[Senate Hearing 105-556]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 105-556

 
              REVISING PHYSICIAN PRACTICE EXPENSE PAYMENTS

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                                 ______


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                            WASHINGTON : 1998


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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana                TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire            HARRY REID, Nevada
ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado    PATTY MURRAY, Washington
LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
SLADE GORTON, Washington             ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        DANIEL K. INOUYE, Hawaii
JUDD GREGG, New Hampshire            DALE BUMPERS, Arkansas
LAUCH FAIRCLOTH, North Carolina      HARRY REID, Nevada
LARRY E. CRAIG, Idaho                HERB KOHL, Wisconsin
KAY BAILEY HUTCHISON, Texas          PATTY MURRAY, Washington
TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
  (Ex officio)                         (Ex offico)
                      Majority Professional Staff
                            Bettilou Taylor

                      Minority Professional Staff
                              Marsha Simon

                         Administrative Support
                              Jim Sourwine


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening remarks of Senator Arlen Specter.........................     1
Statement of Neil H. Brooks, M.D., president, American Academy of 
  Family Physicians..............................................     2
    Prepared statement...........................................     3
Statement of Nancy Ann Min DeParle, Administrator, Health Care 
  Financing Administration, Department of Health and Human 
  Services.......................................................     8
    Prepared statement...........................................    10
Statement of Arthur L. Day, M.D., University of Florida, 
  professor of neurosurgery, American Association of Neurological 
  Surgeons.......................................................    13
    Prepared statement...........................................    15
Statement of Timothy J. Gardner, M.D., University of 
  Pennsylvania, chief of cardiothoracic surgery, American 
  Association of Thoracic Surgeons...............................    21
    Prepared statement...........................................    22
Budget neutrality................................................    29
Statement of Alan R. Nelson, M.D., executive vice president, 
  American Society of Internal Medicine..........................    29
    Prepared statement...........................................    31
Report...........................................................    40
Proposed rule....................................................    44
New regulations..................................................    47
Regulations......................................................    47
  


              REVISING PHYSICIAN PRACTICE EXPENSE PAYMENTS

                              ----------                              


                        TUESDAY, MARCH 10, 1998

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 3:30 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senator Specter.

                       NONDEPARTMENTAL WITNESSES

STATEMENT OF NEIL H. BROOKS, M.D., PRESIDENT, AMERICAN 
            ACADEMY OF FAMILY PHYSICIANS

                   opening remarks of senator specter

    Senator Specter. Ms. DeParle, if you would come up, along 
with Dr. Brooks, Dr. Day, Dr. Gardner, and Dr. Nelson. All of 
your statements will be made part of the record.
    On the Senate floor at this moment we have the 
transportation bill, and my amendment is now pending on reverse 
commuting--and may we have order in the Chamber, please--and I 
have to go to the Senate floor, so we will recess for just a 
few minutes and I will return as promptly as I can.
    [A brief recess was taken.]
    Senator Specter. We will now proceed with the hearing.
    Just a word or two of explanation. The ISTEA bill, the so-
called transportation mass transit bill is on the Senate floor 
right now, and they were about to close down the section on 
mass transit. I had an amendment which provided for reverse 
commuting to take people from the inner city to the suburbs and 
that required my attention.
    Well, then they had a very important meeting on the House 
side which I just went and gave three words of support and came 
back here, but this is one of the problems of roller skates in 
the Senate, and I am sorry to have kept you all waiting here. I 
hear you have been told, due to the lateness of the hour, that 
your time might be cut to 3 or 4 minutes. Well, it has been 
reinstated to 5 minutes since you had to wait, 2 minutes is not 
a whole lot, but it is something.
    So let us begin first with the medical panel, if we may.

                  SUMMARY STATEMENT OF DR. NEAL BROOKS

    Dr. Neal Brooks, president of the American Academy of 
Family Physicians, you are at the top of the list. Dr. Brooks, 
the floor is yours.
    Dr. Brooks. Good afternoon, Mr. Chairman, I am Neil Brooks, 
a practicing family physician from Rockville, CT, president of 
the 85,000 member Academy of Family Physicians. I thank you for 
inviting us to testify.
    The balanced budget law requires that a resource-based 
method for Medicare practice cost payments be in place by the 
year 2002, a decade after the physician fee schedule first took 
effect.
    Between now and then we should be focused on creating a 
system that best serves the beneficiaries instead of having 
providers battle over fees. Family physicians recognize the 
unique role of our subspecialty colleagues. To be good family 
doctors we need to consult with subspecialists and refer our 
patients to them, but we are concerned about access to services 
as well, but a strong primary care base is also needed to have 
balanced health care.
    I believe that full implementation of the fee schedule will 
be good for everyone and eventually improve access to medical 
services. This is why a switch to resource-based practice 
expense payments in the fee schedule is a compelling and urgent 
one. Practice expenses are more than 52 percent of the average 
family physician's fees. In my own practice it exceeds 60 
percent. If we want more medical students to elect primary care 
specialties and want them to participate in Medicare, we need 
to be sure that Medicare pays primary care fairly.
    Last June, HCFA published a proposal for a new practice 
expense method. The GAO released a report last month on the 
HCFA plan. The academy is pleased with this report for several 
reasons.
    First, GAO says the HCFA proposal is acceptable and 
reasonable. We agree. A lot of time and effort has gone into 
putting it together.
    In 1996 direct practice costs for labor, equipment, 
supplies, for hundreds of medical services were obtained from 
physicians, nonphysician providers, and practice administrators 
on panels called CPEP's.
    Last fall, an entirely new group of experts reexamined the 
CPEP data, and then a cross-specialty panel studied the highest 
volume and highest cost services. These groups were 
representative of physicians whose direct expenses were being 
studied. The resulting data has the combined experience of all 
the members of the expert panels to back it up.
    Second, GAO dismisses the idea of replacing the CPEP data 
with data gathered by alternative methods. Like GAO, we believe 
the alternatives would increase the costs of developing a new 
method while needlessly delaying implementation.
    Third, GAO recommends that HCFA monitor the impact of the 
proposal on access to services, especially those with the 
largest reduction in payments. We believe that HCFA's 
monitoring access would be more balanced if improvements in 
obtaining primary care services that result from the new method 
are also reported.
    And fourth, and most importantly, the GAO confirms that the 
HCFA proposal meets the requirements of the balanced budget 
law. It is clear that the Government's principal accounting 
agency has validated HCFA's proposal and that the GAO report 
should lay to rest criticisms that it is fatally flawed.
    The GAO concludes that HCFA is on the right track, and we 
could not agree more. As good as HCFA's work is, though, 
however, the proposal could be improved by striking two 
controversial provisions. The behavioral offset should be 
removed from the proposal. Any changes in the physician 
behavior will be taken care of by the new sustainable growth 
factor of the fee schedule. This is supported by the Medicare 
Payment Advisory Commission and AMA.
    We also request HCFA to delay a 50-percent reduction in 
practice expense payments for procedures done at the same time 
as an office visit. There is no evidence for this large 
reduction. It has the potential for having physicians fail to 
offer preventive services such as cancer screening concurrent 
with an office visit. It is a disincentive to the provision of 
good medical and preventive care. I do not believe that is 
HCFA's intent.
    We urge HCFA to delay this reduction and work instead on 
gathering procedure-specific data so the appropriate practice 
expense reductions in these situations can be made.

                           PREPARED STATEMENT

    In closing, thanks for the opportunity to speak for family 
physicians, and helping to ensure that we can deliver the best 
in medical services to our patients.
    I will be glad to answer any questions.
    Senator Specter. Thank you very much, Dr. Brooks.
    [The statement follows:]

                Prepared Statement of Dr. Neil H. Brooks

                              INTRODUCTION

    My name is Neil H. Brooks, M.D. I am the President of the 
85,000-member American Academy of Family Physicians. It is my 
privilege to appear before this subcommittee today to discuss 
our views on the method being developed by the Health Care 
Financing Administration (HCFA) for implementing resource-based 
practice expense relative value units as part of the Medicare 
physician fee schedule.
    As you may know, the HCFA proposal appeared in a June 18, 
1997, Federal Register proposal addressing revisions in the 
Medicare physician fee schedule. On October 31, 1997, HCFA 
published a Notice of Intent to Regulate in the Federal 
Register that requested information from the physician 
community and other experts on specific elements of the 
proposal. The HCFA practice expense proposal is examined in 
reports that Congress received last week from the Medicare 
Payment Advisory Commission (MedPAC) and the General Accounting 
Office (GAO).

         THE NEED FOR RESOURCE--BASED PRACTICE EXPENSE PAYMENTS

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

         PRACTICE EXPENSES AND THE BALANCED BUDGET LAW OF 1997

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

                  THE GENERAL ACCOUNTING OFFICE REPORT

    The Academy is pleased with the report. We believe the GAO 
displayed commendable objectivity in its thorough examination 
of the issues surrounding the HCFA proposal as well as balance 
in its subsequent recommendations to Congress. The report 
thoroughly analyzes the complicated topic of Medicare practice 
expense payments, the HCFA proposal and the various arguments 
advanced in support of or in opposition to the HCFA proposal.
    The GAO report contains a number of significant findings 
and recommendations that I will address in the order presented 
in the draft.
    The GAO found that using expert panels such as the Clinical 
Practice Expert Panels (CPEP's) for estimating direct labor and 
other direct practice expenses is an acceptable method. The GAO 
rebuts specific criticisms of the CPEP process by noting that 
these panels were representative of the medical specialties and 
that members were contributing information based largely on 
facts, not merely ``best guesses.'' It should be noted that the 
Physician Payment Review Commission also supports the HCFA 
approach for gathering direct expense data for the development 
of resource-based practice expense RVU's. The Academy concurs 
with these assessments of the HCFA method.
    The report is very clear in stating that alternative data 
gathering proposals that have been advanced are unreasonable 
and, if followed, would increase costs while needlessly 
delaying the implementation of a new method for determining 
practice expense payments. The GAO resoundingly dismisses the 
activity-based accounting alternative, for example, because it 
reallocates practice costs to broad categories of codes and not 
to specific procedures, as required by the law. The Academy 
agrees with the GAO position on alternative data gathering 
proposals.
    The GAO suggests that there may be a need to gather a small 
amount of additional data through a limited survey to be used 
as part of a refinement process, and that the refinement 
process itself should be clearly described to the public. 
Collecting additional data specifically as part of a refinement 
process is supportable and could be of assistance to HCFA. Such 
an activity, however, should not be used as justification to 
discard the data already amassed from the expert and validation 
panels. The Academy believes that if additional data is to be 
collected as part of the refinement process, HCFA must then 
offer a detailed proposal for conducting a targeted data 
gathering effort to the public so that physicians may 
collaborate with the agency on how such data should be gathered 
and used.
    Some specialty groups would like to involve the Relative 
Value Unit Update Committee (RUC) in the practice expense 
refinement activities. Although we are supportive in concept of 
utilizing the RUC in this fashion, the Academy also has 
concerns with involving the RUC in refinement of the resource-
based practice expense RVU's. Before utilizing the RUC, 
sufficient staffing and resources must be obtained to ensure 
that the committee is capable of handling an increased 
workload. Just as importantly, we believe that non-physician 
clinicians, such as physician assistants, nurses and practice 
administrators should be invited to participate in RUC practice 
expense refinement activities. These providers and 
administrators would bring valuable perspectives on the 
clinical and administrative labor upon which the allocation of 
direct and indirect practice expense RVU's is based.
    The report supports the use of a statistical linking method 
for normalizing the data generated by the CPEPs while 
suggesting that HCFA consider other possible means of linking 
the labor and administrative costs for E/M and non-E/M 
services. The Academy reviewed HCFA's proposed regression 
formula for linking the CPEP data and found it to be a 
statistically valid one. We also found it preferable to simply 
averaging values across all expert panels since this approach 
can disturb the relative rankings of codes within panels. 
Further, we believe that a linkage based on the E/M codes is 
preferable because virtually every specialty provides E/M 
services and virtually all of the CPEPs reviewed E/M services, 
making these codes a ``common denominator'' that can connect 
all of the findings to one another. In addition, the 
composition of the E/M panel was more balanced between primary 
care and subspecialties than were other panels, and there was 
greater consensus among its members, leading us to believe that 
the data reported by the E/M panel were inherently more 
accurate and less inflated than those recorded by the other 
panels.
    The Academy is supportive of HCFA's proposed linking 
formula. If other methods for normalizing the direct practice 
expense data are considered, we believe they should be 
thoroughly reviewed. If the linkage formula is to be modified, 
a detailed proposal for accomplishing this change should be 
developed with guidance from physicians, offered for public 
comment, and it should correct the problem with inflated 
administrative and labor cost estimates for some non-E/M codes. 
Otherwise, an alternative formula probably would be opposed by 
family physicians.
    The report also recommends that HCFA consider certain 
improvements in its methodology, including the use of 
``scaling'' to match aggregate CPEP data with data from the 
AMA's 1996 SMS survey, the use of specialty-specific adjustment 
factors to determine the ratio of direct and indirect costs, 
and moving administrative costs into the indirect practice 
expense category. I will address these individually below.
    ``Scaling'' refers to a statistical adjustment made in the 
CPEP data so that the proportion of direct expenses 
attributable to labor, equipment and supplies is consistent 
with the AMA Socioeconomic Monitoring Survey (SMS). In its June 
18, 1997 proposed rule, HCFA noted that in the aggregate, for 
all CPEPs, labor comprised 60 percent of total direct expenses, 
medical supplies comprised 17 percent, and medical equipment 
comprised 23 percent. Further, HCFA noted that the 
corresponding percentages from the AMA SMS data were 73, 18, 
and 19, respectively. To equate the aggregate CPEP percentages 
with those of the AMA SMS, HCFA proposed an adjustment in CPEP 
expenses for labor, medical supplies and medical equipment 
using scaling factors of 1.21, 1.06 and 0.39, respectively. In 
essence, this involved multiplying the CPEP expenses for labor, 
equipment and supplies for each code by the given scaling 
factors so that the overall distribution would be equivalent to 
the distribution in the AMA SMS.
    The impact of scaling on the direct expenses of any given 
code depends on the distribution of direct expense for that 
code as compared to the aggregate distribution. This means that 
codes with a greater-than-average share of labor costs would 
experience an increase in direct expenses as a result of 
scaling, while the opposite would occur for codes with a 
greater-than-average share of equipment costs.
    The GAO believes that scaling is necessary so that HCFA has 
an external benchmark to ensure that labor, supply and 
equipment costs are appropriately apportioned among the total 
RVU's for direct practice expenses. As the Academy commented 
last year, we are not convinced that scaling adds value, 
especially given the credibility of the CPEP data. We would, 
however, support the use of scaling to the extent that it can 
be shown to add value or greater accuracy to the overall HCFA 
formula for determining resource-based practice expense RVU's.
    The GAO recommends using specialty-specific ratios to 
allocate indirect practice expenses among codes. In its 
proposed rule, HCFA wants to use the aggregate ratio (55/45) 
for this purpose so the adjustment would be the same across the 
board for all codes. The Academy has not taken issue with the 
method HCFA originally suggested for allocating indirect 
practice expenses among codes. However, scaling indirect 
practice expense RVU's to the available pool of RVU's on the 
basis of the percentage of direct and indirect practice expense 
RVU's billed by each specialty, as recommended by the American 
Society of Internal Medicine, rather than on a fixed factor of 
0.219 as in the HCFA proposal, has merits. We believe that the 
use of specialty-specific ratios in the formula would represent 
a further refinement of that formula. Although the ASIM method 
is more complex, this approach might, in fact, allocate 
indirect practice expenses more accurately. We would support 
HCFA's consideration of this refinement, with an understanding 
of the trade-off between simplicity and precision in this 
decision.
    In reference to the GAO proposal to shift administrative 
expenses to the indirect side of the equation, the Academy 
conceptually has no problem with doing this, a position similar 
to that held by ASIM. The CPEP and subsequent validation panels 
have highlighted the difficulty with trying to attach 
administrative costs to individual procedure codes. For 
example, how does one account for multiple service codes 
submitted on the same claim form? Or all of the other 
administrative expenses incurred for a patient presenting with 
multiple medical problems--a common situation in family 
practices? Like rent and utilities, administrative costs will 
probably vary less by procedure code and more by the size and 
type of practice. The only problem with shifting administrative 
costs to the indirect category is that the formula for 
allocating indirect expenses would allow higher payments for 
the indirect practice costs of surgical services even though 
associated billing costs, for example, are most likely the same 
as those costs associated with billing for an E/M service. 
However, the question of whether these billing and 
administrative costs should be standardized, or if this data 
should be obtained from independent data sources such as 
billing agencies, has not been addressed by the Academy.
    The GAO recommends that HCFA determine whether practice 
expense payments are warranted in situations where physicians 
bring their clinical staff into the hospital setting. GAO said 
there is no evidence that utilizing staff in this fashion is a 
common practice at this time. The Academy agrees. Any claims 
about using clinical staff in the hospital should be subjected 
to external review and validation. Even if such practices are 
validated, we contend that payment for the expenses of staff 
brought into the hospital should come from Medicare Part A, not 
Part B.
    It should also be noted that the GAO report specifically 
certifies that the HCFA proposal meets the balanced budget 
law's requirements for consulting physicians and other experts 
and gathering actual cost data to the ``maximum extent 
practicable,'' as required by the balanced budget law. We hope 
that having the government's principal accounting agency 
validate HCFA's approach will finally lay to rest the 
criticisms about data gathering efforts, accounting principles, 
the thoroughness of efforts to consult with physicians and 
other experts and so forth that have been lodged against the 
HCFA proposal.
    Finally, the GAO recommends that HCFA monitor the impact of 
its proposal on access to services, focusing its attention in 
particular on those procedures with the largest reductions in 
practice expense payments. The Academy believes that HCFA 
should also monitor improvements with access to primary care 
services that may result from the new practice expense payment 
method.

