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



 
          REHABILITATION AND LONG-TERM CARE HOSPITALS PAYMENTS

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 10, 1997

                               __________

                             Serial 105-74

                               __________

         Printed for the use of the Committee on Ways and Means




                     U.S. GOVERNMENT PRINTING OFFICE
58-339 CC                    WASHINGTON : 1999




                      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

Health Care Financing Administration, Barbara Wynn, Acting 
  Director, Bureau of Policy Development.........................     7
Prospective Payment Assessment Commission, Joseph P. Newhouse, 
  Ph.D., Chairman; accompanied by Donald Young, M.D., Executive 
  Director.......................................................    18

                                 ______

American Rehabilitation Association, and Schwab Rehabilitation 
  Hospital and Care Network, Kathleen C. Yosko...................    55
Federation of American Health Systems, and HEALTHSOUTH Corp., 
  Patrick A. Foster..............................................    44
Long Term Acute Care Hospital Association of America, and 
  Transitional Hospitals Corp., J. Rod Laughlin..................    62
LoBiondo, Hon. Frank A., a Representative in Congress from the 
  State of New Jersey............................................     5
National Association of Long Term Hospitals, and Hospital for 
  Special Care, James F. Standish................................    69

                       SUBMISSION FOR THE RECORD

National Association of Psychiatric Health Systems, Mark Covall, 
  statement......................................................   106


          REHABILITATION AND LONG-TERM CARE HOSPITALS PAYMENTS

                              ----------                              


                        THURSDAY, APRIL 10, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:35 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

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

March 21, 1997

No. HL-9

                      Thomas Announces Hearing on

                   Rehabilitation and Long-Term Care

                           Hospitals Payments

    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 rehabilitation and long-term care hospitals. The 
hearing will take place on Thursday, April 10, 1997, in room 1310 
Longworth House Office Building, beginning at 1:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony will be heard from invited witnesses only. 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 payments to rehabilitation facilities and long-term care 
hospitals have increased rapidly in recent years. The Prospective 
Payment Assessment Commission recently examined Medicare spending for 
these providers. Between 1990 and 1994, rehabilitation facility 
payments increased from $1.9 billion to $3.9 billion--an average annual 
increase of 20 percent. Long-term care hospital payments increased from 
$200 million to $800 million--an average annual increase of 41 percent.
      
    Rehabilitation facilities and long-term care hospitals are paid 
under a system established in the Tax Equity and Fiscal Responsibility 
Act of 1982 (TEFRA). Under TEFRA, operating payments are based on an 
individual facility's costs or a facility-specific limit. The 
discharge-level limits are calculated for each individual hospital 
using cost report data from the second year that the facility is in 
operation, updated to the current year. Therefore, for some hospitals, 
their target payments are based on cost report data that is more than a 
decade old. Capital payments are based on costs.
      
    TEFRA was intended to be an interim system until a prospective 
payments system (PPS) could be established. Fifteen years later, 
rehabilitation and long-term care hospitals remain under this 
``temporary'' system. In the Omnibus Budget Reconciliation Act of 1990, 
the Secretary of Health and Human Services was instructed to reform the 
TEFRA system or replace it with a PPS. There has been little progress 
in this area.
      
    The President's fiscal year 1998 budget proposal contains 
provisions to recalculate all TEFRA hospital targets using more recent 
cost report data. A target ceiling and floor would be imposed to reduce 
the variation across facilities. Capital payments would also be reduced 
to 85 percent of costs, for fiscal years 1998 through 2002. In 
addition, the administration would impose a moratorium on long-term 
care hospitals, effective upon enactment.
      
    In announcing the hearing, Chairman Thomas stated: ``Medicare 
payments for rehabilitation facilities and long-term care hospitals are 
spiraling upward. Notwithstanding the fact these facilities provide 
important services to seniors, Medicare needs to find ways to become a 
more prudent purchaser.''
      

FOCUS OF THE HEARING:

      
    This hearing will focus on the President's fiscal year 1998 budget 
policies related to rehabilitation facilities and long-term care 
hospitals in light of the recommendations of the Prospective Payment 
Assessment Commission, 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 24, 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 1 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 `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-225-1904 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 AND ROOM***

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

April 1, 1997

No. HL-9-Revised

                 Time and Room Change for Subcommittee

                  Hearing on Thursday, April 10, 1997,

                     on Rehabilitation and Long-Term

                         Care Hospitals Payments

    Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on 
Health, Committee on Ways and Means, today announced that the 
Subcommittee hearing on rehabilitation and long-term care hospitals 
payments previously scheduled for Thursday, April 10, 1997, at 1:00 
p.m., in 1310 Longworth House Office Building, will begin instead at 
1:30 p.m. in the main Committee hearing room, 1100 Longworth House 
Office Building.
      
     All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-9, dated March 21, 1997.)
      

                                


    Chairman Thomas. The Subcommittee will come to order. In a 
number of hearings, we have examined several aspects of 
Medicare part A spending. It is clear that in recent years the 
Health Care Financing Administration has focused its effort on 
inpatient hospital care. For prospective payment rewards, 
efficient hospitals maintain access to care for beneficiaries 
and contain spending. In the meantime, Medicare payments for 
other part A services, including skilled nursing facilities, 
home health care, and PPS-exempt hospitals have spiraled upward 
under antiquated payment systems.
    Today we will examine two of the PPS-exempt providers: 
long-term care hospitals and rehabilitation facilities. While a 
relatively small number of Medicare Part A Trust Fund spending, 
these payments have mushroomed in recent years, and our 
attention is focused on them in terms of the percentage 
increase rather than total dollar amount.
    In its March 1997 report to Congress, the Prospective 
Payment Assessment Commission reported that Medicare payments 
to rehabilitation facilities increased from $1.9 billion in 
1990 to $3.9 billion in 1994, an average annual increase of 
nearly 20 percent, or double the overall Medicare average.
    Even more alarming was the growth in payments to long-term 
care hospitals, which grew from $200 million to $800 million 
during the same period. If your math is any good, that is a 
rate of more than 40 percent.
    Why are these payments growing at such rapid rates? Perhaps 
it is because of the incentives resulting from Medicare payment 
policy made under a ``temporary'' payment system that was 
established in the Tax Equity and Fiscal Responsibility Act of 
1982.
    Clearly, the system is inadequate, and apparently the 
administration now agrees. However, their approach to deal with 
the problem, at least for a long-term care hospital, is to call 
for a moratorium on new providers. It is hard to believe that 
after 15 years the administration, in weighing its options, has 
decided that the moratorium is the only option. I cannot 
believe that they could not implement a PPS system for long-
term care hospitals or rehabilitation facilities. Obviously, 
all of us need to do better than this.
    Today we will hear from several witnesses regarding 
Medicare payment policies for these providers. But before we 
hear from our panel of experts--and that is in no way to 
denigrate the first witness that we have, because he has a 
longtime concern in this area, and has talked to me about it--
it is a pleasure to have as our first witness the gentleman 
from New Jersey, Mr. LoBiondo.
    If you have any written statement, it will be made a part 
of the record, but you can address the Subcommittee in any way 
you see fit.

   STATEMENT OF HON. FRANK A. LOBIONDO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. LoBiondo. I will have a short presentation, Mr. 
Chairman, and then we will have experts testify a little bit 
later on. I want to thank you very much for the opportunity to 
make remarks today on the issue of reimbursement for 
rehabilitation hospitals under the Medicare Program.
    I appreciate the chance to speak on this subject because I 
think that the current payment system is in serious need of 
reform. I would also like to take the occasion to talk about 
legislation that I introduced, H.R. 585, which would reform the 
current imbalanced system in favor of a more equitable 
approach.
    As the Ways and Means Committee prepares to craft a 
Medicare reform package, I would like to bring to your 
attention an important fact: Adopting a prospective payment 
system for rehabilitation hospitals will help to slow the 
steady depletion of Medicare's finances. That was the 
conclusion of the Medicare Board of trustees in its 1996 annual 
report. The board found that the adoption of a prospective 
payment system for additional types of health care providers, 
such as rehabilitation hospitals, could postpone the depletion 
of the Hospital Insurance Trust Fund beyond the year 2001.
    Why is this? Mainly because the existing payment system is 
fiscally unbalanced and from the beginning was never intended 
to be permanent. Developed under the Tax Equity and Fiscal 
Responsibility Act, TEFRA, of 1982, the current system 
encourages unrestrained growth of providers, services, and 
spending. Rather than sensibly scaling payments to 
rehabilitation hospitals on the basis of patient services, 
payments from the Medicare Trust Fund simply increase as new 
hospitals and spending proliferate.
    At the same time, however, TEFRA limits on payments per 
discharge create a serious imbalance between older and newer 
facilities. First, it provides inadequate payments to older 
hospitals--in most cases, far less than operating costs. 
Second, it pays much higher amounts, and even bonuses, to newer 
facilities.
    And from a humanitarian standpoint, the current payment 
system is flawed because of a de facto bias against severely 
impaired patients. By giving the same financial value to all 
rehabilitation patients, TEFRA provides an incentive to treat 
short-stay and less complex cases over more seriously disabled 
patients who require a longer hospital stay.
    As a result, this quick turnaround environment makes it 
very hard for facilities to take advantage of innovations in 
treatment programs. It is no exaggeration to say that many 
Medicare beneficiaries who need long-term rehabilitative care 
have been ill-served by the Medicare Program that has the 
obligation to treat them. TEFRA created these conditions and, 
if not reformed, they will continue.
    I also believe it is no small matter when the agency set up 
to monitor the Medicare Program--the Prospective Payment 
Assessment Commission--advocates for this change in the TEFRA 
system.
    Mr. Chairman, this is only a basic description of the 
problem. I do not want to go into too many details, because you 
have an excellent resource who is here today to testify on this 
issue. Richard Kathrins, the president of Betty Bachrach 
Rehabilitation Hospital in Pomona, New Jersey, which is in my 
congressional district, has been a valuable asset, both in 
identifying specific problems and in formulating an effective 
solution.
    In the time remaining, Mr. Chairman, I would just like to 
talk briefly about H.R. 585, the legislation that I have 
introduced, that could go a long way toward ending the misuse 
of money occurring under the current rehabilitation hospital 
payment scheme. My bill makes the payment system for 
rehabilitation hospitals more cost effective. More importantly, 
it puts all hospitals--old and new--on a level playingfield.
    Specifically, my bill directs the Secretary of Health and 
Human Services to implement a prospective payment system for 
the approximately 1,000 rehabilitation hospitals in the Nation 
by October 1, 1998. Under the PPS, providers are paid similar 
amounts for similar services. Payments made by Medicare would 
be determined by a patient's needs. That way, the system will 
reward innovation, and not penalize hospitals that treat the 
severely disabled. Finally, H.R. 585 would benefit the Medicare 
Trust Fund by eliminating incentives for duplicate services.
    Mr. Chairman, I must also note that the RAND Corp., under 
contract from the Health Care Financing Administration, is now 
completing a comprehensive study on Medicare payments to 
rehabilitation hospitals. In addition to emphasizing the 
distortions of the current system, it is my understanding that 
RAND has designed a model prospective payment system to replace 
TEFRA. When the report on this study is officially released, I 
would like to forward RAND's observations to your Subcommittee 
for your review and consideration. I would also like to offer 
any suggestions warranted by that report to amend H.R. 585.
    Once again, Mr. Chairman, thank you for the opportunity to 
testify on this important piece of legislation and how it might 
fix some of the current problems facing rehabilitation 
hospitals. When it comes to restoring Medicare's financial 
health, I hope this is one issue that we can all agree on. 
Thank you very much, Mr. Chairman.
    Chairman Thomas. Thank you, Frank. Thank you for your 
legislation, and especially your understanding and willingness 
to be ready to amend it as new information emerges, in order to 
make it a vehicle that would be as responsive as possible to 
suggested changes in the area.
    Mr. LoBiondo. Yes. Thank you, Mr. Chairman. I look forward 
to working with you.
    Chairman Thomas. My pleasure. Any questions from any of the 
Members? No? Thank you very much, Frank.
    Mr. LoBiondo. Thank you.
    Chairman Thomas. Now I would call Barbara Wynn, who is the 
Acting Director of the Bureau of Policy Development at the 
Health Care Financing Administration; and Dr. Newhouse, 
Chairman of the Prospective Payment Assessment Commission; who 
will be accompanied, as usual, by Dr. Young, the Executive 
Director of ProPAC.
    As usual, any testimony will be made a part of the record, 
and you can address us in any way you see fit. Why not start 
from right to left. Barbara, if you will begin? These 
microphones are very unidirectional, so you need to speak 
directly into the microphone.
    Thank you very much.

