicaid 
combined represent more than two-thirds of total revenue. 
Seventeen percent of these hospitals are sole community 
providers; another 16 percent are located in the core city of 
metropolitan areas. Many are already in weakened financial 
positions, with roughly 10 percent of these hospitals 
experiencing bottom-line losses for three years in a row, 
considering all sources of revenue.
    These hospitals are vital resources to their communities; 
many serve a large number of elderly citizens. While it is true 
we need to rationally reduce our excess hospital capacity, 
placing at risk many hospitals in rural and inner-city areas 
with high Medicare and Medicaid populations does not qualify as 
a rational approach.
    In addition, the Medicare program has already shared in the 
savings that resulted from PPS isolating the program from the 
effects of the high cost inflation that occurred in the 1980s. 
Now that cost inflation has slowed, the commission's 
recommendation seeks to have Medicare share again--this time in 
hospital-produced savings. Regardless of the Medicare program 
update, hospitals must still meet market price increases as 
measured by the hospital market basket index. As a result, we 
urge Congress to reject ProPAC's recommendations and enact a 
positive PPS update--the most appropriate policy to ensure that 
Medicare can continue purchasing high-quality services for 
seniors. In that regard, the Administration's budget proposal 
is a far more preferable and reasonable approach than the 
commission's recommendation.
    Reducing capital payment rates--The commission recommends 
revising current payment rates for capital and then applying an 
update factor, which, it predicts, would result in a reduction 
in payments of between 15 and 17 percent. We have several 
concerns about suggested reductions in capital payments, 
including:
     The commission claims that there were flaws in the 
data and updating methods in prior years, which are responsible 
for capital payment rates being between 15 and 17 percent too 
high. In fact, higher-than-anticipated payments for capital 
costs likely resulted from a change in HCFA's policy regarding 
the treatment of allowable interest for payment purposes 
(published in the Federal Register on August 30, 1991), which 
increased payments for capital--not from an ``overstatement'' 
of payment rates.
     One of the reasons for changing Medicare's method 
of paying for capital costs several years ago was to slow the 
growth of capital costs, and it has worked. The capital PPS 
system was designed to reward hospitals for slowing cost 
growth, and they have responded to that incentive. Yet in the 
face of hospitals' success in significantly slowing capital 
cost growth, ProPAC proposes not a reward, but a penalty, in 
the form of further payment reductions. PPS should not be 
turned on its ear and used to penalize hospitals when they 
achieve or exceed cost control goals.
    Capital payments should be reasonable and predictable for 
hospitals and for the Medicare program--that's fair. But after 
several years of prospective payment, it is unfair to look back 
now and suggest that cost-based reimbursement, not PPS, might 
have produced a better outcome for the Medicare program. We 
urge Congress not to penalize hospitals for the efficiencies 
they have achieved and to reject ProPAC's justification for 
capital payment reductions.
    Reducing the level of IME payments--The commission 
recommends reducing the indirect medical education (IME) 
adjustment from its current level of 7.7 percent to 7 percent. 
This amounts to ``double jeopardy'' for teaching hospitals when 
added to proposed reductions in the PPS update. That is because 
when the PPS update amount is reduced, additional amounts paid 
by Medicare to teaching hospitals for IME are also 
automatically reduced. Lowering the IME adjustment to 7 percent 
means that hospitals will be receiving a smaller payment for 
Medicare's share of teaching costs on top of an already smaller 
teaching and base payment amount.
    Moreover, reductions like this have an impact far beyond 
just Medicare's payments to teaching hospitals. The marketplace 
for medical care is changing: from competing on the basis of 
service to competing on price; from fee-for-service to 
capitation; and from inpatient care to ambulatory and community 
care. Each change has affected the structures that support 
clinical education. In addition to federal budget constraints, 
these marketplace trends will continue to undermine historical 
private sector support for the important community service role 
that teaching hospitals play.
    If the Medicare program were to reduce its historic 
commitment to support hospital costs for physicians-in-
training, other payers might use the Medicare policy as 
justification for reducing or eliminating support for these 
costs. Therefore, we urge Congress to reject this proposal, 
continue to provide a benchmark for support of the educational 
and uncompensated care costs of teaching hospitals, and 
continue Medicare's long-standing commitment to fund its share 
of teaching hospitals' costs.
    LONG-TERM ISSUES--Mr. Chairman, let me be clear: Hospitals 
and health systems support efforts to balance the federal 
budget. We also understand that some reductions in Medicare 
payments to hospitals are likely to be part of any balanced 
budget proposal. However, we believe that the ProPAC 
recommendations I've just discussed would do more harm than 
good.
    Critical congressional decisions must focus not just on 
fiscal policy, but on sound health policy--issues such as the 
long-term financial viability of Medicare and the future of the 
health care delivery system. That is why we support the general 
long-term direction outlined by many of the commission's 
recommendations, including the following.
    Improving distribution of IME payments, and establishing a 
broader-based financing mechanism for GME and teaching 
hospitals--The commission states that IME payments should 
reflect the historical relationship between hospital costs and 
teaching intensity, and should continue to be based on the 
volume of Medicare patients treated. The commission adds that 
IME payments no longer should change in proportion to annual 
variations in the number of residents or beds, and that they 
should allow and support training in settings outside the 
hospital. And the commission calls for a broader-based 
financing mechanism that is not limited to the Medicare 
program. We wholeheartedly agree.
    Like ProPAC, the AHA believes that a broad-based financing 
mechanism--a trust fund for graduate medical education--is an 
appropriate vehicle for supporting clinical education. A 
federal trust fund for graduate medical education should be 
supported by all public and private payers. Unless such a fund 
is established and adequately supported, teaching hospitals 
will have to choose between being price-competitive by reducing 
their educational responsibilities, or retaining their 
responsibilities and being priced out of the market.
    In addition, a broader array of training sites are better 
suited to contemporary needs of residency programs. Residency 
programs began in the inpatient units of teaching hospitals. 
Over the past two decades, an increasing amount of residency 
training has moved to ambulatory training sites, both hospital-
based and elsewhere within a community. Medicare has recognized 
hospital-based training, both inpatient and outpatient. It has 
also recognized hospital-supported programs in non-hospital 
sites. Nevertheless, there is a need to expand support for 
residencies in ambulatory training sites, home and community 
service sites, and long-term care sites. In addition, the 
training provided under such a fund should be broadened to 
include not just physicians, but nurses and other health care 
practitioners.
    Improving Medicare's DSH adjustment and distribution--The 
commission calls for protecting access to hospital care for 
beneficiaries, and disproportionate share hospital (DSH) 
payments based on each hospital's share of low-income patient 
care and volume of Medicare cases. The commission also calls 
for concentrating DSH payments among the hospitals that serve 
the highest number of poor patients.
    A decade ago, Congress mandated an explicit PPS payment 
adjustment for hospitals that serve large numbers of low-income 
patients. One rationale was to compensate hospitals for the 
costs of treating poor patients, who often lack access to 
routine care or early intervention and, as a result, are sicker 
when they reach the hospital.
    Another rationale for the adjustment: Congress had become 
increasingly concerned that certain hospitals were at risk of 
closing as a result of treating large shares of low-income 
patients, and began to view the DSH payment as a way to 
mitigate that concern. The payments were seen as helping to 
maintain access to care for low-income Medicare beneficiaries 
and other patients.
    Policy changes in Medicaid and welfare, along with more 
health care being provided on an outpatient basis, raise the 
question of whether the DSH adjustment itself be reviewed. AHA 
believes a re-examination of the mechanics of the adjustment 
may help ensure that the adjustment continues to meet its 
mission in light of the many dramatic changes health care is 
going through. We urge Congress to consider two issues in 
particular. 
    First, the AHA believes that the Medicare DSH payment 
should continue to reflect the higher cost of caring for low-
income people, and of maintaining access to health care for 
these people. But HCFA's interpretation of the current formula 
used to calculate these payments takes into account a 
hospital's Medicare inpatient days, and only the number of 
Medicaid inpatient days for which Medicaid has paid a hospital, 
as proxies for the number of low-income people served by a 
hospital.
    AHA believes that the DSH payment should be based on the 
number of patient days actually furnished to Medicaid 
recipients--known as Medicaid-eligible days--and not on the 
number of Medicaid inpatient days that Medicaid actually pays a 
hospital--known as Medicaid-paid days. The number of days a 
hospital furnishes to Medicaid patients--which, especially as 
managed care grows, is often greater than the number of days 
Medicaid actually pays for--is the appropriate measure.
    Federal courts have backed our view. Current law states 
simply that Medicaid days should be used in the DSH 
calculation. The Health Care Financing Administration (HCFA) 
has interpreted this to mean that the Medicare DSH payment 
should be based on the inpatient days Medicaid pays for--which 
is defined differently in each state. However, the Department 
of Health and Human Services has lost in four federal appeals 
courts--the Ninth, the Eighth, the Sixth, and the Fourth 
circuits--on HCFA's interpretation. In each case the court has 
sided with hospitals, determining that the Medicare DSH 
adjustment should be based on the number of days provided to 
Medicaid patients.
    The Ninth Circuit was particularly pointed, saying that 
``Patients meeting the statutory requirements for Medicaid do 
not cease to be low-income patients on days that the state does 
not pay Medicaid inpatient hospital benefits. Thus it is 
illogical to conclude that Congress intended that only 
Medicaid-paid days serve as proxy for low-income patient 
days.'' The AHA urges this subcommittee to clarify current law 
so that it requires the calculation of the Medicare DSH payment 
to be based on Medicaid-eligible days.
    Second, in the current environment of managed care, keeping 
track of hospital inpatient Medicaid days has become more 
difficult--resulting in often understated Medicaid burdens for 
hospitals. Under Medicaid managed care many hospitals do not 
know whether the patient seeking care is a Medicaid recipient. 
Also, state-based Medicaid waiver programs have changed certain 
eligibility rules, bringing new population groups into the 
program. And discussions about restructuring Medicaid add 
uncertainty to a hospital's ability to track Medicaid inpatient 
days when calculating Medicare DSH.
    Therefore, we believe that keeping track of which patients 
are covered by Medicaid should be the responsibility of the 
managed care plan that has contracted with Medicaid to provide 
care for those patients. Because the plan receives payment 
directly from Medicaid for Medicaid-eligible patients, and then 
pays the hospital for that recipient's care, it seems logical 
that the plan would be more easily able to track those 
Medicaid-eligible patients than the hospital. ProPAC, in its 
March 1 report to Congress, agrees.
    Expanding Prospective Payment to Outpatient Services--The 
commission recommends using prospective payment methods for 
hospital outpatient departments. The AHA has been and remains a 
proponent of an appropriately structured prospective payment 
system. We support improved payment arrangements like PPS that 
are simple to understand, easy to administer, and promote cost-
effective utilization of appropriate patient care services.
    However, while promoting a rapid move to prospective 
payment, the commission at the same time suggests an arbitrary 
budget-driven reduction in current outpatient reimbursement for 
certain surgical, diagnostic and radiology services. The 
commission suggests that hospitals have been ``overpaid'' for 
these services because of an error in the formula used to 
calculate payments. Hospitals are not ``overpaid'' for 
outpatient services. In fact, Medicare pays hospitals less than 
the cost of actually providing outpatient care to seniors. But, 
more important, we believe the combination of first lowering 
formula-based payments and then moving to prospective payment 
would create conflicting incentives for hospitals. It makes 
little policy sense to tinker in the short term with the 
formula-based payments, which may encourage an increase in 
services provided, while at the same time embracing prospective 
payment and the incentives for efficiency it brings. AHA asks 
that Congress implement PPS for outpatient services as quickly 
as possible as proposed by the Administration, and forego short 
term, contradictory changes in payment as suggested by the 
commission. 
    Reducing beneficiary liability for outpatient services--The 
commission also recommends that beneficiary liability for 
hospital outpatient services should be reduced, from 20 percent 
of charges, as set by Congress, to 20 percent of the allowed 
payment. Beneficiaries have been paying a greater share of the 
bill each year while Medicare's share has declined. Reducing 
seniors' liability for the cost of their care is a legitimate 
concern and an issue appropriately resolved between the 
Medicare program and its beneficiaries. We disagree with the 
commission's suggested use of short-term hospital outpatient 
payment savings to remedy this long-standing problem. Instead, 
we support a proposal like the President's, which would 
gradually increase the government share of payments so that, 
ultimately, beneficiaries will pay only the 20 percent 
coinsurance the law intended to be applied.
    Expanding Prospective Payment to Skilled Nursing and Home 
Health Services--The commission calls for implementation of PPS 
for skilled nursing and home health services as well. As stated 
above, the AHA favors prospective payment. We strongly 
recommend, however, that Medicare's home health and skilled 
nursing services payment policies reflect several justifiable 
differences in the cost of furnishing care.
     Medicare should recognize, at a minimum, 
differences in levels of physical functioning, cognitive 
capabilities and behavior of the patient, and intensity of 
rehabilitation and therapy services. A clear variation in costs 
results from the different nursing and rehabilitation needs of 
each patient. As a result, some facilities provide more 
intensive nursing and therapy; some admit more severely ill or 
more disruptive patients; some are more capable of responding 
to medical episodes. These differences need to be recognized in 
payment. Otherwise, low intensity nursing facilities would 
receive a windfall and high intensity facilities would be 
penalized.
    These differences in patients needs and costs are known as 
case mix costs. They are recognized in the Medicare hospital 
inpatient PPS system through a combination of the Diagnosis-
Related Groups (DRG) classification system, supplemental 
payments for outlier cases, and other payments for the higher 
costs associated with indirect medical education and treating 
large numbers of low-income people. While the hospital 
inpatient PPS system is inappropriate for long-term care and 
home care patients, the underlying principle of recognizing 
patient-related cost differences is the same and should be 
recognized in any prospective payment system for skilled 
nursing or home health care.
     Medicare should recognize geographic differences 
in costs, which are beyond the control of the health care 
system. Providers serve Medicare patients in communities with 
different costs of delivering care. Some communities have 
higher wage rates than others; some have higher supply or 
operational costs than others. While PPS and the Resource-Based 
Relative Value Scale (RBRVS) revealed the difficulty of drawing 
geographic boundaries for payment purposes, the difficulties 
are minor compared to the inequities that would result from 
failing to recognize geographic cost differences.
     Medicare should recognize the added operational 
costs associated with hospital-based skilled nursing and home 
health services. Hospital-based services are provided by 
delivery systems that have a broad array of services and 
responsibilities. As a result, additional costs arise from: a 
hospital's ability to provide service on demand (standby 
services) that are not available from limited service 
providers; greater availability of laboratory and x-ray 
services that support hospital-based and freestanding 
providers; and requirements imposed on the hospital by 
licensure and accreditation.
     Medicare should incorporate accounting costs that 
result from government-mandated cost-finding practices, which 
historically allocated hospital overhead from inpatient care 
units to ambulatory, community-based, and nursing home units. 
Or, Medicare should increase inpatient PPS payments to adjust 
for prior accounting requirements. Under Medicare's original 
policies, services provided under Medicare Part A were 
reimbursed on a cost basis using accounting procedures 
prescribed by Medicare. While there were many concerns with 
these procedures, they were equitable because they applied to 
all Medicare Part A services. Because Medicare accounting 
procedures require allocation of all general service and 
administrative costs among the various Part A facilities and 
units, any over-allocation of costs in one area would result in 
under-allocation in another.
    When Medicare hospital inpatient PPS was established, it 
based inpatient payments on the level of costs determined using 
the accounting practices that had been used for cost-based 
reimbursement. Nevertheless, equity was preserved in part by 
continuing to recognize the consequences of Medicare's 
accounting requirements through the payment differential for 
hospital-based facilities and services.
     Medicare payments should provide clear public 
recognition of the uncompensated care missions that hospitals 
and hospital-based services fulfill in our nation. Hospitals, 
by legislation (Emergency Medical Treatment and Active Labor 
Act--EMTALA) and commitment to community service, provide 
emergency services that evaluate and treat all individuals 
regardless of ability to pay. Once admitted and treated, the 
patient may be reassigned to a hospital-based home health or 
nursing home service that is medically appropriate and lower in 
cost than an inpatient unit.
    However, uncompensated care patients bring no revenue, 
regardless of where they receive care. Unlike freestanding home 
health agencies and nursing home facilities that have no 
emergency room for uninsured or underinsured people, the 
hospital-based facility bears a disproportionate share of the 
costs of uncompensated care.
    Changing Medicare payments to health plans--When 
beneficiaries join managed care plans, Medicare pays an up-
front, monthly, per-person amount based on the adjusted average 
per capita cost (AAPCC). The AAPCC is a formula by which 
Medicare determines the average cost of providing care to 
beneficiaries in a particular area.
    The commission calls for reducing the variation in Medicare 
payments to health plans across the country and for setting a 
minimum payment amount. AHA agrees. The current system, based 
on Medicare's fee-for-service payments, is flawed and 
inequitable. Given the wide variations in historic fee-for-
service utilization patterns, there is a resulting wide 
variation in health plan payments--more than 300 percent among 
counties across the United States.
    We advocate Medicare health plan payments that are uniform 
across the country, with an adjustment that reflects regional 
differences in the cost of delivering care due to the fact that 
some areas may care for less-healthy, more costly Medicare 
beneficiaries. To achieve this, the current AAPCC should be 
blended with a new payment rate that eliminates differences in 
historical patterns of use across counties. And a payment floor 
should be quickly established to raise payments in the lowest-
rate areas.
    The AAPCC payment also includes what Medicare traditionally 
spends on DGME, IME and DSH. However, the rates that a plan 
negotiates with a hospital do not necessarily include these 
direct graduate medical education (DGME), IME or DSH payments 
that the hospital would traditionally receive. In addition, the 
plan may direct patients away from the hospitals to a lower-
cost site of care--because the plan receives the same AAPCC 
amount regardless of the provider it contracts with. In either 
case, there is no requirement that the plan use the portion of 
the AAPCC that results from clinical education and 
uncompensated care payments to support these provider costs. As 
a result, the health plan often benefits financially if it can 
avoid using hospitals that support medical education.
    The hospital--which is directly incurring the costs of 
providing clinical education or uncompensated care--does not 
receive the funds that Medicare intends to help pay for those 
costs. The AHA strongly supports the commission's 
recommendation to remove the clinical education and DSH payment 
amounts included in the AAPCC and to make those payments 
directly to the entities that incur the costs of these 
important missions. 

                               Conclusion

    Mr. Chairman, Medicare has, in some way, touched the lives 
of every American. It was a good idea 30 years ago, when it was 
created, and it is a good idea today. But, in order for 
Medicare to continue its mission of caring for America's 
seniors for another 30 years, it has to be brought up to date 
so that it can adapt to the dramatic changes health care has 
experienced. We believe that many of the commission's 
recommendations can help get that job done. We look forward to 
working with you to ensure that hospitals and health systems 
can continue serving America's seniors for generations to come.
      

                                


    Mrs. Johnson [presiding]. Thank you, Mr. Johnson.
    Mr. Scully.

   STATEMENT OF THOMAS SCULLY, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, FEDERATION OF AMERICAN HEALTH SYSTEMS

    Mr. Scully. Mrs. Johnson, Mr. McCrery, I am Tom Scully with 
the Federation of American Health Systems. The federation 
represents 1,700 hospitals across the country, approximately 
780 acute-care hospitals, 600 specialty hospitals, and a little 
over 300 hospitals that are nonprofit that are managed 
primarily by Quorum Health Care. Our members are Mr. Stark's 
favorite company, Columbia; Tenant Health Care; HealthSouth, 
the largest rehab provider in the country; Vencor, the largest 
long-term care hospital in the country; Community Health and 
Health Management Associates, both very large, primarily rural 
providers, mostly in the South and the West; Magellan, the 
largest psychiatric provider in the country; and Horizon CMS, 
also a rehab and specialty care provider.
    Overall, the federation's members have 820,000 employees 
nationwide, primarily in the South and the West. Columbia alone 
has 295,000, is the ninth largest private employer in the 
United States. Tenant is among the largest employers in 
Florida, California, Louisiana, and Texas.
    We support virtually everything that the AHA has in their 
testimony and most of what Larry with the public hospitals 
would probably support. We have some minor differences. The 
major thing you might find in the differences is we represent 
the majority of the PPS-exempt providers, most of which, I 
think, are not included in the other two groups.
    I would like to make two quick general points first, and 
then hit on a few specific reimbursement issues.
    First, the reason I put that lovely budget chart up is to 
show that I think there is a perception that this is a very 
easy year in Medicare. The fact is, the numbers are much 
tougher than you think. Two years ago, we were talking about 
$270 billion of cuts. That was over 7 years. This year we are 
talking about $100 billion. That is over 5 years. The 
comparable number with 7 is more like 180. A lot of people do 
not realize that the baseline, because health inflation has 
dropped, has dropped a lot.
    When you look at the absolute numbers 2 years ago in the 
vetoed budget bill, the capped spending numbers that were in 
your bill, and then you look at where the President's budget is 
as far as his target for spending, I think the numbers are much 
closer than people realize. They are remarkably close. If you 
look at the bottom two lines, you see that by the year 2000, 
2001, 2002, the targets the President is talking about spending 
are extremely close, and almost identical to what you had in 
your 1995 bill 2 years ago, which was perceived as being very 
harsh. So I am not here to whine. I am just here to say as a 
matter of course, the policies in here, we are looking at still 
a very tough year on Medicare. And I think when you look at----
    Mrs. Johnson. Excuse me, Mr. Scully. Are you talking about 
the two top lines?
    Mr. Scully. The two bottom lines. The two top lines--the 
top three lines are CBO baselines from 1995, 1996, and 1997. 
The bottom two lines, the further down are the absolute targets 
that were written into OBRA 1995, and the next line up is the 
projected spending in the President's budget that he would like 
to see in Medicare for the next 5 years.
    My point is when you look at what you would like to spend 
on Medicare for the next 5 years, we are still looking at 
pretty close to where you were 2 years ago. And, again, I am 
not complaining. I am just saying the numbers have dropped 
significantly, and the baselines are closer together than 
people might think.
    Second, when you look at the payments, 2 years ago when we 
came and met with most of you in the leadership, we basically 
said we would be happy to see one-third out of hospitals, one-
third out of physicians and other providers, and one-third out 
of beneficiaries. We would like to see a fair spread among the 
different categories of Medicare. No matter how you slice it 
this year, you can estimate between 60 and 70 percent, but 60 
to 70 percent is coming out of hospitals. So when you look at 
it, it is a very, very tough year by any reasonable measure for 
hospitals.
    In the 1995 bill, we may not have liked the 270 number, but 
as most of you remember, we very much liked almost all the 
reforms. The federation is for the ultimate PPS reform, which 
is capitation for everything. We would like to see you do that. 
We would be very happy with slightly lower reduction numbers, 
but we would like to see many of the 1995 reforms repeated. We 
supported most of them. We still support most of them, 
especially in the original House bill.
    Going to some of the specifics, we are obviously very 
concerned about the market basket update. Growth in hospital 
spending is down to 3 or 4 percent per year. We have reacted to 
all the incentives you have created. We have reduced costs 
massively. Our wages next year are going to go up by 3.3 
percent, yet we are looking at very small increases. Even if 
you assume all of the ProPAC assumptions, which are pretty 
tough, all the ProPAC assumptions, they say that they would 
look at between 0.6 and 1.4. Splitting the difference does not 
come to zero. I think a zero update is very, very harsh.
    Second, on capital payments, there is a 15- to 17-percent 
cut. That is a very steep cut, especially tough on providers in 
the South and the West. Hospitals in the South and the West 
tend to be newer, have higher capital costs. The Federal 
Government as a partner in capital is a rollercoaster. We may 
have had a reasonably good payment last year, but 17 percent is 
very dramatic.
    Disproportionate share I am sure Larry will get into, so I 
will get back to that.
    Outpatient payment reform, I have tortured Mr. Thomas over 
the years trying to explain FIDO. It is a very complicated 
payment issue, but it is $11 billion off budget that is not 
counted that we get reduced in payments to hospitals for 
copayments. It is $8 billion on budget. We happen to very much 
support the administration's proposal. We think it is a very 
good proposal, but it is an enormous cut to providers and it is 
going to have a big impact on every outpatient department 
across the country.
    I see the red light is on. That is as fast as I can talk. I 
have a lot of other issues I would like to cover. I know there 
is a later hearing on PPS-exempt facilities. We have a lot of 
very major concerns about psychiatric, rehab, long-term care 
hospitals. But I would state again that the federation in the 
long run is for the ultimate PPS reform, which is capitating 
everything.
    We are happy to work with you to try to get reductions out 
of the existing program, but as long as we keep tinkering with 
the existing program, you are going to have the structural 
problems we all live with, and eventually going to capitation 
is the only way you are going to eventually really fix the 
Medicare Program.
    [The prepared statement follows:]

Statement of Thomas Scully, President and Chief Executive Officer, 
Federation of American Health Systems