            THE MEDICARE PAYMENT ADVISORY COMMISSION REPORT

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

           DOWN PAYMENT IS APPLICABLE IN THE TRANSITION YEARS

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

                               CONCLUSION

    Once again, thank you for this opportunity to present the 
family practice viewpoint on the resource-based practice 
expense issue. After so many years of waiting for this 
component of the Medicare physician fee schedule to be fixed, 
we are gratified that Congress at last has set a deadline 
certain of January 1, 2002 for full implementation of the new 
payment method. It is overdue, but ``better late than never'' 
as the old saying goes.
    If you take away one message from my comments, let it be 
this: the practice expense issue does not need to be re-opened 
legislatively. HCFA is on the right track, according to the 
GAO. We could not agree more.
    I invite the subcommittee and its members to continue to 
look to the Academy as a resource on matters pertaining to the 
Medicare physician fee schedule and resource-based practice 
expenses. We would like to continue to be a part of this 
discussion, and we will try to be as helpful as possible. At 
this time, I would pleased to answer questions from the 
subcommittee members.

                DEPARTMENT OF HEALTH AND HUMAN SERVICES

                  Health Care Financing Administration

STATEMENT OF HON. NANCY ANN MIN DePARLE, ADMINISTRATOR, 
            HEALTH CARE FINANCING ADMINISTRATION
ACCOMPANIED BY DR. BART McCANN, CHIEF MEDICAL OFFICER

    Senator Specter. Ms. DeParle, the floor is yours.
    Ms. DeParle. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today to discuss resource-based practice 
expenses under the Medicare physician fee schedule.
    With me today is Dr. Bart McCann, the Chief Medical Officer 
who has led our practice expense efforts. He is a family 
physician who trained at Children's Hospital in Pittsburgh 
before joining the Public Health Service.
    Practice expenses, as you know, Mr. Chairman, are a 
resource input such as the physician's clinical and 
administrative staff, rent, equipment, and supplies. In 1994, 
Congress passed legislation requiring HCFA to implement a 
resource-based practice expense relative value system in order 
to create a more equitable system for Medicare physician 
payment that better reflects the relative overhead expenses 
involved in furnishing a service.
    Today, Mr. Chairman, I would like to give you an update on 
our implementation efforts. As mandated by the Balanced Budget 
Act, we are working toward a May 1 implementation date of a 
proposed rule. We are still analyzing data, input, and comments 
from many specialty societies, including those represented here 
today. We are also considering the recommendations made in the 
recent GAO report.
    Converting the current system based on historic cost to one 
based on relative resources has been very challenging. Each 
year, Medicare pays about 500,000 physicians more than $40 
billion for more than 6,000 different procedure codes. Average 
practice expenses represent about 41 percent of the total 
relative value for a service, or $16 billion of Medicare's 
total physician spending.
    Our task is to establish relative values for the more than 
6,000 services involved, even though data are not readily 
available for each service. Because the law requires the system 
be implemented in a budget-neutral manner, there will also be 
redistributions. In other words, increases for some procedures 
will result in decreases for others.
    I want to emphasize that the new system will reflect the 
relative practice expense resources involved with furnishing 
physician's services. The new system is not a cost 
reimbursement system.
    We have sought and encouraged the participation of the 
medical community in virtually every step along the way. We 
have consulted with hundreds of representatives of medical 
specialty groups. We will continue to do so.
    As you know, on June 18 of last year HCFA published a 
proposed rule in the Federal Register announcing the proposed 
relative value units for practice expenses. The publication of 
the proposed rule elicited strong reactions. Generally 
speaking, family practitioners and other primary care 
physicians had been supportive of the approach that HCFA took. 
However, most surgeons and many medical specialties have 
challenged many aspects of our proposal.
    The Balanced Budget Act made several changes in how 
Medicare will pay for physician practice expenses, including, 
importantly, delaying the implementation until 1999 and 
providing for a 4-year transition.
    The Balanced Budget Act requires that we publish a notice 
in the Federal Register by May 1 and provide a 90-day comment 
period, and we are on track to do that right now.
    One message of the Balanced Budget Act was that Congress 
wanted us to do more consulting with doctors, and we have done 
that, Mr. Chairman. We met with physician groups in October, 
November, and December 1997 on these issues.
    In October, we hosted 17 medical specialty panels charged 
with validating some of the direct expense data generated 
through the original panel process used for our June 18 notice. 
Members of the panels were nominated by their specialty 
societies, and I think that Dr. Brooks has referred to some of 
that activity today.
    On November 21, we held a forum on indirect practice 
expenses. Again, all major specialty societies were invited to 
send representatives, and the comments that we received were 
both constructive and informative.
    And then on December 15 and 16 we again hosted a single 
cross-specialty panel with the objective to understand the 
differences in the way specialties provide common 
administrative functions such as billing and scheduling.
    On October 31 of this year, through a Federal Register 
notice, we again solicited comments from the physician 
community on a wide variety of key data and methodological 
issues, including generally accepted accounting principles, 
equipment utilization, physician-employed staff, and the 
refinement process.
    The Balanced Budget Act, as you know, also requested an 
independent review and evaluation by GAO and, as Dr. Brooks has 
testified already GAO has supported the key elements of the 
methodology that we used. As we develop our May 1 proposed 
rule, we are carefully reviewing and considering each of GAO's 
recommendations.

                           PREPARED STATEMENT

    Mr. Chairman, we are working very hard to analyze the data, 
including comments that we have received, and considering the 
recommendations that GAO has made, and we look forward to 
working with you and with the members of the subcommittee as we 
develop our May 1 proposed rule.
    Thank you very much.
    Senator Specter. Thank you, Ms. DeParle.
    [The statement follows:]
              Prepared Statement of Nancy Ann Min DeParle

                              INTRODUCTION

    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to be here today to discuss resource-based practice 
expenses under the Medicare physician fee schedule. Research performed 
by the Physician Payment Review Commission (PPRC) and recommendations 
made in their 1993 Annual Report to the Congress documented the need to 
change the current practice expense system and the significant 
redistributions that would occur under a new system. Following the PPRC 
recommendations, Congress passed legislation requiring HCFA to 
implement a resource-based practice expense relative value system 
beginning in 1998. The intent of the new system is to create a more 
equitable system for physician reimbursement which better reflects the 
relative practice expense resources involved in furnishing a service.
    As you know, last June 18th, we published a proposed rule. The 
Balanced Budget Act delayed the new system for one year and made a 
number of other changes in resource-based practice expenses, including 
a report to Congress from the Secretary and publication of a new 
proposed rule by May 1, 1998.
    Today, I will review our efforts since the passage of the Balanced 
Budget Act. We are busily working on development of the May 1st rule. 
At this point, we are still analyzing data, input and comments that we 
received during the activities I will describe later and considering 
the recommendations made in the just released GAO report. Since our new 
proposed rule is currently under development, I do not have details and 
specifics to discuss with you today.

                               BACKGROUND

    Medicare spends about $40 billion annually for physicians' 
services. We pay for more than 6,000 different procedure codes under 
the physician fee schedule. These services are provided by more than 
500,000 physicians and practitioners in settings as diverse as 
physician's offices, hospitals, ambulatory surgical centers, and 
nursing homes.
    Medicare's physician fee schedule established relative values for 
three components of each physician's service: physician work, practice 
expenses and malpractice insurance. The sum of these three components 
represents the total relative value for a service; this total relative 
value is used in conjunction with a conversion factor to establish the 
Medicare fee schedule amount for the service. The relative size of the 
three components varies for each service, but on average, physician 
work represents 54 percent of the overall relative value, practice 
expenses 41 percent and malpractice insurance 5 percent. Practice 
expenses include resource inputs such as a physician's staff (both 
clinical and administrative), rent, equipment and supplies.
    The relative values for physician work have been resource-based 
since the inception of the fee schedule in 1992. The relative values 
for physician work are based on physicians' estimates of the physician 
time and effort needed to perform a service. Practice expense and 
malpractice expense relative value units (RVU's), however, currently 
are based on allowed charges under the old reasonable charge system of 
paying physicians. Relative values for these components thus largely 
reflect historical charges, without a direct and explicit relationship 
to resources used.
    One example of the inequity in the current system can be seen by 
comparing practice expense RVU's that Medicare currently pays for the 
most common office visit and for triple by-pass surgery. Under the 
existing system, Medicare pays almost 100 times more for the 
physician's practice expense (overhead) for a by-pass surgery than for 
an office visit. In other words, a physician practicing in an office 
would have to do almost 100 office visits to receive the same payment 
for practice expenses as a surgeon performing one by-pass surgery in a 
hospital. Most observers would agree that the ``relative'' values for 
practice expense is out of line for both services.
    The Balanced Budget Act requires that malpractice expense relative 
value units be converted to a new system beginning in 2000. The 
Balanced Budget Act also requires that practice expense RVU's be 
converted to a resource-based system beginning on January 1, 1999.
    Converting the charge-based system to a resource-based system has 
been quite challenging. We must establish relative values for the large 
number of services involved, but practice expense data are not readily 
available for each service.
    In addition, the law requires that we establish resource-based 
practice expense relative values in a budget-neutral manner. In other 
words, the total Medicare payments for practice expenses prior to the 
changeover to resource-based values should be the same as the payments 
under the new system. This necessarily involves a redistribution of 
payments across services; to the extent that there are increases in 
values for some services, others will decrease.
    I want to emphasize that new resource-based relative values for 
practice expense reflect the relative practice expense resources 
involved with furnishing physicians' services. The new system is not a 
cost reimbursement system.
    Since we started to develop the new system, we have sought and 
encouraged the participation of the medical community in virtually 
every step along the way. We will continue to actively encourage the 
participation of the medical profession and others who have a stake in 
the physician fee schedule as we proceed with our proposal. I have 
attached to my testimony the Appendix to our Report to Congress which 
contains a list of the major physician and other groups with whom we 
have consulted.

                       LAST YEAR'S PROPOSED RULE

    As you know, on June 18, 1997, we published a proposed rule in the 
Federal Register announcing our proposed relative value units for 
practice expenses. Using the traditional accounting concepts of direct 
and indirect costing, we segmented the project into two parts, one 
involving direct costs, the other involving indirect costs.
    For direct costs, we used a contractor to convene panels of 
physicians and others knowledgeable about how services are provided to 
present information on direct cost inputs, i.e., the time it takes 
various clinical and administrative staff to assist the physician in 
providing the service. The panels also provided information on the 
types of supplies and equipment used in providing services.
    The second part of the project involved indirect costs. We needed 
to allocate the remaining resources, indirect expenses, to specific 
procedures in order to arrive at a total practice expense relative 
value for the service. This process was initially to be accomplished 
through a survey of physician practices. However, due to the very low 
response rate to this survey, we instead relied on existing data 
sources to allocate indirect expenses. The data source we used was the 
information gathered by the American Medical Association through 
surveys of its members.
    Needless to say, the publication of the June 18 Notice resulted in 
strong opinions about our methodology, assumptions, and approach. 
Generally speaking, family practitioners, and other primary care 
physicians have been supportive of our approach. However, most surgeons 
and many medical specialties have challenged many aspects of our 
proposal. Many of the physicians and groups which were adversely 
affected by our proposal criticized our methodology as flawed and 
suggested alternatives. Some of the alternatives would have required 
abandoning the panel process of gathering data in favor of a brand new 
data gathering activity.
     the balanced budget act and our consultations with physicians
    I would like to describe some of the recent key events of this 
project. As you know, the Balanced Budget Act (BBA) made several 
changes in how Medicare will pay for physician practice expenses. The 
BBA delayed the implementation of a resource-based relative value 
practice expense for one year. The BBA also allowed for a four-year 
transition to the new system beginning January 1, 1999. The Balanced 
Budget Act required that we publish a notice in the Federal Register by 
May 1 and provide a 90 day comment period, which is 30 days longer than 
our usual comment period for the annual physician fee schedule 
regulation.
    The Balanced Budget Act requires us, to the maximum extent 
practicable, to use generally accepted cost accounting principles which 
recognize all staff, equipment, supplies, and expenses and to use 
actual data on equipment utilization, etc. The Balanced Budget Act also 
requires that we consult with organizations representing physicians on 
our methodology and to develop a refinement process to be used during 
each year of the transition period.
    On October 31, 1997, we published a Notice of Intent to regulate in 
the Federal Register. We solicited input from the physician community 
on a wide variety of key data and methodological issues including 
general accepted accounting principles, equipment utilization, 
physician employed staff and the refinement process. This was an 
opportunity for many of the groups to provide additional information to 
aid us as we develop this year's proposed rule. We received a number of 
constructive and thoughtful comments in response to this Notice.
    Since the Balanced Budget Act was enacted, we have met with 
physician groups in October, November, and December 1997 to discuss 
various practice expense issues. In October, we hosted 17 medical 
specialty panels charged with validating some of the direct expense 
data generated through the original panel process used for our June 18 
Notice. The panels reviewed about 200 of the highest volume Medicare 
services to validate the data originally collected. These codes 
represent about 80 percent of Medicare physician spending. Members of 
the panels were nominated by their specialty societies and were given 
extensive information about the original panel process prior to the 
meetings to help them as they validated the data.
    On November 21, 1997, we held a forum on indirect practice 
expenses. Again, all major specialty societies were invited to send 
representatives. We asked specialties who had specific concerns about 
our indirect cost methodology to present their views to the meeting 
and, where applicable, to provide alternatives to the approach in last 
June's proposed rule. Several presentations were made offering 
alternative approaches to the allocation of indirect costs as well as 
an approach which used a non traditional accounting approach to 
determining practice costs. There was consensus that by definition all 
approaches to dealing with indirect costs require an allocation 
formula. As with our prior meetings and discussions with the physician 
community, the comments were both constructive and informative.
    On December 15 and 16, we again hosted a single cross-specialty 
panel to discuss some of the issues that were believed to have 
commonality among the various specialties. The objective was to 
understand the differences in the way specialties provide common 
administrative functions, such as billing and scheduling. Although 
there was no agreement among the specialties about many of the issues, 
the discussions were helpful in framing the debate and in shaping 
alternatives to some of the original assumptions that were made in the 
June 18 proposal.
    Since the December panel, we have been meeting with groups 
proposing alternative approaches to the practice expense project. Some 
of these groups are advocating extensive data surveys of individual 
physician practices. We do not believe it is practicable at this time 
to do any new surveys and still meet the January 1, 1999 implementation 
date established in the Balanced Budget Act. Although we have not 
completed our internal deliberations on the refinement process we will 
be proposing in May, we are considering additional data gathering as 
part of a longer term refinement of the practice expense values.

                         GAO REPORT TO CONGRESS

    The Balanced Budget Act requested an independent review and 
evaluation by the General Accounting Office (GAO) of the practice 
expense methodology contained in last June's proposed rule.
    We are pleased that GAO supports the key elements of the 
methodology we used to develop practice expense relative values. GAO 
found that our use of expert panels is an acceptable method to develop 
direct cost estimates. GAO also found that assigning indirect expenses 
to individual procedures, such as the method we used, is an acceptable 
approach. As the GAO Report indicates: ``There is no need for HCFA to 
start over and utilize different methodologies for creating new 
practice expense RVU's; doing so would needlessly increase costs and 
further delay implementation of the fee schedule revisions.''
    GAO also made recommendations about a number of technical issues. 
As we develop our May 1, 1998 proposed rule, we will carefully review 
and consider each of GAO's specific recommendations.
    GAO recommended that we use sensitivity analyses to test the 
effects of two items, (1) the limits we placed on direct cost panel's 
estimates of clinical and administrative labor, and (2) our assumptions 
about equipment utilization. We are currently doing such sensitivity 
analyses. GAO also recommended that where our adjustments or 
assumptions substantially changed the rankings and RVU's or specific 
procedures we should collect additional data to assess the validity of 
our assumptions and adjustments, focusing on the procedures most 
affected. We will consider that recommendation for future years since 
it does not appear to be possible to collect any new data in time for 
the proposed or final rules this year.
    GAO recommends that we evaluate three interrelated issues: (1) 
classifying administrative labor associated with billing and other 
administrative expenses as indirect expense, (2) alternative methods 
for assigning indirect expenses, and (3) alternative specifications of 
the regression model used to link the panels' estimates. We are 
currently analyzing these issues.
    GAO recommends that we ``determine whether changes in hospital 
staffing patterns and physicians' use of their clinical staff in 
hospital settings warrants adjustments between Medicare reimbursements 
to hospitals and physicians''. On a related note, GAO recommends that 
we ``determine whether physicians have shifted tasks to non-physician 
clinical staff in a way that warrants re-examining the physician work 
RVU's''. We are currently analyzing these issues.
    The GAO Report recommends that we ``work with physician groups and 
the AMA to develop a process for collecting data from physician 
practices as a cross-check on the calculated practice expense RVU's, 
and to periodically refine and update the RVU's''. I also note that the 
Balanced Budget Act also requires that we develop a refinement process 
to be used during each of the four years of the transition. We are 
currently developing our plans for refinement.
    The GAO Report recommends that we ``monitor indicators of 
beneficiary access to care, focusing on those services with the 
greatest cumulative reductions in Medicare physician fee schedule 
allowances, and consider any access problems when making refinements to 
the practice expense RVU's''. We have comprehensively monitored access 
to care and utilization of services since the inception of the 
physician fee schedule and we will continue to do so.