 STATEMENT OF BARBARA WYNN, ACTING DIRECTOR, BUREAU OF POLICY 
       DEVELOPMENT, HEALTH CARE FINANCING ADMINISTRATION

    Ms. Wynn. Good afternoon. My name is Barbara Wynn, and I am 
the Acting Director of the Bureau of Policy Development at the 
Health Care Financing Administration.
    I am pleased to be here today to speak to you about 
Medicare proposals in the President's budget for hospitals that 
are excluded from the Prospective Payment System, or PPS. I 
would like to start by providing some background on the types 
of hospitals that are excluded from PPS and how they are paid. 
I will also discuss some of the shortcomings of the current 
payment system, and how the proposals in the President's budget 
would improve them. Finally, I will discuss HCFA long-term 
plans for reforming payments to rehabilitation and long-term 
care hospitals.
    Since 1983, most hospitals have been paid under the 
inpatient prospective payment system. However, certain types of 
specialty hospitals and units are excluded from PPS because the 
PPS diagnosis-related groups do not accurately explain resource 
costs for these facilities.
    Excluded facilities are paid in accordance with the Tax 
Equity and Fiscal Responsibility Act of 1982, or TEFRA. TEFRA 
facilities include rehabilitation, psychiatric, children's, 
cancer, and long-term care hospitals, rehabilitation and 
psychiatric hospital distinct part units, Christian Science 
sanatoria, and hospitals located outside the 50 States and 
Puerto Rico.
    TEFRA facilities are paid on the basis of Medicare 
reasonable costs, up to a hospital's specific limit per 
discharge. Each hospital has a separate limit, or target rate, 
which was calculated using its cost per discharge in a base 
year. Hospitals whose costs are below their limit are entitled 
to bonus payments up to a maximum of 5 percent of the target 
amount. Hospitals whose costs exceed their target amounts are 
entitled to additional Medicare payments, to help cover their 
costs, up to 10 percent of the target amount. Hospitals that 
experience significant increase in resource-intensive patients 
may apply for additional Medicare exceptions payments.
    There are 3,462 TEFRA facilities. Total Medicare 
expenditures for these facilities in fiscal year 1994 were $6.8 
billion, which is 8.4 percent of Medicare expenditures for all 
inpatient hospital care. Medicare expenditures for postacute 
care provided in TEFRA facilities include $3.3 billion for 
rehabilitation hospitals and units and $473 million for long-
term care hospitals.
    By comparison, Medicare fiscal year 1994 expenditures for 
skilled nursing facility care were $6.9 billion, and for home-
health agency services, $12.7 billion.
    In recent years, the number of patients being transferred 
from PPS hospitals to TEFRA hospitals has increased rapidly. In 
addition, the number of discharges from TEFRA hospitals to 
other postacute care settings has increased, while the average 
length of stay in TEFRA facilities has declined. We believe 
these trends reflect a response by providers to incentives in 
the current payment systems.
    In addition, the payment methodology creates an incentive 
for newly established hospitals to inflate base period costs in 
order to create a higher target rate or limit. Thus, the 
existing TEFRA payment methodology may give an unfair advantage 
to newer facilities with more recent base periods, in 
comparison to older TEFRA providers.
    The President's fiscal year 1998 budget includes a variety 
of proposals that would help reduce the inequities and 
inappropriate incentives created by the current payment system, 
including:
    Encouraging efficient provision of services by reducing the 
update factor for fiscal year 1998 through 2002 to market 
basket minus 1.5 percentage points, and reducing capital 
payments 15 percent;
    Rebasing each TEFRA hospital's target rate by using more 
recent cost data, and limiting the target rates to not less 
than 70 percent, but not more than 150 percent, of a national 
mean rate for each type of hospital;
    Reducing the incentive for new providers to maximize base-
year costs, and by limiting the cost-based reimbursement for a 
new TEFRA provider to 150 percent of the national mean target 
amount for that type of provider;
    Eliminating bonus payments in excess of hospitals' costs, 
and modifying the cost sharing formula for hospitals with costs 
in excess of that target amount;
    Finally, maintaining a safety net for hospitals whose costs 
exceed 150 percent of their target amount, by providing after 
rebasing additional payments for significant changes in patient 
acuity.
    The President's budget also includes a moratorium on the 
establishment of new long-term care hospitals. Under current 
law, the only characteristic these hospitals have in common is 
an average length of stay greater than 25 days. Patients in 
different long-term care hospitals receive services that are 
comparable to those provided by other types of providers, 
rehabilitation hospitals, psychiatric hospitals, and skilled 
nursing facilities that serve medically complex patients.
    As we modify our payment systems for these provider types, 
we believe that newly certified facilities should be classified 
by the nature of the services they provide, rather than by 
their average length of stay. Otherwise, we will be 
establishing different methodologies for similar services and 
allowing facilities to choose the provider classification which 
will result in the most favorable payment. The moratorium would 
not affect any current providers.
    Finally, the President's budget grants the Secretary 
authority to collect patient assessment data from all providers 
of postacute care. HCFA intends to use this data to continue 
developing an integrated payment system for postacute services. 
The integrated payment system for postacute services will 
address the rapid growth and postacute spending, and eliminate 
the incentive for providers to discharge patients from one 
setting to another based on payment considerations rather than 
an assessment of patient needs.
    Currently, payments for the same clinical services vary 
depending upon treatment setting, and may create incentives 
that inappropriately affect treatment decisions. HCFA's long-
term goal is to develop an integrated beneficiary-centered 
system of paying for postacute services that would avoid these 
inappropriate incentives.
    The integrated system would encompass care provided in 
rehabilitation hospitals and units, long-term care hospitals, 
skilled nursing facilities, and agencies. Service delivery 
would be integrated through a core patient assessment tool, 
which would describe patient care needs and would be used to 
assess patients' functional status as they move across 
treatment settings. Payment would be integrated into a single 
system that would apply to the bundle of services the 
beneficiary needs. In addition, the integrated system would be 
site-neutral to avoid creating incentives to maximize 
reimbursement by treating patients in inappropriate settings.
    HCFA has taken some of the initial steps toward our goal of 
developing an integrated payment system. For example, we are 
currently testing prospective payment systems for skilled 
nursing facilities and home-health services. Ultimately, these 
systems may form the basis of an integrated system. We are also 
looking at expanding the SNF Prospective Payment System to 
accommodate similar admissions in either rehabilitation or 
long-term care hospitals.
    Although we have already put substantial thought and effort 
into the development of this system, its implementation would 
require additional work. We still need to develop a core 
patient assessment instrument that can be used across various 
settings, and we need to develop a payment system that 
recognizes appropriate variations in cost. In addition, we need 
legislative authority to implement the system.
    Our long-term goal of developing an integrated system 
represents a shift in thinking from previous years. For several 
years, we have been evaluating patient classification systems 
that could be used in a prospective payment system for 
rehabilitation hospitals and units. Most recently, we funded an 
evaluation by the RAND Corp. of a system known as Functional 
Related Groups, or FRGs, which is based on a coding system 
known as the functional independence measure, or FIM.
    RAND has prepared a draft report that finds in general that 
this system provides a reasonable and feasible approach for 
classification of hospital inpatient rehabilitation services. 
However, considerable work would be needed before a prospective 
payment system can be implemented. For example, the technical 
advisory panel on the project questioned the reliability of the 
FIM and the breadth of the cognitive measures it includes.
    In addition, RAND developed their model system based on 
data from a limited set of rehabilitation facilities that 
significantly underrepresents rehabilitation units. RAND also 
identified potential coding problems that could affect the 
validity of the payment system and undermine its effectiveness 
in controlling cost.
    The limitations of the RAND FRG-based system probably could 
be resolved with careful analysis, additional data collection, 
refinement of the FIM descriptors, and training of coders. The 
question then is whether we should devote significant resources 
toward refining this system, rather than to the task of 
developing an integrated payment approach.
    However, consistent with our current thinking about 
reforming payments to postacute care providers, we no longer 
believe that developing a separate prospective payment system 
for rehabilitation hospitals is the best approach. Patients 
needing rehabilitation services are treated in several 
different settings with similar outcomes. We do not believe it 
would be appropriate to establish individual payment systems 
for each type of setting. We are concerned that the different 
systems would create payment incentives that would influence 
clinical decisions about appropriate treatment settings for 
some patients.
    For example, if we were to implement an episodic or per-
discharge prospective payment system for rehabilitation 
hospitals such as the FRG system, rehabilitation facilities 
would have an incentive to discharge patients as quickly as 
possible and transfer them to other postacute settings, in 
order to maximize Medicare payments. We are also concerned that 
an episodic payment system, by creating incentives for early 
discharge, may not encourage optimum outcomes. The RAND study 
found a correlation between length of stay and improvement in 
functional status.
    In order to avoid creating these incentives, we intend to 
develop an integrated postacute payment system that is based on 
the patients' service needs, rather than the type of provider 
furnishing the services. We are modifying the patient 
assessment instrument used in the SNF demonstrations so that it 
can also be applied to the services furnished by rehabilitation 
facilities.
    If we continue to develop a system that can be used across 
all postacute settings, we could be ready for implementation as 
early as 2002. We believe that the benefit of having a more 
comprehensive system where the incentives are in place to place 
the patient in the most appropriate setting, rather than where 
the payment is highest, is worth the additional wait. Without 
such a comprehensive system, the episodic prospective payment 
system for rehabilitation facilities will further encourage 
short lengths of stay and discharges to SNF facilities in order 
to maximize Medicare payment.
    In summary, our immediate goal is to improve the tougher 
payment system through the reforms included in the President's 
budget. Our long-term goal is to create a beneficiary-centered 
payment system for postacute services that encourages 
appropriate care for patients regardless of setting in which 
they are treated, and that promotes quality, access, and 
continuity of care, while adequately controlling costs.
    Thank you. I would be pleased to answer any questions you 
might have.
    [The prepared statement follows:]

Statement of Barbara Wynn, Acting Director, Bureau of Policy 
Development, Health Care Financing Administration
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    Chairman Thomas. And you are welcome. I know this is the 
first time you have appeared before the Subcommittee--and this 
is the Senate, not the House.
    Ms. Wynn. Whoops.
    Chairman Thomas. This is the House, not the Senate. And you 
get one to a customer. So, I appreciate your testimony, Ms. 
Wynn. All of that was alluding to the fact that your staff 
should have briefed you that a 20-minute presentation was 
probably a little longer than we normally get when we have all 
of the written material and we have already read it.
    Ms. Wynn. I appreciate your patience.
    Chairman Thomas. No, it is good stuff. I did read it.
    Dr. Newhouse.

 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 with you and the other Members of the 
Subcommittee today. You have my written testimony, and I would 
just like to walk through four issues.
    The first issue is our recommendation on the update factor; 
and two issues that Ms. Wynn mentioned, the new provider 
exemption and the so-called FIM-FRG system for rehabilitation 
hospitals; and finally, the long-term hospital-within-a-
hospital issue.
    On the update factor, our recommendation is the market 
basket minus eight-tenths of a percent. And that is pretty 
straightforward. The eight-tenths of a percent is our estimate 
of the error in the prior market basket. And we did not see any 
scientific and technological advance factor coming in; so 
hence, market basket minus the error from last year.
    On the three policy issues, we agree with the 
administration on the incentive effects, or the poor incentive 
effects, of the new provider exemption. For new hospitals, the 
rate going forward is based on the second year of operation. 
You get your cost in the first 2 years of operation, so there 
is no incentive to hold down the cost. And in fact, there is an 
incentive to keep the costs high because your rates going 
forward are going to be based on that. So our recommendation is 
to simply do away with the new provider exemption. The 
Commission came out a bit differently than the administration 
there.
    That leaves open the issue of how to handle the new 
providers. We would take some kind of average, or average 
within subgroup adjusted for local payment factors like wage 
indices.
    The second issue is the functional independence measure, 
function related group system that Ms. Wynn mentioned, as well, 
the classification system for the rehabilitation hospitals and 
units. We came out a little differently than the administration 
here. We think this is just about ready for prime time, and we 
would urge going forward with it as soon as possible.
    We are not opposed to--in fact, we favor--the integrated 
system, for the reasons that Ms. Wynn mentioned. But the real 
issue is what to do until we have the integrated system--that 
is, for the next 5 years, say--with the rehabilitation 
hospitals and the units. There are a thousand of these 
institutions. In 1994 they got $4 billion, as you noted in the 
opening statement, and the increase has been pretty rapid.
    We think that the TEFRA system has gone on much longer than 
anyone anticipated in 1983, as you said in your opening 
statement. And this seems like a pretty good shot for getting a 
chunk of it out from under cost-based reimbursement and into 
prospective payment. And while there are some disadvantages to 
it that were mentioned, we think the advantages outweigh the 
disadvantages, and we would do it as an interim step until we 
have the integrated system.
    Finally, the long-term hospital-within-a-hospital issue: As 
you know, we have separate payments for distinct part 
rehabilitation units and distinct part psychiatric units. We do 
not have separate payments for distinct part long-term units. 
And the reason is that the prospective payment system by its 
nature is supposed to average patients with different lengths 
of stay within the same DRG.
    And we are concerned that if there were separate, in 
effect, units, which is how we see long-term hospitals within 
hospitals, that it would potentially violate the integrity of 
the overall prospective payment system for acute care 
hospitals. So we have urged that the issue of long-term 
hospitals within hospitals be intensively monitored, with a 
concern about whether it may be gamed against the Federal 
Government.
    So thank you, Mr. Chairman. Those are the three issues I 
wanted to emphasize. And I will be happy to answer your 
questions.
    [The prepared statement and attachments follow:]