    My name is Thomas Scully, President and CEO of the 
Federation of American Health Systems and I am pleased to be 
here today to testify on behalf of the nation's 1700 investor-
owned and managed hospitals. Nationwide, there are 
approximately 780 acute care hospitals and almost 600 specialty 
hospitals that are investor-owned. Our companies also manage 
over 300 nonprofit hospitals.
    This committee will be considering many issues this year 
that will have a profound impact on hospitals and other 
providers of care and, consequently, on the quality of health 
care in this country, particularly for Medicare beneficiaries. 
The recommendations of the Physician Payment Review Commission 
and of the Prospective Payment Assessment Commission are likely 
to have a significant impact on your deliberations, so I am 
especially grateful to be here today to offer our views on 
their recommendations.
    This is a time of great challenge and change in our 
nation's health care delivery. We are seeing continued steady 
growth in managed care. Health care providers are merging and 
integrating to form systems that can provide improved care over 
the full course of an illness. And these provider-sponsored 
systems are contracting with employers, insurers and plans to 
provide a comprehensive range of health care services for their 
insured beneficiaries, often on a capitated, at-risk basis. Our 
member hospitals and health systems are leaders in driving 
these fundamental changes in health care. Whether it is in 
Texas, Florida, Louisiana, or right here in Washington, DC, our 
hospitals are leading the way in revitalizing aging systems or 
developing new systems that are creating efficient, high 
quality, low cost health care for consumers. The trends toward 
lower costs, with continued excellence in quality, offer 
considerable promise to make access to affordable, quality 
health care available to all Americans. We are proud that our 
hospitals and health systems are on the forefront of the 
creation of a new dynamic market for health care.
    This is also a time when major Federal health-financing 
programs face significant pressures as we seek to balance the 
Federal budget and restructure the Medicare program. Congress 
must proceed carefully to ensure that the changes made in these 
programs preserve access to high quality care and that they 
begin to develop the groundwork for the kind of long term 
structural changes that are needed for the future.
    ProPAC has made many detailed recommendations for changes 
in Medicare payments rendered on a fee-for-service basis that 
will significantly impact hospitals. One of the biggest issues 
for hospitals is ProPAC's recommendation, made only by a very 
divided Commission after a long and contentious debate, to 
provide a zero market basket update for FY98. This 
recommendation may encourage the perception that reductions in 
payments to hospitals can be achieved without inflicting pain. 
This is absolutely not true! Many hospitals of all capital 
structures are struggling financially and reductions of this 
magnitude in Medicare payments would hurt and hurt a lot.
    It is important to remember that ProPAC reports average 
hospital margins. At the same time that it shows hospitals with 
what appear to be relatively healthy Medicare margins, on 
average, about 40 percent of the nation's hospitals are losing 
money when they treat Medicare patients. In the past these 
hospitals have been able to stay in business by shifting unmet 
Medicare costs to other payers. Increasingly, however, this is 
becoming an impossible strategy as competitive pressures 
increase throughout the health care sector. In fact, 20 percent 
of hospitals have negative total margins, meaning that, 
overall, they are losing money on all patients served. There is 
a reason for all the recent hospital mergers and 
consolidations. It is a tough business. This is no picnic.
    Under any scenario, government payment sources still pay 
less than the cost of providing care. Including both inpatient 
and outpatient services, Medicare pays only 97 cents on a 
dollar for the cost of care, according to ProPAC, and Medicaid 
pays even less. This is a very serious situation for hospitals 
that do not have a sufficient level of private-pay patients to 
make up the difference, or who are unable to do so due to 
competition. Many hospitals are already in weakened financial 
position, with roughly 10 percent of high Medicare/Medicaid 
hospitals experiencing bottom line losses three years in a row, 
considering all sources of revenue.
    All hospitals are vital resources to their communities; 
many serve a large number of elderly citizens. While it is true 
that the hospital ``squeeze'' is working to find a rational way 
to reduce our country's excess hospital capacity, unnecessarily 
placing at risk many in rural and inner-city communities does 
not seem to be the prudent strategy. Medicare reductions of the 
magnitude being discussed will have an adverse impact on a 
significant number of hospitals and on the beneficiaries they 
serve.
    In the context of these concerns, it is hard to fathom 
ProPAC's recommendations to provide a zero update for Medicare 
payment rates for FY98. The cost of doing business increases 
each year for hospitals, which are labor intensive, at least as 
much as for other enterprises, and when these increases are not 
recognized by Medicare, unfair financial pressure is placed on 
hospitals already struggling with all the issues discussed 
above. Perhaps that is why the Commission was divided in their 
vote on this recommendation.
    In addition, our member hospitals and health systems are 
especially concerned about the deep cut in Medicare payment for 
hospitals' capital expenditures. These cuts would fall 
disproportionately on hospital systems, a growing segment of 
the industry that is important to the future delivery of health 
care services in the country and to the growth of networks with 
the capacity to provide coordinated care and to offer managed 
care options to beneficiaries. It is troubling that the 
Commission would recommend such deep reductions, nearly 17 
percent, in Medicare's capital payments given the multi-year 
commitments that hospitals make in this area. Hospitals, like 
other businesses, need to have a reasonable expectation of what 
their future revenue will be when they undertake capital 
planning and make major financial investments. To be a reliable 
business partner, Medicare must ensure a reasonable level of 
continuity in these payments from year to year.
    ProPAC also recommends that improvements be made in the 
Medicare formula for allocating payments to hospitals serving a 
large number of low-income patients (disproportionate share or 
DSH). These additional payments have become important for many 
hospitals and can be significant in maintaining access to care 
for low-income patients. We are concerned about the 
recommendation to establish a new minimum threshold and to not 
make any disproportionate share payments to hospitals whose 
percentage of low-income patients falls below the threshold. 
Our members are the biggest care providers in Texas, Florida, 
California and other border states with high levels of low 
income patients. They may not meet the levels of some inner 
city teaching hospitals, but they--and their patients--will be 
adversely impacted by inappropriate DSH reforms. Finally, any 
proposed changes in disproportionate share payments should be 
reviewed carefully for their effect on all hospitals, and their 
possible effect on access to care for low-income Americans. I 
would strongly urge that our hospital associations be fully 
involved and consulted in making these formula changes.
    ProPAC also includes several recommendations affecting both 
Medicare outpatient payments and beneficiary coinsurance for 
hospital outpatient services. These would be extremely 
significant changes given the huge effect they would have on 
hospital revenues, the amount of beneficiary coinsurance 
assessed and the level of Medicare spending. We strongly 
support one of the proposals, the adoption of a prospective 
payment system for hospital outpatient services. We are very 
concerned, however, about the suggestion to eliminate the so-
called ``formula-driven'' overpayment (FIDO). We do not 
understand how hospitals can be considered ``overpaid'' for the 
outpatient services they provide to Medicare beneficiaries when 
they are paid considerably less than the cost of providing 
those services. We would strongly oppose the reductions that 
are caused by eliminating FIDO, unless they are accompanied by 
implementation of a reasonable outpatient prospective payment 
system for all outpatient services. A fixed rate prospective 
system allows hospitals to know in advance what they will be 
paid and encourages them to adjust to reductions by becoming 
more efficient in providing care.
    Finally, we would urge Congress to adopt the principle of 
shared responsibility for the burden of program changes needed 
to balance the Federal budget and restore solvency to the 
hospital trust fund. In this context, Congress might consider 
to what extent the Federal budget can help to absorb the large 
reductions in beneficiary coinsurance for outpatient services 
that ProPAC and the Administration have recommended. 
Alternatively, you might consider whether these reductions 
might be part of a package that would include increased 
beneficiary payments in other areas. For example, ProPAC 
recommends that some copayment should be introduced for home 
health services.
    Finally, ProPAC makes eighteen separate recommendations 
concerning Medicare payment for post-acute and psychiatric 
services, an area of enormous importance to our member 
hospitals and systems. As mentioned earlier, most of the 
specialty hospitals in the U.S. are FAHS members. In 
particular, HealthSouth, the dominant rehab provider, Vencor, 
by far the largest long term care hospital system, and 
Magellan, the nation's largest psychiatric health provider, are 
all active FAHS members.
    ProPAC recommends that case-mix adjusted prospective 
payment systems be implemented as soon as possible for skilled 
nursing facility services, home health, rehabilitation services 
and long-term care hospitals, and it recommends that interim 
payment reforms be adopted immediately in each of these areas 
until an appropriate prospective payment system is implemented. 
Our member hospitals and systems support the development of 
case-mix adjusted prospective systems, but they are especially 
concerned about possible interim changes to the current TEFRA 
payment system that is the basis of payment for rehabilitation, 
psychiatric and long-term care hospital services. ProPAC 
supports interim changes to address perceived disparities in 
payments between new and old providers. But the Commission 
itself acknowledges, and I quote from its report, that several 
``... methods to correct for the payment disparity between new 
and old providers have been considered in the past. Each one 
has strengths and weaknesses and may raise additional equity 
issues if implemented.'' I would add the thought that many of 
the changes being considered would create serious equity 
problems.
    One frequently discussed approach, and the one recommended 
by the Administration, is to rebase the TEFRA facility-specific 
cost limits. We have very serious concerns about this proposal. 
As ProPAC also observes, rebasing would penalize hospitals that 
have constrained their costs (often our hospitals) by paying 
them less. At the same time, facilities that had not become 
more efficient would be rewarded with higher payments. I assume 
Congress wants to encourage efficiency--as PPS would--not 
penalize it. We hope the Committee would not adopt a proposal 
with such perverse effects.
    We also must emphasize that our support for case-mix 
adjusted prospective payment systems for post-acute services is 
conceptual support at this time. Although we believe this is 
the appropriate direction for reform, neither the Congress nor 
the industry, (nor apparently HCFA) has seen any of the crucial 
elements of such systems spelled out. How would payments be 
adjusted for case-mix? Would payment be on a per-day or per-
episode basis? What exceptions and special payment rules would 
apply? How would it be phased in? How would the prospective 
systems vary across the different provider types: skilled 
nursing, rehab, long term hospital, and home health? Given the 
need to resolve such large issues, we are extremely concerned 
that the Health Care Financing Administration is proposing that 
it be given the authority to implement prospective payment 
using interim final rulemaking authority. This would mean that 
HCFA could implement major program change, affecting a 
significant portion of the health care sector, without the 
opportunity for Congress, the industry or the beneficiaries to 
have any input. While we are very supportive of HCFA and have 
enjoyed a good working relationship with the Administrator and 
the staff, I would certainly hope that this Committee would not 
agree with such an unprecedented approach. Such a ``blind'' 
delegation of policymaking would set the stage for a potential 
policy debacle that will end up back in Congress' lap.
    ProPAC makes numerous other recommendations that we are 
interested in working with ProPAC and the Committee to address, 
but I wish to conclude by encouraging Committee support for 
broader structural reforms, some of which are touched upon by 
the Physician Payment Review Commission in its report.
    It is imperative that the inevitable Medicare reductions 
that Congress requires to achieve a balanced budget be combined 
with a broader restructuring of the program that firmly places 
it on a long-term road toward greater efficiency, cost-
effectiveness and high quality care. One important step would 
be to allow seniors to choose to receive care from a variety of 
private health plan options, similar to the design of the 
Federal Employees Health Benefit Program (FEHBP). One of the 
essential options in such a new system would be the purchase of 
care directly from local provider-sponsored organizations 
(PSOs). These community-based, integrated networks of 
physicians, hospitals and other caregivers can directly provide 
the full Medicare benefit package. PSOs achieve the cost 
efficiency necessary to hold down health care costs by managing 
both the utilization and the cost of producing those services. 
And they do it by providing services through the same hospitals 
and physicians many patients, including the elderly, are 
already familiar with. The PSOs we seek would provide services 
to Medicare beneficiaries only and would be federally approved, 
with appropriate solvency, accountability and quality standards 
in place. This approach is embodied in H.R. 475/S. 146, 
bipartisan legislation introduced by Congressmen Greenwood and 
Stenholm on the House side and Senators Frist and Rockefeller 
on the Senate side.
    Why should PSOs be certified by the federal government? The 
simple answer is that without federal certification they will 
never happen. Hospitals, for the most part do not want to be in 
the commercial insurance business. The under 65 year old 
commercial market is saturated with commercial plans and HMOs. 
It is very tough and very expensive to enter that market. You 
have to market door-to-door to every small business and 
retailer in a community. Yet the Medicare market (over 65) is 
only 10% penetrated by managed care and offers a wide open 
market for new entrants. Insurers and HMOs see this as their 
growth market and they want to keep new competitors, especially 
local providers, out. It is greatly in the interest of the 
Congress, and seniors, to let new qualified competitors in.
    If we are forced to get a commercially insured life for 
every Medicare covered senior, we will never be in the market. 
If providers have to go to Richmond or Austin to get a license 
and meet the 50/50 rule, it will be a cold day in hell before 
you see a significant provider-based plan take Medicare 
capitation. That is the insurers strategy. It is very smart. It 
is also called Protectionism.
    Our health sytems are extremely solvent and practice the 
highest quality medicine. Give us fair federal rules and we'll 
give you quality Medicare capitated coverage.
    The real question is why not have federal certification? 
Medicare is a federal program. Insurance commissioners have no 
historical jurisdiction over Medicare. They do have 
jurisdiction over commercial plans, and if we want to do 
commercial insurance we will get a state license. And you can 
establish federal rules without a new bureaucracy. Create 
federal guidelines and let the states implement them under 
contract--as they have for three decades with hospital survey 
and certification standards. A competitive Medicare market is 
long overdue. Let local providers compete--and we'll deliver 
competition in big doses of high quality and low costs.
    Hospitals have enjoyed a strong working relationship with 
the Committee and its staff. The ProPAC and PPRC 
recommendations have led off yet another year of complex and 
difficult policy decisions for the Committee and Congress. We 
appreciate the opportunity to add our input and look forward to 
working with you again to ensure quality results for America's 
seniors and America's taxpayers.
      

                                


    Chairman Thomas [presiding]. Notwithstanding the 
gentleman's concern about the light, he does understand that 
any written testimony has already been made a part of the 
record, and that anything he might want to submit for us to 
better understand the workings of the operation----
    Mr. Scully. I had a tortuously detailed written statement 
that you probably do not want to read. But it is submitted. 
Thank you.
    Chairman Thomas. It may shock the gentleman when I tell him 
I have read it.
    Mr. Gage.

STATEMENT OF LARRY S. GAGE, PRESIDENT, NATIONAL ASSOCIATION OF 
              PUBLIC HOSPITALS AND HEALTH SYSTEMS

    Mr. Gage. Thank you very much, Mr. Chairman, Members of the 
Subcommittee. I am Larry Gage, president of the National 
Association of Public Hospitals and Health Systems, and I am 
afraid I cannot talk as fast as Tom, but I will do my best.
    NAPH represents over 100 of America's metropolitan area 
public and some nonprofit safety net hospitals. These hospitals 
uniquely rely on governmental sources of financing to support 
their care to Medicare, Medicaid, uninsured, and low-income 
patients.
    I am pleased to have this opportunity to testify today on a 
range of issues of concern to safety net providers, with 
particular emphasis on Medicare payments for hospital and 
physician services. I do have a prepared statement which I have 
submitted for the record. Also, last week NAPH board member 
Jerry Starr, who is the chief executive officer of the Kern 
Medical Center in Bakersfield, did testify before the 
Subcommittee on the specific issues of disproportionate share 
hospital and graduate medical education payments. I will not 
repeat what he said here. I am certainly happy to answer any 
questions about these issues.
    I do want to emphasize, to reemphasize, however, that DSH 
funding and graduate medical education will continue to be 
essential sources of funding for safety net health systems, and 
we strongly support the ProPAC recommendations regarding the 
restructuring of Medicare DSH.
    My additional comments can be summarized in several areas. 
First, I do want to take the opportunity to describe in a 
little more detail the situation of safety net hospitals 
nationally today using new data which we gathered from 1995 
that is being released today for the first time. This data is 
included at some length in my prepared statement, but let me 
call your attention to just two key facts represented by two 
charts. Not to be outdone by the federation, we have two 
charts, but they are smaller and undoubtedly less costly to 
produce. [Laughter.]
    Mr. Gage. The first chart indicates with two colorful pies 
that over 70 percent of inpatient care and----
    Chairman Thomas. Mr. Gage, our concern is not what the 
charts cost you, but what your conclusions cost the taxpayers.
    Mr. Gage. Very good. You will be happy on both fronts, I am 
sure, sir.
    It shows that over 70 percent of all inpatient care and 
over 77 percent of the 22 million outpatient visits provided by 
NAPH members in 1995 were for Medicaid and so-called self-pay 
individuals. And if you add Medicare to those numbers, the 
proportion jumps to 90 percent for both inpatient and 
outpatient. These are uniquely governmental institutions.
    Second, on the second chart, I want to point out that State 
and local subsidies only cover about half of the cost of 
uncompensated care provided at urban public hospitals. To make 
up the difference, member hospitals rely on Medicaid 
disproportionate share payments for 40 percent of the funding 
and Medicare disproportionate share payments for 9 percent. And 
while that may sound small, that 9 percent is an essential 
component of uncompensated care. Medicare is a key player in 
the fragile partnership of Federal, State, and local 
governments that currently finances uncompensated care.
    I also wanted to comment briefly on the issue of margins. 
While the average inpatient margin for all hospitals in 1995, 
as reported by ProPAC, was 5.6 percent, the average overall 
margin for NAPH hospitals was a meager 0.7 percent, which is 
lower by far than any individual group of hospitals looked at 
by ProPAC, and many individual NAPH members experienced 
negative margins. This finding, I believe, is consistent with 
the New England Journal study released last week which showed 
that public hospitals as a group have the lowest administrative 
costs in the industry.
    Now, because of the unique role of safety net providers in 
the health care delivery system, the impact of changes in 
Medicare policy must be fully considered before reforms are 
implemented. In particular, the freeze in PPS rates urged by 
ProPAC would be likely to disproportionately affect safety net 
institutions, and I join Tom and the AHA and others in strongly 
opposing such a freeze.
    Similarly, these hospitals and health systems, which 
already face unique challenges in financing capital improvement 
projects, will be further disadvantaged by reductions in 
capital payment rates. We also want to take this opportunity to 
urge you to support legislation to provide additional capital 
financing assistance to safety net health systems, such as the 
assistance that would be provided in H.R. 735, recently 
reintroduced by Representative Stark. These systems require 
access to capital, not necessary for major construction 
projects, but to enable them to downsize appropriately, to 
decentralize, to form broader networks and systems, and to 
improve access for low-income and elderly patients.
    Finally, in conclusion, even though it is not in the 
jurisdiction of this Subcommittee, I want to urge you again as 
you participate in broader budget discussions to reject further 
Medicaid cuts as part of any budget package you consider this 
year. Medicaid Program growth has slowed considerably in the 
last year. Due to the implementation of welfare reform, safety 
net hospitals are faced with significant losses of Medicaid 
revenues as legal immigrants lose Medicaid and Medicare SSI 
eligibility. Further, States' delinking of the enrollment 
process from welfare and Medicaid is going to result in fewer 
healthy Medicaid recipients in the risk pool as States move to 
managed care.
    Thank you very much. I would be happy to answer any 
questions you may have.
    [The prepared statement follows:]

Statement of Larry S. Gage, President, National Association of Public 
Hospitals and Health Systems

    I am Larry Gage, President of the National Association of 
Public Hospitals & Health Systems (NAPH), which represents over 
100 of America's metropolitan area safety net hospitals. These 
hospitals and systems are uniquely reliant on governmental 
sources of financing to support care to Medicare, Medicaid, and 
uninsured, low income patients. They also provide many 
preventive, primary and costly tertiary services to their 
entire communities, not just to the poor and elderly. These 
services include a wide variety of around-the-clock standby 
services such as trauma units, burn centers, neonatal intensive 
care, poison control, emergency psychiatric services, and 
crisis response units for both natural and man-made disasters.
    I am pleased to have the opportunity to testify before the 
Subcommittee today on a range of issues of concern to safety 
net providers with relation to Medicare payments for hospital 
and physician services. As the health care market undergoes 
revolutionary change in how it delivers and pays for health 
care services, safety net institutions will continue to be 
called upon to meet certain unique needs within their 
communities, such as training physicians, ensuring health care 
access for low income, uninsured individuals and providing the 
types of round-the-clock specialty services mentioned earlier. 
Governmental payers, like Medicare, have long recognized the 
importance of these missions and the need to support them 
through the overall Medicare hospital reimbursement 
methodology, including DSH and GME payments. As the health care 
market becomes more competitive--as the number of uninsured 
continue to increase--and as payment rates increasingly reflect 
whatever plans or payers can negotiate with providers of care, 
the importance of explicit, adequately-financed funding streams 
for safety net providers will be essential to the stability of 
many urban and rural health systems.
    Last week, NAPH Board Member Jerry Starr, CEO of Kern 
Medical Center in Bakersfield, California, testified before 
this subcommittee on the specific issues of disproportionate 
share hospital (DSH) and medical education payments. I will not 
repeat his testimony here today. However, I want to re-
emphasize that DSH and GME funding will continue to be 
essential sources of funding for safety net health systems. 
NAPH strongly supports the ProPAC recommendations regarding the 
restructuring of Medicare DSH.
    My additional comments today can be summarized in four 
areas:
    First, because your first hearing focused mainly on DSH and 
GME, I want to take this opportunity to describe for you in 
more detail the situation of safety net hospitals, using new 
data being publicly released today for the first time. This 
data is from NAPH's 1995 annual survey and highlights the 
important mission of these hospitals and how their ability to 
meet that mission is being impacted by changes in the health 
industry. We also have information to present about the 
relative margins of these hospitals and their current source of 
funding for uncompensated care. Recent market trends have 
indicated increasing competition for Medicaid business 
(particularly low cost Medicaid business) while an ever-
shrinking group of safety net providers shoulder most of the 
uncompensated care burden--a burden that is growing steadily.
    Second, because of the unique role of safety net providers 
in the health care delivery system and the fragility of the 
funding sources on which they rely, the impact of any changes 
in Medicare payment policy on these institutions must be fully 
considered before reforms are implemented. In particular, 
changes in prospective payment system (PPS) rates are likely to 
disproportionately affect safety net institutions. Similarly, 
these hospitals and health systems, which already face unique 
challenges in financing capital improvement projects, will be 
further disadvantaged by reductions in capital payment rates. 
Finally, while we support the idea of an outpatient prospective 
payment system, as recommended by ProPAC, we caution that it 
must be designed carefully, taking into account unique costs 
incurred by safety net providers. We also want to take this 
opportunity to urge you to support legislation to provide 
additional capital financing assistance to safety net health 
systems, such as the assistance that would be provided by H.R. 
735 recently introduced by Rep. Stark, and to consider 
permitting broader use of a global fee structure for hospital 
and physician services. Safety net systems presently require 
access to capital, not necessarily for major construction 
projects, but to enable them to downsize appropriately, 
decentralize, and form broader networks and systems to improve 
access for the low income and elderly patients they serve.
    Third, I have included in my prepared testimony a further 
discussion of Medicare disproportionate share hospital (DSH) 
and medical education payments, which are essential to the 
continued viability of safety net hospitals and health systems. 
Although the focus of this hearing is not on DSH or GME, I 
nevertheless want to reiterate the importance of these two 
payment streams and to suggest certain changes in them to 
better tailor the payments to sound health care policy. 
Specifically, NAPH urges you to revise the DSH payment formula 
to account for uncompensated care, and to adopt a ``shared 
responsibility'' or all-payer approach to financing graduate 
medical education. We also urge the Subcommittee to carve DSH 
and GME payments out of capitated payments to Medicare risk 
contractors and pay them directly to hospitals. Finally, we 
want to strongly urge you to accept the ProPAC's recommendation 
to authorize the Secretary to collect additional data on the 
provision of inpatient and outpatient services to uninsured and 
underinsured patients.
    Fourth, even though it is not in the jurisdiction of this 
Committee, we ask that Medicaid cuts not be part of any budget 
package you consider this year. Medicaid program growth has 
slowed considerably in the last year. Due to the implementation 
of welfare reform legislation, safety net hospitals are faced 
with significant losses of Medicaid revenues as legal 
immigrants lose Medicaid and Medicare SSI eligibility. Further, 
states' de-linking of the enrollment process for welfare and 
Medicaid is going to result in fewer healthy Medicaid 
recipients in the risk pool in states with Medicaid managed 
care. The impact of further cuts in the program or a shift to 
per capita caps would be devastating. At a minimum, we ask that 
a targeted group of hospitals treating the highest volumes of 
low income patients be protected from cuts in the Medicaid DSH 
program.

NAPH Members Provide Remarkable Levels of Both Inpatient And Outpatient 
                                  Care

    Perhaps the most striking characteristic of safety net 
hospitals and health systems is the tremendous volume of both 
inpatient and outpatient services they provide. On the 
inpatient side, in NAPH's most recent member survey, 90 
hospitals reported total staffed beds of almost 40,000 for an 
average of 442 per hospital, total admissions of 1.4 million 
and total inpatient days of 10.9 million. To place this volume 
of care in perspective, in comparison to the average hospital 
in the 100 largest cities in the U.S., the average NAPH member 
reported 30 percent more admissions, 9 percent more inpatient 
days, and an occupancy rate (75 percent) that was 11 percent 
higher.\1\
---------------------------------------------------------------------------
    \1\ The 100 largest cities are ranked according to population and 
defined as central cities, not MSAs. The analysis was conducted using 
data from the 1994 AHA Annual Survey.
---------------------------------------------------------------------------
    Contrary to a sometimes-held misconception of safety net 
hospitals as primarily inpatient facilities, these institutions 
have always been the family doctor for large numbers of low 
income and uninsured patients, providing large amounts of 
primary and preventive care. In 1995, just 67 NAPH members 
provided an astounding total of 22 million outpatient visits, 
only 4 million of which were emergency room visits. Compared to 
the average hospital in the 100 largest cities, NAPH members 
provide a full 68 percent more outpatient visits.

Care to Low Income And Uninsured Patients Is on the Rise in Safety Net 
                              Institutions

    In addition to providing large volumes of care generally, 
safety net hospitals and health systems tend to provide a huge 
proportion of care to Medicaid, Medicare and uninsured patients 
in particular. Over 70 percent of inpatient care provided in 
NAPH member hospitals in 1995 was for Medicaid and so-called 
``selfpay'' individuals. For safety net institutions, these 
patients are for the most part medically indigent individuals 
who cannot afford to pay for the services they receive.\2\ When 
Medicare patients are added, the proportion jumps to 90 
percent. For outpatient and emergency care, the proportion is 
the same: 90 percent of visits were for Medicare, Medicaid and 
selfpay (Figure 1) and only 10 percent from commercial payers.
---------------------------------------------------------------------------
    \2\ Self-pay patients typically include both uninsured patients who 
can afford to pay some or all of their hospital bills out-of-pocket, as 
well as uninsured patients who can or do not. So, for NAPH members, 
``selfpay'' patients are the equivalent of ``no-pay'' patients.

[GRAPHIC] [TIFF OMITTED] T5005.019

    As safety net providers, NAPH members have historically 
provided large amounts of uncompensated care in their 
communities and their share of the uncompensated care burden is 
steadily increasing. In 1995, 67 hospitals reported incurring 
$5.8 billion in uncompensated care (defined as bad debt and 
charity care) for an average of just over $86 million per 
hospital. For these institutions, bad debt and charity care 
charges represented a full 25 percent of total gross charges. 
According to data from AHA, all hospitals nationwide provided 
$28.1 billion in bad debt and charity care. While NAPH member 
hospitals represent less than two percent of hospitals, they 
provide over 20 percent of bad debt and charity care.
    Moreover, in a trend with sobering implications for safety 
net institutions, uncompensated care is increasingly 
concentrated among an ever-shrinking number of providers. AHA 
data on public general hospitals in the 100 largest cities (a 
subset of total NAPH members) from 1980 and 1993 indicate that 
the category of selfpay (or no-pay) patients increased from 
16.8 percent of gross charges to 22.2 percent, or an increase 
of over 30 percent. Among private general hospitals during the 
same period, the proportion of patients with no insurance 
decreased from 7.4 percent of gross charges to 5.5 percent, a 
26 percent decrease. At the same time, private hospitals' share 
of Medicaid patients grew by 15 percent, reflecting increasing 
competition for less costly Medicaid patients, such as healthy 
pregnant women and children.\3\
---------------------------------------------------------------------------
    \3\ National Public Health and Hospital Institute. Urban Social 
Health: A Chart Book Profiling the Nation's 100 Largest Cities. 
Washington, DC:1995.
---------------------------------------------------------------------------
    Further, the number of uninsured Americans continues to 
rise. The passage of welfare reform legislation in the last 
Congress is the single most sweeping rollback in Medicaid 
coverage since the program's establishment. The bill eliminated 
Medicaid and SSI coverage for substantial numbers of legal 
immigrants, thereby not only significantly increasing the rolls 
of the uninsured, but placing a particular burden on safety net 
providers and the state and local governments that support 
them. Legal immigrants will continue to need medical care in 
times of sickness or accident, and will seek that care in 
safety net hospitals who treat all regardless of ability to 
pay. Many of these hospitals in high immigrant states, like 
California, will be overwhelmed by the burden of providing yet 
more uncompensated care.

    Safety Net Providers Depend on Medicaid and Medicare to Finance 
                           Uncompensated Care

    Unlike most community hospitals that can tap commercial 
patient revenues to subsidize uncompensated care, urban safety 
net hospitals rely on Medicare and Medicaid revenues to 
subsidize the huge amounts of uncompensated care they provide. 
While Medicaid and Medicare combined represented 55 percent of 
the overall care provided by NAPH members in 1995, they 
accounted for 71 percent of net patient revenues.\4\
---------------------------------------------------------------------------
    \4\ Since much of the overall care provided by NAPH members (as 
measured by their ``gross revenues'') is to uninsured patients who 
cannot afford to pay for their care, the actual revenues received (as 
measured by their ``net revenues'') that is represented by Medicaid and 
Medicare revenues is higher than the proportion of care provided to 
these patient populations.
---------------------------------------------------------------------------
    Appropriations from local government and other revenues 
intended to cover indigent care costs amounted to 12.3 percent 
of total revenues. In effect, state and local subsidies cover 
just over half of the cost of uncompensated care provided at 
NAPH member hospitals. To make up the difference, these 
hospitals rely on Medicaid disproportionate share hospital 
(DSH) payments (40 percent) and Medicare DSH payments (9 
percent) (Figure 2). While Medicare DSH payments may not appear 
significant by comparison, Medicare is a key payer in the 
fragile partnership of federal/state and local governments that 
currently finances uncompensated care, particularly in the face 
of serious proposals to cut Medicaid DSH and declining support 
by state and local governments (local subsidies have decreased 
46 percent over the last eight years). In 1995, 53 NAPH 
hospitals received a total of $316 million in Medicare DSH 
payments, roughly 8 percent of the $3.8 billion DSH payments 
nationwide. Medicare DSH has been and will continue to be an 
essential piece of the patchwork funding that enables NAPH 
members to provide critical health services to the elderly, 
disabled and poor.

[GRAPHIC] [TIFF OMITTED] T5005.020

  Changes in PPS payment rates are likely to have a disproportionate 
                   impact on safety net institutions.