                               CONCLUSION

    I appreciate the opportunity to discuss with you today the status 
of our efforts on resource-based practice expenses under the Medicare 
physician fee schedule. We are working very hard analyzing data, input 
and comments that we received and considering the recommendations made 
in the GAO Report. We look forward to working with you, Mr. Chairman 
and Members of the Subcommittee, as we develop our May 1st proposed 
rule.

                       NONDEPARTMENTAL WITNESSES

STATEMENT OF ARTHUR L. DAY, M.D., UNIVERSITY OF 
            FLORIDA, PROFESSOR OF NEUROSURGERY, 
            AMERICAN ASSOCIATION OF NEUROLOGICAL 
            SURGEONS
    Senator Specter. I would like now to turn to Dr. Arthur 
Day.
    Dr. Day. Mr. Chairman and members of the subcommittee, my 
name is Arthur Day. I am a professor and practicing 
neurosurgeon at the University of Florida in Gainesville, and I 
appear here today wearing two hats, one as a member of the 
Practice Expense Coalition, and the other as a member of 
Organized Neurosurgery.
    The Medicare physician fee schedule should accomplish two 
fundamental goals: First, it should ensure that Medicare 
beneficiaries have continued and prompt access to high quality 
medical care; and Second, it should provide a fair payment 
system based on accurate data.
    The coalition is concerned that without substantial 
correction HCFA's current effort to develop new practice 
expense relative values will not meet these important 
objectives. My remarks today focus on four areas.
    First, the GAO report. For an entirely different set of 
reasons, the Practice Expense Coalition and Organized 
Neurosurgery support the GAO report. The GAO report is 
entitled, ``HCFA Can Improve Methods of Revising Physician 
Practice Expense Payments.'' In our view, can means should, and 
the report identifies a number of key spots in HCFA's work that 
must be addressed before a final system is put into place.
    Our sites of concern are incorporated into our written 
testimony and due to time constraints today will not be 
individually discussed.
    The second point. What has HCFA done since the enactment of 
the Balanced Budget Act? Since last summer, HCFA has conducted 
three public meetings which on the surface appear to satisfy 
the BBA's requirements for consultation with physician groups. 
Each of these meetings, however, focused on refining 
methodology and data from the original June 1997 proposed rule. 
From our viewpoint, HCFA appears to have made no substantive 
alterations in last year's proposal.
    Third, what should HCFA do to comply with the Balanced 
Budget Act? It is obvious in this debate, and reading these 
testimonies, that medicine is divided, the proceduralist versus 
primary care. Both groups interpret this data from their own 
perspective and with their own self-interest in mind. Within 
the confines of budget neutrality, what benefits one will harm 
the other. It may be, however, that both sides are right.
    How can we reconcile this disagreement without irreparable 
damage to our health care system? The answer is, in our 
opinion, clear and accurate data, not assumptions derived from 
statistical theory.
    To accomplish this goal, HCFA must start with total 
practice costs and then, using accounting methodology, allocate 
specialty-specific practice expenses to relative value units. 
The coalition has presented HCFA with a straightforward plan 
developed by Coopers & Lybrand as to how this can be done.
    Finally, what are the consequences to a poorly designed 
system? If HCFA implements essentially the same proposal as 
last year, access to quality health care for all patients, not 
just Medicare beneficiaries, may be severely compromised. Such 
large reductions may create a two-tier health care delivery 
system.
    For example, if the June 1997 rule had been implemented, 
fees for many common neurosurgical procedures will have equaled 
or dropped below Medicaid rates in many States. We are all 
aware of the access problems that Medicaid patients face.
    The survival of academic medical centers may also be 
threatened, thus endangering medical education and research. A 
1997 study conducted by the AAMC found that HCFA's original 
proposal would have reduced practice expense reimbursement to 
the University of Pennsylvania's Department of Neurosurgery by 
over 50 percent.
    Senator Specter. How about to your university?
    Dr. Day. Approximately the same.
    Senator Specter. Why do you pick the University of 
Pennsylvania?
    Dr. Day. I think I got that research from my staff person.
    Senator Specter. You have a very able staff person. 
[Laughter.]
    We will extend your time by 57 seconds. [Laughter.]
    Dr. Day. In our opinion, Congress can do two things to help 
prevent these adverse consequences. First, continue active 
oversight of HCFA to ensure that access is not compromised, and 
second, provide HCFA with the necessary resources to carry out 
the mandates of Congress in the GAO's recommendations.

                           PREPARED STATEMENT

    Today, we, the Practice Expense Coalition in Neurosurgery, 
pledge our support for a public-private partnership to get this 
task done completely, correctly, and on time.
    Thank you very much.
    Senator Specter. Thank you very much, Dr. Day.
    [The statement follows:]
                  Prepared Statement of Dr. Arthur Day

                           EXECUTIVE SUMMARY

Background

    In 1997, the Health Care Financing Administration (HCFA) proposed 
changes to the Medicare Fee Schedule that would have produced 
significant reductions in reimbursement for many physicians. These 
changes centered around the manner in which Medicare calculates 
physician practice expenses. Because the cuts were so severe, and 
because the methodology on which they were based was flawed, the 
Congress intervened and mandated HCFA to take an entirely new approach 
to devising the new payment system. The Balanced Budget Act of 1997 
(BBA), among other things, required the following:
    1. A one-year delay in the implementation date of new practice 
expense relative values from January 1998 to January 1999;
    2. A four year phase-in of the new values from 1999-2002;
    3. A General Accounting Office (GAO) review and evaluation of 
HCFA's proposed methodology, including an evaluation of the adequacy of 
the data and the potential impact of the proposal on Medicare 
beneficiary access to services; and
    4. Detailed requirements for HCFA in developing new practice 
expense relative values, including a directive to use generally 
accepted accounting principles and data based on actual physician 
practice expenses. HCFA is also required to work closely with 
physicians in developing the new values.

The GAO report

    Issued on Friday, February 27, 1998, the GAO report is titled: 
``HCFA Can Improve Methods for Revising Physician Expense Payments.'' 
The report identifies several key problem areas, and raises appropriate 
criticisms of HCFA's work up through the June 1997 Notice of Proposed 
Rulemaking, which include:
    1. HCFA's failure to validate the data produced by the Clinical 
Practice Expert Panels. GAO recommends that HCFA validate the data 
using surveys of actual physician practices.
    2. HCFA's use of statistical techniques to overcome the lack of 
common ground rules between the various panels. GAO raises serious 
questions about these statistical techniques.
    3. HCFA's failure to use actual specialty specific practice costs 
to formulate ``indirect'' practice expenses. GAO suggested that the use 
of specialty specific indirect expense data would be more consistent 
with the requirements of the law, which requires the use of actual 
expense data.
    4. HCFA's disallowance of certain costs, such as the costs 
physicians incur when they bring their own staff to facilities located 
outside their own office to assist in the care of patients. GAO 
acknowledged that there may have been a shift in hospital and physician 
practices that Medicare has not recognized in its reimbursement 
methods.
    5. HCFA's lack of a detailed plan to address the concerns raised in 
the report. GAO raises concerns about HCFA's failure to have a specific 
plan to address the many problems with the current data and 
methodology.
    If HCFA responds effectively to each of the points in the GAO 
report, and if HCFA follows the mandates of the BBA, the Coalition 
believes that the agency can design new relative values that will be 
generally acceptable to the entire physician community.
HCFA'S activities since the enactment of the BBA
    HCFA has conducted three public meetings since the BBA was enacted 
the October ``validation'' panel meeting, the November ``indirect 
expense'' conference, and December's ``cross-specialty'' panel meeting. 
Each of these meetings focused on refining the methodology and data 
that were the basis for the original June 1997 proposed rule. Based on 
this experience, the Coalition does not think that HCFA is meeting the 
directives of the BBA.

What HCFA should do to comply with the BBA

    If generally accepted accounting principles (as required by the 
BBA) are used, the process for allocating specialty specific aggregate 
practice expenses to relative value units should be relatively 
straightforward. HCFA should enter into a public-private partnership 
with the physician community to jointly fund and help facilitate the 
collection of practice expense data. The project should proceed in the 
following way:
    1. Realize that the practice expense relative values effective in 
1999 (the first transition year) will change quite a bit as the 
refinement proceeds and reach agreement on the process that will get us 
to a final product by 2002 (final implementation year);
    2. Develop interim values for 1999 based on the premise: ``first do 
no harm.'' Even modest reallocations of payment should not occur until 
HCFA has fully complied with the mandates of the BBA to use total costs 
and an accounting methodology; and
    3. Refine the system based on the key requirements of the BBA 
actual data on total physician practice costs and generally accepted 
cost accounting standards. Coopers & Lybrand, a well known national 
accounting firm with significant health care industry experience, has 
developed a method to allocate total costs to the individual code 
level, using standard cost accounting techniques.

Consequences of a poorly designed system

    If HCFA implements essentially the same proposal as last year, it 
will produce both near and long-term threats to our Medicare system, 
and, to the extent that many private insurers use the Medicare 
physician fee schedule, the entire health care delivery system. Access 
to quality health care for all patients, not just Medicare 
beneficiaries, will be severely compromised. Specifically, such large 
reductions may: (1) create a two-tiered health delivery system and (2) 
threaten the survival of academic medical centers, endangering medical 
education and research.

What Congress can do to ensure HCFA complies with the BBA

    Congress can do two things to help solve this problem: (1) continue 
active oversight of HCFA on this project to ensure that the BBA's 
mandates are achieved, and (2) provide the necessary funding to HCFA to 
carry out the GAO recommendations and the mandates of Congress. The 
estimated costs of these tasks would be no more than $2 million.
    Mr. Chairman, and members of the subcommittee, my name is Arthur L. 
Day, M.D. I am a professor and practitioner of neurosurgery at the 
University of Florida in Gainesville, Florida. I am here today on 
behalf of the Practice Expense Coalition, a group that represents 43 
physician specialty societies, medical organizations and major medical 
clinics, and also on behalf of my own organizations, the American 
Association of Neurological Surgeons and the Congress of Neurological 
Surgeons, which are members of the Coalition. Mr. Chairman, the 
Coalition is united by our common belief that the Medicare physician 
fee schedule should accomplish two fundamental goals: (1) ensure that 
Medicare beneficiaries have continued prompt and high quality access to 
medical care and (2) provide a fair payment system based on accurate 
and reliable data. The Coalition is concerned that, without substantial 
correction, the Health Care Financing Administration's (HCFA) current 
effort to develop new practice expense relative values will not meet 
these important objectives.
    The members of the Coalition appreciate your interest in this issue 
and the opportunity to present testimony today. We recognize that the 
task originally given to HCFA in the Balanced Budget Act of 1997 (BBA) 
is complex. If properly carried out, however, the directives contained 
in that Act will make it easier for the agency to complete its work. 
Continued congressional oversight is critical to the project's 
successful completion.
    My testimony this afternoon will focus on four areas: (1) the 
findings of the General Accounting Office (GAO) report, which under 
congressional mandate reviewed HCFA's methodology and the reliability 
of the agency's data, (2) HCFA's activities since the enactment of the 
BBA, (3) the Coalition's recommendations of what HCFA should be doing 
to develop reliable data and a sound methodology to ensure that 
accurate practice expense relative values are developed by the year 
2002, and (4) the consequences of HCFA's failure to develop a fair and 
accurate payment system.
The GAO report
    Issued on Friday, February 27, 1998, the GAO report is titled: 
``HCFA Can Improve Methods for Revising Physician Expense Payments.'' 
In our opinion, this report is a reasonably balanced view of the 
challenges and the problems that have beset this very complex project. 
The report clearly validates Congress's efforts, by virtue of the 
passage of the BBA, to give HCFA both more time to complete the 
formulation of new practice expense relative values, and direction on 
how HCFA must develop this new payment system. If HCFA responds 
effectively to each of the points in the GAO report, and if HCFA 
follows the mandates of the BBA, we believe that the agency can design 
new relative values that will be generally acceptable to the entire 
physician community.
    The GAO report identifies several key problem areas, and raises 
appropriate criticisms of HCFA's work up through the June 1997 Notice 
of Proposed Rulemaking, which include:
    1. HCFA's failure to validate the data produced by the Clinical 
Practice Expert Panels. While GAO concluded that this process of 
collecting ``direct'' practice expense data was acceptable, it stated 
that HCFA should validate the data using surveys of actual physician 
practices.
    2. HCFA's use of statistical techniques to overcome the lack of 
common ground rules between the various panels. The use of these 
statistical adjustments is a key point of controversy, because most of 
the redistribution in physician payment is derived from these 
manipulations. The GAO raises serious questions about the techniques of 
``linking'' and other ``data reasonableness'' rules used in the June 
1997 proposed rule.
    3. HCFA's failure to use specialty specific costs to formulate 
``indirect'' practice expenses. While the Clinical Practice Expert 
Panels focused on ``direct'' practice expenses, HCFA planned a survey 
of 5000 physician practices to collect ``indirect'' expense data. This 
survey was never completed, and HCFA was forced to look to other less 
reliable sources. Although GAO did not measure the validity of the data 
used, it did state that the use of specialty specific indirect expense 
ratios would be more consistent with the requirements of the 1994 and 
the 1997 statues which require the use of actual expense data.
    4. HCFA's disallowance of certain costs. Many specialty physicians 
bring their own staff to facilities located outside their own office to 
assist in the care of patients. HCFA has disallowed nearly all of these 
costs, arguing that they are already included in the hospital payment 
rates. Although not every specialty uses its own staff in this way, 
several recent studies demonstrate that some specialties, such as 
neurosurgery, significantly utilize their own staff outside of the 
office. The GAO report acknowledged that there may have been a shift in 
hospital and physician practices that Medicare has not recognized in 
its reimbursement methods.
    5. HCFA's lack of a detailed plan to address the concerns raised in 
the report. Throughout the report, GAO raises concerns about HCFA's 
failure to have a specific plan to address the many problems with the 
current data and methodology. Such a plan is essential if HCFA is to 
comply with both the 1994 and the 1997 statutes.
    Mr. Chairman, at this point I would like to address each of the 
above issues in more detail.
    1. Use of Expert Panels to Estimate Direct Costs.--In 1996, HCFA 
convened a number of expert panels to collect information on direct 
costs. These panels, known as Clinical Practice Expert Panels (CPEPs), 
included physicians, practice managers and other health professionals, 
and represented virtually every specialty. The panels met twice to 
estimate direct costs and labor times for all physician services under 
Medicare.
    While GAO concluded that the process itself for collecting direct 
cost information was acceptable, it also stated that HCFA should 
validate the data using surveys of actual physician practices. While 
this panel process can estimate this kind of information, many 
questions remain about the data's accuracy. The Coalition agrees with 
the suggestions in the GAO report that external validation is critical 
to confirming the specific information derived from these panels.
    If the information gathered from the panels is to be an ongoing 
part of the practice expense data base, we believe that Congress should 
insist on such validation. At the very least, HCFA should survey 
physician practices and make any needed corrections based on these 
surveys. This effort does not need to be time consuming or resource 
intensive, but can be based on a limited number of surveys of physician 
practices.
    2. Statistical Techniques Used by HCFA.--Because of the lack of 
common ground rules in the CPEPs, the results understandably varied 
greatly. HCFA tried to correct this problem by using statistical 
adjustments to the data, referred to as ``linking'' and ``scaling.'' 
HCFA also applied edits for ``data reasonableness.'' Each technique was 
intended to adjust the data to establish more consistency between the 
results that came from each panel. The use of these statistical 
adjustments is a key point of controversy, since most of the 
redistribution in physician payment was derived from these 
manipulations. The very large cuts in payments for many procedures--for 
neurosurgery some over 30 percent--were in large measure driven by 
HCFA's decisions at this point in the process.
    The GAO raises serious questions about ``linking'' and the ``data 
reasonableness'' rules that HCFA used in the June 1997 proposed rule. 
The Coalition agrees with this assessment. The application of these 
techniques greatly altered the work product of the CPEPs. These 
alterations were undoubtedly the greatest contributing factor to our 
concerns that we expressed last year--concerns which ultimately led 
Congress to change the practice expense law. By enacting the BBA, 
Congress rejected such statistical manipulation by requiring the use of 
actual physician practice cost data.