Statement of Joseph P. Newhouse, Ph.D., Chairman, Prospective Payment 
Assessment Commission
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    Chairman Thomas. Thank you very much.
    Ms. Wynn, I guess our concerns are fairly similar. As I 
outlined, you have got something that was created as a 
temporary patch in 1983. Your testimony is basically talking 
about a perfect system somewhere in the future, and I am 
looking at the time that has already expired.
    And I notice in your testimony you say, ``Hospitals that 
experience significant increase in patient acuity may also 
apply for additional Medicare exception payments.'' And it is 
my understanding that the period covering 1990-1992 produced 68 
percent of the rehabilitation facilities receiving exceptions 
of payments totaling $4.8 million. And during the same period, 
58 percent of long-term care hospitals received exceptions 
payments totaling 5.1.
    I believe those are accurate figures, and both of them 
represent significantly over a majority of the facilities. Now, 
at what point do you decide that making exception payments for 
more than a majority of the facilities means you have got to 
move to something else?
    Ms. Wynn. Right. Your point is well taken. And the reason, 
in essence, that we are proposing the rebasing is to remove the 
disparity between the costs and payments that currently exist 
for the TEFRA providers. And we really see that as an interim 
measure, so that the target amounts will reflect what their 
current cost and case mix is.
    Chairman Thomas. But if you are making that many exceptions 
to try to keep TEFRA afloat in an equitable way, and it is a 
temporary structure, why does the administration not buy Dr. 
Newhouse's recommendation of taking the other structure--which 
clearly has some flaws--which has got to be at least as good as 
a 60-plus percent exception procedure on a yearly basis?
    Ms. Wynn. Well, the rebasing will eliminate the need for 
most exceptions.
    Chairman Thomas. And when are we going to do this?
    Ms. Wynn. This would be in fiscal year 1998.
    Chairman Thomas. Right.
    Ms. Wynn. So, it would be accomplished immediately.
    Chairman Thomas. And it will not have any additional need 
for adjustments clear through 2002 when your new program is 
online?
    Ms. Wynn. We would still retain a safety net for any 
hospital whose costs ended up being 150 percent above its 
rebased target amount. And there may be a need for an 
adjustment at that point.
    Chairman Thomas. So, you are just going to take a deep 
breath and continue doing what you have been doing, is 
basically what you are saying?
    Ms. Wynn. Well, we see it as an interim measure. And I 
think the problem that we have is that, both on policy grounds 
and on more practical grounds, we do not feel that moving to 
the FRG system would be appropriate. And in terms of policy, 
there were really three things that are guiding that.
    One is the belief that with patients receiving similar 
services payments should be similar for those patients; and 
that there is a significant overlap in the services that are 
received by patients in skilled nursing facilities, 
rehabilitation facilities.
    Chairman Thomas. That's right. And this is to be utilized 
on an interim basis?
    Ms. Wynn. Right. The rebased system.
    Chairman Thomas. I Understand. And we have had TEFRA for 15 
years?
    Ms. Wynn. Yes, we have.
    Chairman Thomas. And that has basically been an interim 
basis, a temporary structure?
    Ms. Wynn. That was the original intent of it, that it would 
be an interim system.
    Chairman Thomas. What has HCFA been doing for 15 years, if 
what you have now offered is an interim adjustment for the 
interim proposal?
    Ms. Wynn. We have been really hampered by the lack of an 
adequate case mix classification system. And it is not just a 
matter of having the resources to develop the classification 
system itself. It is a matter of whether there is data 
available on which that system could be developed.
    Chairman Thomas. And you are now confident that you have 
that data?
    Ms. Wynn. Well, the system that the FRGs are based on, the 
FIM, is a proprietary system operated by UDS out of the 
University of Buffalo. We had to enter into a protracted 
negotiation process with them to get access to that data. The 
data base itself represents only 30 percent of the 
rehabilitation hospitals.
    Chairman Thomas. I understand.
    Ms. Wynn. That means that 70 percent are not using that 
data base.
    Chairman Thomas. I understand, but what have you been doing 
for 15 years, is the point. In your testimony you talk about a 
core patient assessment instrument. Obviously, that is what you 
are talking about. You are going to need that. When is it going 
to be developed?
    Ms. Wynn. We believe that we could develop a core patient 
assessment instrument that would work across all of the 
postacute settings within about 18 months.
    Chairman Thomas. I am trying to understand the event that 
occurred between 1982 and your testimony that now allows you to 
tell me that you can get a measurement instrument in 18 months 
that we have not been able to do for the past 15 years.
    Ms. Wynn. Well, the reason why we can is that we have 
explicit statutory authority to collect the patient assessment 
data for skilled nursing facilities.
    Chairman Thomas. Oh, it has been Congress' fault? Is that 
it? Over the 15 years we were not able to communicate that you 
needed statutory approval to collect this data? When was that 
given to you?
    Ms. Wynn. The skilled nursing facility, the MDS? I am not 
sure what year.
    Chairman Thomas. The statutory power to collect the data 
you were unable to collect before.
    Ms. Wynn. We do not have statutory authority yet----
    Chairman Thomas. Oh.
    Ms. Wynn [continuing]. To collect the data to develop a 
functional status measure for rehabilitation hospitals, to 
actually implement and collect that data. That is why we are 
using this proprietary system.
    Chairman Thomas. Are you asking for statutory power now to 
do it?
    Ms. Wynn. Yes, we are.
    Chairman Thomas. What is the vehicle for that request?
    Ms. Wynn. It is in the President's budget proposal.
    Chairman Thomas. And in the first term of the Clinton 
administration, was it in the budget?
    Ms. Wynn. I am not certain, sir.
    Chairman Thomas. I am trying to figure out when in this 15-
year period we discovered that we needed the statutory 
authority to collect the data to get off of a temporary system 
which has been patched up in a way that 68 percent of the units 
are affected by an exception rule.
    My problem is, I am listening to Dr. Newhouse and the 
Commission that advises us, and they are telling us we have got 
a plan that is a whole lot better than what we have currently. 
And our decision will be: Do we go ahead with the plan that is 
better than what we have got; or do we accept your argument 
that if we buy a moratorium within 18 months you are going to 
generate a data base that has not been there because of 
statutory limitations for 15 years, and by the year 2002 you 
will be able to provide us with a complete structure for 
reorganizing?
    Ms. Wynn. It is possible that we may actually be able to 
expand the SNF PPS system to include rehabilitation and long-
term care hospitals prior to 2002. That may prove to be 
something that would be feasible. The entire integrated system 
that would also include home-health agencies, we do not believe 
would be possible before 2002.
    Chairman Thomas. Dr. Newhouse, what are the advantages if 
we take this other position, if we tell you that you have told 
us your system is imperfect, theirs is imperfect. What are the 
advantages? Is it that we are going to get a perfect system? 
And in terms of the time that we have already spent, is it 
worth the hope that in fact it will occur over the next 18 
months to 5 years, if it has not in the last 15?
    I think it is a loaded question, but I tried not to make it 
that way.
    Mr. Newhouse. Right. I understand. HCFA has been laboring 
under resource constraints in developing these systems. But we 
are where we are, and we are confronted with what is the best 
way to go forward from here. I think the problem is well 
recognized, that the TEFRA system gives inappropriate 
incentives. There is no perfect answer here that is perfectly 
defensible. Our judgment on the Commission was that it was 
better to, as I said, move toward prospective payment for this 
part of the TEFRA set of hospitals and units.
    Chairman Thomas. Let me ask you a question that I know you 
have not anticipated. And you may not have the answer to it, 
and I obviously do not, and that is why I am asking it.
    In terms of the exception process--and I understand, using 
a temporary device you have got to make adjustments. But I 
would think at some point, as the exceptions grew--unless from 
day one the exceptions were more than 50 percent on the payment 
adjustments--at some point you saw those exceptions growing. 
When they reached 68 percent in terms of utilizing the 
exception procedure to try to create some degree of fairness 
within the payment structure, somebody should have said, 
``Maybe we need to revisit this.''
    Has it been a rapid growth of exceptions, do we know? Are 
any of your resource people aware? Has this crept up in the 
last couple of years, or are we looking at a pretty steady 
increase? Or did they jump up in 1985-1987, and we have simply 
done this as an adjustment on the TEFRA mechanism for 15 or 12 
or 10 years?
    Mr. Newhouse. I do not know.
    Ms. Wynn. The general trend was for a number of years an 
increasing number of exceptions as hospitals were under their 
TEFRA limits longer. Now, however, a number of hospitals that 
had needed exceptions, no longer do, because they have made 
such significant reductions in their average length of stay. So 
that now I believe more than half of rehabilitation hospitals 
are earning bonus payments.
    Chairman Thomas. Well, that is another problem. You got 
into bonus payments versus exceptions, so you are going to win 
either way.
    Dr. Young, I know that you want to answer this question. 
And it is more appropriate, I think, that you should answer it, 
because it comes out of the March 1997 report which, although 
Dr. Newhouse deals with a lot, you are kind of primarily 
responsible for.
    I have noticed in the testimony from the Long Term Acute 
Care Hospital Association there are several statements from 
your March 1997 report, and I want to know if you want to 
clarify whether your Commission's findings indicate that there 
are two distinct groups of long-term care hospitals and that 
Medicare payments should reflect this division. Is that what 
your report said?
    Dr. Young. No, it is not. We do not believe that there is 
evidence that there are two distinct groups of hospitals. There 
is a continuum when you array long-term care hospitals. At one 
end of that continuum are low-cost hospitals; at the other end 
of that continuum are high-cost hospitals.
    Even for the high-cost hospitals, however, we cannot 
separate out how much of that cost is due to differences in 
their mix of patients, and how much of those higher costs are 
due to Medicare's very generous policies in regard to setting 
the base-year payment rate.
    Chairman Thomas. Thank you. Does the gentleman from 
Maryland wish to inquire?
    Mr. Cardin. Thank you, Mr. Chairman. Let me concur with 
your comment that it is difficult to understand why we have not 
made more progress to moving toward a PPS system for the TEFRA 
facilities. Dr. Newhouse, if I understand your testimony, you 
believe we can make more rapid progress than Ms. Wynn believes.
    I would just encourage us to try to move this process more 
rapidly. I think 15 years is too long, and that we could start 
to make progress more quickly than HCFA has indicated today, 
and I look forward to trying to develop some recommendations to 
reflect that.
    Part of my concern is that when you have two different 
systems, when you have a person who is admitted to a hospital 
under a DRG system, that there is a tendency to early discharge 
that person into a TEFRA hospital and double dip and get that 
paid on a cost basis. Whereas, if we had a prospective payment 
system we could deal with that issue in a more straightforward 
way.
    I am curious as to whether the double dipping problem is a 
serious problem? Have either ProPAC or HCFA reviewed whether 
there are opportunities here for cost savings by avoiding that 
type of an abuse of the system.
    Mr. Newhouse. Well, we know that as the acute care length 
of stay has fallen in recent years, the postacute side, of 
which the rehabs are part, has exploded. And while there may be 
some other reasons for that, like chronic long-term use on home 
health, we think there is a link between the financial 
incentives under prospective payment and the piece that is kind 
of out from under prospective payment; namely, the excluded 
hospitals and units.
    Mr. Cardin. Is there an effective way to deal with that 
under the current system where you have one cost-based and the 
other under PPS?
    Mr. Newhouse. Well, you have put your finger on the 
problem. And we think, as we have testified before, there are 
some short-term fixes you can do on the SNF and home health 
side, although they will not solve this underlying 
macroincentive-type problem. But this is why we would at least 
try to make the playingfield more level between the acute 
hospital and the rehabilitation hospital and unit as soon as 
possible.
    Now, that still leaves unbalanced now the acute care 
hospital and the rehabilitation side with the rest of the 
postacute side, as Ms. Wynn mentioned. And that is the down 
side of doing that. But we are going to have some imbalance 
here. The issue is kind of where to have the scales tip.
    Ms. Wynn. If I may, I think that that is one of our areas 
of concern, that the prospective payment system that we are 
developing for SNFs is on a per diem basis, and the FRG system 
is on a per discharge basis. So the same kind of incentive that 
you currently have from the acute care hospital to discharge 
patients rapidly to postacute services--We may well be creating 
the same kind of incentive to rapidly discharge patients from a 
rehabilitation hospital to a skilled nursing facility or for 
home health.
    We are already seeing some indications of that. For 
instance, between 1992 and 1994 there was a 27-percent increase 
in the number of cases that had both rehabilitation care and 
home-health care, and there was a 48-percent increase in the 
number of cases that had both rehabilitation hospital care and 
SNF care. The number of cases that had only rehabilitation 
hospital care, however, remained absolutely flat.
    Mr. Cardin. And I appreciate the difficulty of dealing with 
this under the current system. It is just another reason to 
move along faster to a system that would be more accountable.
    Ms. Wynn. Right. One other point on that, if I may. There 
is still considerable practical implementation work that would 
be needed for the FRG system. Seventy percent of the 
hospitals----
    Mr. Cardin. I hate to interrupt, but you are always going 
to have those problems. I understand that. Any time we 
implement a new system, there are going to be problems, and we 
are going to have to make adjustments after we have gotten into 
it because we do not get it perfectly right the first time.
    Ms. Wynn. Right.
    Mr. Cardin. We understand that.
    Ms. Wynn. Right.
    Mr. Cardin. But unless we start to move more aggressively, 
we will be talking about this 5 years from now, or 10 years 
from now.
    Ms. Wynn. Right. This implementation is not actually in 
refining the payment system; it is coding and training the 
coders to use the coding system. In other words, it is a system 
that has not been used by 70 percent of the hospitals, and 
their coders would need to be trained, tested for reliability, 
and we would have to have some confidence in that.
    Mr. Cardin. Thank you, Mr. Chairman.
    Chairman Thomas. The gentleman is welcome.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Thank you, Mr. Chairman. It is frustrating, 
not only because it has been so long and we keep waiting for 
some formula to come out that will solve all these problems. 
But it is also frustrating because I know, after not very much 
experience with the Medicare system on this Subcommittee, that 
whatever we come up with will have problems; it will not be 
perfect; it will not work for very long; and we will have to 
come up with some new formula or some adjustments to it. I 
mean, it is like trying to squeeze the balloon and keep it from 
getting out of shape as you squeeze it.
    Ms. Wynn. That is right.
    Mr. McCrery. It is just impossible. So, I am just 
frustrated. I have made this speech before, and a lot of you 
already know what I am thinking. I am just frustrated with the 
whole system of trying to manage a marketplace, when we are 
actually creating the marketplace. And I am not smart enough to 
do that, and I do not think government--I do not think anybody 
on this Subcommittee and the whole Congress put together is 
smart enough to do that. And we just keep creating things for 
entrepreneurs to chase, and that does not necessarily reflect 
what the market is, or should be. So, I am just frustrated with 
the whole thing.
    I am willing to keep playing this game but, dad-gum, I am 
getting tired of it. And I long for the day when maybe we will 
say, ``Enough is enough,'' and maybe we will go to some sort of 
defined contribution plan where there is really an opportunity 
for the market to take shape as consumers want it to take 
shape, and not as we policymakers direct it. Thank you.
    Chairman Thomas. If anyone feels moved, they can respond. 
My assumption is, that was a statement.
    Mr. McCrery. It does not require a response.
    Chairman Thomas. It does not require one.
    Does the gentlewoman from Connecticut wish to inquire?
    Mrs. Johnson. Thank you, Mr. Chairman. And thank you for 
your testimony.
    The Chairman has mentioned that more than 60 percent of the 
institutions, I gather, get exception payments. And what I want 
to ask--and you may not know this. But you know, in 1989, we 
very, very clearly gave the Secretary the power to make 
adjustments, to rebase, to adjust up or down. So, there should 
not really be this enormous disparity in the system, given the 
authority that the Secretary has to decrease target rates or 
assign new more representative base periods to hospitals whose 
payments are distorted.
    But given that disparity, do you know any instances in 
which the Secretary has exercised this authority? And if not, 
why not?
    Ms. Wynn. We did implement that authority through 
regulation, and we have done some rebasing. I do not have the 
numbers that I can provide.
    Mrs. Johnson. So you have implemented that authority. I 
would be interested in knowing, did you implement it in 1989? I 
do not expect you can answer this right now, Ms. Wynn, but did 
you implement it in 1989? And how many instances of rebasing or 
in how many instances have you exercised that? Presumably, if 
you had not exercised that then the more than 60 percent figure 
would be higher.
    Ms. Wynn. I will need to provide that for the record.
    Mrs. Johnson. Yes, I would like to do that, because I know 
I have worked with a hospital that has tried for years to get 
rebased, is based on 1982, but has managed to keep up with 
technology. Not only does the current system provide incentives 
for new hospitals to come in at the highest possible cost, but 
we give them reimbursements; and then we look at these 
institutions that were based earlier and we expect them somehow 
to meet the current quality standard of care without any 
accommodation in their rate for the cost of the new technology 
and so on and so forth.
    Ms. Wynn. Right. That is why the President's proposal is 
for an across-the-board rebasing, to address both of those 
issues.
    Mrs. Johnson. Yes, the problem is, of course, that when you 
have institutions that were based in 1982, to suggest that in 
1997 we now wait until 2002 to fix this is really not 
tolerable. Because the costs already are really so distorted 
and the problems are so severe we are in danger of losing our 
lowest cost high-quality facilities, because the newer 
facilities at high reimbursement rates are going to find it 
easier to survive in the competitive environment of the future, 
buying new technology and stuff, than the lower based 
facilities.
    So, I really do want to know in how many instances the 
administration has exercised the authority that it was given, 
and whether the changes have been down or up in terms of rates, 
and what effect this has had on the overall picture.
    [The following was subsequently received:]
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    Mrs. Johnson. Dr. Newhouse, do you have any comment on this 
authority that they have had and their, I think, probably, 
failure to exercise it?
    Mr. Newhouse. I am not aware of the data on how frequently 
it has been exercised. You clearly have the data on the amount 
of exceptions.
    Chairman Thomas. Will the gentlewoman yield?
    Mrs. Johnson. Yes.
    Chairman Thomas. I have got in front of me the Omnibus 
Budget Reconciliation Act of 1990 conference report. And it 
says:

    Development of national prospective payment rates for 
current non-PPS hospitals: The Secretary of Health and Human 
Services shall develop a proposal to modify the current system 
under which hospitals that are not Subsection D, non-PPS, of 
the Social Security Act receive payment,

and so forth.

    Reports: By not later than April 1, 1992, the Secretary 
shall submit the proposal developed under Paragraph One to the 
Committee on Finance of the Senate and the Committee on Ways 
and Means of the House of Representatives.

    And just to go on:

    By not later than June 1, 1992, the Prospective Payment 
Assessment Commission shall submit an analysis of, and comments 
on, the proposal developed under Paragraph One to the same 
Committees.