    The recently released report of the Prospective Payment 
Assessment Commission (ProPAC) makes a number of 
recommendations with regards to Medicare payments for acute 
care hospitals. In particular, the Commission recommends no 
update for prospective payment system (PPS) operating rates.
    Although NAPH members are most concerned about DSH and GME 
payment policies, the underlying prospective reimbursement rate 
upon which those additional adjustments are made is obviously 
of concern as well. In particular, the effect of any changes 
(including a freeze) of PPS rates is compounded for NAPH 
members since the DSH and indirect medical education (IME) 
payments on which they depend are calculated as percentage add-
ons to the PPS rate. Therefore, an inadequate PPS update is 
magnified for safety net teaching institutions because it means 
that their DSH and IME payments will also be lower.
    In addition, safety net institutions in general tend to 
incur above average costs in treating Medicare (and other) 
patients because they generally serve a sicker, poorer and 
needier population. Although PPS rates are adjusted to account 
for variables such as case mix indices, they are nevertheless 
based on averages across all Medicare hospitals. Safety net 
hospitals will always be on the higher end of the spectrum with 
regard to costs, and therefore payment rates based on average 
costs across hospitals will always place these institutions at 
a disadvantage.
    This reality is reflected in NAPH member margins. While the 
average inpatient margin for all hospitals in 1995, according 
to ProPAC, was 5.6 percent, the average margin for NAPH 
hospitals and health systems was a meager 0.7 percent. These 
margins are lower by far than any of the various groups of 
hospitals looked at by ProPAC. (Major teaching hospitals had 
the lowest margin, at 3.7 percent, while propriety hospitals 
enjoyed margins of 8.8 percent.) Many individual NAPH members 
actually experienced negative margins.
    To the extent that NAPH members have been successful in 
maintaining positive--albeit relatively small--margins, it is 
reflective of their success in holding down costs and 
increasing their efficiency. In fact, an article in last week's 
New England Journal of Medicine reported that public hospitals 
have lower costs per discharge ($6,507) than either for-profit 
($8,115) or private nonprofit ($7,490) institutions, and that 
they experienced a dramatically smaller rise in administrative 
costs between 1990 and 1994--0.6 percent as compared to 2.2 
percent for for-profit hospitals and 1.2 percent for nonprofit 
hospitals. NAPH members have also worked hard to shift the 
focus of care from predominantly inpatient-based to providing 
an ever-increasing portion of care on an outpatient basis in 
more cost-effective and community-based settings. To the extent 
that their margins have improved based on these cost-saving 
measures, hospitals should not be penalized. Such behavior is 
precisely what Congress intended to encourage in enacting and 
refining the PPS system in the first place. So while it is 
appropriate for the Medicare program to share in some of those 
savings, it is not appropriate to penalize hospitals for 
achieving them.
    Safety net hospitals face unique challenges in financing 
capital improvement projects and are likely to be particularly 
impacted by changes in Medicare capital payment policy.
    With respect to capital payment rates, ProPAC recommends 
revising the current payment rates and applying a zero update 
factor for fiscal year 1998. NAPH member institutions have 
traditionally been particularly disadvantaged with respect to 
capital improvements. Unlike their private counterparts, they 
do not have ready access to financing to support renovation or 
rebuilding projects, for a variety of reasons. Their large 
indigent care burdens and uncertain revenue streams make them a 
too-risky proposition for private investors. Moreover, federal, 
state and local government assistance for capital expenses has 
become scarcer and tighter. As a result, NAPH member 
institutions have physical plants that are on average 29 years 
old, as compared to an average lifespan of 7 years for 
hospitals as a whole. Changes in Medicare capital payment 
policies that make it harder to cover the costs of capital 
improvement projects are therefore likely to place a particular 
burden on safety net institutions.
    For these reasons, NAPH is greatly indebted to Mr. Stark 
for his persistent efforts over the years to establish a 
federal trust fund to provide limited capital financing 
assistance to safety net providers. He has again this year 
introduced legislation to achieve this goal, H.R. 735, the 
Essential Health Facilities Investment Act, and we are grateful 
for his understanding of the critical need to assist safety net 
hospitals in this regard in order to ensure that they are able 
to compete in a changing health care marketplace.

   A hospital outpatient prospective reimbursement system should be 
    designed with sensitivity to its impact on safety net providers.

    ProPAC also recommends implementation of a prospective 
payment system for hospital outpatient services, including some 
mechanism to control for the volume of services. NAPH certainly 
supports this approach in general as a means of adopting 
appropriate incentives on the outpatient side to match those 
measures long established for inpatient care. Although the 
ProPAC report does not specify exactly how the system should be 
set up, NAPH urges Congress to ensure that however it is 
designed, it is sensitive to the particular situation of safety 
net institutions. Again, we emphasize that safety net 
institutions often incur costs that are higher than the 
average, and as a prospective rate is developed it should both 
provide for appropriate outliers, and take into account the 
justifiably higher costs that certain hospitals with 
particularly vulnerable patient bases are likely to incur.
    Finally, with respect to physician payments, we note that 
the ProPAC report calls attention to the relative incentives 
inherent in two different approaches to Medicare expenditures: 
traditional unbundled fee-for-service reimbursement and managed 
care. We would like to urge you to consider a third option, 
based on the experience of a number of urban safety net 
hospitals with largely salaried medical staffs. While salaried 
physicians may have once been considered at an economic 
disadvantage in a fee-for-service era, we are finding 
increasingly that this system can be an advantage under other 
reimbursement methodologies. These include managed care, and we 
certainly support the AHA and Administration's recommendations 
to open up the Medicare program to managed care products 
offered by provider-sponsored organizations. There is another 
model to which we would like to call your attention, however--
one that is already in use in a number of urban safety net 
systems with salaried medical staffs. That is the ``global 
fee'' arrangement, whereby a system is paid a single, bundled 
fee for hospital and physician services to a patient. We are 
aware that HCFA has experimented with such global fees in areas 
like cardiac surgery, and we strongly urge the Committee to 
consider making broader use of such global fee options.

The Medicare Disproportionate Share Hospital Formula Should Be Changed 
 to Reflect Uncompensated Care And HCFA Should Be Authorized to Begin 
           Collecting The Data to Do So As Soon As Possible.

    Although this hearing is focused primarily on non-DSH and 
non-GME payment policies, there are a few recommendations in 
ProPAC's report in these areas which I would nevertheless like 
to take a few moments to address. In particular, I want to 
emphasize NAPH's support for ProPAC's suggested reform of the 
Medicare DSH formula to account for uncompensated care. We 
wholeheartedly endorse the approach they have developed using 
costs of care for low income populations, and in fact have used 
it as the basis for our proposed reform of the Medicaid DSH 
program.
    Nevertheless, in order to implement this kind of a measure 
of low income care, additional data collection will be 
necessary, as ProPAC points out. No accurate or consistent data 
on hospitals' costs for these populations currently exist in 
any usable form. While we are in the process of modeling our 
Medicaid DSH proposal using proxies for some of these costs, it 
may be desirable for HCFA to do so more systematically in the 
manner outlined in the ProPAC report. As ProPAC observes, data 
necessary to develop a reasonably accurate estimate of these 
costs could be collected with relatively little additional 
burden on hospitals. Because this information would be 
invaluable for both Medicare and Medicaid DSH reform, we urge 
Congress to authorize and direct HCFA to begin collecting such 
data as soon as possible, without waiting for a Medicare or 
Medicaid bill to be adopted to get this ball rolling.
    To summarize NAPH's concern about the current DSH formula, 
it is based on a hospital's ``disproportionate share patient 
percentage,'' which is a measure of the proportion of care 
provided to Supplemental Security Income (SSI) and Medicaid 
patients.

There are a number of serious problems with this formula that 
warrant reexamination.

     In relying on measures of SSI and Medicaid 
populations, the statutory low income proxy does not include 
the significant uncompensated patient care load that some 
hospitals are currently bearing.\5\ This problem will be 
exacerbated as the impact of welfare reform legislation begins 
to reduce Medicaid eligibility in states with high numbers of 
immigrants or in states that choose to de-link Medicaid and 
welfare eligibility.
---------------------------------------------------------------------------
    \5\ Uncompensated care is accommodated in the formula only 
indirectly, because payments are made to hospitals with at least 100 
beds that receive at least 30 percent of their net revenues from state 
or local government payments for indigent care.
---------------------------------------------------------------------------
     Many hospitals are finding it difficult, if not 
impossible, to identify Medicaid patients in states that have 
moved to implement Medicaid managed care--Medicaid patients 
show up with an insurance card from a managed care plan, which 
may not identify them to be Medicaid recipients. To the extent 
the Medicare DSH formula relies on Medicaid utilization, the 
inability to account for all Medicaid patients translates into 
reduced Medicare DSH dollars.
     Hospitals with significant uncompensated care 
burdens are finding it increasingly difficult to retain their 
share of the less costly Medicaid populations (for example, 
healthy mothers and children) as market competition 
intensifies. Their burden of uncompensated care and care to 
high risk chronically ill populations is increasing while their 
ability to cross-subsidize that care with lower risk Medicaid 
volume is diminishing.
     The DSH formula needs to reflect the change in 
health care delivery from inpatient to outpatient services. As 
hospitals reorient to provide more preventive and primary 
outpatient care and less episodic, acute inpatient care, the 
DSH formula should include inpatient and outpatient services as 
part of its measure of low income costs.
    For all of these reasons, changing the Medicare DSH low 
income proxy is imperative to protecting access in hospitals 
that serve large numbers of low income patients. ProPAC has 
recognized this need and proposes a change in the low income 
proxy to include all of the elements of low income care. Their 
proposed low income cost variable includes Medicare SSI 
patients, Medicaid patients, care to patients supported by 
local indigent care programs, and uncompensated care. NAPH 
strongly supports this approach to incorporating all of the 
components of low income care and to targeting Medicare DSH 
funds on the highest volume providers of low income care.

   GME is a Public Good Which Should Be Financed By All Parts of the 
                           Health Care System

    NAPH member hospitals play a significant role in training 
residents and health professionals. Over 85 percent of NAPH 
members are teaching hospitals, and they trained nearly 18 
percent of all residents in 1994. In 1994, 62 NAPH hospitals 
trained 12,531 residents, or an average of 202. In 1995, 63 
NAPH members received $158 million in direct GME (DGME) 
payments from Medicare and nearly double that or $261 million 
in indirect medical education (IME) payments.
    NAPH supports a ``shared responsibility'' approach to 
financing graduate medical education which treats GME as a 
public good. This approach would require contributions from all 
payers of health care, not just Medicare, and, thus, should 
distribute GME funding based on all patient care volume. 
Alternatively a trust fund approach could be financed with 
general revenue contributions or a broad-based tax. ProPAC's 
report includes just such a recommendation for a broader-based 
financing mechanism for GME payments.
    The level of financing for GME is critical. As other payers 
negotiate ever lower rates, teaching hospitals are losing their 
ability to cross-subsidize medical education costs. In 
addition, as more Medicare patients move to managed care, GME 
funds, which are currently based on the volume of Medicare fee-
for-service patients, will diminish considerably. These trends 
threaten to undermine the viability of our nation's teaching 
hospitals and their ability to train physicians.

 Medicare GME and DSH Funds Should Be Carved Out of the AAPCC and Made 
                         Directly to Hospitals

    The current methodology for distributing DGME, IME and DSH 
payments is seriously flawed in the Medicare managed care 
context. For Medicare patients enrolled in managed care, these 
supplemental payments are incorporated into the average 
adjusted per capita cost (AAPCC) which is the capitation 
payment made to managed care plans. The plans do not 
necessarily pass these payments along to the hospitals which 
incur the costs that justify the payments. In fact, some plans 
receive the payments and do not even contract with such 
hospitals. As Medicare increases the use of capitated risk 
contracting, the amount of DGME, IME and DSH funds that go to 
teaching hospitals will diminish considerably unless this 
payment policy is changed. In essence, payments intended to 
support the costs of teaching or low income care are being 
diverted from the hospitals that provide the care to managed 
care plans that are not fulfilling this mission. For this 
reason, ProPAC has recommended, and NAPH strongly agrees, that 
the GME and DSH payments be carved out of the AAPCC rate and 
paid directly to the hospitals that incur those costs.

Physician Workforce Reforms Must Be Balanced With Maintaining Access to 
                    Care in Underserved Communities

    ProPAC also recommends restructuring DGME and IME payments 
to remove disincentives for hospitals to reduce the size of 
their residency programs. NAPH supports this notion. Our 
members have been making significant efforts in recent years to 
decrease the size of their resident population.
    It is important to keep in mind, however, that safety net 
teaching institutions face particular challenges in reducing 
their reliance on residents. In general, these institutions 
depend on residents and supervising attending physicians to 
provide otherwise unavailable care to underserved communities. 
Replacing these physicians is costly--NAPH members estimate 
that it would cost two to three times more to replace a 
resident with some combination of physicians and non-physician 
providers--and difficult, since replacements are not easily 
found. Therefore, while we support proposals such as ProPAC's 
to restructure the physician workforce, we urge that such 
measures be implemented carefully, with sensitivity to the 
patient care role that residents play in underserved 
communities.

   Proposals to Remove DSH and GME Payments from Medicare Should Be 
   Undertaken with Extreme Care Not to Undermine the Safety Net and 
        Teaching Institutions that These Payment Streams Support

    Finally, I would like to comment briefly on recent informal 
suggestions from both House and Senate members that we examine 
the possibility of removing DSH and GME payments from Medicare 
and finance them with general revenue funds. In theory, NAPH 
agrees that providing care to low income populations and 
training physicians are ``public goods'' that should be 
financed by a broader base than just Medicare. However, without 
having seen any details about how such a move would be 
implemented, we do have a number of concerns about these 
suggestions.
    First, under the current system DSH and GME are part of the 
Part A Trust Fund, and as such the funding for them is 
protected through a dedicated revenue stream. We would 
certainly be concerned about any approach that did not set up a 
similar trust fund mechanism and provide protection for these 
payments similar to that currently accorded them.
    Second it is imperative that these payments be adequately 
funded. At a bare minimum they should receive funding in at 
least the same amounts as under current law. We would not 
support any such structural move that had the effect--intended 
or otherwise--of cutting the overall funding for these 
programs.
    On the other hand, as I indicated earlier, conceptually a 
broader base of funding for these services is certainly 
justifiable. An approach that would set up multiple funding 
streams for a new GME/DSH trust fund would certainly be worth 
considering. For example, Senator Moynihan and Representative 
Lowey have introduced bills to establish a very broad financing 
base for GME, including Medicare, Medicaid, and private 
insurance (through a premium tax). This may be an approach 
worth further exploration.
      

                                


    Chairman Thomas. Thank you, Mr. Gage. I wonder how much you 
did pay for the charts. I am looking at the one, and if I read 
it correctly, the local subsidy is 51 percent, and 51 percent 
of that pie starts about 12 o'clock and stops somewhere around 
7 to 8 o'clock.
    Mr. Gage. We obviously did not pay enough to get the 
segments of the pie looking quite proportional. [Laughter.]
    Chairman Thomas. Well, you know, you get what you pay for.
    The gentlewoman from Connecticut.
    Mrs. Johnson. Mr. Scully--and others can chime in on this 
if they want--you mentioned that you were willing to have one-
third of the cuts come out of hospital reimbursements, and 
yet--I mean, you point to the impact of the steep 15-percent 
cut, 17-percent cut in capital costs, the impact of the 
outpatient cuts, and the low update on top of all of the 
economies that hospitals have already adopted and imply that 
these three sets of cuts are really going to be unbearable.
    If we are to get one-third of the savings out of the 
hospital sector, then how would you do it?
    Mr. Scully. Well, that adds up--for instance, if you look 
at the AAPCC, which you haven't gotten to yet, but the 
President did, a lot of people do not--when they see the number 
that says managed care was cut by $34 billion, 50 percent of 
that is a passthrough. That money goes--60 percent of all money 
in Medicare goes to hospitals. So if you are going to say you 
are going to reduce the AAPCC, that is going to have an impact 
on us as well. The money goes through us.
    So when you add up the $102 billion net, for instance, in 
the President's budget and you look at how much it affects 
hospitals--and a lot of the part B stuff, other outpatient 
payments also affect hospitals--it goes far beyond just the 
market basket and outpatient and outpatient reform. There are a 
lot of these components that people do not think of as hospital 
hits that hit hospitals, and by my calculations, I think very 
credible calculations, it got up as high as $72 billion out of 
the $102 billion. But I think a reasonable number is certainly 
60 to 70 of it goes directly to hospitals, depending on the 
chunks of the pot you look at.
    Now, there are a lot of reasons for that. We can look at 
the physician side. There is only 7 percent that comes out of 
physicians. The physician baseline is very low. Growth is 2, 3, 
4 percent per year for the next 5 years in physicians. But it 
is roughly the same for hospitals. It is about 3.5 percent for 
hospitals.
    I guess our argument is, I am not saying--we have--23 
percent of our hospitals have negative margins. We have 24 
percent that are losing money on Medicare. I am not going to 
say that hospitals are going to shut their doors and say which 
ones are. The fact is we are adapting to a squeeze. I think we 
have reacted very well to market pressures from managed care 
and from fairly low repayment in Medicare. And I think it is 
just a matter of equity.
    The fact is in past budgets--and I have done a few of 
them--it is a lot easier to go out and take a lot of money out 
of the market basket update or big chunks of part A with 
hospitals than it is from any place else. And for 15 years, we 
have been the victims, I would say, of the fact that it is a 
lot easier for somebody at OMB or CBO or ProPAC to say let's 
take half a point off the market basket instead of taking 25 
little nicks out of physician updates. It is just easier as a 
budgeteer to do that. And I think when you look back at the 
history----
    Mrs. Johnson. I guess what I was getting at is you 
mentioned that only capitation payments would fix Medicare. 
Could you sort of apply that to the current situation? In other 
words, if we are going to constrain the growth in health care 
costs, in Medicare costs, since the hospital payments are such 
a big part of that, we are going to have to do something.
    Now, constraining the update factor at least is not a cut 
below the line. The capital cuts are below the line, and they 
have a quite variable effect on different types of 
institutions. The outpatient cuts are also going to be 
extremely heavy and vary a lot from institution to institution. 
At least, I would guess that. I am not sure about that.
    But I understand the problems with the proposals, but on 
the other hand, we have to have some input on what would be a 
less destructive way to at least constrain the growth in 
hospital costs, preserving to the best of our ability a healthy 
hospital system.
    Mr. Scully. Well, I think we are more than happy to 
contribute our fair share, and I think there are a lot of ways 
to do that. The President did market basket minus 1. I think a 
freeze is probably not, I do not think, rational policy. I 
think somewhere between a freeze and market basket minus 1 is 
probably where we will end up, but I think freeze is pretty 
harsh. And I think it is not equitable compared to where you 
are looking at other places in Medicare. Are you going to have 
masses of hospitals across the country closing? I doubt that. 
But it is going to add to the squeeze, and it is very hard to 
find a hospital in this country right now that is not feeling 
the squeeze, staffwise, patient carewise, every place.
    Mrs. Johnson. Thank you.
    Chairman Thomas. The gentleman from Maryland.
    Mr. Cardin. Thank you.
    Mr. Johnson, let me ask you a question on the beneficiary's 
liability on outpatient services. I notice in your testimony 
that you support the change so that their liability would be 20 
percent of the allowed payment rather than the current 
arrangement.
    I am curious, though, that you do not want to do this 
immediately. You believe it should be phased in over time. I am 
just curious as to why there is an overpayment by beneficiaries 
now. I understand the revenue issue. Why wouldn't you be more 
anxious to get this corrected on a faster time schedule?
    Mr. Johnson. Mr. Cardin, the beneficiary liability we 
believe is really a matter between Medicare and the 
beneficiaries. I think there is a misconception that the 
hospital is somehow gaining a great amount of revenue because 
of the higher charges and the beneficiary copayment based on 
those higher charges, when, in fact, that is not the case at 
all. The Medicare outpatient rates are what Medicare pays 
hospitals. And I think there is a similar misconception out 
there in the senior community about what hospital charges are, 
related to inpatient services. When there is a DRG payment and 
they see a bill that is exceeding that, they think somehow 
there is more money coming to the hospitals.
    I think this matter needs to be addressed between Medicare 
and the beneficiary.
    Mr. Cardin. Well, why not then correct it immediately? 
Would you support correcting it immediately?
    Mr. Johnson. I think whatever Medicare and the beneficiary 
plan is immediately, or as it is explained, these things do 
take explanations, and I think how it is explained to the 
senior citizens and the complex relationship it is between the 
increased Medicare costs that could result. If you are basing a 
copayment on a different point, if it is on the payment instead 
of on the charges, it could increase the Medicare Program's 
costs. I think that all has to be balanced, and I think that is 
a balancing act that does take a little careful work.
    Mr. Cardin. I am not sure I follow you or agree with your 
point. I guess my point is that if there is an overcharge, 
regardless of who is benefiting from that overcharge--and we 
all acknowledge that the beneficiaries are paying too much--why 
shouldn't we move more rapidly to correct it?
    Mr. Johnson. If the government wants to move rapidly to 
correct that, that is great. But it will cost the government 
more money, probably, in their share.
    Mr. Cardin. Mr. Scully.
    Mr. Scully. I think it is fair to say the outpatient 
payment system is a mess and has been for a long time, and this 
problem has built up over 10 to 15 years. What you have really 
is that HCFA, OMB, everybody in the budget over the years, we 
have gotten to the point that we are being paid in the 
outpatient area far less than our costs. And the whole system, 
basically--I can explain it in detail, if you would like some 
day, but we are basically being paid about 50 to 60 percent of 
our cost. Beneficiaries--and it is usually paid by their 
Medigap plan--are getting hit. There is no question they are 
paying excessively high copayments.
    If the government just went out and fixed it tomorrow and 
said the beneficiary tomorrow is going to pay a 20-percent 
copayment, hospitals would take an enormous hit. And I think 
you can see that, HCFA, Medicare is paying far, far less than 
their share of the actual costs in outpatient. I think the 
administration--this is a very tough issue. I think they happen 
to have come up with an extremely rational phased-in policy 
over 10 years that will keep--the hospitals will get paid a 
little less. Beneficiary copayments will drop. It is a very 
good long-term policy.
    Mr. Cardin. I understand that, and I understand your point. 
I am not so sure I would agree with you that we are reimbursing 
the hospitals too low and, therefore, allowing you to recoup 
some of the costs from the beneficiaries. I am not sure that is 
the rationale for the current mistake in law where our 
beneficiaries are overpaying. I believe there was a good-faith 
effort to reimburse what we believe to be a reasonable 
reimbursement for outpatient services. We may have missed, but 
there was at least an effort.
    Mr. Scully. I would be happy to sit down with ProPAC and go 
through it with you, but I think there is a lot of evidence 
going way back, as far back as 7, 8 years ago when I first got 
involved in this, that the HCFA rate of payment for outpatient 
is significantly less than cost by any measure. There is no 
doubt there is a problem here, and there is no doubt the 
beneficiaries have been paying more than they should for a long 
period of time.
    Mr. Cardin. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. Just one quick followup to that. According 
to our charts and CBO's estimate of the President's plan to 
correct it now, it is about $48.8 billion. Does the gentleman 
have any idea what it would have cost to correct it--oh, let's 
pick a period, 1983, 1985, somewhere around in there?
    Mr. Scully. I am not sure I want to touch that one. 
[Laughter.]
    Chairman Thomas. Any idea what it would have cost to 
correct it at that time, Mr. Scully.
    Mr. Scully. Well, there were periods probably from 1989 to 
1993 where it probably could have been corrected, too, and it 
was not. So it probably would have been cheaper to correct it 
at the time.
    Chairman Thomas. The old business of a stitch in time 
applies to this as well, and since it was the beneficiary that 
was left holding the bag, it was the easiest route to go, 
although totally unacceptable, and taking the easy way out now 
costs us, I guess, $48 billion to correct. It would have been 
$10 billion, $5 billion, $3 billion had we done it when it 
became apparent.
    Mr. Scully. Also, one of the reasons it was done was it 
created an awful lot of budget savings at the time in the 
baseline for people that were trying to do balanced budget nips 
and tucks here and there. So there are a lot of things that 
contributed to it, but it certainly would have been cheaper.
    Chairman Thomas. I appreciate your reference to cheating 
the beneficiary in terms of explaining to them what their 
actual costs are versus what their costs should have been as 
nips and tucks in terms of a balanced budget structure. We 
probably should stop this conversation right here. Because if 
you are going to give me those answers--what else should I 
say?--I am going to keep responding a little more pointedly. So 
we probably just ought to stop right there.
    Mr. Scully. OK.
    Chairman Thomas. Does the gentleman from Louisiana wish to 
inquire?
    Mr. McCrery. Mr. Johnson, let's talk about taxes paid by 
for-profits and sometimes not-for-profits paying in lieu of 
taxes, and they are being reimbursed directly for those 
expenses by Medicare rather than including those costs in the 
base for the calculation of capital reimbursement for all 
hospitals.
    Do you have an opinion on that, or does AHA have a position 
on that?
    Mr. Johnson. I do not know if AHA has an opinion on it, Mr. 
McCrery, but we can certainly get back to you on that. I can 
tell you from my experience or our experience, we do receive 
taxes from our local--the public. All of those are put toward 
what we call our community benefit plan, so they go back into 
the community for services that are needed and directed by the 
elected board. But I do not know if there is a position by the 
AHA on your question, but we will certainly get back to you on 
that.
    Mr. McCrery. OK. Well, let me rephrase the question so you 
will know exactly what I am looking for. I would like to know 
what AHA's position on it is.
    I want to know if AHA supports allowing investor-owned 
hospitals, which incur local property taxes, and not-for-
profits, which make payments in lieu of taxes, to be reimbursed 
by Medicare for their share of those costs. That is the 
question.
    Mr. Johnson. OK. I have been informed that AHA supports a 
specific adjustment for property taxes.
    Mr. McCrery. OK. Thank you.
    Mr. Johnson. OK.
    Mr. McCrery. Do either of the other two witnesses want to 
address that?
    Mr. Scully. I am not sure Larry and I would agree on this 
one. If you want us to, we probably could, if you want us to. 
[Laughter.]
    Mr. McCrery. I would like for you to agree, but----
    Mr. Scully. Well, we certainly support it. It is basically 
the federation's proposal, and the AHA--it has been somewhat 
controversial within the different segments of the hospital 
field.
    Just to give you a brief history behind it, there was a 
long negotiation, which I was involved in when I was in the 
government, in 1991 when hospital capital was folded into PPS 
and essentially all hospitals got paid the same for capital. 
Some nonprofits pay payments in lieu of taxes locally. Most 
for-profits pay taxes locally. And an agreement was done at the 
time where HCFA was going to go off and write a separate 
regulations, which they did over the course of 2 years, that 
everybody agreed to in 1991, and then it finally came out 
almost 3 years later. It was in the NPRM exactly as it was 
agreed to, and it was yanked at the last minute for a variety 
of reasons.
    The provision was fixed in the 1995 budget bill in the 
House and the Senate, and that bill was vetoed. Our view has 
been and always has been--I think it is very similar to the IME 
argument. We pay the property taxes; the nonprofits who pay the 
payments in lieu of taxes pay them. There are costs. Nonprofits 
do not pay them. The nonprofits that do not pay those fees, and 
that we should be reimbursed for those capital costs. And as it 
is now, they go into the pot, and everybody splits them up.
    It is similar--there are very few in IME. We do not have as 
many teaching hospitals. We have a number of them. Our view is 
that the people who do the teaching hospital payments should 
get paid for teaching hospital costs. There are very specific 
costs. This was negotiated in great detail in 1991 when the 
PPS--Gail Wilensky was then the HCFA Administrator, and I was 
at OMB, and I was intensely involved on the government side 
then. This was a very long negotiated agreement between all the 
hospitals as to how it was done, and when the regulations came 
out, at the last minute it was not fixed.
    So it has a long history to it.
    Mr. McCrery. Mr. Gage, do you have any comment on this?
    Mr. Gage. We do not as an organization have an official 
position. We have discussed the issue from time to time. It is 
not directly relevant to most of our members, although some of 
them feel pretty strongly, and as Tom indicated, on the other 
side of the issue, mainly because they see capital 
reimbursement as a zero sum game. And if you have capital funds 
flowing out in one direction--and that clearly does not include 
most of the Nation's public hospitals--you have to take it away 
from somewhere else. If it were not a zero sum game, I am not 
sure we would have the same level of concern with it.
    Mr. McCrery. Yes. Well, there does seem to me to be some 
inequity there since those costs are fixed, they are mandatory, 
they cannot be avoided, and so maybe we will try to work 
something out again.
    Thank you.
    Chairman Thomas.I want to thank the panel very much. 
Obviously, we will be visiting again as we move forward with 
this. Tom, it is good to see you.
     Our next panel consists of Dr. Thomas Reardon, who is vice 
chair of the American Medical Association; Alan R. Nelson, Dr. 
Nelson, executive vice president of the American Society of 
Internal Medicine; Dr. Michael Maves, who is the executive 
director of the American Academy of Otolaryngology-Head and 
Neck Surgery, Alexandria, Virginia; and Patrick Harr, Dr. Harr, 
president, American Academy of Family Physicians.
    I want to thank you all for coming. Any written testimony 
that you may have will be made a part of the record, and you 
may inform the Subcommittee about your interests and concerns 
in any way you see fit.
    Dr. Reardon, why don't we start with you and then we will 
just move right across the panel. I will warn you. These 
microphones are very unidirectional, so you are going to have 
to speak directly into them. Thank you.