    HCFA needs to completely revise or discard the ``data 
reasonableness'' rules and fix its ``linking'' methodologies. Some 
means must be identified to collate the expenses of quite diverse 
physician specialties into a coherent payment system. It is still 
unclear what HCFA intends to do.
    3. Indirect Cost Issues.--HCFA proposes to divide physician 
practice expenses into direct and indirect costs. To accomplish this, 
separate data collection strategies were developed. While the CPEP 
process focused on direct costs, HCFA planned a mail survey of 5,000 
physician practices to collect indirect expense data. To ensure a 
reasonable and accurate response rate, we urged HCFA to involve the 
physician specialty societies in this process. These offers were 
rebuffed by the agency, however, and the result was predictable. The 
survey was so complicated that the response was woefully inadequate by 
any standard--well below the response rate demanded by the Office of 
Management and Budget (OMB). HCFA thereafter abandoned the survey, and 
therefore had to use estimates of indirect expense rather than actual 
data. The agency also decided to allocate expense data based on a 
single direct/indirect cost ratio of 55/45 percent for all specialties. 
Needless to say, the quality and accuracy of these estimates has been 
highly controversial and has been refuted by several subsequent 
studies.
    While GAO did not assess the validity of the data used in 
formulating these estimates, it did review allocation and definition 
issues. Since there is no universally accepted way to allocate indirect 
expenses, the GAO report recognized that HCFA's method for allocating 
indirect costs to the individual procedure codes was an acceptable 
approach. The report points out, however, that the use of specialty 
specific indirect expense ratios (rather than a uniform ratio for all 
specialties) would be more consistent with the law, which requires HCFA 
to use actual practice expense data.
    We believe that many of the controversies related to indirect 
expenses could be avoided if HCFA used other widely accepted accounting 
techniques to allocate practice cost data. These other allocation 
methods do not artificially separate expenses into ``direct'' and 
``indirect'' cost categories, so that the end result is more accurate 
and less arbitrary. If HCFA insists on pursuing its current approach, 
the Coalition concurs with GAO's recommendations that specialty 
specific ratios should be derived, based on individual specialties' 
actual practice expense data. We believe that Congress should insist 
that HCFA comply with these recommendations.
    4. Disallowance of Certain Costs.--As HCFA has defined practice 
expenses, certain categories of costs have not been included. For 
example, many specialty physicians bring their own staff to facilities 
located outside their own office to assist in the care of patients. 
HCFA has disallowed nearly all of these costs, arguing that they are 
already included in the hospital payment rates. Certainly, not every 
specialty uses its own staff in this way. Several recent studies, 
however, demonstrate that some specialties (e.g., neurosurgery and 
thoracic surgery) do substantially utilize their own staff for patient 
care activities that occur outside of the office. These studies have 
been provided to both HCFA and GAO, and can be made available to this 
subcommittee as well.
    The GAO report acknowledges that there may have been a shift in 
hospital and physician practices that Medicare has not recognized in 
its reimbursement methods. Hospitals may no longer provide the same 
level of staff support that they did before when Medicare established 
its current method of hospital expense reimbursement.
    These expenses are very real to these physicians and they should be 
incorporated into the Medicare physician fee schedule. HCFA should 
therefore determine if there have been changes in hospital staffing 
patterns and physicians' use of their clinical staff in hospital 
settings, and include these costs in the new relative values.
    5. Lack of Detailed Plan for Developing and Refining New Relative 
Values.--Throughout the report, the GAO points out that there are many 
unresolved issues that should be addressed prior to the May rulemaking. 
Even though the BBA requires HCFA to report to Congress on the status 
of the project by March 1, 1998, HCFA has yet to provide a detailed 
plan for developing and refining new practice expense relative values. 
This report should have included a presentation of data to be used in 
developing the relative values, and an explanation of the methodology. 
The purpose of the report was to give Congress and physician groups an 
opportunity to review and comment on HCFA's work prior to the May 
rule's publication, so that appropriate adjustments could be 
entertained.
    The delay in producing this report reduces the opportunity for 
physician input to Congress. Given this year's short legislative 
session, Congress will have limited opportunity to review these 
comments or, if necessary, to intervene on the final proposal before it 
is implemented on January 1, 1999. Congress must be given a detailed 
status report prior to May, and we urge you to require this from HCFA.
HCFA's activities since the enactment of the BBA
    The Balanced Budget Act of 1997 requires the agency to develop 
``new resource-based practice expense RVU's'' that utilize ``generally 
accepted cost accounting principles that recognize all staff, 
equipment, supplies, and expenses, not solely those that can be linked 
to specific procedures '' The law further requires HCFA to use ``actual 
data'' in developing the new relative value units. Through its member 
organizations, the Coalition has participated in three public meetings 
held by HCFA since the BBA was enacted the October ``validation'' panel 
meeting, the November ``indirect expense'' conference, and December's 
``cross-specialty'' panel meeting. Each of these meetings focused on 
refining the methodology and data that were the basis for the original 
June 1997 proposed rule.
    Based on this experience, we do not think that HCFA is meeting the 
directives of the BBA. Congress has implicitly repudiated the project's 
original direction, by enacting the new detailed requirements and 
oversight mechanisms. Given this new statutory mandate, the Coalition 
expects HCFA to significantly modify its methods of developing the new 
relative values.

What HCFA should do to comply with the BBA

    In our view, the specifications contained in the BBA and the 
standards laid out in the GAO report provide the framework for a 
successful transition to a new set of practice expense relative values. 
If generally accepted accounting principles (as required by the BBA) 
are used, the process for allocating specialty specific aggregate 
practice expenses to relative value units should be relatively 
straightforward, and can be accomplished in the time frame provided by 
Congress.
    The Coalition has offered to enter into a public-private 
partnership with HCFA that would jointly fund and help facilitate the 
various activities that must be completed if this change in practice 
expense relative value units is to be successful. Every physician 
interest should be included in that joint effort. Although we have 
received no response from HCFA to this offer, we reiterate it today in 
the hope that all sides will see the wisdom of such collaboration, and 
we can proceed to implement it immediately.
    Were HCFA to agree with us on this cooperative arrangement, we 
believe that the work should proceed in the following way:
    The first step is to agree that the practice expense relative 
values effective in 1999 (the first transition year) will probably 
change quite a bit as the refinement proceeds. Not every question has 
to be answered in the May rulemaking, but everyone should clearly see 
the process that will be in place to get us to a final product.
    Next, the interim values for 1999 need to be determined. We 
recommend that HCFA develop these interim values based on the premise: 
``first do no harm.'' With such an inadequate data base, we do not see 
how the agency could do otherwise. We realize that the four year 
transition period for implementing the final relative values is 
intended to ``soften the blow'' to any affected specialty, but we urge 
that even modest reallocations of payment not occur until HCFA has 
fully complied with the mandates of the BBA to use total costs and an 
accounting methodology. We believe that there is enough data available 
from several sources, and that an acceptable short term methodology can 
be worked out, to allow a first step toward practice expense relative 
values that are based on the resources actually used by physicians. We 
must be mindful, however, that important data refinements and 
methodological work remain to be done, and must be done, before the 
completion of the transition period. Because there is still much 
uncertainty, we recommend that HCFA ensure that the interim system's 
redistribution impacts be very modest, so the many remaining issues can 
be worked out without causing significant disruption to patient care.
    Finally, HCFA should refine the system around the key requirements 
of the BBA actual data on total physician practice costs and generally 
accepted cost accounting standards. The Coalition recommends that the 
total practice cost requirement be met by using the American Medical 
Association's statistical monitoring system data as the starting point. 
It is unlikely that we will find a more robust data base, although it 
does have some limitations. For example, data from some specialties and 
subspecialties (e.g., neurosurgery) are not included in the current 
data base, so additional information needs to be collected. The 
Coalition recently presented to HCFA an outline of how the AMA data 
base can be used to allocate total costs to the individual code level, 
using standard cost accounting methods. The approach was developed by 
Coopers & Lybrand, a well known national accounting firm with 
significant health care industry experience, and is relatively 
straightforward. We would be happy to arrange for representatives from 
Coopers & Lybrand to brief you and your staff in greater detail.
    This is a process that can work and can be completed in the time 
allowed, but it needs the concurrence of Congress and HCFA to be 
accomplished.

Consequences of a poorly designed system

    The importance of getting this project ``right'' cannot be 
understated. For many specialties, including neurosurgery, last year's 
proposed payment reductions were extreme. If HCFA implements 
essentially the same proposal, it will produce both near and long-term 
threats to our Medicare system, and, to the extent that many private 
insurers use the Medicare physician fee schedule, the entire health 
care delivery system. Access to quality health care for all patients, 
not just Medicare beneficiaries, will be severely compromised. 
Specifically, such large reductions may:
    Create a Two-Tiered Health Delivery System.--Many physicians simply 
cannot absorb these drastic reductions and continue to offer access to 
world-standard medicine. To demonstrate the impact of these reductions, 
organized neurosurgery conducted a survey of Medicaid and Medicare 
rates in 20 states. If the June 1997 rule had been implemented, fees 
for many common neurosurgical procedures performed on Medicare 
beneficiaries would have equaled or dropped below Medicaid rates in 16 
of these states. The problems that Medicaid beneficiaries face in 
accessing medical care are well documented. If private insurers follow 
Medicare's lead (as often they do) payment inequities will further 
multiply, and other patients will find their medical care quality 
similarly diminished.
    Endanger Medical Education and Research.--The dramatic decrease in 
Medicare payments proposed by HCFA will have a significant impact on 
our nation's academic medical centers. For example, a 1997 study of 
academic health centers conducted by the Association of American 
Medical Colleges found that HCFA's original proposal would have reduced 
practice expense reimbursement for the University of Pennsylvania's 
Department of Neurosurgery by over 52 percent. If HCFA's new proposal 
includes reductions of this magnitude, we risk undercutting these 
centers' ability to provide high-quality, specialized education for 
physicians. Moreover, these reductions could result in fewer dollars 
for academic medical centers to distribute to their research 
facilities. Such cuts could have devastating impacts on the kind of 
superb academic medical centers that attract our brightest and hardest-
working young men and women. If we send the message that we no longer 
consider education and research a national priority, we will sacrifice 
one of our nation's greatest assets, our world-class teachers and 
researchers.

What Congress can do to ensure HCFA complies with the BBA

    Congress can do two things to help solve this problem: (1) continue 
active oversight of HCFA on this project to ensure that the BBA's 
mandates are achieved, and (2) provide the necessary funding for HCFA 
to carry out the GAO recommendations and the mandates of Congress. The 
estimated costs of these tasks would be no more than $2 million. We 
fully understand that HCFA's administrative budget is very tight, and 
the Practice Expense Coalition is therefore prepared to enter into a 
public/private partnership to share in the cost of properly formulating 
the new practice expense relative values.
    In his recent testimony before the House Ways and Means Health 
Subcommittee, William J. Scanlon, of the GAO stated that even ``though 
HCFA has made considerable progress developing new practice expense 
fees, much remains to be done before the new fee schedule payments are 
implemented in 1999.'' We agree and we hope that your subcommittee will 
provide the necessary resources for HCFA to get the job done right.
    Thank you for the invitation to appear before the subcommittee. I 
will be pleased to answer any of your questions.

STATEMENT OF TIMOTHY J. GARDNER, M.D., UNIVERSITY OF 
            PENNSYLVANIA, CHIEF OF CARDIOTHORACIC 
            SURGERY, AMERICAN ASSOCIATION OF THORACIC 
            SURGEONS
    Senator Specter. We now turn to Dr. Timothy Gardner, chief 
of the division of cardiothoracic surgery at the University of 
Pennsylvania.
    Welcome, Dr. Gardner.
    Dr. Gardner. Thank you, Senator. I appreciate the 
opportunity to address the committee on this very important 
issue of reevaluation of the practice expense component of the 
Medicare fee special schedule.
    At the hospital of the University of Pennsylvania I am 
responsible for the care of hundreds of patients entrusted to 
us for cardiac and thoracic surgery, but also for the training 
of surgical residents who will be the cardiothoracic surgeons 
of the future.
    The impact projections from HCFA on the practice expense 
redistribution published last year is for a 32-percent 
reduction in reimbursement for cardiac surgery. This reduction 
would be added to reductions in Medicare reimbursement for 
cardiac surgery which over the past 10 years have already 
amounted to a 34-percent decrease in actual dollars. The 
cumulative effect of the prior reductions and the additional 
changes will be a 67-percent decrease in reimbursement when 
adjusted for inflation.
    Let me give you specific figures to clarify the impact of 
HCFA's proposed changes. A busy cardiac surgeon with a 
customary workload of 200 major open heart surgeries per year 
would receive practice expense reimbursement of $92,000 under 
HCFA's proposed formula. The most recent AMA socioeconomic 
survey indicates that the average annual practice expenses for 
surgeons, including cardiac surgeons, is $248,000 a year.
    A cardiac surgeon with a caseload of 200 major surgeries 
annually currently received $259,000 in practice expense 
reimbursement at Medicare rates, but the proposed $92,000 
practice expense reimbursement in HCFA's reformed schedule will 
amount to only 38 percent of actual practice cost.
    We have already heard from Dr. Day concern expressed in the 
GAO's analysis that HCFA's work has a flawed methodology and 
may result in conclusions that are not accurate or reliable, 
and the GAO report concluded that the proposal by HCFA may 
affect access to care as well as might influence physician 
decisions regarding the care of Medicare beneficiaries.
    Now, the accomplishment of cardiothoracic surgeons, along 
with so many other medical specialist researchers and 
scientists over the last 25 years, have really been astounding, 
and our citizens have been the beneficiaries. We cannot expect 
to sustain a commitment to the kinds of extraordinary advances 
that have occurred in the fields such as these if it costs 
doctors to take care of Medicare patients.
    Of even greater concern to me as a medical school professor 
and residency program director charged with ensuring the future 
quality of surgeons, is how are we going to attract individuals 
from among the best and the brightest of our young people who 
will be willing to spend 12 to 15 years of additional education 
after college to become cardiac surgeons, who will then begin 
practice at an average age of 35 years, in a specialty that is 
so demanding that few can remain fully active as surgeons into 
their sixties?
    One of HCFA's stated goals in this present environment is 
to restore trust in the Medicare Program. That is the challenge 
that has been given to the providers.
    If the agency expects to restore the trust of all of us in 
the medical community, a regulation as important as this one 
has to be done properly. Resource-based practice expense reform 
can be done properly. The agency should begin by using the best 
data set available, namely the AMA socioeconomic survey, to 
correct its current estimates and to develop interim values for 
1999.
    These interim values should then be refined through 
additional surveys of actual costs of practices, particularly 
the practices of specialists such as cardiac and thoracic 
surgeons which are neither clearly defined nor well-represented 
in the AMA data base. The estimates should be further refined 
through limited onsite data gathering, as the GAO has 
recommended.
    We appreciate that HCFA has a heavy workload and may not be 
able to conduct a proper study without supplementary funding. 
We would therefore ask the committee to consider a modest 
appropriation to HCFA which is targeted to this task with 
specific directions that the agency must base its analysis this 
time on real practice costs.
    I would like to close by saying that I have participated in 
the HCFA analysis of practice expenses, and I appreciate 
greatly the leadership that Dr. McCann, who I have worked with 
on various projects over the years, has provided to this very 
difficult task. I think all of us involved in the process agree 
that the complexity was almost beyond the scope of the group 
that was given the task of performing it.

                           PREPARED STATEMENT

    I also would like to say that somehow or other there is 
something wrong with this becoming an argument between 
different medical groups. If the primary care family practice 
group is not being paid appropriately for their practice cost, 
that should be corrected, but we should not do that at the 
expense of specialists who will not be able to provide the same 
quality of care in the future.
    Thank you.
    [The statement follows:]


             Prepared Statement of Timothy J. Gardner, M.D.

    Mr. Chairman, members of the Committee. Thank you for inviting me 
to discuss the very important issue of revaluation of the practice 
expense component of the Medicare Fee Schedule. I am Timothy J. 
Gardner, William M. Measey Professor of Surgery and Chief of the 
Division of Cardiothoracic Surgery at the University of Pennsylvania. I 
am also chairman of the joint Professional Affairs Committee of the 
Society of Thoracic Surgeons and the American Association for Thoracic 
Surgery. These two organizations represent the board certified cardiac 
and thoracic surgeons of the United States.
    Congress last year, under the Balanced Budget Act, directed HCFA to 
propose a rule for reimbursing practice expenses which would ``utilize, 
to the maximum extent practicable, generally accepted accounting 
principles'' and ``recognize all staff, equipment, supplies and 
expenses, not just those which can be tied to specific procedures, and 
use actual data on key assumptions.''
    Congress also asked the General Accounting Office to report on the 
adequacy of the data used by HCFA in developing the rule which it 
proposed last year. GAO was not asked to, and did not consider, whether 
HCFA was meeting the mandates of the Balanced Budget Act. This report 
has recently been submitted to Congress.
    The GAO notes that HCFA's proposed rule would reallocate 
$2,000,000,000 annually in payments to physicians. The impact of 
reallocations of payments of that magnitude is obvious. Surgeons and 
other specialists will make decisions based on what HCFA publishes this 
year. Surgeons will decide whether or not they can continue to support 
highly qualified staff; senior surgeons will decide whether they remain 
in practice; medical school graduates will make their choice of 
specialty.
    It is important to get this right--to get it right the first time. 
The message sent this year will drive decisions, irretrievably. If 
there is an interim proposal, with the expectation of future review, 
the Health Care Financing Administration must take care that the 
initial proposal not do damage that is irremediable. To count on 
corrections during the first year or two--on refinements that would 
correct mistakes and undo damage--would be unrealistic.