    Dr. Newhouse, I want to know why you have not submitted the 
analysis, nor commented on the proposal that was required of 
the Secretary by April 1, 1992.
    Mr. Newhouse. Well, Dr. Young informs me that I was not on 
the Commission then; that we did submit a report, but not an 
analysis of the administration's report, the Secretary's 
report.
    Chairman Thomas. Well, why did you not submit an analysis? 
You are required under the Omnibus Budget Reconciliation Act.
    Mr. Newhouse. We did not receive such a report.
    Chairman Thomas. What happened, Ms. Wynn?
    Ms. Wynn. We essentially have been unable to develop the 
system because we have not been able to establish appropriate 
case mix classification systems, and the research, for 
instance, that we have----
    Chairman Thomas. Did you submit a report that said you 
could not live up to what was asked of you under this?
    Ms. Wynn. No, sir, we did not.
    Chairman Thomas. So you just ignored the ``shall'' for 
Congress requiring you to tell us what you were going to do?
    Ms. Wynn. No, we did not----
    Chairman Thomas. Ignore it?
    Ms. Wynn [continuing]. Ignore it at all. We undertook a 
number of efforts to explore the possibility. We entered into 
the negotiation, for instance, to use the FIM instrument, and 
have funded the RAND study as far as the rehabilitation 
services are concerned.
    Chairman Thomas. OK. I just want to underscore for the 
gentlewoman from Connecticut in her point that it was not just 
1982. And Congress did not ignore it. We in fact directly 
requested something. And Dr. Newhouse has talked about 
something. And HCFA's basic position is, ``It is not as good as 
we would like, so we are not going to use it, and will continue 
this discussion for a number of years. In 2002, we are going to 
have it done.''
    I just wanted to underscore that, because obviously 
previous Congresses were concerned about TEFRA and how long we 
were going to operate under it, as well. I thank the 
gentlewoman.
    Mrs. Johnson. Yes. I certainly have been very concerned 
about our inability to rebase a hospital based in 1982, and our 
unwillingness to look at that, and our willingness to 
continue--if you look at the data provided in Dr. Newhouse's 
testimony, spending for rehab and long-term care hospitals has 
grown by leaps and bounds, 95 percent between 1990 and 1993 
alone. And you would think there might have been more attention 
to low-cost hospitals, and that might have been taken into 
account when giving out new rates.
    But I want to just ask one last question of both of you. 
First of all, there is a school of thought that says that in 
long-term care we should distinguish between acute care and 
chronic care, in the long-term care hospitals. Having toured a 
lot of these hospitals, it seems to me this is logical. Where 
do you come down in that debate? And second, where do you stand 
on the new now quite well-developed NALTH rebasing proposal?
    Mr. Newhouse. Our view is that, as Dr. Young said earlier, 
there are low-cost long-term hospitals and high-cost long-term 
hospitals, but we do not think we can satisfactorily 
distinguish between them, in terms of a payment system.
    Mrs. Johnson. It does seem to me that, for instance, 
ventilator patients: a clear grouping. Why can we not deal with 
that? Other long-term care--there are some categories of long-
term care that reflect acuity and intensity that it seems to me 
we ought to be able to identify. I am afraid that by going down 
the sort of simple path of one reimbursement rate we are going 
to end up disadvantaging the more costly patient.
    Mr. Newhouse. Well, there is that danger, Mrs. Johnson. 
That is very right. My concern I think would be how you do this 
for part of the patient mix at the hospital, and how then one 
would have, in effect, a TEFRA-type system, if I understand 
where you are headed, for just part of the patients in the 
hospital. Now, I frankly have not thought that one through.
    Mrs. Johnson. Well, I have not either, and I am certainly 
not an expert in this area. That is why I am asking this rather 
basic question. But it does seem to me that even in long-term 
care hospitals there is a difference between the chronic 
patient, who is really going to be there years, and the 
patients more and more that are rehab and they are sort of long 
term but they are short term. So, I think there are a lot of 
problems with the single reimbursement rate, and I would ask 
you to help me on that in the months ahead.
    I also am very interested in this rebasing proposal that is 
revenue-neutral. And I wondered what you thought about the sort 
of national target rate limit mechanism that keeps that 
rebasing revenue-neutral.
    Mr. Newhouse. We would support the notion of rebasing. If 
you look at my chart 3, particularly for the long-term 
hospitals, you see the hospitals that have come in most 
recently have much higher payment-to-cost ratios than the old 
hospitals, the so-called original hospitals. Actually, in this 
chart it just distinguishes 1989 or before, so it is probably 
even more discrepant than this exhibit shows.
    But the concern is, as I mentioned, because of the new 
provider exemption, the new providers come in--and you 
mentioned, too, in your questions. They have an incentive to 
come in at high cost to establish their ceiling. And this chart 
is an effort to say, yes, that in fact appears to have gone on.
    Mrs. Johnson. Well, I think that the NALTH proposal 
basically pays for the rebasing by gradually limiting the 
overpayments. I mean, that is the way, as a sort of relative 
layman, I hear this. Would you disagree with that?
    Mr. Newhouse. Well, the rebasing would be an effort to then 
get back some of the----
    Mrs. Johnson. Money from the national target group.
    Mr. Newhouse [continuing]. The people who have come in at a 
high cost and then drop their cost--and get incentive payments. 
So, we would support that idea.
    Mrs. Johnson. Thank you. That is the way it appears to 
work.
    Ms. Wynn. Mrs. Johnson, I understand that the proposal has 
what I would call selective rebasing; that it is only an 
opportunity for hospitals whose costs are above their target 
amount to be rebased. The Administration's proposal is for an 
across-the-board rebasing.
    Mrs. Johnson. When? When would the across-the-board 
rebasing take place?
    Ms. Wynn. The President's fiscal year 1998 proposal is to 
rebase all hospitals, both those that are above their target 
amount and those that are below.
    Mrs. Johnson. And how do you pay for it?
    Ms. Wynn. Part of it is by eliminating the disparity 
between costs and payments. The rebasing itself is a 
redistribution of payments among the TEFRA facilities 
themselves. So that those with costs above their target amount, 
the cost of rebasing them is paid for in part by rebasing those 
who now have costs below their target amount.
    Mrs. Johnson. I think you mean vice versa, but anyway--the 
ones whose rebasing needs to be adjusted up get paid for by the 
ones who get rebased essentially down.
    Ms. Wynn. That is correct.
    Mrs. Johnson. I will be interested to look at that and see 
what its impact is. It is true that the proposal that I am 
referring to really rebases the most disadvantaged group.
    Ms. Wynn. Right.
    Mrs. Johnson. And that in itself is hard to pay for. I 
mean, the more you rebase, the more you have to reduce the 
reimbursements for the more generously reimbursed.
    Ms. Wynn. Right.
    Mrs. Johnson. So you have to eliminate their exceptions, or 
reduce their exceptions.
    Ms. Wynn. The other way that we are paying for it is by 
eliminating the bonus payments altogether; whereas I understand 
the National Association of Long Term Care proposal is to just 
limit the amount of bonus payments that an individual hospital 
could receive; whereas the President's proposal would eliminate 
bonus payments altogether.
    Mrs. Johnson. Considering the state of the art in terms of 
its imprecision, which we all acknowledge, I think perhaps the 
more flexible bonus payment system has a place. But I would be 
interested in pursuing this with you in greater detail.
    Ms. Wynn. I would be pleased to.
    Mrs. Johnson. Because I think this is one of the things we 
absolutely have to do this year.
    Ms. Wynn. I would be pleased to talk to you about it.
    Mrs. Johnson. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you.
    Does the gentleman from California wish to inquire?
    Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman.
    Let me ask a first question. And that is, do we know if 
anyone has done any research or analysis of the long-term care 
or rehabilitation hospitals to see what their occupancy rate 
has been over the course of, say, their first 5 years of 
operation?
    Ms. Wynn. That information is certainly available.
    Mr. Becerra. Has anyone analyzed it to find out what 
happens after that third year?
    Ms. Wynn. I am not aware of any studies that have 
specifically focused on that question.
    Mr. Becerra. Might it be worth doing, to find out how 
occupancy rates change after the second or third or, probably, 
fourth year?
    Ms. Wynn. We will be happy to look at that for you.
    Mr. Becerra. I would appreciate knowing. I am not sure how 
to approach this one. I have information here that says that 
the average TEFRA limit of for-profit hospitals is about 
17,000; for nonprofits it is about 15,000; that the average 
cost per discharge for for-profits is about 15,000; as opposed 
to about 12\1/2\ thousand for nonprofits. Dr. Newhouse, what 
makes for-profits cost so much more?
    Mr. Newhouse. Are these long-term hospitals, the excluded 
hospitals?
    Mr. Becerra. I would imagine it is both long term and 
rehabilitation. This breaks it down by for-profit and 
nonprofit.
    Mr. Newhouse. OK. A couple of things. First, my guess is, 
although I have not seen the numbers, that the new entrants are 
disproportionately proprietary hospitals. And we know that the 
new entrants are coming in with higher costs than the prior 
hospitals.
    Second, as we have all here lamented, we do not have an 
adequate measure of case mix. So any time one has got different 
hospitals, the hospitals that are the higher cost hospitals can 
always say, ``Well, we have sicker patients,'' and there is 
really no data to shed light on the accuracy of that claim. So 
whether it is the case mix or whether it is the financial 
incentives is really impossible for me to say. Maybe Ms. Wynn 
has some data on that.
    Mr. Becerra. But it could be one of those two factors?
    Mr. Newhouse. Yes, and as I say, I think part of it is the 
new entrants and the incentives of the new entrants.
    Mr. Becerra. Dr. Newhouse or anyone else on the panel can 
try to see if you can answer this for me. The understanding I 
am beginning to develop here is that these startups get to 
include their basic costs. And HCFA does the job of auditing to 
make sure those costs are reasonable as they are going along. 
And a lot of these for-profits--or most of them, if not all of 
them--are corporations, correct?
    Ms. Wynn. That is correct.
    Mr. Becerra. Executive compensation is included within a 
corporation's cost, is it not?
    Ms. Wynn. Yes, it is.
    Mr. Becerra. We know that a number of executives make a 
handsome salary or compensation package. I think we would all 
agree on that. Ms. Wynn, what do we do to make sure that, as 
corporations are entitled to do, they include within their 
basic costs of running that hospital the cost of providing 
compensation to the chief executive officer or other high 
executives, that we are making sure that they charge only a 
reasonable amount for that particular cost?
    Ms. Wynn. When the costs are audited--and because of 
resource constraints, only a small percentage of hospitals' 
costs are actually audited--we would expect the intermediary to 
essentially be alert to situations where compensation might be 
unreasonable and to make an evaluation as to whether those 
costs are prudent based on sort of what the going rate is for 
individuals with comparable responsibilities.
    Mr. Becerra. Three quick questions: One, are those costs 
isolated within whatever records you have, so that you can find 
them without too much of a problem?
    Ms. Wynn. No, they are not readily identified.
    Mr. Becerra. How do you then determine whether or not a 
reasonable amount has been charged by that hospital for its 
basic hospital costs with regard to the employees, the 
compensation for the chief executive officer, for example?
    Ms. Wynn. Right. At the hospital level information is 
obtained on what we would call owners' compensation. But when 
you are talking about large corporations you do not have that 
data available. So that the real evidence would be if the 
administrative costs of the facility appeared to be out of 
line.
    Mr. Becerra. Let me ask, do you check to find out how much 
they are charging you, or how much they are saying were costs 
incurred in operating that hospital, as it pertains to chief 
executive officers?
    Ms. Wynn. They file a cost report.
    Mr. Becerra. Does that cost report break down that 
particular item of compensation for a chief executive officer?
    Ms. Wynn. No, it does not. You can identify administrative 
salaries as a single line item that would cover everything from 
the clerk typist through to the chief administrative officer.
    Mr. Becerra. And if they have an administrative cost of $10 
million, how do you know how much of that $10 million pertains 
to one person?
    Ms. Wynn. If that $10 million was out of line with the size 
of the institution where you are talking about an audit 
situation--the intermediary could, if it appeared to be out of 
line----
    Mr. Becerra. How would the intermediary know?
    Ms. Wynn. They have comparative data and experience with 
the costs being incurred by other hospitals, as well.
    Mr. Becerra. But you still have no sense of what those 
costs are itemized. You are just going based on comparisons.
    Ms. Wynn. That is correct.
    Mr. Becerra. What if all of the other hospitals are 
including high executive salaries within their administrative 
costs, so that everyone seems to be about the same?
    Ms. Wynn. It would be more difficult to detect unreasonable 
situations then.
    Mr. Becerra. So, then let me ask my baseline question that 
I asked earlier. Can HCFA determine what amount is being 
included within the administrative costs by these for-profits 
for executive salaries?
    Ms. Wynn. We have the authority to determine that.
    Mr. Becerra. Can you.
    Ms. Wynn. We do not have an ongoing mechanism that we have 
used at this point.
    Mr. Becerra. So, if I were to ask you today to provide me 
with the amount that corporations are including in their 
administrative costs that relates to executive salaries, could 
you provide me with that information?
    Ms. Wynn. We could not readily provide you with that 
information. We would have to go out to each intermediary, that 
would then have to go to each of the hospitals to obtain that 
data. So that is not information that we have available.
    Mr. Becerra. Does that not concern you? You have some 
executives, I understand, I have got some figures before me--I 
do not need to mention them--but some individuals are getting 
compensation packages that amount to $8 million in 1 year. And 
does it not concern you that you may not know how much of that 
$8 million is being included in the administrative costs for 
that for-profit corporation to run a hospital and ultimately 
get reimbursement from the Federal Government?
    Ms. Wynn. It concerns me that we do not have the resources 
or the ability to essentially examine every cost for 
reasonableness. Yes, it does.
    Mr. Becerra. And there I can appreciate and empathize with 
you, if you need the resources to do it. Let us put aside for a 
second the empathy for the resources that you need. If you had 
the resources, do you think it would be worthwhile to do? You 
may say ``No.'' I mean, it may not be worth your while. You may 
spend more money of the Federal Government, the tax dollars, 
just trying to figure out how much corporations are including 
in administrative costs for their executives and what it is 
worth.
    Ms. Wynn. Right.
    Mr. Becerra. But I am just asking, is that of interest to 
you?
    Ms. Wynn. Quite honestly, it depends in part on the 
situation. For instance, where you do have a prospective 
payment system, and that is one of the beauties of it----
    Mr. Becerra. We are not in a prospective payment system.
    Ms. Wynn. But when you are on a cost-based system, what 
would concern us the most is whether costs in general for that 
facility--in other words, the bottom-line costs--appear to be 
out of line. And there are certainly some excluded hospitals 
that have far higher target amounts. And again, with the lack 
of the case-mix measurement system it is harder for us to get 
to whether those costs are reasonable or not. And that is an 
area of concern, certainly.
    Mr. Becerra. Mr. Chairman, you have been gracious with the 
time, and this will be the last question I ask.
    What would you consider reasonable costs to associate to an 
executive's compensation that is included within the 
administrative costs of a corporation that is a for-profit 
hospital?
    Ms. Wynn. I am not an expert in executive compensation, so 
I really cannot----
    Mr. Becerra. As a nonexpert. As a nonexpert.
    Ms. Wynn. You are asking a civil servant. Anything over--I 
am not qualified to answer that.
    Mr. Becerra. At all? Not even as a reasonable layperson? 
[Laughter.]
    Ms. Wynn. Not even, no, sir. But we would expect the 
intermediary to be able to answer that question and to 
investigate it where it appeared to be an unreasonable 
compensation package.
    Mr. Becerra. But you have no opinion as to what might be 
considered reasonable to include? What would be excessive?
    Chairman Thomas. Mr. Becerra.
    Mr. Becerra. Yes, Mr. Chairman.
    Ms. Wynn. I am sorry.
    Chairman Thomas. Might I ask a question in a slightly 
different way?
    Mr. Becerra. Certainly.
    Chairman Thomas. Which results in the expiration of your 
time. [Laughter.]
    Do you not have the ability to set reasonable reimbursement 
guidelines for physical therapists?
    Ms. Wynn. Yes, we do.
    Chairman Thomas. And have you not recently done that?
    Ms. Wynn. Yes.
    Chairman Thomas. Do you have the ability to set reasonable 
reimbursement guidelines for administrative costs?
    Ms. Wynn. Yes, we do. In fact, we are currently doing that 
for home health agencies.
    Chairman Thomas. Now, let me pause there--and yield a 
portion of my time to the gentleman from California. 
[Laughter.]
    Since you have the ability to set administrative costs on 
reasonable guidelines, he might very well ask the question----
    Mr. Becerra. Do you have reasonable guidelines for 
administrative costs? [Laughter.]
    And if not, would you consider instituting some?
    Ms. Wynn. First of all, at the present time we do not have 
those for hospital executive compensation. And it is certainly 
something that we can take a look at.
    Mr. Becerra. I do not want to end it on that note. You can 
take a look at a lot of things. I asked if it was something you 
would consider.
    Ms. Wynn. Yes.
    Mr. Becerra. Is it worthwhile?
    Ms. Wynn. I think the first thing we need to understand is 
the extent to which there are abuse or unreasonable 
compensation arrangements.
    Chairman Thomas. Reclaiming my time----
    Mr. Becerra. Thank you, Mr. Chairman.
    Chairman Thomas. It seems to me we would be chasing our 
tail trying to create a reasonable reimbursement guideline, 
when we could be spending our time imposing a prospective 
payment system----
    Mr. McCrery. Amen.
    Chairman Thomas [continuing]. Which in fact would be self-
corrective, because if that is where they want to spend their 
money, they may not be in business all that long.
    Mr. Becerra. And if I could add, Mr. Chairman, you are 
absolutely correct. But if I just heard correctly, we have 
waited 15 years. And unless we have any expectation it is going 
to end any sooner, at some point we had better know what is 
reasonable.
    Chairman Thomas. I appreciate the gentleman's generous use 
of ``we waited 15 years.'' We waited 3, and I am tired of 
waiting.
    Mr. Becerra. Well, 11 of those 15 years were when you were 
in the executive branch.
    Chairman Thomas. No, I was not. They were. [Laughter.]
    Mr. Becerra. Yes. That is true. They were not us.
    Chairman Thomas. Does the gentleman from Nevada wish to 
inquire?
    Mr. Ensign. Thank you, Mr. Chairman. By the way, it would 
be interesting to ask somebody who worked in McDonald's what a 
fair compensation for a Member of Congress would be. I do not 
think that you would get that $133,600 would be a reasonable 
figure. So that kind of line of questioning I think discounts 
the theory that somebody is worth what they make, which is 
determined by the marketplace. It is the only fair way for 
anybody's value to be determined.
    Chairman Thomas. Would the gentleman yield?
    Mr. Ensign. Just a second. I want to ask a fundamental 
question in this whole system. And that is, what incentives in 
the whole area of long-term care do we have for providing 
better quality care at less cost, under the current system?
    Ms. Wynn. Under the current system----
    Mr. Ensign. Better quality at less cost.
    Ms. Wynn. The incentives for efficiency are built in 
through the TEFRA methodology.
    Mr. Ensign. But I prefaced that question ``better quality, 
less cost.''
    Ms. Wynn. I understand that.
    Mr. Ensign. Do you think that the systems under TEFRA are 
incentives for better quality at less cost?
    Ms. Wynn. There is nothing within the TEFRA system that 
provides incentives to improve quality.
    Mr. Ensign. Right, and I agree with that. And as a matter 
of fact, I think that some of the questions from the gentleman 
from California sound like fair questions, but the problem is--
--
    Chairman Thomas. Excuse me?
    Mr. Ensign. Listen. I said they sound like fair questions.
    Chairman Thomas. No, no, no. ``The gentleman from 
California.''
    Mr. Ensign. Excuse me. The gentleman on the end in the 
Minority party from California. [Laughter.]
    The Chairman's questions are always fair questions, by 
definition. [Laughter.]
    Anyway, while the line of questioning sounds fairly 
reasonable up front, following along with what Mr. McCrery 
talked about. I have only been up here for a couple of years, 
but it seems like a lot of the answers that we try to come up 
with are because the government set up a bad system in the 
first place. And some of the answers are bad answers, or they 
are not great answers, because the system was bad in the first 
place.
    The system that we have now has no incentives for providing 
better quality at less cost. We do not have those built into 
the current system. And that was really the only point that I 
wanted to make. And I just wanted to make sure that you felt 
the same way.
    So thank you, Mr. Chairman. That is really all I had.
    Mr. Becerra. Will the gentleman yield some of his time?
    Mr. Ensign. Surely.
    Mr. Becerra. I agree with the gentleman. His point is well 
taken. You should be paid what you earned. It is a matter of 
whether the taxpayers should pay for that. If someone is being 
paid $8 million and the company that individual is making the 
money from is including that within the cost which ultimately 
will be reimbursed to some degree by the taxpayer----
    Mr. Ensign. Oh--reclaiming my time--I think a cost-based 
system is a terrible system. It has been proven time and time 
again, a cost-based system is a terrible system. And that is 
what I was saying; that your questions sound reasonable because 
it was a terrible system in the first place.
    Mr. McCrery. A cost-based reimbursement system is a 
terrible system if somebody besides the consumer is paying the 
bill.
    Mr. Ensign. Yes. There is no accountability. It takes 
accountability out of the system. And that was really the whole 
reason for the line of questioning. Thank you, Mr. Chairman.
    Chairman Thomas. I want to thank the panel. If Members have 
no additional questions, we will move on to the next panel, 
because I believe they are anxious to present testimony to the 
Subcommittee.
    I want to thank you all.
    Ms. Wynn. Thank you, sir.
    Mr. Newhouse. Thank you.
    Chairman Thomas. The next panel will be Patrick Foster, 
senior vice president of the Inpatient Division of HEALTHSOUTH, 
Birmingham, Alabama, on behalf of the Federation of American 
Health Systems; Kathleen C. Yosko, I believe it is, president 
and chief executive officer, Schwab Rehab Hospital and Care 
Network, Chicago, Illinois, on behalf of the American 
Rehabilitation Association; J. Rod Laughlin, president, 
Transitional Hospitals Corp., Las Vegas, Nevada, and president 
of the Long Term Acute Care Hospital Association of America; 
and James Standish, chief financial officer, Hospital for 
Special Care, New Britain, Connecticut, on behalf of the 
National Association of Long Term Hospitals.
    I want to thank you all for coming. Any written statement 
that you may have will be made a part of the record. And you 
may address us in the time that you have in any way that you 
see fit to inform the panel. Let me just say that we will start 
from my left, your right, and move across the panel.
    I do want to mention that these microphones are 
unidirectional, and you will want to speak directly into them. 
Thank you very much for coming. And Mr. Foster, the time is 
yours.