    STATEMENT OF THOMAS R. REARDON, M.D., MEMBER, BOARD OF 
             TRUSTEES, AMERICAN MEDICAL ASSOCIATION

    Dr. Reardon. Thank you, Mr. Chairman. My name is Dr. Thomas 
Reardon. I am a general practitioner from Boring, Oregon, and 
vice chair of the AMA's board of trustees. I appreciate this 
opportunity to testify today on physician payment issues.
    It is clear that Medicare has been extremely successful in 
improving the health of our Nation's seniors. It is also 
obvious that the current Medicare Program cannot be sustained. 
The Hospital Insurance Trust Fund faces bankruptcy in 5 years 
or less, and the future looks even bleaker with the aging of 
the babyboomers.
    In contrast, Medicare's physician spending is below the 
growth rate for any other major sector of Medicare and well 
below Medicare's overall growth rate. The AMA is pleased that 
the administration's 1998 budget proposal recognizes this fact. 
Unfortunately, the administration's approach to Medicare reform 
relies primarily on payment reductions in hopes of getting more 
services for less money. We believe this approach threatens 
seniors' access to quality care, while also postponing the 
major restructuring needed for Medicare's long-term survival.
    The administration's budget targets $5 billion in savings 
over 5 years from physicians by moving to a single conversion 
factor and revising the physician payment update formula. The 
AMA has consistently sought a return to a single conversion 
factor. Because of the impact on certain specialties, we 
support a transition of as close to 3 years as possible, with a 
single conversion factor fully phased in by January 2000.
    The administration also proposes replacing the current 
Medicare volume performance standard update formula with a 
sustainable growth rate formula. The volume allowance in the 
administration's formula was initially set at growth in real 
capita GDP plus 1 percentage point. CBO apparently failed to 
score $5 billion in savings from the administration's proposal, 
and the volume allowance has been reportedly reduced to GDP 
plus zero. Under GDP plus zero, physician payments would 
continue to fall well below medical inflation and could even 
fall below current payment levels as they are projected to do 
under the current system. We believe policymakers must set 
spending growth for physician services that best balances 
patient care needs and the Federal budget. Physicians are only 
asking for the opportunity to have Medicare payments keep up 
with the cost of providing care to their patients.
    The AMA could support the new payment update formula set at 
a minimum of GDP plus 2 as provided in the 1995 Balanced Budget 
Act, with assurances that this would be increased as necessary 
to cover medical inflation. Physicians have been doing their 
part to keep Medicare costs under control. Budget resolution 
should not penalize them with further reductions.
    Many physicians face additional extreme payment reductions 
due to the implementation of a resource-based practice expense 
component of the Medicare fee schedule by January 1998. 
However, preliminary data released by HCFA earlier this year 
suggests that there are problems with HCFA's practice expense 
data and methodology. The AMA supports resource-based practice 
expenses so long as they reflect actual practice expenses, but 
we are seeking a 1-year extension of the implementation date. 
We believe that with an additional year, there would be time to 
correct the data, develop better methodologies, and collect 
missing data. It is extremely important HCFA get this right the 
first time because practice expenses represent over 40 percent 
of Medicare's payment to physicians. The cuts HCFA projected 
earlier this year would nearly eliminate practice cost 
reimbursement for some procedures and some specialties.
    The AMA urges Congress to: One, extend the implementation 
date by 1 year; two, give physicians the opportunity to review 
HCFA's data 6 months before issuing a rule; and, three, ensure 
that the new practice expense values do not reduce physicians' 
ability to provide high-quality medical services to the 
Medicare beneficiaries.
    The AMA opposes the administration's proposal to eliminate 
payments to assistants at surgery and reduce the payments for 
so-called high-cost medical staffs. We also have concerns with 
the proposal to expand the Centers of Excellence demonstration 
project. In addition, the AMA strongly opposes the 
administration's effort to repeal fraud and abuse safeguards 
included in last year's health insurance legislation.
    We look forward to working with you and the entire Congress 
in enacting reforms needed to protect Medicare for seniors and 
save it for our children. We thank you again for this 
opportunity to present.
    [The prepared statement follows:]

Statement of Thomas R. Reardon, M.D., Member, Board of Trustees, 
American Medical Association

    Mr. Chairman, my name is Thomas R. Reardon, MD. I am a 
general practitioner from Boring, Oregon, and a member of the 
Board of Trustees for the American Medical Association (AMA). 
On behalf of the 300,000 physician and medical student members 
of the AMA, I thank you for this opportunity to testify before 
the Subcommittee today regarding Medicare physician payment 
issues.
    A wide range of experts have independently concluded that, 
despite Medicare's clear success in improving the health status 
of our elderly and disabled citizens, the program cannot be 
sustained without fundamental restructuring. The Hospital 
Insurance Trust Fund faces bankruptcy in five years or less, 
and Medicare's current overall expenditure growth cannot be 
sustained. Medicare faces a much more serious long-term problem 
as the ``baby boom'' generation ages and the number of workers 
paying taxes for every Medicare beneficiaries will decline from 
3.9 currently to only 2.2 in the year 2030.
    The high growth rates for many of the services are due to a 
combination of factors, including increased beneficiary demand 
for new services, flaws in payment rules which encourage high 
volume growth in some categories of service, insulation of most 
beneficiaries from cost considerations, and ineffective 
approaches to cost control. However, as the chart below 
indicates, physician spending growth is well below the rate for 
any other major sector of Medicare, and well below overall 
Medicare growth. The AMA is pleased that the President's 1998 
budget proposal explicitly recognizes this fact.

[GRAPHIC] [TIFF OMITTED] T5005.022

    We are also pleased that the Administration's budget 
supports the development of innovative provider sponsored 
organizations in order to offer greater choice to Medicare 
beneficiaries. We believe these types of options hold the 
promise of enhancing beneficiary choice while controlling 
Medicare's costs. The AMA also supports the President's 
investment in preventive health care to improve seniors' health 
status by covering colorectal screening, diabetes management, 
and annual mammograms without copayments, and by increasing 
reimbursement rates for immunizations to ensure that Medicare 
beneficiaries are protected from pneumonia, influenza and 
hepatitis.
    Unfortunately, the Administration's budget primarily adopts 
the strategy of cutting physician and other provider payments 
in hopes of getting more services for less money. We believe 
this approach will ultimately divorce the Medicare system and 
its beneficiaries from the mainstream of American medical care, 
while postponing the major restructuring needed for Medicare's 
long-term survival. In the meantime, the long-term problems 
will only grow larger, requiring more draconian and expensive 
solutions.

               AMA's Proposal For Medicare Transformation

    The AMA has a plan which addresses both the short and long-
term problems with Medicare, while preserving the bond of trust 
between a patient and physician that makes medicine unique. The 
AMA's Transforming Medicare proposal is based on the idea of a 
competitive market-driven system as the best option for the 
future of the Medicare program because it offers more choice to 
senior citizens and the disabled. We must give the patient both 
the opportunity and the responsibility to make wise prospective 
choices of physician and health plan, with the reasonable 
opportunity to change either if they prove unsatisfactory.
    Our plan would modernize traditional Medicare, eliminating 
the need for Medigap, while preserving the security and quality 
of care beneficiaries now receive. It would create a new 
MediChoice option, which would provide a broad menu of health 
plan choices for Medicare beneficiaries to choose from, 
including medical savings accounts and provider sponsored 
organizations. And finally, it would ensure that a healthy 
Medicare is available for future generations. The AMA would 
welcome the opportunity to discuss our Transforming Medicare 
proposal with the Subcommittee in greater detail at an 
appropriate forum.

                 Improving the Physician Payment System

    The Administration's 1998 budget proposal targets $5 
billion in savings over five years from refinements to the 
Medicare physician payment schedule. In particular, the 
Administration proposes moving to a single conversion factor 
(CF) for the payment schedule, and replacing the current 
Medicare Volume Performance Standard (MVPS) update formula with 
a Sustainable Growth Rate (SGR) formula.
    Under the Administration's budget proposal, the overall 
payment update for 1998 would be set at 1.9%, yielding an 
overall CF of $36.63 in 1998. With the move to a single CF of 
$36.63, surgical service payments would fall by 10.6% compared 
to 1997 levels, while primary care payments would increase by 
2.4% and other service payments would increase by 8.2%. The 
payment reductions for surgical services are further 
exacerbated by the implementation of resource-based practice 
expense relative value units scheduled for 1998, as discussed 
below.
    The AMA has consistently sought a return to a single growth 
standard and conversion factor for physician services. We 
adopted this position well before any indication of which 
services would benefit from multiple standards. At our Annual 
House of Delegates meeting in 1996, AMA policy was modified to 
adopt a compromise that responds to two realties. First, 
because moving to a single conversion factor could lead to 
large single year cuts for some services and specialties, we 
support a transition of as close to three years as possible. 
Second, because we also recognize that one of the purposes of a 
transition is to allow those who face cuts time to adjust, and 
that there has been ``fair notice'' of a shift to a single 
conversion factor, our House of Delegates voted that the 
``clock should start running'' on such a transition on January 
1, 1997.
    In addition to moving to a single conversion factor, the 
AMA supports replacing the MVPS system of updating physician 
payments. There is widespread agreement that the current method 
of updating physician payments, the MVPS system, is 
fundamentally flawed. The Congress, the Administration, and the 
Physician Payment Review Commission (PPRC) have all proposed 
replacing the current MVPS update formula with a sustainable 
growth rate (SGR) formula, which uses real per capita gross 
domestic product (GDP) to adjust for volume and intensity.
    The Administration's fiscal year 1998 budget proposes 
implementing an SGR formula, with the volume target in the SGR 
formula initially set at growth in real per-capita GDP plus one 
percentage point. However, the Congressional Budget Office 
(CBO) scoring of the proposal apparently failed to yield the 
targeted savings of $5 billion in savings from the Medicare fee 
schedule, and the volume allowance in the SGR was reportedly 
reduced to GDP+0.
    In general, the AMA supports implementing the SGR approach 
as a needed correction for the MVPS. Fundamentally, the 
question for policymakers is determining the level of annual 
spending growth for physician services that best balances 
patient care needs and the federal budget. Under the current 
MVPS physician update formula, the projected Medicare payment 
level for physicians is a steep actual decline, while hospital 
and other provider payment rates go up, as the chart below 
indicates. Although these non-physician services are unlikely 
to see their full projected increases, their budget savings 
will be charged against this rising baseline, while further 
savings from physicians require even steeper cuts.

[GRAPHIC] [TIFF OMITTED] T5005.021

    Budget reconciliation for Medicare should reflect the fact 
that physician spending is under better control than any other 
major Medicare segment, and that the budget baseline already 
assumes steep annual payment cuts. Physician practice costs, as 
measured by the Medicare Economic Index (MEI), continue to rise 
while physician reimbursement under Medicare is projected to 
fall. Physicians are only asking for the opportunity to have 
Medicare payments keep up with the costs of providing care to 
Medicare beneficiaries, and are willing to accept the challenge 
of maintaining volume growth at current low levels.
    While we believe that MEI is the appropriate goal for 
physician updates, we understand that budgetary constraints may 
not presently allow for a full MEI update for physicians. 
Physicians are willing to do their part to put Medicare's 
fiscal house in order, as we have repeatedly done in the past. 
Physicians, who accounted for 32% of combined physician and 
hospital Medicare spending from 1987 to 1993, absorbed 43% of 
Medicare provider cuts over the same time. We would be willing 
to accept GDP+2 under an SGR system as a temporary measure, if 
there were assurances that this could be increased to cover MEI 
once the necessary Medicare savings were obtained. In contrast, 
under GDP+0 as the Administration proposes, physician payments 
would continue to fall well below MEI, as they are projected to 
do under the current MVPS system.
    Given a new SGR, with a realistic growth allowance, we 
could also support a new ceiling on positive MVPS adjustments, 
which would provide direct financial benefits to the federal 
budget if actual volume is below target. Moreover, the federal 
government receives a very real additional benefit--the ability 
to pay for the payment rates needed to maintain the viability 
of Medicare fee-for-service out of reduced service volume. At 
the same time, like the PPRC, we believe it essential to 
maintain the current 5% maximum payment reduction from the MEI 
(increased from 3% by OBRA 93) and to reject Administration 
proposals to lower the floor to MEI minus 8.25%.

                    Resource-Based Practice Expense

    As mentioned above, many physicians face additional extreme 
payment reductions due to the implementation of the resource-
based practice expense in 1998. The Social Security Act 
Amendments of 1994 requires the Health Care Financing 
Administration (HCFA) to implement a ``resource-based'' 
practice expense component of the Medicare fee schedule by 
January 1, 1998. That is, the payment for this component--which 
represents over 40 percent of the payment for physician 
services--is to be based on the actual expenses incurred in 
delivering each service. Currently, the practice expense 
allowance is derived from a formula based on the prior 
reasonable charge payment system.
    The AMA supports resource-based practice expenses so long 
as they reflect actual practice expenses, but is seeking a one-
year extension of the implementation date. The 1994 legislation 
said that HCFA should ``recognize the staff, equipment, and 
supplies used in the provision of various medical and surgical 
services in various settings.'' HCFA contracted with Abt 
Associates to conduct a two-part study of 3,000 physician 
practices expenses. When the survey was pulled back due to poor 
response rates, HCFA was left without adequate data to meet the 
intent of the law.
    HCFA is relying primarily on data derived from clinical 
practice expert panels, or CPEPs. Early review of the recently-
released CPEP findings suggest that they contain a number of 
errors. HCFA has even rejected certain direct costs that its 
expert panels found were part of the cost of surgery when 
doctors supply their own staff and supplies in hospital 
operating rooms. The AMA and medical specialties are working to 
identify and correct those flaws but more time is needed.
    Those who want to adhere to the current January 1, 1998, 
deadline argue that any problems can be corrected later through 
a refinement process similar to the one used when new work 
values were implemented in 1992. The AMA believes this is an 
inappropriate comparison. HCFA invested nearly three times as 
much time and money on the design of new work values as it has 
spent to revise practice expense values. Whereas thousands of 
doctors were surveyed to come up with the work values, in the 
end, there was no broad survey of practice expenses. Simply 
put, with work values, the product being tested was much 
further along in the development process than is now the case 
with practice expense values.
    Opponents of an extension also maintain that there is no 
point in waiting another year because the demise of the 
indirect cost survey shows that it will never be possible to 
collect this information independently. We believe that with 
another year, HCFA could develop alternative relative values 
that bear some relationship to actual practice expenses. There 
would be adequate time to validate and correct the CPEP data. 
Better indirect cost allocation methodologies could be 
developed and tested. Missing data could be collected, perhaps 
through an expansion of existing surveys.
    The cuts HCFA projected in January are so extreme that they 
would nearly eliminate practice cost reimbursement for some 
procedures and specialties. Many inpatient surgical procedures 
and two specialties could suffer cuts of more than 80% in their 
practice expense values, and at least 40% in their total 
payments. Under HCFA's projections, payments for many surgical 
procedures would fall below Medicaid levels. Thus, there is 
good reason to fear that if Medicare makes deep cuts in its 
payments for complex procedures, doctors performing these 
services may find that they can no longer afford to accept 
Medicare patients.
    In addition, even some of the specialties which seem 
relatively unscathed in HCFA's projections could actually 
experience significant cuts if other payers pick up the new 
Medicare values because the projections do not show the impact 
of cuts in procedures usually done on patients under age 65. To 
impose such deep payment cuts based on such spotty research 
seems certain to undermine physician support for the RBRVS.
    The AMA urges Congress to: (1) extend the resource-based 
practice expense implementation date by one year to January 1, 
1999, in order for HCFA to incorporate data on physicians' 
actual practice expenses into the new relative values; (2) 
direct HCFA to give physicians the opportunity to review the 
practice expense data and assumptions six months prior to 
issuing the proposed rule; and (3) instruct HCFA to take 
whatever steps may be necessary to ensure that implementation 
of the new values will not have a negative effect on 
physicians' ability to provide high quality medical services to 
Medicare beneficiaries.

                     Other Physician Payment Issues

Assistants at Surgery

    The Administration is proposing to save $400 million over 
the next five years by making a single payment for surgery. 
This means that the additional payment Medicare now makes for a 
physician assisting the principal surgeon in performing an 
operation would no longer be made. Instead, the payment amount 
for the operation would have to be split between the principal 
surgeon and the assistant at surgery. We believe this provision 
dangerously imposes financial disincentives for the use of an 
assistant at surgery. The AMA supports efforts to develop 
guidelines for the appropriate use of assistants at surgery, 
but believes that patient care should not be compromised in 
search of Medicare savings. The professional judgment of 
surgeons regarding the need for an assistant at surgery for a 
specific patient must be recognized, even for operations in 
which an assistant ordinarily may not be required. Congress has 
considered and rejected this proposal in the past, and we urge 
the Subcommittee to reject it again.

High Cost Medical Staff

    The Administration proposes to reduce Medicare payments for 
so-called high cost hospital medical staffs. This proposal is 
not new. In its 1994 Annual Report to Congress, the PPRC 
concluded that such a ``provision's disadvantages ... outweigh 
its advantages.'' The Commission went on to note that such a 
provision:

may have unintended effects on physician behavior, including a 
shifting of admissions away from hospitals with the high-cost 
designation. The provision would also increase the cost and 
complexity [of] administering the Medicare program.

    In some cases, the physicians responsible for a hospital's 
medical staff being designated ``high cost'' for a given year 
might simply take their patients elsewhere, leaving the 
remaining physicians on staff to bear the financial 
consequences, with potentially serious repercussions for the 
affected hospital. Finally, the proposal could have the effect 
of inappropriately reducing payments to physicians who treat a 
sicker patient population. In the absence of a sound 
methodology to measure differences in the severity of illness 
of the patient population being treated by the medical staff, 
it is too risky to put in place a formula-driven process that 
could inappropriately lower payments for treating patients who 
are more expensive to treat because they are sicker.

Centers of Excellence

    The Administration proposes to expand what it calls the 
``Centers of Excellence'' demonstration project, under which 
Medicare makes a bundled payment to participating entities 
covering both physician and facility services for selected 
conditions, such as coronary artery bypass operations. We are 
concerned that these demonstration projects do not offer a 
potential increase in quality and cost-effectiveness, and that 
these ``centers of excellence'' in fact emphasize cost-cutting 
rather than excellence. We also find the name ``centers of 
excellence'' inappropriate in that it implies that institutions 
participating in this payment arrangement provide higher 
quality services than non-participating institutions.

                            Fraud and Abuse

    The AMA strongly opposes the Administration's efforts to 
repeal the fraud and abuse safeguards included in the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), 
which would eliminate the obligation of the Departments of 
Justice and Health and Human Services to issue advisory 
opinions on the anti-kickback statute, reduce the government's 
burden of proof for civil monetary penalties, and repeal the 
risk sharing exception to the anti-kickback statute.
    Fraud and abuse has no place in medical practice and the 
AMA is committed to setting the highest ethical standards for 
the profession. For those who wish to comply with the law, the 
incidence of misconduct can be greatly reduced by setting 
standards of appropriate behavior, disseminating this 
information widely, and designing and implementing programs to 
facilitate compliance. HIPAA provides new and much needed 
guidance by requiring HHS to establish mechanisms to modify 
existing safe harbors, create new safe harbors, issue advisory 
opinions, and issue special fraud alerts. This guidance will 
allow physicians, hospitals and insurers to develop efficient 
and effective integrated delivery systems that will benefit 
Medicare, Medicaid and the private health care marketplace.
    In the area of civil monetary penalties (CMPs), HIPAA 
requires that the Inspector General establish that the 
physician either acted ``in deliberate ignorance of the truth 
or falsity of the information,'' or acted ``in reckless 
disregard of the truth or falsity of the information.'' The AMA 
fought long and hard to preserve this clarified standard in the 
face of huge opposition. This standard makes the burden of 
proof for imposing CMPs under HIPAA identical to the standard 
used in the Federal False Claims Act, and there is no reason 
that two enforcement tools designed to address the same 
fraudulent behavior should have different standards of proof. 
Moreover, this section provides important protection for 
physicians who may unwittingly engage in behavior that is 
impermissible.
    Finally, the AMA strongly opposes the Administration's 
proposal to eliminate the new risk sharing exception to the 
anti-kickback law provided in HIPAA. The expansion of managed 
care in today's health care market requires additional 
exceptions to the anti-kickback laws so that more flexibility 
in marketing practices and contractual arrangements is 
afforded. The future of the Medicare and Medicaid programs 
depends upon the ability of competing plans to offer quality 
alternatives to the existing program. HIPAA provides a much 
needed exception to the anti-kickback law for certain risk-
sharing arrangements which will facilitate the development of 
innovative and cost-effective integrated delivery systems.

                               Conclusion

    Americans can no longer postpone tackling fundamental 
reform of the Medicare program. Failure to do so is certain to 
prove even more costly for the millions of Americans who expect 
to be able to rely on this program in the future, as well as 
those working Americans who are called upon to help finance it. 
Simplistic budget-cutting has not resulted in cost-control over 
recent years; on the contrary, price controls have had the 
perverse effect of exacerbating Medicare's fiscal crisis and 
severely threatening the promised access of beneficiaries to 
medical care.
    However Medicare is reformed, it will be our overriding 
goal to ensure that the change not damage the essential 
elements of the patient-physician relationship. Above all, 
reform should not break the bond of trust between a patient and 
physician that makes medicine unique. By that we mean:
     All patients must remain free to choose the 
physician they feel is best qualified to treat them or 
individually elect any restrictions on choice;
     All patients, including those with chronic 
conditions and special health or financial needs, must have 
access to any needed service covered by Medicare;
     No restrictions on information about treatment 
options and no financial incentive program can be allowed to 
interfere with the physician's role as patient advocate;
     Both patients and physicians must have complete, 
easily understood information about the Medicare program, and a 
right to raise questions, voice grievances, and to have them 
responded to in a fair, effective process; and
     Patients must be protected from unscrupulous or 
inept health plans, physicians, and other providers.
    Americans who depend on the Medicare program for their 
medical and health care, as well as those who will rely on it 
in the future, should not have to worry about whether benefits 
promised them will be forthcoming. The AMA looks forward to 
working with the Subcommittee and the 105th Congress in 
protecting Medicare for our seniors and saving it for our 
children.
      

                                


    Mrs. Johnson [presiding]. Thank you very much, Dr. Reardon.
    Dr. Nelson.

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

    Dr. Nelson. Thank you. I am Alan Nelson, executive vice 
president of the American Society of Internal Medicine. My 
request today is a simple one: That Congress do what is 
required to make 1998 the year when Medicare payments become 
truly resource based by doing two things--first, Congress 
should mandate implementation of a single dollar conversion 
factor, which would be fully implemented on January 1, 1998; 
and, second, Congress should not grant an extension of the date 
when resource-based practice expenses will be implemented 
unless--and I want to emphasize the ``unless''--a review of the 
proposed rule shows that it is not possible to implement sound 
resource-based practice expenses on January 1 of next year.
    You will recall that this Subcommittee included a single 
conversion factor in the Balanced Budget Act of 1995. We 
appreciate your past support, but we must now ask that you once 
again enact legislation to mandate a single conversion factor. 
ASIM supports the administration's proposal to establish the 
conversion factor at the dollar amount of the current primary 
care conversion factor updated for inflation. Given that the 
Balanced Budget Act approved by this Subcommittee would have 
mandated implementation of a single conversion factor on 
January 1, 1996, surgeons will already have had several years 
of de facto transition under the administration's proposal to 
implement a single conversion factor of January 1 next year.
    There is no reason to believe that access to surgical 
procedures will suffer under a single conversion factor. Even 
with the one-time reduction in payments that would be required 
under a single conversion factor, the average annual updates 
for surgical procedures between 1993 and 1998 will have kept 
pace with inflation.
    ASIM also urges this Subcommittee to withhold judgment on 
changing the timetable for implementation of resource-based 
practice expenses until after the proposed rule is published 
and until HCFA explains the process that will be used to refine 
the initial resource-based practice expenses. In today's 
testimony on behalf of PPRC, Dr. Wilensky explained that the 
Commission recently concluded that sufficient data are 
available to develop resource-based practice expenses and that 
no better data would be forthcoming should a delay be granted 
by Congress. We agree with the Commission's view that the 
unfairness inherent in the current system demands that 
methodologically sound RBPEs be implemented as soon as 
possible.
    Most of the groups that are calling for a delay are basing 
their assessment on highly preliminary data that HCFA released 
in January. ASIM agrees that improvements are needed in HCFA's 
preliminary approach, but there is no basis now for concluding 
that HCFA will be unable to make the improvements needed so 
that implementation cannot still occur on January 1.
    We question the assumption that access to surgical 
procedures will suffer if resource-based practice expenses were 
implemented next year. Under a valid resource-based practice 
expense methodology, all physician services would be paid on 
data on how much it costs to provide the service. As long as 
these costs are appropriately recognized, there is no reason 
for access to suffer. The income estimates that are being cited 
by some to make the case that access could suffer are based on 
the most extreme numbers from only one of the options that HCFA 
presented in January. It is likely that the actual impact of 
the proposed rule will differ substantially from those 
preliminary numbers.
    Now, let me make it absolutely clear that ASIM is not 
saying that we automatically will sign off on anything that 
HCFA proposes as long as it is implemented on January 1, 1998. 
We have offered HCFA constructive criticism on the preliminary 
data and methodology. We will continue to work to influence the 
process so that the proposed rule is one that had credibility 
with physicians. We also believe it is essential that there be 
a fair process for refining the initial practice expense RVUs.
    When the proposed rule is published, we will determine if 
it meets reasonable standards for methodological soundness. If 
it does not, then it would be appropriate to reexamine the 
timetable for implementation. But doesn't it make sense for 
Congress to not pull the plug on the process that may yet 
result in implementation on January 1, 1998, of a credible and 
defensible resource-based practice expense methodology that is 
more fair than the current charge-based system?
    So, in conclusion, 8 years ago Congress, with bipartisan 
support, concluded that beneficiaries would benefit from a 
resource-based system for determining Medicare payments to 
physicians. Congress was right in 1994 when it decided to 
complete the job by mandating implementation of RBPEs, and the 
104th Congress, under the leadership of this Subcommittee, was 
right when it included a single conversion factor for the 
Medicare fee schedule for the Balanced Budget Act of 1995. We 
believe now is the time to complete the process.
    [The prepared statement follows:]

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

                              Introduction

    The American Society of Internal Medicine (ASIM) represents 
physicians who specialize in internal medicine, the nation's 
largest medical specialty. Internists provide both primary and 
consultative care to more Medicare patients than any other 
physician specialty. Consequently, Medicare payment policies 
have a direct and disproportionate impact on the ability of 
internists to provide their elderly and disabled patients with 
the best care possible. ASIM's testimony today will address the 
impact of two important Medicare fee schedule payment reforms--
resource-based practice expenses and a single conversion 
factor--on internists and their patients. The testimony will 
also address other reforms that are needed in Medicare payment 
policy.