              THE REPORT OF THE GENERAL ACCOUNTING OFFICE

    The General Accounting Office has done Congress and the medical 
community a major service in pointing out several of the most egregious 
flaws in the methodology used by the Health Care Financing 
Administration. GAO reports that the linking process used to alter the 
data from the Clinical Practice Evaluation Panels was faulty; that HCFA 
should sample a sufficient number of medical practices to verify its 
data and its assumptions; that reimbursement of staff paid for by 
physician practices who work in hospitals should be reviewed and that a 
new means of deriving indirect costs should be considered. These are 
important recommendations. The title is central: ``HCFA Can Improve 
Methods for Revising Physician Practice Expense Payments''. In a rule 
of such importance, we believe ``can'' means ``must.''
    The General Accounting Office also notes that the ``cumulative 
effects of fee schedule changes could affect access to care'' and that 
``total potential reductions of approximately 25 percent are 
significant and could affect physician decisions regarding their care 
of beneficiaries.''
    The issue of access is important and very difficult. Cardiothoracic 
surgery is the specialty which would have been most impacted by the 
HCFA proposal last year, with reductions for some procedures as high as 
40 percent. These reductions would come on top of reductions of 34 
percent over the last 10 years--reductions which are actually more than 
50 percent if calculated in constant dollars. The cumulative total 
reductions for cardiac surgery would have been 54 percent in present 
dollars 67 percent in constant dollars--if the HCFA proposal of last 
year were enacted.
    At present, cardiac and thoracic surgeons usually do not even know 
the insurance status of their patients. Our patients come to us by 
referral from other physicians, sometimes from hospital emergency 
rooms. We treat every patient the same.
    Most surgeons would rather leave practice than be compelled to 
choose between private pay and Medicare patients, or even between the 
insured and the uninsured. And that is the point. If surgeons cannot 
afford to maintain highly qualified staff; if they know that quality is 
suffering; if payment rates are once again reduced significantly--the 
impact will be on the availability of highly trained surgeons a few 
years from now. The years of training are long and strenuous. Qualified 
surgeons are not created overnight. If a large number of senior 
surgeons retire and the attractiveness of the field to new medical 
school graduates is impaired, there will not be a sufficient number 
competent surgeons to treat the increasing number of citizens who reach 
the age where heart disease is prevalent 5 years from now.
    Those decisions will be made on what the rule is that goes into 
effect next January. Vague promises of review and refinement during a 
``transition'' period will not change this. Surgeons and new medical 
school graduates will base their decisions on what they see in the 
Federal Register, not on expectations that what they see there isn't 
for real and will be changed.
    Given the consequences of error--of getting this wrong--we are very 
concerned that the intent of Congress that HCFA use actual data and 
include all costs is not being followed. HCFA has still gathered no 
data on total costs and appears still not to recognize many critical 
staff costs.

I. Practice costs of cardiac and thoracic surgeons
    As the committee knows, these practice expense allowances were 
originally set through a formula based on historical allowed charges--
those essentially set in the free market, paid by commercial insurers.
    A resource-based system requires that the real costs of 
representative practices be allocated to specific procedures. To do 
this, you have to have data on total costs--data which HCFA has not 
gathered.
    In this absence, we need to look at other information available. 
The American Medical Association Socioeconomic Survey shows mean 
practice costs for ``other surgeons''--which includes cardiac and 
thoracic surgeons--at $252,000 per surgeon. Research we have done--and 
we are now undertaking a larger survey to provide more definitive 
information--has shown average practice expenses among our specialty of 
approximately $244,000.
    Present practice cost reimbursement, under the 1998 fee schedule, 
for a cardiac surgeon who performs 200 major operations a year, with an 
additional 200 consults and another 200 chargeable office visits--a 
case load higher than typical--is $259,600 per year--within 6 percent 
of our best information on actual costs.
    HCFA's June 1997 proposal would have reduced practice expense 
reimbursement for a three-vessel bypass to $398; for a partial lung 
removal to $280; and for a heart transplant to $620. (These were HCFA's 
estimates at that time of the correct allowance for all practice 
expenses incurred by the cardiac or thoracic surgeon, not just for the 
hours required for the operation and the days of hospitalization, and 
all other services provided in the full 90 day global period. For a 
heart transplant, these allowances would also have to cover the time of 
the transplant coordinator, which often extends to 6 months before the 
transplant surgery is performed.)
    Total practice expense reimbursement for the cardiac surgeon with 
the case load outlined above, under this proposal, would have dropped 
to $92,500--to about 38 percent of actual costs.

                     Practice costs, cardiac surgeon

Practice cost/surgeon (AMA other surgery).....................  $252,000
Present practice expense reimbursement \1\....................   259,600
Proposed reimbursement \1\..............................          92,500

\1\ At a case load of 200 major cardiac surgeries, 200 consults, 200 
billable office visits.

    For comparison, the AMA Socioeconomic Survey shows that the mean 
practice expenses for a general family practitioner are $170,400 a 
year. Under the HCFA proposal, practice expense reimbursement for a 
general family practitioner with a case load of 6,000 office visits a 
year (an average of 24 patients a day for 20 minute patient encounters) 
would be $170,000 a year--full practice expense reimbursement.
    These above comparisons are approximate, and should be refined. The 
wide differential in the ratio of actual costs to proposed 
reimbursement clearly indicates, however, that the 1997 HCFA proposal 
was fatally flawed. Validation of any new proposal against actual 
practice costs is essential before any radical changes are made in the 
Medicare Fee Schedule. We are pleased that the General Accounting 
Office has recommended such sampling to check the validity of HCFA's 
estimates.

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

III. What would happen to access under the HCFA proposal?
    At present there are no serious problems for Medicare patients to 
access to either general medical or specialty care. This is a balance 
that should not be upset casually.
    What would be the effect upon Medicare patients with heart or lung 
disease under a redistribution of reimbursement from specialty care to 
general medical care of the magnitude proposed by HCFA?
    The impact of severe reductions in practice expense reimbursement 
for cardiac and thoracic surgery should be reviewed in context of 
cumulative changes over the last then years. Reimbursement for open-
heart surgery--coronary artery bypass and surgery and other complex 
heart procedures--has already been reduced sharply in the last 10 
years. The national Medicare average allowed charge for three-vessel 
by-pass and graft surgery was $3,781 in 1988; in 1998, it has been 
reduced to $2,512. Adjusted for inflation, the allowed charge today is 
$1,802. That is, reimbursement for this lengthy and complicated 
procedure, where the life of the patient is at risk, has been reduced 
34 percent in present dollars; in constant dollars--the real measure--
the reduction is more than 50 percent.
    The allowed charge for lobectomy--removal of a part of one lung for 
lung cancer or other diseases--has been reduced from $1,654 in 1988 to 
$1,071 today--a reduction of 15 percent in present dollars and over 39 
percent in constant dollars.
    HCFA's 1997 proposal would have reduced the allowed charges for 
these procedures by another 32 and 26 percent, respectively.
    The cumulative reductions for heart surgery would have been 54 
percent in present dollars and 67 percent in constant dollars.
    The following table illustrates the reductions which have already 
occurred over the 10 years from 1988 to 1998 and the further effect 
last year's proposal would have had:

                                 [In current dollars and constant 1988 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                CABG x 3 (CPT 33512)      Lobectomy (CPT 32480)
                                                             ---------------------------------------------------
                            Year                                             Constant                  Constant
                                                                Current        1988       Current        1988
----------------------------------------------------------------------------------------------------------------
1988........................................................       $3,781       $3,781       $1,654       $1,654
1997........................................................        2,831        2,058        1,518        1,098
1998........................................................        2,514        1,802        1,420        1,005
June 1997 HCFA proposal (at 1998 conversion factor).........        1,714        1,230        1,071          768
----------------------------------------------------------------------------------------------------------------

    As noted earlier, cardiac and thoracic surgeons do not currently 
distinguish between Medicare and other patients. We typically do not 
even know the insurance status of the majority of our patients (billing 
and pre-authorization are handled by office staff). We treat the 
uninsured or underinsured the same as private pay patients. Our 
commitment is to treat patients irrespective of their ability to pay.
    However, the impact of reductions in reimbursement that even 
approach the magnitude discussed above would be substantial. Thirty-one 
percent of the practicing cardiac and thoracic surgeons in the United 
States are 55 years of age or older. These are the most experienced and 
capable individuals in our profession. If a large number of these 
surgeons retire, and many are already doing so, the work force may not 
be sufficient to treat the anticipated increase in the number of 
Americans who are over age 55. (There is no evidence that improvement 
in preventive or other non-specialty care is reducing the need for 
surgery or other advanced medical procedures. The need is largely age-
driven).
    Years of strenuous advanced training are essential in our 
profession. The early sacrifices are significant. At these reduced 
rates of reimbursement, will the most talented individuals--those both 
intellectually acute and gifted with the essential hand coordination--
enter into this profession? What will attract young physicians to this 
field if they cannot afford to hire the staff they know is needed to 
provide excellent outcomes?
    We do not know the answer. We do know that in Canada and in some 
European countries, shortages of cardiac surgeons have resulted in 
waiting lists for operations which are currently performed in the 
United States as soon as the decision is made for surgery and that some 
patients die before they are scheduled. The General Accounting Office 
is correct in warning that changes in reimbursement of the significance 
proposed could affect coverage for Medicare beneficiaries and the 
quality of care that physicians are able to provide.
    Because of the long lead-time involved in training heart and lung 
surgeons, a 4-year phase in of a bad proposal would not prevent the 
damage to the specialty of cardiac and thoracic surgery. The incentives 
put in place now will determine to a great extent the supply of cardiac 
and thoracic surgeons four and 10 years from now.

IV. The use of physician-employed staff in hospitals

    Some analyses of practice costs seem to assume that physicians who 
practice primarily in a hospital setting have few practice costs. The 
assumption seems to be that when a surgeon goes to the hospital, he or 
she turns out the lights, puts the telephone on message recording, and 
puts the staff on unpaid leave.
    The reality, of course, is that our staffs are working in the 
office while we are in the hospital. Staff must be there to take calls 
from patients, to triage emergency calls, to handle all the pre-
authorization, insurance billing and other administrative work of an 
office, at all times. HCFA staff or its research contractors are 
welcome to visit without appointment, at our members' offices, at any 
time.
    One issue which has become contentious in the review of practice 
expenses is allocation of the expense of clinical staff employed by 
physicians who assist them in the hospital.
    Within the last 5 years it has become common for physicians 
providing highly-skilled and high intensity critical services such as 
heart and lung surgery to employ their own staff to assist in patient 
care in hospitals. There are two reasons for this. First, under the 
cost-saving pressures of managed care and the hospital DRG payment 
system, hospitals have reduced both the number and the skill levels of 
hospital staff.
    Second, and most important, advances in the technology and the 
quality control required for complex surgery have made it more 
important than ever that the surgical team function as a coordinated 
unit, not as an assemblage of individuals. Surgeons work most 
effectively and most safely with nurses and operating assistants who 
work with them consistently.
    Prospective payment through DRGs has caused hospitals to encourage 
early discharge of patients. Thoracic surgeons have worked with their 
hospitals to find safe and effective ways to shorten hospital length of 
stay which, in the past 8 years, has decreased dramatically for all 
patients following heart and lung surgery. However, with earlier 
discharge from the hospital, care responsibilities have been shifted 
from the hospital to the surgeon's office. Consequently, more nurses 
have been hired to maintain postoperative surveillance and contact with 
patients and to assist the surgeon during an additional number of 
office visits during the early part of the 90 global period. Thus far, 
surgeons have absorbed these new practice expenses. The drastic 
reductions in practice expense proposed by HCFA will result in the 
curtailment of these services and place the quality of care in 
jeopardy.
    The mortality rate for coronary artery bypass surgery has declined 
from 4.5 percent in 1987 to 2.9 percent in 1996, at a time when the 
average age of the patients and the severity of their disease and 
comorbid factors have increased. The skill and unity of the operating 
team is a major factor in obtaining and maintaining quality at this 
level.
    One issue is accountability; the surgeon is clearly and solely 
responsible for the selection, training, and supervision of clinical 
staff when they are his staff. Lines of responsibility are more diffuse 
if the clinical staff are employed by the hospital. Second is 
predictability. This is critical for all surgeons, but notably for 
those who, as is common, have operating privileges at more than one 
hospital. The surgeon must take his or her own team from one hospital 
to the next to maintain quality.
    These clinical staff members from the surgeon's team typically work 
not only in the operating room, but with the patient in the hospital 
delivering both pre and post-operative care. This is particularly 
important in the intensive care unit and in the first several days 
post-operatively, when the patient must be carefully monitored and the 
surgeon notified immediately of any complication.
    We do not have data on the number of clinical nurses who work with 
our members in hospitals. (We would be willing to survey membership as 
part of a private-public data-gathering effort.) Data on the employment 
of physician assistants in surgery are, however, available from surveys 
of The American Association of Physician Assistants and the Association 
of Physician Assistants in Cardiovascular Surgery.
    The AAPA has estimated that 1,002 of the 31,300 practicing 
physician assistants in clinical practice specialize in cardiothoracic 
surgery. A cardiothoracic PA will assist in the care of 180-250 
patients a year. This leads to the conclusion that PAs alone (not 
counting other clinical staff employed by surgeons) are involved in at 
least 200,000 cardiac cases a year.
    The APACVS survey shows that 72 percent of the PAs employed in 
cardiovascular surgery are employed by solo or group physician 
practices. An undetermined number of the remaining 28 percent, who work 
in university teaching hospitals, are in actuality employed by the 
university clinical practice plan.
    Data recently submitted to HCFA from the American College of 
Surgeons also show that 71 percent of the cardiac and 62 percent of the 
general thoracic practices pay for staff who work with them in non-
office settings.
    Data included in the APACVS survey show that virtually all of those 
PAs have responsibilities in the operating room. More than 85 percent 
have follow-up assignments with those patients in critical care and 
other hospital postoperative care as long as these patients are in the 
hospital.
    This data has been submitted to HCFA and, most recently, to the 
General Accounting Office, which has concluded that ``there may have 
been a shift in hospital and physician practices that Medicare has not 
recognized in its methods for reimbursing nonphysician clinical labor 
expenses.'' We urge the Committee to monitor this issue closely, as the 
failure to consider these costs in any revision of practice expenses 
could have a severe impact on quality.
    HCFA several times has noted that there is separate reimbursement 
for services provided by PAs as assistants at surgery. This 
reimbursement is not, however, available for PAs who work in the 110 
teaching hospitals. Even where this reimbursement is available, it 
covers only the services in the operating room, not the additional 
services pre- and post-operatively. Of course, there is no separate 
reimbursement for the nurses or other clinical personnel who also work 
with surgeons in the hospital.
    The General Accounting Office has raised two relevant issues: 
whether some of the work being done by clinical staff represents a 
shift of physician work warranting review of work RVU's; and, if 
expenses have shifted from hospitals to physicians, whether there 
should be a shift of resources from Part A to Part B. We agree that 
both of these issues warrant examination. We would encourage a full 
reappraisal of the work values for cardiac and thoracic surgery--which 
we believe were undervalued by the Harvard School of Public Health, and 
will recommend this as part of the next 5-year review.
    But recognition that these are real costs of surgical and other 
specialty practices should not be obscured by these questions. 
Accounting for clinical staff employed by specialists, in the 
reallocation of practice costs, does not increase Medicare 
expenditures. It only grounds the resource-based revaluation in 
reality.
    Adequate recognition of the cost of these personnel to physicians 
must be recognized. This is a matter not just of equity, but of 
quality. We intend to maintain the record of quality which has reduced 
mortality in CABG to current levels--we intend in fact to improve 
further. We do not believe HCFA should ask us to turn back to standards 
of care which we now know are unacceptable.

V. Development of interim values for 1998
    It is now obvious that HCFA will not be able to meet the 
Congressional directive and the present deadline of May 1998 for 
development of a new practice expense proposal using, ``to the maximum 
extent practicable, generally accepted accounting principles.'' Any 
expectation that it might be possible to meet this requirement through 
refinement of existing data should have been dispelled by the inability 
of the cross-specialty panel meetings December 15 and 16 to reach 
agreement on any point other than this one: that any extrapolations of 
indirect expenses should start with specialty-specific data.
    The data and information now available is not sufficient to provide 
the basis for confidence in any rule which would significantly revise 
the present Medicare Fee Schedule. The GAO has outlined problems with 
the HCFA methodology and reported--correctly--that HCFA has not yet 
developed a plan to correct these deficiencies. In addition to the lack 
of data on total costs by specialty, the information from the 
validation panels and the cross-specialty meeting has shown 
conclusively that the linkage of CPEP data according to the E&M codes 
and other revisions to CPEP estimates made in developing the June 
proposal were based on assumptions, not data.
    We hope that HCFA will recognize and communicate to Congress its 
need for additional time to meet the Congressional mandate. This should 
be preferable, for all parties, to presenting Congress and the medical 
community, in May 1998, with a proposal which clearly does not meet the 
statutory mandate.
    If Congress and HCFA believe that HCFA should keep to the current 
timetable, it is essential that HCFA correct at least the most obvious 
flaws in the methodology used and utilize the best data now available--
the AMA Socioeconomc Survey--to validate its assumptions and to develop 
interim values which will ``do no harm'' (in the words of Hippocrates.) 
The Practice Expense Coalition, of which we are a member, has provided 
HCFA with recommendations, prepared by Coopers & Lybrand, to develop 
such interim values.
    Over the next six months, this AMA data could be supplemented by 
limited additional surveying of specialties, such as cardiac and 
thoracic surgery, which are not well represented. Limited sampling as a 
verification check, as recommended by the GAO, would also be 
appropriate.
    This is not a difficult or overwhelming task. Coopers & Lybrand has 
outlined several options for the methods to be used in allocating 
specialty practice costs to individual procedures. These code specific 
allocations would need to be weighted by the frequency with which 
different specialties use the same code; that is not difficult in an 
age of computers.
    Questions have been raised whether special modifiers are needed in 
some situations; that is a question that could be referred to the AMA 
Coding Committee or the Relative Value Update Committee [RUC] but which 
need not delay development of an interim rule. We would be pleased to 
enter a public-private partnership with HCFA to develop this 
information; such a partnership would reduce the need for additional 
Federal funds.
    We would request that this committee consider a relatively small 
appropriation to HCFA targeted to this work, with specific directions 
that the agency must, this time, base its analyses on total practice 
costs. The Practice Expense Coalition has asked Coopers and Lybrand to 
develop a specific recommendation for the costs of this additional 
work, which we will share with this committee. HCFA should be directed 
to carry out this work within the next twelve months.
    Unless Congress chooses to extend the present deadline, an interim 
proposal would be required while HCFA does this work. We believe HCFA 
could readily develop an interim proposal, based on the AMA SES data, 
without need for additional funds.
    I noted above that the HCFA proposal of 1997 would have reimbursed 
an active cardiac surgeon for only 38 percent of actual costs.
    We recognize that the resource-based relative value schedule, under 
budget neutrality, will reimburse physicians for less than 100 percent 
of their costs. But everyone accepts that the reimbursement must be 
relative among specialties.
    We do not know--HCFA may know but has not told us--how practice 
expense reimbursement would relate to total practice costs for all of 
medicine (or, in other terms, what budget neutrality would be for all 
specialties treated equally). But even if the correct budget neutrality 
factor is as low as 75 percent, the HCFA proposal is off by a factor of 
two to one.
    Given the impact of any mistaken proposal, the limitations of the 
data now being used, and the need (identified by the GAO) for 
improvements in methodology, we believe that Congress should direct 
HCFA to limit the final impact of any interim proposal (calculated as 
fully implemented) to no more than 10 percent of the allowed charge for 
any procedure.