    STATEMENT OF PATRICK A. FOSTER, SENIOR VICE PRESIDENT, 
 INPATIENT OPERATIONS, HEALTHSOUTH CORP., BIRMINGHAM, ALABAMA; 
     ON BEHALF OF THE FEDERATION OF AMERICAN HEALTH SYSTEMS

    Mr. Foster. Thank you, sir. Mr. Chairman and Subcommittee 
Members, thank you for the opportunity to address this 
Subcommittee today. I am Pat Foster, senior vice president with 
the HEALTHSOUTH Corp., which is a member of the Federation of 
American Health Systems.
    The federation represents a large portion of the PPS-exempt 
facilities in the Nation. It represents approximately 70 
percent of the freestanding rehabilitation hospitals, 50 
percent of the behavioral hospitals, and 35 percent of the 
long-term care facilities. As a result of that, we feel like we 
have the qualifications to address the issues that are at hand 
related to the quality of patient care and the cost of patient 
care.
    The President's budget for this year addresses a lot of 
things, and some of those things we think will add to the 
Medicare cost. We think they are a Band-Aid approach. And some 
we think will reduce the cost of providing care. The 
President's proposal includes both short- and long-term 
approaches and issues. Let me address short-term issues first.
    Our chief concern is rebasing. We do not support rebasing. 
Rebasing is a redistribution of Medicare funds from the 
efficient provider to the inefficient provider. And we, again, 
think this is a Band-Aid effect. There is an exemption system 
which has been referred to today where facilities can rebase. 
We have in fact had one facility that was allowed rebasing. 
This has been in place since 1989, and the Secretary of HHS has 
the authority to do this. So what I am saying is it does work. 
We have had one facility that has been approved, and one in 
fact that was not.
    Closely related to this proposal in the President's budget 
is the elimination of the incentive payment. We do not support 
the elimination of the incentive payment today. We again think 
that is an interim approach. The one thing that works in the 
existing system is it does reward the efficient providers. And 
if we take this out, we are rewarding the inefficient 
providers.
    It is very similar to the DRG payment. The DRG payment, the 
PPS payment, and the PPS-exempt payment are different in one 
way. The PPS payment allows a provider to keep 100 percent of 
the difference in their cost and what their DRG amount is; 
whereas the incentive payment with PPS facilities generally is 
about 5 percent of the TEFRA limit. And the President's 
proposal suggests the elimination of this, and we do not 
support that.
    The existing system works. It does reward the efficient 
provider. It does save health care dollars. I have some charts 
up that show under the present system what has occurred in my 
company, the HEALTHSOUTH Corp. And as you can see, the costs 
since 1994 have gone down. And there are a variety of TEFRA 
limits in these hospitals, a lot of these. In fact, one 
hospital is one of the oldest hospitals in the country. And as 
our costs have gone down, our clinical outcomes have gone up. 
So we have the incentive in place today.
    Let me talk about capital reduction. We do not support the 
reduction in capital. The 15-percent reduction is drastic. We 
are very sensitive to the Medicare mix. In a PPS-exempt 
facility, 60 percent to 65 percent of our patients are 
Medicare. In a PPS facility, it is about 40 percent.
    An example, Mr. Chairman, would be at our facility in 
Bakersfield, and how this would affect the facilities that are 
new in the South and the West. In Bakersfield, California, we 
have a rehabilitation hospital, and our capital cost per day is 
$189. The average amount in our company is $128. So this will 
definitely impact facilities, and I think you will find that is 
consistent with the facilities in the South and the West.
    We know we must continue to reduce Medicare expenditures, 
and we are committed to do that. We support several things in 
the President's proposals in this year's budget. We support the 
inflation update cuts. ProPAC recommended 2 percent; the 
President, 1.3. In lieu of rebasing, we would even recommend 
lower than the 1.3.
    We do support and encourage elimination of the new provider 
exemption. That exemption allows facilities to be inefficient 
in the first 2 years of operation, and we thoroughly and 
strongly suggest that every facility should be cost efficient 
out of the gate.
    For the long term, we absolutely support going to a PPS 
system. The thing that we do not support is, the system that 
has been under review right now does not represent the large 
portion of the freestanding rehabilitation hospitals in the 
United States of America. And as we are driving our costs down, 
the data that is being used was generated in 1994. So, we do 
definitely support PPS. Absolutely, we do. But we do not 
support it in the form that it is today.
    In summary, we are willing to share our commitment, and 
willing to share the commitment to drive down Medicare costs. 
Please, whatever we do, let us make sure that it does not 
jeopardize patient care. And when we implement a PPS system, 
let us ensure that it takes care of implementing excellent 
clinical outcomes for the patient.
    Thank you very much.
    [The prepared statement follows:]

Statement of Patrick A. Foster, Senior Vice President, Inpatient 
Operations, HEALTHSOUTH Corp., Birmingham, Alabama; on Behalf of the 
Federation of American Health Systems
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    Chairman Thomas. Thank you, Mr. Foster.
    Ms. Yosko.

 STATEMENT OF KATHLEEN C. YOSKO, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, SCHWAB REHABILITATION HOSPITAL AND CARE NETWORK, 
  CHICAGO, ILLINOIS; ON BEHALF OF THE AMERICAN REHABILITATION 
                          ASSOCIATION

    Ms. Yosko. Yes, good afternoon, Mr. Chairman and Members of 
the Subcommittee. Today, I am appearing on behalf of the 
American Rehabilitation Association, the principal membership 
organization of rehabilitation facilities, of which I am the 
chairman of the board of directors. I am also president and 
chief executive officer of Schwab Rehabilitation Hospital and 
Care Network in Chicago. Also present today, as Congressman 
LoBiondo mentioned, is Richard Kathrins, president of Betty 
Bachrach Rehabilitation Hospital in New Jersey.
    The objective of medical rehabilitation is to eliminate or 
minimize disability. We seek to restore a person's ability to 
live, work, and enjoy life after an illness, trauma, stroke, or 
similar event has impaired one's physical or mental abilities. 
Christopher Reeves' spinal cord injury and President Clinton's 
recent knee injury are just two of the many examples of 
rehabilitation.
    Many of the conditions requiring rehabilitation services 
are associated with advancing age, particularly strokes, 
orthopedic conditions, and arthritis. Medicare is the primary 
payer of over two-thirds of those who need rehabilitation.
    Rehabilitation hospitals and units are excluded from the 
Medicare PPS. Rehabilitation facilities are paid on the basis 
of reasonable cost, subject to ceilings imposed under TEFRA. 
TEFRA limits were imposed in 1993 as a temporary method for 
controlling costs. HCFA was charged with developing a PPS 
suitable for rehabilitation, but this never occurred.
    TEFRA distorts the delivery and cost of hospital 
rehabilitation services in a number of ways. I will highlight 
the two most critical problems. TEFRA limits do not adjust for 
changes in the case mix or increased acuity of patients. They 
treat all cases as having the same value. Hence, inherent in 
the system is a financial incentive to treat short-stay, less 
complex patients, not more severely disabled patients.
    The current system is inequitable because it allows new 
rehabilitation providers to establish much higher TEFRA limits 
than older ones. These new facilities can establish TEFRA 
limits based on contemporary costs, and can be reimbursed 
significantly more than older hospitals. The incentives within 
any rehabilitation payment system should encourage the 
treatment of all patients according to their individual 
rehabilitation needs. The current TEFRA system is an 
ineffective reimbursement structure to accomplish this goal.
    Rehabilitation hospitals and units would be better served 
with a reimbursement system that is accurately calibrated to 
the intensity of the needs of the patients we serve. That in 
turn best serves the ultimate goal of rehabilitation: to enable 
persons with disabilities and chronic illness to live 
independently in the community.
    While some rehabilitation providers prosper and others 
struggle under TEFRA, no one defends it, including HCFA. 
Replacing this system with a rehabilitation PPS has been 
recommended by ProPAC in 1996, and more strongly in 1997, as 
well as the trustees of the Health Insurance Trust Fund.
    In 1990, Congress directed HCFA to submit recommendations 
for rehabilitation payment reform by April 1992, but again, 
nothing happened. Rehabilitation providers then funded research 
to develop a patient classification and payment system for 
rehabilitation called the functional related groups, FRGs. This 
system, now existing, covers almost all Medicare patients. It 
is designed to account for variations in the case mix of 
patients, unlike the TEFRA system.
    In the fall of 1995, HCFA contracted with the RAND Corp. to 
evaluate the FRG system and, if found to be suitable, design a 
PPS for rehabilitation. This work is now complete. RAND has 
reported to HCFA that FRGs are suitable as the basis for an 
accurate rehabilitation payment system.
    The Administration's Medicare proposals ultimately 
represent an endorsement of the current rehabilitation payment 
policy. We oppose the administration's TEFRA proposals because 
they do not cure the flaws of the present system. They do 
nothing to chart a course for the efficient use of 
rehabilitation resources under Medicare.
    In conclusion, any rehabilitation payment reform should 
ultimately focus on the needs of patients. A rehabilitation PPS 
would, one, establish the proper incentives to treat all 
patients, regardless of case mix; and two, assure that newly 
developed rehabilitation facilities are founded on community 
need, rather than the current payment incentives.
    There is a bill in Congress that establishes a 
rehabilitation PPS based on FRGs. This is H.R. 585. We look 
forward to the final RAND report, in order to identify 
necessary modifications to the bill. There may be other ways to 
structure rehabilitation PPS. The important point is that the 
current TEFRA system is inequitable and outdated, and should be 
replaced with a rehabilitation PPS that accounts for case mix.
    Thank you, Mr. Chairman, for this opportunity, and I would 
be pleased to answer any questions.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you, Ms. Yosko.
    Mr. Laughlin.

STATEMENT OF J. ROD LAUGHLIN, PRESIDENT, TRANSITIONAL HOSPITALS 
 CORP., LAS VEGAS, NEVADA; AND PRESIDENT, LONG TERM ACUTE CARE 
                HOSPITAL ASSOCIATION OF AMERICA

    Mr. Laughlin. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the House Ways and Means Subcommittee on Health, my 
name is Rod Laughlin. I am president of Transitional Hospitals 
Corporation in Las Vegas. I am also president of the Long Term 
Acute Care Hospital Association of America. I appreciate the 
opportunity to speak to you to address the President's proposed 
Balanced Budget Act of 1997 as it addresses payment for long-
term care hospitals.
    Our association supports a PPS-type system for long-term 
care, and we look forward to providing any data that HCFA may 
need to assist in development of that sort of system. In the 
interim, we are willing to absorb our fair share of reductions 
in Medicare payments.
    ProPAC noted in 1994 that PPS-exempt providers accounted 
for about 7.2 percent of total part A payments. The long-term 
care hospitals represent only 10 percent of that amount, or 
about seven-tenths of 1 percent of total part A payments. So we 
really are a small piece of the Medicare problem.
    Based on the CBO's March 1997 analysis of the President's 
budget, the PPS-exempt hospitals should not be asked to bear 
more than about $3.7 billion in cuts on a fair-share basis.
    Medicare reductions are more hurtful to long-term hospitals 
and other PPS-exempt hospitals, as you have heard, because we 
tend to have a higher percentage of Medicare patients--
typically, about 65 percent in the exempt hospitals, compared 
to 35 to 40 percent in regular community hospitals. PPS-exempt 
hospitals have a greater dependency on Medicare revenues, and 
they are less able to shift unreimbursed Medicare costs to 
other payers.
    I would like to discuss our position on several issues that 
have been proposed as ways to reduce costs and save money for 
Medicare. First of all, with regard to the moratorium on new 
long-term hospital exclusions, our association is totally 
opposed to that moratorium. I think the moratorium probably 
came about as a result of some of the percentages of growth 
that have been tossed out, numbers at 30 percent annual growth 
and even higher.
    I would like to say, though, that those percentages are 
misleading because they are starting from a very small base. 
Even today I think there are only 186 or so long-term hospitals 
in the whole country. The largest growth in this long-term 
hospital sector is in the hospital-within-hospital area.
    HCFA has in place ample regulations to control the growth 
of hospitals in hospitals. These regulations are not being 
consistently enforced region by region. There is not consistent 
interpretation of the rules by all of the various 
intermediaries. And the first step that should be taken is to 
ensure that those rules are consistently applied. That will cut 
down on a number of the hospital-in-hospital facilities that 
exist currently that violate the rules.
    Finally, the moratorium is a bad idea because it eliminates 
important treatment services that achieve very good patient 
outcomes--sometimes medical miracles--that are not generally 
available in short-term facilities, and certainly not available 
in some of the sub-acute facilities and nursing homes that are 
not able to treat the high-end acute patient that our 
association represents.
    With regard to the cap on the TEFRA target, rebasing, other 
changes to TEFRA, we are opposed to those changes, not because 
TEFRA is not a flawed system and does not need some changes, 
but we are opposed to a single approach to TEFRA. The reason 
for that is that there are a number of different types of 
hospitals within the category called long-term hospitals.
    It is not our purpose to misrepresent ProPAC's position on 
this issue. In our presentation to you we quoted some 
statements from their report to Congress of March 1997. I would 
just say that the main reason ProPAC and no one else can 
distinguish the costs related to the two types of hospitals is 
that we do not have a patient classification system. One of 
those needs to be developed by HCFA in the earliest possible 
time.
    Putting a 150-percent cap on the TEFRA cost structure will 
put our association's hospitals out of business, because they 
are treating, by design, very, very sick patients. We treat the 
sickest of the sick. We do not have any chronic patients. We 
tend to discharge those patients. And so we have some higher 
cost, very sick patients.
    We are in favor of maintaining the incentives on TEFRA at 
the present time. I think if there are going to be changes to 
TEFRA, again, they need to address the fact that there are at 
least two classifications of hospitals within the long-term 
category.
    Two ideas we can live with are the reduction in the market 
basket updates of 1\1/2\ percent annually, which the CBO says 
saves about $3 billion over 5 years; and the reduction of the 
capital payments to 85 percent of allowable cost. That will 
save another $600 million over 5 years. These two items alone 
would save $3.6 billion from the long-term care category, which 
is just about our fair share.
    In conclusion, let me say that we want to say ``No'' to the 
moratorium. We think any change to TEFRA needs to recognize the 
two classes of long-term hospitals. We think HCFA should be 
enforcing the current rules on hospital within hospital, which 
are being widely violated. We think cuts to all hospitals 
should be proportional to their impact in the Medicare Program. 
And we certainly support the development of a PPS system.
    Thank you.
    [The prepared statement follows:]
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    Chairman Thomas. Thank you, Mr. Laughlin.
    Mr. Standish.

   STATEMENT OF JAMES F. STANDISH, VICE PRESIDENT AND CHIEF 
  FINANCIAL OFFICER, HOSPITAL FOR SPECIAL CARE, NEW BRITAIN, 
CONNECTICUT; ON BEHALF OF THE NATIONAL ASSOCIATION OF LONG TERM 
                           HOSPITALS

    Mr. Standish. Mr. Chairman and Members of the Subcommittee, 
thank you for inviting me to speak before you today on behalf 
of the National Association of Long Term Hospitals. My name is 
James F. Standish. NALTH has approximately 45 member 
institutions located across the United States, 90 percent of 
which are not-for-profit organizations which exist for the 
benefit of the communities in which they operate.
    While my remarks today are made on behalf of the National 
Association of Long Term Hospitals, many of the issues related 
directly to Hospital for Special Care, which participates in 
the Medicare Program as a long-term hospital and is located in 
New Britain, Connecticut. Hospital for Special Care is a 
founding member of NALTH, and I am the Hospital for Special 
Care's vice president and chief financial officer.
    The notice of today's hearing correctly indicates that the 
current TEFRA system of payments treats older long-term 
hospitals differently than new long-term hospitals. In 1996 
ProPAC reported to Congress that older, as opposed to new, 
long-term hospitals had the lowest margins of any type of 
hospital which participates in the Medicare Program. In fact, 
Hospital for Special Care loses an average of $5,000 per 
Medicare discharge.
    In light of the unfair inequities which exist among TEFRA-
rated hospitals it is important for Congress to assess a number 
of important issues related to the potential restructuring of 
any payment program governing long-term hospitals. A summary of 
recommendations by NALTH, to which I will testify today, are as 
follows:
    Number one, the current TEFRA system, as others have said, 
should be discarded as soon as possible in favor of a long-term 
hospital prospective payment system. In fact, our association 
is spending upward of a half-million dollars to begin 
developing such a system, and expects to complete a long-term 
hospital patient classification system, together with a payment 
system, by the summer of 1998. NALTH will continue to meet with 
the congressional staff and HCFA as it develops the long-term 
hospital PPS.
    We believe that a PPS is the only true solution to 
replacing the flawed TEFRA system which, as others have 
mentioned, was a temporary system we still live with 15 years 
hence. It is essential that a valid case-mix-adjusted patient 
classification system be at the root of a prospective payment 
system.
    As was stated in the recent ProPAC report to Congress in 
March, payment amounts should vary depending on the intensity 
and nature of services beneficiaries require, rather than 
basing payment on the setting or type of long-term care 
facility providing the service. NALTH agrees with ProPAC's 
logic, and urges speed in the development of a patient 
classification system. This system should be pursued instead of 
establishing an arbitrary breakdown of long-term hospitals 
based on the type of facility. Again, the focus should be on 
the type of service provided.
    Number two, while completing development of a PPS system, 
Congress should not require rebasing of TEFRA rates based on 
average cost, as has been proposed by the President. Again, the 
use of this average cost as a payment limit would produce an 
invalid patient classification system and reward hospitals 
which change the type of patients they serve to minimize 
resource use after the establishment of the new base year. It 
is well documented that long-term hospitals serve a 
heterogeneous mix of patients. The use of an average would 
erroneously assume that long-term hospitals serve patients who 
require similar medical resources.
    Number three, until a long-term care PPS is implemented, 
cost savings we believe may be achieved by imposing a national 
limit on the difference between allowable costs and TEFRA 
ceiling amounts. This is further outlined in Attachment C to my 
testimony on file.
    The national ceiling would have two functions. First, it 
would place a limit on incentive payments for new hospitals; 
and second, it would reduce the rate of increase and target 
ceilings for existing long-term hospitals with incentive 
payments.
    Number four, long-term hospitals with distorted base years, 
like Hospital for Special Care which has been significantly 
underreimbursed, should be allowed to update their base year if 
they serve a significant disproportionate share population of 
25 percent or more. This is more fully outlined in Attachment B 
to my testimony on file.
    Number five, Congress should continue the minimum payment 
protections it has established for PPS-exempt hospitals whose 
allowable costs exceed their TEFRA limit. This issue primarily 
affects long-term hospitals with older target rates.
    NALTH believes strongly that Congress should grandfather 
long-term hospitals which are colocated with other hospitals as 
of September 30, 1995, from special conditions of Medicare 
participation which the Secretary has applied to these 
hospitals.
    In summary, I urge the Subcommittee to recognize that it is 
anticipated that NALTH's proposal for selective rebasing is 
made at least budget neutral by our cost-savings proposal. In 
addition, it is our intent for the development of the PPS 
system for long-term hospitals to also be budget neutral. Only 
a PPS for long-term hospitals which appropriately classifies 
patients by level of care will correct the unfair inequities 
which exist today under the flawed TEFRA system.
    If interim measures are taken to modify the existing TEFRA 
system before a PPS is in place, I urge that you take the 
unfair inequities of the current system into consideration, and 
do not cause more harm to certain long-term hospitals. NALTH is 
prepared to work on a united front to resolve these issues.
    I wish to thank you and the Subcommittee staff again for 
inviting me here today and for your courtesy and attention to 
these important issues, and I am pleased now to answer any 
questions you may have.
    [The prepared statement and attachments follow:]