                Making Medicare Payments Resource-Based

    Congress has an opportunity to make 1998 the year that 
Medicare payments truly become resource-base--a full nine years 
since Congress first said that it wanted Medicare payments to 
be based on the resources required to provide each physician 
service. Or it can accept the arguments of those who say that 
further delay is needed--even though this means continuing 
highly inequitable payment policies. ASIM believes that 
Congress should assure that the 1998 budget allows for 
correction of two distinct flaws in the Medicare fee schedule 
that have resulted in payments not being truly resource based:
    1. Separate volume performance standards, conversion 
factors, and updates have resulted in surgical procedures being 
paid at a much higher rate than primary care and other 
nonsurgical services that require the same resources to 
perform.
    2. Medicare payments for practice expenses continue to be 
based on historical charges, not resource costs. As a result, 
services that historically were overvalued prior to 
implementation of the resource based relative value scale 
(RBRVS) continue to be overpaid for their overhead expenses, 
while services that were undervalued continue to be underpaid 
for their practice expenses. Concern about the inequities 
created by the current charge-based formula led Congress to 
enact a technical corrects act in 1994 that mandates 
implementation of resource-based practice expenses on January 
1, 1998.

                        Single Conversion Factor

    ASIM strongly supports the administration's proposal to 
enact a single dollar conversion factor for the Medicare fee 
schedule, effective 1/1/98, and to establish the single 
conversion factor at a level that is no less than the current 
primary care conversion factor, updated for inflation. We 
appreciate this subcommittee's support in the past for 
enactment of a single conversion factor--particularly, the 
decision by the subcommittee to include a single conversion 
factor during mark-up of the Balanced Budget Act of 1995.
    Under the 1997 default conversion factors, surgical 
procedures are reimbursed at a rate that is 14% higher than 
primary care services, and 21% higher than other nonsurgical 
services, that involve the same amount of physician work. In an 
effort to correct this inequity, Congress included a single CF 
in the Balanced Budget Act of 1995. The single CF would have 
been effective on January 1, 1996. As the committee is well 
aware, however, President Clinton vetoed the BBA, with the 
result that the policy of separate conversion factors and 
updates remains in effect. There continues to be strong 
bipartisan support for enacting a single CF, however, as 
evidenced by the fact that it not only was included in the BBA 
and in the President's current budget, but it has also been 
included in other proposals such as the recently-unveiled 
``Blue Dog'' budget proposal.

Current Law Requirements

    Current law requires that separate target rates of increase 
in expenditures--or volume performance standards (VPSs)--be 
established for surgical procedures, primary care services, and 
nonsurgical services. If actual spending is below the 
applicable VPS, the services in that category get a bonus 
increase (the Medicare economic index plus the percentage that 
actual spending came in under the VPS). If spending exceeded 
the applicable VPS, the Medicare economic index (MEI) is 
reduced by the percentage that spending exceeded the VPS unless 
Congress specifies otherwise. After adjustment for demographic 
changes and changes in law that may affect annual growth in 
expenditures on physician services, the VPSs represent a target 
rate of growth that is equal to the previous five year 
historical average growth in expenditures for the category of 
services, minus a performance standard adjustment factor.
    Congress' original intent in mandating separate volume 
performance standards in the 1989 authorizing legislation was 
to create incentives for physicians to reduce the rate of 
increase in the volume of services that they provide. Some 
surgical groups argued at that time that the volume performance 
standards would have a greater impact on physician behavior if 
a separate VPS was created for surgical procedures. Congress 
responded by creating separate VPSs for surgical procedures and 
all other non-surgical services. In 1993, an additional 
category--for primary care services (office, nursing home, 
home, and emergency room services) was added--resulting in the 
three separate VPS categories.
    The evidence now shows that the policy of having three 
separate VPSs has done great damage to the concept of resource-
based payments--without achieving the intended objective of 
increasing incentives for physicians to control the volume of 
services within their own specialty. Surgical volume growth has 
slowed not because surgeons responded to the separate VPS by 
being more diligent in reducing unnecessary care, but because 
of changes in practice patterns--specifically, the substitution 
of non-surgical treatments for surgical procedures--that would 
have occurred anyway and that are outside of a surgeon's 
control. In many cases, it is effective medical management by 
internists and other non-surgeons that have resulted in fewer 
surgical procedures being performed.
    To illustrate, many heart patients that in the past may 
have eventually required coronary bypass surgery can now be 
treated through medication and careful management by an 
internist of their diets and lifestyles, and when necessary, by 
a procedure called angioplasty that can clear blocked arteries 
without resorting to more invasive (and costly) bypass surgery. 
Under the current VPS methods, internists and cardiologists are 
penalized because substituting visits and less invasive 
nonsurgical treatments for surgery increases the ``volume'' of 
primary care and nonsurgical services. Cardiac surgeons receive 
a reward for the reduction in the number of coronary bypass 
procedures, even though the reduction in volume was due to 
changes in practice patterns over which they had no control.
    The Physician Payment Review Commission, citing the Agency 
for Health Care Policy and Research, reported in 1994 that 
``Reductions in the volume of prostate-related procedures 
mostly reflect changes in treatment through increased use of 
drugs, less invasive surgical procedures, and watchful 
waiting'' (PPRC, Fee Update and Medicare Volume Performance 
Standards for 1995, May 15, 1994). The evidence also suggests 
that much of the reduction in surgical volume is due to an 
inevitable ``bottoming out'' of the number of patients who have 
a need for cataract surgery and several other surgical 
procedures that experienced explosive growth in the mid-1980s. 
In the same 1994 report from the PPRC that is cited above, the 
Commission noted that:
    ``The period of greatest growth in volume for a new medical 
procedure or technology is often the first few years following 
introduction, largely because it is during this period of 
diffusion that patients with existing indications are treated 
along with those newly identified. In the mid-1980s, the volume 
of new technologies such as cataract surgery was growing at 
double-digit rates, because there were tens of millions of 
patients who needed--and could benefit--from those treatments. 
As time has passed, however, the demand for such procedures has 
naturally declined . . . Cataract lens replacement surgery 
provides an illustration [of how the demand for technology can 
decrease over time because fewer patients require the 
procedure]. Lens implant improvements and new surgical 
techniques transformed cataract surgery in the 1980s into a 
safe, rapid, and convenient cure for cataracts. In 1988, 
however, the volume of cataract surgery began to decline on a 
per person basis . . . this decline may have indicated that the 
backlog of potential lens implant recipients created by the 
improved surgical technology had largely been depleted. In its 
1990 report, the Commission noted that if this hypothesis were 
correct, the volume of cataract surgery should be expected to 
be level or possibly decline over the next few years. Noting 
the large percentage of total surgical volume associated with 
cataract surgery, the Commission observed that such a reduction 
in growth of this surgery, if not offset by increases in other 
types of surgery, would substantially reduce the growth of 
total surgical volume. Analysis of Medicare claims data 
supports the validity of the Commission's prediction. Volume of 
cataract lens replacement services declined by 7.0 percent from 
1992 to 1993. These procedures, along with other eye-related 
surgical procedures, continue to account for a substantial 
portion of Medicare expenditures for surgery--currently about 
30 percent. This decline in cataract surgery has had a 
substantial impact on growth in total surgical volume.''
    It is time for Congress to recognize that separate volume 
performance standards have not had the intended effect of 
motivating physicians to more carefully control the volume of 
services within their own specialty. What separate VPSs have 
done, however, is create inequities that are in direct conflict 
with the principle of paying the same amount for service 
involving the same resource costs.

Timing, Amount of the Conversion Factor

    Eliminating the inequities created by separate VPSs and 
conversion factors requires that a single CF be implemented on 
January 1, 1998--without any additional transition or delay. 
Given that Balanced Budget Act of 1995 would have mandated that 
a single conversion factor go into effect on January 1, 1996, 
physicians will already have had two years of a de facto 
transition to a single conversion factor under the 
administration's proposal for implementation on January 1, 
1998. Unlike a true transition, which would have lowered the 
surgical CF each year, surgeons have actually benefited from 
higher updates in the meantime. Further, in 1995 many surgical 
groups advocated a transition of ``as close to three years as 
possible''; had their advice been followed by Congress and 
signed into law by the President, the single CF would have 
become fully implemented on January 1, 1998. If a 1998 
implementation date was acceptable to them in 1995, there is no 
reason for Congress to grant a request this year by the same 
groups to delay it further. As noted later in our testimony, 
there is no basis for concluding the implementation of a single 
CF on January 1, 1998 will reduce access, given that the 
average per annum update for surgical procedures from 1993-1998 
will have kept pace with inflation, even with the one-time 
reduction that will be required in the surgical CF.
    We also urge Congress to support the administration's 
proposal to establish the single conversion factor at a level 
that is no lower than the current primary care conversion 
factor, updated for inflation. Payments for primary care 
services, which have been undervalued in the fee schedule 
updates for most of the past five years, should not be rolled 
back below current levels. Establishing the conversion factor 
at anything less than the primary care conversion factor, as 
updated for inflation, would also require deeper cuts in 
payments for surgical procedures, and provide less relief for 
the other nonsurgical services that have been most 
disadvantaged under the current update formula. A transition 
would also reduce the savings that the administration projects 
from a single CF by easing the reductions in payments for 
overvalued surgical procedures.

           Implementation of Resource-Based Practice Expenses

    ASIM continues to strongly support implementation of 
methodologically sound resource-based practice expenses as 
Congress mandated in 1994. Because current practice expense 
payments are not truly resource-based, some services remain 
grossly overvalued while others remain substantially 
undervalued. An internist who provides 115 level 3 established 
patient office visits--typically requiring 29 hours of face-to-
face time with patients--receives the amount of practice 
expense reimbursement that a surgeon gets for one bypass graft 
that takes only a few hours to perform. Medicare also ends up 
paying surgeons for operating room overhead expenses that the 
hospital, not the physician, incurs and that are already paid 
under Part A. In 1992, the Physician Payment Review Commission 
noted that ``54% of the Medicare fee schedule payment for a 
coronary bypass graft in the final rule represents payments for 
practice expenses. However, this service is provided in 
hospital operating theaters that are equipped and staffed by 
the hospital, not the physician. In this case, the Medicare 
Part A payment includes the costs of virtually all of the 
expense payment for this service besides the physician work.''
Preliminary Data and Methodology

    Research on the development of resource-based practice 
expenses has been underway for most of this decade. The current 
congressionally-mandated study builds upon work by Harvard 
University, the Physician Payment Review Commission, and 
several other notable experts in the field. Several studies 
have looked at the use of existing data sources to develop 
indirect practice expense relative value units (RVUs), and 
concluded that results can be obtained using existing data that 
mirror those that would be obtained from cost accounting 
surveys. Attached to this testimony is a chronology of the work 
that has been done on RBPEs. It is therefore not correct to 
suggest, as some have, that HCFA's efforts to develop a 
methodology for implementation on January 1, 1998 are based on 
only two years of research.
    In late January, HCFA released some highly preliminary 
data--and a range of possible methodological options--for 
comment and review by specialty societies and the American 
Medical Association. Because the data released by HCFA in 
January indicate that major redistribution of income may occur 
under resource-based practice expenses, some have concluded 
that the Health Care Financing Administration's approach to 
this issue is fundamentally flawed.
    ASIM does not believe that the test of HCFA's proposed 
methodology should be the degree that it does or does not 
redistribute payments. Rather, it should be whether or not the 
methodology that HCFA will propose is methodologically sound 
and more fair than the existing charge-based methodology. HCFA 
project staff have repeatedly stated that the data, 
methodological options, and specialty-impact estimates released 
in January for review and comments are ``highly preliminary'' 
and meant only to be ``illustrative'' of the impact of a range 
of approaches to determining RBPEs--and that none of the 
specific options presented will be adopted by HCFA to develop 
the proposed rule. Given the preliminary nature of the 
information that was released, we do not believe that it is 
appropriate to conclude now that implementation of RBPEs needs 
to be delayed. ASIM has provided HCFA with detailed 
recommendations for making improvements in the methodology and 
data that will be used to develop resource-based practice 
expenses.
    We urge this Committee to withhold judgment on changing the 
timetable for implementation of resource-based practice 
expenses until a proposed rule is published, and until HCFA 
explains the process that will be used to refine the initial 
resource-based practice expenses. The Physician Payment Review 
Commission will likely present testimony today that explains 
the reasons why it rejects any delay in implementation of 
RBPEs, a view that will be reflected in its upcoming report to 
Congress. Dr. Gail Wilensky, chair of the PPRC, recently told 
your colleagues on the Senate Finance Committee that sufficient 
data are available and that no better data would be forthcoming 
should a delay be granted by Congress. We agree with the 
Commission's view that the unfairness inherent in the current 
system demands that methodologically sound RBPEs be implemented 
as soon as possible, and that there is no reason to conclude 
now that this can't be accomplished on January 1, 1998.
    We don't understand why some other physician groups have 
concluded that it is not possible for HCFA to develop a sound 
resource-based proposal within the current time frame mandated 
by Congress. Certainly, it makes more sense to wait until the 
proposed rule is out to make an informed decision--rather than 
reacting (or overreacting) to some highly preliminary data and 
options.
    This does not mean that ASIM is fully satisfied with the 
work done by HCFA to date. We have offered our own suggestions 
for improvement in the methodology. But we are willing to wait 
and see if the proposed rule meets our standards for 
methodologically soundness before making a premature judgment 
based on data that HCFA itself said was highly preliminary. If 
the published methodology isn't sound, then Congress can always 
reexamine the timetable for implementation at a later date. But 
given that correction of the existing inequities is long 
overdue, Congress should want HCFA to continue to work toward 
implementation on January 1, 1998, rather than pulling the plug 
on the current process and timetable. Congress should also 
insist that HCFA establish an adequate refinement process for 
the interim RBPEs that will be implemented on January 1, 1998. 
The only circumstance that would justify a delay in 
implementation is if it turns out that HCFA is unable to 
develop a sound and defensible methodology--a conclusion that 
is not warranted at this time.

Behavioral Offset

    ASIM also strongly supports the Physician Payment Review 
Commission's view, as explained in its upcoming report to 
Congress, that unproven assumptions of a behavioral offset 
should not be incorporated into the RBPEs. A behavioral offset 
will magnify the reductions for overvalued services and reduce 
the gains for undervalued ones. The Commission correctly points 
out that the administration's contention that physicians offset 
50 cents of every dollar that is lost when payments are reduced 
was not borne out when the RBRVS was implemented. HCFA should 
learn from its experience with the RBRVS, rather than repeating 
the same mistakes. If necessary, Congress should consider 
enacting legislation that would limit HCFA's ability to apply a 
behavioral offset. ASIM recalls that Rep. Fortney (Pete) Stark, 
the ranking minority member of this subcommittee, led a 
bipartisan effort in 1991 to prohibit HCFA from applying a 
behavioral offset when resource-based work relative value units 
were first implemented. ASIM appreciated Mr. Stark's efforts at 
that time, and asks that the subcommittee members consider pre-
empting HCFA's efforts to again apply a behavioral offset in 
implementing resource-based practice expense RVUs.

Refinement Process

    We also agree with the Commission's view that HCFA should 
propose a refinement process--allowing for sufficient input 
from practicing physicians and other experts on practice 
expenses--to permit reexamination of the proposed practice 
expense RVUs prior to implementation of the final rule. Such 
refinement panels should be used to address major areas of 
disagreement with the proposed RBPEs for specific codes or 
families of codes, if a specialty has compelling evidence to 
suggest that the proposed RBPEs may be incorrect. The practice 
expense RVUs that HCFA will implement in January 1998 will be 
interim final RVUs, allowing parties to provide additional 
input and comments in 1998.
    Because all of the interim RVUs will be subject to further 
refinement, ASIM has urged HCFA to exercise caution in 
implementing the interim practice expense RVUs to avoid the 
problems that would be created by ``overshooting'' or 
``undershooting'' in the interim RVUs. ``Overshooting'' would 
occur if HCFA implements interim practice expense RVUs that 
call for major reductions in payments that are later found upon 
refinement to have been set too low. This can be avoided if 
HCFA errs on the side of being cautious in the magnitude of the 
reductions required for services that will undergo refinement.
    ASIM is not persuaded that a three-year transition to RBPEs 
is merited, as the Commission recommends. A transition not only 
would perpetuate current inequities for several more years, but 
it also makes the process of implementation far more complex, 
with the potential for creating the same kinds of unintended 
budget-neutrality problems that occurred with the transition to 
the RBRVS. When the proposed rule on implementation of the 
RBRVS was published in 1991, HCFA proposed a much larger budget 
neutrality adjustment than otherwise would have been necessary 
because the transition formula specified by Congress resulted 
in an asymmetrical transition (more services initially 
experienced gains in payments than received reduced payments, 
thereby creating a larger budget-neutrality offset). The result 
was that the reductions for some services were much greater 
than was appropriate, while the gains for others were less than 
intended. Expressions of concern by Congress ultimately led 
HCFA to apply a lesser offset to deal with the asymmetrical 
transition. The complexity of developing a transition that 
would not have unintended consequences supports the wisdom of 
Congress' original plan to implement RBPEs on January 1, 1998 
without further delay or transition.

If Not Now . . . When?

    Most of the organizations that advocate a delay in 
implementation of RBPEs imply that their concern is limited to 
making sure that HCFA has the best data available, and that 
more time is simply needed for HCFA to do the job right. 
Congress should consider the possibility that some of those who 
are calling for a one-year delay may never support 
implementation, no matter how much time is granted to study the 
issue or the process and methodology that is used. Some of the 
groups advocating a ``delay'' have essentially said as much. 
One member of the surgeon-dominated Practice Expense Coalition, 
the American Society of General Surgeons, has explicitly stated 
that it seeks repeal, not just a delay, of resource based 
practice expenses. The March 5 testimony of the American 
College of Surgeons (ACS) to the Senate Finance Committee 
suggests that it is opposed to the concept of basing practice 
expenses on resource costs, not just to the current methodology 
and timetable. Their testimony stated that ``on an even more 
fundamental level, the preliminary impact analysis confirms 
that a purely resource-based approach yields inappropriate 
results.'' The ACS witness, when questioned by a member of the 
Finance Committee, refused to commit to any date when the 
College would agree that RBPEs should be implemented.
    The specialty societies who are opposed to basing payments 
on resource costs because they will yield ``inappropriate'' 
results--i.e., that they will reduce payments for some of their 
specialty's services--are not likely to be satisfied with a one 
year delay. It can be expected that even if a one-year delay 
was granted, those same groups would likely be back again next 
year seeking repeal of resource based practice expenses, or 
absent that, continued delay in implementation. Their request 
for an extension may have less to do with the ostensible 
purpose of assuring that the methodology is valid and more with 
putting off as long as possible (which would be forever, if 
some of them had their way) any resource based methodology that 
will redistribute Medicare dollars from surgical procedures to 
primary care and other physician services.
    This is not to suggest that all of the groups asking for an 
extension are fundamentally opposed to resource-based payments. 
Some may in fact be motivated principally by concerns about the 
adequacy of the data. But Congress needs to be aware that there 
are other groups that will never accept resource-based 
payments, no matter how much time is granted to develop the 
methodology.

                  Impact on Access of Single CF, RBPEs

    Those who are opposing implementation of RBPEs and a single 
CF argue that the ``extreme'' reductions that it may be 
required would reduce access to surgical procedures. In March 5 
testimony to the Senate Finance Committee, the American College 
of Surgeons stated that ``The combined payment effect from 
adoption of a single conversion factor, refusal to pay fairly 
for medically necessary assistant at surgery services, and 
implementation of flawed practice expenses is simply too much . 
. . To be frank, we sometimes get the feeling that Medicare 
would simply prefer to stop providing surgical services to its 
beneficiaries. We presume this also means that the 
administration expects that Medicare beneficiaries requiring 
radical mastectomies, cataract extractions, kidney transplants, 
hip replacements, brain surgery and a few thousand other types 
of operations, will soon be forced to obtain them from someone 
other than a qualified surgeon, or to be offered some unproven 
alternative treatment by less-trained health care providers.''
    ASIM does not believe that our surgical colleagues would 
refuse to perform needed surgery on their Medicare patients, as 
the above statement unfortunately implies. Under a single CF, 
surgeons would be paid at the same dollar rate as an internist 
or a family physician gets paid for a service that requires the 
same amount of physician work. If internists are able and 
willing to provide needed services to their Medicare patients 
at this rate, why would a surgeon by unable or unwilling to do 
so? The conversion factor for surgical procedures was increased 
by almost 30% from 1993 through 1997. A 10.6% reduction in the 
current CF for surgical procedures would be required in 1998 
under the administration's proposal for a single CF. This means 
that the surgical CF still will have increased by 14.6% from 
1993 through 1998, assuming that Congress enacts the 
administration's proposal--or by an average of almost 3 percent 
per year. Since the average annual updates for surgical 
procedures will have kept pace with inflation, there is 
absolutely no basis for suggesting that implementation of a 
single CF, at the dollar amount recommended by the 
administration, will reduce access to surgical procedures. Some 
of the loss to surgeons in payments for their surgical 
procedures will also be offset by increases in the ``other 
nonsurgery'' and primary care services category. Surgeons don't 
just provide surgery; they also provide consultations, hospital 
visits and diagnostic procedures in the ``other nonsurgery'' 
category, which will gain 8.2% under the administration's 
proposal.
    Under methodologically sound resource based practices, 
Medicare payments for practice expenses for the first time will 
be based on the differences in the costs of providing physician 
services. The payments for the practice expenses of surgeons 
(and other physicians, for that matter) therefore will be based 
on their resource costs--no more, and no less than the data 
show are appropriate. Payments would be reduced for some 
procedures only by the amount that Medicare now pays in excess 
of the resource costs that are required to provide them (such 
as the amount that some surgeons are now paid for overhead 
costs that are actually picked up by the hospital). Some 
appropriate redistribution of dollars will be required under 
RBPEs, but there is no reason to conclude now that RBPEs won't 
be high enough to cover surgeons' true practice expenses. Until 
HCFA's proposed methodology is published as a proposed rule, 
there clearly isn't any basis for deciding now that Medicare's 
practice expense payments would not cover the costs of 
providing surgical procedures.
    There is another dimension to access that also must be 
considered: access to primary care services. Although most 
beneficiaries enjoy good access to physician services, it is 
access to primary care services that is most at risk when 
Medicare payment policies undervalue the work and practice 
expenses involved in delivering primary care. We've heard from 
many internists who say that Medicare payments barely cover 
their costs, and some have said they've begun limiting the 
number of new Medicare patients they can accept into their 
practice. A single CF and fair, resource-based Medicare payment 
system should have an overall positive impact on access.

           Replacing the VPSs with a Sustainable Growth Rate

    A single conversion factor, and methodologically sound 
RBPEs, will result in a true resource-based fee schedule. 
Improvements are also needed in the update formula, however, so 
that physicians have a reasonable opportunity to obtain CF 
updates that keep pace with inflation--an opportunity that does 
not exist under current law.
    ASIM agrees with the administration that the current volume 
performance standards (VPSs) should be replaced by a single 
sustainable growth rate (SGR). We are concerned, however, that 
the administration's proposal to establish the SGR at an amount 
equal to per capita GDP does not allow for sufficient growth in 
the volume of services that beneficiaries will require. (It is 
our understanding that the administration, after originally 
proposing an SGR of per capita GDP plus one percent, is now 
proposing that the SGR be limited to per capita GDP only). As 
noted earlier in our testimony, after adjustment for 
demographic changes and changes in law that may affect annual 
growth in expenditures on physician services, the VPSs 
represent a target rate of growth that is equal to the previous 
annual growth in five year historical average expenditures for 
the applicable category of services, minus a performance 
standard adjustment factor. In OBRA 93, Congress increased the 
performance standard adjustment factor from 2 to 4 percent. To 
illustrate, if the average growth in expenditures on primary 
care services in a particular five year period was 4 percent, 
the VPS would allow for zero growth in volume and intensity of 
primary care services. No matter how low the growth in 
expenditures is during a five year period, physicians will 
always be required to reduce growth by another 4 percent in 
order to get an update equal to inflation as measured by the 
Medicare economic index.
    It is not reasonable to expect that physicians can 
continually reduce growth by 4 percent per year from the prior 
five year average. Because OBRA 93 established an unreasonable 
and unrealistic target rate of growth, expenditures will in 
most years exceed the VPSs, resulting in updates that do not 
keep pace with inflation--and a 21 percent reduction in the 
weighted conversion factors (in constant dollars) over the next 
ten years, according to the CBO. It is essential that Congress 
enact legislation that would replace the VPSs with a single 
sustainable growth rate that would give physicians a reasonable 
opportunity to earn inflation updates if volume growth is kept 
to a reasonable level.
    Although a single sustainable growth rate would appear to 
be better than the current VPS formula, ASIM is concerned that 
the administration's proposed SGR is too low to give physicians 
a realistic opportunity to earn updates equal to inflation. 
Assuming a per capita GDP growth of 1.5%, the add-on would need 
to be at least GDP plus two percent (or a total of 3.5%) to 
assure a full inflation update, based on the CBO's projected 
average per annum increase in expenditures on physician 
services of 2.4% per year. An SGR of per capita GDP only would 
require growth to stay within 1.5 percent, which is below the 
current baseline projections. Therefore, the administration's 
proposal for an SGR of per capita GDP growth would not be 
sufficient to prevent the automatic cuts in the Medicare 
conversion factor that will occur due to the increase in the 
performance standard reduction factor mandated by OBRA' 93. In 
its upcoming report to Congress, the PPRC will express a 
preference for the SGR to be set at GDP plus two percent. ASIM 
urges the subcommittee to support the Commission's preference 
for replacing the VPSs with a single SGR that is no lower than 
per capita GDP plus two percent.
    ASIM is also concerned that the administration may apply 
its behavioral offset assumptions in an inconsistent manner for 
the purposes of calculating the SGR and the single conversion 
factor as proposed in its budget. The legislative language for 
the President's budget indicates that the SGR in 1998 and 
subsequent years will include an allowance for ``changes in 
expenditures for all physicians' services in the fiscal year 
(compared with the previous year) which will result from 
changes in the law, determined without taking into account 
estimated changes in the expenditures due to changes in the 
volume and intensity of physicians' services resulting from 
changes in the update in the conversion factor . . . '' 
(emphasis added). This would seem to indicate that the 
administration plans to assume that a behavioral offset will 
occur as a result of changes in the conversion factor (i.e., in 
response to the reduction in payments for surgical procedures 
that would occur under a single conversion factor), but that it 
does not intend to incorporate this change in calculations of 
the SGR. If the administration's baseline projections assume an 
increase in volume due to a behavioral offset, this should be 
reflected in the SGR as well as the CF updates. Otherwise, 
physicians will have no opportunity to recoup the losses 
triggered by the behavioral offset adjustment to the conversion 
factor update should volume not increase as assumed by the 
administration in its behavioral offset. ASIM would prefer, of 
course, that the administration not incorporate a behavioral 
offset adjustment at all. But if an offset is assumed for the 
conversion factor update, then the administration should be 
consistent in applying this to the SGR.

              Reduced Payments to Hospital Medical Staffs

    ASIM has concerns about the administration's budget 
proposal to reduce payments to ``high cost medical staffs.'' 
This proposal, which has been included in past budgets from 
this administration, could have the effect of inappropriately 
reducing payments to hospitals with higher costs because they 
have a sicker patient population. In the absence of a sound 
methodology to measure differences in the severity of illness 
of the patient population being treated by the medical staff, 
it is too risky to put in place a formula-driven process that 
could inappropriately lower payments for physicians on hospital 
medical staffs that are treating patients who are more 
expensive to treat because they are sicker.

               Savings Should Target Higher-Growth Areas

    ASIM supports the objective of a balanced budget, and 
recognizes the need to reform Medicare to keep it solvent and 
affordable. Given that Medicare fee schedule payments to 
physicians are already expect to decline under current law, we 
believe that Congress should focus its attention on higher 
growth areas, rather than on extracting more savings from 
payments for physician services. We also believe that 
structural reforms are preferable to attempting to squeeze more 
savings out payments to ``providers.'' We would be pleased to 
provide the subcommittee with our recommendations for short-and 
long-term structural reforms.
    In deciding where savings might be achievable without 
compromising access and quality, Congress should take into 
consideration which categories of spending are growing at a 
rate that may not be sustainable. By the same token, categories 
of spending that are growing so slowly that they are not 
contributing to Medicare's fiscal problems are not the place to 
look for further reductions.
    Notwithstanding our concern that the administration's 
proposed SGR is too low, ASIM is pleased that the 
administration's proposed budget takes into account the fact 
that expenditures on physician services are growing slower than 
any other category of Medicare spending. The January 
``baseline'' projections from the Congressional Budget Office 
show how much spending on physician services has already been 
curtailed. According to the CBO, total outlays for physician 
services will grow by an average of only 2.4% per year through 
the year 2002. By comparison, payments to hospital, home health 
agencies, skilled nursing facilities, and most particularly 
HMOs will all grow at a rate exceeding that of inflation. The 
CBO estimates that Medicare fee schedule payments--as expressed 
by the weighted separate conversion factor updates--will 
actually decline by about one percent over this period of 
time--or by 21 percent after inflation is taken into account. 
Fee schedule payments to physicians therefore have the dubious 
distinction of being the only category of outlays whose payment 
rate is projected to actually drop, in both real (after 
inflation) and nominal dollars. It is not reasonable to expect 
that total outlays on physician services--which will now barely 
keep pace with inflation--can be reduced further without 
compromising access and quality.