                               CONCLUSION

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

                           BUDGET NEUTRALITY

    Senator Specter. How do you think we should do this, Dr. 
Gardner?
    Dr. Gardner. I think the question has to be asked as to 
whether budget neutrality in this area is an appropriate 
position to take, especially at a time when we are dealing with 
a balanced budget, sir.
    Senator Specter. Budget neutrality is indispensable if you 
are going to balance the budget, unless you take it from some 
place else.
    Dr. Gardner. Well, I think the question is whether we are 
willing to run the risk of slowing or stopping the advances 
that we have made over the last 25 to 50 years in American 
medicine by not paying for the advances and providing for the 
access to care that our increasingly aging population is 
expecting.
    Senator Specter. When you talk about advances, you are 
talking about family practitioners versus cardiologists? I 
agree with you Dr. Gardner, we should not have to play one 
group off against another, but the chore is how you do it.
    I am impressed with your compliment of Dr. McCann, since he 
is one of the authors here. We will get to that in a moment or 
two.
    A lot of people have been waiting for me in the hall, and 
on this occasion I will only be gone for not more than 5 
minutes and I regret the interruption, but this is more of the 
roller skate job. I will be right back.
    [A brief recess was taken.]

STATEMENT OF ALAN R. NELSON, M.D., EXECUTIVE VICE 
            PRESIDENT, AMERICAN SOCIETY OF INTERNAL 
            MEDICINE
    Senator Specter. We will now proceed to hear from Dr. Alan 
Nelson.
    Dr. Nelson. Thank you, Mr. Chairman. ASIM appreciates the 
leadership shown by this subcommittee in supporting the 
practice expense provisions reported out of the committee last 
year. We are especially pleased that the Balanced Budget Act of 
1998 included the Finance Committee's downpayment provision, 
which increased the practice expense provision for office 
visits beginning January 1 of this year.
    The BBA also included the Senate Finance Committee's 
language that mandated a review by the GAO of HCFA's 
methodology. The BBA directed HCFA to increase consultation 
with physicians, and the agency has met that requirement.
    HCFA is also meeting the BBA's mandate that it consider 
actual cost data to the maximum amount practicable.
    In March 3 testimony to the Ways and Means Committee the 
GAO reported, and I quote, ``HCFA's general approach for 
collecting information on physician practice expense was 
reasonable, and HCFA's use of expert panels is a reasonable 
method for estimating the direct labor and other direct 
practice expenses.''
    The GAO also found that the cost accounting methodologies, 
mail surveys and onsite studies of actual cost data from 
physician practice, all of which have been proposed by some as 
alternatives to the expert panel approach, have, and I quote, 
``practical limitations that preclude their use as reasonable 
alternatives to the HCFA's use of expert panels.''
    Now, this does not mean that the expert panel data are 
perfect, of course. HCFA found that it was necessary to make 
some adjustments to the data, including application of the 
statistical linking formula to reduce variations in the panel's 
estimates of labor costs. Without such adjustments, HCFA found 
that the labor costs of office visits and other evaluation and 
management services would be undervalued compared to most other 
services.
    The GAO agreed with the intent and desirability of HCFA's 
adjustments, while at the same time noting that HCFA's linking 
formula might be improved.
    None of the recommended improvements would cause what the 
GAO termed, quote, ``the needless costs and further delays that 
would be required if HCFA started over with a different 
methodology.''
    The GAO also recommends HCFA monitor the impact of its rule 
on access, and we agree, but it should not be assumed that the 
overall impact on access is likely to be negative. In many 
parts of the country Medicare payments now barely cover the 
practice expense costs incurred by office-based primary care 
physicians and, as a result, some Medicare patients may not be 
able to easily find a new doctor if their previous doctor moves 
or retires.
    Resource-based practice expenses by raising payments for 
office-based primary care services may well make it easier for 
internists to accept new Medicare patients into their practices 
and will assure a wider range of choices for Medicare 
beneficiaries.
    Even as we debate the methodologic issues, it is important 
to recall why Congress mandated resource-based practice 
expenses in the first place. Resource-based practice expenses 
were being developed because Congress concluded that Medicare's 
current charge-based practice expense payments are not fair.
    Even with the welcome 1998 downpayment that increased 
practice expenses for office visits, an internist would still 
have to provide 30 midlevel office visits requiring at least 7 
hours of face-to-face contact with patients to obtain the 
practice expense payments that Medicare allows when an 
orthopedic surgeon repairs a single lower leg fracture, and the 
same internist would have to provide 53 office visits, 
requiring at least 12 hours with patients, to receive the 
practice expense payments that Medicare now allows when an 
ophthalmologist repairs a detached retina.
    Such disparities are especially surprising, given the fact 
that the hospital bears a substantial amount of the direct cost 
when a surgical procedure is provided in a hospital operating 
room while the internist is paying 100 percent of the office 
expense incurred while providing care to patients in the 
office.
    The GAO's verdict on HCFA's approach is clear. HCFA has met 
the BBA's requirements. The basic methodology is reasonable. 
Further refinements will give physicians an even higher degree 
of confidence in the data. There are no practical alternatives 
that can produce better data.

                           PREPARED STATEMENT

    ASIM believes that HCFA will be able to produce resource-
based practice expenses for implementation on January 1 of next 
year that will more accurately reflect relative differences in 
the actual cost of physician services than the current charge-
based relative value units. As a result, Medicare payments will 
also be far more fair than they are today.
    Senator Specter. Thank you very much, Dr. Nelson.
    [The statement follows:]
                Prepared Statement of Dr. Alan R. Nelson

                              INTRODUCTION

    I am Alan R. Nelson, MD, Executive Vice President of the American 
Society of Internal Medicine (ASIM). ASIM represents physicians who 
specialize in internal medicine, the nation's largest medical specialty 
and the one that provides care to more Medicare patients than any other 
specialty. I am pleased to provide the Senate Appropriations Labor HHS 
Subcommittee with internists' perspectives on the current state of 
HCFA's efforts to develop resource-based practice expenses (RBPEs). Our 
testimony will address the following questions:
    Is HCFA meeting the spirit and intent of the provisions in the 
Balanced Budget Act of 1997 (BBA) relating to practice expenses?
    Are the basic process and methodology being used by HCFA for 
developing RBPEs fundamentally sound, and if so, are there improvements 
that still should be considered by HCFA as it develops the proposed 
rule?
    My testimony will refer to the findings and recommendations of a 
report by the General Accounting Office (GAO) on HCFA's methodology for 
developing physician practice expense payments, which was released on 
February 27. ASIM's testimony also refers to recommendations that the 
Medicare Payment Advisory Commission (MEDPAC) has made in its March 1 
report to Congress.
    ASIM's testimony today will explain why we believe that:
    HCFA is meeting the spirit and intent of the BBA relating to 
practice expenses, particularly the requirements that it consult with 
physicians and consider data on actual costs to the maximum extent 
practicable.
    HCFA's basic methodology and data are valid, although some 
improvements are appropriate.
    It is not necessary for HCFA to start over and use an entirely 
different approach to develop resource-based practice expenses, which 
would needlessly increase costs and lead to further delay.
    The GAO concurs with ASIM on each of these conclusions.
            requirements of the balanced budget act of 1997
    The Balanced Budget Act of 1997 directs the Secretary of the 
Department of Health and Human Services to:
    Phase-in implementation of resource-based practice expense (PE) 
payments over four years, beginning on January 1, 1999;
    Use generally accepted accounting principles and ``actual cost'' 
data to the ``maximum extent practicable'';
    Consult with physicians and other experts.
    Publish a new proposed rule and new practice expense relative value 
units (PE-RVU's) by May 1, 1998, with a 90 day public comment period;
    Begin moving payments to resource-based practice expenses, 
effective on January 1, 1998, by implementing a ``down payment'' that 
increased practice expense RVU's for undervalued office visits and 
reduced them for procedures whose current PE-RVU's are overvalued 
(based on a comparison of PE-RVU's to work RVU's).
    It also directed the General Accounting Office (GAO) to submit a 
report to Congress, within six months of enactment of the BBA, on the 
data and methodology being used by HCFA to develop the new proposed 
rule.
    ASIM supported the practice expense provisions of the BBA. As you 
will recall, ASIM testified last year in support of two key provisions 
that originated in the Senate Finance Committee version of the BBA: the 
GAO study of practice expenses and the ``down payment'' for office 
visits. We thank the members of this subcommittee for your support of 
those provisions.

                      CONSULTATION WITH PHYSICIANS

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

  USE OF ACTUAL COST DATA AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

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

            ACCEPTABILITY OF HCFA'S BASIC DATA, METHODOLOGY

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

                USE OF SURVEY DATA IN FUTURE REFINEMENTS

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

           SUGGESTED IMPROVEMENTS IN HCFA'S METHODOLOGY, DATA

Linkages

    One of the most important--and potentially controversial--
recommendations in the GAO report concerns the formula used by HCFA to 
link the labor costs of physician services. The GAO suggests that HCFA 
consider other approaches to the statistical regression formula 
proposed in the June 18 notice of proposed rule making.
    HCFA's rationale for applying the regression formula was that the 
relative relationships within the CPEP's are generally correct, but the 
absolute time estimates need normalization. HCFA noted that absolute 
numbers within some of the CPEP's may have reflected duplicate counting 
of tasks that can be performed simultaneously, and that different 
CPEP's may not have calculated absolute labor costs in the same manner. 
As a result, HCFA observed that there was considerable variation in the 
CPEP absolute estimates for the clinical and administrative staff 
times, including variation in the estimates for services that were 
evaluated by more than one CPEP.
    ASIM believes that it is essential that such variation be 
corrected. To illustrate, if one CPEP came up with absolute estimates 
of clinical and administrative staff times that are 20 percent higher 
than those derived by another CPEP for services that in fact involve 
comparable labor costs, the result of using the ``raw'' CPEP 
estimates--without statistical linking--would be that the services 
rated by the former CPEP would be overvalued compared to those rated by 
the other panel. In other words, since the purpose of a relative value 
scale is to place all the relative value units on a common relative 
scale, use of the ``raw'' CPEP estimates would not produce a common 
scale of the costs of providing one service compared to another as the 
law requires.
    More specifically, with the exception of the panel that evaluated 
evaluation and management services, the CPEP's generally came up with 
absolute labor costs estimates that were too high, especially compared 
to those for E/M services. HCFA implicitly recognized this, since the 
regression formula had the effect of lowering the labor cost estimates 
of non-E/M services.
    The GAO report accurately quotes ASIM as believing that linking is 
appropriate because some of the CPEP's uniformly assigned higher labor 
time than the E/M CPEP. The GAO agrees that linking is desirable. The 
report suggests, however, that HCFA's regression formula may have 
created anomalies that are not supported by the CPEP data. As an 
alternative to the regression formula, the GAO noted that HCFA is 
looking at assigning uniform administrative staff times across broad 
categories of codes, such as the time required to schedule an 
appointment. It also suggests that shifting billing costs into the 
indirect cost formula may reduce the need for statistical linking.
    ASIM is not opposed to looking at an alternative to the regression 
formula, if there are better approaches to establishing appropriate 
linkages between the labor costs of E/M services and non-E/M services. 
However, we believe that any alternative linking method must correct 
the continued problem of non-E/M codes having excessively high 
administrative cost estimates compared to E/M services. The validation 
panels, and the cross specialty panel meeting that HCFA held in 
December, did not correct the misalignment of the labor costs of non-E/
M services compared to E/M services. Therefore, it is essential that 
HCFA establish an appropriate linkage in the new proposed rule. The GAO 
report makes it clear that it too agrees that linking is desirable, 
notwithstanding its criticisms of the regression formula.
    Although it is unlikely that Congress would want to get involved in 
the technical deliberations on linkage, Congress needs to be aware of 
the impact this issue will have on whether or not the new proposed rule 
satisfies the law's intent that practice expenses be based on the 
resources involved in providing each physician service. If an 
alternative to the statistical linking formula perpetuates the over-
valuation of the clinical and administrative labor costs of in-hospital 
surgical procedures compared to office visits and other E/M services, 
the new practice expense payments will still not accurately reflect the 
resource costs of providing one physician service compared to another. 
    ASIM is committed to working with HCFA on developing an approach 
that will assure that the labor costs of non-E/M services are 
appropriately aligned with those of non-E/M services. If there is a 
better way to achieve this than the statistical formula proposed in 
June, then we have no objection to considering such an alternative. But 
without knowing what alternative may be offered by HCFA, it is 
premature to conclude that statistical linking is not necessary.
Scaling
    The GAO supports HCFA's decision to scale the CPEP data to 
independent data from the AMA's Socioeconomic Monitoring Survey.
    Scaling means adjusting the proportion of direct costs from the 
CPEP data so that they are consistent with the AMA SMS data. The SMS 
data suggests that the direct costs can be divided as follows: labor 
cost, 73 percent; medical supplies, 18 percent; and medical equipment, 
9 percent. The CPEP estimates, in aggregate, came up with different 
shares of direct costs: labor, 60 percent; medical supplies, 17 
percent; and medical equipment, 23 percent. Thus, HCFA adjusted the 
CPEP expenses for labor, medical supplies and equipment by scaling 
factors of 1.21, 1.06, and 0.39 respectively.
    Eliminating scaling would tend to help specialties with a higher 
proportion of equipment costs, and disadvantage those with a higher 
proportion of labor costs. Since the direct expenses of primary care 
physicians typically have high proportions of labor costs, and lower 
proportions of equipment costs, than surgical and medical specialists, 
elimination of scaling likely would disadvantage internists and other 
primary care physicians.

Indirect costs
    The GAO report recommends that HCFA consider using specialty-
specific adjustment factors to determine the ratio of direct and 
indirect costs; and consider moving administrative costs into the 
indirect cost category. It also concludes that the basic approach of 
allocating indirect costs based on physician work RVU's, direct PE 
RVU's and malpractice RVU's, as proposed by HCFA, is acceptable. Some 
physician groups had argued that the indirect costs should not be 
allocated using such a ``proxy'' formula. ASIM agrees with the GAO 
report's conclusion that HCFA's method for allocating indirect costs 
based on the proposed formula is acceptable.
    We do not have any conceptual problems with moving billing and 
other administrative costs into the indirect cost category, but we 
believe that this would necessitate treating those costs differently 
than would be the case if they were allocated based on the physician 
work+direct cost+malpractice RVU formula. Use of the formula used to 
determine other indirect practice expense would inappropriately allow 
surgical procedures with higher work RVU's to get substantially higher 
billing costs than E/M services, even though the costs of billing for a 
surgical procedure are not much different than for an office visit.
    ASIM supports use of specialty-specific ratios of direct to 
indirect costs, provided that there are adequate and valid data for 
each specialty to accurately calculate specialty-specific ratios.
Use of physician nurses
    The GAO report concluded that HCFA appropriately disallowed nearly 
all expenses related to staff that accompany physicians to the hospital 
since there is no available evidence that these expenses are not 
already being reimbursed or are a common practice.
    The American College of Surgeons (ACS) and the Practice Expense 
Coalition, which represents surgical groups and medical specialties 
that expect to experience reduced payments under RBPEs, have argued 
that surgeons often bring their nurses into the hospital and that these 
costs should be reimbursed by HCFA. The GAO indicated that HCFA is 
reviewing limited data it has received on how widespread this practice 
is, and that HCFA may reconsider its policy after review of such data. 
ASIM recommends that HCFA independently validate any such evidence, to 
determine if it is the usual practice for a typical Medicare patient, 
before agreeing that such expenses should be allowed.
    In testimony that was given on March 3 to the health subcommittee 
of the Ways and Means Committee, the ACS and Practice Expense Coalition 
cite a survey by the Lewin group that supposedly supports their 
contention that it is a common practice in some specialties for 
surgeons to bring their own nurses into the hospital. Their own data, 
which were appended to the ACS statement, do not provide any credible 
evidence to support this claim, however. This is because the response 
rate to the Lewin survey was so low that it is impossible to base 
Medicare policy on numbers that clearly have no statistical validity. 
For instance, the finding that 50 percent of ophthalmologists pay for 
staff in out-of-office settings was based on two respondents from that 
specialty, one of whom reported that he or she paid for staff in out-
of-office settings. The 71 percent of adult cardiac surgeons that 
allegedly use their staff in the hospital setting was based on 
affirmative responses from only 10 cardiac surgeons, out of 14 total 
respondents from that specialty. In every other specialty that was 
surveyed, fewer than 10 respondents per specialty indicated that they 
paid for staff in out-of-office settings. In no case did more than 15 
physicians in any given specialty respond to the Lewin survey. (The ACS 
and PE Coalition also did not indicate what the response rate was to 
the Lewin survey, i.e., they did not report how many physicians in each 
specialty were surveyed, only how many responded. Without knowing the 
response rate, the results cannot be viewed as being statistically 
valid).
    Interestingly, even if one were to accept the Lewin ``data'' as 
being statistically valid, in four of the surveyed specialties only a 
third or fewer respondents indicated that they pay for staff in out-of-
office settings, which suggests that this is not the typical practice 
in those specialties. By definition, a resource-based practice expense 
relative value scale should be based on what is typical, not what is 
atypical.
    If the Lewin data are the best data that are available on this 
issue, clearly HCFA was correct in disallowing expenses for physician 
staff in out-of-office settings.