Statement of James F. Standish, Vice President and Chief Financial 
Officer, Hospital for Special Care, New Britain, Connecticut, on Behalf 
of the National Association of Long Term Hospitals
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    Chairman Thomas. I want to thank all of the panel. And as 
you noticed from the first panel, our ability to understand why 
we are doing what we are doing and the changes that have been 
made here are a little more difficult than in some other areas, 
because this is a kind of a patchwork operation; 
notwithstanding the fact that it is growing because services 
are being provided, apparently in ways that people want them in 
facilities that they want.
    Trying to understand the charts, especially the one on the 
right: Mr. Foster, when you say ``aggregate Medicare cost per 
discharge,'' can I change ``cost'' to ``payment''? Is that what 
that is?
    Mr. Foster. No, sir, that is cost.
    Chairman Thomas. If that is the aggregate Medicare cost per 
discharge, you get paid differently than that?
    Mr. Foster. It depends on the TEFRA limit for the 
individual facility.
    Chairman Thomas. What does that show me, then? You see, to 
me a Medicare cost is what it costs Medicare in payment per 
discharge. But that is not what that chart is?
    Mr. Foster. Yes, sir, that is what that is. What that chart 
shows with the existing system that is in place, the cost--we 
have acquired a lot of hospitals over the last 2 years, and 
there is a big variance in the TEFRA limit. And what that chart 
shows from 1994, the cost per Medicare discharge was 14,204. In 
1996, that cost has gone down per discharge to 11,622.
    Chairman Thomas. But it says up top, ``same store 
comparisons.'' So are we comparing different hospitals that 
came on at different times?
    Mr. Foster. No, sir. No, that is same store.
    Chairman Thomas. It says ``same store comparisons.''
    Mr. Foster. Right. I am sorry, yes, sir.
    Chairman Thomas. So one store in 1994 is the purple line, 
and in essence the same store is the 1996 green line?
    Mr. Foster. Yes, sir, correct. You are correct.
    Chairman Thomas. So in 1994, getting back to Mr. Becerra's 
concern about administrative costs----
    Mr. Foster. Yes, sir.
    Chairman Thomas [continuing]. Since that is not a broken-
out item, if we can, to try to explain it, let us assume that 
the hospital opened in 1994. Can we do that?
    Mr. Foster. Yes, sir.
    Chairman Thomas. Will that work?
    Mr. Foster. OK.
    Chairman Thomas. Let us say it opened in 1994. And you have 
fixed where you have administrative costs. And you have maybe 
100 patients. Now, is it possible that between 1994 and 1996 
the administrative costs would remain the same, but you could 
perhaps double your patient load to have 200 patients for the 
same administrative costs, which would certainly show a cost-
per-discharge reduction, and that would be an efficiency kind 
of thing?
    Mr. Foster. Yes, sir, per day. If you have more patient 
days divided into your total cost, if your census increased 
from 50 to 100, your cost per day would go down, and it would 
affect that. You are absolutely correct.
    Chairman Thomas. So you could open up with a top-heavy 
administrative arrangement in the hospital, not increase it 
over that period, but add what would be the normal amount of 
patients, and get this same chart?
    Mr. Foster. Theoretically, you could.
    Chairman Thomas. Rather than build the administration as 
your patient load increases?
    Mr. Foster. Yes, sir.
    Chairman Thomas. And would there be any incentive for 
having a top-heavy administration when you opened the hospital, 
versus building the administration as the patient load grew, 
under current reimbursement structure?
    Mr. Foster. Theoretically, yes, sir.
    Chairman Thomas. In the real world, is there?
    Mr. Foster. No, sir.
    Chairman Thomas. No.
    Mr. Foster. No, sir.
    Chairman Thomas. You would not be reimbursed more if you 
had a larger administrative structure going in?
    Mr. Foster. You would, yes, sir. But I am saying that is 
not the case with this data. Same stores in 1994 included a lot 
of hospitals that came on with our company.
    Chairman Thomas. I understand. But if you look at the 
11,600----
    Mr. Foster. Yes, sir.
    Chairman Thomas. Now, again, this is not what Medicare 
pays; this is the Medicare cost.
    Mr. Foster. Right.
    Chairman Thomas. In discussing with the first panel and Ms. 
Wynn, where she talked about the percentage of incentive 
reimbursements, does any of this 11,600 reflect the 
reimbursement cost?
    Mr. Foster. Yes, sir.
    Chairman Thomas. That is all of the money that comes from 
HCFA?
    Mr. Foster. That is Medicare cost per discharge.
    Chairman Thomas. I understand that. But since we did not 
say it was Medicare payment----
    Mr. Foster. Right.
    Chairman Thomas [continuing]. How does the 14,200 as a 
Medicare payment reflect any of the incentive payments that she 
discussed between 1994 and 1996? This is not discussed on this 
chart.
    Mr. Foster. OK. The chart shows that the Medicare funds 
that are reimbursed to HEALTHSOUTH, or this particular 
facility, the funds that are reimbursed are going down, the 
expenditures that are required are going down.
    Chairman Thomas. Per discharge?
    Mr. Foster. Yes, sir, cost per discharge.
    Chairman Thomas. Where would a chart show the total amount? 
Or are you telling me that the 11,600 is the total amount of 
payment? I know it says ``cost.'' You do not have a payment 
chart. What I am looking for is, what would have happened 
between 1994, if this is the first year the hospital opened, 
and 1996, in terms of what it would cost us, if you will, the 
taxpayers, in terms of Medicare payment per discharge?
    Mr. Foster. OK.
    Chairman Thomas. Where do the incentives show up? Or have 
none of your hospitals participated in that incentive program 
that she discussed?
    Mr. Foster. Yes, sir. If you look at the 1994 data, say you 
have a TEFRA limit of, say, $16,000. Then you are allowed to 
participate with the current system up to 50 percent in the 
difference in the cost per discharge and the TEFRA limit, not 
to exceed 5 percent of the limit. So in this particular case, 
as the cost goes down, it reduces Medicare expenditures.
    Chairman Thomas. But the amount per patient goes up? When 
you say ``cost'' there, is that cost plus the----
    Mr. Foster. Yes, sir, per day. If you have more patient 
days divided into your total cost, if your census increased 
from 50 to 100, your cost per day would go down, and it would 
affect that. You are absolutely correct.
    Chairman Thomas. So you could open up with a top-heavy 
administrative arrangement in the hospital, not increase it 
over that period, but add what would be the normal amount of 
patients, and get this same chart?
    Mr. Foster. Theoretically, you could.
    Chairman Thomas. Rather than build the administration as 
your patient load increases?
    Mr. Foster. Yes, sir.
    Chairman Thomas. And would there be any incentive for 
having a top-heavy administration when you opened the hospital, 
versus building the administration as the patient load grew, 
under current reimbursement structure?
    Mr. Foster. Theoretically, yes, sir.
    Chairman Thomas. In the real world, is there?
    Mr. Foster. No, sir.
    Chairman Thomas. No.
    Mr. Foster. No, sir.
    Chairman Thomas. You would not be reimbursed more if you 
had a larger administrative structure going in?
    Mr. Foster. You would, yes, sir. But I am saying that is 
not the case with this data. Same stores in 1994 included a lot 
of hospitals that came on with our company.
    Chairman Thomas. I understand. But if you look at the 
11,600----
    Mr. Foster. Yes, sir.
    Chairman Thomas. Now, again, this is not what Medicare 
pays; this is the Medicare cost.
    Mr. Foster. Right.
    Chairman Thomas. In discussing with the first panel and Ms. 
Wynn, where she talked about the percentage of incentive 
reimbursements, does any of this 11,600 reflect the 
reimbursement cost?
    Mr. Foster. Yes, sir.
    Chairman Thomas. That is all of the money that comes from 
HCFA?
    Mr. Foster. That is Medicare cost per discharge.
    Chairman Thomas. I understand that. But since we did not 
say it was Medicare payment----
    Mr. Foster. Right.
    Chairman Thomas [continuing]. How does the 14,200 as a 
Medicare payment reflect any of the incentive payments that she 
discussed between 1994 and 1996? This is not discussed on this 
chart.
    Mr. Foster. OK. The chart shows that the Medicare funds 
that are reimbursed to HEALTHSOUTH, or this particular 
facility, the funds that are reimbursed are going down, the 
expenditures that are required are going down.
    Chairman Thomas. Per discharge?
    Mr. Foster. Yes, sir, cost per discharge.
    Chairman Thomas. Where would a chart show the total amount? 
Or are you telling me that the 11,600 is the total amount of 
payment? I know it says ``cost.'' You do not have a payment 
chart. What I am looking for is, what would have happened 
between 1994, if this is the first year the hospital opened, 
and 1996, in terms of what it would cost us, if you will, the 
taxpayers, in terms of Medicare payment per discharge?
    Mr. Foster. OK.
    Chairman Thomas. Where do the incentives show up? Or have 
none of your hospitals participated in that incentive program 
that she discussed?
    Mr. Foster. Yes, sir. If you look at the 1994 data, say you 
have a TEFRA limit of, say, $16,000. Then you are allowed to 
participate with the current system up to 50 percent in the 
difference in the cost per discharge and the TEFRA limit, not 
to exceed 5 percent of the limit. So in this particular case, 
as the cost goes down, it reduces Medicare expenditures.
    Chairman Thomas. But the amount per patient goes up? When 
you say ``cost'' there, is that cost plus the----
    Mr. Foster. The TEFRA limit, you would get 5 percent. Say 
your TEFRA limit----
    Chairman Thomas. You see, my problem is, it does not say 
``payments.'' It says ``cost.''
    Mr. Foster. Yes, sir.
    Chairman Thomas. Now, we talked about the incentives. Is 
that cost plus the incentives, or just cost?
    Mr. Foster. Oh, I see what you are saying. That is cost per 
discharge, yes, sir.
    Chairman Thomas. Where are the incentives?
    Mr. Foster. The incentives are not shown. But the incentive 
would be constant, depending on your TEFRA limit. The thing 
that changes is you share in 50 percent in the difference of 
the cost.
    Chairman Thomas. But you have to have a base year.
    Mr. Foster. Right.
    Chairman Thomas. And if we use 1994 as the base year, and 
you have got the 14,200----
    Mr. Foster. Yes, sir.
    Chairman Thomas [continuing]. And you are now showing us 
that the cost per discharge has been reduced, but they give you 
an incentive payment based upon an interaction of that, and 
where is it on the chart? Is it in the 11,600, or would we add 
more money to the 11,600 in 1996 to show the incentive 
payments?
    Mr. Foster. It is in the 11,600.
    Chairman Thomas. Total?
    Mr. Foster. No, the incentive payment is not. The purpose 
of this chart----
    Chairman Thomas. No, I understand the purpose of the chart.
    Mr. Foster. OK.
    Chairman Thomas. I am trying to get an answer out of you, 
because you do not have a chart that shows what I want to see.
    Mr. Foster. OK. Yes, sir.
    Chairman Thomas. Which is what your Medicare payment was in 
1994, and what your Medicare payment was in 1996.
    Mr. Foster. OK.
    Chairman Thomas. You have shown me a cost per discharge.
    Mr. Foster. Yes, sir. OK.
    Chairman Thomas. I can produce that chart by frontloading 
my administrative costs in 1994, and then holding them constant 
while I increase patients, which gives me a lower cost per 
discharge----
    Mr. Foster. Absolutely.
    Chairman Thomas [continuing]. And wind up making more 
money.
    Mr. Foster. Absolutely.
    Chairman Thomas. And that chart shows me--in other words, 
it does not tell me anything. You would have to tell me in your 
1994 hospital what your percentage of administrative costs 
were, versus 1996. And I have got to believe that you are not 
getting that amount of money per patient in 1996, 11,600, 
versus 14,200. So I guess a simpler question is, what does this 
chart show me, and why did you put it up?
    Mr. Foster. OK. What I am trying to show you, sir, is the 
hospitals that are in this 14,204 were hospitals that are same 
stores, but they are hospitals that we acquired, that came into 
the company where the base year had already been established. 
And these costs have been reduced not by increasing census, but 
by decreasing a lot of the administrative costs that were in 
the facilities that came on with HEALTHSOUTH. And that is why 
we support the elimination of the new----
    Chairman Thomas. Yes, but that chart does not show me that.
    Mr. Foster. OK.
    Chairman Thomas. Because there is no patient load number.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Have you increased patients?
    Mr. Foster. No, sir, patient load would be about the same. 
Patient days would be about the same.
    Chairman Thomas. Well, I guess what we need is, obviously, 
more data to be able to understand the argument that you are 
making.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Because I can wind up creating a chart 
like that either through the ratio of administration to 
personnel and the incentive payment with a number of 
adjustments. I am trying to figure out what I am getting except 
three lines going down.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Which I understand was the intent. But it 
does not tell me anything. I just wanted you to know.
    Mr. Foster. Yes, sir.
    Chairman Thomas. I also have in my charts--and you did not 
put it up--you have a big one called ``Charges.''
    Mr. Foster. Yes, sir.
    Chairman Thomas. I do not know what that means.
    Mr. Foster. That is charges per discharge per patient. That 
is gross charges. What that shows, as costs go down, charges 
have gone down, and clinical outcomes have improved. And under 
the current system, you have the incentive to reduce your cost 
and to reduce the outlay of funds from Medicare because of the 
50-50 share, not to exceed 5 percent of the limit.
    Chairman Thomas. I understand the argument.
    Mr. Foster. And very frankly, sir, that is one reason that 
we support elimination of the new provider exemption.
    Chairman Thomas. I guess one of my difficulties is that, if 
you are going to go ahead and provide us with charts, you 
really ought to provide us with charts that I think make your 
point fairly easily.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Rather than having three lines that look 
good that go down.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Because I do not understand why you put 
Medicare cost per discharge, instead of Medicare payment per 
discharge, because frankly our concern has been the payment.
    Mr. Foster. Yes, sir. But the savings come in the cost, and 
not necessarily the payment. In other words, if it costs 
$14,000 per discharge--my example for the DRG. If this was a 
PPS facility and, say, my DRG payment was $20,000 and my cost 
was $14,000, a DRG or a PPS facility would share 100 percent in 
that. If it is a PPS-exempt facility, then it is no more than 5 
percent of the limit. It is 50 percent of the difference in the 
cost per discharge, not to exceed 5 percent of the limit. So 
these savings are passed on to Medicare----
    Chairman Thomas. That is an argument that could be made for 
that.
    Mr. Foster. Yes, sir.
    Chairman Thomas. But I just want to say that, based upon 
the payment structure that was explained to us and the 
incentive payments that are included, a front-heavy 
administrative structure with lower patients, if when keeping 
that front-heavy administrative structure and bringing more 
patients in, can produce the same chart. Do you agree?
    Mr. Foster. Yes. I agree.
    Chairman Thomas. So what I am telling you is that chart 
does not tell me anything. Because I can create the same-
looking chart by gaming the system by introducing a hospital in 
the last 5 years that has, as the ProPAC showed us, the higher 
base, and then play the game. So I am just trying to say, if 
you are going to present us with a chart that you want to use 
to convince us of a certain thing, you ought to not be able to 
have it interpreted four different ways.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Especially two ways, one of which is 
negative and one of which is positive.
    Mr. Foster. Yes, sir.
    Chairman Thomas. Ms. Yosko.
    Ms. Yosko. Yes.
    Chairman Thomas. You are in favor of that RAND 
rehabilitation study?
    Ms. Yosko. Yes.
    Chairman Thomas. My understanding is that one of the 
comments that Ms. Wynn and others made was that 70 percent of 
the freestanding rehabilitation hospitals were not included in 
that study. Is that true?
    Ms. Yosko. I am not exactly sure of the mix that was 
included in the RAND study. But we have been involved with a 
lot of the reviewing of the data that is coming out of RAND. We 
are waiting for the report that is due out this month. And we 
believe that it is a sound system and that there may be some 
technicalities, but the technicalities could be worked out.
    Chairman Thomas. So you do not think a study that leaves 
out 70 percent of the freestanding rehabilitation hospitals is 
in any way flawed?
    Ms. Yosko. We believe that today the FRG system is probably 
the best mechanism we have. It is a system that really does 
adjust for case mix. And the current system, the TEFRA system--
--
    Chairman Thomas. Well, no, I understand. Let me ask you 
another question, then. Why would you leave out 70 percent of 
the freestanding rehabilitation hospitals in a study? I mean, 
was that on purpose?
    Ms. Yosko. I cannot address that. Our organization, the 
American Rehabilitation Association, was not involved with the 
selection process of that, so I cannot address that, sir.