                            Payments to HMOs

    ASIM's interest in payment reform is not limited to the 
Medicare physician fee schedule. Since increasing numbers of 
internists are treating their Medicare patients through 
arrangements with Medicare HMOs and other risk contracts, 
internists and their patients are directly affected by changes 
in the way that HMOs are paid by Medicare. The President's 
budget proposes that the average adjusted per capita cost 
(AAPCC) be reformed by (1) setting local rates at 90 percent of 
the prevailing fee-for-service rates, rather than 95 percent 
under current policy (2) subtracting graduate medical education 
payments and disproportionate share hospital payments from the 
AAPCC and instead giving them directly to the institutions 
incurring the costs and (3) lowering the AAPCC in certain high 
cost areas and increasing them in low cost areas.
    ASIM has no specific policy on the proposal to lower 
payments from 95 percent to 90 percent of the prevailing fee-
for-service rates. Given that the CBO projects that outlays on 
Medicare HMOs will increase at an average rate of 71 percent 
per annum, it is reasonable for the Congress and the 
administration to review ways to achieve savings in this 
category of spending, especially if this will reduce the need 
to further slash fee-for-service payments. Although not 
conclusive, there are some studies that suggest that Medicare 
HMOs do enroll a healthier patient population than the fee-for-
service program, and that the current formula may on average 
overcompensate HMOs for the care of the healthier patients that 
they typically enroll. ASIM also supports the goal of reducing 
geographic inequities in AAPCC payments, but we have not yet 
determined if the administration's proposal is the best way to 
correct such inequities.
    ASIM is concerned that in the absence of a risk adjustment 
for the AAPCC payments to HMOs, HMOs that treat a sicker mix of 
patients will be penalized, especially if the AAPCC rate is 
lowered to 90 percent from 95 percent. This would increase the 
disincentive for HMOs to enroll sicker patients. ASIM supports 
the PPRC's view that:
    regardless of how payment rates are set, as long as 
Medicare beneficiaries can choose among options, improved risk 
adjustment will be essential. Otherwise, health plans will not 
be fairly paid for enrollees with better or worse-than-average 
status (for example those with chronic conditions or functional 
disability). Without improvements in risk adjustment, plans 
will continue to have an incentive to avoid enrolling patients 
who will be expensive to care for. The commission recommends 
that improved risk adjustment be implemented immediately. 
(Statement before the Subcommittee on Health, Ways and Means, 
on Medicare HMO Payment Policy, February 25, 1997)
    Because internists tend to treat Medicare patients that are 
older and sicker than those of other physicians, ASIM believes 
that it is particularly important that Congress initiate 
payment reforms--including risk adjustment--for Medicare HMOs 
that would decrease the likelihood that internists' patients 
will be discriminated against by HMOs that are trying to limit 
their own risk.
    ASIM also has recommendations on federal consumer 
protection standards for beneficiaries enrolled in Medicare 
managed care plans. We are submitting a separate statement for 
the record of the subcommittee's March 6 hearing on Medicare 
HMO Regulation and Quality.

                               Conclusion

    In conclusion, let's recall some of the reasons why 
Congress, in 1989, mandated a resource based payment system for 
Medicare. Congress believed that patients were not well-served 
by a system that rewarded physicians for providing surgical and 
technological procedures while penalizing them for providing 
primary care and other nonsurgical services. Under the charge-
based system that existed before, surgical procedures were paid 
far more for the resources involved than primary care services. 
Congress wanted to equalize the financial incentives, so that 
physicians' decisions about what services to order, or what 
specialty to enter, weren't influenced by biased financial 
incentives.
    By mandating instead that Medicare pay the same amount for 
all services that involve the same resources to provide, 
Congress hoped to increase the incentives for physicians to 
enter, and remain in, primary care, and to encourage physicians 
to put more emphasis on management of patient care as an 
alternative to surgical intervention. Although progress has 
been made, the fact is that surgical procedures are still paid 
under a much higher conversion factor than primary care and 
other nonsurgical services. The current charge-based method for 
paying for practice expenses--which Congress intended as only a 
temporary measure until a resource-based methodology could be 
developed--similarly perpetuates the payment inequities that 
favor procedures done in the hospital over primary care and 
other services provided in the office.
    Eight years ago, Congress--with bipartisan support--
concluded that beneficiaries would benefit from a resource 
based system. Congress was right then, and it was right in 1994 
when it mandated resource based practice expenses. The 104th 
Congress--under the leadership of this subcommittee--was right 
when it included a single conversion factor for the Medicare 
fee schedule in the Balanced Budget Act of 1995.
    Now is the time to complete the process by once again 
enacting legislation to mandate a single conversion factor and 
by rejecting any delay in implementation of sound resource 
based practice expense. There is no basis for further delay or 
for requiring a transition to a single CF. Resource-based 
practice expenses that are derived from a valid methodology 
need to be implemented as soon as is feasible. As the PPRC has 
stated, there is no basis for concluding now that it is not 
feasible to implement a valid RBPE methodology on January 1, 
1998 as Congress has mandated. Congress can always reexamine 
the timetable for implementation once the proposed rule is 
published, although a change in the timetable for 
implementation would be justified only if the methodology is 
fundamentally unsound.
    ASIM appreciates this subcommittee's long history of 
support for Medicare physician payment reform, and pledges our 
support to your efforts to assure that 1998 becomes the year 
when it will be said that Medicare payments are truly resource-
based.
      

                                


    Mrs. Johnson. Dr. Maves.

  STATEMENT OF MICHAEL MAVES, M.D., EXECUTIVE VICE PRESIDENT, 
   AMERICAN ACADEMY OF OTOLARYNGOLOGY-HEAD AND NECK SURGERY, 
ALEXANDRIA, VIRGINIA; ON BEHALF OF PRACTICE EXPENSE COALITION, 
        AND PATIENT ACCESS TO SPECIALITY CARE COALITION

    Dr. Maves. Thank you. Members of the Subcommittee, I am Dr. 
Michael Maves, executive vice president of the American Academy 
of Otolaryngology-Head and Neck Surgery, and a practicing head 
and neck surgeon at Georgetown University Medical Center. I was 
also the chair of the Department of Otolaryngology at St. Louis 
University.
    I would like to thank the Subcommittee for this opportunity 
to testify on behalf of the Practice Expense Coalition with 
respect to HCFA's proposal to revise the practice expense 
component of the Medicare fee schedule.
    In 1994 Congress directed the Health Care Financing 
Administration to develop resource-based practice expense 
relative values for each procedure and service provided under 
Medicare. In so doing, the statute specifically directs that 
the relative values ``recognize the staff, equipment, and 
supplies used in the provision of medical and surgical services 
in various settings.'' Clearly, congressional intent was for 
HCFA to construct the practice expense values using data 
generated by actual resources involved in the provision of 
physician services.
    Unfortunately, HCFA's proposed new practice expense values 
are not based on a methodology that measured the actual 
resources consumed in the provision of a Medicare procedure or 
service. It is inconceivable that a sound practice expense 
methodology using actual data could produce payment reductions 
of the magnitude identified by HCFA at its January 22d 
briefing. In fact, some of the reductions completely eliminate 
the practice expense values for certain specialties.
    For example, cardiac surgeons could experience as much as a 
44-percent reduction in total relative value units they 
received under the Medicare Program in 1995. Contrast this with 
national data which shows that practice expenses, on average, 
account for about 41 percent of the total physician revenues. 
Thus, any proposal that would reduce total payment by 44 
percent, such as is the case for cardiac surgeons, we believe 
is fatally flawed, unrealistic, and not the product of an 
actual measuring of the resources required to provide a 
service, such as nursing staff, clerical staff, rent, 
utilities, and so on.
    While we recognize that HCFA made an effort to collect data 
through the use of clinical practice expert panels and through 
the use of a survey of selected physician practices, neither of 
these tasks were completed.
    In fact, the survey instrument was so complex that only 
about 27 percent of the practices selected responded. It is our 
understanding that the Office of Management and Budget, when it 
gave its approval of the survey, indicated that a response rate 
of at least 70 percent would be required in order to have a 
representative and sound database.
    We understand firsthand the problems of having surveys 
completed by physicians and offered our assistance to HCFA to 
help in this regard, but HCFA declined to accept the offer to 
work with us on this part of the program.
    To construct a new set of values, HCFA relies primarily on 
data derived from the clinical practice expert panels. Early 
review of the recently released CPEP findings suggest that they 
contain a number of errors. In addition, HCFA has no indirect 
cost data and there has been no way to reality test its 
proposed methodology. Such tests are needed because preliminary 
projections from HCFA released in January envisioned payment 
cuts that are far more drastic than had been anticipated in 
other studies. The 20- to 25-percent cut projected for 
cardiologists, for example, is double what had been proposed in 
prior practice cost studies.
    This is not just a Medicare problem. As you are aware, many 
insurance companies utilize the Medicare relative values in 
developing their own payment schedules. Thus, the true impact 
of this proposal is really not known at this time. However, it 
could be very substantial. It seems unwise to cause such a 
major disruption in the health care delivery system using 
spotty research.
    As someone who has spent essentially my entire career in 
academic medicine, I am concerned about the impact of such 
change on academic health centers and their mission to provide 
community services, such as indigent care and charity 
hospitals.
    The impact on patients also is an unknown, especially in 
terms of access and quality. No one knows for sure how 
physicians will adjust to these changes. In surgery, a 
substantial portion of the preoperative and postoperative care 
is provided by nursing staff. Currently, the surgery is paid on 
the basis of a global fee, which covers the preoperative, 
intraoperative, and postoperative care. If you take away a 
substantial portion of the relative value units, it would seem 
to us that the quality of such services in the global fee would 
have to suffer--as would patient care.
    In conclusion, the Practice Expense Coalition urges 
Congress to, first of all, stop the current rulemaking process 
and to instruct HCFA to assemble experts in cost accounting to 
develop the mechanisms for collecting actual data on physician 
practice expenses.
    The project that Congress gave HCFA is one that industries 
throughout this country deal with every day. U.S. industries 
have cost accounting systems to assign cost to products and 
services.
    I believe that is the task Congress asked HCFA to do, and 
if done correctly, it should not result in the type of 
reduction being proposed.
    Thank you.
    [The prepared statement and attachment follow:]

Statement of Michael Maves, M.D., Executive Vice President, American 
Academy of Otalaryngology-Head and Neck Surgery, Alexandria, Virginia; 
on Behalf of Practice Expense Coalition, and Patient Access to 
Speciality Care Coalition

[GRAPHIC] [TIFF OMITTED] T5005.023

[GRAPHIC] [TIFF OMITTED] T5005.024

[GRAPHIC] [TIFF OMITTED] T5005.025

      

                                


               Members of the Practice Expense Coalition

American Academy of Dermatology
American Academy of Facial Plastic and Reconstructive Surgeons
American Academy of Ophthalmology
American Academy of Orthopaedic Surgeons
American Academy of Otolaryngology--Head and Neck Surgery, Inc.
American Association of Clinical Urologists
American Association of Neurological Surgeons
American College of Cardiology
American College of Emergency Physicians
American College of Gastroenterology
American College of Nuclear Physicians
American College of Osteopathic Surgeons
American Gastroenterological Association
American Psychiatric Association
American Society for Dermatologic Surgery
American Society for Gastrointestinal Endoscopy
American Society of Anesthesiologists
American Society of Cataract and Refractive Surgery
American Society of General Surgeons
American Society of Plastic and Reconstructive Surgeons
American Urological Association
College of American Pathologists
Congress of Neurological Surgeons
International Society for Cardiovascular Surgery
Society for Vascular Surgery
Society of Cardiovascular and Interventional Radiology
Society of Nuclear Medicine
Society of Thoracic Surgeons
      

                                

    Mrs. Johnson. Thank you, Dr. Maves.
    Dr. Harr.

STATEMENT OF PATRICK B. HARR, M.D., PRESIDENT, AMERICAN ACADEMY 
                      OF FAMILY PHYSICIANS

    Dr. Harr. Thank you, Madam Chair.
    My name is Patrick Harr, M.D. I am a practicing family 
physician from Maryville, Missouri, and president of the 
American Academy of Family Physicians, the largest primary care 
specialty group in the Nation, representing over 84,000 
members. The administration's budget offers a reasonable basis 
upon which Congress could develop a bipartisan Medicare reform 
package that advances primary care, restores trust fund 
solvency, and lowers the budget deficit. I would like to turn 
first to something that is not in the budget: The resource-
based practice expense project that HCFA is currently working 
on.
    Several medical specialty groups have asked you to delay 
implementation of the practice expense project. The academy 
believes it would be inappropriate to delay the project at this 
time. Instead, we urge you to first review the proposed 
rulemaking that will be published this spring. Weigh for 
yourself the soundness and fairness of the proposal, and then 
decide if the project should move forward as scheduled or be 
sent back to the drawing board for further work.
    Under the flawed system now in place, a family physician 
must perform 115 intermediate-level office visits to receive 
the practice expense payments received by a surgeon for one 
coronary artery bypass graft procedure, although the hospital 
and not the surgeon assumes most of the overhead costs for the 
procedure. The new practice expense method will hopefully 
correct such glaring inequities and be more sound and 
defensible than the current method.
    We support the administration's proposal to establish a 
single conversion factor in the Medicare physician fee schedule 
with no transition. It should be no less than the 1997 
conversion factor amount for primary care services, updated for 
inflation. A single conversion factor would guarantee that 
physician services involving the same amount of work are paid 
at the same rates as originally intended by Congress. Given 
that private sector plans are relying more and more upon the 
Medicare fee schedule for setting their own fees, it is 
essential that a single conversion factor become law. 
Otherwise, the flawed system will be duplicated on the private 
sector side, thus creating a snowball effect of undervalued and 
miscalculated payments for primary care services.
    We agree with the proposal to use the sustainable growth 
rate method for calculating annual physician fee updates, but 
urge you to support at least a 2-percent adjustment. We support 
modifying the AAPCC formula by establishing a $350 base payment 
for Medicare HMO plans. This would level the playingfield by 
reducing geographic disparities in the current formula, which 
today vary from $221 to $767. The $350 floor would help attract 
managed care plans to underserved areas, especially rural 
communities, and make the HMO option available to these 
beneficiaries.
    Given the magnitude of the problems with Medicare GME 
payments, the administration's GME proposal is modest at best. 
We support the idea of shifting GME and IME payments to 
ambulatory training sites where the majority of family practice 
training occurs. This part of the budget could have gone much 
further. My written statement contains a 10-point plan for 
completely restructuring Medicare GME. Unlike the current 
system, the academy's plan would achieve the appropriate 
distribution of physicians in the work force by geographic 
location and specialty.
    We strongly oppose the idea of repealing the clarified 
``should have known'' standard adopted last year as part of 
HIPAA. Congress was correct in HIPAA by insisting that 
physicians should not be subject to civil monetary penalties 
for making an honest mistake. We also oppose efforts to repeal 
the HIPAA requirement that the HHS inspector general furnish 
physicians with advisory opinions on whether a proposed health 
care business venture violates Medicare laws and regulations. 
Eleven other Federal agencies provide such opinions and are not 
overwhelmed by the process.
    A major shortcoming of the Medicare Program is the virtual 
absence of coverage for preventive services. We are very 
encouraged by the introduction of H.R. 15, the bill to expand 
Medicare coverage for preventive services. The academy fully 
supports the recommendations of the U.S. Preventive Services 
Task Force and believes they should be fully incorporated into 
Medicare. My written statement includes an extensive 
recommendation for modernizing the Medicare Program, and I 
would like to share just a few highlights with you.
    First, public funding for Medicare should come from one 
source by combining part A and B funding into a single funding 
pool.
    Second, Medicare should be a program with a defined 
contribution with a minimum defined benefit. The defined 
contribution should be means tested--``means'' meaning both 
income and assets. And, further, Medicare and Social Security 
reform should be linked, since both programs financially affect 
the same populations.
    The academy also believes that a telemedicine policy fully 
covering physician consultations is a critical part of any 
Medicare reform effort. Interested members and their staff may 
refer to my written statement for more information about our 
ideas for telemedicine in Medicare.
    In closing, I thank you for this opportunity to appear 
before you and look forward to your questions.
    [The prepared statement follows:]

Statement of Patrick B. Harr, M.D., President, American Academy of 
Family Physicians

    My name is Patrick B. Harr, M.D., and I am a practicing 
family physician from rural Maryville, Missouri. It is my honor 
to serve as the President of the American Academy of Family 
Physicians. The Academy is the single largest primary care 
medical specialty organization in the United States. On behalf 
of the 84,000 members of the Academy, I would like to thank you 
for the invitation to present our views today on the Medicare 
provisions in the administration's fiscal year 1998 budget 
proposal that are of importance to family practice. My remarks 
also include recommendations for reform of the Medicare program 
that were recently approved by the Academy's Board of 
Directors.

          The Administration's Fiscal Year 1998 Medicare Plan

    The Academy supports a number of the Medicare provisions in 
the administration's budget plan. Overall, we believe that this 
plan offers a reasonable basis upon which Congress could 
develop a bipartisan Medicare reform package that would advance 
primary care, restore solvency to the trust funds, and achieve 
a balanced budget.
    The budget plan is worth consideration not only for the 
provisions it includes, but also for the provisions it does 
not. We are referring specifically to the plan's omission of 
any delay in the Health Care Financing Administration (HCFA) 
project to develop resource-based practice expense values as 
part of the Medicare physician fee schedule.
    The RBPE Project. The Academy believes it would be 
inappropriate to consider legislating a delay in the resource-
based practice expense (RBPE) project at this time. We urge 
concerned lawmakers to first review the proposed rule on 
resource-based practice expenses that is scheduled for 
publication this spring, weigh carefully the soundness and 
fairness of this proposal, and then determine whether the 
practice expense project deserves to continue or else be 
delayed and ``sent back to the drawing board'' for further 
work.
    It is true that the family practice specialty would post 
``gains'' of 9 to 19 percent in practice expense values 
according to preliminary data released by HCFA on January 22. 
However, it must be emphasized that we, like many other medical 
specialties, have concerns with this preliminary data. For 
example, the volatility of the estimated impacts by specialty, 
the validity of redistributing practice expense relative value 
units (RVUs) to non-physician providers, and the application of 
a 2 to 4 percent behavioral offset in the calculation of 
practice expenses are of concern to the Academy. Especially 
puzzling is that under one of the preliminary options reported 
by HCFA, the in-office practice expense RVUs for CPT codes 
99211 through 99213 would receive the same practice expense 
RVUs (.90 in all three cases) despite the fact that these codes 
involve increasing complexity and increasing professional and 
staff time allocations.
    Let us emphasize that we support a new practice expense 
method that is methodologically sound and defensible. However, 
preliminary data released January 22 are not the final word on 
this matter. All stakeholders will have an opportunity to 
suggest improvements to the practice expense method during a 
60-day comment period following the NPRM that will be released 
this spring. We feel it is wholly appropriate during that time 
period to formulate decisions as to whether the project should 
continue as scheduled toward a January 1, 1998 effective date. 
It should also be noted that HCFA staff plan to convene a 
multispecialty panel later this year to assist the agency with 
evaluating the comments and refining the proposed new practice 
expense method before the implementation date.
    The Academy believes that as interested parties continue to 
discuss the numbers in the HCFA proposal it is important to 
keep a sense of perspective about the practice expense project. 
For example, some specialties favoring a delay claim that 
access to their services would be adversely affected in rural 
and underserved areas and yet it is primary care providers, 
especially family physicians, who disproportionately serve 
these areas, at lower Medicare payment rates. Under the flawed 
system now used for determining practice expense payments, a 
family physician must typically perform 115 intermediate-level 
office visits to receive the practice expense payments 
equivalent to one coronary artery bypass graft (CABG) 
procedure--despite the fact that the hospital, and not the 
surgeon, assumes most of the overhead costs for such a 
procedure. Such glaring inequities in the Medicare program's 
method of reimbursing physicians for their overhead expenses is 
unfair to all primary care physicians and also is contributing 
greatly to problems in rural and underserved communities with 
access to needed medical services--including primary care and 
other non-surgical services.
    The HCFA project mandated by Congress to develop a new 
method for reimbursing physician practice expenses is the only 
effort to date attempting to rectify this long-standing 
problem. For these reasons, the Academy simply asks the members 
of this subcommittee not to rush to judgment on the project 
before the proposed rule for the new RBPE method is available 
for review.
    A Single Conversion Factor. We support the administration's 
proposal to ``fix'' long-standing problems with the formula for 
calculating annual updates in the Medicare physician fee 
schedule through the establishment of a single conversion 
factor. Correcting existing flaws in the update formula is 
absolutely essential not only to restore the original intent of 
the Medicare physician fee schedule, but also because the 
effects of the fee schedule reach far beyond the Medicare 
program itself. Private sector health plans are relying 
increasingly upon the Medicare physician fee schedule to 
determine the fees for physicians participating in their plans. 
Correcting the inequities in the present Medicare fee schedule 
is necessary to ensure that these flaws are not duplicated on 
the private sector side of a physician's practice, creating a 
snowball effect of undervalued and miscalculated payments for 
primary care services.
    The administration's plan would eliminate the three 
individual conversion factors for primary care services, 
surgical services, and other non-surgical services by replacing 
them with a single conversion factor equivalent to the FY'97 
amount for primary care services ($35.7671). This new 
conversion factor would be adjusted each year by the Medicare 
economic index. The Academy is a strong advocate for the 
implementation of a single conversion factor for all medical 
services that would be no less than the current primary care 
conversion factor amount. The single conversion factor should 
take effect January 1, 1998--without a transition period--as 
proposed in the administration's budget.
    Such a policy would guarantee that physician services 
involving the same amount of work are paid at the same rates--
as intended by the drafters of the resource-based relative-
value schedule (RBRVS) that serves as the basis for the 
Medicare physician fee schedule. Surgical and primary care 
services with exactly the same work values are reimbursed at 
significantly different rates, as the numbers illustrate. Both 
a diagnostic laryngoscopy (CPT code 31575) and a level 4 
established patient office visit (CPT code 99214) are assigned 
1.10 work relative value units by the Medicare physician fee 
schedule. However, despite the fact that each service involves 
the same amount of physician work, the surgical service 
receives $45.0563 while the primary care service receives only 
$39.3438. Both an incision and drainage of an abscess (simple 
or single, CPT code 10060) and a mid-level established patient 
home visit (CPT code 99352) are assigned 1.12 work relative 
value units by the fee schedule. Yet, the surgical service 
receives $45.8755 while the primary care service receives only 
$40.0591.
    The Academy is not alone in believing that a single 
conversion factor would bring greater consistency and fairness 
to the Medicare physician fee schedule. The policy is also 
supported by the Physician Payment Review Commission.
    A Sustainable Growth Rate Measure. The Academy also favors 
switching from the current Medicare Volume Performance Standard 
(MVPS) formula to a single target based on Gross Domestic 
Product (GDP), such as the sustained growth rate (SGR) formula 
in the administration's FY'98 budget. The current MVPS system 
is based in part on a rolling five-year historical average of 
growth in the volume and intensity of Medicare services. As 
such, it has the perverse effect of rewarding poor performance, 
defined as actual expenditure growth exceeding the target rate 
of increase, with higher future targets. Meanwhile, good 
performance results in lower future targets. This flawed method 
does not adequately take into account the influence of changing 
medical practices or efficiencies. However, the change to GDP 
and a cumulative measure--such as the SGR method favored by the 
administration, the PPRC, and the Academy--would eliminate this 
perverse incentive. Under the SGR system, a single target would 
be established for growth in the volume and intensity of 
Medicare services, based in part on the growth in GDP. Given 
the SGR system's cumulative nature, it measures spending on 
physician services in a base year against a target level of 
spending. This feature of the SGR system is more equitable to 
primary care providers than the current MVPS system based on 
rolling averages. The SGR system also eliminates the 4-percent 
behavioral offset from calculations of annual fee updates that 
makes it impossible for physicians to achieve the performance 
targets required by the MVPS formula.
    While the Academy favors switching to the SGR method for 
calculating annual physician fee updates, we are concerned that 
the proposed 1 percent adjustment for volume and intensity 
proposed by the administration is insufficient. We recommend a 
volume and intensity adjustment of at least 2 percent to ensure 
that fee schedule updates come closer to matching inflation 
changes.
    The AAPCC Formula. The administration's budget proposes to 
alter the method by which Medicare reimburses participating 
managed care plans. Under the current method, Medicare HMO 
plans are paid 95 percent of the average annual per capita cost 
(AAPCC) provided for fee-for-service care in a county. Under 
this method, monthly payment rates for Medicare HMO services 
vary greatly across geographic areas, from $221 to $767. The 
administration budget would establish a $350 minimum HMO 
payment for areas with below-average payment rates, effective 
in 1998, so that more Medicare beneficiaries could select a 
managed care option. Leveling the playing field is especially 
important so that managed care plans would be attracted to 
rural areas where HMO penetration is currently very low, and 
rural beneficiaries would be able to choose from at least one 
managed care option in their community.
    A recent study based on HCFA data and distributed by the 
Fairness Coalition demonstrates clearly that enrollment in 
Medicare managed care plans is lowest in those areas where the 
AAPCC payment rate is below $350. For example, less than 1 
percent of Medicare beneficiaries in counties with an AAPCC 
payment rate below $300 per member per month are enrolled in 
managed care plans. Most of the counties are in rural areas. By 
contrast, 76 percent of Medicare beneficiaries are enrolled in 
managed care plans in counties where the AAPCC payment rate 
exceeds $400 per member per month. While the Academy has not 
endorsed a particular method for adjusting the AAPCC, we do 
support the idea of adjusting it toward a national average 
amount that would apply in all counties. Given that the AAPCC 
rate in most counties is below the national average at this 
time, bringing up the floor would be beneficial for the growth 
and development of most existing Medicare HMO plans. The 
Academy believes that consumers would benefit from the ability 
to select between fee-for-service and viable managed care 
options in their communities as a result of normalizing the 
AAPCC payment rate.
    Some observers have expressed concerns that the AAPCC 
modifications in the budget plan might diminish quality and 
harm consumers in the areas in which payments to HMOs are 
highest by forcing the plans serving those areas to cut back on 
their supplemental benefit packages, as their payments are 
lowered to raise the floor in other areas. These supplemental 
packages typically include low-cost prevention services, 
prescription drugs, eyeglasses and hearing aids. The Academy is 
sensitive to these concerns and believes changes ought to be 
carefully considered and monitored with equal care as they are 
implemented. We believe it is equally important to modify the 
AAPCC formula so as to reduce geographic disparity in payment 
rates and attract managed care to counties where this option is 
currently unavailable.
    We are concerned, however, that the proposal to reduce the 
AAPCC from 95 percent to 90 percent of the county-level fee-
for-service payment rate without an adequate risk adjustment 
mechanism could jeopardize the prospects for normalizing the 
AAPCC payment rate nationwide. Accordingly, we urge Congress to 
examine fully the implications of a reduction in the AAPCC rate 
upon efforts to establish a $350 minimum national payment floor 
for Medicare HMO services. Support for an adequate and accurate 
risk adjustment mechanism should be carefully considered in any 
AAPCC modification that Congress may adopt this session.
    Graduate Medical Education. The budget proposal includes 
some of the GME reform measures that the Academy has advocated 
for years. For example, the budget plan would carve out the 
portions of the AAPCC payment attributable to GME and indirect 
medical education (IME) payments. The GME and IME payments 
would instead be distributed directly to the teaching 
facilities. Given that a substantial portion of family practice 
training occurs in non-hospital, ambulatory settings, the 
Academy urges Congress to guarantee that GME and IME payments 
would follow the medical resident, so that ambulatory training 
sites, and not just academic medical centers, would receive 
support for the instructional services they provide. In 
addition, we agree with the budget plan's provision to count 
work in non-hospital training settings for IME payments.
    However, given the magnitude of the GME problem, the 
administration could have gone much further with its proposal 
to restructure GME. Medicare GME policies are largely 
responsible for the over-specialization of the physician 
workforce. At this time, GME is subsidized by the Medicare 
program without reference to ensuring the appropriate 
distribution of physicians by geographic location or specialty. 
Reforming the financing of GME should address these and other 
policy issues.
    The Academy urges Congress to adopt a comprehensive 
Medicare GME reform policy based on the following 
recommendations:
     National physician workforce policy, including but 
not limited to allocation of the total GME financing support 
pool and the weighting of per-resident capitation payments, 
should be developed by a public-private commission, the 
recommendations of which can only be accepted or rejected 
without modification by Congress;
     The amount of federal GME financial support should 
initially include no less than the full amount of payments 
currently included in DME, IME, and the GME component of the 
AAPCC. The portion of federal support historically identified 
as IME should decrease over a five year transition period to 75 
percent of the current amount;
     All payors of health care services, in addition to 
the federal government, should share in contributing to a total 
GME pool;
     GME financial support should be provided in a per-
resident capitation amount to the entity legally responsible 
for paying the costs of training the resident;
     GME financial support to the institution 
sponsoring residency training must be used to pay the direct 
and indirect costs of training that occur in any site 
authorized by an ACGME accredited or AOA approved residency 
program;
     Full GME capitation payments should be made to 
support the training of individual residents for the minimum 
number of months necessary to meet the training requirements of 
only one certifying board, regardless of the number of months 
actually experienced by the resident during training;
     Per-resident capitation payments should reflect 
national physician workforce policy, i.e. increased payments 
should be made to support the training of residents in 
undersupplied specialties or geographic areas;
     GME financing policy should limit the total number 
of funded first-year post-graduate residency positions to 110 
percent of the annual number of U.S. MD and DO graduates, 
phased in from current levels over a five year period;
     Sponsoring institutions should receive GME 
capitation payments based on the number of residents enrolled 
in the training program(s) through a national program (such as 
the National Resident Matching Program) determined by the 
public-private commission, regardless of the school of 
graduation of the resident, as long as the resident is eligible 
for post-graduate residency training in an ACGME accredited or 
AOA approved residency program in the U.S.; and
     The National Health Service Corps (NHSC) should be 
used to provide service to populations that would have been 
served by previously funded residency positions. 
Disproportionate share payments should continue to support 
training institutions serving vulnerable populations.
    Fraud and Abuse Provisions. The Academy opposes the 
provisions in the budget plan that would eliminate the 
``knowing and willful'' standard enacted last year as part of 
the Health Insurance Portability and Accountability Act of 1997 
(HIPAA). We believe the Congress was correct in HIPAA in 
insisting that no physician should be held liable for criminal 
penalties if that physician did not intend to defraud the 
government but simply made honest mistakes. Repealing the 
knowing and willful standard for conviction of health care 
crimes would, we are convinced, increase the chance that 
physicians will be penalized for ``human error,'' such as 
unintentional coding errors.
    We also oppose the budget plan's proposed repeal of the 
advisory opinion requirement. By seeking to eliminate this 
provision, the administration is demonstrating its continued 
unwillingness to abide by the spirit and intent of the HIPAA 
law requiring that advisory opinions be furnished to physicians 
considering health care business ventures that might or might 
not conflict with Medicare law and regulations. It is precisely 
these sort of advisory opinions that would help physicians (and 
the health care delivery system as a whole) to avoid costly and 
unintentional violations of the fraud and abuse laws. The 
administration has claimed that the Inspector General of the 
Department of Health and Human Services may be deluged with an 
unmanageable flood of physician-generated requests for advisory 
opinions. However, at least 11 other federal agencies, 
including the Federal Elections Commission (FEC) and the 
Internal Revenue Service (IRS) provide advisory opinions. 
Furnishing advisory opinions is a common government practice. 
It should be further noted that these agencies have not been 
overwhelmed by such requests. Given that the advisory opinion 
process is operating well within these agencies, we recommend 
that the HHS Inspector General contact these agencies, learn 
from their experiences, and proceed without delay to implement 
the advisory opinion requirement in HIPAA.
    The knowing and willfull standard and the advisory opinion 
requirements enacted last year are reasonable and widely-
supported within the physician community. For these reasons, we 
urge Congress to oppose the administration's effort to 
eliminate these provisions of HIPAA.
    Preventive Services. A major shortcoming of the present 
Medicare program is the virtual absence of coverage for 
clinical preventive services. The Academy strongly supports 
adding clinical preventive services to the benefits package for 
Medicare beneficiaries. We are pleased, therefore, with the 
administration's intent to extend Medicare coverage to 
preventive health care services such as diabetes management, 
colorectal screening, annual mammograms without copayments, and 
reasonable payment rates for administering immunizations to 
protect beneficiaries from pneumonia, influenza, and hepatitis 
B. We strongly support efforts to include preventive services 
in the basic benefit package as long as these services are 
based on scientific evidence and outcomes, and are consistent 
with the recommendations of the U.S. Preventive Services Task 
Force (USPSTF).
    In a related matter, the Academy is greatly encouraged by 
the introduction of the Medicare Preventive Benefit Improvement 
Act of 1997 (H.R. 15). The majority of the standards in H.R. 15 
are long overdue. House Ways and Means Subcommittee on Health 
Chairman Thomas, Representative Ben Cardin, and House Commerce 
Subcommittee on Health and the Environment Chairman Michael 
Bilirakis are to be commended for the introduction of this 
measure and their obvious commitment to updating the Medicare 
benefits package. This bill is an opportune vehicle for 
creating a mechanism to implement the science-based 
recommendations of the USPSTF, which does not rely on ``old-
style'' consensus medicine that has been medicine's usual 
recourse. We know a great deal more now about what tests are 
effective, which monitoring activities provide the physician 
with accurate data and what interventions are likely to result 
in further productive years for the patient. This medical 
knowledge should be reflected in both public and private 
insurance benefit packages.
    The Academy urges all health-related committees of Congress 
to begin implementation of all the recommendations of the 
USPSTF in federal health programs. Let these recommendations be 
reviewed and updated as outcomes-based medical research sheds 
additional light on promoting and preserving health.
    High-Volume Withhold. The budget plan includes a provision 
for withholding 15-percent of payment from physicians 
practicing in hospitals where the volume and intensity of 
services per admission exceed 125 percent of the national 
median for urban hospitals (140 percent of the national median 
for rural hospitals). The projected savings from this policy is 
$2 billion by the year 2002. Family physicians serving in 
underserved or rural communities, where the population is 
characterized by a higher proportion of Medicare beneficiaries 
with multiple health problems, would be adversely affected by 
this proposal. The Academy feels that this proposal is 
insensitive to the demographics that can lead to a higher 
volume and intensity of services per admission in such 
settings, and for this reason opposes the high-volume withhold 
in the budget plan.
    Expanded Health Plan Options. Consistent with the intent of 
past Republican-sponsored Medicare legislation, the 
administration's budget would increase the choice of health 
plans available to beneficiaries by offering them the option of 
enrolling in provider-sponsored organizations (PSOs). Expanding 
the choice of health plans available to beneficiaries is also 
consistent with Academy policy. We will monitor closely any 
developments with this proposal.