                          GAO RECOMMENDATIONS

    Based on its overall analysis and findings, as discussed previously 
in this testimony, the GAO report concludes with several 
recommendations. ASIM's specific reaction to each recommendation is as 
follows:
    1. HCFA should use sensitivity analyses to test the effects of (1) 
the limits HCFA placed on the panel's estimates of clinical and 
administrative labor and (2) HCFA's assumptions about equipment 
utilization. Where HCFA's adjustments or assumptions substantially 
alter the rankings and RVU's of specific procedures, HCFA should 
collect additional data to assess the validity of its adjustments and 
assumptions, focusing on the procedures most affected.
    ASIM generally concurs with this recommendation. It is not clear, 
however, what additional data the GAO believes should be collected to 
assess the validity of HCFA's assumptions. It is also important to 
reiterate that GAO supported the intent of HCFA's adjustments.
    2. Evaluate (1) classifying the administrative labor associated 
with billing and other administrative expenses as indirect expenses (2) 
alternative methods for assigning indirect expenses and (3) alternative 
specifications of the regression model used to link the panels' 
estimates. HCFA should determine how changes in one aspect of the 
methodology, such as reclassifying some labor from direct to indirect 
expenses, affect other aspects of the methodology, such as the 
specification of the regression model to link the panels' estimates of 
administrative labor and the method used to allocate indirect expenses.
    ASIM generally concurs with this recommendation. We have some 
concern, however, about using the current indirect cost allocation 
formula to determine billing costs, should those costs be shifted into 
the indirect cost category. We support looking at alternative 
specifications for the regression (linking) formula, provided that any 
change in the linking methodology address the misalignment of labor 
costs of non-E/M services compared to E/M services. Elsewhere in its 
report, the GAO concluded that linking is not only desirable, but that 
``such a linking regression may be appropriate for use in developing 
adjustments to the CPEP data for practice expense RVU's.'' (page 47 of 
the GAO report).
    3. Determine whether changes in hospital staffing patterns and 
physicians' use of their clinical staff in hospital settings warrants 
adjustments between Medicare reimbursements to hospitals and 
physicians. Similarly, HCFA should determine whether physicians have 
shifted tasks to nonphysician clinical staff in a way that warrants 
examining the physician work RVU's
    We believe that any data on use of physicians' nurses must be 
independently validated by HCFA before changes are made to reflect 
those costs in the physician PE-RVU's. As noted previously in this 
statement, the data that was submitted by surgical groups to support 
the contention that this is a widespread practice was based on 
responses of fewer than 15 physicians in any given specialty (and as 
few as two in one specialty). Such data are not sufficient to support a 
decision by Medicare to allow these expenses. We agree that changes in 
staffing patterns may have reduced the physician work RVU's for some 
surgical procedures (in cases where the nursing staff are providing 
services that in the past were provided by the surgeon).
    4. Work with physician groups and the AMA to develop a process for 
collecting data from physician practices as a cross check on the 
calculated practice expense RVU's, and to periodically refine and 
update the RVU's.
    ASIM generally concurs, with the caveat that survey data to 
validate the PE-RVU's may be biased by poor response rates and other 
problems that the GAO identified with a survey process.
    5. HCFA should monitor the impact of RBPEs on access, focusing on 
procedures with the largest cumulative reduction, and consider any 
access problems when making refinements to the practice expense RVU's.
    ASIM concurs that the impact on access should be monitored. 
Improvements in access to primary care services should also be 
monitored.

      APPLICATION OF THE ``DOWN PAYMENT'' TO THE TRANSITION YEARS

    The BBA began the process of moving payments in the direct of 
resource-based payments, by mandating a ``down payment'' in 1998 that 
improved the practice expense RVU's for office visits, while lowering 
them for some procedures. The legislative history of this provision, 
which originated in the Senate Finance Committee but was also accepted 
by the House conferees, shows that the intent was to increase the PE-
RVU's of office visits in 1998 as a first step toward the expected 
increases that will occur when RBPEs are implemented on January 1, 
1999. Congress clearly intended for the PE-RVU's, as adjusted by the 
down payment, to be used in the subsequent years of the transition that 
begins in 1999 (i.e. the down-payment adjusted PE-RVU's would be 
blended with the resource-based PE-RVU's). Since other provisions in 
the BBA postponed implementation of RBPEs for one year (followed by an 
additional four year transition) the down payment was viewed by 
Congress as being an essential first step to helping physicians whose 
practice expense payments for office visits are undervalued.
    In its notice of intent to issue a rule, HCFA indicated that the 
1998 PE-RVU's, as adjusted by the down payment, would be the basis for 
the subsequent blended transition. Some physician groups are now trying 
to influence HCFA to re-interpret the law in such a way as to apply the 
down payment only to the 1998 PE-RVU's. They argue that the charge-
based RVU's, which would be blended with the resource-based PEs 
beginning in 1999, should revert back to the 1997 PE-RVU's that were in 
effect prior to the down payment mandated by the BBA.
    ASIM strongly opposes any such re-interpretation of the law and 
congressional intent. If HCFA agreed to apply the down payment only in 
1998, but not the subsequent transition years, this would not only 
violate congressional intent, but would break faith with the members of 
ASIM and other primary care groups that supported the compromise on 
practice expense that was adopted last year. (We accepted a delay in 
implementation and a four year transition, conditioned on the 
requirement that HCFA begin making improvements in 1998 in PE payments 
for office visits, with the understanding that such improvements would 
carry into the transition years). It will also re-open the divisive 
debate in Congress and within the medical profession on an issue that 
Congress intended to settle last year. Finally, it could have the 
effect of raising PE payments for office visits in 1998, then lowering 
them in 1999--a ``ping pong'' effect that makes no rational sense.
    The March 1 report to Congress of the Medicare Payment Advisory 
Commission (MEDPAC) supports ASIM's interpretation of the down payment 
provisions. Without expressing an opinion on this issue, MEDPAC 
factually reports that:
    ``The $390 million limit on reallocation of practice expense 
payments to office visits [from the down payment provisions] applies to 
1998 only. Since 1998 practice expense values will be used during the 
transition to resource-based practice RVU's, the adjustment to practice 
expense RVU's required by the BBA will affect payment rates throughout 
the transition, from 1999 through 2001.'' (Source: Medicare Payment 
Advisory Commission, Report to the Congress: Medicare Payment Policy, 
March 1998, Volume II, p. 98; emphasis added by ASIM).
    It must be remembered why Congress mandated resource-based practice 
expenses in the first place, and why it decided to begin the process of 
making improvements--through the down payment--in 1998. Congress 
concluded--correctly--that the historical charge basis for determining 
practice expense payments undervalued office-based services. Even with 
the ``down payment'' that increased practice expense payments for 
office visits, an internist would have to provide 81 mid-level 
established patient office visits--requiring over 20 hours in face-to-
face contact with patients--before he or she would receive the practice 
expense payments that Medicare allows for a single coronary bypass. The 
same internist would have to provide 30 mid-level office visits--
requiring at least seven hours of face-to-face contact with patients--
to obtain the practice expense payments that Medicare allows for 
treatment of a lower leg fracture. An internist would have to provide 
53 office visits--requiring at least twelve hours with patients--to 
receive the practice expense payments that Medicare now allows when an 
ophthalmologist repairs a detached retina. Such disparities are 
especially surprising, given the fact that the hospital bears a 
substantial amount of the direct costs when a surgical procedure is 
provided in a hospital operating room, while the internist is paying 
100 percent of the office expenses incurred while providing care to 
patients. Even allowing for the indirect costs incurred by surgeons in 
keeping their offices running when they are in the hospital and pre-and 
post-operative office visits, it defies logic to suggest that the 
practice expenses of surgical procedures done in the hospital are so 
much higher than those incurred by office-based internists.
    The fact is that for many office-based services, Medicare payments 
now barely cover the costs of providing those services. Improved 
payments for the practice expenses of office visits and other 
undervalued services will therefore help improve access for those 
services. The down payment was a good first step to correcting the 
existing inequities, and Congress should not go along with any attempt 
to reverse the progress that is being made.
    ASIM does not believe that it will be necessary for Congress to 
enact legislation to clarify the intent of the down payment provisions, 
since we believe that the intent of the BBA provisions are clear. But 
if this issue is re-opened by HCFA, then we will urge Congress to step 
in and enact a technical correction that makes it clear that the 1998 
PE-RVU's, as adjusted by the down payment, will apply in the transition 
years.

         PAYMENTS FOR PROCEDURES PERFORMED WITH AN OFFICE VISIT

    MEDPAC recommends that HCFA not adopt its proposal to reduce 
payments for non-surgical procedures provided in conjunction with an 
office visit or other E/M service. ASIM strongly concurs with the 
MEDPAC's recommendation. HCFA's proposal to reduce PE-RVU's for such 
procedures by 50 percent would result in payments that do not reflect 
the resource costs of providing each procedure. There is no basis for 
HCFA to arbitrarily assume that the costs of providing procedures in 
conjunction with an E/M service are reduced by 50 percent from the 
costs of the original procedure.

                        VOLUME-INTENSITY OFFSET

    MEDPAC also opposes HCFA's proposal to include a volume and 
intensity adjustment--otherwise known as a behavioral offset--in its 
calculations of the PE-RVU's. In its June 18, 1997 propose rule, HCFA 
stated that it intended to assume that 50 percent of the reductions in 
payments for specific procedures will be offset by an increase in 
volume and intensity. The effect of this assumption is to increase the 
amount of reductions for some procedures, and reduce the expected gain 
from others. ASIM agrees with MEDPAC's view that HCFA's experience with 
implementation of the RBRVS does not support the need for such a volume 
and intensity adjustment. Further, MEDPAC argues--correctly--that the 
sustainable growth rate for physician services, also mandated by the 
BBA, already corrects for any increase in the volume and intensity of 
physician services. ASIM strongly urges Congress to advise HCFA that 
application of a volume and intensity offset to the PE-RVU's is 
inconsistent with the requirement that resource-based practice expenses 
be implemented in a budget neutral manner.

                       PUBLIC-PRIVATE PARTNERSHIP

    The Practice Expense Coalition has recommended, as an alternative 
to HCFA's methodology, a so-called public-private partnership that 
would assign PE-RVU's to services using a cost-accounting methodology 
developed by Coopers and Lybrand under contract to the coalition. As we 
understand the coalition's proposal, PE-RVU's would be determined by 
determining the total costs of practices on a specialty-specific basis, 
based on the AMA SMS data, and then allocating those total costs to 
specific codes billed by that specialty using a cost-accounting 
methodology.
    This alternative would not be acceptable to ASIM. For one thing, we 
do not think it is reasonable to expect that a coalition of specialties 
with a vested interest in the outcome of a study can enter into a 
partnership with HCFA that would produce unbiased results. Also, we 
believe that the SMS data on absolute costs is itself distorted by the 
inequities created by the current charge-based method for determining 
practice expenses. Specialties that have gained unfairly under the 
current methodology are likely to report higher practice revenue, 
higher net income, and higher PEs than specialties that have been 
disadvantaged by the charge-based formula. Therefore, using the SMS 
data to construct the PE-RVU's would perpetuate the inequities that 
exist in the current formula. By contrast, HCFA's methodology starts by 
looking at what the relative costs are of providing each procedure 
compared to all others on the same scale, without prejudging what the 
impact would be on total revenue, net income, or costs for any given 
specialty.
    For the same reasons, the SMS data cannot be used as a validity 
check on whether or not HCFA's methodology covers the total costs of 
physician practices. Although the SMS data is useful in determining 
such things as the relative proportion of direct and indirect costs by 
specialty, it cannot and should not be assumed or expected that HCFA's 
methodology will--or was intended to--cover the total costs of practice 
for any given specialty as currently reported in the SMS data. Nor 
should it be assumed that every specialty should get the same 
percentage share of Medicare payments for their practice expenses as 
reported in the SMS data. The law simply requires that HCFA's 
methodology establish an appropriate relative relationship among all 
services, based on relative differences in the practice costs required 
to perform each procedure that take into consideration ``actual costs'' 
to the maximum extent practicable. It says nothing about covering 
physicians' total costs as currently reported by the SMS data.
    Finally, a public-private partnership that does not include 
internal medicine, family practice and other primary care specialties 
cannot produce representative and acceptable results. As currently 
proposed, we doubt that that any of the organizations that represent 
those specialties would agree to participate in the so-called public-
private partnership
    We would support establishing a process to regularly involve the 
medical profession in future refinements, however. The RVS Update 
Committee (RUC), which as we noted earlier is a multispecialty 
committee chaired and staff by the AMA that advises HCFA on refinements 
in physician work RVU's for the Medicare fee schedule, intends to 
submit a proposal to HCFA to assist in future practice expense 
refinements. Although some changes in the RUC process and composition 
may be necessary to accomplish this, ASIM believes that the RUC model 
has proven to be the kind of public-private partnership that has 
benefited both HCFA and the medical profession, and one that may be 
applicable to practice expense refinements.

                               CONCLUSION

    ASIM believes that HCFA is satisfying the intent of the BBA and 
that it is not necessary or desirable for HCFA to start over with an 
entirely different approach. The GAO recognizes the validity of the 
CPEP process and HCFA's formula for allocating indirect costs. We agree 
with the report's assessment of the practical limitations of the cost 
accounting surveys and other alternatives that have been advocated by 
others. We concur with the GAO that HCFA was correct in disallowing the 
costs associated with nurses who accompany a surgeon into the hospital, 
barring independently verifiable and statistically valid data that this 
is a typical practice.
    None of the GAO report's recommendations for improvement are 
fundamentally inconsistent with the way HCFA is going about developing 
RBPEs. ASIM believes that the GAO's suggestions for improvement are for 
the most part appropriate, although we have some concern about 
supporting alternatives to statistical linking until we are certain 
that there is a better approach that would correct the misalignment of 
labor costs for non-E/M services compared to E/M services. We also 
support the need for establishing a refinement process that allows for 
the collection of additional data. ASIM recommends that the 
Appropriations Committee support adequate funding for HCFA's efforts to 
develop and refine the RBPE methodology, including sufficient funding 
to support the refinement efforts recommended by the GAO.