    Chairman Thomas. Well, you understand our concern, if you 
are going to ask us to support legislation based upon a RAND 
rehabilitation study which in fact leaves out 70 percent of the 
freestanding rehabilitation hospitals, that creates an 
automatic question on the validity of the data that we receive. 
My guess would be that you probably would want to try to 
provide the best data available. And I guess I will have to 
talk to RAND as to why they would ignore that segment of the 
industry, or do you know something about that segment of the 
industry that would produce a study significantly different and 
so that is why it was left out?
    Ms. Yosko. I cannot address that.
    Chairman Thomas. I cannot, either. I would just suggest 
that if you are going to ask us to support legislation backed 
by the RAND rehabilitation study, somebody had better figure 
out what we do when 70 percent of the freestanding 
rehabilitation hospitals are not included in this study. That 
is going to be tough.
    Mr. Laughlin, long-term acute care hospitals, how many do 
you have?
    Mr. Laughlin. Our company?
    Chairman Thomas. Yes.
    Mr. Laughlin. Our company has 20.
    Chairman Thomas. Twenty? How many of them were opened in 
the last 5 years?
    Mr. Laughlin. All of them.
    Chairman Thomas. What prompted you to open them in the last 
5 years, rather than in the previous 5-year window?
    Mr. Laughlin. Well, I just decided to start the company in 
1992.
    Chairman Thomas. Any reason why in 1992?
    Mr. Laughlin. I recognized that this was a treatment area 
that had a great need across the country.
    Chairman Thomas. It had nothing to do with the payment cost 
ratio between hospitals that are new startups versus old 
hospitals?
    Mr. Laughlin. No, sir. I did not even know about that 
disparity.
    Chairman Thomas. Right. OK.
    Mr. Standish.
    Mr. Standish. Yes.
    Chairman Thomas. In your testimony, you say in your second 
point, ``Incentive payments constitute a surrogate payment for 
the disproportionate share population which is uniquely cared 
for by long-term hospitals.''
    I thought incentive payments, as discussed, were to reward 
hospitals for keeping their costs below their ceiling.
    Mr. Standish. They are. I think that the point made is 
that, because of the severe nature of the disease and illness 
of our patients, they tend to be those that at some point in 
their term of illness will cross over to the Medicaid Program.
    Chairman Thomas. But you do not think the incentive 
payments were set up to be a surrogate payment for the 
disproportionate share population, do you?
    Mr. Standish. No.
    Chairman Thomas. Or that is just the way you guys view them 
now?
    Mr. Standish. Right.
    Chairman Thomas. OK. Does it make sense? I mean, if you are 
going to provide a payment for a disproportionate share of the 
population, what about those hospitals that do not have that 
profile and are getting incentive payments?
    Mr. Standish. If a hospital has a TEFRA limit that is 
reasonable and they are able to keep their costs below it, as I 
believe the incentive payment concept was originally conceived, 
then that payment process would make some sense.
    Chairman Thomas. Is it easier for a hospital that has been 
created in the last 5 years to do that, versus one that was 
created 10 years ago?
    Mr. Standish. I would imagine so. Our hospital is 53 years 
old, and I am most familiar with it. But certainly, the data 
that has been presented would indicate that.
    Chairman Thomas. And given the rapid increase in the 
payments and the number of hospitals, is there something that 
has occurred in the last few years in terms of the unique 
approach of this kind of a hospital, versus the payment 
structure, that might account for the number of hospitals that 
have been opened, since you are a longtime one?
    Mr. Standish. I am led to believe that many of the more 
recently opened long-term hospitals care for a population that 
does not include some chronic lower intense patients than 
others do.
    Chairman Thomas. Why?
    Mr. Standish. I do not know the answer. Again, we are not 
one, so I do not know the answer to that. Our hospital cares 
for a large population of both, but primarily the sicker, just 
as the newer hospitals care for.
    Chairman Thomas. Does any panel member want to react to any 
question that I have asked?
    Yes, Mr. Laughlin.
    Mr. Laughlin. Mr. Chairman, I appreciate the opportunity to 
answer that question. Our company was founded with that very 
mission in mind. We specifically did not want to be in the sub-
acute care business; we wanted to take the sickest patients we 
could find. A large majority of our patients come out of other 
hospitals' ICUs. And we are focusing on that patient that has 
been stabilized but needs an intensive intervention over a 
longer term period of time.
    The kind of patient we are taking we refer to as the 
sickest of the sick. They are patients that are often on life 
support. They are people who have been unable to be weaned off 
ventilators or waked up from comas or dealt with in the normal 
short-term hospital according to their protocol. And we take 
that patient and get some outstanding results.
    We are not keeping those patients into what I would call a 
chronic stage. Our average length of stay averages 45 days, so 
we are doing an intensive intervention in that patient and 
getting them to the point where either they are well and can go 
home, or we have taken them as far as we can. And at that point 
we make a discharge decision to another facility or to home 
with home health care support.
    These are train wrecks, they are very costly patients 
because of the things that they need to have done to them. And 
that is why I am so concerned about any change in TEFRA that is 
not tied to an acuity measure.
    Chairman Thomas. Do you believe that there was a kind of a 
market created for this type of service because of the 
diagnostic related group structure imposed on hospitals; that 
this may have been done more frequently in hospitals prior to 
the DRGs being put in place?
    Mr. Laughlin. I do not think the DRG system has anything to 
do with it, really. The kind of patient I am talking about is a 
pretty rare patient. When we go into a community, there is no 
one hospital that has enough of these----
    Chairman Thomas. OK, then let me ask you some questions, 
because I am curious about how you got started. In 1992, you 
were looking at a niche that was there that had not been met, 
and you were going to meet it. And you were looking at 
providing a service for the sickest of the sick, in terms of 
the acute care structure. What came about for you to be able to 
focus in that market?
    Mr. Laughlin. In my own case, why did I start the company?
    Chairman Thomas. Yes. Yes, I am just curious.
    Mr. Laughlin. I started talking with a group of 
pulmonologists about what makes the difference in being able to 
wean a patient, and I learned that the longer a patient has 
been in somebody's ICU the harder they are to wean. And I also 
learned that the techniques they can follow in an intensive 
intervention, with 3 to 4 hours of respiratory therapy per day 
and bringing in a multidisciplinary team where everybody is 
focused on weaning that patient, can get outstanding results.
    And in some of my hospitals we are weaning 80 percent of 
the people we get who have come to us as weaning problems. And 
it is all because of the technique we are applying to it.
    Chairman Thomas. And if we move toward a prospective 
payment system, what is it that you are most concerned about?
    Mr. Laughlin. I just have a concern that we need to get 
there. I am looking forward to providing the data from our 
hospitals and working with HCFA to try to come up with a system 
that will work.
    Chairman Thomas. And once we get a system in place, what is 
it that you would be most concerned about not working?
    Mr. Laughlin. I think, as long as that system's design is 
reasonable and there is a testing period and a phase-in period 
for it, I do not see why we cannot adopt a system like that for 
long-term care.
    Chairman Thomas. So you are just willing to live with 
whatever system has been tested, because you would be at a 
level playingfield with other people who are doing the same 
thing?
    Mr. Laughlin. Exactly. I am sure we would lose money on 
some patients; hopefully, we make some, and we average out OK 
in the end.
    Chairman Thomas. Well, that is the way the system is 
supposed to work.
    Any last comment on the prospective payment system from any 
of your particular perspectives, as to what you would be most 
concerned about? The same thing, as long as it is fairly 
reasonable and it is applied to everybody?
    Mr. Foster. Yes, sir. One comment: The RAND study did not 
take into consideration comorbidities--or at least, it is my 
understanding that it did not--or acuity level of the patient. 
I think some consideration needs to be given to that, and onset 
days, the number of days a patient is in a PPS facility. Just 
minor.
    Chairman Thomas. Yes, I was not even going to get to the 
methodology of the RAND study.
    Mr. Foster. OK. Yes, sir.
    Chairman Thomas. I just could not figure out why they had 
left out 70 percent of the hospitals.
    Mr. Foster. Yes, sir.
    Chairman Thomas. That was what threw me.
    Ms. Yosko. May I add something?
    Chairman Thomas. If in fact that statistic is correct, and 
I will be talking to RAND to find out.
    Go ahead, Ms. Yosko.
    Ms. Yosko. I have gotten some further information. Again, I 
am not a technical expert on RAND.
    Chairman Thomas. I understand.
    Ms. Yosko. But apparently, RAND used only large data bases 
for rehabilitation, which was the UDS. And they had really no 
interest to exclude any organizations. So about 40 percent of 
the Medicare patients who were receiving service were included 
in this study in 1994. And the outcome was that RAND found that 
patients in UDS reflected case mix for all rehabilitation 
patients.
    Chairman Thomas. So the 40 percent sample they were 
comfortable with gave them a pretty good reflection of 100 
percent of the universe?
    Ms. Yosko. That is my understanding, yes, sir.
    Chairman Thomas. OK.
    Mr. Standish. I just wanted to add, if I could, to make 
sure that it is understood that the National Association of 
Long Term Hospitals is undertaking an effort to develop a PPS 
system using Medpar data with the folks from Lewin. I think the 
question on the biggest concerns that we have just is that we 
have been able to prove that the existing PPS system for acute 
care hospitals does not work for long-term hospital patients 
because of the long term of stay and the multiple comorbidities 
that exist with our patient population.
    Chairman Thomas. I just want to provide fair warning to 
everybody that, as was observed in the last Congress, there is 
a bipartisan interest--and Mr. Cardin I thought presented it 
quite well, without any prompting whatsoever--about the need to 
get on with this, both in terms of skilled nursing facilities 
and home health care, which were the areas that we focused on, 
frankly, in the last Congress. There is a bipartisan desire to 
have a system.
    Those folks who do not think it is coming do not 
understand. And those folks who work with solid data to help us 
create a system, rather than us relying on HCFA or getting in a 
closed room and making a decision, have a better chance of 
getting a prospective payment system that does what we want it 
to do but, probably more important from your point of view, 
does not do the things you are afraid it is going to do if we 
do not work with you.
    So we would love to look at any examples that you do come 
up with; notwithstanding whatever someone might say about the 
base study. We are going to find one, and we are going to 
implement it faster than HCFA indicates they are going to try 
to. I can assure you of that.
    Does the gentleman from California wish to inquire?
    Mr. Becerra. Thank you, Mr. Chairman.
    Let me go back to the discussion about charts and what they 
imply, and ask Mr. Foster if you could tell me--I hope you have 
the information--what your occupancy rate has been over the 
last several years?
    Mr. Foster. It has been right around 80 percent.
    Mr. Becerra. Eighty percent?
    Mr. Foster. Yes, sir, about 80 percent.
    Mr. Becerra. And are we talking about licensed beds, or 
available beds?
    Mr. Foster. Licensed beds.
    Mr. Becerra. OK. I am looking at your FEC filing. It showed 
70 percent for the year ending 1995, but it says--let me see, 
let me read the line. ``During the year ended December 31, 
1995, the company's inpatient facilities achieved an overall 
utilization, based on patient days and available beds, of 70.5 
percent.''
    Do you mean there in this filing by ``available beds,'' 
licensed beds, according to your answer that you just gave?
    Mr. Foster. I would say licensed beds, yes, sir.
    Mr. Becerra. And you are indicating you have an occupancy 
rate of about--not utilization rate, occupancy rate--you did 
not mean 80 percent occupancy rate, did you?
    Mr. Foster. I am not sure I understand your question.
    Mr. Becerra. OK. By 80 percent, you meant to imply that is 
the number of beds at some point filled?
    Mr. Foster. Yes, sir.
    Mr. Becerra. OK. And that 80 percent corresponds to your 
last year of documentation? Are we talking 1996?
    Mr. Foster. Yes, sir.
    Mr. Becerra. Do you happen to know what the occupancy rate 
or utilization rate--whichever we wish to use--of licensed beds 
was in 1995?
    Mr. Foster. No, sir, I do not.
    Mr. Becerra. Do you have that?
    Mr. Foster. The reason I do not is a lot of these 
facilities had come over in 1994 and had been in existence for 
years and years. An example is Mechanicsburg, Pennsylvania, 
when we acquired the NME Division rehabilitation facilities. 
That is one of the older rehabilitation facilities in the 
country, and it came over. So the historical data----
    Mr. Becerra. Do you have an easy way to track for the 
various facilities what the occupancy rate has been over the 
last, say, 5 years?
    Mr. Foster. Yes, sir.
    Mr. Becerra. If we were to ask for that, would you be able 
to provide it?
    Mr. Foster. Absolutely.
    Mr. Becerra. Thank you. Let me ask, and actually, Mr. 
Foster, you mentioned in your testimony a bit, that HEALTHSOUTH 
does not receive any disproportionate share payments. If I 
could ask each of the panelists to tell me, what percentage of 
your patient base is Medicaid, SSI, and uncompensated care, if 
you happen to know? And if you do not know, you can just tell 
me you do not know.
    Mr. Foster. I do not know.
    Mr. Becerra. OK.
    Mr. Foster. Are you talking about PPS-exempt Medicare?
    Mr. Becerra. Thank you for clarifying. PPS-exempt Medicare.
    Mr. Foster. Medicare?
    Mr. Becerra. Yes. Well, let us put it this way. I am 
talking about PPS-exempt facilities.
    Mr. Foster. Yes, sir.
    Mr. Becerra. And you mentioned that you do not receive any 
Medicare disproportionate share.
    Mr. Foster. Yes, sir. What I intended to say was that there 
was a disproportionate share of Medicare patients in a PPS-
exempt facility, if you looked at the national average, related 
to the reduction in the capital cost. So there is more of a 
Medicare mix in a PPS-exempt facility; at least, that is what 
our data shows.
    Mr. Becerra. And you are probably right. But I will tell 
you that I know a lot of PPS facilities that are salivating to 
get Medicare patients these days. So my question to you is, 
with regard to PPS-exempt facilities, do you know--and this is 
a question for all of the panelists--what percentage of your 
patient base is Medicaid, SSI, and uncompensated care?
    Ms. Yosko. I can speak for my own organization, Schwab 
Rehabilitation Hospital in Chicago. We have 55 percent Medicaid 
inpatient.
    Mr. Becerra. Five-five?
    Ms. Yosko. Fifty-five percent inpatient; and another 40--
between 43 and 45 percent Medicare; and a couple of percentage 
points, about 2 percent, managed care patients; and the rest is 
uncompensated care.
    Chairman Thomas. How much would that be?
    Ms. Yosko. I am sorry?
    Chairman Thomas. How much would that be, the rest, when you 
say ``the rest''?
    Ms. Yosko. Oh, well, the other 2 percent or so, 2 or 3 
percent, to make up 100 percent.
    Chairman Thomas. So it is about 2 percent?
    Ms. Yosko. Ninety-five percent of our patients are either 
Medicare or Medicaid--about 55 percent are Medicaid; another 40 
are Medicare--and about 2 percent is managed care.
    Mr. Becerra. So about 5 percent are uncompensated?
    Ms. Yosko. Uncompensated, yes.
    Mr. Becerra. OK. The rest of the panelists? And Mr. Foster, 
I will get back to you on that.
    Mr. Laughlin. In our case, we have about 2 percent 
uncompensated; around 8 percent Medicaid, 7 to 8 percent; 
Medicare is about 75 percent; and managed care, insurance, what 
have you, is about 15 percent.
    Mr. Standish. In Hospital for Special Care, combined 
Medicaid-Medicare is 86 percent.
    Mr. Becerra. Can you break down Medicare and then Medicaid?
    Mr. Standish. Medicare would be the smaller percentage. 
Because of our TEFRA rate we tend to take fewer cases than we 
otherwise might, so that the bulk of the 86 would be Medicaid, 
the disproportionate share of population that you are talking 
about.
    Mr. Becerra. But give me a sense, and roughly. We will not 
hold you to these figures.
    Mr. Standish. Seventy.
    Mr. Becerra. Seventy percent of the 80 percent?
    Mr. Standish. Seventy percent of the total.
    Mr. Becerra. Of the total, is Medicaid?
    Mr. Standish. Right. Another 16 percent would be Medicare.
    Mr. Becerra. OK.
    Mr. Standish. With probably 5 percent uncompensated; and 
the difference, managed care and traditional insurance plans.
    Mr. Becerra. About 9 percent?
    Mr. Standish. Yes.
    Mr. Becerra. OK. Mr. Foster?
    Mr. Foster. Sir, our Medicaid and uncompensated care would 