       Medicare Reform Should Emphasize Modernization of Program

    Medicare reform will be a very prominent subject in the 
legislative and policy arenas in 1997. The Academy believes 
there are at least three reasons for its prominence. First, as 
recently as June 1996, trustees for the Medicare trust funds 
reported that the Hospital Insurance (Part A) trust fund would 
be exhausted in 2000 or 2001. Second, Medicare expenditure 
growth continues to spiral out of control. Finally, the 
Medicare program is encountering a serious problem in that the 
number of workers contributing payroll taxes to finance the 
Part A trust fund is declining. Under present constraints, 
these demographics will necessitate increased payroll taxes to 
sustain the Medicare program--a solution that most likely is 
not politically viable.
    Because of these problems, Medicare reform is the subject 
of intense debate. The Academy believes that:
     Medicare should be a program with a defined-
contribution and a minimum defined-benefit;
     Eligibility should remain as it currently is under 
Medicare;
     Beneficiaries should have a range of Medicare 
options from which to choose, including traditional fee-for-
service Medicare and any other plan that offers the minimum 
defined-benefit, accompanied by incentives to choose the most 
cost-effective option;
     The minimum defined-benefit should include the 
current benefits available under Medicare, clinical preventive 
services as defined by the U.S. Preventive Services Task Force, 
and mental health services at parity with medical services;
     Public funding for the Medicare program should 
come from one source (combined Part A and Part B financing), 
which covers all of Medicare;
     The defined-contribution should be based on the 
per capita cost of providing the minimum defined-benefit in a 
base year plus a market-determined adjustment rate in years 
beyond the based;
     Beneficiaries should be responsible for all costs 
beyond the defined-contribution;
     Medigap insurance should remain an option for 
Medicare beneficiaries;
     Quality should be certified to commonly accepted 
professional standards; and
     The defined-contribution should be means-tested, 
where ``means'' includes both income and assets.
    Further, the Academy takes the position that efforts to 
reform Medicare should be tied to efforts to reform Social 
Security (e.g., the adjustment to the Consumer Price Index for 
cost-of-living-allowances, etc.) since both programs 
financially affect the same populations. To restructure the 
Medicare program without also addressing Social Security would 
place a disproportionately heavy burden on Medicare alone, 
placing the program and its beneficiaries at risk. Such a half-
measure would essentially defeat the purpose of overhauling the 
Medicare program.
    The Academy's recommendations reflect our view that reform 
should change Medicare from strictly a defined-benefit program, 
in which the costs to the government are essentially open-
ended, to a program with a defined-contribution (and thus a 
defined cost) and a minimum defined-benefit. Our recommendation 
favoring more choices for Medicare beneficiaries is consistent 
with long-standing Academy policy that supports providing 
beneficiaries with a range of health plan choices accompanied 
by incentives to choose the most cost-effective option. In this 
case, the incentive is the defined-contribution coupled with 
the beneficiary's responsibility for all costs beyond the 
defined-contribution. Likewise, consistent with the notion of 
beneficiary choice, the Academy believes that the right of 
beneficiaries to choose Medigap coverage should be retained as 
part of overall Medicare program reform.
    With regard to funding Medicare, the Academy finds the 
current distinction between Part A and Part B to be an 
artificial and archaic one that needs to be updated. Given that 
beneficiaries are automatically enrolled in Part A but may 
choose not to participate in Part B, questions may arise over 
whether the resources of these programs could be combined into 
one funding stream for Medicare. However, separate funding for 
the different parts of Medicare often creates perverse 
incentives to shift patients from one sector of the health care 
system to another without regard to what may be the best 
clinical practice. It also is contrary to the notion of a 
``continuum of care,'' which the Academy supports. Thus, the 
Academy favors the concept of a single source to fund all of 
Medicare.
    Another improvement that the Academy endorses is an 
extension of Medicare benefits to include clinical preventive 
services and mental health services at parity with medical 
services. This would make the basic benefits package offered 
under Medicare more responsive to enrollees' health care needs 
and may actually generate program savings.

  Comprehensive Telemedicine Policy Needed as Part of Medicare Reform

    The Academy believes that modernization of the Medicare 
program would not be complete without the establishment of a 
comprehensive telemedicine policy. We are particularly 
sensitive to the potential for telemedicine to assist family 
physicians serving remote and sparsely populated communities. 
It is with this perspective in mind that the Academy's Board of 
Directors recently adopted a number of recommendations 
concerning Medicare reimbursement and support for telemedicine.
    Medicare should reimburse physicians for telemedicine 
consultations independent of the site of service or technology 
utilized. Referring physicians should be reimbursed for the 
initial encounter(s) leading to the telemedicine referral using 
standard evaluation and management (E/M) codes. Consulting 
physicians should be reimbursed for the telemedicine 
consultation also using standard E/M codes.
    A mechanism should be developed to fund telemedicine 
infrastructure. Telemedicine infrastructure in our view 
includes, but is not limited to, transmission and reception 
audio/video equipment, specialized examination equipment, 
telecommunications lines, electronic transmission costs, 
operational personnel, protocol development, and organizational 
support.
    Telemedicine is a technology currently available primarily 
to the entities fortunate enough to have received grant-funded 
startup costs. Without a mechanism to ensure capital 
availability for telemedicine, its benefit will be limited. 
Some populations, especially those that are historically under-
served, may never have access to telemedicine unless patients 
and/or third party payers, such as the Medicare program finance 
the technology infrastructure. Examples of infrastructure costs 
include facility fees, technical component fees, copays, or 
capitation. Sustaining the cost of telemedicine once the 
initial infrastructure is in place is an equally formidable 
problem, and once the Academy believes can best be resolved 
through Medicare reimbursement for telemedicine consultations.
    Presently, HCFA recognizes the utility of technical and 
professional components, as described in CPT, to pay for 
certain medical procedures or services. Some cardiology and 
radiological services are routinely billed using modifiers. For 
example, a -26 CPT modifier is used whenever a professional 
component is reported separately for a service or procedure 
that has both technical and professional components. Resource 
based relative value scale relative value units for CPT codes 
account separately for the physician work (professional 
component) and practice expense (technical component) portions 
of a medical procedure or service. In addition, in the case of 
cardiovascular stress testing, for example, a series of CPT 
codes (93015-93018) have been developed to accurately describe 
the services provided.
    Code 93015 is a global code involving physician 
supervision, the actual test tracing, interpretation, and a 
report. Code 93016 involves only physician supervision. Code 
93017 involves only providing a test tracing (technical 
component). Code 93018 involves only an interpretation and a 
report (professional component).
    Thus, the Academy believes that HCFA has established 
mechanisms to pay separately for the telemedicine component of 
physician services when appropriate. Further, these mechanisms 
could serve as the basis for Medicare reimbursement for 
recognized telemedical infrastructure elements, such as the 
technical components--or telemedicine practice expenses--
associated with providing medical services via this medium.
    Access to telemedicine consultations should be initiated 
and recorded by the patient's designated health care provider 
(attending physician or non-physician provider), rather than by 
the patient or consultant. The Academy is sensitive to the 
potential for inappropriate telemedicine utilization and 
believes that a mechanism should be developed to help ensure 
that telemedicine consultations are medically indicated. A 
policy limiting patient self-referral and consultant-generated 
referral would address HCFA concerns regarding increased 
Medicare costs generated by telemedicine. Further, such a 
policy, in our view, would be consistent with good health care 
management principles.
    A mechanism should be developed to ensure that the 
referring physician is appropriately reimbursed if referring 
physician presence is medically necessary during a telemedicine 
consultation. The Academy believes that there will be certain 
circumstances when it will be necessary for the referring 
physician to be present during the telemedicine consultation. 
In such cases, the referring physician should be reimbursed 
appropriately. This approach would provide concurrent 
reimbursement for two physicians, which is a departure from 
current payment policies. However, the Academy notes that 
telemedicine consultations are different from traditional 
physician/patient encounters and telemedicine reimbursement 
policies must reflect such differences. The policy developed 
should take into consideration the situation, the service 
complexity, and the patient's comprehension and comfort. For 
example, a patient with impaired mental capacity may require 
the presence of his or her health care provider to explain, 
demonstrate, and comfort during a telemedicine consult. Current 
HCFA-approved pilot projects are paying for ``attending 
physician'' presence during telemedicine consultations using 
CPT codes 99211-99215 (established patient office visit codes). 
Potential approaches for referring physician reimbursement 
might include a fixed fee, use of current E/M codes, a new CPT 
codes, or a CPT code modifier.

                               Conclusion

    The Academy appreciates this opportunity to appear before 
the subcommittee today. As practicing physicians, Academy 
members span the political spectrum and support both major 
parties. It is important to us that both parties work together 
to build an improved Medicare program that the nation can 
afford and that will endure well into the 21st Century. I would 
be happy to entertain any questions from the members at this 
time.
      

                                



   American Academy of Family Physicians Federal Grants and Contracts
------------------------------------------------------------------------

------------------------------------------------------------------------
Funder:                                     National Institute on Drug
                                             Abuse
Project:                                    American Family Physicians
                                             (AFP) Monograph on
                                             Diagnosis and Treatment of
                                             Drug Abuse
Type of Funding:                            Contract
Identification #:                           NO1DA-3-2400
Funding Period:                             9/30/93 to 3/30/95
Award:                                      $155,265.00
------------------------------------------------------------------------
Funder:                                     Health Resources and
                                             Services Administration
Project:                                    Interdisciplinary Generalist
                                             Curriculum Project
Type of Funding:                            Subcontract
Identification #:                           240-93-0010
Funding Period:                             3/11/93 to 3/10/99
Award:                                      $122,373.00 (to date)
------------------------------------------------------------------------
Funder:                                     Agency for Health Care
                                             Policy and Research
Project:                                    Development of Practice
                                             Guide for Otitis Media
Type of Funding:                            Contract
Identification #:                           282-90-0086
Funding Period:                             10/1/91 to 5/30/95
Award:                                      $79,333.00
------------------------------------------------------------------------
Funder:                                     Office of Disease Prevention
                                             and Health Promotion
Project:                                    Put Prevention into Family
                                             Practice
Type of Funding:                            Contract
Identification #:                           HP 930002-01-0
Funding Period:                             10/1/93 to 5/31/97
Award:                                      $279,933.00
------------------------------------------------------------------------
Funder:                                     Health Care Financing
                                             Administration
Project:                                    Literature Review and
                                             Evidence Tables for Type 2
                                             Diabetes
Type of Funding:                            Contract
Identification #:                           95-0821
Funding Period:                             9/28/95 to 11/30/95
 Award:                                     $23,250.00
------------------------------------------------------------------------

      

                                


    Mrs. Johnson. Thank you for your excellent testimony.
    Mr. McCrery, do you have any questions?
    Mr. McCrery. Madam Chair, I am 10 minutes late to an 
appointment, and we have a vote on the floor, and so I want to 
thank these gentlemen for their excellent testimony. I know 
there are some disagreements among you, and we will take those 
into consideration as we look at it.
    Thanks.
    Mrs. Johnson. Since I do not have another meeting but only 
a vote on the floor, I did want to take a couple of minutes to 
enlarge on what I think is a significant underlying problem.
    Dr. Maves, in your statement you mention that the 
methodology used by HCFA did not measure the actual resources 
involved in provision of physician services as the law 
requires. Could you specifically address what resources have 
not been identified and collected and how you would collect 
those data?
    Dr. Maves. Yes, ma'am, thank you. The problem with the 
current system is that there is really no direct data on the 
indirect cost component. This was to have been collected by a 
survey in the original proposal from HCFA. This was not 
completed due to a very low response rate.
    In addition, as we have examined the CPEP data, the data 
from the panels, we find that there are some errors contained 
within it, and in addition, there is some incomplete data 
provided by the CPEP panels.
    Finally, there are a number of key costs that were 
eliminated from consideration. One that I am familiar with is 
surgeons who may take an office nurse to the hospital with them 
for assistance in surgery, and those were arbitrarily 
eliminated from the study.
    I would be happy to have the staff of the Practice Expense 
Coalition give you additional information, but there are a 
substantive number of pieces of information. I think the most 
critical one is the indirect cost information which is not 
collected, and instead HCFA has used a mathematical 
approximation to reach that piece of information.
    Mrs. Johnson. You mentioned also in your testimony the 
clinical practice expert panels that were to be used in 
collecting the direct data. Could you give this Subcommittee a 
better understanding of the composition of these CPEPs, how 
they were selected, and what the process was for verification 
of the data?
    Dr. Maves. The panels were selected both from nominees from 
the specialty societies and also from individuals selected by 
HCFA. It was a cooperative venture. It is one that, in fact, 
the Practice Expense Coalition vigorously supported. All of the 
specialties involved provided volunteers, in some cases at 
specialty society expense, to help HCFA go over actual 
procedures and estimate the direct costs involved in various 
procedures.
    Typically, these panels were interdisciplinary; in other 
words, for areas where more than one specialty might provide a 
service, there was a number of different specialties 
represented at each panel. I think the CPEP process in and of 
itself was a good one, a rigorous one, but one where we have 
had really, I think, insufficient time to examine it. We found 
some errors. There are some pieces of that pie that need to be 
completed, and so more than a bad start, it has just simply 
been the job has not been finished at this point in time to our 
satisfaction or, I believe, to the standard which Congress 
initially gave HCFA to complete this.
    Mrs. Johnson. Thank you.
    There was a comment also in your testimony that you think 
that if reimbursement rates are cut too dramatically, the 
quality of services would suffer.
    Dr. Maves. Yes, ma'am. We are concerned about that. I think 
one of the things that has to be taken into consideration are 
what are the downstream effects from this particular proposal. 
We are concerned about access. We are concerned about quality. 
Clearly, as I indicated in my testimony, as an individual who 
essentially spent his entire career in academic medicine, I am 
concerned about the research and education components of our 
academic health centers who obviously--the income from surgical 
procedures, all procedures, all services increasingly is an 
important part of their budget. And so, yes, we are concerned 
about those. We do not know in what fashion those will go.
    These are pretty dramatic cuts. In my own instance, we have 
some cases, such as total laryngectomy, where we remove the 
voice box for people that have cancer of the larynx, this has 
been cut by one-third to one-half. So we are worried that in 
some cases perhaps access will be affected because of the 
severe and extreme nature of the cuts that have been proposed 
in the preliminary rule.
    Mrs. Johnson. Do any of the rest of you have any comments 
on this issue, either the quality of the data or the 
possibility that reimbursement rates would sink to a level that 
would affect access and eventually quality?
    Dr. Nelson. Yes, I would like to comment, Madam Chair. The 
direct cost estimates, as you indicated, were put together by 
panels, and that includes the equipment that is necessary and 
the direct staff expenses and so forth.
    The part that has been estimated through other kinds of 
research is the indirect, which is the heat, lights, rent, 
those kinds of expenses that you cannot directly assign to a 
procedure. But research has been done that indicates that time 
is a pretty good surrogate for that, and that is one of the 
reasons why we supported what Dr. Wilensky said when she 
indicated that, while the data may not be perfect, it is 
certainly adequate to proceed. And it is why in our statement 
we emphasized the fact that we have serious concerns with these 
preliminary data, but it is too early for us to judge whether 
or not HCFA will indeed put together data that are perfectly 
adequate and reassure the medical community.
    Mrs. Johnson. I do have to go vote, but the reason I raise 
this issue--and I think you all ought to think about it really 
seriously, and particularly as this issue advances--is that 
during our hearing the other day on the preventive services 
package, the issue came up that if you are going to reimburse 
for a lot of screening yet the rate for screening is very low, 
physicians are going to make choices: Do I schedule someone who 
wants to see me because they are sick and so on and so forth? 
Or do I schedule this kind of preventive action that reimburses 
me below costs? And remember, Medicaid went through a period of 
reimbursing below costs, and for internists, 2 years ago I 
began to get direct input that reimbursement rates for an 
office visit were now so low that if you had a primarily 
Medicare practice, you could not afford to take any more 
Medicare patients.
    So while we do not talk about this much, in fact both 
Medicaid and Medicare have experienced a reduction in patient 
access to care as a result of underreimbursement, and we do not 
like to talk about that because we go out there and we say now 
these cuts are going to affect the seniors, and that is a lot 
of you know what. So it does worry me when I hear, on top of 
our history of reductions, such sharp reductions. And I would 
certainly want to be clear that they were well--they were based 
on very good data.
    Dr. Nelson. That is exactly what this change that we are 
proposing would serve to meet. The problem has been that the 
kinds of services you just described--the careful history, 
discussing the treatment options--have been undervalued. And 
the purpose for the payment reform that we are encouraging to 
be completed is to assign the value that those services 
require.
    Mrs. Johnson. Thank you very much for your testimony today. 
We appreciate it.
    [Whereupon, at 3:17 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of American Academy of Otolaryngology-Head and Neck Surgery, 
Inc., Alexandria, Virginia

    The American Academy of Otolaryngology-Head and Neck 
Surgery (AAO-HNS) is pleased to submit the following statement 
for the record of the Ways and Means Subcommittee on Health 
hearing on Recommendations Regarding Medicare Hospital and 
Physician Payment Policies held on March 20, 1997. We 
appreciate the Committee's consideration of our views on the 
following issues.

                         Background on AAO-HNS

    The AAO-HNS is a national medical specialty society of 
physician specialists dedicated to the care of patients with 
disorders of the ears, nose, throat and related structures of 
the head and neck. There are approximately 7500 practicing 
otolaryngologists--head and neck surgeons in the United States. 
The public commonly refers to otolaryngologists as ears, nose 
and throat (ENT) specialists. We are a surgical specialty that 
provides a range of services to the population, including many 
services that would be considered primary care. Sore throats, 
ear aches, allergies and stuffy noses are those most commonly 
treated in both children and adults. We are also trained, 
however, to perform complex surgeries, including those related 
to head and neck cancers.

            Resource-Based Practice Expense Relative Values

    The AAO-HNS is extremely concerned about the progress and 
status of the Health Care Financing Administration's (HCFA) 
efforts to develop resource-based practice expense relative 
value units for the Medicare physician fee schedule. HCFA is 
currently under a statutory obligation to implement the new 
practice expense relative values by January 1, 1998. Although 
the preliminary estimates released by HCFA in January indicate 
that otolaryngology payments would increase anywhere from two 
to twenty percent, we remain concerned about the validity of 
the data and methodologies being used. A review of the top 200 
service specific winners and losers indicates that there are 
serious flaws with the HCFA data and methods. The numbers and 
relationships are beyond reason.
    The law stipulates that the methodology utilized should 
``recognize the staff, equipment and supplies used in the 
provision of various medical and surgical services in various 
settings.'' Unfortunately, HCFA's failure to collect data on 
the actual resources used is contrary to congressional intent. 
The AAO-HNS has complied with HCFA's study plans from the 
beginning. We participated in both HCFA survey data collection 
efforts and served on the Clinical Practice Expert Panels 
(CPEPs). However, despite everyone's best efforts, the survey 
failed and the CPEPs were unable to arrive at direct cost 
estimates for numerous services. In particular, we strongly 
believe that there is not enough time left to assign 
appropriate values given the cancellation of the survey on 
indirect costs. The Office of Management and Budget specified 
that a response rate of seventy percent was necessary for the 
data to be valid when it gave approval. There was only a 
twenty-seven percent response rate when the survey was 
canceled.
    We are also concerned about HCFA's failure to submit a 
report to Congress by June 30, 1996 on the method and data to 
be used as was required in the legislation. The mandate stated 
that the report must specifically include a presentation of the 
data utilized in developing the methodology and an explanation 
of that methodology.
    The AAO-HNS is gravely concerned about access to quality 
medical care under this scenario. The current HCFA plan would 
seem to adversely affect patient access to quality medical care 
if implemented in 1998 as scheduled. Implementation of the 
current HCFA data must be stopped and new methodologies 
evaluated.
    The AAO-HNS is a member of the Practice Expense Coalition 
that testified before the Subcommittee at this hearing. We 
fully support the Practice Expense Coalition's recommendations 
that Congress should:
    1. stop the current rule making process;
    2. instruct HCFA to assemble experts in cost accounting and 
to develop mechanisms for collecting actual data on physician 
practice expenses.