                                 REPORT

    Senator Specter. Ms. DeParle, why, when the report is due 
on March 1, did we not receive it until this morning, March 10, 
at 10:40 a.m?
    Ms. DeParle. Sir, in order to get a report up to the 
Congress, we have to get it cleared through a number of 
different offices within the Administration. We should have 
started sooner, and I apologize for being late.
    Senator Specter. You knew all the offices you had to have 
it cleared by before March 1.
    Ms. DeParle. Yes, sir; we did. I apologize.
    Senator Specter. It does not do the job, Ms. DeParle, 
because we had this hearing set for March 10 and we are not 
able to go through your report to have an intelligent hearing 
when the report is not received.
    Ms. DeParle. Again, sir, I apologize.
    Senator Specter. Please don't. It does not matter. What has 
to be done is that we need to receive the report so we can make 
an evaluation. We have people who have traveled long distances 
to come to this hearing, and we expected your report.
    There has been a plea made on your behalf for more funding. 
If you need more funding, that is something that this 
subcommittee would be prepared to do. I find it unsatisfactory 
to have letters that are written on November 25 answered on 
February 13, and I suspect that it is not a coincidence that we 
received the report today because the hearing was held today. 
If the hearing had been held 3 weeks from now--I do not want to 
speculate on when the report would have been received, but we 
simply cannot do our job.
    Last year--you were not there, it was not on your watch--
HCFA did not meet the timetable of May 1 and the new fees were 
supposed to go into effect on January 1, 1998, so apologies are 
just not relevant to what we are doing here. You have got to 
tell us what you need to get the job done, then you have got to 
meet the timetable. That timetable was established a long time 
ago.
    The issue which confronts the Congress is what to do by way 
of oversight. I agree with the comments made today about 
oversight. What would the GAO report, if those recommendations 
were followed, enable us to do, Dr. Day?
    Dr. Day. Well, I think first of all they would enable us, 
if data was collected, to really assess what our practice costs 
are so that the debates would be based on reality.
    Senator Specter. Do you think the practice costs are not 
adequately assessed by what HCFA has done?
    Dr. Day. Absolutely not, especially for individual 
specialties within it. We are lumped into a group.
    Senator Specter. How about that, Ms. DeParle?
    Ms. DeParle. Well, it was my understanding that the GAO 
report actually said that our data collection was pretty good. 
In fact, I think the GAO used the word acceptable.
    Senator Specter. How about your methodology?
    Ms. DeParle. Given the limitations in collecting data, the 
GAO knew that we tried some different methods, and that they 
thought the panels----
    Senator Specter. How about it, Dr. Day? Can we at least 
agree on what the GAO report said?
    Dr. Day. I thought they said that their process of data 
collection was fine, but that the actual data needed to be 
validated by actual practice expense data.
    Senator Specter. Did you do that, Ms. DeParle?
    Ms. DeParle. We did. In my testimony, sir, I spoke about 
the number of panels that we held this past fall to validate 
the data.
    Now, there is another issue that is related to this and I 
think everybody has talked about this, which is continued 
refinement of the data. This is one thing the GAO recommended.
    Senator Specter. Continued refinement? How is that going to 
affect the fee schedules which are established?
    Ms. DeParle. I think what it means, sir, is that what they 
are saying is, the way I read it, the gist of it was that the 
data is about as good as you are going to be able to obtain to 
get this done, but you should continue to work on refining data 
as you go forward.
    Senator Specter. Why? Are the fee schedules going to be 
changed?
    Ms. DeParle. Yes; I think that GAO recommended we would go 
forward with our rule and implement it, but that we should 
continue to refine the data. I assume that means that we could 
recommend changes based upon the new data.
    Senator Specter. Dr. Day, you did not have very long, but 
does your written submission specify where HCFA did not 
adequately handle the data?
    Dr. Day. Yes; it does, and we believe we can get that data. 
We have been consulting with Coopers & Lybrand, a very well-
known accounting firm.
    Senator Specter. Do you have some time when we finish today 
to sit down with my staff and Ms. DeParle and go over the 
specifics of that and see if we can have a little arbitration 
as to what is going on here?
    Dr. Day. I would be delighted to.
    Ms. DeParle. Sir, if I may, I am familiar with the Coopers 
& Lybrand data, and I believe that Dr. Day's group has met with 
Dr. McCann, and he tells me that they are in the process of 
reviewing that data. So we can certainly meet again, but I do 
think that we are aware of their recommendations, and we 
appreciate them. It has been a helpful process.
    Senator Specter. Aware of their recommendations and 
appreciate them? I am not sure that exactly comes to grips with 
the difference in approach. I would like you to sit down with 
my staff afterward and see if we can move through it.
    Dr. Gardner, you are very complimentary about Dr. McCann, 
but you are a cardiothoracic surgeon. Cardiac surgery, 
according to last year's charts, would lose 32 percent, if you 
are a thoracic surgeon, you would lose 28 percent. Which one do 
you choose, or are you right in the middle? [Laughter.]
    It is a tremendous reduction. I have had a lot of 
complaints from the losers in the 30-percent range, so 
substantial. Dr. McCann, why so substantial, all in one fell 
swoop?
    Dr. McCann. Those numbers, those impacts were published in 
a rule that--we put out a proposed rule, I am sorry, last June, 
and it was put out for public comment. Subsequent to that, the 
Congress passed the Balanced Budget Act. We put that out in 
hopes of getting comments. It was based on the data we had in 
hand. Many of the comments that you have heard in this 
testimony today have suggested that we take a different 
approach and look at different options.
    Senator Specter. Have you changed your way of living after 
hearing all the comments?
    Dr. McCann. We are very sensitive to the concerns that have 
been raised by everyone on this panel.
    Senator Specter. How about my question?
    Dr. McCann. We are working at the staff level to prepare 
some options for our administrator to review, and that is 
underway as we speak, taking into account, as an example, Dr. 
Day's suggestion that we look at the Coopers & Lybrand approach 
to developing practice expense. That requires an enormous 
amount of computer work back at our Baltimore offices, and it 
is underway as we are speaking.
    Senator Specter. Dr. Nelson, internal medicine is just in 
for a plus-three. Doesn't all of this pretty much boildown to 
where you stand on this chart as to what your positions are 
going to be? It would be contrary to human nature not to have 
it that way. If you are getting hit very hard you are obviously 
going to be disadvantaged here.
    What is the reality of Congress providing oversight, Dr. 
Brooks? How do we do that?
    Dr. Brooks. Well, Senator, where the fee schedules proposed 
are phased in over 4 years, that gives HCFA and the other 
agencies time to try to reevaluate it and look and see if there 
are----
    Senator Specter. Four years. Does that mean one-fourth 
change each year?
    Dr. Brooks. As I understand it, that is correct, so that 
when we are talking about these large percentage reductions my 
understanding is that although it is 30 percent over the total, 
it is delayed during that time. During that time the Congress 
and HCFA and the other agencies have a chance to look at that 
data to reevaluate it and find out if there are problems, but 
the fact of the matter is that there is a set amount of dollars 
that is going to be used.
    Senator Specter. What internal mechanisms are there, Ms. 
DeParle, that you faced as to how you are going to listen to 
inputs of other information to make adjustments in the charts?
    Ms. DeParle. Well, there are not any right now, but I think 
an important point was made by you when you talked about the 
transition. Under the law before the Balanced Budget Act we had 
to, as you put it, do this in one fell swoop, and it had to be 
budget-neutral.
    Senator Specter. May I suggest you address that question 
very promptly, and establish a timetable immediately after you 
put out your suggested changes. I also suggest you meet with 
the groups no later than 30 days afterward, and take into 
account what they have to say?
    This subcommittee may be reconvened, but Dr. Gardner said 
it was a complexity, I think beyond--I forget what you said, I 
think capacity, a complexity beyond the capacity of the panel. 
Forget about the Senate.
    Dr. Gardner. You know, sir, the reason I gave you some of 
the bottom-line figures on the impact on cardiac surgery in 
addition to the background reductions is to emphasize the 
severity of the impact on our specialty, and I do not think 
that the cottage industry approach that HCFA was forced to take 
because of failure of the national survey and a lack of, 
perhaps what they felt was time or staffing, should be allowed 
to determine the course here.
    Senator Specter. What should be done now Dr. Gardner?
    Dr. Gardner. I think we should step back and do a study 
that is acceptable to an accounting approach.
    Senator Specter. Who is going to do the study, would you 
propose?
    Dr. Gardner. I think it should be contracted out. I think 
it should be contracted to a professional firm that can do this 
and not expect the HCFA staff to do it, and I think that we 
should let the cards fall where they are.
    Senator Specter. So you want to start from scratch?
    Dr. Gardner. I think that the issues are actual practice 
costs, and the distribution of direct versus indirect costs, 
and whether that can be allocated.
    Senator Specter. But you are saying start from scratch.
    Dr. Gardner. Yes, sir.
    Senator Specter. But in HCFA we are supposed to have an 
agency to do just that, are we not?
    Dr. Gardner. Sir, my experience with HCFA is fairly 
superficial. I have been there a few times. My impression is 
they are chronically overworked.
    Senator Specter. What about that, Dr. McCann?
    Dr. McCann. We do have a lot to do. [Laughter.]
    Senator Specter. Are you chronically overworked?
    Dr. McCann. At the moment, yes, sir.
    Senator Specter. How about you, Ms. DeParle? You have not 
been there long enough to be chronically overworked.
    Ms. DeParle. It feels like it has been a long time. 
[Laughter.]
    Senator Specter. Well, I would like to have you, lady and 
gentleman, sit down with my staff to try and deal with some of 
the specifics as to where you are heading, especially with what 
Dr. Day has said.
    I know it takes a long time, but the methodology is very 
perplexing here as to how we are supposed to provide remedies. 
We are going to see these figures, and I would like to see in 
writing your review process so people have a chance in a 
formalized way to come in and tell you what they do not like 
and be specific, and have you rule, and if you need more help I 
think the subcommittee would be prepared to do it.
    Ms. DeParle. Thank you.
    Senator Specter. Ms. DeParle, if you would stay for a few 
minutes. We obviously on this subcommittee are enormously 
concerned with how all of this is handled, but we need some 
help from the professionals as to how we come to terms with it.
    Ms. DeParle, I want to take up a number of questions with 
you on matters that have been outstanding in your Department.
    Ms. DeParle, what is the status of your unit's response on 
the Salitron issue that I was talking to you about?
    Ms. DeParle. Yes; I was talking to your staff about this in 
one of the breaks. I heard about this issue for the first time 
yesterday. I understand you had a recent letter in to me which 
I had not seen until yesterday.
    As I understand the issue, what you have been interested 
in----
    Senator Specter. I wrote to you on January 21, 1998, and 
February 12, 1998, and you saw it for the first time yesterday?
    Ms. DeParle. Yes, sir.
    Senator Specter. Why?
    Ms. DeParle. I do not know why, sir. I am trying to review 
the congressional correspondence, but I have not seen this, and 
I had not heard of this issue.
    As I understand it, it is a device that can be helpful to 
people with something called Sjogren's disease, and it has been 
an issue around HCFA for some time, several years in fact. The 
agency has performed a technology assessment but has not found 
evidence that the device could be useful.
    I asked staff yesterday to request another technology 
assessment.
    Senator Specter. I understand the regulations are very old 
and, doubtless, outdated.
    Ms. DeParle. I believe you are referring to a regulation 
that the agency put out in 1994, yes, sir. It was a proposed 
rule I think, sir, that never became final.
    Senator Specter. Would you take a look at it, and would you 
answer two questions for me, why you do not see your mail from 
January 21, and what the substantive answer is?
    Ms. DeParle. Yes, sir; I certainly will.
    [The information follows:]

                            Salitron System

    With respect to the incoming letters from Senator Specter 
regarding the Salitron System, I did not see the February 12 
letter even though I had instructed staff to provide me with 
copies of all correspondence from Members of Congress. 
Unfortunately, a mistake was made within our correspondence 
control system.

                             PROPOSED RULE

    Senator Specter. I am told by staff that you are prepared 
to testify that you will withdraw the regs if you are asked, is 
that true?
    Ms. DeParle. Yes, sir; I talked to Mr. Sauerwein about this 
during the break. From my understanding of this issue the 
problem relates to--or your problem relates to a regulation, or 
a proposed rule that was put out in 1994. It is now 1998.
    We never went final with the rule, and I would not intend 
to go final with a rule that has been out that long, so I would 
be prepared to withdraw it.
    Senator Specter. Ms. DeParle, why did you not tell me that 
when I asked you the question about this matter generally, 
without a specific question as to whether you are prepared to 
withdraw it?
    Ms. DeParle. I am sorry, sir, I did not know that is what 
you wanted to know.
    Senator Specter. Mr. Sourwine points out that it is in the 
letter. Is there any other relevant information that you have 
on this subject that I have not asked you specifically about? I 
really find this a little hard to understand. We are not in a 
courtroom. You are not a hostile witness. If you are prepared 
to withdraw the regulation, why don't you say so?
    Ms. DeParle. Sir, the letter that I remember looking at 
yesterday was a letter that asked more generally about what the 
status was. I did not remember that you wrote a letter asking 
about pulling the regulation.
    Senator Specter. The letter says, of February 12, a formal 
withdrawal in the Federal Register would clarify the Medicare 
coverage for the device is up to the regional carriers, and the 
decision is reached on a national coverage policy. That is what 
the letter says.
    Ms. DeParle. I am sorry, sir, I was not--as I said, I did 
not look at this until yesterday, and I was not familiar with 
the specifics of the letter. I know you wrote two letters on it 
that I saw yesterday.
    Senator Specter. But if you saw it yesterday, and you saw 
the line about withdrawal--I just do not understand, Ms. 
DeParle. The letter talks about withdrawal. You are prepared to 
withdraw it, but I have to ask a specific question before we 
get there.
    Is there anything else about that issue which is relevant 
that this subcommittee ought to know about?
    Ms. DeParle. Well, no, sir. I was just trying to say that 
the staff who have looked at this--again, my knowledge is from 
yesterday--tell me that they have tried a number of times to 
find a suitable use for this device, and to find some evidence 
that it would help people. However, they have not been able to, 
and so they are concerned about this particular device. That is 
the only other thing that I can tell you.
    I requested yesterday that they request another technology 
assessment, because there was one done, as you probably know, 
back in 1990. I thought that, given your continued interest in 
it, that we ought to at least update our technology assessment 
and see what the experts were saying about the device, so I did 
request that. This is the only other thing I know about.
    Senator Specter. OK.
    I had written to you on January 27, or to Secretary 
Shalala, about the final regulations implementing the Medicare 
salary equivalency rule and again got a letter dated yesterday, 
and this is on behalf of a specific constituent, and when I 
receive these requests from constituents I am not intimately 
familiar with all of the ramifications, but really pass on the 
problems which are created to try to get an expert evaluation.
    But as I said in my letter of January 27, I am advised that 
the promulgation of the final rule will cause undue financial 
hardship because they will have to change their reimbursement 
systems to comply with the rule, only to change the 
reimbursement system later this year, when HCFA promulgates a 
second series of regulations required by the Balanced Budget 
Act of 1997.
    Are they correct that there will be another series of 
regulations issued later this year?
    Ms. DeParle. Yes, sir; they are.
    Senator Specter. Are they correct they are going to have to 
revamp their reimbursement system to comply with the new set of 
regulations?
    Ms. DeParle. I think I have talked to some of the same 
people, sir, and I believe they probably will.
    Senator Specter. Do you think that is fair to change the 
regulations twice in such a short period of time to cause that 
kind of extra expense?
    Ms. DeParle. This rule originally went out in March, sir, 
and in fact the agency----
    Senator Specter. March 1997?
    Ms. DeParle. Yes; the agency staff, given the Balanced 
Budget Act, had--and I discussed this with Mr. Sauerwein back 
in January, I believe.
    The agency staff had originally decided not to go forward 
for two reasons, first, because of concerns about issuing two 
rules so quickly, a final rule on this and the BBA rules at the 
same time, and second, frankly, as you have heard today, our 
staff is very busy and is often not performing up to the 
standards that you and other Members would like on the issues 
that we have on our plate, so for those reasons we were not 
going to go forward.
    However, Senator Harkin in particular felt very strongly 
that this rule had some savings, that it was a program 
integrity issue, and asked that we go forward with it, so we 
have done so.
    Senator Specter. Well, is there any way to give some 
regulatory relief to the specific entities, constituents which 
are burdened by a revised set of regulations in such a short 
period of time?
    Ms. DeParle. I do not know, sir, but I would be willing to 
talk to you and your staff about a way to do it. I am not sure 
there is any way to give relief and also honor the commitment 
to Senator Harkin.
    Senator Specter. Well, do you have waiver authority to make 
adjustments on a showing of hardship in an area of this sort?
    Ms. DeParle. I do not know, sir, but let me find out and 
get back to you soon with that.
    [The information follows:]

          HCFA's Waiver Authority Involving Salary Equivalency

    With respect to whether it is possible to waive the salary 
equivalency guidelines in certain circumstances, or for certain 
providers, we believe that we do not have the authority to 
change or waive the salary equivalency guidelines regulation's 
effective date of April 10 for one provider or a group of 
providers. Existing regulations do provide for exceptions to 
the guidelines for unique circumstances or special labor market 
conditions, although any exceptions may reduce the savings from 
these guidelines. These exceptions are available to providers 
of services. For instance, the guidelines apply to payments 
that the Medicare Program makes to skilled nursing facilities, 
home health agencies, and other providers, for therapy services 
provided under arrangement. HCFA pays the entity (the provider) 
that claims the therapy costs in its cost report. This means a 
provider can apply for an exception if (1) That provider files 
the cost report with HCFA and (2) it contracts with another 
entity to provide therapy services, because the guidelines do 
not apply to therapists directly employed by the provider.

                            NEW REGULATIONS

    Senator Specter. As I say, this is a constituent inquiry, 
and I do not know the details, but if you are going to have 
another set of regulations coming out, and if you agree with 
their representation that it costs extra expense, that seems to 
me something which ought not to be done if it can be possibly 
avoided. So I would appreciate it if you would take a look at 
it.
    If you conclude that it is a matter of fairness--you are 
nodding in agreement.
    Ms. DeParle. I will take a look at it.
    Senator Specter. There will be double expenses for them to 
comply with the new set of regulations, correct?
    Ms. DeParle. There will be more expenses. I do not know if 
they are double. The concern I have----
    Senator Specter. But more expenses.
    Ms. DeParle. Yes, sir; I think it stands to reason there 
will be.
    My concern is that, frankly, I talked to the same groups, 
and I had the conversation with Senator Harkin, and he feels 
very strongly that because there are savings attached to this 
regulation, it saves money for the Medicare trust fund, that--
--
    Senator Specter. Well, how much are the savings, if you can 
quantify that?
    Ms. DeParle. It has been a couple of months since I looked 
at this, but I want to say it is several hundred million 
dollars, which is not huge in the realm of Medicare, but it is 
a substantial amount. Let me get back to you with the exact 
numbers.
    My staff is saying $260 million.
    Senator Specter. Over how long a period of time?
    Ms. DeParle. Well, I think this would only have effect for 
a couple of years, because, as you said, the Balanced Budget 
Act makes some other changes.
    Senator Specter. Well, it would not last for a couple of 
years if there will be another change in regulations this year, 
would it, and let the record show you are consulting with staff 
and you have $260 million figure, but over how long a period of 
time is that?
    Ms. DeParle. I do not know, sir. Let me get back to you 
with an answer.
    [The information follows:]

              Salary Equivalency Rule's Projected Savings

    The estimated cost savings associated with salary 
equivalency guidelines, involving Medicare part A and B, is 
$260 million during fiscal years 1998 through 2000. This 
estimate is based on the effective date of April 10, 1998.

                              REGULATIONS

    Senator Specter. When a constituent comes and says, they 
just put out some regulations and there are going to be some 
more coming out later this year. Why do we have to change our 
systems twice, in an age where there is so much regulation? I 
miss the regulatory reform bill before governmental 
administrations. We are all committed, the President, Secretary 
of Health and Human Services, I think you, too, Ms. DeParle are 
committed to try to keep the regulations to a minimum point 
necessary to get the job done. Thank you.
    Ms. DeParle. Yes, sir; and I understand your concerns about 
this one. Thank you.

                         CONCLUSION OF HEARING

    Senator Specter. Thank you all very much for being here, 
that concludes our hearing. The subcommittee wil stand in 
recess subject to the call of the Chair.
    [Whereupon, at 5:20 p.m., Tuesday, March 10, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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