be about 8 percent, but I would like to clarify that.
    Mr. Becerra. OK, but if you could break it down as well, 
Medicaid versus uncompensated?
    Mr. Foster. Medicaid would be about 5 percent, and 
uncompensated the other 3.
    Mr. Becerra. OK, and managed care, or fee-for-service?
    Mr. Foster. About 60 percent Medicare, and the other would 
be non-cost-based HMO. There is very little fee-for-service.
    Mr. Becerra. Right. So 32 percent would be the remainder 
for managed care?
    Mr. Foster. Yes, sir.
    Mr. Becerra. OK. Did you want to explain something?
    Mr. Foster. Yes, sir. I just wanted to make sure that I did 
not mislead you on when I talked about disproportionate 
Medicare. PPS-exempt facilities are not entitled to any 
disproportionate care payment. I just wanted to make sure that 
I clarified that. I think you understand that, but just to make 
sure.
    Mr. Becerra. Actually, go ahead and explain it.
    Chairman Thomas. Will the gentleman yield briefly?
    Mr. Becerra. Surely.
    Chairman Thomas. The problem was, you used 
``disproportionate share'' in a way that we do not use 
``disproportionate share,'' that was all.
    Mr. Foster. Yes, sir.
    Chairman Thomas. It is just that you used that to describe 
an unfair allocation; when ``disproportionate share'' to us 
means a very specific thing.
    Mr. Foster. Yes,
    Chairman Thomas. That is what happened.
    Mr. Foster. Sorry.
    Chairman Thomas. But I have a question, actually, on the 
basis of your responses to Mr. Becerra. Because the other three 
of you talked about managed care in a 2 to 3 to 4 percent 
range, and I heard, Mr. Foster, you talking about one-third as 
managed care?
    Mr. Foster. Yes, sir, is non-cost-based, non-Medicare and 
Medicaid patients. We have a high----
    Chairman Thomas. OK. Well, I am trying to understand 
because, obviously, one of the growing areas is the managed 
care area. And is this a growing market? Your Medicare-Medicaid 
I understand, but I am frankly a little surprised.
    Do any of you have contracts with managed care 
organizations, and that is how you get your 2 percent?
    Ms. Yosko. Yes.
    Mr. Standish. Right.
    Chairman Thomas. Do any of you have a growth factor on 
where this is going over the next 5 years?
    Mr. Foster. Yes, sir.
    Mr. Standish. Oh, yes.
    Mr. Foster. It is definitely going to increase.
    Chairman Thomas. Well, if they double, it is up to 4 
percent. So I mean, I am asking for--if it triples, it is up to 
6. See, I can do that.
    Mr. Standish. You get to the issue of the definition of 
``managed care.'' In Connecticut, our Medicaid payment is a per 
diem, so that we are at risk after a per diem payment.
    Chairman Thomas. Yes.
    Mr. Standish. So if that is defined as managed care in your 
mind, then we are up to 70 percent of our business that is 
managed care.
    Chairman Thomas. OK. But the point I want to make is--and I 
will yield back to Mr. Becerra, because he has got a line of 
questioning and I do not want to interrupt it--but as long as 
you are looking at that you folks are operating from a basis of 
Medicaid-Medicare, and we have to go into it with a different 
approach. But if you are actually out there on the open market 
in terms of managed care risk contracts, and people are 
contracting with you more frequently, that gives us a kind of 
an independent check on what others think you are doing that, 
one, is effective and, probably as importantly, two, is cost 
effective.
    And so I guess I would just say, from a knee-jerk reaction, 
the higher the contracted managed care portion of what you are 
doing, the more comfort it allows me, in terms of the Medicaid 
and Medicare government-supported portion of your program.
    I thank the gentleman for yielding.
    Ms. Yosko. May I say something to that? Our organization, 
Schwab, again, is representative of other specialty hospitals 
within the inner city. We are related to two trauma networks, 
so we receive really high-intensity patients in need of 
rehabilitation.
    We have about 32 managed care contracts, and the business 
is very low, and even though we have very competitive rates. 
But what we see happening in the rehabilitation facility that I 
am at is there is a lot of shifting going on, and patients who 
could benefit from rehabilitation services go to nursing homes 
within the private sector of the managed care contracting. So 
the Medicaid is high because that is usually what we see from 
the trauma centers.
    Chairman Thomas. And there would be a growing awareness of 
the cost-effective use of a facility----
    Ms. Yosko. Yes.
    Chairman Thomas [continuing]. Versus continued longer term 
payment of the skilled nursing facility but not getting them up 
and out, as Mr. Laughlin described.
    Thank you for yielding.
    Mr. Becerra. Thank you, Mr. Chairman.
    Actually, could I ask that you submit for the record those 
numbers you just gave us? Because I tried to write them down; I 
hope I got them accurately. But if you could just give us those 
numbers for the record, I would very much appreciate that.
    Ms. Yosko. Yes.
    Mr. Becerra. I do not want to have wrong numbers down for 
what you have just said.
    Mr. Foster. Absolutely.
    Mr. Becerra. Let me ask a question, and actually direct it 
at Mr. Laughlin. I believe in your testimony you mentioned that 
you would be against rebasing of the targets. Can you just 
really briefly--because I do not want to take up a lot of time; 
I know there are other questions that will be asked--say why 
you are opposed to the rebasing?
    Mr. Laughlin. Well, what I said was, I was opposed to 
rebasing and other changes to TEFRA without there being a 
recognition that there are different classes of hospitals 
within the long-term hospital category. Because these hospitals 
have different missions and different emphases, and that 
necessitates different staffing patterns and different cost 
structures.
    Mr. Becerra. I agree. Now, if you could rebase taking into 
account the different characteristics of the facilities, so 
that those that have high acute patient loads are gauged 
according to that family of providers, would that then cause 
you to change your opinion of rebasing?
    Mr. Laughlin. It would.
    Mr. Becerra. You mentioned also that all of your facilities 
have come online over the last 5 years. I suspect that means 
that most of your facilities are fairly new?
    Mr. Laughlin. Yes, sir.
    Mr. Becerra. Would it be fair to say that the newer the 
facility, the lower your overhead costs would be, as opposed 
to, say, an older facility with older equipment?
    Mr. Laughlin. I do not think the age would necessarily have 
anything to do, or much to do, with the overhead costs. The 
approach that we have taken in our company and many other 
companies in our association--and other associations have done 
the same thing--we try to find unused hospital facilities that 
can be rehabbed at a low cost. So we are trying to keep the 
capital cost per bed as low as possible.
    Even though these are new hospitals, it is not that we have 
got necessarily new, expensive hospital facilities. The cost in 
these new hospitals is primarily related to staffing. The kind 
of patient that I am treating requires a very high level 
intervention with a lot of ACLS-certified RNs, strong 
respiratory therapy. This is the cost factor in what we do. And 
we are treating a lot of patients with very difficult VRE-type 
infections that require third-level antibiotics that cost $200 
or $300 a day per dosage. So that is where the cost comes in. 
We are really tying it back to what the patient's acuity 
demands.
    Mr. Becerra. And I think it is a good point. And we should 
take with caution just assuming that any provider that has come 
online over the last few years is going to have a better 
infrastructure automatically because of that. So I take that as 
a good note to keep in mind.
    Mr. Laughlin. Hospitals, though, even within our own 
association and even hospitals within my company, vary in terms 
of the patient load they treat, what their focus is. If a 
hospital has a higher emphasis on wound care, I mean, if a 
physician comes along and says, ``I like your facility in 
Tampa; I am going to bring all my wound-care business to you 
and create a wound-care clinic here,'' it is going to knock 
your cost structure down, because that is a cheaper illness to 
treat than, say, a hospital that has 75 percent respiratory. 
And so that happens within our company, within our association, 
and within the industry as a whole.
    Mr. Becerra. Thank you, Mr. Chairman.
    Chairman Thomas. Does the gentlewoman from Connecticut wish 
to inquire?
    Mrs. Johnson. Thank you very much. And it is a pleasure to 
welcome Mr. Standish here, and to acknowledge the really 
marvelous work of the Hospital for Special Care in New Britain, 
which is a very old facility.
    Mr. Standish. It is.
    Mrs. Johnson. With a long and honorable history, and was 
into this business long before there were many in the Nation.
    Mr. Standish. Right.
    Mrs. Johnson. And is very highly regarded in terms of 
quality of care. You know, I think to sort of cut to the core 
of this--because it is late--I think we are all in agreement 
that we need a case classification system, but we do not know 
how to do it right now. So the real issue is, what do we do 
between now and for the next couple of years, or whatever time 
it takes--2 or 3 years--to get the data for a classification 
system.
    And I think we really have three alternatives. We have the 
President's proposal. And Mr. Standish, you make some very 
interesting comments in your testimony about the President's 
proposal. And I would like to have you talk about the 
President's proposal and its impact on hospitals, versus 
NALTH's proposal. And if you are familiar with it, which you 
may not be, and may need to get back to us--and then anyone 
else in the panel who wants to comment, can--the proposal that 
was in the Balanced Budget Act of 1995, which was the effort of 
this Subcommittee to address this interim problem that you 
face.
    So, I think we need to just kind of buckle down on what are 
our choices here, because they will have very disparate impacts 
on the system. At least, certainly, the President's proposal 
using an average cost would have an immediate impact. So Mr. 
Standish, if you would enlarge on either two or three of these 
alternatives, I would appreciate it.
    Mr. Standish. Sure. I think that an area of agreement 
between the two associations before you here actually is the 
President's proposal does not work, for the reason that any 
system that attempts to make an adjustment to TEFRA rates based 
on an average simply is not proper, because the populations 
served in each of our hospitals, as Rod just explained, is so 
diverse. In fact, the only true answer, short of a change, 
would be the identification by patient of the intensity and the 
acuity level of that patient.
    And so therefore, what NALTH has come up with is an 
alternative rebasing proposal that examines those hospitals 
that have had more than 2 years of Medicare losses and serve 
that disproportionate share population, as you are aware that 
the Hospital for Special Care does, and there are many others.
    And it sets in place a rebasing mechanism for those 
hospitals for the short period--and we truly believe that a 
patient classification system will be available next summer. 
That is about 15 months from now. To the extent that the CBO 
determines that that costs anything to implement, NALTH has 
also developed a cost-savings proposal that is outlined in 
Attachment C.
    And there is a numerical chart submitted with my testimony 
that walks us through the case of a hospital whose authorized 
spending TEFRA ceiling is, say, a $40,000 amount. And it is 
``Hospital B'' on that exhibit.
    Our understanding is that the Congress currently uses the 
target limit, the upper ceiling, as the authorized spending 
amount. In fact, in many instances, that amount is not actually 
spent on patient care. And so our proposal would be to simply 
determine across the hospital population the difference between 
the upper authorized amount, but not spent, take a portion of 
that, allow it to be spent, but reserve a piece for savings 
that would be totaled, we believe, more than enough to pay for 
the selective rebasing.
    Mrs. Johnson. In other words, you would reduce the 
authorized amount to cover the rebasing costs?
    Mr. Standish. Right.
    Mrs. Johnson. And you think 10 to 15 percent would be 
affected by the rebasing proposal?
    Mr. Standish. Right.
    Mrs. Johnson. That is really important, because ProPAC has 
repeatedly testified that the old hospitals in this category 
had the lowest margins, and have been for years really 
disadvantaged by the system. So this would provide an immediate 
redistribution, in a sense, without harming the other hospitals 
in the system.
    Mr. Standish. I think that is right. I think that if both 
parts of what I just explained are taken together, they both 
help the older, disadvantaged hospitals, while not hurting the 
rest of the population. And again, this is an interim solution, 
pending the PPS implementation which we are working on.
    Mrs. Johnson. Would anyone else care to comment on that 
proposal versus the administration's proposal?
    Mr. Foster. I would like to make a few comments. I think 
anything that we do needs to be done quickly, going to PPS. I 
think the ultimate PPS system should be even capitation. I do 
not understand why the system that is in place that allows the 
Secretary since 1989--does not provide relief where necessary 
on a case-by-case basis. And I would suggest that we look at 
that.
    Mrs. Johnson. Well, certainly some of us have been looking 
at it for a number of years.
    Mr. Foster. Yes, ma'am.
    Mrs. Johnson. And have been working very closely with the 
administration.
    Mr. Foster. Yes.
    Mrs. Johnson. Frankly, nothing happens. And so I think 
Congress really does have to act to fill the void at this time, 
to enable us to go into a new payment system. But when you say 
capitation, is that different than a classification system?
    Mr. Foster. The payment would be different. You are paid x 
number of dollars per covered life.
    Mrs. Johnson. Regardless of nature of illness?
    Mr. Foster. Yes, ma'am.
    Mrs. Johnson. That is what ProPAC was talking about. And I 
have a lot of concerns about that, particularly in this type of 
treatment. I think Mr. Laughlin was talking earlier about the 
incentive then to focus----
    Mr. Foster. I agree.
    Mrs. Johnson [continuing]. On areas of lower cost patients. 
I know certainly for the Hospital for Special Care, they were 
one of the earliest institutions in America that took 
ventilator-dependent patients. And for years they lost money on 
those patients, because the system could not acknowledge the 
problems. And yet, they have been a leader now in weaning, as 
well.
    So I think classification has the advantage of aligning 
cost and care in a macro setting. So you do not get into 
rewarding high-cost institutions, but you also do not get into 
the problems that the original DRG system got into with no 
recognition of outliers.
    Any other comment?
    Ms. Yosko. Yes. I would just like to say that, again, we do 
oppose the administration's proposal, one, because it does not 
adjust for case mix and, two, because, as many have mentioned, 
it continues these existing inequities between the old and the 
new providers.
    We are not necessarily in opposition to a postacute payment 
system. But in terms of waiting another 5 or even 10 years--or 
who knows? We have been working within the Rehabilitation 
Association with the FRG system for sometime and believe the 
technicalities could be worked out and could be a preferential 
treatment, at least for the rehabilitation segment of the 
industry. FRGs could be even rolled in, or be compatible with 
some larger system, if that system gets developed.
    Mrs. Johnson. You mean for the rehabilitation hospitals?
    Ms. Yosko. Yes, the rehabilitation hospitals.
    Mrs. Johnson. All right. Thank you.
    Mr. Laughlin. If I could comment, Mrs. Johnson. I would 
urge the Subcommittee to deal with the pieces of the 
President's proposal that we have information on. I think 
overall the proposal is horrible, but the two elements that we 
do know about and that we can deal with today are the reduction 
in the market basket updates, and also the reduction in capital 
payments.
    Those things can generate most of the savings that are 
necessary from the PPS-exempt hospitals and the long-term 
hospitals; if necessary, to reduce slightly, maybe by 1 
percent, the incentive payment formula. That would be a 
possibility. But I think the changes to TEFRA are premature 
because, number one, we do not have the patient classification 
system, we do not have a good acuity index. And any change on 
an average basis is going to penalize the really sick, higher 
cost patient that is now getting some outstanding care in our 
hospitals.
    Mrs. Johnson. Thank you very much, Mr. Laughlin. And I 
thank the panel for your testimony today.
    Ms. Yosko. Thank you.
    Mr. Standish. Thank you.
    Chairman Thomas. Are there any final statements by any of 
the panel?
    I want to thank you very much for your testimony. And 
obviously, as we move forward we may need to revisit this area. 
But thank you for your willingness. As you may know, we have 
not focused in separate ways on these areas, but we are now 
going to try to do that, because I think you have been lumped 
in for too long in a general way. And at least it is showing 
some maturity or sophistication on our part to give you an 
opportunity to inform us of what you are doing particularly, 
and not in a general setting.
    The Subcommittee hearing is adjourned.
    [Whereupon, at 4:08 p.m., the hearing was adjourned.]
    [A submission for the record follows:]



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