                           Conversion Factors

    We continue to be opposed to proposals for a single 
conversion factor for the Medicare Physician Fee Schedule. We 
believe that continuation of a separate conversion factor for 
surgical services is fair public policy. Separate conversion 
factors provide relevant policy information about physician 
behavior patterns and cost containment methods.
    If a single conversion factor were implemented, it would 
result in blatantly unfair payment reductions for surgeons. 
Surgery has not contributed to the problem of Medicare spending 
growth, but rather has consistently come under the spending 
targets set for it by the Congress.
    In fact, in recent years, Medicare spending for surgical 
services has dropped in absolute dollars, not just in growth 
rates. Because surgery has consistently come in under target, 
it has received rewards in the form of positive updates. 
However, despite these positive updates, overall payment rates 
to surgeons have significantly declined in recent years due to 
the re-distributive effects of the budget neutral relative 
value scale. The AAO-HNS believes that it is unfair to 
implement such a change without at least some transition.
    President Clinton's FY '98 Medicare budget proposal calls 
for a single conversion factor in 1998 without a transition 
period. Under the proposal, all physician services would be 
paid at the 1997 conversion factor rate for primary care 
updated to 1998. Even if fees were frozen at 1997 levels, this 
would mean a real dollar cut in payments to surgical services 
of 14.5 percent. This comes on top of any relative value 
changes HCFA might make in 1998.
    The AAO-HNS supports maintaining a separate conversion 
factor for surgical services. However, should Congress be 
insistent on changing the law to allow for only one conversion 
factor for all physician services, we would urge that Congress 
include, at the very minimum, a three-year transition or phase-
in.
      

                                


Statement of American College of Rheumatology, Atlanta, Georgia

    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 Committee on two issues pertaining to the 
Medicare Fee Schedule (MFS): use of a single conversion factor 
and implementation of resource-based practice expenses by 1/1/
98. We believe that achieving these critically important 
reforms will end the inequities that currently undermine the 
original intent of the Resource-Based Relative Value Scale 
(RBRVS)--equal reimbursement for equal work.

                        Single Conversion Factor

    ACR strongly supports the administration's proposal to 
enact a single dollar conversion factor for the Medicare fee 
schedule, effective 1/1/98, and to establish the single 
conversion factor at a level that is no less than the current 
primary care conversion factor, updated for inflation. We 
appreciate this subcommittee's support in the past for 
enactment of a single conversion factor--particularly, the 
decision by the subcommittee to include a single conversion 
factor during mark-up of the Balanced Budget Act of 1995.
    Under the 1997 default conversion factors, surgical 
procedures are reimbursed at a rate that is 14% higher than 
primary care services, and 21% higher than other nonsurgical 
services, that involve the same amount of physician work. In an 
effort to correct this inequity, Congress included a single CF 
in the Balanced Budget Act of 1995. The single CF would have 
been effective on January 1, 1996. As the committee is well 
aware, however, President Clinton vetoed the BBA, with the 
result that the policy of separate conversion factors and 
updates remains in effect. There continues to be strong 
bipartisan support for enacting a single CF, however, as 
evidenced by the fact that it not only was included in the BBA 
and in the President's current budget, but it has also been 
included in other proposals such as the recently-unveiled 
``Blue Dog'' budget proposal.
    The College urges Congress to support the administration's 
proposal to establish the single conversion factor at a level 
that is no lower than the current primary care conversion 
factor, updated for inflation. Payments for primary care 
services, which have been undervalued in the fee schedule 
updates for most of the past five years, should not be rolled 
back below current levels. Establishing the conversion factor 
at anything less than the primary care conversion factor, as 
updated for inflation, would also require deeper cuts in 
payments for surgical procedures, and provide less relief for 
the other nonsurgical services that have been most 
disadvantaged under the current update formula. A transition 
would also reduce the savings that the administration projects 
from a single CF by easing the reductions in payments for 
overvalued surgical procedures.

                    Resource-Based Practice Expenses

Background

    As the Committee knows, the Health Care Financing 
Administration (HCFA) is in the process of fulfilling its 
legislative mandate of establishing a RBPE methodology for 
implementation of a resource-based system and for determining 
equitable practice expense values for each physician service. 
HCFA's mandate grew from a long standing consensus that the 
previous, historical charge-based methodology was unsound and 
biased against the primary care and evaluation and management 
physicians who most often serve Medicare beneficiaries. The 
historical-charge methodology of the practice expense component 
acts as a disincentive against primary care by consistently 
overvaluing many surgical procedures while evaluation and 
management services are undervalued. For example, a 
rheumatologist or other evaluation and management-oriented 
physician would have to conduct 115 established patient office 
visits (level 3) to equal the overhead that would be assigned 
to one coronary triple bypass procedure. This injustice is 
heightened by the fact that a considerable portion of the 
surgeon's overhead is assumed by the hospital or surgical 
center.
    Maintaining current law and implementing a resource-based 
methodology will alleviate these problems by ending payment 
disparity in the MFS. The RBPE methodology will facilitate the 
MFS's ability to encourage appropriate usage of increasingly 
finite health care resources. A resource-based system should 
provide incentives to explore all available evaluation and 
management patient care options before proceeding with more 
costly surgical procedures. Overall, the Medicare Resource 
Based Relative Value Scale (RBRVS) was implemented to create a 
more level playing field by removing the financial incentives 
that encourage physicians to enter highly technical procedure-
oriented specialties. Because practice expenses account for 
approximately 41 percent of the Medicare RBRVS, resource-basing 
this component will assist in realizing these goals and will 
increase access to primary care and evaluation and management 
services that are utilized most often by Medicare 
beneficiaries.

Suggested Modifications of Preliminary Data

    At a January, 1997 briefing, HCFA released highly 
preliminary data which indicated a wider than expected 
redistribution of RVUs in the MFS. This information has served 
to heighten the calls for a delay by some affected 
stakeholders. While we understand the concern of some 
organizations in the medical professional community regarding 
the preliminary and undefinitive nature of the data and 
methodological outlines released at the briefing, ACR feels it 
is entirely too early to dismiss the current timetable. We 
believe that it is premature to conclude, at this point, that 
the data and methodological options cannot be sufficiently 
improved between now and issuance of a proposed rule (which is 
scheduled for May, 1997) to allow for implementation on January 
1, 1998, as required under current law. Given the recognized 
unfairness of the current system, it is imperative that 
methodologically sound RBPEs be implemented as soon as 
possible. Therefore, it is ACR's opinion that any decision to 
re-assess the current timetable mandated by Congress must await 
publication of the proposed rule and a description of HCFA's 
approach to refining the proposed RBPEs.
    ACR believes that now is the time for providing 
constructive input on how to implement HCFA's proposals 
according to the Congressionally mandated deadline. In this 
spirit, last month we offered specific comments on three 
aspects of the preliminary data issued in January: the 
undervaluation of higher level evaluation and management (E/M) 
codes, linking the CPEP data on direct costs, and the 
refinement process.
1. Higher Level E/M Code Concerns

    The ACR raised concerns that some anomalies exist in the E/
M code families as preliminarily released. Specifically, ACR 
believes that there is an incremental progression in the amount 
of administrative time necessary to provide increasingly 
complex levels of E/M services that was not reflected in the 
administrative time estimates. We therefore urged HCFA to 
review the administrative times for the E/M visit codes, with 
the purpose of establishing an incremental progression of these 
estimates within the code families.

2. Linking

    The ACR also supported utilization of a methodology that 
uses the redundant CPT codes reviewed by the Clinical Practice 
Expert Panels (CPEPs) to link the direct cost estimates 
generated by the separate CPEPs. Linking refers to the process 
of using the redundant CPT codes (i.e., codes reviewed by more 
than one CPEP) to establish relativity among the different 
CPEPs. While it is difficult to analyze the tangible effects of 
the linking process without reviewing the mathematical models 
for linking and potential impacts, the College philosophically 
supported the concept of establishing a standardized scale in 
order to retain the relativity inherent in a resource-based 
relative value scale.

3. Refinement

    ACR shares the opinion of the PPRC and others that a well-
defined, inclusive and multidisciplinary refinement process is 
crucial to the success of the resource-based practice expense 
initiative. We therefore encourage HCFA to provide as specific 
an outline as possible for refining the proposed values when it 
publishes the proposed rule in the Spring. HCFA's ability to 
establish a refinement mechanism that allows the medical 
professional community opportunity to address any perceived 
imperfections in the proposed values is vital in gaining 
physician acceptance of the proposal. We support the concept of 
utilizing a multispecialty refinement panel to review the 
relative values proposed in the Spring, the comments submitted 
in response by the medical professional community, and the 
updated values as they evolve in the future. For the latter, we 
believe that the use of a process similar to that of the AMA 
Relative Value Update Committee (RUC) is the most appropriate 
method of achieving long-term refinement of the practice 
expense values.

                               Conclusion

    After a full and open legislative debate on the merits of a 
resource-based practice expense methodology, it is critical to 
maintain the current schedule (full implementation by January 
1, 1998). The ACR is persuaded that HCFA is well equipped to 
meet the current implementation date required by law. Clearly, 
Congressional intent is not in doubt, and determining practice 
expense RVUs is not a new concept. The analytical framework for 
developing a more fair and rational resource-based methodology 
for determining practice expenses has been underway for almost 
a decade. The methodology will be based on more than eight 
years of work devoted to the development of equitable RBPE 
relative values. We urge Committee to recommend to HCFA that it 
devote all necessary resources to developing resource-based 
practice expenses, while addressing legitimate concerns 
regarding the preliminary data, in time for the Congressionally 
mandated implementation schedule.
      

                                


Statement of American Gastroenterological Association, Bethesda, 
Maryland

    Mr. Chairman and members of the Subcommittee, thank you for 
the opportunity to provide the views of the American 
Gastroenterological Association on the Health Care Financing 
Administration's (HCFA) proposals to revise the practice 
expense component of the Medicare fee schedule. The American 
Gastroenterological Association (AGA) serves as an advocate for 
its more than 8,400 member physicians and scientists and their 
patients. The AGA is working in close partnership with other GI 
societies, namely, the American Society for Gastrointestinal 
Endoscopy (ASGE), the American Association for the Study of 
Liver Diseases (AASLD) and the American College of 
Gastroenterology (ACG), as well as all members of the Practice 
Expense Coalition, to alert Congress to the serious problems 
posed by the HCFA proposals.
    The AGA strongly believes that the HCFA proposals to alter 
the practice expense rules are based on inaccurate and 
unreliable data and are contrary to congressional intent. We 
are deeply concerned that if these changes go into effect as 
currently proposed, access to quality care for Medicare 
beneficiaries will suffer, and major disruptions in the entire 
health care delivery system will occur.
    As you know, in 1994 the Congress directed HCFA to develop 
resource-based practice expense relative values for each 
procedure and service provided under Medicare. This legislation 
specifically directs that the new relative values ``recognize 
the staff, equipment, and supplies used in the provision of 
medical and surgical services in various settings.'' Earlier 
this year, HCFA released four options it is proposing as 
methodologies for developing the new practice expense RVU's. 
Each of the four options would result in dramatic reductions in 
Medicare payments for many services and procedures.
    HCFA has failed to follow the clear intent of Congress to 
base changes in the practice expense component of the fee 
schedule on actual resources used in the provision of Medicare 
procedures or services. Rather, HCFA has proposed sweeping 
changes in the practice expense values that are based on 
neither fact nor actual experience. The results of this flawed 
methodology are dramatic: gastroenterology fees under Medicare 
will be reduced by 20-24 percent in 1998 and total payments for 
most procedural and surgical specialties will be reduced by up 
to 40 percent next year if the HCFA proposals go into effect as 
scheduled. Allowing the current HCFA proposals to become 
effective will cause major disruptions in the delivery of 
quality health care for Medicare beneficiaries nationwide and 
jeopardize access to care for Medicare patients.
    Moreover, the consequences of these HCFA proposals reach 
far beyond Medicare alone. As you well know, many third party 
payers now use the Medicare relative values in establishing 
their own payment schedules for health care procedures and 
services. It is unfair and unwise to base such major changes in 
the health care delivery system on flawed and unreliable data.
    The deficiencies in the HCFA process are exacerbated by the 
fact that these changes will, unless altered by Congress, 
become effective on January 1, 1998. We urge the Congress to 
direct HCFA to stop its current rulemaking process and to 
instruct HCFA to develop mechanisms for collecting actual data 
on physician practice expenses.
    The AGA recognizes that over the coming months and years, 
Congress will be required to make many difficult choices about 
how to reform Medicare to ensure its long term solvency and how 
to balance the federal budget. The HCFA rules now being 
developed, however, do nothing to further either of these 
goals. Rather, these proposals will cause dramatic shifts in 
Medicare payments even before the tasks of Medicare reform or 
deficit reduction are undertaken.
    Again, the AGA thanks the subcommittee for the opportunity 
to provide our views and we urge you to act immediately to 
redirect HCFA's proposals on practice expense so they are based 
on reliable and fair data.
      

                                


Statement of College of American Pathologists, Northfield, IL

    The College of American Pathologists (CAP) appreciates this 
opportunity to present its views to the House Ways and Means 
Subcommittee on Health regarding recommendations for Medicare 
hospital and physician payment policies. The College represents 
more than 15,000 physicians who are board certified in clinical 
and/or anatomic pathology. College members practice in a wide 
variety of settings including community hospitals, independent 
clinical laboratories, academic medical centers, and federal 
and state health facilities.
    Pathologists are responsible for the overall operation and 
medical administration of the laboratory and for ensuring that 
quality laboratory services are available. They provide or 
supervise the provision of the large majority of pathology 
services paid for under the Medicare program. In most pathology 
practices, Medicare patients comprise a significant percentage 
of the patients served. Therefore, Medicare payment policies 
have a significant impact on pathologists. When the precedent-
setting effect of Medicare policies on other federal programs 
and private payers is considered, the effect of Medicare policy 
on pathology practices is significantly greater.
    The College is grateful to the Subcommittee chair, Mr. 
Thomas, and the members of the Subcommittee for their 
leadership in conducting hearings to examine the policy options 
proposed by the Physician Payment Review Commission, as well as 
those in the Administration's fiscal 1998 budget proposal. The 
timing of this hearing is particularly important, as the 
Medicare program stands at a critical point in its development. 
Medicare should ideally be a model of efficient interaction 
between the public and private sectors, providing beneficiaries 
with a broad choice of providers, sites of care, and coverage 
options. But the program faces a severe financial crisis due to 
a flawed financial structure. Rather than addressing these 
underlying structural defects, Congress and the Administration 
have historically attempted to deal with Medicare's financial 
problems by cutting provider payments and making numerous 
operational changes that have added to the burden and confusion 
for everyone involved with the program. The results have been 
cost-shifting to the private insurance market, where premiums 
and prices increased dramatically. Now, as private payers 
intensify their bargaining with providers, the ability to 
cross-subsidize Medicare with private dollars is shrinking.
    College members applaud the efforts of this Congress and 
the Administration to achieve a balanced federal budget. But 
the College is concerned that pressure to balance the budget 
will once again lead to short-sighted policy decisions to meet 
deficit reduction targets rather than moving toward a careful, 
comprehensive look at how the Medicare program could be 
financed more equitably.
    While the College is pleased that the President's fiscal 
1998 budget proposal imposes relatively small reductions in 
Medicare payments to physicians and laboratories, we are 
disappointed that it fails to address many of the long-term 
structural problems facing the program. We are also concerned 
that Congress may attempt to achieve greater deficit reduction, 
turning once again to Medicare providers for additional 
savings.
    The College would like to take this opportunity to comment 
on several policies in the Physician Payment Review 
Commission's recommendations to Congress, as well as issues 
raised in the Administration's budget proposal. We hope these 
comments will be helpful to the Subcommittee as it crafts its 
own fiscal 1998 spending plan for the Medicare program.

            Resource-based Practice Expense Relative Values

    The College of American Pathologists supports the PPRC 
recommendation for a three-year phase-in of resource-based 
practice expense relative values. However, we believe a phase-
in alone is inadequate to ensure equitable implementation of 
these changes in physician payment.
    We share the concern expressed by the Commission in its 
1996 Report to Congress, that ``. . . it will be difficult for 
HCFA to develop reliable relative values in time for 
implementation in 1998 for a variety of reasons.'' These 
concerns were magnified in January, when the Health Care 
Financing Administration released preliminary information about 
the development of practice expense relative values. This 
information was released in a manner which has hampered efforts 
to analyze the data and allocation assumptions on which its 
calculations were based.
    The data collection and analysis process used thus far to 
develop resource-based practice expense values is incomplete 
and badly flawed. A methodologically sound approach has not yet 
been identified, and it will take time to develop and implement 
such a process.
    We therefore strongly urge Congress to adopt legislation 
this year that remove the statutory requirement to implement 
new practice expense relative values on January 1, 1998, and 
allow the time needed for productive analysis and refinement of 
data and methodologies for developing accurate relative values. 
Once begun, resource-based practice expenses should be phased 
in over three years.

                        Single Conversion Factor

    The College also supports the PPRC's recommendation, also 
included in the President's budget proposal, to establish a 
single conversion factor update and performance standard for 
all physicians' services covered by the Medicare fee schedule. 
However, we disagree with the PPRC recommendation for a phase-
in. We believe that any further delay in moving to a single 
conversion factor and performance standard will serve only to 
delay the restoration of the resource-based relationship 
between physician services on which the current fee schedule is 
based.
    The current system of three separate conversion factors for 
surgical, primary care, and all other physician services has 
distorted the relationship between these services for five 
years. Immediate use of a single conversion factor and 
performance standard for all physician services is needed to 
correct the five-year inequity in the Medicare fee schedule 
that primary care and other physician services have 
experienced. The large majority of physician services billed to 
the Medicare program are in the non-surgical categories, and 
all physicians would benefit to some extent from this 
correction--including surgeons who bill for office visits and 
other non-surgical procedures.
    The College strongly urges Congress to support the 
President's proposal and enact legislation to implement a 
single conversion factor update and performance standard for 
all Medicare physician services beginning in January, 1998.

          Competitive Bidding for Clinical Laboratory Services

    The ill-conceived idea of establishing a competitive 
bidding process for Medicare clinical diagnostic laboratory 
services is one which Congress has considered and repeatedly 
rejected. We are therefore disappointed to see the concept 
proposed once again in the President's budget, tied to an 
arbitrary 20-percent reduction in payments. This proposal seems 
particularly ill-timed, since the Administration is attempting 
to conduct a demonstration project to test the feasibility and 
effectiveness of using a competitive bidding procedure to set 
Medicare fees for clinical diagnostic laboratory services--
despite the advice of a physician advisory committee to abandon 
this approach.
    Competitive bidding or pricing arrangements will not, in 
fact, promote competition. True competition is based on 
comparing both service and price. The competitive bidding 
proposal for laboratory services deals only with price, 
ignoring the issues of service, choice and quality. In fact, 
such competitive pricing schemes can actually interfere with 
competition by creating a system that allows low bidders to 
provide inferior quality services at below-market prices 
without providing the services essential to basic patient care, 
driving many smaller laboratories out of business.
    A nationwide competitive bidding program would be 
complicated and difficult to administer, potentially requiring 
a bureaucracy that would cost more to create and operate than 
the process would save in discounted prices. For that reason, 
the Administration proposes to arbitrarily reduce payments to 
laboratories if competitive bidding fails to achieve a 20-
percent reduction in payments. Such an approach is clearly 
aimed solely at obtaining the lowest price for Medicare, with 
no concern for the quality of or access to clinical laboratory 
services. No evidence has been suggested to justify a 20-
percent cut in payments. In fact, payments for clinical 
laboratory services have been reduced by roughly $6 billion 
over the past ten years.
    The College strongly urges Congress to once again reject 
the Administration's proposal to competitively bid Medicare 
clinical laboratory services.

            Payment for Automated Clinical Laboratory Tests

    The College is opposed to the Administration's proposal to 
expand the current list of 22 tests that Medicare now pays for 
as ``automated'' tests. Medicare rules for determining payment 
for tests added to the list of ``automated'' tests do not 
adequately compensate laboratories for the additional costs 
they incur in performing the additional tests. In addition, 
many laboratories do not have the equipment capable of 
performing the additional tests at the same time as other tests 
are being performed. For example, the tests that are proposed 
to be added to the automated list are often not capable of 
being performed by laboratories on multi-channel analyzers on a 
random access basis. This means the laboratory cannot perform 
the additional tests on an incremental basis along with other 
tests during the same equipment run. As a result, these 
laboratories would be forced to accept lower payments when 
their costs have not decreased.
    The College believes that current Medicare payment rules 
that limit the automated test payment policy to a specific list 
of 22 tests should remain unchanged.

        Patient Choice and Access in Medicare Managed Care Plans

    The College supports the efforts of this Subcommittee to 
expand the choices of health plans available to Medicare 
beneficiaries. However, as the pressure of competition and 
efforts to reduce costs increase, we believe Congress has an 
obligation to enact appropriate safeguards to protect the 
Medicare population and assure that beneficiaries retain the 
ability to choose and have access to their own physicians. It 
is important that beneficiaries not be ``locked in'' to closed 
health maintenance organizations or similar plans that severely 
restrict access to physicians and other health care providers.
    The College strongly believes that Medicare beneficiaries 
should have the right to choose their provider and that 
attending physicians should be able to refer patient specimens 
to the pathologist or laboratory of their choosing. This means 
that managed care plans should be required to provide access to 
out-of-network providers. Payment disincentives for the use of 
out-of-network providers, such as increased cost-sharing, 
should be limited to reasonable amounts and beneficiaries must 
have access to a meaningful, expedited grievance process to 
appeal denials of coverage for out-of-network services. Appeals 
procedures should include a requirement for timely notice of 
the denial and rapid response to beneficiary appeals.
    Managed care plans often contract with laboratories to 
provide all clinical and/or anatomic pathology services for 
plan enrollees, regardless of where the patient lives or sees 
the attending physician. The perception seems to be that since 
the patient does not generally have to travel to the location 
of the laboratory, and that since all laboratories are 
federally licensed, access and quality are not an issue.
    Our experience is that physicians choose pathologists and 
laboratories to which to refer patient specimens using a 
combination of variables that are not necessarily known by 
insurers and that can affect access and quality. These factors 
include familiarity with the pathologists involved in the 
laboratory and knowledge of their specialty expertise and other 
strengths, turn-around time for test results and tissue and 
cell examination and diagnosis, clarity of reports, 
availability of pathologists for discussion and consultation, 
and the inevitable balance between cost and quality. We believe 
physicians who are knowledgeable about the pathologists and 
laboratories to which they refer patient specimens are in a 
much better position to ensure quality services than are 
managed care plans that lack this knowledge and often contract 
primarily on the basis of price.
    Accordingly, we strongly believe that Congress should enact 
legislation that requires health plans that limit access to 
health care providers within a chosen network should also be 
required to offer beneficiaries a plan that provides coverage 
for services by out-of-network providers at rates that do not 
unreasonably inhibit access. Specifically, the College endorses 
the ``Medicare Patient Choice and Access Act of 1997,'' H.R. 
66, introduced by Reps. Tom Coburn (R-Okla.) and Sherrod Brown 
(D-Ohio) and cosponsored by 68 Members of Congress.

                       Graduate Medical Education

    The College recognizes that U.S. medical schools, residency 
programs and teaching hospitals, faced with an abundance of 
physicians, must evaluate and possibly restructure the current 
manner in which programs and services are delivered. We believe 
that any restructuring of programs and services must enable 
medical schools, residency programs and teaching hospitals to 
continue to receive graduate medical education funding in the 
future.
    Therefore, we are concerned that the President's budget 
proposal includes provisions to reduce graduate medical 
education payments by $7.6 billion over five years by capping 
the total number and the number of non-primary care residencies 
at the current level and reducing indirect medical education 
payments by 2.2 percent over five years. The College remains 
opposed to federal restrictions on the numbers and specialty 
mix of medical residencies. Any changes in funding for graduate 
medical education must ensure that an adequate supply of 
pathologists is trained to meet the nation's medical needs 
during the coming century.
    The College supports the creation of a national physician 
workforce body, staffed independently of federal agencies. Such 
a body must have adequate representation and involvement of 
specialties for which increased funding for residency programs 
is targeted, but also specialties which are likely to 
experience decreases in funding. A national physician workforce 
body should have broad authority to study and make 
recommendations on all aspects of the physician workforce 
issue, including the appropriate number of residency slots and 
specialty mix to be funded by the government and the effect of 
different funding approaches on graduate medical education. The 
College believes that it may become necessary to limit the 
number of entry-level positions receiving federal graduate 
medical education funds in the near future. However, we oppose 
the creation of arbitrary quotas. Until adequate studies are 
conducted, market forces should be allowed to determine the 
number and specialty mix of residency positions.
    The College recognizes the continuing problem of inadequate 
numbers of physicians in underserved communities and, 
therefore, endorses the idea of encouraging and supporting 
opportunities for medical students to gain experience in rural 
and inner-city communities. Similarly, we support the concept 
of encouraging medical schools to increase the diversity of 
their student bodies to graduate a larger number of minority 
physicians. We recommend that incentives for training and 
practice be included as one of the issues addressed by a 
national physician workforce body.
    There is no question that, in light of limited financial 
resources and the continuing pressure to reduce federal 
spending, the Medicare program cannot continue to be the 
primary funding source for graduate medical education. While 
approaches such as a voucher system and/or an all-payer system 
may be viable alternatives, these and other ideas need to be 
thoroughly studied before they are widely adopted and 
implemented. Again, we believe a national physician workforce 
body should have the authority to study and develop 
recommendations on alternative systems for funding graduate 
medical education.

                            Fraud and abuse

    In adopting the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), the 104th Congress wisely 
included important fraud and abuse provisions requiring the 
Departments of Justice and Health and Human Services to issue 
advisory opinions on the application of anti-kickback statutes, 
clarifying the standard of proof required to impose civil money 
penalties, and provide an exception to the anti-kickback law 
for risk-sharing arrangements to facilitate the development of 
cost-effective, innovative delivery systems.
    We are disappointed that the Administration intends to 
press for legislation repealing these important protections. 
The College strongly believes that fraudulent and abusive 
activities have no place in the practice of medicine, but 
physicians who intend to comply with the law can be greatly 
assisted by the setting of standards for appropriate behavior. 
HIPAA provides important guidance by requiring the Department 
of Health and Human Services to issue advisory opinions and 
special fraud alerts. This guidance will allow physicians, 
hospitals and insurers to develop integrated delivery systems 
that will benefit patients.
    The burden of proof for imposition of civil money penalties 
established in HIPAA is identical to that used in the Federal 
False Claims Act. The College sees no reason why two statutes 
aimed at preventing the same fraudulent behavior should not 
have the same standards of proof. These provisions of the law 
provide significant protection for physicians who may 
unwittingly engage in behavior that is found to be 
impermissible.
    The College believes Congress acted appropriately in 
enacting these important fraud and abuse provisions and 
strongly urges you to reject any efforts to repeal them.

                High-volume inpatient physician services

    The College is also disappointed that the Administration 
chose to include in its budget proposal a new elaborate layer 
of physician volume performance standards. The Administration 
would limit payments to medical staffs in hospitals if the 
volume and intensity of services per admission exceed 125 
percent of the national median for urban hospitals or 140 
percent for rural hospitals. Each physician in a hospital that 
exceeds the limits would have 15 percent of each payment 
withheld during the year. The physician could receive the 
withheld payments plus interest at the end of the year if they 
``collaborate to efficiently manage the volume and intensity of 
the services.''
    Such a proposal would lead to creation of a new and onerous 
structure based, at best, on limited, purely socio-economic 
data. It would require medical staffs to establish expensive 
fiscal and administrative structures to monitor care and 
provide incentives to reward the provision of the least amount 
of care, regardless of the care's effectiveness. Hospital 
admissions and physician inpatient services have continued to 
decline for more than a decade. For patients who need 
hospitalization, physicians and other care givers should not be 
penalized for advocating appropriate care for their patients. 
This proposal is unnecessary, and the College strongly urges 
Congress to reject it.

                                Summary

    Pathologists support the efforts of Congress and this 
Subcommittee to achieve a balanced federal budget and to 
restore financial solvency to the Medicare program. We urge you 
to confront Medicare's underlying structural problems and avoid 
relying on further reductions in payments to health care 
providers to achieve short-term savings goals.
    The College of American Pathologists hopes you will take 
this opportunity to address long-standing physician payment 
policies, including halting the January, 1998, implementation 
of resource-based practice expense relative values and 
immediately implementing a single conversion factors and 
performance standard. We strongly urge you to enact meaningful 
protections for patient choice and access in Medicare managed 
care plans. The College urges the Subcommittee to reject the 
Administration's proposals for competitive bidding for clinical 
laboratory services, for repeal of HIPAA fraud and abuse 
provisions and for limiting payments for so-called ``high-
volume'' inpatient physician services.
    College members look forward to working with you to achieve 
these goals and to serving as a resource for the Subcommittee 
in considering future Medicare payment policies. Thank you 
again for the opportunity to share our views on these important 
issues.

                                  
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